The following is a reply to the response that Mr. MacKenzie posted on his blog on July 24th. In that response, Mr. MacKenzie states:
1. Mr Davis has conceeded the essential point. If SS reduces total savings, then it is impossible to argue that it is an investment progam. This program reduces the total amount of available loanable funds, and with it investment and capital accumulation. This reduces the long run rate of economic growth. We are poorer than would otherwise would be the case because of this pernisious program. SS is an impediment to greater prosperity.
2. Mr Davis claims that we can realize a positive rate of return on SS by drawing upon wage increases. this only makes sense if one fails to count the cost of higher gross taxes drawn out of wage increases. Once these costs are subtracted SS must deliver a negative return overall, given that it is a transfer program with administrative costs, and given that it reduces economic growth. Social security can only deliver a positive rate of return to the average recipient by INCREASING economic growth. Mr Davis has admitted that SS REDUCES savings, and therefore growth. Game, set, and match.
What I said was "I agree with his contention that people would generally save more privately if Social Security did not exist". I was speaking, of course, about future Social Security recipients. I said nothing about "total savings". On that matter, the following excerpt is from page 41 of a 1999 General Accounting Office (GAO) report titled "Issues in Comparing Rates of Return With Market Investments":
Some proponents of individual accounts point out that making the transition to increased advanced funding is critical and has implications for comparing rates of return. They observe that rates of return from the individual accounts in an advance-funded system fundamentally differ from Social Security’s implicit rates of return because individual accounts would provide a new source of investment funds and would increase national saving. This increased pool of investment would produce real increases in economic activity that would make society better off. In contrast, they assert that Social Security only transfers income from taxpayers to beneficiaries, detracts from saving and long-term economic growth, and produces no real economic returns.
Other analysts contend that workers paying the transition costs must receive lower returns than they would otherwise in order to improve returns for future generations. Moreover, some observe that increasing the advance funding of Social Security would not necessarily increase national saving. Consumers might compensate for their increased savings in their individual accounts by saving less elsewhere or borrowing more. National saving also depends on federal budgets and surpluses, which could be affected by the specific aspects of any changes enacted. For example, any federal borrowing that helps pay for transition costs would offset any corresponding increases in individual account balances to some degree.
I wanted to mention that before Mr. MacKenzie puts away his tennis racket! In any case, he continues:
3. I didnt think that I needed to mention this, but the social security adminiistrastion is, if anything, less reliable than the AARP. There is an obvious conflict of interest at work here, and I do not trust their numners. the SanFransisco Fed is obviously a more credible source, but I have not seen how these numbers were calculated. given the life expectancies of poor black men, it is hard to see how they get a positive return on SS retirement payments (more on this below).
That the Social Security Administration's numbers are not reliable is Mr. MacKenzie's personal opinion. It does not appear to be the opinion of everyone at the Heritage Foundation which he lists as a source below. A recent issue memo on their site states the following in answer to the question "Did politics influence the trustees report?":
No. Social Security Administration Chief Actuary Stephen Goss and his staff of non-partisan experts produce the numbers in the Trustees Report. They are respected professionals who never have been, and are not, subject to political pressure. Goss has been at SSA since 1973 and is internationally respected. Although members of the President's cabinet serve as trustees, they have little influence over the numbers. The 2007 numbers are substantially similar to those in the Trustees Reports issued during the Clinton Administration.
In any case, Figure 1 on page 6 of the GAO report shows a graph of Social Security’s Implicit Rates of Return. The returns are inflation-adjusted and are all positive, same as the SSA numbers.
Mr. MacKenzie concludes his response as follows:
5. For a quick source on how SS transfers to rich white women from poor black men, look at the SS calculators from Heritage and other organizations. You can see the rates of return for the afformetnioned groups by plugging in the right zip code and other data. For the long answer, start reading Feldstein. If he has not done these calculations he surely cites someone who does. I have moved on to othe projects at the moment and cannot justify a special trip to the campus library to look this up. Perhaps I can take another look after the semester starts, but for now I will leave it as is. In any case, alleged rates of return of 4-5% are not too bad, but the less than one percent that high wage worker get (according to the source cited by Mr Davis) is unacceptably low.
The phrase "SS transfers to rich white women from poor black men" is highly misleading. As Table 1 in an Urban Institute paper suggests, women generally receive a better return than men. Hence, Mr. MacKenzie could have just as well said "SS transfers to rich black women from poor white men". Of course, simply saying that it generally transfers from women to men would have been the most accurate. In any case, the table does suggest that black men do receive a positive real return from Social Security and receive slightly more than white men, at least for those born between 1931 and 1964.
I have now provided links to several studies that support my numbers. If Mr. MacKenzie can provide a link to a credible study that purports to show that Social Security transfers from poor to wealthy or that the return for average people fall into the 2.5 to minus 2.5 range, I'll be more than happy to look at it. Until then, I'll just have to stick with the sources that I have.