From: jwh@citi.umich.edu (Jim Howe)
Subject: Re: Facts on Social Security (Berry Long)
Reply-To: jwh@citi.umich.edu
Organization: IFS Project, University of Michigan
Date: Mon, 6 Apr 1992 17:34:29 GMT

In article <92094.172220DGS4@psuvm.psu.edu>, DGS4@psuvm.psu.edu writes:
|> I have to add a few comments on some apparent
|> misinterpretations or mistakes in previous posts.
|> 
|> [stuff deleted]
|> 
|> A few other minor issues.  James Howe favors putting
|> the money into private investments, not recognizing
|> that in fact SS is a pay-as-you-go system.  

I fully recognize the fact that SS is a pay-as-you-go system.
This is one of its major faults, IMHO.  A pay-as-you-go
system will only work as long as there are enough non-recipients
available who can be taxed to pay for the recipients.  In
the past this hasn't been as much of a problem, but the future
looms dim for this method of 'financing'.  The so-called 'surplus'
is simply a hoax.  Funds for future retirees will come either
from increased SS taxes, increased personal taxes, reduced benefits,
or some combination of the above.  Converting from the current
system to a system where the individual has his own policy is
much less fraught with funding problems and is far more conducive
to individual freedom.  Getting from where we are to today to 
where we should be won't be politically easy but is also not impossible.

|> There isn't any money (except for the amount which is now
|> supposed to be accumulated for the boomers retirement)
|> to put into private systems.  If we want to go to a
|> funded pension system, we would have to raise taxes by
|> an enormous amount to fund the retirement of those
|> currently retired and those who are nearly completing
|> their work life. The money to pay for these retirees
|> comes from current FICA taxes, and would have to be
|> made up. 
|>

Your assesment is correct, only the actual amount needed varies.
For example, we could means test current recipients.  Benefits
would be reduced for those earning income or with substantial
personal pension plans.  People coming into retirement would see
reduced benefits based on how far they are from retiring.  At
some age (maybe mid 40's to low 50's) the benefit would be eliminated.
We would probably have to maintain some type of SS phase out tax
but it would be substantially less that the current rate.  Remember,
the current rate is designed to generate a surplus.  We don't need to
build a surplus, we need to be exactly pay-as-you-go, with the payout
becoming smaller and smaller.

|> 
|> Finally, one person suggested I read those who
|> "refuted" Keynes.  I have.  So I will quote from my
|> rather worn copy of Tom Sargent's Macroeconomic Theory
|> where he compares the Keynesian and New Classical
|> models:
|> 
|> "We have set out two logically consistent arguments,
|> one in favor of rules with feedback (Keynesian) and one
|> arguing that rules with feedback are no better than
|> rules without feedback, and may be worse if they
|> introduce into policy what agents perceive as noise
|> from the point of view of their information sets....As
|> of this date, the evidence on this issue is very
|> fragmentary and somewhat mixed."
|> 
|> That is, James Howe, even those who created the work
|> that you claim "refutes" Keynes argue that they have
|> not "refuted" Keynes, arguing that his arguments are
|> logically consistent and not yet disproven through
|> empirical evidence.
|> 

There are many more people who have discussed the shortcomings
(and fallacies) of Keynes General Theory than one author of
a macroeconomics textbook.  I stand by my statement that his
General Theory has been discredited.


James W. Howe                  internet: jwh@citi.umich.edu
University of Michigan             uucp: uunet!mailrus!citi.umich.edu!jwh
Ann Arbor, MI   48103-4943         
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