Jason Furman (NYU, Wagner School) presents Coping With Demographic Uncertainty at NYU today as part of its Colloquium on Tax Policy and Public Finance series conducted by Alan Auerbach and Daniel Shaviro. Here is the Conclusion:
In a sense, dependency indexing is a purely political proposal. In a world with no fixed costs to undertaking Social Security reforms future policymakers could, in an ad hoc way, just change taxes or benefits to ensure that Social Security remains solvent in the even of any shock. In world of fixed costs to political decision making and sub-optimally delayed stabilizations , there is a large advantage to getting the default right. If policymakers do not like the combination of taxes and benefits that result from the dependency indexing formula they can always pass new legislation to change it.
Perhaps an even more important implication of dependency indexing is to overcome one of the sources of resistance to undertaking Social Security reforms today: the idea that it is better to wait and get the reform right than to act on the basis of earlier and less certain information. Alan Auerbach and Kevin Hassett formalize this intuition in a model which assumes that budgetary policies can only be changed once in a generation
Dependency indexing can overcome some of this inertia. For example, some skeptics about the need for Social Security reform have argued that the Social Security Trustees have underestimated future immigration. They claim that with higher immigration (especially illegal immigration which results in higher payroll tax collections without higher benefit payments) Social Security’s solvency problems would be considerably smaller. If dependency indexing were proposed, the proper response to such a claim would be “well, if you are correct then the benefit reductions would automatically be much smaller.”
At a minimum, future research and policy proposals should take “robust solvency” more seriously and the Social Security actuaries should include information that makes it possible to evaluate the robustness of alternative approaches to restoring solvency.
The Colloquium will be held in Room 120 of Furman Hall from 4:00 – 6:00 p.m. EST. Although the public is invited to attend, due to heightened security throughout NYU Law, please contact Rosemary Simon so she can provide the Guard’s desk with your name.
