Harvard Economist Jeff Miron's Social Security Solution
Tuesday, May 12, 2009SUSIE GHARIB: The recession is taking a toll on the government's biggest benefit program, Social Security. Trustees said today the program's financial health has worsened. Social Security will start paying out more in benefits than it collects in the year 2016 and the trust fund will be empty come 2037. For a different perspective on Social Security and other issues, we turned to Harvard economist Jeff Miron. This afternoon, Washington bureau chief Darren Gersh talked with Miron and began by asking whether Social Security has reached a crisis point.
JEFFREY MIRON, HARVARD ECONOMIST: I think it's in serious trouble. It's not huge news what we learned today. We already knew that there was a big problem, because the benefits we're promising to pay out is way in excess of the tax revenues coming in. This new report says that's going to happen much sooner than we thought because of the recession, but of course we already knew we were facing a huge problem.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Treasury secretary, when he was announcing this news, said that the president thinks there's a possibility of a new consensus for how to reform Social Security. What would you like to see that new consensus become?
MIRON: I would like to see that consensus be that basically we cut the level of benefits and the best way to do it, I think, is balance different considerations, is to gradually phase in a higher age of eligibility. Life expectancy and health for the elderly have expanded substantially since we created the program in 1935. So 65 was the right age then. Something like 70 to 75 is probably about the right age now. Phasing in over a period of 10, 20 years that higher age and eligibility would put the system back into balance to a substantial degree and still be completely consistent with the spirit of the original program.
GERSH: I have to say one of the problems it just seems to me from a lot of the people I know, I don't know how they get to 75 in the current economy to make it to retirement. It seems like that's a very harsh way to go for a lot of people. How are you going to sell that?
MIRON: I agree it's a difficult sell at the moment, but of course we have other programs that are aimed at things like unemployment. We have unemployment insurance. We of course also have disability insurance for some people between 65 and 75 for whom working would be an undo burden. The disability insurance covers them, but averaged out over the decades and over many years, when we have an economy, which is on average is healthy, lots of people in the 65 to 70 or even 75 range are capable of working at a normal pace and therefore funding some of their -- funding themselves for a longer period and not having to rely on the Social Security system.
GERSH: We've talked a little bit about the banking system here and we've just had these stress tests. I'm wondering what your observations are there. You've argued that basically what got us into this banking problem is too much leverage and we're curing it with more leverage. Why is that a concern?
MIRON: Well, the concern is that the thing that we did going back five, 10 years, of having the government be in a position where banks thought that their downside losses were going to be cushioned and indeed their downside losses have been cushioned. That of course encourages private sector to take on excessive amounts of risk, because it's profitable to take that risk in the short term, especially if you don't bear the full losses and now we're in the position where we've bailed blanks out. We're telling that we want them to lend again and so we're sowing the seed to have a similar situation five, 10 years down the line. Same thing with sub-prime debt. We're still extending lots of sub-prime mortgages, much of it guaranteed by government agencies and that's just going to put us in the same position again in some number of years.
GERSH: We're about to get a regulatory reform package. It sounds like a libertarian you're in the odd position of arguing for more regulation. Is that what you're arguing?
MIRON: No. If we could really do it in the strict libertarian (INAUDIBLE) there would be much, much less or no regulation. The regulation is very difficult. For example, the FDIC, which has a beneficial effect at trying to stop banking panics, at the same time means the depositors don't monitor the risk taking by the banks as much as they might and that of course is part and parcel of the problem that we've had. So I'm not arguing for more regulation. If anything, we should have less, because then everybody would be on notice that they had to think for themselves in a market environment.
GERSH: Jeff Miron, thank you very much for joining us.
MIRON: My pleasure. Thank you.
