WEBVTT 00:00:00.000 --> 00:00:01.967 align:middle line:90% [SQUEAKING] 00:00:01.967 --> 00:00:04.412 align:middle line:90% [RUSTLING] 00:00:04.412 --> 00:00:05.390 align:middle line:90% [CLICKING] 00:00:05.390 --> 00:00:09.757 align:middle line:90% 00:00:09.757 --> 00:00:11.840 align:middle line:84% JON GRUBER: Today, we're continuing our discussion 00:00:11.840 --> 00:00:12.673 align:middle line:90% on social insurance. 00:00:12.673 --> 00:00:14.800 align:middle line:84% To remind you where we are, we're 00:00:14.800 --> 00:00:18.360 align:middle line:84% on the second big section of the class on social insurance. 00:00:18.360 --> 00:00:22.500 align:middle line:84% And last lecture, we covered the principles of social insurance. 00:00:22.500 --> 00:00:24.360 align:middle line:84% How does social insurance basically work? 00:00:24.360 --> 00:00:26.610 align:middle line:84% How do we think about the fundamental social insurance 00:00:26.610 --> 00:00:29.920 align:middle line:84% trade-off between consumption smoothing and moral hazard? 00:00:29.920 --> 00:00:31.680 align:middle line:84% What we'll do for the next few lectures 00:00:31.680 --> 00:00:34.560 align:middle line:84% is apply those basic principles to a variety 00:00:34.560 --> 00:00:37.000 align:middle line:84% of different social insurance programs. 00:00:37.000 --> 00:00:39.760 align:middle line:84% Now, there's a tension with these lectures. 00:00:39.760 --> 00:00:41.478 align:middle line:84% These programs are somewhat complicated. 00:00:41.478 --> 00:00:43.520 align:middle line:84% They all have different rules about how they work 00:00:43.520 --> 00:00:45.680 align:middle line:84% and who's eligible and stuff like that. 00:00:45.680 --> 00:00:48.500 align:middle line:84% So my goal is to tell you enough about the program 00:00:48.500 --> 00:00:52.705 align:middle line:84% so you can do the economics, but not more than you need to know. 00:00:52.705 --> 00:00:55.080 align:middle line:84% That means I walk the line between boring you and leaving 00:00:55.080 --> 00:00:56.180 align:middle line:90% you uninformed. 00:00:56.180 --> 00:00:57.980 align:middle line:84% I'll try to walk that line appropriately, 00:00:57.980 --> 00:01:00.392 align:middle line:84% but please don't be afraid to ask questions. 00:01:00.392 --> 00:01:01.850 align:middle line:84% Wait till I go through the details. 00:01:01.850 --> 00:01:03.250 align:middle line:84% But at the end, if you're like, I still 00:01:03.250 --> 00:01:04.810 align:middle line:84% don't understand how this program works, 00:01:04.810 --> 00:01:05.768 align:middle line:90% you don't have to wait. 00:01:05.768 --> 00:01:08.550 align:middle line:84% But if there's questions along the way, let me know. 00:01:08.550 --> 00:01:10.090 align:middle line:84% And if I'm going to answer them later, I'll tell you. 00:01:10.090 --> 00:01:11.290 align:middle line:84% So go ahead and ask when you have them. 00:01:11.290 --> 00:01:12.170 align:middle line:90% You don't have to wait. 00:01:12.170 --> 00:01:13.530 align:middle line:84% If I'm going to answer them later, I'll tell you. 00:01:13.530 --> 00:01:15.322 align:middle line:84% But just ask me questions if it's not clear 00:01:15.322 --> 00:01:16.830 align:middle line:90% how the programs work. 00:01:16.830 --> 00:01:19.870 align:middle line:84% So today we're going to start with our nation's largest 00:01:19.870 --> 00:01:24.750 align:middle line:84% single social insurance program, which is the Social Security 00:01:24.750 --> 00:01:25.490 align:middle line:90% program. 00:01:25.490 --> 00:01:32.270 align:middle line:90% 00:01:32.270 --> 00:01:35.670 align:middle line:84% The Social Security program is basically 00:01:35.670 --> 00:01:42.390 align:middle line:84% our program that provides people insurance against retirement 00:01:42.390 --> 00:01:46.510 align:middle line:84% and disability and death of a spouse, 00:01:46.510 --> 00:01:49.390 align:middle line:84% basically terrible things that are very financially 00:01:49.390 --> 00:01:52.070 align:middle line:84% consequential at the end of your life. 00:01:52.070 --> 00:01:53.167 align:middle line:90% So how does this work? 00:01:53.167 --> 00:01:54.250 align:middle line:90% How does the program work? 00:01:54.250 --> 00:01:57.850 align:middle line:84% Well, first of all, you pay a tax when you work. 00:01:57.850 --> 00:01:59.830 align:middle line:90% You pay the FICA tax. 00:01:59.830 --> 00:02:03.590 align:middle line:84% The FICA tax, you may have seen that line on your pay stub. 00:02:03.590 --> 00:02:05.270 align:middle line:84% That is the tax that goes to contribute 00:02:05.270 --> 00:02:06.870 align:middle line:90% towards Social Security. 00:02:06.870 --> 00:02:11.670 align:middle line:84% It's 12.4% split between you and your employer, 6.2% on each. 00:02:11.670 --> 00:02:14.420 align:middle line:84% And it's capped at a certain level, 00:02:14.420 --> 00:02:16.790 align:middle line:84% right now about $150,000 of earnings. 00:02:16.790 --> 00:02:19.090 align:middle line:84% So on$ the first $150,000 of earnings, 00:02:19.090 --> 00:02:21.430 align:middle line:84% you and your employer each pay 6.2%. 00:02:21.430 --> 00:02:24.290 align:middle line:84% That goes into a trust fund we'll discuss later. 00:02:24.290 --> 00:02:27.150 align:middle line:84% And that finances Social Security. 00:02:27.150 --> 00:02:30.110 align:middle line:90% Now, who gets Social Security? 00:02:30.110 --> 00:02:33.310 align:middle line:84% Well, to get Social Security, basically you 00:02:33.310 --> 00:02:37.230 align:middle line:84% have to have paid into the system-- you've paid this FICA 00:02:37.230 --> 00:02:39.590 align:middle line:90% tax for 40 quarters. 00:02:39.590 --> 00:02:41.190 align:middle line:84% I say 40 quarters instead of 10 years 00:02:41.190 --> 00:02:43.807 align:middle line:84% because it can be 40 quarters spread across many years. 00:02:43.807 --> 00:02:44.890 align:middle line:90% They measure it quarterly. 00:02:44.890 --> 00:02:47.432 align:middle line:84% So you have to have paid above some minimum amount in payroll 00:02:47.432 --> 00:02:49.770 align:middle line:90% tax over 40 different quarters. 00:02:49.770 --> 00:02:51.670 align:middle line:90% Then you qualify. 00:02:51.670 --> 00:02:56.740 align:middle line:84% If you qualify, you can get a benefit. 00:02:56.740 --> 00:02:59.780 align:middle line:90% And so what is that benefit? 00:02:59.780 --> 00:03:02.460 align:middle line:84% Well, that's where things get complicated. 00:03:02.460 --> 00:03:03.220 align:middle line:90% OK? 00:03:03.220 --> 00:03:05.420 align:middle line:84% What you get as a benefit is you get what's 00:03:05.420 --> 00:03:08.180 align:middle line:90% called an annuity payment. 00:03:08.180 --> 00:03:11.342 align:middle line:84% An annuity is the opposite of life insurance. 00:03:11.342 --> 00:03:12.800 align:middle line:84% We all know what life insurance is. 00:03:12.800 --> 00:03:14.100 align:middle line:84% You pay money while you're alive and your kids 00:03:14.100 --> 00:03:15.500 align:middle line:90% get money when you die. 00:03:15.500 --> 00:03:16.900 align:middle line:90% Annuity is the opposite. 00:03:16.900 --> 00:03:19.060 align:middle line:84% You pay them a chunk of money upfront 00:03:19.060 --> 00:03:21.120 align:middle line:84% and you get a check as long as you're alive. 00:03:21.120 --> 00:03:23.340 align:middle line:90% But it stops when you die. 00:03:23.340 --> 00:03:25.420 align:middle line:84% It's a way to insure against the uncertainty 00:03:25.420 --> 00:03:26.863 align:middle line:90% of the length of your life. 00:03:26.863 --> 00:03:28.780 align:middle line:84% Since you don't know when you're going to die, 00:03:28.780 --> 00:03:30.488 align:middle line:84% savings is not a very good way to insure. 00:03:30.488 --> 00:03:32.405 align:middle line:84% You'll either die with too much or too little. 00:03:32.405 --> 00:03:35.100 align:middle line:84% Imagine you don't have kids or don't care about your kids. 00:03:35.100 --> 00:03:37.362 align:middle line:84% Then by definition, when you save-- 00:03:37.362 --> 00:03:39.820 align:middle line:84% unless you know with certainty the day you're going to die, 00:03:39.820 --> 00:03:42.380 align:middle line:84% by definition, you save too much or too little. 00:03:42.380 --> 00:03:45.260 align:middle line:84% What annuity does is resolve that uncertainty 00:03:45.260 --> 00:03:49.180 align:middle line:84% by basically letting you buy upfront a payment stream that 00:03:49.180 --> 00:03:51.380 align:middle line:90% lasts until the day you die. 00:03:51.380 --> 00:03:53.860 align:middle line:84% And that's what Social Security provides. 00:03:53.860 --> 00:04:04.100 align:middle line:84% That annuity is based on your 35 years of highest earnings. 00:04:04.100 --> 00:04:07.420 align:middle line:84% So they take your earnings over all your life. 00:04:07.420 --> 00:04:12.760 align:middle line:84% And they take the 35 highest years and average your earnings. 00:04:12.760 --> 00:04:15.580 align:middle line:84% They take those 35 highest years. 00:04:15.580 --> 00:04:19.860 align:middle line:84% They put them in real terms and they average them. 00:04:19.860 --> 00:04:24.720 align:middle line:84% And that gives you your average income monthly earnings. 00:04:24.720 --> 00:04:26.220 align:middle line:84% Your average monthly earnings, think 00:04:26.220 --> 00:04:29.077 align:middle line:84% as your average monthly earnings over your working life. 00:04:29.077 --> 00:04:31.160 align:middle line:84% Now, it's not really over your whole working life. 00:04:31.160 --> 00:04:32.000 align:middle line:90% It's 35 years. 00:04:32.000 --> 00:04:32.920 align:middle line:90% Why 35 years? 00:04:32.920 --> 00:04:34.358 align:middle line:90% Well, there's a trade-off. 00:04:34.358 --> 00:04:35.900 align:middle line:84% On the one hand, if they average over 00:04:35.900 --> 00:04:37.900 align:middle line:84% your whole life, that means that quarter when 00:04:37.900 --> 00:04:39.683 align:middle line:84% you made like $6 delivering newspapers-- 00:04:39.683 --> 00:04:41.600 align:middle line:84% or well, you don't deliver newspapers anymore, 00:04:41.600 --> 00:04:44.865 align:middle line:84% but $6 working on mowing your neighbor's lawn or whatever, 00:04:44.865 --> 00:04:46.240 align:middle line:84% it's going to count your average. 00:04:46.240 --> 00:04:48.220 align:middle line:90% You don't want that. 00:04:48.220 --> 00:04:50.300 align:middle line:84% At the same time, if you make it too short, 00:04:50.300 --> 00:04:51.820 align:middle line:90% you can distort decisions. 00:04:51.820 --> 00:04:54.370 align:middle line:84% A great example of that is what happened in Boston, 00:04:54.370 --> 00:05:00.770 align:middle line:90% which is the MBTA in-- 00:05:00.770 --> 00:05:03.010 align:middle line:90% I forget the year-- 00:05:03.010 --> 00:05:04.090 align:middle line:90% 1980. 00:05:04.090 --> 00:05:05.943 align:middle line:84% The MBTA, there was a huge crash. 00:05:05.943 --> 00:05:08.610 align:middle line:84% It turned out that the crash was caused because the operator had 00:05:08.610 --> 00:05:11.570 align:middle line:84% fallen asleep at the wheel, because he was working a 24-hour 00:05:11.570 --> 00:05:14.170 align:middle line:84% shift, because retirement benefits were based on what he 00:05:14.170 --> 00:05:15.730 align:middle line:90% earned the last year he worked. 00:05:15.730 --> 00:05:17.647 align:middle line:84% So he wanted to make as much money as he could 00:05:17.647 --> 00:05:19.170 align:middle line:90% the last year he worked. 00:05:19.170 --> 00:05:23.755 align:middle line:84% Likewise, if you go to Brazil, it turns out traditionally 00:05:23.755 --> 00:05:25.130 align:middle line:84% that your pension benefits-- what 00:05:25.130 --> 00:05:26.730 align:middle line:84% you get for your entire retirement-- 00:05:26.730 --> 00:05:29.030 align:middle line:84% were based on 100% of what you-- were 00:05:29.030 --> 00:05:31.330 align:middle line:84% 100% based on what you earned the last month before you 00:05:31.330 --> 00:05:32.118 align:middle line:90% retired. 00:05:32.118 --> 00:05:34.410 align:middle line:84% So everyone got promoted right before they were retired 00:05:34.410 --> 00:05:35.770 align:middle line:90% and got a big pension. 00:05:35.770 --> 00:05:37.085 align:middle line:90% Clearly, that's too short. 00:05:37.085 --> 00:05:38.710 align:middle line:84% Clearly, your whole career is too long. 00:05:38.710 --> 00:05:39.670 align:middle line:90% Is 35 years right? 00:05:39.670 --> 00:05:42.490 align:middle line:84% I don't know, but it's some compromise in between. 00:05:42.490 --> 00:05:46.970 align:middle line:84% So you get this average income monthly earnings. 00:05:46.970 --> 00:05:49.850 align:middle line:84% And that translates to the benefit you get. 00:05:49.850 --> 00:05:54.600 align:middle line:90% So look at figure 13-1. 00:05:54.600 --> 00:05:58.920 align:middle line:84% On the x-axis is your average indexed monthly earnings. 00:05:58.920 --> 00:06:01.480 align:middle line:84% On the y-axis is your Social Security benefit. 00:06:01.480 --> 00:06:03.777 align:middle line:84% This essentially is a schedule that translates. 00:06:03.777 --> 00:06:05.360 align:middle line:84% It's not your Social Security benefit. 00:06:05.360 --> 00:06:07.580 align:middle line:84% It's what's called your primary insurance amount. 00:06:07.580 --> 00:06:13.800 align:middle line:84% Your AIME translates to your PIA, your Primary Insurance 00:06:13.800 --> 00:06:14.788 align:middle line:90% Amount. 00:06:14.788 --> 00:06:17.080 align:middle line:84% By the way, you're not responsible for specific details 00:06:17.080 --> 00:06:18.720 align:middle line:90% like this. 00:06:18.720 --> 00:06:22.200 align:middle line:84% I will not ask you specifically what AIME and PIA are. 00:06:22.200 --> 00:06:24.400 align:middle line:84% I just want you to understand the basic concepts. 00:06:24.400 --> 00:06:26.460 align:middle line:84% What is your primary insurance amount? 00:06:26.460 --> 00:06:28.680 align:middle line:84% It's what your benefits are based on. 00:06:28.680 --> 00:06:30.880 align:middle line:84% And I'll come back later to what I mean based on. 00:06:30.880 --> 00:06:32.020 align:middle line:90% And so it's a translation. 00:06:32.020 --> 00:06:36.880 align:middle line:84% So basically, for the first $996 of AIME, 00:06:36.880 --> 00:06:40.840 align:middle line:84% you get $0.90 per dollar in benefits. 00:06:40.840 --> 00:06:44.552 align:middle line:84% Then for the next chunk, you get $0.32 per dollar of earnings. 00:06:44.552 --> 00:06:46.760 align:middle line:84% And then for the last chunk, you get $0.10 per dollar 00:06:46.760 --> 00:06:48.778 align:middle line:90% of earnings. 00:06:48.778 --> 00:06:51.320 align:middle line:84% So the bottom line is-- and the reason it cuts off is at some 00:06:51.320 --> 00:06:53.237 align:middle line:84% point, you stop paying Social Security taxes-- 00:06:53.237 --> 00:06:55.515 align:middle line:90% $150,000 a year. 00:06:55.515 --> 00:06:57.140 align:middle line:84% So you stop paying Social Security tax. 00:06:57.140 --> 00:06:59.880 align:middle line:84% That's why the benefits cut off at that point. 00:06:59.880 --> 00:07:01.980 align:middle line:84% So basically, if you think about it, 00:07:01.980 --> 00:07:06.400 align:middle line:84% the idea is that everyone's eligible. 00:07:06.400 --> 00:07:08.120 align:middle line:84% But the amount of benefits you get 00:07:08.120 --> 00:07:10.220 align:middle line:90% are a function of your earnings. 00:07:10.220 --> 00:07:13.600 align:middle line:84% But it's what we call a progressive function. 00:07:13.600 --> 00:07:15.480 align:middle line:84% The poorer you are, the more you get to keep. 00:07:15.480 --> 00:07:17.810 align:middle line:84% The richer you are, the less you get to keep. 00:07:17.810 --> 00:07:20.060 align:middle line:84% But it doesn't mean rich people aren't in the program. 00:07:20.060 --> 00:07:21.640 align:middle line:90% Everyone's in the program. 00:07:21.640 --> 00:07:24.280 align:middle line:84% It just means that as you get richer, 00:07:24.280 --> 00:07:27.600 align:middle line:84% the benefits gets less generous per dollar you earn. 00:07:27.600 --> 00:07:28.260 align:middle line:90% OK? 00:07:28.260 --> 00:07:30.280 align:middle line:84% Another way to think about this is a common term 00:07:30.280 --> 00:07:33.080 align:middle line:84% we'll use when talking about social insurance programs, what 00:07:33.080 --> 00:07:35.400 align:middle line:90% we call the replacement rate. 00:07:35.400 --> 00:07:37.440 align:middle line:84% The replacement rate is, to what extent 00:07:37.440 --> 00:07:41.580 align:middle line:84% does a social insurance program replace what you're earning? 00:07:41.580 --> 00:07:44.580 align:middle line:84% So in this case, since we're insuring you against retirement, 00:07:44.580 --> 00:07:46.880 align:middle line:84% to what extent do your Social Security benefits replace 00:07:46.880 --> 00:07:48.800 align:middle line:90% your pre-retirement earnings? 00:07:48.800 --> 00:07:51.830 align:middle line:84% And on average, that number is about 40%. 00:07:51.830 --> 00:07:54.310 align:middle line:84% On average, Social Security replaces about 40% 00:07:54.310 --> 00:07:56.910 align:middle line:84% of what you earn before you retired. 00:07:56.910 --> 00:07:59.122 align:middle line:84% But as you can see from this chart, that varies. 00:07:59.122 --> 00:08:01.330 align:middle line:84% If you're a low income person, you replace much more. 00:08:01.330 --> 00:08:04.630 align:middle line:84% In fact, if you're very low income, it would replace 90%. 00:08:04.630 --> 00:08:07.670 align:middle line:84% For Bill Gates, it'd replace approximately zero. 00:08:07.670 --> 00:08:09.510 align:middle line:84% So basically, that replacement rate 00:08:09.510 --> 00:08:13.830 align:middle line:84% varies based on how much you earned before you retired. 00:08:13.830 --> 00:08:18.605 align:middle line:90% Now, that's the benefit. 00:08:18.605 --> 00:08:19.730 align:middle line:90% How do you get the benefit? 00:08:19.730 --> 00:08:23.150 align:middle line:84% Well, as I said, have to work for 40 quarters. 00:08:23.150 --> 00:08:24.950 align:middle line:90% Then you have to retire. 00:08:24.950 --> 00:08:26.590 align:middle line:90% And what does that mean? 00:08:26.590 --> 00:08:34.070 align:middle line:84% OK, well, first of all, it means you have to be at least age 62. 00:08:34.070 --> 00:08:37.162 align:middle line:84% That is what's called the early entitlement age. 00:08:37.162 --> 00:08:38.870 align:middle line:84% That is the earliest age at which you can 00:08:38.870 --> 00:08:42.510 align:middle line:90% collect your Social Security. 00:08:42.510 --> 00:08:47.470 align:middle line:84% But the other key age is 67, which 00:08:47.470 --> 00:08:50.940 align:middle line:90% we call the full benefit age. 00:08:50.940 --> 00:08:56.100 align:middle line:84% 67 is key because if you retire at 67, you get your PIA. 00:08:56.100 --> 00:08:58.900 align:middle line:84% So this PIA I calculated, this is what 00:08:58.900 --> 00:09:01.820 align:middle line:90% you get if you retire at 67. 00:09:01.820 --> 00:09:06.940 align:middle line:84% But you can retire as early as 62 or as late as 70. 00:09:06.940 --> 00:09:08.860 align:middle line:84% Actually, you can retire whenever you want, 00:09:08.860 --> 00:09:12.660 align:middle line:84% but there's no gain for going past 70. 00:09:12.660 --> 00:09:15.720 align:middle line:84% And what they do is they adjust your benefit 00:09:15.720 --> 00:09:16.800 align:middle line:90% for the retirement age. 00:09:16.800 --> 00:09:18.620 align:middle line:90% Here's the basic principle. 00:09:18.620 --> 00:09:21.548 align:middle line:84% You get Social Security till you die. 00:09:21.548 --> 00:09:23.840 align:middle line:84% Imagine when you die is independent of when you retire. 00:09:23.840 --> 00:09:25.860 align:middle line:90% It's not, but imagine it is. 00:09:25.860 --> 00:09:28.040 align:middle line:84% Then the idea is if you retire earlier, 00:09:28.040 --> 00:09:29.868 align:middle line:84% you get more months of Social Security, 00:09:29.868 --> 00:09:32.160 align:middle line:84% because you get from the time you retire until you die. 00:09:32.160 --> 00:09:34.165 align:middle line:84% If you retire later, you get fewer months. 00:09:34.165 --> 00:09:35.540 align:middle line:84% So what we have is we have what's 00:09:35.540 --> 00:09:43.220 align:middle line:84% called an actuarial adjustment, which basically 00:09:43.220 --> 00:09:45.340 align:middle line:84% says if you retire before 67, we're 00:09:45.340 --> 00:09:47.758 align:middle line:84% going to crank down your monthly benefits. 00:09:47.758 --> 00:09:49.800 align:middle line:84% Because you're going to get them for more months, 00:09:49.800 --> 00:09:51.500 align:middle line:90% so you get less per month. 00:09:51.500 --> 00:09:53.140 align:middle line:84% And if you retire after 67, we're 00:09:53.140 --> 00:09:55.100 align:middle line:84% going to crank up your monthly benefits, 00:09:55.100 --> 00:09:56.360 align:middle line:84% because you're getting them for fewer months. 00:09:56.360 --> 00:09:58.180 align:middle line:84% So we're going to give you more per month. 00:09:58.180 --> 00:10:00.550 align:middle line:84% So the idea is, think of a system that pivots around 67. 00:10:00.550 --> 00:10:02.860 align:middle line:90% At 67, you get this PIA. 00:10:02.860 --> 00:10:05.100 align:middle line:84% If you retire earlier than 67, then every month 00:10:05.100 --> 00:10:06.948 align:middle line:90% you get less than your PIA. 00:10:06.948 --> 00:10:08.740 align:middle line:84% If you're retire later than 67, every month 00:10:08.740 --> 00:10:10.980 align:middle line:90% you get more than your PIA. 00:10:10.980 --> 00:10:12.780 align:middle line:84% And that's basically the way it works. 00:10:12.780 --> 00:10:15.300 align:middle line:90% So the idea is-- 00:10:15.300 --> 00:10:17.360 align:middle line:90% now, one other thing. 00:10:17.360 --> 00:10:19.940 align:middle line:90% What does retire mean? 00:10:19.940 --> 00:10:24.020 align:middle line:84% Retire means earning below a certain amount. 00:10:24.020 --> 00:10:32.540 align:middle line:84% That amount today is about $19,000. 00:10:32.540 --> 00:10:36.240 align:middle line:84% So retire means not earning much. 00:10:36.240 --> 00:10:40.864 align:middle line:90% 00:10:40.864 --> 00:10:43.820 align:middle line:84% So basically, retiring means not earning much. 00:10:43.820 --> 00:10:46.840 align:middle line:84% So essentially you can keep working and make up to $19,000, 00:10:46.840 --> 00:10:49.090 align:middle line:84% and you're effectively retired as far as the system is 00:10:49.090 --> 00:10:50.770 align:middle line:90% concerned. 00:10:50.770 --> 00:10:55.090 align:middle line:90% If you earn more than $19,000-- 00:10:55.090 --> 00:10:56.310 align:middle line:90% well, let me just stop there. 00:10:56.310 --> 00:10:59.210 align:middle line:84% So basically, retirement means earning less than $19,000. 00:10:59.210 --> 00:11:02.810 align:middle line:90% So that's how the system works. 00:11:02.810 --> 00:11:06.930 align:middle line:84% If you've worked 40 quarters and you reach age 62, 00:11:06.930 --> 00:11:09.130 align:middle line:90% you're eligible for this system. 00:11:09.130 --> 00:11:12.370 align:middle line:84% The benefits you get depend on what age you retire 00:11:12.370 --> 00:11:14.530 align:middle line:90% and what your past income was. 00:11:14.530 --> 00:11:18.810 align:middle line:84% And you have to earn less than $19,000 to qualify. 00:11:18.810 --> 00:11:20.210 align:middle line:90% OK? 00:11:20.210 --> 00:11:22.090 align:middle line:90% Two other wrinkles. 00:11:22.090 --> 00:11:26.130 align:middle line:84% First of all, the benefits are indexed, 00:11:26.130 --> 00:11:29.770 align:middle line:84% which means that the benefits also go up with inflation. 00:11:29.770 --> 00:11:31.190 align:middle line:84% So once you're receiving benefits, 00:11:31.190 --> 00:11:32.710 align:middle line:84% your monthly benefit doesn't stay-- 00:11:32.710 --> 00:11:34.930 align:middle line:84% let's say you retire at 67 and get your PIA. 00:11:34.930 --> 00:11:38.290 align:middle line:84% Let's say you're exactly this guy who earned 996 and your PIA 00:11:38.290 --> 00:11:39.850 align:middle line:90% is 896. 00:11:39.850 --> 00:11:42.830 align:middle line:84% You get a check for 896 the first 12 months. 00:11:42.830 --> 00:11:44.930 align:middle line:84% But then every year it goes up with inflation. 00:11:44.930 --> 00:11:47.010 align:middle line:90% So it's indexed. 00:11:47.010 --> 00:11:53.050 align:middle line:84% The second thing to know is that family members also 00:11:53.050 --> 00:11:54.530 align:middle line:90% get Social Security benefits. 00:11:54.530 --> 00:12:02.010 align:middle line:84% In particular, most importantly, a spouse is eligible for-- 00:12:02.010 --> 00:12:04.050 align:middle line:90% to make things really hard-- 00:12:04.050 --> 00:12:08.490 align:middle line:84% the larger of their own Social Security benefit or half 00:12:08.490 --> 00:12:10.112 align:middle line:90% of yours. 00:12:10.112 --> 00:12:11.570 align:middle line:84% So if you're married to someone who 00:12:11.570 --> 00:12:13.290 align:middle line:84% didn't earn much relative to you, 00:12:13.290 --> 00:12:15.270 align:middle line:84% they'll get half your Social Security benefit. 00:12:15.270 --> 00:12:16.910 align:middle line:84% If you married someone who earned a lot relative to you, 00:12:16.910 --> 00:12:19.370 align:middle line:84% they'll get their own Social Security benefit. 00:12:19.370 --> 00:12:21.790 align:middle line:90% OK? 00:12:21.790 --> 00:12:25.410 align:middle line:84% And lastly, there's a survivor benefit. 00:12:25.410 --> 00:12:29.050 align:middle line:84% When you die, your spouse gets the larger of their benefit 00:12:29.050 --> 00:12:31.530 align:middle line:90% or all of your benefit. 00:12:31.530 --> 00:12:36.690 align:middle line:84% So basically, the idea is a married couple 00:12:36.690 --> 00:12:41.970 align:middle line:84% gets at least 150% of the higher earning spouse's benefit. 00:12:41.970 --> 00:12:45.280 align:middle line:84% When they die, it goes to 100% of the larger earning spouse's 00:12:45.280 --> 00:12:46.560 align:middle line:90% benefit. 00:12:46.560 --> 00:12:48.260 align:middle line:90% OK, I'll stop there. 00:12:48.260 --> 00:12:49.580 align:middle line:90% Questions about how this works? 00:12:49.580 --> 00:12:52.400 align:middle line:90% 00:12:52.400 --> 00:12:54.440 align:middle line:84% So basically I said social insurance is payments 00:12:54.440 --> 00:12:56.100 align:middle line:90% you get in an adverse event. 00:12:56.100 --> 00:12:57.720 align:middle line:84% The adverse event here is retirement, 00:12:57.720 --> 00:12:59.342 align:middle line:90% being unable to work. 00:12:59.342 --> 00:13:00.800 align:middle line:84% Then you get this payment, which is 00:13:00.800 --> 00:13:04.600 align:middle line:84% this annuity based on your past income and the age you retired. 00:13:04.600 --> 00:13:07.640 align:middle line:90% And that's how it works. 00:13:07.640 --> 00:13:12.060 align:middle line:84% Now, that's how the benefits are determined. 00:13:12.060 --> 00:13:14.560 align:middle line:84% But what's very interesting about Social Security and drives 00:13:14.560 --> 00:13:18.760 align:middle line:84% a lot of the policy debate is how it works over time. 00:13:18.760 --> 00:13:23.480 align:middle line:84% Because the point is, when you retire, 00:13:23.480 --> 00:13:28.480 align:middle line:84% many of you will get jobs with, say, a 401(k) or a pension plan. 00:13:28.480 --> 00:13:33.485 align:middle line:84% These plans are what's called funded retirement plans. 00:13:33.485 --> 00:13:34.860 align:middle line:84% What is a funded retirement plan? 00:13:34.860 --> 00:13:37.920 align:middle line:84% That means that-- so MIT, I have a retirement plan where 00:13:37.920 --> 00:13:41.633 align:middle line:84% every month they take some money out of my salary, put it aside. 00:13:41.633 --> 00:13:43.050 align:middle line:84% It goes into an account, it grows. 00:13:43.050 --> 00:13:45.510 align:middle line:90% I get it when I retire. 00:13:45.510 --> 00:13:47.858 align:middle line:84% That's not how Social Security works. 00:13:47.858 --> 00:13:50.150 align:middle line:84% Social Security was set up because an entire generation 00:13:50.150 --> 00:13:52.630 align:middle line:84% had been devastated by the Depression 00:13:52.630 --> 00:13:55.390 align:middle line:90% and lost all their savings. 00:13:55.390 --> 00:13:57.630 align:middle line:84% So they wanted to immediately bail out 00:13:57.630 --> 00:13:59.910 align:middle line:84% a generation that needed savings. 00:13:59.910 --> 00:14:02.270 align:middle line:84% They couldn't let them spend their lifetimes building up 00:14:02.270 --> 00:14:03.990 align:middle line:90% like you will. 00:14:03.990 --> 00:14:07.830 align:middle line:84% So they set up what's called an unfunded system. 00:14:07.830 --> 00:14:12.990 align:middle line:84% The way an unfunded system works is it's not real savings. 00:14:12.990 --> 00:14:18.710 align:middle line:84% It's transfers from workers to retirees in real time. 00:14:18.710 --> 00:14:19.870 align:middle line:90% OK? 00:14:19.870 --> 00:14:25.390 align:middle line:90% Let me explain how this works. 00:14:25.390 --> 00:14:28.270 align:middle line:90% Look at table 13-1. 00:14:28.270 --> 00:14:31.230 align:middle line:84% Table 13-1 is a simple version of what we call an overlapping 00:14:31.230 --> 00:14:34.270 align:middle line:84% generations model, a famous modeling tool used 00:14:34.270 --> 00:14:36.630 align:middle line:90% by economists. 00:14:36.630 --> 00:14:39.810 align:middle line:84% Imagine a society with the following conditions. 00:14:39.810 --> 00:14:42.350 align:middle line:90% 00:14:42.350 --> 00:14:47.070 align:middle line:84% The society starts with 100 people in it. 00:14:47.070 --> 00:14:49.170 align:middle line:84% There's two periods to the world. 00:14:49.170 --> 00:14:51.970 align:middle line:84% Everybody works the first period and retires the second period. 00:14:51.970 --> 00:14:54.830 align:middle line:84% The two periods, there's working life and retirement. 00:14:54.830 --> 00:14:58.750 align:middle line:84% Every period, a new generation is 00:14:58.750 --> 00:15:05.210 align:middle line:84% born that's 5% larger than the last, and due to productivity, 00:15:05.210 --> 00:15:08.103 align:middle line:90% earns 5% more than the last. 00:15:08.103 --> 00:15:10.270 align:middle line:84% So it's a society where every year, a new generation 00:15:10.270 --> 00:15:12.270 align:middle line:90% is coming along. 00:15:12.270 --> 00:15:14.290 align:middle line:84% They're 5% bigger than the previous generation, 00:15:14.290 --> 00:15:15.590 align:middle line:90% earning 5% more. 00:15:15.590 --> 00:15:18.370 align:middle line:84% Then they get old, and then new generation comes along. 00:15:18.370 --> 00:15:21.670 align:middle line:84% And so at any point in time, you have two groups alive, the young 00:15:21.670 --> 00:15:23.910 align:middle line:84% and the old, the workers and the older. 00:15:23.910 --> 00:15:27.710 align:middle line:84% So let's map out what this means for how Social Security works 00:15:27.710 --> 00:15:28.790 align:middle line:90% in reality. 00:15:28.790 --> 00:15:31.790 align:middle line:84% So we started with society just starting out with 100 young 00:15:31.790 --> 00:15:34.907 align:middle line:84% workers who paid $20,000 per worker. 00:15:34.907 --> 00:15:36.490 align:middle line:84% And these are the pre Social Security. 00:15:36.490 --> 00:15:39.270 align:middle line:84% These are the people before Social Security existed. 00:15:39.270 --> 00:15:41.420 align:middle line:90% Now we go to period two. 00:15:41.420 --> 00:15:44.420 align:middle line:84% In period two, there are 105 young workers 00:15:44.420 --> 00:15:46.380 align:middle line:90% because population grows. 00:15:46.380 --> 00:15:48.280 align:middle line:90% They each earn $21,000. 00:15:48.280 --> 00:15:48.780 align:middle line:90% Why? 00:15:48.780 --> 00:15:50.072 align:middle line:90% Because of productivity growth. 00:15:50.072 --> 00:15:53.740 align:middle line:84% Remember, wages go up 5% for every generation. 00:15:53.740 --> 00:15:58.380 align:middle line:84% So the number of workers has gone from 100 to 105. 00:15:58.380 --> 00:16:01.660 align:middle line:84% Earnings has gone from $20,000 to $21,000. 00:16:01.660 --> 00:16:03.780 align:middle line:90% OK, clear on that? 00:16:03.780 --> 00:16:07.020 align:middle line:84% Now, the young people from period one 00:16:07.020 --> 00:16:09.140 align:middle line:84% are now the old people in period two. 00:16:09.140 --> 00:16:12.220 align:middle line:84% That's the overlapping generations notion of it. 00:16:12.220 --> 00:16:13.980 align:middle line:90% Well, how many were there? 00:16:13.980 --> 00:16:18.820 align:middle line:84% Well, there were 100 retirees, because they 00:16:18.820 --> 00:16:21.660 align:middle line:84% were the 100 young workers in the previous period. 00:16:21.660 --> 00:16:26.240 align:middle line:84% Well, each of those retirees gets $2,205. 00:16:26.240 --> 00:16:27.980 align:middle line:90% Why do they get that much? 00:16:27.980 --> 00:16:35.005 align:middle line:84% Because the 105 workers are each paying taxes on $21,000. 00:16:35.005 --> 00:16:36.880 align:middle line:84% Oh, last thing is assume the tax rate is 10%. 00:16:36.880 --> 00:16:37.380 align:middle line:90% I'm sorry. 00:16:37.380 --> 00:16:37.880 align:middle line:90% My bad. 00:16:37.880 --> 00:16:40.770 align:middle line:90% Assume there's a 10% tax rate. 00:16:40.770 --> 00:16:43.090 align:middle line:84% So the total tax that's collected from those young 00:16:43.090 --> 00:16:46.650 align:middle line:84% workers in period one are $21,000 a worker. 00:16:46.650 --> 00:16:51.090 align:middle line:84% You get $2,100 per worker in taxes times 105 workers 00:16:51.090 --> 00:16:54.070 align:middle line:90% for $220,500 in total revenue. 00:16:54.070 --> 00:16:55.730 align:middle line:90% People see that? 00:16:55.730 --> 00:17:01.550 align:middle line:84% You split that across 100 old people, they each get $2,205. 00:17:01.550 --> 00:17:03.730 align:middle line:90% And they paid no taxes. 00:17:03.730 --> 00:17:05.569 align:middle line:90% Now we go to period three. 00:17:05.569 --> 00:17:08.550 align:middle line:84% In period three, there are now 110 young workers. 00:17:08.550 --> 00:17:10.190 align:middle line:90% I'm assuming the 5%-- 00:17:10.190 --> 00:17:11.829 align:middle line:84% I'm smoothing the 5% out a little bit. 00:17:11.829 --> 00:17:15.369 align:middle line:84% Not making it precisely 5%, rounding it. 00:17:15.369 --> 00:17:21.170 align:middle line:84% And they each earn $22,050 because of productivity growth. 00:17:21.170 --> 00:17:23.530 align:middle line:84% So they each pay $2,205 in taxes. 00:17:23.530 --> 00:17:27.930 align:middle line:84% That means total taxes collected are $242,550. 00:17:27.930 --> 00:17:30.610 align:middle line:84% There's now 105 old workers because the young 00:17:30.610 --> 00:17:33.530 align:middle line:84% from period two are the old in period three. 00:17:33.530 --> 00:17:35.970 align:middle line:90% They each get $2,310. 00:17:35.970 --> 00:17:39.610 align:middle line:84% And they each pay paid $2,100 in taxes. 00:17:39.610 --> 00:17:40.930 align:middle line:90% Same in period four. 00:17:40.930 --> 00:17:43.547 align:middle line:84% Now, in period five, something changes. 00:17:43.547 --> 00:17:45.130 align:middle line:84% In period five, the government decides 00:17:45.130 --> 00:17:48.570 align:middle line:84% it's going to cancel Social Security at the end of period 00:17:48.570 --> 00:17:49.912 align:middle line:90% five. 00:17:49.912 --> 00:17:50.870 align:middle line:90% So what does that mean? 00:17:50.870 --> 00:17:55.723 align:middle line:84% That means the young workers in period five, they pay taxes. 00:17:55.723 --> 00:17:57.890 align:middle line:84% The young workers in period five don't pay anything. 00:17:57.890 --> 00:18:01.070 align:middle line:84% So at the end of period five, young workers pay nothing, 00:18:01.070 --> 00:18:04.650 align:middle line:84% and therefore the old people in that period get nothing. 00:18:04.650 --> 00:18:09.090 align:middle line:84% Now let's look at what does that imply for the rate of return 00:18:09.090 --> 00:18:11.450 align:middle line:90% of the system. 00:18:11.450 --> 00:18:14.570 align:middle line:84% Well, first of all, for the first generation, 00:18:14.570 --> 00:18:16.410 align:middle line:84% they have an infinite rate of return. 00:18:16.410 --> 00:18:17.290 align:middle line:90% Why? 00:18:17.290 --> 00:18:22.010 align:middle line:84% They paid in nothing and they get benefits. 00:18:22.010 --> 00:18:27.330 align:middle line:84% The second through fourth-- the second and third generations, 00:18:27.330 --> 00:18:32.570 align:middle line:90% they get a 10% rate of return. 00:18:32.570 --> 00:18:35.250 align:middle line:84% Now, stop and think about this for a second. 00:18:35.250 --> 00:18:37.360 align:middle line:90% This is pretty fucking weird. 00:18:37.360 --> 00:18:39.325 align:middle line:90% OK, think about interest. 00:18:39.325 --> 00:18:41.950 align:middle line:84% We think of interest is coming from-- you put money in the bank 00:18:41.950 --> 00:18:43.420 align:middle line:90% and it's used productively. 00:18:43.420 --> 00:18:45.003 align:middle line:84% There's a marginal product of capital. 00:18:45.003 --> 00:18:47.128 align:middle line:84% That marginal product of capital is returned to you 00:18:47.128 --> 00:18:48.240 align:middle line:90% as interest payments. 00:18:48.240 --> 00:18:49.540 align:middle line:90% There's no capital here. 00:18:49.540 --> 00:18:51.280 align:middle line:90% There's no savings. 00:18:51.280 --> 00:18:54.200 align:middle line:84% How are they getting a rate of return of 10%? 00:18:54.200 --> 00:18:56.320 align:middle line:90% How is that possible? 00:18:56.320 --> 00:18:56.905 align:middle line:90% Yeah. 00:18:56.905 --> 00:18:58.280 align:middle line:84% AUDIENCE: Increased productivity. 00:18:58.280 --> 00:18:59.738 align:middle line:84% JON GRUBER: Increased productivity, 00:18:59.738 --> 00:19:01.600 align:middle line:90% increased population. 00:19:01.600 --> 00:19:04.240 align:middle line:90% It's just they are basically-- 00:19:04.240 --> 00:19:08.520 align:middle line:84% this is basically a Ponzi scheme. 00:19:08.520 --> 00:19:10.540 align:middle line:84% Now, remember what Ponzi schemes were. 00:19:10.540 --> 00:19:14.280 align:middle line:84% Ponzi actually lived in my town of Lexington, Massachusetts. 00:19:14.280 --> 00:19:15.460 align:middle line:90% How did Ponzi schemes work? 00:19:15.460 --> 00:19:17.335 align:middle line:84% Well, imagine the way Ponzi scheme would work 00:19:17.335 --> 00:19:20.920 align:middle line:84% is let's say I teach two classes in one day, 00:19:20.920 --> 00:19:23.160 align:middle line:84% as I used to when I was younger and stronger. 00:19:23.160 --> 00:19:24.960 align:middle line:84% OK, let's say I go to the first class 00:19:24.960 --> 00:19:28.480 align:middle line:84% and I say class, if you each give me $1, 00:19:28.480 --> 00:19:32.000 align:middle line:84% I will come back next class and give you $2. 00:19:32.000 --> 00:19:32.958 align:middle line:90% And they're kiss asses. 00:19:32.958 --> 00:19:34.500 align:middle line:84% They're like, fine, I'll give him $1. 00:19:34.500 --> 00:19:35.680 align:middle line:90% What's it going to cost me? 00:19:35.680 --> 00:19:37.540 align:middle line:84% I then go to my afternoon class and say, 00:19:37.540 --> 00:19:42.160 align:middle line:84% class, if you each give me $3, then I'll come back next class 00:19:42.160 --> 00:19:43.960 align:middle line:90% and give you $5. 00:19:43.960 --> 00:19:45.340 align:middle line:84% They say, fine, I'll give you $3. 00:19:45.340 --> 00:19:47.405 align:middle line:90% I take the $3, I pocket $1. 00:19:47.405 --> 00:19:49.780 align:middle line:84% I bring the other $2 and give it back to the first class. 00:19:49.780 --> 00:19:52.400 align:middle line:84% They're like, holy shit, this guy's for real. 00:19:52.400 --> 00:19:55.080 align:middle line:84% So I say, here's an even better deal. 00:19:55.080 --> 00:19:58.747 align:middle line:84% If you guys give me $6, I'll pay you back $10 next class. 00:19:58.747 --> 00:19:59.580 align:middle line:90% They're like, great. 00:19:59.580 --> 00:20:00.247 align:middle line:90% They give me $6. 00:20:00.247 --> 00:20:03.020 align:middle line:84% I pocket $1, I bring the $5, I pay back the second class. 00:20:03.020 --> 00:20:05.040 align:middle line:90% They're excited, and on it goes. 00:20:05.040 --> 00:20:09.160 align:middle line:84% This is what Bernie Madoff did successfully for decades. 00:20:09.160 --> 00:20:13.120 align:middle line:84% This is what the single largest social program of the US 00:20:13.120 --> 00:20:16.040 align:middle line:90% government relies on. 00:20:16.040 --> 00:20:16.680 align:middle line:90% OK? 00:20:16.680 --> 00:20:18.300 align:middle line:84% What's the problem with Ponzi schemes? 00:20:18.300 --> 00:20:20.960 align:middle line:84% Why did Madoff's Ponzi scheme fall apart? 00:20:20.960 --> 00:20:22.262 align:middle line:90% The problem is people stop-- 00:20:22.262 --> 00:20:23.720 align:middle line:84% if the class finally says, you know 00:20:23.720 --> 00:20:25.280 align:middle line:84% what, we're not contributing anymore, 00:20:25.280 --> 00:20:28.000 align:middle line:84% it all falls apart because then I can't pay the other class. 00:20:28.000 --> 00:20:30.640 align:middle line:84% That's what happens to the last generation. 00:20:30.640 --> 00:20:33.187 align:middle line:84% The last generation gets totally screwed, 00:20:33.187 --> 00:20:35.770 align:middle line:84% as all the people who ended up holding the bag for Madoff did. 00:20:35.770 --> 00:20:37.890 align:middle line:84% As my voice says, his name is "Made-off." 00:20:37.890 --> 00:20:40.990 align:middle line:90% Didn't people see that coming? 00:20:40.990 --> 00:20:45.870 align:middle line:84% So basically, the thing with an unfunded system is it 00:20:45.870 --> 00:20:49.190 align:middle line:90% works under two conditions-- 00:20:49.190 --> 00:20:53.070 align:middle line:84% as long as the contributions are ever-growing and as long 00:20:53.070 --> 00:20:56.910 align:middle line:90% as people always agree to play. 00:20:56.910 --> 00:21:00.710 align:middle line:84% Now, the difference between the Madoff scheme 00:21:00.710 --> 00:21:01.650 align:middle line:90% and Social Security-- 00:21:01.650 --> 00:21:02.710 align:middle line:90% I'm being kind of glib. 00:21:02.710 --> 00:21:04.252 align:middle line:84% Social Security has one big advantage 00:21:04.252 --> 00:21:06.910 align:middle line:84% compared to Madoff, which is what would happen politically 00:21:06.910 --> 00:21:08.368 align:middle line:84% if the US government announced they 00:21:08.368 --> 00:21:11.240 align:middle line:90% were ending Social Security? 00:21:11.240 --> 00:21:12.990 align:middle line:84% AUDIENCE: I think a number of policymakers 00:21:12.990 --> 00:21:14.210 align:middle line:90% would be literally killed. 00:21:14.210 --> 00:21:16.470 align:middle line:84% JON GRUBER: They would all lose their jobs because the elderly 00:21:16.470 --> 00:21:17.450 align:middle line:90% would be like, no way. 00:21:17.450 --> 00:21:18.450 align:middle line:90% We paid into the system. 00:21:18.450 --> 00:21:19.270 align:middle line:90% We want our money. 00:21:19.270 --> 00:21:22.230 align:middle line:84% So unlike Ponzi, there's the power of the entire US democracy 00:21:22.230 --> 00:21:23.150 align:middle line:90% behind-- 00:21:23.150 --> 00:21:24.910 align:middle line:84% the power of vote maximizing politicians 00:21:24.910 --> 00:21:26.210 align:middle line:90% behind this Ponzi scheme. 00:21:26.210 --> 00:21:29.670 align:middle line:84% This is a Ponzi scheme with real credibility behind it. 00:21:29.670 --> 00:21:31.340 align:middle line:84% OK, so that's why it's different. 00:21:31.340 --> 00:21:37.860 align:middle line:84% But what this does say is the rate of return to this Ponzi 00:21:37.860 --> 00:21:40.660 align:middle line:84% scheme that we call Social Security is dictated 00:21:40.660 --> 00:21:45.980 align:middle line:84% by two things, the rate of population growth 00:21:45.980 --> 00:21:48.940 align:middle line:84% and the rate of productivity growth. 00:21:48.940 --> 00:21:53.820 align:middle line:90% Those dictate what happens. 00:21:53.820 --> 00:21:56.700 align:middle line:84% Now, you might think this all sounds 00:21:56.700 --> 00:21:58.320 align:middle line:90% kind of fun and theoretical. 00:21:58.320 --> 00:22:00.940 align:middle line:84% But let's talk about Ida Mae Fuller, my favorite example 00:22:00.940 --> 00:22:01.760 align:middle line:90% in this class. 00:22:01.760 --> 00:22:03.820 align:middle line:84% Ida Mae Fuller was the very first beneficiary 00:22:03.820 --> 00:22:05.220 align:middle line:90% of Social Security. 00:22:05.220 --> 00:22:07.722 align:middle line:84% She was born in 1874, in Vermont, 00:22:07.722 --> 00:22:10.180 align:middle line:84% and attended the same school that President Calvin Coolidge 00:22:10.180 --> 00:22:11.340 align:middle line:90% did. 00:22:11.340 --> 00:22:13.820 align:middle line:84% She worked for three years once Social Security 00:22:13.820 --> 00:22:16.500 align:middle line:84% was established and paid a total of $24.75 00:22:16.500 --> 00:22:19.540 align:middle line:90% in Social Security taxes. 00:22:19.540 --> 00:22:20.772 align:middle line:90% On November 4, 1939-- 00:22:20.772 --> 00:22:22.980 align:middle line:84% I love this-- she dropped by a Social Security office 00:22:22.980 --> 00:22:23.880 align:middle line:90% in Rutland, Vermont. 00:22:23.880 --> 00:22:26.293 align:middle line:84% And she said, it wasn't that I was expecting anything, 00:22:26.293 --> 00:22:28.460 align:middle line:84% mind you, but I had been paying for something called 00:22:28.460 --> 00:22:30.835 align:middle line:84% Social Security and I wanted to ask the people in Rutland 00:22:30.835 --> 00:22:31.380 align:middle line:90% about it. 00:22:31.380 --> 00:22:33.762 align:middle line:84% She was the very first check processed by Social Security 00:22:33.762 --> 00:22:35.220 align:middle line:84% Administration, and she got a check 00:22:35.220 --> 00:22:39.420 align:middle line:84% for $22.54, almost the entire amount she paid in. 00:22:39.420 --> 00:22:41.140 align:middle line:90% Ida Mae Fuller lived to 100. 00:22:41.140 --> 00:22:47.940 align:middle line:84% Over the 35 years she lived, she collected $23,000 in Social 00:22:47.940 --> 00:22:49.100 align:middle line:90% Security benefits. 00:22:49.100 --> 00:22:51.340 align:middle line:84% Ida Mae Fuller is generation one. 00:22:51.340 --> 00:22:52.360 align:middle line:90% She paid $24. 00:22:52.360 --> 00:22:55.300 align:middle line:90% She collected $23,000. 00:22:55.300 --> 00:22:58.820 align:middle line:84% The problem is, what about generation four? 00:22:58.820 --> 00:23:00.940 align:middle line:90% Well, they haven't hit yet. 00:23:00.940 --> 00:23:04.260 align:middle line:84% But the existing generation four means the Social Security system 00:23:04.260 --> 00:23:07.340 align:middle line:84% carries around it something my Nobel Prize winning 00:23:07.340 --> 00:23:12.660 align:middle line:84% former colleague Peter Diamond called a legacy debt, which 00:23:12.660 --> 00:23:15.220 align:middle line:84% is essentially the Social Security system 00:23:15.220 --> 00:23:17.120 align:middle line:84% carries around a giant implicit debt. 00:23:17.120 --> 00:23:17.960 align:middle line:90% What is that debt? 00:23:17.960 --> 00:23:20.620 align:middle line:84% It's what we owe the generation that's old. 00:23:20.620 --> 00:23:23.760 align:middle line:84% That if we wanted to end the system and not cause revolt, 00:23:23.760 --> 00:23:26.500 align:middle line:84% we'd have to pay off a whole generation of old people. 00:23:26.500 --> 00:23:29.050 align:middle line:90% And that debt is enormous. 00:23:29.050 --> 00:23:31.250 align:middle line:84% So the consequence of an unfunded system 00:23:31.250 --> 00:23:33.410 align:middle line:84% is we're always behind the eight ball. 00:23:33.410 --> 00:23:35.470 align:middle line:84% If we don't keep it going, we have a huge debt. 00:23:35.470 --> 00:23:37.010 align:middle line:84% A funded system doesn't matter because a funded system, 00:23:37.010 --> 00:23:38.885 align:middle line:84% you put the money and you take the money out. 00:23:38.885 --> 00:23:42.530 align:middle line:84% An unfunded system, that does matter. 00:23:42.530 --> 00:23:48.270 align:middle line:84% So you end up with a system with this giant legacy debt. 00:23:48.270 --> 00:23:48.770 align:middle line:90% OK? 00:23:48.770 --> 00:23:51.330 align:middle line:84% We'll come back to this when we talk about Social Security 00:23:51.330 --> 00:23:53.090 align:middle line:84% reform at the end of the lecture. 00:23:53.090 --> 00:23:56.650 align:middle line:90% OK, questions about that? 00:23:56.650 --> 00:23:59.010 align:middle line:90% OK. 00:23:59.010 --> 00:24:00.410 align:middle line:90% Let's keep being active here. 00:24:00.410 --> 00:24:03.110 align:middle line:84% I know the details get a bit sloggy, 00:24:03.110 --> 00:24:05.130 align:middle line:84% but let's keep staying involved here. 00:24:05.130 --> 00:24:08.963 align:middle line:84% Now, while 13-1 is an imaginary system, 00:24:08.963 --> 00:24:10.630 align:middle line:84% let's go to real Social Security system. 00:24:10.630 --> 00:24:13.330 align:middle line:90% Let's go to table 13-2. 00:24:13.330 --> 00:24:18.130 align:middle line:84% What table 13-2 does is calculate something called 00:24:18.130 --> 00:24:21.010 align:middle line:90% Social Security wealth. 00:24:21.010 --> 00:24:22.930 align:middle line:90% What is Social Security wealth? 00:24:22.930 --> 00:24:28.680 align:middle line:84% Social Security wealth is the net present discounted value 00:24:28.680 --> 00:24:33.600 align:middle line:84% of your stream of Social Security payments minus taxes. 00:24:33.600 --> 00:24:36.560 align:middle line:84% What you do is you, say, take someone, 00:24:36.560 --> 00:24:39.160 align:middle line:84% project how long they're going to live, calculate 00:24:39.160 --> 00:24:42.240 align:middle line:84% all the benefits they'll get over the rest of their life, 00:24:42.240 --> 00:24:44.200 align:middle line:90% and discount them back to today. 00:24:44.200 --> 00:24:47.280 align:middle line:84% Do the same with taxes and discount it back to today. 00:24:47.280 --> 00:24:49.702 align:middle line:84% The difference is your Social Security wealth-- the net 00:24:49.702 --> 00:24:52.160 align:middle line:84% of what the system will pay out to you over your life minus 00:24:52.160 --> 00:24:55.880 align:middle line:84% what you'll pay in discount to today. 00:24:55.880 --> 00:24:59.480 align:middle line:84% What this table does is show the amount of Social Security wealth 00:24:59.480 --> 00:25:02.000 align:middle line:84% for people in three generations-- 00:25:02.000 --> 00:25:05.880 align:middle line:84% the first generation, those who turned 65 in 1960, 00:25:05.880 --> 00:25:08.920 align:middle line:84% the middle generation, those who turned 65 in '95, 00:25:08.920 --> 00:25:14.400 align:middle line:84% and my generation, those who turn 65 in 2030. 00:25:14.400 --> 00:25:16.040 align:middle line:90% What you see here-- 00:25:16.040 --> 00:25:18.660 align:middle line:84% and then it shows it for three types, a low earner, 00:25:18.660 --> 00:25:21.455 align:middle line:84% an average earner, a high earner. 00:25:21.455 --> 00:25:22.580 align:middle line:90% A couple of things to note. 00:25:22.580 --> 00:25:25.140 align:middle line:84% First thing to note, all three columns, 00:25:25.140 --> 00:25:28.040 align:middle line:84% the numbers are getting smaller over time. 00:25:28.040 --> 00:25:29.440 align:middle line:90% Why? 00:25:29.440 --> 00:25:32.280 align:middle line:84% Because population growth and productivity 00:25:32.280 --> 00:25:34.320 align:middle line:90% growth are both falling. 00:25:34.320 --> 00:25:36.720 align:middle line:84% The rate of return to this scheme 00:25:36.720 --> 00:25:40.600 align:middle line:84% depends on how fast the population and the productivity 00:25:40.600 --> 00:25:42.040 align:middle line:90% growth grow. 00:25:42.040 --> 00:25:45.360 align:middle line:84% The less they grow, the less good a scheme it is. 00:25:45.360 --> 00:25:48.760 align:middle line:84% So basically, the whole system is less beneficial 00:25:48.760 --> 00:25:52.400 align:middle line:84% because basically we are seeing a dramatic drop. 00:25:52.400 --> 00:25:57.760 align:middle line:84% Before 1973, population growth was 1.5% a year. 00:25:57.760 --> 00:25:59.920 align:middle line:90% Now it's less than 1% of year. 00:25:59.920 --> 00:26:02.380 align:middle line:84% Productivity growth was 2.5% a year. 00:26:02.380 --> 00:26:04.520 align:middle line:90% Now it's less than 1% of year. 00:26:04.520 --> 00:26:08.247 align:middle line:84% So we've seen a shrinking in the rate of return to this scheme. 00:26:08.247 --> 00:26:09.580 align:middle line:90% That's the first thing you note. 00:26:09.580 --> 00:26:14.000 align:middle line:84% The second thing you note is a fascinating inversion by income. 00:26:14.000 --> 00:26:16.680 align:middle line:84% For the first generation, the richer you are, the more wealthy 00:26:16.680 --> 00:26:17.655 align:middle line:90% you had. 00:26:17.655 --> 00:26:19.280 align:middle line:84% For the last generation, the richer you 00:26:19.280 --> 00:26:20.060 align:middle line:90% are, the less wealth you have. 00:26:20.060 --> 00:26:21.120 align:middle line:90% Indeed, it's negative. 00:26:21.120 --> 00:26:24.320 align:middle line:84% The richest generation is a loser from this. 00:26:24.320 --> 00:26:25.260 align:middle line:90% What happened? 00:26:25.260 --> 00:26:26.670 align:middle line:90% What changed? 00:26:26.670 --> 00:26:27.190 align:middle line:90% Why? 00:26:27.190 --> 00:26:30.178 align:middle line:84% Well, I'll you a hint what changed, which is r plus d. 00:26:30.178 --> 00:26:31.970 align:middle line:84% Population and productivity growth changed. 00:26:31.970 --> 00:26:35.670 align:middle line:84% But why did that invert the income distribution effect? 00:26:35.670 --> 00:26:38.580 align:middle line:90% Why did it go from being-- yeah. 00:26:38.580 --> 00:26:42.413 align:middle line:84% AUDIENCE: Your income [INAUDIBLE]. 00:26:42.413 --> 00:26:43.330 align:middle line:90% JON GRUBER: Not quite. 00:26:43.330 --> 00:26:44.410 align:middle line:90% That's a piece of it. 00:26:44.410 --> 00:26:44.993 align:middle line:90% But what else? 00:26:44.993 --> 00:26:47.350 align:middle line:84% AUDIENCE: Is it the distribution of low, average, 00:26:47.350 --> 00:26:48.790 align:middle line:90% and high-income earners? 00:26:48.790 --> 00:26:49.770 align:middle line:90% JON GRUBER: No. 00:26:49.770 --> 00:26:51.510 align:middle line:90% No, you guys are way too clever. 00:26:51.510 --> 00:26:54.830 align:middle line:90% Think way simpler. 00:26:54.830 --> 00:27:00.510 align:middle line:84% Basically, this is an investment that for the first generation 00:27:00.510 --> 00:27:02.910 align:middle line:84% was a better investment than what they could have done 00:27:02.910 --> 00:27:04.710 align:middle line:90% with their money otherwise. 00:27:04.710 --> 00:27:07.110 align:middle line:84% For the last generation, it was a worse investment. 00:27:07.110 --> 00:27:08.948 align:middle line:84% That means the more you're invested, 00:27:08.948 --> 00:27:11.490 align:middle line:84% the better you did at first and the worse you did at the end. 00:27:11.490 --> 00:27:13.610 align:middle line:84% In the first generation, it was a good investment. 00:27:13.610 --> 00:27:16.242 align:middle line:84% It was better than investing in the stock market. 00:27:16.242 --> 00:27:18.450 align:middle line:84% Therefore, the more you invested, the better you did. 00:27:18.450 --> 00:27:20.590 align:middle line:90% Richer people are more invested. 00:27:20.590 --> 00:27:22.930 align:middle line:84% For the last generation, it was a bad investment, 00:27:22.930 --> 00:27:24.443 align:middle line:90% way worse than the stock market. 00:27:24.443 --> 00:27:26.610 align:middle line:84% Therefore, the more you invested, the worse you did. 00:27:26.610 --> 00:27:28.318 align:middle line:84% And that's why it actually goes negative. 00:27:28.318 --> 00:27:31.070 align:middle line:84% The negative number means for high earners in Social Security 00:27:31.070 --> 00:27:33.153 align:middle line:84% today, they would be better off having their money 00:27:33.153 --> 00:27:35.050 align:middle line:90% out than in the system. 00:27:35.050 --> 00:27:35.550 align:middle line:90% OK? 00:27:35.550 --> 00:27:39.170 align:middle line:84% Now, that's not the only redistribution. 00:27:39.170 --> 00:27:40.550 align:middle line:90% It's the only one shown here. 00:27:40.550 --> 00:27:43.110 align:middle line:84% Let's talk about other redistribution. 00:27:43.110 --> 00:27:46.130 align:middle line:84% Think about a single woman and a single man. 00:27:46.130 --> 00:27:47.630 align:middle line:84% Who has more Social Security wealth? 00:27:47.630 --> 00:27:48.910 align:middle line:90% With the same earnings. 00:27:48.910 --> 00:27:51.390 align:middle line:84% Who has more Social Security wealth? 00:27:51.390 --> 00:27:53.143 align:middle line:84% Single woman, same man with the same-- 00:27:53.143 --> 00:27:54.810 align:middle line:84% single woman, single man, same earnings. 00:27:54.810 --> 00:27:56.090 align:middle line:84% Who has more Social Security wealth? 00:27:56.090 --> 00:27:56.470 align:middle line:90% Yeah. 00:27:56.470 --> 00:27:57.190 align:middle line:90% AUDIENCE: Single women. 00:27:57.190 --> 00:27:57.690 align:middle line:90% JON GRUBER: Why? 00:27:57.690 --> 00:27:58.230 align:middle line:90% AUDIENCE: They live longer. 00:27:58.230 --> 00:27:59.310 align:middle line:90% JON GRUBER: Women live longer. 00:27:59.310 --> 00:28:01.710 align:middle line:84% Women live about five to seven years longer on average 00:28:01.710 --> 00:28:02.710 align:middle line:90% than men. 00:28:02.710 --> 00:28:08.310 align:middle line:84% Now, let's talk about a married couple. 00:28:08.310 --> 00:28:11.650 align:middle line:84% So my wife and I versus someone who earns the exact same-- 00:28:11.650 --> 00:28:15.770 align:middle line:84% my wife and I versus someone else who's not married, 00:28:15.770 --> 00:28:17.450 align:middle line:90% who earned the same as I did. 00:28:17.450 --> 00:28:20.870 align:middle line:84% Which family has more Social Security wealth? 00:28:20.870 --> 00:28:21.392 align:middle line:90% Yeah. 00:28:21.392 --> 00:28:22.100 align:middle line:90% AUDIENCE: You do. 00:28:22.100 --> 00:28:23.740 align:middle line:90% JON GRUBER: Because? 00:28:23.740 --> 00:28:25.820 align:middle line:84% AUDIENCE: If you die, your wife continues-- 00:28:25.820 --> 00:28:28.180 align:middle line:84% JON GRUBER: Not just that, she gets 50% of my benefit. 00:28:28.180 --> 00:28:29.880 align:middle line:84% So just by virtue of being married, 00:28:29.880 --> 00:28:33.580 align:middle line:84% I get a 50% plus up from my family and my benefit. 00:28:33.580 --> 00:28:38.380 align:middle line:90% Now, here's a tricky one. 00:28:38.380 --> 00:28:41.140 align:middle line:84% Take my couple where I've earned and my wife doesn't 00:28:41.140 --> 00:28:44.660 align:middle line:84% earn anything, and another couple 00:28:44.660 --> 00:28:50.620 align:middle line:84% where basically the husband earns the same I do 00:28:50.620 --> 00:28:54.740 align:middle line:84% and the wife earns a decent amount, but less 00:28:54.740 --> 00:28:57.260 align:middle line:90% than the husband. 00:28:57.260 --> 00:29:00.180 align:middle line:84% Actually, let's say the wife earns less than a quarter 00:29:00.180 --> 00:29:01.540 align:middle line:90% of what the husband does. 00:29:01.540 --> 00:29:04.660 align:middle line:84% So take my family where my wife's earned nothing, 00:29:04.660 --> 00:29:07.080 align:middle line:84% and their family where the husband earns the same as me, 00:29:07.080 --> 00:29:08.955 align:middle line:84% and the wife's earned about a quarter of what 00:29:08.955 --> 00:29:09.700 align:middle line:90% the husband does. 00:29:09.700 --> 00:29:12.020 align:middle line:84% Which one has more Social Security wealth? 00:29:12.020 --> 00:29:13.660 align:middle line:90% AUDIENCE: [INAUDIBLE]. 00:29:13.660 --> 00:29:14.340 align:middle line:90% JON GRUBER: Why? 00:29:14.340 --> 00:29:16.132 align:middle line:84% AUDIENCE: Because the wife, essentially she 00:29:16.132 --> 00:29:19.900 align:middle line:84% gets 50% of the [INAUDIBLE] 25% [INAUDIBLE]. 00:29:19.900 --> 00:29:22.970 align:middle line:84% JON GRUBER: Well, you describe the benefit side, which 00:29:22.970 --> 00:29:24.390 align:middle line:90% is we get the same benefits. 00:29:24.390 --> 00:29:25.550 align:middle line:90% We each get 50%. 00:29:25.550 --> 00:29:29.170 align:middle line:84% Remember, you get the bigger of your own-- 00:29:29.170 --> 00:29:31.050 align:middle line:90% so why is it less wealth? 00:29:31.050 --> 00:29:31.958 align:middle line:90% Why is it-- 00:29:31.958 --> 00:29:33.250 align:middle line:90% AUDIENCE: She paid [INAUDIBLE]. 00:29:33.250 --> 00:29:34.730 align:middle line:90% JON GRUBER: She paid no taxes. 00:29:34.730 --> 00:29:36.850 align:middle line:84% My wife paid no taxes, but still gets 00:29:36.850 --> 00:29:39.570 align:middle line:84% 50% of my benefit, whereas the wife of my colleague 00:29:39.570 --> 00:29:41.317 align:middle line:90% earns 25% of what he did. 00:29:41.317 --> 00:29:43.650 align:middle line:84% She paid a bunch of tax on that, but still gets only 50% 00:29:43.650 --> 00:29:45.370 align:middle line:90% of his benefit. 00:29:45.370 --> 00:29:50.970 align:middle line:84% So working spouses are penalized by the system. 00:29:50.970 --> 00:29:55.050 align:middle line:84% And then finally, one last interesting wrinkle 00:29:55.050 --> 00:29:59.110 align:middle line:84% is this table's a bit misleading because of an important reason, 00:29:59.110 --> 00:30:02.610 align:middle line:84% which is rich people live much longer than poor people. 00:30:02.610 --> 00:30:04.610 align:middle line:84% So while it's still a bad deal for rich people 00:30:04.610 --> 00:30:06.490 align:middle line:84% relative to poor people today, the numbers in reality 00:30:06.490 --> 00:30:08.210 align:middle line:84% are much closer than they show in this table, 00:30:08.210 --> 00:30:09.410 align:middle line:84% because rich people on average live 00:30:09.410 --> 00:30:10.660 align:middle line:90% a lot longer than poor people. 00:30:10.660 --> 00:30:13.770 align:middle line:84% So they get more benefit from the system. 00:30:13.770 --> 00:30:17.770 align:middle line:84% So basically, there's a lot of redistribution going on 00:30:17.770 --> 00:30:19.342 align:middle line:90% within the system. 00:30:19.342 --> 00:30:21.050 align:middle line:84% So I just want to stop-- that's basically 00:30:21.050 --> 00:30:22.750 align:middle line:84% all I want to describe about the system. 00:30:22.750 --> 00:30:24.270 align:middle line:84% Then I want to come back to the chapter 12 stuff. 00:30:24.270 --> 00:30:26.145 align:middle line:84% But any other questions about how this works? 00:30:26.145 --> 00:30:26.710 align:middle line:90% Yeah. 00:30:26.710 --> 00:30:29.043 align:middle line:84% AUDIENCE: I understand that Social Security is primarily 00:30:29.043 --> 00:30:32.510 align:middle line:84% a distribution of wealth to current retirees 00:30:32.510 --> 00:30:33.510 align:middle line:90% from current workers. 00:30:33.510 --> 00:30:33.930 align:middle line:90% JON GRUBER: Yeah. 00:30:33.930 --> 00:30:36.610 align:middle line:84% AUDIENCE: Was it also designed to be a redistribution of wealth 00:30:36.610 --> 00:30:40.690 align:middle line:84% from past high earners and past low earners? 00:30:40.690 --> 00:30:42.305 align:middle line:90% JON GRUBER: It was not clear. 00:30:42.305 --> 00:30:44.430 align:middle line:84% That was not clear in the founding, not explicitly. 00:30:44.430 --> 00:30:46.250 align:middle line:84% It was really about basically bailing out 00:30:46.250 --> 00:30:48.583 align:middle line:84% a generation whose retirement savings had been wiped out 00:30:48.583 --> 00:30:49.810 align:middle line:90% by the Great Depression. 00:30:49.810 --> 00:30:51.770 align:middle line:84% Basically, those people were going to retire with no money. 00:30:51.770 --> 00:30:54.145 align:middle line:84% And they bailed them out by having young people send them 00:30:54.145 --> 00:30:55.770 align:middle line:90% money. 00:30:55.770 --> 00:30:56.330 align:middle line:90% Yeah. 00:30:56.330 --> 00:30:58.710 align:middle line:84% AUDIENCE: Is there any thought to adjust the tax rates, 00:30:58.710 --> 00:31:01.530 align:middle line:84% so that the rate of returns were even across generations? 00:31:01.530 --> 00:31:03.510 align:middle line:84% JON GRUBER: Well, that's a great point. 00:31:03.510 --> 00:31:08.930 align:middle line:84% So what happened over time was the tax rate's gone up a lot. 00:31:08.930 --> 00:31:10.430 align:middle line:84% So the tax rates increased a lot. 00:31:10.430 --> 00:31:13.992 align:middle line:84% Another way to fight the Ponzi, fight the erosion-- 00:31:13.992 --> 00:31:15.450 align:middle line:84% if you raise the tax rate to offset 00:31:15.450 --> 00:31:17.710 align:middle line:84% the slowing of productivity and population growth, 00:31:17.710 --> 00:31:18.543 align:middle line:90% then it evens it up. 00:31:18.543 --> 00:31:20.320 align:middle line:90% But then you have higher tax. 00:31:20.320 --> 00:31:22.360 align:middle line:84% So that did happen some, but now it 00:31:22.360 --> 00:31:26.400 align:middle line:84% stopped because people didn't want to raise taxes more. 00:31:26.400 --> 00:31:29.300 align:middle line:90% So that's basically the program. 00:31:29.300 --> 00:31:31.800 align:middle line:84% Now let's come back and apply chapter 12. 00:31:31.800 --> 00:31:35.080 align:middle line:84% What chapter 12 says is that the optimal size 00:31:35.080 --> 00:31:37.040 align:middle line:84% of a program like Social Security 00:31:37.040 --> 00:31:40.640 align:middle line:84% is about trading off its consumption-smoothing benefits 00:31:40.640 --> 00:31:43.497 align:middle line:90% against its moral hazard costs. 00:31:43.497 --> 00:31:45.580 align:middle line:84% Well, what are the consumption smoothing benefits? 00:31:45.580 --> 00:31:50.320 align:middle line:84% Well, that's going to depend in return on self-insurance. 00:31:50.320 --> 00:31:53.520 align:middle line:84% And what's the primary form of self-insurance for retirement? 00:31:53.520 --> 00:31:55.240 align:middle line:90% Savings. 00:31:55.240 --> 00:31:57.520 align:middle line:84% So the big question is going to be, to what extent 00:31:57.520 --> 00:32:00.000 align:middle line:84% does Social Security actually help you 00:32:00.000 --> 00:32:01.420 align:middle line:90% consume when you're retired? 00:32:01.420 --> 00:32:04.400 align:middle line:84% Or does it just displace savings you would have done anyway? 00:32:04.400 --> 00:32:06.440 align:middle line:84% Is it just that you would have saved anyway, 00:32:06.440 --> 00:32:08.540 align:middle line:84% and now Social Security is doing it for you? 00:32:08.540 --> 00:32:10.240 align:middle line:84% That becomes the central question 00:32:10.240 --> 00:32:12.323 align:middle line:84% in thinking about the consumption-smoothing effect 00:32:12.323 --> 00:32:14.000 align:middle line:90% of Social Security. 00:32:14.000 --> 00:32:14.530 align:middle line:90% OK? 00:32:14.530 --> 00:32:15.780 align:middle line:90% Actually, I skipped something. 00:32:15.780 --> 00:32:17.520 align:middle line:90% Let's go back for one second. 00:32:17.520 --> 00:32:19.860 align:middle line:84% I forgot the first question, which is, 00:32:19.860 --> 00:32:21.440 align:middle line:90% why do we need Social Security? 00:32:21.440 --> 00:32:22.880 align:middle line:90% Bad on me. 00:32:22.880 --> 00:32:25.280 align:middle line:84% Why do we need Social Security in the first place? 00:32:25.280 --> 00:32:28.800 align:middle line:84% Well, there's a technical answer and a real answer. 00:32:28.800 --> 00:32:32.440 align:middle line:84% The technical answer is we need Social Security because 00:32:32.440 --> 00:32:34.960 align:middle line:84% of a critical market failure, which 00:32:34.960 --> 00:32:37.920 align:middle line:84% is a failure in the market for annuities. 00:32:37.920 --> 00:32:40.960 align:middle line:84% In principle, people should just save when they're alive. 00:32:40.960 --> 00:32:43.055 align:middle line:84% The minute they retire, they should annuitize. 00:32:43.055 --> 00:32:45.680 align:middle line:84% They should say, look, I don't know how long I'm going to live. 00:32:45.680 --> 00:32:47.597 align:middle line:84% So I'll take all my wealth, put it in annuity. 00:32:47.597 --> 00:32:49.470 align:middle line:84% I'll take aside what I leave to my kids. 00:32:49.470 --> 00:32:51.220 align:middle line:84% But I'll take the rest, I'll annuitize it. 00:32:51.220 --> 00:32:52.860 align:middle line:84% And that way, I can take money to live. 00:32:52.860 --> 00:32:54.608 align:middle line:90% And annuities are a great deal. 00:32:54.608 --> 00:32:55.900 align:middle line:90% Why are annuities a great deal? 00:32:55.900 --> 00:32:59.240 align:middle line:84% Annuities are a great deal because essentially people 00:32:59.240 --> 00:33:02.143 align:middle line:84% live a long time benefit from people who die soon. 00:33:02.143 --> 00:33:03.560 align:middle line:84% So essentially the idea is you can 00:33:03.560 --> 00:33:06.588 align:middle line:84% get a positive rate of return on annuity from the fact 00:33:06.588 --> 00:33:08.380 align:middle line:84% that you're pooling with a bunch of people. 00:33:08.380 --> 00:33:11.320 align:middle line:84% And the longer you live, the more benefit you get. 00:33:11.320 --> 00:33:14.440 align:middle line:84% But in fact, no one ever annuities. 00:33:14.440 --> 00:33:15.990 align:middle line:84% So there's two possible reasons why. 00:33:15.990 --> 00:33:18.230 align:middle line:84% One reason is because the annuity market 00:33:18.230 --> 00:33:20.950 align:middle line:84% is a classic example of market failure. 00:33:20.950 --> 00:33:23.750 align:middle line:84% Because what's the adverse selection in the annuity market? 00:33:23.750 --> 00:33:27.190 align:middle line:84% What sorts of adverse selection in the annuity market? 00:33:27.190 --> 00:33:28.000 align:middle line:90% Yeah. 00:33:28.000 --> 00:33:29.750 align:middle line:84% AUDIENCE: People who might not live longer 00:33:29.750 --> 00:33:30.890 align:middle line:90% are less likely to want to save. 00:33:30.890 --> 00:33:31.598 align:middle line:90% JON GRUBER: Yeah. 00:33:31.598 --> 00:33:33.430 align:middle line:84% So basically, people who buy annuities 00:33:33.430 --> 00:33:34.270 align:middle line:84% are going to be the ones who know they're 00:33:34.270 --> 00:33:35.570 align:middle line:90% going to live a long time. 00:33:35.570 --> 00:33:37.010 align:middle line:90% There's private information. 00:33:37.010 --> 00:33:38.680 align:middle line:84% There's an information asymmetry, 00:33:38.680 --> 00:33:40.930 align:middle line:84% which is if you know you're going to live a long time, 00:33:40.930 --> 00:33:41.763 align:middle line:90% you want an annuity. 00:33:41.763 --> 00:33:43.830 align:middle line:84% If you know you're going to die soon, you don't. 00:33:43.830 --> 00:33:48.070 align:middle line:84% And therefore, the market doesn't work well. 00:33:48.070 --> 00:33:52.832 align:middle line:84% So that's the classic rationale for an annuity program. 00:33:52.832 --> 00:33:54.790 align:middle line:84% The real rationale is we just think people just 00:33:54.790 --> 00:33:57.270 align:middle line:84% don't know how to save for retirement, which means people 00:33:57.270 --> 00:33:59.910 align:middle line:90% aren't going to save enough. 00:33:59.910 --> 00:34:03.353 align:middle line:84% They don't really know how to annuitize. 00:34:03.353 --> 00:34:05.770 align:middle line:84% And it's really kind of a form of the Samaritan's dilemma. 00:34:05.770 --> 00:34:08.690 align:middle line:84% Indeed, one of the very first pension programs-- 00:34:08.690 --> 00:34:12.195 align:middle line:84% it's just an apocryphal story, but probably true. 00:34:12.195 --> 00:34:14.070 align:middle line:84% One of the very first pensions in the country 00:34:14.070 --> 00:34:15.199 align:middle line:90% was at Harvard University. 00:34:15.199 --> 00:34:17.909 align:middle line:84% And the story goes that Harvard University 00:34:17.909 --> 00:34:19.159 align:middle line:90% didn't used to have a pension. 00:34:19.159 --> 00:34:21.788 align:middle line:84% Then what happened is all the widows of professors-- 00:34:21.788 --> 00:34:23.580 align:middle line:84% because professors were all men back then-- 00:34:23.580 --> 00:34:24.955 align:middle line:84% would come and say, I'm starving, 00:34:24.955 --> 00:34:27.593 align:middle line:84% you got to help me out, because my husband didn't save enough. 00:34:27.593 --> 00:34:29.010 align:middle line:84% Eventually Harvard said, well, you 00:34:29.010 --> 00:34:30.179 align:middle line:84% know what, we've got to make these professors save 00:34:30.179 --> 00:34:33.500 align:middle line:84% so their widows don't come and throw themselves on our doorstep 00:34:33.500 --> 00:34:34.907 align:middle line:90% and say they need money. 00:34:34.907 --> 00:34:36.699 align:middle line:84% So really, the origin of the pension system 00:34:36.699 --> 00:34:38.215 align:middle line:84% was sort of a Samaritan's dilemma, 00:34:38.215 --> 00:34:40.340 align:middle line:84% that they wanted to make sure people actually saved 00:34:40.340 --> 00:34:44.179 align:middle line:84% for themselves, rather than relying on Harvard at the end. 00:34:44.179 --> 00:34:45.060 align:middle line:90% OK? 00:34:45.060 --> 00:34:45.560 align:middle line:90% OK. 00:34:45.560 --> 00:34:47.960 align:middle line:84% So that was a side note, why do we have Social Security. 00:34:47.960 --> 00:34:50.860 align:middle line:84% Now let's go back to does Social Security smooth consumption. 00:34:50.860 --> 00:34:53.260 align:middle line:84% Well, empirically, there's two ways 00:34:53.260 --> 00:34:56.159 align:middle line:84% to look at that, because there's two sides of the same question. 00:34:56.159 --> 00:34:58.380 align:middle line:90% One is does it crowd out saving? 00:34:58.380 --> 00:35:00.740 align:middle line:84% The other is, does it smooth consumption? 00:35:00.740 --> 00:35:03.460 align:middle line:84% Two different sides of the same coin. 00:35:03.460 --> 00:35:06.860 align:middle line:84% And both topics have been studied. 00:35:06.860 --> 00:35:09.655 align:middle line:84% On the savings, there's actually an incredibly large 00:35:09.655 --> 00:35:11.780 align:middle line:84% empirical literature on how Social Security affects 00:35:11.780 --> 00:35:12.738 align:middle line:90% savings decisions. 00:35:12.738 --> 00:35:15.280 align:middle line:84% It's very interesting, because if you follow this literature, 00:35:15.280 --> 00:35:19.260 align:middle line:84% it traces the evolution of empirical work in economics. 00:35:19.260 --> 00:35:22.005 align:middle line:84% The first work in this area was time series studies, 00:35:22.005 --> 00:35:24.380 align:middle line:84% where they said, look, over time, as Social Security gets 00:35:24.380 --> 00:35:26.380 align:middle line:90% more generous, people save less. 00:35:26.380 --> 00:35:29.140 align:middle line:84% Therefore, Social Security is crowding out savings. 00:35:29.140 --> 00:35:30.973 align:middle line:84% Well, the problem with that is lots of stuff 00:35:30.973 --> 00:35:34.220 align:middle line:84% is changing over time and they aren't really credible. 00:35:34.220 --> 00:35:38.082 align:middle line:84% The second was cross-sectional regression saying, hey, 00:35:38.082 --> 00:35:39.540 align:middle line:84% A has more Social Security benefits 00:35:39.540 --> 00:35:42.540 align:middle line:90% than B. Does A save less than B? 00:35:42.540 --> 00:35:45.060 align:middle line:84% Well, the problem with that is if A has more Social Security 00:35:45.060 --> 00:35:47.620 align:middle line:84% benefits than B, then A is different than B in ways 00:35:47.620 --> 00:35:49.205 align:middle line:90% that may affect their savings. 00:35:49.205 --> 00:35:50.580 align:middle line:84% We have the standard bias problem 00:35:50.580 --> 00:35:52.765 align:middle line:90% we talked about in chapter 3. 00:35:52.765 --> 00:35:55.140 align:middle line:84% And that's why the literature has moved on to very clever 00:35:55.140 --> 00:35:58.260 align:middle line:84% natural experiments or quasi-experimental methods, 00:35:58.260 --> 00:36:01.460 align:middle line:84% where for example, they'll study countries where there are two 00:36:01.460 --> 00:36:04.340 align:middle line:84% groups of workers, one group sees a big Social Security cut 00:36:04.340 --> 00:36:05.580 align:middle line:90% and one doesn't. 00:36:05.580 --> 00:36:08.220 align:middle line:84% And they'll look over time what happens to their savings. 00:36:08.220 --> 00:36:10.620 align:middle line:84% So a typical difference in difference quasi-experimental 00:36:10.620 --> 00:36:13.590 align:middle line:84% study of what happens when there's two groups of workers, 00:36:13.590 --> 00:36:16.270 align:middle line:84% one sees a Social Security benefit cut, one doesn't. 00:36:16.270 --> 00:36:18.850 align:middle line:90% How does their savings change? 00:36:18.850 --> 00:36:22.810 align:middle line:84% And what these studies typically find is that every dollar 00:36:22.810 --> 00:36:26.330 align:middle line:84% of Social Security benefits crowds out about $0.40 00:36:26.330 --> 00:36:29.010 align:middle line:90% of savings. 00:36:29.010 --> 00:36:32.930 align:middle line:84% That basically, there is some savings crowd out, 00:36:32.930 --> 00:36:36.110 align:middle line:90% but it's not complete. 00:36:36.110 --> 00:36:37.610 align:middle line:84% So that's one way of looking at this 00:36:37.610 --> 00:36:39.110 align:middle line:84% is asking if it smooths consumption? 00:36:39.110 --> 00:36:40.193 align:middle line:90% Does it crowd out savings? 00:36:40.193 --> 00:36:43.770 align:middle line:84% The answer is yes, but not completely. 00:36:43.770 --> 00:36:52.930 align:middle line:84% Now, the other way to look at it is to say, well, do 00:36:52.930 --> 00:36:54.350 align:middle line:90% elders smooth consumption? 00:36:54.350 --> 00:36:56.243 align:middle line:84% Does Social Security-- let me back up. 00:36:56.243 --> 00:36:57.910 align:middle line:84% Does Social Security-- instead of asking 00:36:57.910 --> 00:37:00.077 align:middle line:84% does Social Security crowd out savings, you can ask, 00:37:00.077 --> 00:37:03.450 align:middle line:84% does Social Security help elders smooth their consumption? 00:37:03.450 --> 00:37:07.250 align:middle line:84% One way to look at that is to look at, to what extent did 00:37:07.250 --> 00:37:10.050 align:middle line:84% the increase in Social Security grew dramatically in the 20th 00:37:10.050 --> 00:37:11.000 align:middle line:90% century? 00:37:11.000 --> 00:37:12.640 align:middle line:90% Because tax rates went up. 00:37:12.640 --> 00:37:14.880 align:middle line:84% To what extent does an increase in Social Security 00:37:14.880 --> 00:37:17.400 align:middle line:90% lower poverty among the elderly? 00:37:17.400 --> 00:37:19.040 align:middle line:84% Now let's step back to a standard model 00:37:19.040 --> 00:37:23.120 align:middle line:84% where everyone's rational optimizers and they self-insure. 00:37:23.120 --> 00:37:25.442 align:middle line:84% Well, if you self-insure, then Social Security 00:37:25.442 --> 00:37:26.900 align:middle line:84% should just crowd out your savings. 00:37:26.900 --> 00:37:29.358 align:middle line:84% And it shouldn't affect whether you live in poverty or not. 00:37:29.358 --> 00:37:31.840 align:middle line:84% Your decision to live in poverty should be independent. 00:37:31.840 --> 00:37:36.520 align:middle line:84% Well, if you look at the data as shown in figure 13-2, 00:37:36.520 --> 00:37:39.700 align:middle line:84% you see an unbelievably strong time series correlation, 00:37:39.700 --> 00:37:42.240 align:middle line:84% in particular in the first half of the period, 00:37:42.240 --> 00:37:44.760 align:middle line:84% between Social Security generosity and the elderly 00:37:44.760 --> 00:37:45.420 align:middle line:90% poverty rate. 00:37:45.420 --> 00:37:47.400 align:middle line:84% Indeed, at the start of the so-called war 00:37:47.400 --> 00:37:51.240 align:middle line:84% on poverty in 1959, elderly had the highest poverty rates 00:37:51.240 --> 00:37:52.520 align:middle line:90% in society. 00:37:52.520 --> 00:37:55.120 align:middle line:84% Now they have the lowest of any group 00:37:55.120 --> 00:37:57.610 align:middle line:84% And at least in the time series, it's suggested-- now, 00:37:57.610 --> 00:37:59.360 align:middle line:84% once again, I already told you time series 00:37:59.360 --> 00:38:01.000 align:middle line:90% studies are not to be trusted. 00:38:01.000 --> 00:38:03.280 align:middle line:84% But I actually did a research project 00:38:03.280 --> 00:38:05.400 align:middle line:84% looking at a quasi-experiment across groups 00:38:05.400 --> 00:38:08.080 align:middle line:84% that got different Social Security benefits. 00:38:08.080 --> 00:38:10.800 align:middle line:84% And our estimate suggests that 100% of this time series 00:38:10.800 --> 00:38:12.720 align:middle line:90% is actually causal-- 00:38:12.720 --> 00:38:15.080 align:middle line:84% that actually the entire drop in the elderly poverty 00:38:15.080 --> 00:38:17.497 align:middle line:84% over this time period can be explained by the massive rise 00:38:17.497 --> 00:38:19.287 align:middle line:90% in Social Security. 00:38:19.287 --> 00:38:21.120 align:middle line:84% Which is once again consistent with the fact 00:38:21.120 --> 00:38:23.768 align:middle line:84% that it's playing an important consumption smoothing role. 00:38:23.768 --> 00:38:25.560 align:middle line:84% Not necessarily full consumption smoothing, 00:38:25.560 --> 00:38:27.083 align:middle line:84% or there'd be no savings crowd out. 00:38:27.083 --> 00:38:29.500 align:middle line:84% But there's certainly some consumption smoothing going on. 00:38:29.500 --> 00:38:31.000 align:middle line:90% It's a prior condition. 00:38:31.000 --> 00:38:33.360 align:middle line:84% If we found zero consumption smoothing and 100% savings 00:38:33.360 --> 00:38:34.640 align:middle line:90% crowd out, we could be done. 00:38:34.640 --> 00:38:36.223 align:middle line:84% We don't care if there's moral hazard. 00:38:36.223 --> 00:38:38.000 align:middle line:84% There's no reason to have this program. 00:38:38.000 --> 00:38:41.200 align:middle line:84% But since we find that there's important consumption smoothing 00:38:41.200 --> 00:38:44.320 align:middle line:84% being done, now we have to go to the second question, which 00:38:44.320 --> 00:38:47.560 align:middle line:84% is, well, how big is the moral hazard? 00:38:47.560 --> 00:38:50.280 align:middle line:84% That's the other side of the trade-off. 00:38:50.280 --> 00:38:53.760 align:middle line:84% Well, what's the moral hazard for Social Security? 00:38:53.760 --> 00:38:56.400 align:middle line:84% Well, Social Security is a program 00:38:56.400 --> 00:39:00.800 align:middle line:84% that protects you against your income loss from retirement. 00:39:00.800 --> 00:39:04.880 align:middle line:84% So what's the moral hazard we're worried about here? 00:39:04.880 --> 00:39:07.320 align:middle line:84% What's the behavioral response that we're worried 00:39:07.320 --> 00:39:10.250 align:middle line:90% about Social Security inducing? 00:39:10.250 --> 00:39:10.750 align:middle line:90% Yeah. 00:39:10.750 --> 00:39:12.470 align:middle line:84% AUDIENCE: People not saving as much. 00:39:12.470 --> 00:39:13.970 align:middle line:84% JON GRUBER: No, that's a crowd out. 00:39:13.970 --> 00:39:14.845 align:middle line:90% That's the crowd out. 00:39:14.845 --> 00:39:16.190 align:middle line:90% What's the behavioral response? 00:39:16.190 --> 00:39:19.670 align:middle line:84% What is the thing that society wants 00:39:19.670 --> 00:39:22.230 align:middle line:84% more of that less gets done, or the decision 00:39:22.230 --> 00:39:25.690 align:middle line:84% people aren't making optimally because Social Security exists? 00:39:25.690 --> 00:39:26.190 align:middle line:90% Yeah. 00:39:26.190 --> 00:39:27.070 align:middle line:90% AUDIENCE: Retiring too early. 00:39:27.070 --> 00:39:28.790 align:middle line:84% JON GRUBER: Yeah, retiring too early. 00:39:28.790 --> 00:39:32.590 align:middle line:84% Basically, if you think about it, 00:39:32.590 --> 00:39:36.270 align:middle line:84% Social Security is bribing you to retire-- 00:39:36.270 --> 00:39:38.510 align:middle line:90% is paying you to retire. 00:39:38.510 --> 00:39:42.570 align:middle line:84% So basically it might cause you retire earlier. 00:39:42.570 --> 00:39:45.230 align:middle line:90% 00:39:45.230 --> 00:39:48.030 align:middle line:84% So the question there is, does Social Security 00:39:48.030 --> 00:39:51.150 align:middle line:90% induce early retirement? 00:39:51.150 --> 00:39:53.590 align:middle line:84% Now, in this case, there's also a huge literature 00:39:53.590 --> 00:39:55.430 align:middle line:90% looking at this. 00:39:55.430 --> 00:39:57.570 align:middle line:84% And the evidence is pretty clear. 00:39:57.570 --> 00:39:59.870 align:middle line:84% First of all, we saw with time series evidence, 00:39:59.870 --> 00:40:04.070 align:middle line:90% here we look at figure 13-3. 00:40:04.070 --> 00:40:07.135 align:middle line:84% Figure 13-3 is not as compelling as 13-2 in that over the first 00:40:07.135 --> 00:40:09.510 align:middle line:84% half of the period, once again, what you see is as Social 00:40:09.510 --> 00:40:12.550 align:middle line:84% Security benefits go up, labor force participation, 00:40:12.550 --> 00:40:14.590 align:middle line:84% or the opposite of retirement, goes down. 00:40:14.590 --> 00:40:16.012 align:middle line:84% Elders work less, benefits go up. 00:40:16.012 --> 00:40:17.470 align:middle line:84% But then they seem to move together 00:40:17.470 --> 00:40:18.637 align:middle line:90% instead of the opposite way. 00:40:18.637 --> 00:40:20.950 align:middle line:90% So it's not super compelling. 00:40:20.950 --> 00:40:23.310 align:middle line:84% More compelling is studies which look 00:40:23.310 --> 00:40:26.750 align:middle line:84% at data on people's retirement decisions. 00:40:26.750 --> 00:40:31.150 align:middle line:84% Remember that there's these key ages in Social Security-- 00:40:31.150 --> 00:40:33.930 align:middle line:90% 62 and 67. 00:40:33.930 --> 00:40:35.520 align:middle line:90% 67, by the way, used to be 65. 00:40:35.520 --> 00:40:37.270 align:middle line:84% That used to be the normal retirement age. 00:40:37.270 --> 00:40:40.110 align:middle line:84% The retirement age used to be 65-- the full benefit age. 00:40:40.110 --> 00:40:41.452 align:middle line:90% Now it's 67. 00:40:41.452 --> 00:40:42.910 align:middle line:84% So what people have done is they've 00:40:42.910 --> 00:40:45.390 align:middle line:84% taken data and graphed what we called the retirement hazard 00:40:45.390 --> 00:40:46.710 align:middle line:90% rate. 00:40:46.710 --> 00:40:49.070 align:middle line:84% What is a retirement hazard rate? 00:40:49.070 --> 00:40:51.750 align:middle line:84% It is the odds of retiring conditional on working 00:40:51.750 --> 00:40:53.390 align:middle line:90% at the start of that year. 00:40:53.390 --> 00:40:59.510 align:middle line:90% So take a look at figure 13-4. 00:40:59.510 --> 00:41:02.870 align:middle line:84% This graphs, with old data, the retirement hazard rate 00:41:02.870 --> 00:41:05.180 align:middle line:90% in the US. 00:41:05.180 --> 00:41:08.600 align:middle line:84% So for example, what this says, if you were working at age-- 00:41:08.600 --> 00:41:11.660 align:middle line:84% if you were working at age 60, there 00:41:11.660 --> 00:41:15.820 align:middle line:84% is less than a 2% chance you retire over the next year. 00:41:15.820 --> 00:41:18.260 align:middle line:84% If you're working at age 64, there's 00:41:18.260 --> 00:41:20.460 align:middle line:84% a 2% chance you retire the next year. 00:41:20.460 --> 00:41:23.140 align:middle line:84% If you work at age 67, there's a 2% chance 00:41:23.140 --> 00:41:24.860 align:middle line:90% you retire the next year. 00:41:24.860 --> 00:41:28.900 align:middle line:84% But at age 62, it jumps to an 8% chance. 00:41:28.900 --> 00:41:33.820 align:middle line:84% And at age 65, it jumps to an 11% chance. 00:41:33.820 --> 00:41:37.460 align:middle line:84% Now, unless there's some biological reason why people 00:41:37.460 --> 00:41:40.618 align:middle line:84% are innately programmed to retire at 62 and 65, 00:41:40.618 --> 00:41:42.660 align:middle line:84% it seems like this must be Social Security having 00:41:42.660 --> 00:41:44.340 align:middle line:90% an effect. 00:41:44.340 --> 00:41:46.698 align:middle line:84% These jumps that people happen to retire 00:41:46.698 --> 00:41:49.240 align:middle line:84% a lot more at the age of when Social Security effects kick in 00:41:49.240 --> 00:41:51.260 align:middle line:84% and what we call the full benefit 00:41:51.260 --> 00:41:54.700 align:middle line:84% age seems like that suggests Social Security is playing 00:41:54.700 --> 00:41:55.980 align:middle line:90% a role. 00:41:55.980 --> 00:41:58.820 align:middle line:84% Indeed, if you look around the world, 00:41:58.820 --> 00:42:01.120 align:middle line:84% you see lots of examples like this. 00:42:01.120 --> 00:42:03.810 align:middle line:84% If you look at the hazard graph for France, 00:42:03.810 --> 00:42:06.890 align:middle line:84% in France, the normal retirement age and the early retirement age 00:42:06.890 --> 00:42:07.670 align:middle line:90% is age 60. 00:42:07.670 --> 00:42:09.970 align:middle line:90% It's one age for both. 00:42:09.970 --> 00:42:14.410 align:middle line:84% Among people working approaching a 60th birthday, 00:42:14.410 --> 00:42:17.270 align:middle line:84% 60% of them retire over the next year-- 00:42:17.270 --> 00:42:19.530 align:middle line:90% 60% in one year. 00:42:19.530 --> 00:42:22.410 align:middle line:84% Whereas it's very low all other years. 00:42:22.410 --> 00:42:26.250 align:middle line:84% It's got to be Social Security causing that. 00:42:26.250 --> 00:42:30.425 align:middle line:84% Indeed, these facts are so compelling that a co-author 00:42:30.425 --> 00:42:33.050 align:middle line:84% and I did an international study where we got a group of people 00:42:33.050 --> 00:42:35.690 align:middle line:84% together from 11 different countries. 00:42:35.690 --> 00:42:39.490 align:middle line:84% And we said, look, we want in each country to understand 00:42:39.490 --> 00:42:43.262 align:middle line:84% what are the incentives for retirement in your country 00:42:43.262 --> 00:42:45.470 align:middle line:84% and how does it affect people's retirement decisions? 00:42:45.470 --> 00:42:47.450 align:middle line:84% So let's go back to how Social Security works. 00:42:47.450 --> 00:42:50.770 align:middle line:84% And let's ask, how does Social Security affect your retirement 00:42:50.770 --> 00:42:51.400 align:middle line:90% decision? 00:42:51.400 --> 00:42:53.150 align:middle line:84% Well, it affects your retirement decision. 00:42:53.150 --> 00:42:56.290 align:middle line:84% Let's say you're age 62 and you're considering, 00:42:56.290 --> 00:43:00.930 align:middle line:84% do I retire at 62 or work one more year? 00:43:00.930 --> 00:43:03.410 align:middle line:84% There are four things that change 00:43:03.410 --> 00:43:04.493 align:middle line:90% if you work one more year. 00:43:04.493 --> 00:43:06.535 align:middle line:84% What are those four things and how do they affect 00:43:06.535 --> 00:43:07.810 align:middle line:90% your retirement decision? 00:43:07.810 --> 00:43:09.670 align:middle line:84% Given the institutional features, 00:43:09.670 --> 00:43:11.690 align:middle line:84% if you work one more year, four things 00:43:11.690 --> 00:43:13.850 align:middle line:84% happen that matter for your retirement decision, 00:43:13.850 --> 00:43:15.730 align:middle line:90% besides the fact you earn wages. 00:43:15.730 --> 00:43:18.270 align:middle line:84% Social Security impacts that decision four ways at age 62. 00:43:18.270 --> 00:43:18.710 align:middle line:90% What are they? 00:43:18.710 --> 00:43:19.210 align:middle line:90% Yeah. 00:43:19.210 --> 00:43:20.210 align:middle line:90% AUDIENCE: Higher PIA. 00:43:20.210 --> 00:43:21.168 align:middle line:90% JON GRUBER: Higher PIA. 00:43:21.168 --> 00:43:25.810 align:middle line:84% So the first way is if you work an extra year, your PIA goes up. 00:43:25.810 --> 00:43:29.770 align:middle line:84% That's going to make you want to work longer. 00:43:29.770 --> 00:43:32.990 align:middle line:84% What else happens for that year at age 62? 00:43:32.990 --> 00:43:35.930 align:middle line:90% 00:43:35.930 --> 00:43:36.850 align:middle line:90% That's one. 00:43:36.850 --> 00:43:37.350 align:middle line:90% What else? 00:43:37.350 --> 00:43:38.810 align:middle line:90% That's actually the hardest one. 00:43:38.810 --> 00:43:39.830 align:middle line:90% What else happens? 00:43:39.830 --> 00:43:43.610 align:middle line:90% 00:43:43.610 --> 00:43:49.110 align:middle line:90% What else happens at age 62? 00:43:49.110 --> 00:43:54.970 align:middle line:90% 00:43:54.970 --> 00:43:57.390 align:middle line:84% Well, if you retire at 63 rather than 62, 00:43:57.390 --> 00:43:58.890 align:middle line:84% what happens to your lifetime amount 00:43:58.890 --> 00:44:00.770 align:middle line:90% of Social Security benefits? 00:44:00.770 --> 00:44:02.880 align:middle line:90% It changes for two reasons. 00:44:02.880 --> 00:44:04.163 align:middle line:90% What are the two reasons? 00:44:04.163 --> 00:44:06.080 align:middle line:84% Why if you work one more year do your lifetime 00:44:06.080 --> 00:44:07.585 align:middle line:90% Social Security benefits change? 00:44:07.585 --> 00:44:08.460 align:middle line:90% You guys are too shy. 00:44:08.460 --> 00:44:09.400 align:middle line:90% I'm not going to bite. 00:44:09.400 --> 00:44:09.900 align:middle line:90% Go ahead. 00:44:09.900 --> 00:44:10.413 align:middle line:90% Yeah. 00:44:10.413 --> 00:44:12.080 align:middle line:84% AUDIENCE: For that year that you worked, 00:44:12.080 --> 00:44:14.238 align:middle line:84% you incurred an opportunity cost. 00:44:14.238 --> 00:44:16.280 align:middle line:84% JON GRUBER: Well, for that year that you worked-- 00:44:16.280 --> 00:44:17.800 align:middle line:90% let's flesh that out. 00:44:17.800 --> 00:44:21.360 align:middle line:84% If you work one more year but you die at the same date, 00:44:21.360 --> 00:44:23.600 align:middle line:84% you get fewer years of Social Security benefits. 00:44:23.600 --> 00:44:25.500 align:middle line:90% You get one fewer year. 00:44:25.500 --> 00:44:29.688 align:middle line:84% So fewer years-- years of benefits fall. 00:44:29.688 --> 00:44:30.980 align:middle line:90% So that makes you work shorter. 00:44:30.980 --> 00:44:32.920 align:middle line:84% So that makes you want to work shorter because you're 00:44:32.920 --> 00:44:34.100 align:middle line:90% getting less benefits. 00:44:34.100 --> 00:44:36.520 align:middle line:90% But what else happens? 00:44:36.520 --> 00:44:37.420 align:middle line:90% What else happens? 00:44:37.420 --> 00:44:37.920 align:middle line:90% Yeah. 00:44:37.920 --> 00:44:39.313 align:middle line:90% AUDIENCE: You don't pay tax. 00:44:39.313 --> 00:44:40.980 align:middle line:84% JON GRUBER: Well, tax is the fourth one. 00:44:40.980 --> 00:44:44.260 align:middle line:84% If you work one more year, you're going to pay tax. 00:44:44.260 --> 00:44:45.760 align:middle line:84% Your tax will go up and that's going 00:44:45.760 --> 00:44:47.640 align:middle line:84% to make you want to work shorter. 00:44:47.640 --> 00:44:49.160 align:middle line:90% But there's a fourth thing. 00:44:49.160 --> 00:44:51.140 align:middle line:84% If you work one more year, what else happens? 00:44:51.140 --> 00:44:51.640 align:middle line:90% Yeah. 00:44:51.640 --> 00:44:53.120 align:middle line:84% AUDIENCE: You'll be closer to the full benefit. 00:44:53.120 --> 00:44:54.500 align:middle line:84% JON GRUBER: You'll be closer to the full benefit age, 00:44:54.500 --> 00:44:56.180 align:middle line:84% so your benefits every month will go up. 00:44:56.180 --> 00:44:58.600 align:middle line:84% You get the actuarial adjustment. 00:44:58.600 --> 00:45:01.990 align:middle line:84% And that's going to make you want to work longer. 00:45:01.990 --> 00:45:04.550 align:middle line:90% So four things happen. 00:45:04.550 --> 00:45:06.903 align:middle line:84% Four things affect your decision. 00:45:06.903 --> 00:45:09.070 align:middle line:84% Four ways that Social Security affects your decision 00:45:09.070 --> 00:45:11.070 align:middle line:84% to work that extra year, in addition to the fact 00:45:11.070 --> 00:45:12.590 align:middle line:90% that you were in wages. 00:45:12.590 --> 00:45:17.790 align:middle line:84% You can take these four factors and for any individual calculate 00:45:17.790 --> 00:45:22.270 align:middle line:84% what we call the implicit tax that Social Security places 00:45:22.270 --> 00:45:27.430 align:middle line:84% on working an extra year, which is the delta in Social Security 00:45:27.430 --> 00:45:30.803 align:middle line:84% wealth relative to what you earned that year. 00:45:30.803 --> 00:45:32.470 align:middle line:84% And that delta in Social Security wealth 00:45:32.470 --> 00:45:36.270 align:middle line:90% is the net of these four things. 00:45:36.270 --> 00:45:37.210 align:middle line:90% Yeah. 00:45:37.210 --> 00:45:40.230 align:middle line:84% AUDIENCE: The PIA going up, isn't that 00:45:40.230 --> 00:45:42.512 align:middle line:90% caused by the actual-- 00:45:42.512 --> 00:45:43.970 align:middle line:84% JON GRUBER: Is that what you meant? 00:45:43.970 --> 00:45:45.390 align:middle line:90% There's two reasons PIA goes up. 00:45:45.390 --> 00:45:47.730 align:middle line:84% It's also caused because-- you're right. 00:45:47.730 --> 00:45:48.370 align:middle line:90% I'm sorry. 00:45:48.370 --> 00:45:49.770 align:middle line:84% I probably misinterpreted what you said. 00:45:49.770 --> 00:45:50.937 align:middle line:90% You probably meant that one. 00:45:50.937 --> 00:45:53.910 align:middle line:84% The PIA-- what I thought you meant is it goes up 00:45:53.910 --> 00:45:56.970 align:middle line:84% because the longer you work, the higher your 35-year average is, 00:45:56.970 --> 00:45:59.190 align:middle line:84% because people's income is typically higher later 00:45:59.190 --> 00:45:59.790 align:middle line:90% in the career. 00:45:59.790 --> 00:46:01.090 align:middle line:84% That may or may not have been what you meant. 00:46:01.090 --> 00:46:02.010 align:middle line:90% I won't quiz you on it. 00:46:02.010 --> 00:46:03.177 align:middle line:90% But that's the other reason. 00:46:03.177 --> 00:46:07.110 align:middle line:84% So I shouldn't say PIA up, it really should be earnings up. 00:46:07.110 --> 00:46:09.270 align:middle line:84% Your average earnings in your 35 years 00:46:09.270 --> 00:46:13.230 align:middle line:84% goes up, because that's why it's the hardest one to suss out. 00:46:13.230 --> 00:46:15.310 align:middle line:84% The average earnings of 35 years goes up 00:46:15.310 --> 00:46:18.370 align:middle line:84% because basically people earn more later in their life. 00:46:18.370 --> 00:46:19.170 align:middle line:90% Good catch. 00:46:19.170 --> 00:46:20.590 align:middle line:90% Thank you. 00:46:20.590 --> 00:46:21.550 align:middle line:90% OK. 00:46:21.550 --> 00:46:23.310 align:middle line:84% So basically, implicit Social Security 00:46:23.310 --> 00:46:26.150 align:middle line:90% taxes net these four things out. 00:46:26.150 --> 00:46:30.950 align:middle line:84% Does Social Security penalize or reward an extra year of work? 00:46:30.950 --> 00:46:33.070 align:middle line:84% So what we did is in each country, 00:46:33.070 --> 00:46:36.630 align:middle line:84% we computed what is the implicit tax over the entire period 00:46:36.630 --> 00:46:40.550 align:middle line:84% of retirement decisions and correlated that 00:46:40.550 --> 00:46:42.390 align:middle line:90% with whether people work. 00:46:42.390 --> 00:46:47.150 align:middle line:84% And the result we got is the incredible correlation in figure 00:46:47.150 --> 00:46:51.750 align:middle line:84% 13-5, one of the most cited figures I think I've ever done 00:46:51.750 --> 00:46:56.030 align:middle line:84% in my career, which shows on the x-axis a measure of disincentive 00:46:56.030 --> 00:46:56.530 align:middle line:90% to work. 00:46:56.530 --> 00:46:57.370 align:middle line:90% Don't worry about the units. 00:46:57.370 --> 00:46:58.240 align:middle line:90% It's complicated. 00:46:58.240 --> 00:47:01.100 align:middle line:84% It's basically a measure of the average implicit tax. 00:47:01.100 --> 00:47:04.420 align:middle line:84% It's the sum of implicit taxes over a period. 00:47:04.420 --> 00:47:07.440 align:middle line:84% On the y-axis, what share of elderly don't work? 00:47:07.440 --> 00:47:08.820 align:middle line:90% So look here. 00:47:08.820 --> 00:47:11.140 align:middle line:84% In the United States and especially 00:47:11.140 --> 00:47:14.580 align:middle line:84% Japan have relatively low disincentive to work. 00:47:14.580 --> 00:47:15.480 align:middle line:90% Why is that? 00:47:15.480 --> 00:47:18.080 align:middle line:84% That's because these things largely balance out. 00:47:18.080 --> 00:47:20.260 align:middle line:90% We've set it up so they do. 00:47:20.260 --> 00:47:24.420 align:middle line:84% We've set the actual adjustments so these things balance out. 00:47:24.420 --> 00:47:26.740 align:middle line:90% Now take the Netherlands. 00:47:26.740 --> 00:47:29.860 align:middle line:84% In the Netherlands, when you retire, 00:47:29.860 --> 00:47:34.220 align:middle line:90% your replacement rate is 90%. 00:47:34.220 --> 00:47:38.220 align:middle line:84% So you get 90% of what you got when you were working. 00:47:38.220 --> 00:47:40.427 align:middle line:84% That's not necessarily actually a problem. 00:47:40.427 --> 00:47:42.260 align:middle line:84% The problem in the Netherlands is that there 00:47:42.260 --> 00:47:45.420 align:middle line:90% is no actuarial adjustment. 00:47:45.420 --> 00:47:47.660 align:middle line:90% This piece goes away. 00:47:47.660 --> 00:47:49.540 align:middle line:90% So think about what that means. 00:47:49.540 --> 00:47:52.420 align:middle line:84% That means if you work one more year-- 00:47:52.420 --> 00:47:55.540 align:middle line:84% let's ignore the fact your earnings is higher. 00:47:55.540 --> 00:47:57.180 align:middle line:90% It's just a complication. 00:47:57.180 --> 00:47:57.680 align:middle line:90% OK? 00:47:57.680 --> 00:47:59.300 align:middle line:90% Imagine you work one more year. 00:47:59.300 --> 00:48:01.740 align:middle line:84% Your earnings is the same, just to get rid of that factor. 00:48:01.740 --> 00:48:03.980 align:middle line:90% You work one more year. 00:48:03.980 --> 00:48:05.580 align:middle line:90% You earn your wage. 00:48:05.580 --> 00:48:07.100 align:middle line:90% What do you give up? 00:48:07.100 --> 00:48:09.820 align:middle line:90% 90% of your wage. 00:48:09.820 --> 00:48:12.180 align:middle line:90% So what do you net? 00:48:12.180 --> 00:48:13.760 align:middle line:90% 10% of your wage by working. 00:48:13.760 --> 00:48:15.980 align:middle line:84% Think about the opportunity cost of working 00:48:15.980 --> 00:48:19.220 align:middle line:84% is you're giving up 90% of your wage from sitting at home. 00:48:19.220 --> 00:48:21.500 align:middle line:84% But it's worse than that, because how do they 00:48:21.500 --> 00:48:23.500 align:middle line:84% pay for this generous Social Security system? 00:48:23.500 --> 00:48:27.220 align:middle line:84% With a 40% tax rate on workers only. 00:48:27.220 --> 00:48:30.500 align:middle line:84% So if you put it all together, by working in the Netherlands, 00:48:30.500 --> 00:48:34.780 align:middle line:90% your implicit tax rate is 140%. 00:48:34.780 --> 00:48:37.140 align:middle line:90% You lose money by working. 00:48:37.140 --> 00:48:39.752 align:middle line:90% Guess what-- no one works. 00:48:39.752 --> 00:48:41.460 align:middle line:84% Once you get to the early retirement age, 00:48:41.460 --> 00:48:42.160 align:middle line:90% everyone drops out. 00:48:42.160 --> 00:48:43.440 align:middle line:84% Now, they drop out of the formal labor force. 00:48:43.440 --> 00:48:44.320 align:middle line:90% There's some informal labor. 00:48:44.320 --> 00:48:47.180 align:middle line:84% People work in the black market and doing stuff under the table. 00:48:47.180 --> 00:48:48.555 align:middle line:84% But the bottom line is that's why 00:48:48.555 --> 00:48:52.100 align:middle line:84% there's all these old people sitting around cafes in Europe. 00:48:52.100 --> 00:48:54.440 align:middle line:84% Because basically, there's no reason to work. 00:48:54.440 --> 00:48:55.745 align:middle line:90% You don't make any money. 00:48:55.745 --> 00:48:57.370 align:middle line:84% Essentially, whatever you make in wages 00:48:57.370 --> 00:49:00.970 align:middle line:84% you take away in lower Social Security benefits. 00:49:00.970 --> 00:49:04.347 align:middle line:84% So these nerdy things like actuarial adjustments 00:49:04.347 --> 00:49:05.930 align:middle line:84% turn out to be crucial for determining 00:49:05.930 --> 00:49:08.410 align:middle line:84% the entire size of the labor force in a country. 00:49:08.410 --> 00:49:11.170 align:middle line:84% The thing you already forgot about and don't understand 00:49:11.170 --> 00:49:14.090 align:middle line:84% anyway you got to understand, because basically this 00:49:14.090 --> 00:49:17.170 align:middle line:84% is a key factor that drives whether people want to work 00:49:17.170 --> 00:49:18.290 align:middle line:90% or not. 00:49:18.290 --> 00:49:22.170 align:middle line:84% And this suggests that essentially, there 00:49:22.170 --> 00:49:25.010 align:middle line:84% is a large moral hazard consequence 00:49:25.010 --> 00:49:31.090 align:middle line:84% of Social Security in terms of causing early retirement. 00:49:31.090 --> 00:49:32.530 align:middle line:84% But that moral hazard consequence 00:49:32.530 --> 00:49:34.197 align:middle line:84% depends on how the program is designed-- 00:49:34.197 --> 00:49:36.113 align:middle line:84% that different programs have different amounts 00:49:36.113 --> 00:49:38.370 align:middle line:84% of disincentive depending on how they're designed. 00:49:38.370 --> 00:49:38.930 align:middle line:90% OK? 00:49:38.930 --> 00:49:39.650 align:middle line:90% Yeah. 00:49:39.650 --> 00:49:41.250 align:middle line:84% AUDIENCE: I have a question regarding 00:49:41.250 --> 00:49:43.570 align:middle line:84% my understanding of other countries' social security 00:49:43.570 --> 00:49:44.530 align:middle line:90% programs. 00:49:44.530 --> 00:49:47.730 align:middle line:84% Are there countries with multiple social security, 00:49:47.730 --> 00:49:49.070 align:middle line:90% programs like unemployment? 00:49:49.070 --> 00:49:52.432 align:middle line:90% JON GRUBER: There are lots of-- 00:49:52.432 --> 00:49:53.390 align:middle line:90% that's a good question. 00:49:53.390 --> 00:49:56.782 align:middle line:84% There's lots of different systems of many types. 00:49:56.782 --> 00:49:59.240 align:middle line:84% Some countries have what's called partially-funded systems, 00:49:59.240 --> 00:50:01.860 align:middle line:84% where it's part of a 401(k) and partly unfunded. 00:50:01.860 --> 00:50:03.400 align:middle line:84% Countries have different systems for different kinds 00:50:03.400 --> 00:50:05.620 align:middle line:84% of workers-- government workers, private sector workers. 00:50:05.620 --> 00:50:07.220 align:middle line:84% There's a ton of variation out there. 00:50:07.220 --> 00:50:09.303 align:middle line:84% And that's the variation we study in these systems 00:50:09.303 --> 00:50:11.800 align:middle line:84% to try to understand how Social Security works. 00:50:11.800 --> 00:50:12.700 align:middle line:90% Good question. 00:50:12.700 --> 00:50:13.580 align:middle line:90% Other questions? 00:50:13.580 --> 00:50:14.360 align:middle line:90% Yeah. 00:50:14.360 --> 00:50:16.960 align:middle line:84% AUDIENCE: If we assume that the government of the Netherlands 00:50:16.960 --> 00:50:20.320 align:middle line:84% is a benevolent, utility-maximizing planner, 00:50:20.320 --> 00:50:22.840 align:middle line:84% then what does the fact that this even happens 00:50:22.840 --> 00:50:24.595 align:middle line:90% in the Netherlands mean? 00:50:24.595 --> 00:50:25.720 align:middle line:90% JON GRUBER: Great question. 00:50:25.720 --> 00:50:27.320 align:middle line:90% Why did the Netherlands do this? 00:50:27.320 --> 00:50:29.113 align:middle line:84% We actually wrote a whole book on that. 00:50:29.113 --> 00:50:30.780 align:middle line:84% We have a series of books on this topic. 00:50:30.780 --> 00:50:33.320 align:middle line:84% The first book was so successful, we did five more. 00:50:33.320 --> 00:50:37.480 align:middle line:84% And what we concluded is that these countries 00:50:37.480 --> 00:50:41.572 align:middle line:84% believe in an incorrect model of the labor market. 00:50:41.572 --> 00:50:43.280 align:middle line:84% It's a model of the labor market we often 00:50:43.280 --> 00:50:45.760 align:middle line:90% call the lump of labor view. 00:50:45.760 --> 00:50:49.360 align:middle line:84% The lump of labor view is that the number of people working 00:50:49.360 --> 00:50:51.200 align:middle line:90% is some fixed number of people. 00:50:51.200 --> 00:50:53.520 align:middle line:84% There's some fixed number of jobs. 00:50:53.520 --> 00:50:55.460 align:middle line:84% So if you get people out of those jobs, 00:50:55.460 --> 00:50:57.865 align:middle line:84% you make more jobs for other people. 00:50:57.865 --> 00:50:59.740 align:middle line:84% So the idea is, we want young people to work. 00:50:59.740 --> 00:51:03.680 align:middle line:84% Let's get the old people-- they wanted old people not to work. 00:51:03.680 --> 00:51:05.020 align:middle line:90% The problem is, it's wrong. 00:51:05.020 --> 00:51:05.700 align:middle line:90% Why is it wrong? 00:51:05.700 --> 00:51:08.505 align:middle line:90% Because taxes impact behavior. 00:51:08.505 --> 00:51:09.880 align:middle line:84% So the fact there's this huge tax 00:51:09.880 --> 00:51:12.505 align:middle line:84% means there's fewer jobs to be had in the first place and fewer 00:51:12.505 --> 00:51:13.600 align:middle line:90% people who want them. 00:51:13.600 --> 00:51:15.520 align:middle line:84% So they've actually shrunk the whole economy 00:51:15.520 --> 00:51:19.720 align:middle line:84% rather than redistributing jobs from young to old. 00:51:19.720 --> 00:51:20.380 align:middle line:90% Question? 00:51:20.380 --> 00:51:20.880 align:middle line:90% Yeah. 00:51:20.880 --> 00:51:24.200 align:middle line:84% AUDIENCE: Is the replacement rate before or after tax? 00:51:24.200 --> 00:51:25.700 align:middle line:84% JON GRUBER: That's a great question. 00:51:25.700 --> 00:51:28.702 align:middle line:84% So social security income is taxed different ways 00:51:28.702 --> 00:51:29.660 align:middle line:90% in different countries. 00:51:29.660 --> 00:51:32.880 align:middle line:84% In the US, it is untaxed up to a certain level 00:51:32.880 --> 00:51:34.600 align:middle line:84% and then taxed beyond that level. 00:51:34.600 --> 00:51:37.300 align:middle line:84% The replacement I give you is the pre-tax replacement rate. 00:51:37.300 --> 00:51:40.360 align:middle line:90% 00:51:40.360 --> 00:51:42.150 align:middle line:84% For most Americans, it's not taxed. 00:51:42.150 --> 00:51:43.900 align:middle line:84% So that's typically how we think about it. 00:51:43.900 --> 00:51:45.900 align:middle line:84% It's only taxed for the higher income Americans. 00:51:45.900 --> 00:51:46.740 align:middle line:90% Good question. 00:51:46.740 --> 00:51:48.460 align:middle line:90% Other questions? 00:51:48.460 --> 00:51:51.270 align:middle line:84% OK, so where does this leave us in terms of optimal Social 00:51:51.270 --> 00:51:51.810 align:middle line:90% Security? 00:51:51.810 --> 00:51:53.990 align:middle line:84% Well, it leaves us that Social Security benefit 00:51:53.990 --> 00:51:56.310 align:middle line:84% should certainly be well below 100% 00:51:56.310 --> 00:52:00.150 align:middle line:84% but definitely above 0%, a tight range. 00:52:00.150 --> 00:52:05.670 align:middle line:84% But more generally, 40% doesn't sound kind of nuts. 00:52:05.670 --> 00:52:08.685 align:middle line:84% The idea is, you want enough that people can live on, 00:52:08.685 --> 00:52:10.310 align:middle line:84% because we know they can't fully smooth 00:52:10.310 --> 00:52:12.110 align:middle line:90% their consumption on their own. 00:52:12.110 --> 00:52:15.470 align:middle line:84% But you really don't want to cause too much retirement. 00:52:15.470 --> 00:52:18.530 align:middle line:84% So range around 40%, 50%, 60% does not sound crazy. 00:52:18.530 --> 00:52:21.350 align:middle line:84% 90% sounds almost certainly wrong. 00:52:21.350 --> 00:52:23.612 align:middle line:84% And 0% would almost certainly be wrong. 00:52:23.612 --> 00:52:25.570 align:middle line:84% And something in the middle sounds about right. 00:52:25.570 --> 00:52:27.362 align:middle line:84% And that's about where we are as a country. 00:52:27.362 --> 00:52:28.390 align:middle line:90% So it's not too bad. 00:52:28.390 --> 00:52:31.110 align:middle line:84% We'll do better next time being more precise. 00:52:31.110 --> 00:52:34.210 align:middle line:84% So that's where it leaves us in trading this off. 00:52:34.210 --> 00:52:36.470 align:middle line:84% But this is once again why I love this topic. 00:52:36.470 --> 00:52:37.870 align:middle line:90% It's a full circle. 00:52:37.870 --> 00:52:39.890 align:middle line:84% We can actually get the costs and benefits. 00:52:39.890 --> 00:52:40.890 align:middle line:90% We have to measure both. 00:52:40.890 --> 00:52:42.598 align:middle line:84% We can put them together and think about, 00:52:42.598 --> 00:52:44.310 align:middle line:84% is this program too big or too small? 00:52:44.310 --> 00:52:48.950 align:middle line:84% That's what's cool about this social insurance trade-off. 00:52:48.950 --> 00:52:52.210 align:middle line:84% Now, any other questions about that? 00:52:52.210 --> 00:52:52.710 align:middle line:90% Yeah. 00:52:52.710 --> 00:52:56.190 align:middle line:84% AUDIENCE: Can you tell us a little bit about Japan? 00:52:56.190 --> 00:52:59.430 align:middle line:84% JON GRUBER: Yeah, Japan, they just loved their working. 00:52:59.430 --> 00:53:01.310 align:middle line:90% They just love to work there. 00:53:01.310 --> 00:53:04.950 align:middle line:84% So they have a system which really rewards work or doesn't 00:53:04.950 --> 00:53:07.410 align:middle line:84% penalize it in a very serious way. 00:53:07.410 --> 00:53:08.890 align:middle line:84% They have very strong adjustments. 00:53:08.890 --> 00:53:11.552 align:middle line:84% And I don't remember what the replacement rate is. 00:53:11.552 --> 00:53:13.510 align:middle line:84% But essentially, the key thing that drives this 00:53:13.510 --> 00:53:15.270 align:middle line:84% is really this actuarial adjustment. 00:53:15.270 --> 00:53:16.730 align:middle line:84% It's the actuarial adjustment times 00:53:16.730 --> 00:53:18.050 align:middle line:90% how generous the system is. 00:53:18.050 --> 00:53:21.270 align:middle line:84% Once again, if the Netherlands had a 90% replacement rate 00:53:21.270 --> 00:53:23.630 align:middle line:84% but had an actuarial adjustment, it wouldn't be as bad. 00:53:23.630 --> 00:53:25.670 align:middle line:84% It's that they have this huge replacement 00:53:25.670 --> 00:53:30.158 align:middle line:84% and they take it away from you if you work. 00:53:30.158 --> 00:53:32.450 align:middle line:84% But I don't remember enough about the details in Japan. 00:53:32.450 --> 00:53:36.270 align:middle line:84% I wrote this book in 1996, so I'm a little fuzzy on it. 00:53:36.270 --> 00:53:38.355 align:middle line:90% All right? 00:53:38.355 --> 00:53:39.730 align:middle line:84% You're supposed to say, gee, Jon, 00:53:39.730 --> 00:53:42.105 align:middle line:84% you don't look old enough to have written a book in 1996. 00:53:42.105 --> 00:53:48.420 align:middle line:84% But anyway, now we come to the last and most policy-relevant 00:53:48.420 --> 00:53:51.260 align:middle line:84% part of the lecture, which is the long-run prospects 00:53:51.260 --> 00:53:53.348 align:middle line:90% for the Social Security system. 00:53:53.348 --> 00:53:55.140 align:middle line:84% The problem with the Social Security system 00:53:55.140 --> 00:53:58.220 align:middle line:84% is the Ponzi scheme is quickly eroding. 00:53:58.220 --> 00:54:04.020 align:middle line:84% So if you look at figure 13-6, this shows the ratio of older 00:54:04.020 --> 00:54:06.820 align:middle line:90% people to working age Americans. 00:54:06.820 --> 00:54:11.240 align:middle line:84% And what you see is until the turn of the century, 00:54:11.240 --> 00:54:13.860 align:middle line:84% typically had five working Americans 00:54:13.860 --> 00:54:15.540 align:middle line:90% for every older person. 00:54:15.540 --> 00:54:18.260 align:middle line:84% That was the base that supported the Ponzi scheme. 00:54:18.260 --> 00:54:21.460 align:middle line:84% It's rising to be only two working people for every older 00:54:21.460 --> 00:54:22.300 align:middle line:90% American. 00:54:22.300 --> 00:54:24.580 align:middle line:84% That really limits the Ponzi scheme, 00:54:24.580 --> 00:54:27.200 align:middle line:84% where only two people are paying in to support one old person. 00:54:27.200 --> 00:54:29.660 align:middle line:90% They have to pay a lot. 00:54:29.660 --> 00:54:31.040 align:middle line:90% Here's a way to think about it. 00:54:31.040 --> 00:54:36.590 align:middle line:84% In the US today, in three states are more than one in five people 00:54:36.590 --> 00:54:38.160 align:middle line:90% are elderly. 00:54:38.160 --> 00:54:40.600 align:middle line:84% Florida, Vermont, I forget the third one. 00:54:40.600 --> 00:54:43.300 align:middle line:84% More than one in five people are elderly. 00:54:43.300 --> 00:54:47.570 align:middle line:84% In 20 years, in 43 states more than one and five people 00:54:47.570 --> 00:54:49.330 align:middle line:90% will be elderly. 00:54:49.330 --> 00:54:50.590 align:middle line:90% We're aging very rapidly. 00:54:50.590 --> 00:54:52.850 align:middle line:84% It's largely because the baby boom 00:54:52.850 --> 00:54:54.630 align:middle line:84% and because of falling fertility. 00:54:54.630 --> 00:54:57.290 align:middle line:84% So what happened is we had a big, big burst of births 00:54:57.290 --> 00:54:58.770 align:middle line:90% after World War II. 00:54:58.770 --> 00:55:01.170 align:middle line:84% And those people are having fewer kids. 00:55:01.170 --> 00:55:03.450 align:middle line:84% And the next generation is having fewer kids. 00:55:03.450 --> 00:55:06.330 align:middle line:84% So we're basically shrinking the rate 00:55:06.330 --> 00:55:08.330 align:middle line:84% at which we can grow the population 00:55:08.330 --> 00:55:10.650 align:middle line:84% and keep this Ponzi scheme going. 00:55:10.650 --> 00:55:11.650 align:middle line:90% OK? 00:55:11.650 --> 00:55:14.930 align:middle line:84% What that means is over the next-- so what 00:55:14.930 --> 00:55:18.530 align:middle line:84% that means over the next 75 years, 00:55:18.530 --> 00:55:21.810 align:middle line:84% the amount by which our promises we've made 00:55:21.810 --> 00:55:27.130 align:middle line:84% will exceed the taxes we collect is about $18 trillion. 00:55:27.130 --> 00:55:29.970 align:middle line:84% So the next 75 years is $18 trillion, 00:55:29.970 --> 00:55:34.610 align:middle line:84% a promise we made beyond the tax we're going to collect. 00:55:34.610 --> 00:55:38.210 align:middle line:90% So this is a big legacy debt. 00:55:38.210 --> 00:55:40.270 align:middle line:84% This is essentially a measure of the legacy debt. 00:55:40.270 --> 00:55:42.812 align:middle line:84% This is the amount of money we have hanging around because we 00:55:42.812 --> 00:55:45.490 align:middle line:90% have this unfunded system. 00:55:45.490 --> 00:55:47.250 align:middle line:90% So what do we do about it? 00:55:47.250 --> 00:55:52.730 align:middle line:84% Well, we took one stab at this in the early 1980s with what was 00:55:52.730 --> 00:55:54.305 align:middle line:90% called the Greenspan Commission. 00:55:54.305 --> 00:55:55.930 align:middle line:84% You might know the name Alan Greenspan. 00:55:55.930 --> 00:55:57.890 align:middle line:84% He was secretary of the Fed for a long-- 00:55:57.890 --> 00:55:59.450 align:middle line:84% chairman of the Fed for a long time. 00:55:59.450 --> 00:56:00.908 align:middle line:84% His first role in public policy was 00:56:00.908 --> 00:56:03.170 align:middle line:84% he actually ran this commission in 1983 00:56:03.170 --> 00:56:04.890 align:middle line:90% to try to save Social Security. 00:56:04.890 --> 00:56:06.830 align:middle line:84% At the time he put this commission together, 00:56:06.830 --> 00:56:08.590 align:middle line:84% Social Security was about to run out of money. 00:56:08.590 --> 00:56:09.965 align:middle line:84% In about six months, it was going 00:56:09.965 --> 00:56:12.213 align:middle line:90% to be unable to pay its bills. 00:56:12.213 --> 00:56:14.130 align:middle line:84% So what they did is they put together a system 00:56:14.130 --> 00:56:15.350 align:middle line:90% to try to save the program. 00:56:15.350 --> 00:56:18.295 align:middle line:84% And the way they did it was basically two things. 00:56:18.295 --> 00:56:20.170 align:middle line:84% First of all, they raised the retirement age. 00:56:20.170 --> 00:56:21.990 align:middle line:90% That went from 65 to 67. 00:56:21.990 --> 00:56:26.170 align:middle line:84% They kept 62, but took the full benefit age from 65 to 67. 00:56:26.170 --> 00:56:29.330 align:middle line:84% Now, you can puzzle on this one at home. 00:56:29.330 --> 00:56:31.610 align:middle line:84% When you change the full benefit age, 00:56:31.610 --> 00:56:34.090 align:middle line:90% that's simply a cut in benefits. 00:56:34.090 --> 00:56:35.170 align:middle line:90% Why is that? 00:56:35.170 --> 00:56:40.070 align:middle line:84% Well, if you keep 62 but tie the PIA to 67, 00:56:40.070 --> 00:56:42.635 align:middle line:84% that means there's more penalty for retiring earlier. 00:56:42.635 --> 00:56:44.760 align:middle line:84% It used to be you only got three years of penalties 00:56:44.760 --> 00:56:45.580 align:middle line:90% retiring earlier. 00:56:45.580 --> 00:56:47.840 align:middle line:84% Now you get five years of penalty retiring earlier. 00:56:47.840 --> 00:56:50.240 align:middle line:84% So in retirement age, you get less benefits. 00:56:50.240 --> 00:56:53.440 align:middle line:84% All it did was it's basically a clever way to cut benefits, 00:56:53.440 --> 00:56:56.520 align:middle line:84% was to basically raise the retirement age. 00:56:56.520 --> 00:56:57.760 align:middle line:90% That's what they did. 00:56:57.760 --> 00:57:02.280 align:middle line:84% But they also substantially increased the tax. 00:57:02.280 --> 00:57:05.880 align:middle line:84% Increasing the tax meant all of a sudden there was extra money. 00:57:05.880 --> 00:57:09.520 align:middle line:84% So they created a large Social Security trust fund, 00:57:09.520 --> 00:57:11.760 align:middle line:84% a fund into which the extra tax will 00:57:11.760 --> 00:57:15.960 align:middle line:84% be put to save up so that it could pay down the debt when 00:57:15.960 --> 00:57:18.480 align:middle line:90% this baby boom retired. 00:57:18.480 --> 00:57:21.840 align:middle line:84% The problem with that is they didn't put enough in 00:57:21.840 --> 00:57:25.150 align:middle line:84% and the baby boom was not just a one-off thing. 00:57:25.150 --> 00:57:27.400 align:middle line:84% As you can see from this graph, forever and ever more, 00:57:27.400 --> 00:57:30.160 align:middle line:84% we're going to have a very high ratio of elderly to working 00:57:30.160 --> 00:57:31.960 align:middle line:90% people. 00:57:31.960 --> 00:57:34.200 align:middle line:84% So as a result, Social Security's trust fund 00:57:34.200 --> 00:57:36.560 align:middle line:90% will run out in about 20 years. 00:57:36.560 --> 00:57:37.920 align:middle line:90% It's the best estimate. 00:57:37.920 --> 00:57:40.280 align:middle line:90% The dates fluctuate. 00:57:40.280 --> 00:57:43.510 align:middle line:84% I think it's now actually about 17 years, they're saying. 00:57:43.510 --> 00:57:45.040 align:middle line:90% But the point is-- what? 00:57:45.040 --> 00:57:45.790 align:middle line:90% AUDIENCE: It's 10. 00:57:45.790 --> 00:57:47.730 align:middle line:84% JON GRUBER: No, no, they pushed it further out. 00:57:47.730 --> 00:57:48.590 align:middle line:84% AUDIENCE: They pushed it out again? 00:57:48.590 --> 00:57:49.298 align:middle line:90% JON GRUBER: Yeah. 00:57:49.298 --> 00:57:52.190 align:middle line:84% I think it's like the late 2030s now. 00:57:52.190 --> 00:57:54.170 align:middle line:90% So it may be 15 years, whatever. 00:57:54.170 --> 00:57:57.230 align:middle line:84% The point is, in the not-too-distant future, 00:57:57.230 --> 00:57:59.190 align:middle line:90% we're going to run out of money. 00:57:59.190 --> 00:58:02.030 align:middle line:90% So what do we do about it? 00:58:02.030 --> 00:58:02.910 align:middle line:90% OK? 00:58:02.910 --> 00:58:05.710 align:middle line:84% Well, what we do about it is we can either 00:58:05.710 --> 00:58:08.030 align:middle line:84% try to take small swings to incrementally fix 00:58:08.030 --> 00:58:11.110 align:middle line:84% the system or a big swing to fix it once and for all. 00:58:11.110 --> 00:58:14.830 align:middle line:84% So let's first talk about the small swings and the big swing. 00:58:14.830 --> 00:58:18.150 align:middle line:84% One small swing is we can just raise taxes. 00:58:18.150 --> 00:58:25.710 align:middle line:84% Indeed, if we raise the payroll tax today by 3% we would solve 00:58:25.710 --> 00:58:28.310 align:middle line:90% the 75-year problem. 00:58:28.310 --> 00:58:32.037 align:middle line:84% If we raised it by 5%, we'd solve the problem forever. 00:58:32.037 --> 00:58:34.370 align:middle line:84% We could build a big enough trust fund that would never, 00:58:34.370 --> 00:58:36.030 align:middle line:90% ever, ever run out. 00:58:36.030 --> 00:58:40.110 align:middle line:84% The problem is, raising taxes is a very difficult thing 00:58:40.110 --> 00:58:41.430 align:middle line:90% to do politically. 00:58:41.430 --> 00:58:44.870 align:middle line:84% But that'd be the most straightforward thing to do. 00:58:44.870 --> 00:58:47.010 align:middle line:84% You could alternatively not raise taxes as much, 00:58:47.010 --> 00:58:48.910 align:middle line:90% but tax more of income. 00:58:48.910 --> 00:58:52.370 align:middle line:84% For instance, you could remove the cap on taxable earnings. 00:58:52.370 --> 00:58:55.170 align:middle line:84% Right now it's capped at $150,000. 00:58:55.170 --> 00:58:58.270 align:middle line:90% You could tax all earnings. 00:58:58.270 --> 00:59:00.310 align:middle line:90% You could tax more earnings. 00:59:00.310 --> 00:59:02.990 align:middle line:84% Alternatively, another way you could do it 00:59:02.990 --> 00:59:06.458 align:middle line:84% is by expanding the base of the Ponzi scheme. 00:59:06.458 --> 00:59:07.250 align:middle line:90% How do you do that? 00:59:07.250 --> 00:59:09.550 align:middle line:84% Well, you could have caused people to have more kids. 00:59:09.550 --> 00:59:12.008 align:middle line:84% It turns out government policy is incredibly bad at causing 00:59:12.008 --> 00:59:13.190 align:middle line:90% people to have kids. 00:59:13.190 --> 00:59:15.910 align:middle line:84% China showed you can limit-- you can have a one-child policy 00:59:15.910 --> 00:59:19.030 align:middle line:84% and cause people to have fewer kids by imposing massive fines 00:59:19.030 --> 00:59:20.568 align:middle line:90% if they have more. 00:59:20.568 --> 00:59:23.110 align:middle line:84% But it turns out it's very hard through government incentives 00:59:23.110 --> 00:59:24.850 align:middle line:90% to get people to have more kids. 00:59:24.850 --> 00:59:27.350 align:middle line:84% What's another way to increase the base of the Ponzi scheme? 00:59:27.350 --> 00:59:30.830 align:middle line:84% How can we get more workers in America? 00:59:30.830 --> 00:59:36.030 align:middle line:84% Ideally, low income workers, because low income workers-- 00:59:36.030 --> 00:59:38.710 align:middle line:84% ideally more low income workers, because the low income workers 00:59:38.710 --> 00:59:41.260 align:middle line:84% will basically be ones who come and eventually 00:59:41.260 --> 00:59:43.500 align:middle line:90% don't drain the system too much. 00:59:43.500 --> 00:59:44.020 align:middle line:90% Yeah. 00:59:44.020 --> 00:59:45.150 align:middle line:90% AUDIENCE: Immigration. 00:59:45.150 --> 00:59:46.900 align:middle line:90% JON GRUBER: Immigration. 00:59:46.900 --> 00:59:49.900 align:middle line:84% Immigration is a massive win for the Social Security system 00:59:49.900 --> 00:59:52.460 align:middle line:84% because you basically increase the base of the Ponzi scheme. 00:59:52.460 --> 00:59:54.920 align:middle line:84% Now, in 70 years, when they retire, you got to pay them. 00:59:54.920 --> 00:59:56.503 align:middle line:84% But if they're low earnings, you don't 00:59:56.503 --> 00:59:57.980 align:middle line:90% have to pay them that much. 00:59:57.980 --> 01:00:01.420 align:middle line:84% So basically, immigration is a great fix. 01:00:01.420 --> 01:00:04.580 align:middle line:84% And there's enormous fiscal benefits from that. 01:00:04.580 --> 01:00:07.023 align:middle line:84% So that's another increment you could do. 01:00:07.023 --> 01:00:08.440 align:middle line:84% You could raise the taxable wages. 01:00:08.440 --> 01:00:11.860 align:middle line:84% You could allow more people to come into the country. 01:00:11.860 --> 01:00:16.700 align:middle line:84% Another thing you could do is you could continue 01:00:16.700 --> 01:00:19.020 align:middle line:90% to raise the retirement age. 01:00:19.020 --> 01:00:26.540 align:middle line:84% So in 1950, men who were aged 65 lived on average 13 more years. 01:00:26.540 --> 01:00:28.400 align:middle line:90% Today they live 19 more years. 01:00:28.400 --> 01:00:32.180 align:middle line:90% 01:00:32.180 --> 01:00:34.240 align:middle line:90% We took 65 to 67. 01:00:34.240 --> 01:00:36.320 align:middle line:84% So men are living on average seven more years. 01:00:36.320 --> 01:00:38.100 align:middle line:90% Women as well. 01:00:38.100 --> 01:00:39.900 align:middle line:84% I forget the number for women there. 01:00:39.900 --> 01:00:42.480 align:middle line:84% Seven more years, yet we only raised the retirement age 01:00:42.480 --> 01:00:43.420 align:middle line:90% two years. 01:00:43.420 --> 01:00:45.020 align:middle line:90% We could raise it more. 01:00:45.020 --> 01:00:49.700 align:middle line:84% Now, as I said earlier, raising the full benefit age 01:00:49.700 --> 01:00:51.700 align:middle line:90% is simply a benefits cut. 01:00:51.700 --> 01:00:54.060 align:middle line:84% If we raise 67 to 70, that would just 01:00:54.060 --> 01:00:57.060 align:middle line:84% mean that every age you get less money. 01:00:57.060 --> 01:01:01.780 align:middle line:84% The real game changer is this one, 01:01:01.780 --> 01:01:05.900 align:middle line:84% which is should we raise the age at which you retire early? 01:01:05.900 --> 01:01:12.860 align:middle line:84% This is a fascinating topic because let's go back to figure 01:01:12.860 --> 01:01:15.100 align:middle line:90% 13-4. 01:01:15.100 --> 01:01:17.860 align:middle line:90% You see the spike at age 62. 01:01:17.860 --> 01:01:21.540 align:middle line:84% Here's the strange thing, that spike should not exist, 01:01:21.540 --> 01:01:26.540 align:middle line:84% because it turns out the implicit tax at age 62 is zero. 01:01:26.540 --> 01:01:28.980 align:middle line:84% We've actually got a system which is almost perfectly 01:01:28.980 --> 01:01:31.098 align:middle line:90% actuarially fair at age 62. 01:01:31.098 --> 01:01:33.140 align:middle line:84% That is, the net benefit of working one more year 01:01:33.140 --> 01:01:34.420 align:middle line:90% is basically zero. 01:01:34.420 --> 01:01:37.520 align:middle line:84% I mean, it's basically your full Social Security benefit. 01:01:37.520 --> 01:01:40.992 align:middle line:90% 01:01:40.992 --> 01:01:43.450 align:middle line:84% Or in other words, there's no delta in your Social Security 01:01:43.450 --> 01:01:45.250 align:middle line:84% wealth from working that extra year, 01:01:45.250 --> 01:01:46.810 align:middle line:84% because you get less benefits, but we 01:01:46.810 --> 01:01:48.930 align:middle line:84% have the actuarial adjustment, et cetera. 01:01:48.930 --> 01:01:50.970 align:middle line:90% So why do people retire at 62? 01:01:50.970 --> 01:01:53.130 align:middle line:84% Unless we know that, we can't say whether we 01:01:53.130 --> 01:01:54.850 align:middle line:90% should change age 62. 01:01:54.850 --> 01:01:57.130 align:middle line:84% The problem is, there are two views 01:01:57.130 --> 01:02:00.610 align:middle line:84% and they have opposite policy implications. 01:02:00.610 --> 01:02:04.890 align:middle line:84% One view is that it's liquidity constraints. 01:02:04.890 --> 01:02:09.710 align:middle line:84% The view is that people would like to retire earlier. 01:02:09.710 --> 01:02:13.422 align:middle line:84% They are happy to optimize and retire earlier. 01:02:13.422 --> 01:02:15.630 align:middle line:84% But they can't because they don't have the liquidity, 01:02:15.630 --> 01:02:18.050 align:middle line:84% and you cannot by law borrow against your Social Security 01:02:18.050 --> 01:02:19.610 align:middle line:90% benefits. 01:02:19.610 --> 01:02:21.250 align:middle line:90% So the idea is, I'm happy. 01:02:21.250 --> 01:02:23.490 align:middle line:84% If I get my Social Security benefits at 60, 01:02:23.490 --> 01:02:26.010 align:middle line:84% I'd be happy to retire at 60 and just live on those benefits 01:02:26.010 --> 01:02:26.590 align:middle line:90% longer. 01:02:26.590 --> 01:02:27.710 align:middle line:90% But you're not letting me. 01:02:27.710 --> 01:02:29.690 align:middle line:84% So what I do is I pile up from the bottom, 01:02:29.690 --> 01:02:33.330 align:middle line:84% and as soon as I can get them, I quit. 01:02:33.330 --> 01:02:36.220 align:middle line:84% That implication-- that explanation would suggest we 01:02:36.220 --> 01:02:38.720 align:middle line:84% should let people get Social Security benefits even earlier. 01:02:38.720 --> 01:02:40.100 align:middle line:84% We're, in fact, lowering welfare. 01:02:40.100 --> 01:02:42.600 align:middle line:84% There are people who have a high marginal value of leisure who 01:02:42.600 --> 01:02:44.183 align:middle line:84% are not getting to retire because they 01:02:44.183 --> 01:02:47.600 align:middle line:90% can't access the liquidity. 01:02:47.600 --> 01:02:49.520 align:middle line:84% There's an alternative theory, which 01:02:49.520 --> 01:02:52.760 align:middle line:84% is that people just don't understand how the system works. 01:02:52.760 --> 01:02:54.940 align:middle line:84% And they don't understand that if they work past 60, 01:02:54.940 --> 01:02:55.982 align:middle line:90% they get bigger benefits. 01:02:55.982 --> 01:02:57.100 align:middle line:90% So it's the Homer theory. 01:02:57.100 --> 01:03:00.040 align:middle line:84% It's like, woo-hoo, I'm 62, I'm retiring. 01:03:00.040 --> 01:03:03.760 align:middle line:84% And in that case, they're making a mistake. 01:03:03.760 --> 01:03:06.880 align:middle line:84% If they understood this, then they'd retire later. 01:03:06.880 --> 01:03:10.320 align:middle line:84% But they're making a mistake and retiring earlier. 01:03:10.320 --> 01:03:13.920 align:middle line:84% And in that case, they're pushing the spike from above. 01:03:13.920 --> 01:03:16.700 align:middle line:84% These are people who in an ideal world would retire later, 01:03:16.700 --> 01:03:19.120 align:middle line:84% but they retire at 62 because they don't understand. 01:03:19.120 --> 01:03:21.400 align:middle line:84% What's the implication of that theory? 01:03:21.400 --> 01:03:23.160 align:middle line:84% We should raise the early retirement age 01:03:23.160 --> 01:03:26.000 align:middle line:84% and protect people from themselves. 01:03:26.000 --> 01:03:28.360 align:middle line:84% So we have two theories, both valid, 01:03:28.360 --> 01:03:30.580 align:middle line:84% with diametrically opposite policy prescriptions. 01:03:30.580 --> 01:03:32.280 align:middle line:84% And we don't actually-- probably both 01:03:32.280 --> 01:03:34.540 align:middle line:90% are right for different groups. 01:03:34.540 --> 01:03:35.040 align:middle line:90% OK? 01:03:35.040 --> 01:03:36.790 align:middle line:84% For some groups, liquidity is a big issue. 01:03:36.790 --> 01:03:41.560 align:middle line:84% For other groups, probably misunderstanding is a big issue. 01:03:41.560 --> 01:03:44.280 align:middle line:84% So that's why the age 62 policy is fascinating. 01:03:44.280 --> 01:03:46.445 align:middle line:84% It's also fascinating because this 01:03:46.445 --> 01:03:48.320 align:middle line:84% comes-- someone asked about different systems 01:03:48.320 --> 01:03:49.720 align:middle line:90% and heterogeneity. 01:03:49.720 --> 01:03:54.680 align:middle line:84% Jobs are so different I mean, I'm 01:03:54.680 --> 01:03:56.772 align:middle line:84% going to be 62 in like three years. 01:03:56.772 --> 01:03:58.980 align:middle line:84% There's no reason I'm going to retire in three years. 01:03:58.980 --> 01:04:00.440 align:middle line:84% But if I was a coal miner, it'd be 01:04:00.440 --> 01:04:04.080 align:middle line:84% pretty shitty to be like a coal miner at 62. 01:04:04.080 --> 01:04:06.220 align:middle line:84% So another thing is, you raise it for everyone. 01:04:06.220 --> 01:04:07.260 align:middle line:90% It's very different. 01:04:07.260 --> 01:04:09.177 align:middle line:84% There's a lot of heterogeneity of whether it's 01:04:09.177 --> 01:04:11.480 align:middle line:90% OK to be working at 62. 01:04:11.480 --> 01:04:15.380 align:middle line:84% So basically, that's the other trick here with age 62. 01:04:15.380 --> 01:04:17.400 align:middle line:84% And so we don't really have a good answer here. 01:04:17.400 --> 01:04:19.160 align:middle line:84% But we do know that would be a game changer. 01:04:19.160 --> 01:04:21.410 align:middle line:84% If we raised it to 62, that could save a lot of money. 01:04:21.410 --> 01:04:22.253 align:middle line:90% Yeah. 01:04:22.253 --> 01:04:23.920 align:middle line:84% AUDIENCE: Do you think we can harmlessly 01:04:23.920 --> 01:04:28.883 align:middle line:84% mitigate problem two by more information? 01:04:28.883 --> 01:04:30.300 align:middle line:84% JON GRUBER: Great, great question. 01:04:30.300 --> 01:04:31.660 align:middle line:84% We have tried to provide more information. 01:04:31.660 --> 01:04:33.150 align:middle line:84% You actually get a mailing from the Social Security 01:04:33.150 --> 01:04:35.130 align:middle line:84% Administration, which says if you retire at this age, 01:04:35.130 --> 01:04:35.570 align:middle line:90% you'll get this. 01:04:35.570 --> 01:04:36.890 align:middle line:84% If you retire at this age, you'll get that. 01:04:36.890 --> 01:04:39.870 align:middle line:84% I don't think it's really moved the needle, but I don't know. 01:04:39.870 --> 01:04:44.590 align:middle line:84% I don't really have a good study of that information provision. 01:04:44.590 --> 01:04:46.190 align:middle line:90% Good question. 01:04:46.190 --> 01:04:47.592 align:middle line:90% So that's something we could do. 01:04:47.592 --> 01:04:49.050 align:middle line:84% We could change the retirement age. 01:04:49.050 --> 01:04:51.990 align:middle line:90% 01:04:51.990 --> 01:04:55.230 align:middle line:84% A third thing we could do is we just cut benefits. 01:04:55.230 --> 01:04:56.990 align:middle line:84% A simple way to do that would be-- 01:04:56.990 --> 01:05:03.470 align:middle line:84% if you go back to figure 13-1, we could just lower the bend 01:05:03.470 --> 01:05:04.430 align:middle line:90% points. 01:05:04.430 --> 01:05:06.730 align:middle line:84% We just say, instead of getting $0.90 on the dollar, 01:05:06.730 --> 01:05:09.330 align:middle line:84% you get $0.80 on the dollar for the first branch. 01:05:09.330 --> 01:05:12.430 align:middle line:84% Instead of getting $0.32, you get $0.25 for the second branch. 01:05:12.430 --> 01:05:13.990 align:middle line:90% We just lower benefits. 01:05:13.990 --> 01:05:16.550 align:middle line:84% The problem with that is it's lowering benefits. 01:05:16.550 --> 01:05:18.150 align:middle line:90% Nobody likes that. 01:05:18.150 --> 01:05:20.830 align:middle line:84% The other thing you can do is you 01:05:20.830 --> 01:05:23.150 align:middle line:84% can try to hide the lowering of benefits 01:05:23.150 --> 01:05:26.970 align:middle line:84% by saying that basically, we are overadjusting for inflation. 01:05:26.970 --> 01:05:29.430 align:middle line:84% You often hear this, that the inflation rate is overstated. 01:05:29.430 --> 01:05:31.870 align:middle line:84% And remember, we raise benefits by inflation. 01:05:31.870 --> 01:05:34.625 align:middle line:84% We should raise benefits by less than inflation over time. 01:05:34.625 --> 01:05:37.000 align:middle line:84% People argue, well, the elderly already have their house. 01:05:37.000 --> 01:05:39.000 align:middle line:84% Inflation is driven a lot by housing prices. 01:05:39.000 --> 01:05:41.292 align:middle line:84% They don't need such a big adjustment in their benefits 01:05:41.292 --> 01:05:42.700 align:middle line:90% every year. 01:05:42.700 --> 01:05:45.420 align:middle line:84% The important thing to know about that-- 01:05:45.420 --> 01:05:47.500 align:middle line:84% that may or may not be a valid thing to do-- 01:05:47.500 --> 01:05:49.260 align:middle line:84% but it has important implications. 01:05:49.260 --> 01:05:50.560 align:middle line:90% This is something I learned. 01:05:50.560 --> 01:05:52.670 align:middle line:84% I never forget learning this from my Nobel Prize 01:05:52.670 --> 01:05:54.170 align:middle line:84% winning colleague Peter Diamond, who 01:05:54.170 --> 01:05:57.140 align:middle line:84% is the world's expert on Social Security. 01:05:57.140 --> 01:06:00.580 align:middle line:84% Think about two policies that save the same amount of money, 01:06:00.580 --> 01:06:03.540 align:middle line:84% one that cuts everybody's benefits equally 01:06:03.540 --> 01:06:07.660 align:middle line:84% and one that cuts the rate at which benefits grow. 01:06:07.660 --> 01:06:10.980 align:middle line:84% Which groups benefit and suffer from the second relative 01:06:10.980 --> 01:06:12.300 align:middle line:90% to the firs? 01:06:12.300 --> 01:06:14.120 align:middle line:84% One cuts benefits equally for everyone. 01:06:14.120 --> 01:06:15.840 align:middle line:84% One cuts the rate at which they grow. 01:06:15.840 --> 01:06:16.680 align:middle line:90% Yeah. 01:06:16.680 --> 01:06:21.355 align:middle line:84% AUDIENCE: [INAUDIBLE] marginal benefit [INAUDIBLE]. 01:06:21.355 --> 01:06:23.980 align:middle line:84% JON GRUBER: Imagine you're doing it distributionally neutrally. 01:06:23.980 --> 01:06:24.740 align:middle line:90% Possibly. 01:06:24.740 --> 01:06:25.567 align:middle line:90% What else? 01:06:25.567 --> 01:06:26.400 align:middle line:90% Income is one thing. 01:06:26.400 --> 01:06:26.900 align:middle line:90% What else? 01:06:26.900 --> 01:06:27.820 align:middle line:90% Yeah. 01:06:27.820 --> 01:06:30.300 align:middle line:84% AUDIENCE: People in the future are more benefited. 01:06:30.300 --> 01:06:32.060 align:middle line:84% JON GRUBER: People who live longer. 01:06:32.060 --> 01:06:34.220 align:middle line:84% The longer you live, the more you're hurt. 01:06:34.220 --> 01:06:36.820 align:middle line:84% Well, it turns out, while we have largely 01:06:36.820 --> 01:06:38.780 align:middle line:84% solved elderly poverty, there still 01:06:38.780 --> 01:06:41.780 align:middle line:84% remains large pockets of poverty in the oldest old, 01:06:41.780 --> 01:06:43.460 align:middle line:84% basically widows whose husband didn't 01:06:43.460 --> 01:06:47.340 align:middle line:84% do a very good job protecting them because men are not good. 01:06:47.340 --> 01:06:49.900 align:middle line:84% Basically, men don't take care of things. 01:06:49.900 --> 01:06:53.260 align:middle line:84% So basically, you have a situation 01:06:53.260 --> 01:06:55.980 align:middle line:84% where, in fact, relative to cutting everyone's benefits, 01:06:55.980 --> 01:06:58.340 align:middle line:84% the benefits you'd cut would be actually the people who 01:06:58.340 --> 01:07:00.140 align:middle line:90% are the worst off in society. 01:07:00.140 --> 01:07:02.120 align:middle line:84% So that's a clever way to hide the benefit cut. 01:07:02.120 --> 01:07:04.080 align:middle line:84% It's actually not a very good way to cut benefits. 01:07:04.080 --> 01:07:04.920 align:middle line:90% Not an important point. 01:07:04.920 --> 01:07:06.003 align:middle line:90% You won't be tested on it. 01:07:06.003 --> 01:07:08.860 align:middle line:84% But just a great way to use basic economic insights 01:07:08.860 --> 01:07:10.320 align:middle line:90% to think about economic policy. 01:07:10.320 --> 01:07:12.820 align:middle line:84% That's why I always love that example. 01:07:12.820 --> 01:07:16.260 align:middle line:84% Another thing you could do is you 01:07:16.260 --> 01:07:19.700 align:middle line:84% could say, look, let's make it a more progressive system. 01:07:19.700 --> 01:07:22.420 align:middle line:90% Let's cut benefits for the rich. 01:07:22.420 --> 01:07:25.713 align:middle line:84% For example, we could raise the tax on Social Security benefits. 01:07:25.713 --> 01:07:26.880 align:middle line:90% We don't tax them very much. 01:07:26.880 --> 01:07:28.420 align:middle line:90% We could tax them more. 01:07:28.420 --> 01:07:32.790 align:middle line:84% We could essentially cut it off and say, if you're rich, 01:07:32.790 --> 01:07:36.130 align:middle line:90% you don't get Social Security. 01:07:36.130 --> 01:07:38.130 align:middle line:84% So essentially, we could move more and more away 01:07:38.130 --> 01:07:40.750 align:middle line:84% from a universal program towards a means tested program. 01:07:40.750 --> 01:07:43.930 align:middle line:90% It depends on your resources. 01:07:43.930 --> 01:07:46.970 align:middle line:84% Now, that could save a lot of money. 01:07:46.970 --> 01:07:49.470 align:middle line:84% And once again, if we haven't talked about distribution yet, 01:07:49.470 --> 01:07:51.762 align:middle line:84% if we talk about our typical utilitarian social welfare 01:07:51.762 --> 01:07:53.640 align:middle line:84% planner, probably taking money from the rich 01:07:53.640 --> 01:07:56.010 align:middle line:84% and giving to the poor is probably a good thing to do. 01:07:56.010 --> 01:08:02.320 align:middle line:84% But there's a key criticism that people levy against this, which 01:08:02.320 --> 01:08:04.570 align:middle line:84% is that the whole reason Social Security is so popular 01:08:04.570 --> 01:08:06.290 align:middle line:90% is that it's universal. 01:08:06.290 --> 01:08:07.578 align:middle line:90% People love Social Security. 01:08:07.578 --> 01:08:09.370 align:middle line:84% They're not so crazy about welfare programs 01:08:09.370 --> 01:08:10.792 align:middle line:90% to distribute to the poor. 01:08:10.792 --> 01:08:12.750 align:middle line:84% Once Social Security becomes a welfare program, 01:08:12.750 --> 01:08:15.830 align:middle line:84% it loses its popularity and it might suffer. 01:08:15.830 --> 01:08:19.250 align:middle line:84% So that's one argument people make against doing that. 01:08:19.250 --> 01:08:23.609 align:middle line:84% So those are what I call modest-sized swings 01:08:23.609 --> 01:08:25.410 align:middle line:90% to reform the program. 01:08:25.410 --> 01:08:29.090 align:middle line:84% There's two big swings you can take. 01:08:29.090 --> 01:08:31.850 align:middle line:84% One big swing you can take is recognize 01:08:31.850 --> 01:08:36.529 align:middle line:84% that the Social Security program is misinvested. 01:08:36.529 --> 01:08:38.569 align:middle line:90% The government is a trust fund. 01:08:38.569 --> 01:08:40.689 align:middle line:84% How does it invest that trust fund? 01:08:40.689 --> 01:08:42.050 align:middle line:90% It buys bonds. 01:08:42.050 --> 01:08:45.390 align:middle line:90% It buys government bonds. 01:08:45.390 --> 01:08:50.189 align:middle line:84% If you're an investment advisor and you said to your client, 01:08:50.189 --> 01:08:52.590 align:middle line:84% you're going to need money over the next 75 years, 01:08:52.590 --> 01:08:55.529 align:middle line:84% I'm going to put none of it in the stock market and all of it 01:08:55.529 --> 01:09:00.635 align:middle line:84% in government bonds, you'd be fired and probably sued. 01:09:00.635 --> 01:09:02.010 align:middle line:84% The bottom line rule in investing 01:09:02.010 --> 01:09:03.470 align:middle line:84% is if you're investing for the long run, 01:09:03.470 --> 01:09:05.939 align:middle line:84% you should be more heavily invested in the stock market. 01:09:05.939 --> 01:09:08.189 align:middle line:84% Stock market over short-term periods is more volatile, 01:09:08.189 --> 01:09:11.173 align:middle line:84% but over long-run periods, it's a higher rate of return. 01:09:11.173 --> 01:09:13.590 align:middle line:84% So given how long the trust fund is supposed to be around, 01:09:13.590 --> 01:09:15.590 align:middle line:84% we could be investing it in riskier assets. 01:09:15.590 --> 01:09:18.090 align:middle line:84% And that could actually-- and we have a much higher rate 01:09:18.090 --> 01:09:20.290 align:middle line:84% of return to risky assets, which means it could 01:09:20.290 --> 01:09:21.770 align:middle line:90% offset some of the deficit. 01:09:21.770 --> 01:09:25.970 align:middle line:84% Indeed, the estimate is that if we invested half the trust 01:09:25.970 --> 01:09:28.040 align:middle line:84% fund in the stock market, we could cover up 01:09:28.040 --> 01:09:31.399 align:middle line:84% to half of the projected deficit in the system. 01:09:31.399 --> 01:09:32.420 align:middle line:90% Yeah. 01:09:32.420 --> 01:09:33.672 align:middle line:90% AUDIENCE: [INAUDIBLE] bitcoin. 01:09:33.672 --> 01:09:34.380 align:middle line:90% JON GRUBER: What? 01:09:34.380 --> 01:09:37.760 align:middle line:90% 01:09:37.760 --> 01:09:40.640 align:middle line:84% I will let my smirk summarize my feelings 01:09:40.640 --> 01:09:44.760 align:middle line:84% towards the entire issue of cryptocurrency. 01:09:44.760 --> 01:09:46.720 align:middle line:84% My feeling of bitcoin is roughly my feelings 01:09:46.720 --> 01:09:48.520 align:middle line:90% on any form of gambling. 01:09:48.520 --> 01:09:52.319 align:middle line:84% It is purely without content and entertainment. 01:09:52.319 --> 01:09:55.300 align:middle line:84% So basically, we can invest in the stock market. 01:09:55.300 --> 01:09:57.380 align:middle line:84% But then what's the challenge there? 01:09:57.380 --> 01:09:59.720 align:middle line:84% What's the big criticism of that? 01:09:59.720 --> 01:10:00.820 align:middle line:90% What's the big criticism? 01:10:00.820 --> 01:10:01.240 align:middle line:90% Yeah. 01:10:01.240 --> 01:10:01.620 align:middle line:90% Yeah. 01:10:01.620 --> 01:10:02.120 align:middle line:90% Did you? 01:10:02.120 --> 01:10:03.360 align:middle line:90% Oh, no, go ahead. 01:10:03.360 --> 01:10:05.812 align:middle line:90% AUDIENCE: [INAUDIBLE]. 01:10:05.812 --> 01:10:06.520 align:middle line:90% JON GRUBER: Yeah. 01:10:06.520 --> 01:10:07.720 align:middle line:84% I mean, basically the trick is, do we 01:10:07.720 --> 01:10:10.320 align:middle line:84% want the government-- what happens when the government owns 01:10:10.320 --> 01:10:13.045 align:middle line:84% 20% of the stock market and they suddenly say, 01:10:13.045 --> 01:10:15.420 align:middle line:84% we're not going to invest in companies that make tobacco. 01:10:15.420 --> 01:10:16.360 align:middle line:84% We're going to invest in companies 01:10:16.360 --> 01:10:17.740 align:middle line:90% that have non-union workers. 01:10:17.740 --> 01:10:20.440 align:middle line:84% We're not going to invest in companies that are woke. 01:10:20.440 --> 01:10:21.400 align:middle line:90% OK? 01:10:21.400 --> 01:10:24.038 align:middle line:84% That's not good for American capitalism. 01:10:24.038 --> 01:10:26.330 align:middle line:84% To have the fundamental arbiter of American capitalism, 01:10:26.330 --> 01:10:29.430 align:middle line:84% our stock market, be driven by political considerations 01:10:29.430 --> 01:10:31.070 align:middle line:90% would be an unhappy outcome. 01:10:31.070 --> 01:10:31.993 align:middle line:90% Yeah. 01:10:31.993 --> 01:10:33.910 align:middle line:84% AUDIENCE: Aren't there examples of countries-- 01:10:33.910 --> 01:10:35.450 align:middle line:84% JON GRUBER: There are pension funds, but it's a choice. 01:10:35.450 --> 01:10:37.290 align:middle line:84% You can choose whether to have your money in them or not. 01:10:37.290 --> 01:10:39.910 align:middle line:84% You can't choose to have your money in Social Security. 01:10:39.910 --> 01:10:43.830 align:middle line:84% So basically, that's the challenge with that big swing. 01:10:43.830 --> 01:10:46.730 align:middle line:84% But it's certainly something to be considered. 01:10:46.730 --> 01:10:49.017 align:middle line:84% For example, you could say we're going to put money 01:10:49.017 --> 01:10:49.850 align:middle line:90% in the stock market. 01:10:49.850 --> 01:10:52.590 align:middle line:84% We're going to have the Fed or some independent organization 01:10:52.590 --> 01:10:55.030 align:middle line:84% will decide what it gets invested in. 01:10:55.030 --> 01:10:57.110 align:middle line:90% So it's worth considering. 01:10:57.110 --> 01:10:59.310 align:middle line:84% If you could set up an ironclad rule, 01:10:59.310 --> 01:11:02.630 align:middle line:84% there's no reason why it shouldn't be done. 01:11:02.630 --> 01:11:05.058 align:middle line:84% A proper investment would have a mix of assets. 01:11:05.058 --> 01:11:07.350 align:middle line:84% The question is, can you set up an ironclad enough rule 01:11:07.350 --> 01:11:09.517 align:middle line:84% that you can protect it from political interference? 01:11:09.517 --> 01:11:10.130 align:middle line:90% Yeah. 01:11:10.130 --> 01:11:12.190 align:middle line:90% AUDIENCE: [INAUDIBLE] 01:11:12.190 --> 01:11:13.390 align:middle line:90% JON GRUBER: With what? 01:11:13.390 --> 01:11:15.258 align:middle line:90% AUDIENCE: [INAUDIBLE] 01:11:15.258 --> 01:11:17.550 align:middle line:84% JON GRUBER: Well, no, but this is just the risk profile 01:11:17.550 --> 01:11:18.300 align:middle line:90% of the government. 01:11:18.300 --> 01:11:20.430 align:middle line:84% They're still getting their benefits. 01:11:20.430 --> 01:11:24.070 align:middle line:84% My benefits are based on what I earned and stuff. 01:11:24.070 --> 01:11:26.350 align:middle line:84% This is just the government's fiscal risk. 01:11:26.350 --> 01:11:29.007 align:middle line:84% No individuals invest in the stock market here. 01:11:29.007 --> 01:11:30.090 align:middle line:90% AUDIENCE: No, I know that. 01:11:30.090 --> 01:11:34.950 align:middle line:84% For example, what happens if a person is closer to retire 01:11:34.950 --> 01:11:37.502 align:middle line:84% and everything is invested in [INAUDIBLE]? 01:11:37.502 --> 01:11:39.210 align:middle line:84% JON GRUBER: Yeah, but it's not his money. 01:11:39.210 --> 01:11:40.050 align:middle line:90% It's the government's money. 01:11:40.050 --> 01:11:42.170 align:middle line:84% He gets a benefit determined by this formula. 01:11:42.170 --> 01:11:45.190 align:middle line:84% This is what's called a defined benefit program. 01:11:45.190 --> 01:11:46.830 align:middle line:90% His benefit is defined. 01:11:46.830 --> 01:11:48.883 align:middle line:84% It's not based on where the money is. 01:11:48.883 --> 01:11:51.050 align:middle line:84% That unfunded system, it's a defined benefit system. 01:11:51.050 --> 01:11:53.870 align:middle line:84% So if the stock goes down, no individual suffers. 01:11:53.870 --> 01:11:56.590 align:middle line:84% But that relates to the second big swing, 01:11:56.590 --> 01:12:00.270 align:middle line:84% which is to say, why don't we just bag this unfunded system 01:12:00.270 --> 01:12:02.270 align:middle line:90% and move to a funded system? 01:12:02.270 --> 01:12:04.550 align:middle line:84% Let's get rid of this whole problem. 01:12:04.550 --> 01:12:07.630 align:middle line:84% Let's have people save on their own. 01:12:07.630 --> 01:12:10.990 align:middle line:84% Let's basically get rid of this Ponzi scheme 01:12:10.990 --> 01:12:14.710 align:middle line:90% and have people invest in-- 01:12:14.710 --> 01:12:17.110 align:middle line:84% have everyone have a 401(k) instead of force them 01:12:17.110 --> 01:12:18.210 align:middle line:90% into Social Security. 01:12:18.210 --> 01:12:21.133 align:middle line:90% 01:12:21.133 --> 01:12:22.550 align:middle line:84% You're forcing people to basically 01:12:22.550 --> 01:12:25.163 align:middle line:90% invest in a bad investment now. 01:12:25.163 --> 01:12:26.080 align:middle line:90% Why are we doing that? 01:12:26.080 --> 01:12:27.830 align:middle line:84% Why don't you let them invest their money? 01:12:27.830 --> 01:12:31.720 align:middle line:84% Now, we still are worried people are making mistakes. 01:12:31.720 --> 01:12:33.500 align:middle line:90% So we'll make them have savings. 01:12:33.500 --> 01:12:36.780 align:middle line:84% We'll let them decide where it is, like a 401(k). 01:12:36.780 --> 01:12:38.460 align:middle line:84% And it'll be real savings that they 01:12:38.460 --> 01:12:41.380 align:middle line:90% know is there when they retire. 01:12:41.380 --> 01:12:47.220 align:middle line:84% Well, this approach has really three problems. 01:12:47.220 --> 01:12:52.658 align:middle line:84% The first problem is, who's paying the legacy debt? 01:12:52.658 --> 01:12:55.200 align:middle line:84% If you suddenly say everybody's going to save for themselves, 01:12:55.200 --> 01:12:56.520 align:middle line:90% what about those old people? 01:12:56.520 --> 01:12:57.720 align:middle line:90% Who's paying for them? 01:12:57.720 --> 01:13:02.180 align:middle line:84% Who's paying the $17.2 trillion we owe them? 01:13:02.180 --> 01:13:03.100 align:middle line:90% OK? 01:13:03.100 --> 01:13:04.703 align:middle line:90% What's that? 01:13:04.703 --> 01:13:05.620 align:middle line:90% AUDIENCE: [INAUDIBLE]. 01:13:05.620 --> 01:13:07.420 align:middle line:84% JON GRUBER: Yeah, well, basically you could essentially 01:13:07.420 --> 01:13:08.680 align:middle line:90% tax people and set this up. 01:13:08.680 --> 01:13:10.680 align:middle line:90% But then what's the point? 01:13:10.680 --> 01:13:13.180 align:middle line:84% In fact, people say-- it's a great article which points out, 01:13:13.180 --> 01:13:15.320 align:middle line:84% everybody says, well, we should privatize Social Security, 01:13:15.320 --> 01:13:17.820 align:middle line:84% because instead of running this Ponzi scheme rate of return, 01:13:17.820 --> 01:13:19.820 align:middle line:84% we'll earn the market rate of return. 01:13:19.820 --> 01:13:21.440 align:middle line:84% So instead of earning a rate of return 01:13:21.440 --> 01:13:23.410 align:middle line:84% which is the rate of population growth P 01:13:23.410 --> 01:13:26.370 align:middle line:84% plus the rate of productivity growth, delta, 01:13:26.370 --> 01:13:28.270 align:middle line:84% which is less than the interest rate-- 01:13:28.270 --> 01:13:30.150 align:middle line:84% if people invest in the market, they earn the interest rate. 01:13:30.150 --> 01:13:31.210 align:middle line:90% Wouldn't that be great? 01:13:31.210 --> 01:13:32.710 align:middle line:84% There's an article which says if you 01:13:32.710 --> 01:13:35.330 align:middle line:84% take the amount of money people would owe and impose it 01:13:35.330 --> 01:13:39.050 align:middle line:84% on a tax, it absolutely offsets this entire gain. 01:13:39.050 --> 01:13:41.410 align:middle line:84% And we'd be back to turning P rho plus delta. 01:13:41.410 --> 01:13:42.890 align:middle line:84% Because we'd earn r, but we'd have 01:13:42.890 --> 01:13:44.350 align:middle line:90% to pay a tax on legacy debt. 01:13:44.350 --> 01:13:47.370 align:middle line:84% And that would offset the entire gain from moving to r. 01:13:47.370 --> 01:13:50.570 align:middle line:84% So the legacy debt is one problem. 01:13:50.570 --> 01:13:54.770 align:middle line:84% The second problem is that basically it 01:13:54.770 --> 01:13:56.533 align:middle line:84% would be much higher administrative costs. 01:13:56.533 --> 01:13:58.450 align:middle line:84% Remember, one of the justifications for Social 01:13:58.450 --> 01:14:00.995 align:middle line:84% Security was if you have a giant pool of people 01:14:00.995 --> 01:14:03.370 align:middle line:84% doing an activity, you can spread the administrative cost 01:14:03.370 --> 01:14:05.218 align:middle line:90% wide. 01:14:05.218 --> 01:14:07.010 align:middle line:84% The administrative costs of Social Security 01:14:07.010 --> 01:14:11.390 align:middle line:84% are on the order of 0.2 cents per dollar, or 20 basis points, 01:14:11.390 --> 01:14:13.210 align:middle line:84% for those of you who knows finance. 01:14:13.210 --> 01:14:15.890 align:middle line:90% OK? 01:14:15.890 --> 01:14:20.470 align:middle line:84% In an example, the UK has a privatized system. 01:14:20.470 --> 01:14:21.790 align:middle line:90% They're partially privatized. 01:14:21.790 --> 01:14:24.730 align:middle line:84% The administrative costs are 1.2% a year. 01:14:24.730 --> 01:14:26.590 align:middle line:84% You might think, well, 1.2% versus 2%, 01:14:26.590 --> 01:14:28.490 align:middle line:90% those are small numbers. 01:14:28.490 --> 01:14:31.290 align:middle line:84% Remember, one more percent should be compared 01:14:31.290 --> 01:14:34.528 align:middle line:90% to the r, which is maybe 4%. 01:14:34.528 --> 01:14:36.070 align:middle line:84% Here's another way to think about it. 01:14:36.070 --> 01:14:40.610 align:middle line:84% If your administrative fee is 1.2% versus 0.2%, 01:14:40.610 --> 01:14:45.450 align:middle line:84% after 30 years, you have 2/3 as much money. 01:14:45.450 --> 01:14:47.670 align:middle line:84% Because it really eats into that compounding. 01:14:47.670 --> 01:14:50.170 align:middle line:84% That's the wonder, the miracle of savings. 01:14:50.170 --> 01:14:52.890 align:middle line:84% Note for all of you making saving decisions, look at fees. 01:14:52.890 --> 01:14:55.510 align:middle line:84% Don't be thrown off by fancy sounding funds. 01:14:55.510 --> 01:14:56.990 align:middle line:90% Fees are what drive everything. 01:14:56.990 --> 01:14:59.130 align:middle line:84% There's no investment advisor in the long run 01:14:59.130 --> 01:15:02.530 align:middle line:84% who can do better than just finding a low-fee fund. 01:15:02.530 --> 01:15:06.650 align:middle line:84% So basically, that's another problem. 01:15:06.650 --> 01:15:10.210 align:middle line:84% And then finally we have the last problem, 01:15:10.210 --> 01:15:12.690 align:middle line:84% which I think is the most fundamental, which comes 01:15:12.690 --> 01:15:14.130 align:middle line:90% to the question in the back. 01:15:14.130 --> 01:15:17.692 align:middle line:84% Which is, do we want people investing their money 01:15:17.692 --> 01:15:19.900 align:middle line:84% given the risk they might take and they might suffer? 01:15:19.900 --> 01:15:21.700 align:middle line:84% In this case, if the market goes down and you're about to retire. 01:15:21.700 --> 01:15:24.780 align:middle line:84% You are screwed, because it's not a defined benefit plan. 01:15:24.780 --> 01:15:26.720 align:middle line:84% Your benefit is based on what you saved. 01:15:26.720 --> 01:15:28.992 align:middle line:84% Market goes down, you are screwed. 01:15:28.992 --> 01:15:29.700 align:middle line:90% Think about this. 01:15:29.700 --> 01:15:33.000 align:middle line:84% This is what to me is the death knell of this whole idea. 01:15:33.000 --> 01:15:34.640 align:middle line:84% We're saying we think people are too 01:15:34.640 --> 01:15:37.240 align:middle line:84% stupid to save for retirement but smart enough 01:15:37.240 --> 01:15:39.500 align:middle line:90% to optimize their portfolio. 01:15:39.500 --> 01:15:40.000 align:middle line:90% Right? 01:15:40.000 --> 01:15:41.708 align:middle line:84% We think they're too stupid because we're 01:15:41.708 --> 01:15:42.960 align:middle line:90% going to force them to save. 01:15:42.960 --> 01:15:44.840 align:middle line:84% We think they're smart enough to choose the right mix of stocks 01:15:44.840 --> 01:15:45.340 align:middle line:90% and bonds. 01:15:45.340 --> 01:15:47.880 align:middle line:84% I'm not smart enough to optimize my portfolio 01:15:47.880 --> 01:15:51.120 align:middle line:84% and I know a lot about this topic. 01:15:51.120 --> 01:15:53.818 align:middle line:84% And that was a really arrogant statement. 01:15:53.818 --> 01:15:55.360 align:middle line:84% The bottom line is, it's a lot harder 01:15:55.360 --> 01:15:58.080 align:middle line:84% to optimize your portfolio and decide how much to save. 01:15:58.080 --> 01:16:00.640 align:middle line:84% So the whole idea is kind of dumb, if you think about it. 01:16:00.640 --> 01:16:02.015 align:middle line:84% And in fact, people have realized 01:16:02.015 --> 01:16:04.960 align:middle line:84% that nobody now would propose a privatization with full choice. 01:16:04.960 --> 01:16:06.660 align:middle line:84% They'd say there'd be some government constraint. 01:16:06.660 --> 01:16:09.035 align:middle line:84% Just like the government constraints in the stock market, 01:16:09.035 --> 01:16:11.680 align:middle line:84% you'd have to have some mix of stocks and bonds, et cetera. 01:16:11.680 --> 01:16:14.280 align:middle line:84% But the bottom line is privatization 01:16:14.280 --> 01:16:16.600 align:middle line:84% was very popular about 20 years ago. 01:16:16.600 --> 01:16:18.420 align:middle line:84% There was real legislative proposals. 01:16:18.420 --> 01:16:19.900 align:middle line:84% It's pretty much died as a topic. 01:16:19.900 --> 01:16:24.160 align:middle line:84% It's still in Project 2025 as a Republican talking point. 01:16:24.160 --> 01:16:25.873 align:middle line:84% But no one really takes it that seriously 01:16:25.873 --> 01:16:28.040 align:middle line:84% anymore because they haven't overcome these problems 01:16:28.040 --> 01:16:29.720 align:middle line:84% of how do you pay the legacy debt 01:16:29.720 --> 01:16:33.480 align:middle line:84% and how much individual responsibility do you 01:16:33.480 --> 01:16:35.760 align:middle line:90% want people to have? 01:16:35.760 --> 01:16:37.840 align:middle line:84% So that's i on Social Security reform. 01:16:37.840 --> 01:16:39.065 align:middle line:90% Look, here's the bottom line. 01:16:39.065 --> 01:16:40.440 align:middle line:84% You remember global warming and I 01:16:40.440 --> 01:16:42.220 align:middle line:84% said the good example was the ozone layer? 01:16:42.220 --> 01:16:43.080 align:middle line:84% There's a hole in the ozone layer, 01:16:43.080 --> 01:16:44.662 align:middle line:84% like, oh my god, we got to fix this. 01:16:44.662 --> 01:16:46.120 align:middle line:84% Social Security reform is not going 01:16:46.120 --> 01:16:49.520 align:middle line:84% to happen until we're six months away from crisis. 01:16:49.520 --> 01:16:50.860 align:middle line:90% Everybody's talking about it. 01:16:50.860 --> 01:16:52.040 align:middle line:84% I'm actually working with people who 01:16:52.040 --> 01:16:53.680 align:middle line:84% are trying to put together Social Security solvency 01:16:53.680 --> 01:16:54.340 align:middle line:90% reforms. 01:16:54.340 --> 01:16:54.900 align:middle line:90% That's great. 01:16:54.900 --> 01:16:55.983 align:middle line:90% Solvency plans, I love it. 01:16:55.983 --> 01:16:57.020 align:middle line:90% We should deal with it. 01:16:57.020 --> 01:16:58.733 align:middle line:84% It's crazy not to wait till the end. 01:16:58.733 --> 01:17:00.900 align:middle line:84% But that's just the nature of our political process. 01:17:00.900 --> 01:17:02.920 align:middle line:84% It's hard to imagine with 10 or 12 or 15 years 01:17:02.920 --> 01:17:05.560 align:middle line:84% to go we're going to seriously raise taxes on people 01:17:05.560 --> 01:17:07.000 align:middle line:90% to solve this problem. 01:17:07.000 --> 01:17:09.680 align:middle line:84% It's going to have to get closer to crisis before we do. 01:17:09.680 --> 01:17:11.440 align:middle line:90% All right? 01:17:11.440 --> 01:17:13.310 align:middle line:90% Stop there. 01:17:13.310 --> 01:17:17.000 align:middle line:90%