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January 11, 2004
David Warsh, Proprietor


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Leading Indicator

Eight years ago, when economists gathered in San Francisco for the annual meeting of the American Economic Association, the plenary lecture — properly speaking, the only lecture, given annually at the invitation of the incoming president — was presented by Martin Feldstein of Harvard University. He called for the privatization of Social Security.

 

And though the possibility of dramatically recasting the program had been in the air ever since presidential aspirant Barry Goldwater raised it in the 1964 election, its adoption as a serious proposal by the scholar/activist who had been a top adviser to Republican presidents since Ronald Reagan accelerated its rise to the top of the party’s political agenda.

 

This year Feldstein himself was president of the association, but when economists met last week in San Diego, it was Mervyn King, governor of the Bank of England, to whom Feldstein turned as his guest lecturer. Alan Greenspan also spoke at a session of the meetings, and, paraphrasing Oscar Wilde’s heroine Lady Bracknell, King observed “To have one central bank governor address you may be regarded as a misfortune, but to invite two looks like carelessness.”

 

For his part, King discussed the current emphasis on “constrained discretion” as the essential goal of monetary policy. He illustrated his remarks with a charming story about the recent history of the two varieties of the Iraqi dinar, silver and Saddam — too long and involved to repeat here, but, for those who like the kind of salacious currency stories that usually are confined to the footnotes or omitted altogether, it is well worth the journey to the speech itself.

 

Interest in Social Security was rather thin on the ground.

 

Indeed, a trio of well-known advocates of individual accounts all but threw in the towel, at least for now. Former Fidelity executive Robert Pozen, compensation specialist Sylvester Schieber and Stanford University dean John Shoven presented a “hybrid indexation” plan that would restore long-term fiscal balance to the system by reducing its payout to the well-to-do.

 

And outgoing president Peter Diamond of the Massachusetts Institute of Technology delivered a strong defense, on strictly economic grounds, of Social Security as it is currently organized in the United States. The system works better than many economists think, he said.

 

It is not hard to say what changed. The stock market bubble of the late 1990s undermined faith that higher returns from equities might both restore fiscal balance and enhance stability of a system on which something like a third of the population depend for their entire retirement income.

 

Everyone agrees that the system now is somewhat out of balance. Present funding levels are thought to be adequate to pay current benefits through 2042. At that point, if no changes are made, revenues would pay only three-quarters of what has been promised — a transition to new rules of the game so abrupt that most would consider it to be grossly unfair.

 

So attention now is swinging back to the kind of behind-the-scenes compromise of relatively modest tax increases and benefit cuts that in 1982 restored the system to actuarial balance for a time.(Alan Greenspan, then in the private sector, led that commission.)

 

Indeed, Diamond and Peter Orzag of the Brookings Institution recently published a book, Saving Social Security: A Balanced Approach, espousing just such a compromise. It is the latest and most authoritative in a series of blueprints on which sucha compromise could be based.       

    

The details can wait. For now, expect the future of the Social Security system to be subordinated to the general excitement of an election campaign. By this time next year, however, we will know much better what kind of negotiations to expect.

 

Social security? Or personal security? This fifty-year-old argument about how best to mandate savings for retirement is coming to a head.

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