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April 23, 2005

Defending Cato

Mark Thoma takes a shot at the latest Cato Institute blast at the anti-privatization crowd, and pgl at Angry Bear asks "Will the Cato Institute Even Offer a Reply to Mark Thoma?".  Probably not, but I'll give it a try.

Out of the gates, Mark takes issue with this statement from Cato:

Yes, if solvency is the only issue at hand – and it does appear to be the singular focus of the Bush administration thus far – then raising the retirement age is a fine idea.

Mark's complaint?

First, the claim that the Bush administration has had a singular focus on solvency is wrong. Privatization does nothing to address solvency as the White House now admits, and no proposal from the administration addresses solvency, in no small part due to the fact that contrary to popular belief, the administration has no proposal for reform on the table. Their singular focus has been on privatization, not solvency, and the two issues are independent.

That's a pretty ticky-tack foul to be calling, if you ask me.  Without jumping into the issue of what the Bush administration has or has not claimed, the passage in question is hardly material to the Cato piece.  And I see no claim in the offending piece that privatization per se addresses the solvency problem.  In fact, the admission that raising the retirement age is sufficient to restore solvency explicitly separates the solvency issue from the privatization issue.

Mark continues:

Second, the claim that the Johnson-Flake proposal solves the solvency problem through privatization is false. The proposal replaces wage indexing with price indexing, a cut in benefits, it covers downside risk which increases the burden on the system, more so with moral hazard factored in, and there is the matter of the 6.5 trillion transition cost that is conveniently ignored in Cato’s analysis. The proposal achieves solvency by cutting benefits, not through privatization (there is another version of the proposal which also achieves solvency by cutting benefits).

I think Mark is misreading what the Cato folks are actually claiming.  This is from Cato's February post on Rep. Sam Johnson's proposed legislation, which is based on Cato's own preferred plan:

Workers who do not choose this option would remain in the current system, but their benefits would be based on a price-indexed formula, rather than the current wage-indexed formula. Workers choosing individual accounts would forgo future accumulation of Social Security retirement benefits, but would receive a tradable "recognition bond" based on those benefits already accrued under the current Social Security system.

The solvency issue is addressed by the change in indexation and the reduction of benefits.  To my knowledge, there has never been a claim to the contrary. (And the recognition bonds, by the way, are all about the transition -- honest people can disagree about whether these represent "costs".)

pgl gets a little closer to the Cato argument:

The most recent “Daily Debunker” from Cato discusses the Johnson-Flake proposal, which sounds to me like an old song: (a) reduce government expenditures by switching from wage indexing to price indexing; and (b) allowing workers to take half of their contributions and invest them anyway they want. Yes, (a) addresses this alleged solvency problem by cutting benefits, but Cato claims that workers will be somehow better off because of (b).

Even though their free lunch claims have been refuted numerous times over the years, the Cato crowd just keeps repeating these bogus arguments.

Close, but still no cigar.  pgl is correct about what the Cato clan believes, but incorrect, in my opinion, in characterizing those beliefs as "free lunch claims."  Their argument, as I understand it, goes something like this: There are many avenues to restoring long-term balance to the system.  Demographics (and delay) make fixes that rely on sustaining a payroll-based pay-as-you-go scheme an increasingly bad deal.  Alternatives that effectively cash out the system over time, coupled with capital-based returns on mandatory saving would be a better deal.  There is no free lunch -- just better and worse diets.