January 14, 2005

TCS: From "Peace of Mind" to "A Piece of the Action"

Great article on the real origins of the Social Security Mess
Economist Paul Craig Roberts described these problems in detail in an article written in 1983. Here is -- literally -- the money quote:
"President Ford, at the apparent urging of his political advisors and with the apparent blessing of his chairman of economic advisors, Alan Greenspan, wished to appear more generous. Ford opted for the much more expensive wage-indexing procedure. This single mistake added well over $2 trillion in unfunded liability in present value terms to the system's long-run deficit. It accounts for more than 100 percent of [Social Security]'s deficit."
Since Roberts wrote this in 1983 consumer prices have risen by about 80%. So the $2 trillion in present value terms he referred to then would be worth about $3.6 trillion now. That's not too far from recent estimates by economists John Cogan and Olivia Mitchell that put the system's long-run deficit at about $3.2 trillion. And -- plus ca change -- the impact of wage indexing still accounts for more than 100% of the estimated shortfall.
Read the whole article to get the good insight on how the urge to "just do something" can be devasting in the long run.