WEBVTT 00:02.080 --> 00:04.260 Prof: Okay, today we're going to talk a 00:04.255 --> 00:06.185 little bit more about Social Security. 00:06.190 --> 00:09.050 Social Security, remember, is the biggest 00:09.052 --> 00:11.202 program the government runs. 00:11.200 --> 00:14.150 Its annual expenditures are slightly bigger than the 00:14.146 --> 00:17.436 military expenditures every year, and those two things are 00:17.440 --> 00:19.520 way bigger than everything else. 00:19.520 --> 00:23.420 It's been the biggest program the government's run since the 00:23.417 --> 00:26.407 New Deal, since Franklin Delano Roosevelt 00:26.411 --> 00:29.181 put it into effect in the late 1930s, 00:29.180 --> 00:31.910 and it seems to be broke. 00:31.910 --> 00:35.580 So it lasted for 70 years, and now it seems on the verge 00:35.576 --> 00:36.706 of going broke. 00:36.710 --> 00:39.590 So what happened and how can we fix it? 00:39.590 --> 00:41.890 And as I said, this has been a topic of 00:41.888 --> 00:44.248 conversation, presidential conversation, 00:44.248 --> 00:45.698 at least since 2000. 00:45.700 --> 00:47.370 There were a bunch of commissions before that, 00:47.370 --> 00:51.800 looking at the problem, and what I said last time was, 00:51.800 --> 00:55.090 the general public and our politicians seem completely 00:55.090 --> 00:57.140 confused about what's going on. 00:57.140 --> 01:00.000 So we need to figure out, how could it be that the 01:00.003 --> 01:01.233 program went broke? 01:01.228 --> 01:05.118 Should that have been a surprise, and how can we fix it? 01:05.120 --> 01:08.190 And the three standard things everybody says is, 01:08.191 --> 01:11.201 President Bush and many people like him saying, 01:11.198 --> 01:13.878 "Well, the system's going broke. 01:13.879 --> 01:17.139 The rate of return young people like you are going to get is 01:17.144 --> 01:18.754 less than 2 percent a year. 01:18.750 --> 01:19.860 That's terrible. 01:19.860 --> 01:22.580 Any bond, any stock, you can expect a much higher 01:22.584 --> 01:25.314 return than that, so the program's just awful. 01:25.310 --> 01:29.080 We should stop it or privatize it." 01:29.080 --> 01:30.920 I'll explain what privatizing means. 01:30.920 --> 01:33.340 In that way, your money, instead of going to 01:33.340 --> 01:35.620 old people, will be put in the stock market 01:35.616 --> 01:38.296 and you'll get a higher rate of return and you'll do much 01:38.300 --> 01:38.780 better. 01:38.780 --> 01:42.290 Then a second thing people say is, "Well, 01:42.287 --> 01:44.857 the thing lasted all this time. 01:44.860 --> 01:47.020 I mean, what's really gone different? 01:47.019 --> 01:49.289 What could possibly have caused the change? 01:49.290 --> 01:54.680 It must be those dastardly baby boom generation-ers, 01:54.680 --> 01:58.450 like me, who are headed towards retirement in another 20 or 30 01:58.453 --> 02:00.103 years, and they're going to bankrupt 02:00.099 --> 02:00.549 the system. 02:00.549 --> 02:03.009 There are going to be so many of those old geezers hanging 02:03.013 --> 02:05.493 around needing to get paid, that young people like you 02:05.488 --> 02:07.118 won't be able to carry the burden, 02:07.120 --> 02:08.630 and so it's our fault." 02:08.628 --> 02:11.538 And then there are the people, the naysayers, 02:11.538 --> 02:14.628 Gore chief among them, but many others, 02:14.628 --> 02:19.058 Obama now similarly saying, slightly similar things, 02:19.060 --> 02:21.180 saying, "Well, privatization doesn't make any 02:21.182 --> 02:21.532 sense. 02:21.530 --> 02:24.850 It's logically impossible, because if you take the taxes 02:24.854 --> 02:27.034 that the young people are paying, 02:27.030 --> 02:29.590 and tell them, those Social Security taxes, 02:29.590 --> 02:31.410 they can invest in private accounts, 02:31.408 --> 02:34.048 the stock market, with their own name on it, 02:34.050 --> 02:37.010 then how are we going to give money to the old people now? 02:37.008 --> 02:38.818 So you'll just be screwing the old generation." 02:38.819 --> 02:40.789 So privatization is impossible. 02:40.788 --> 02:43.478 So those are the three most standard things people say. 02:43.479 --> 02:45.689 All three of them have some truth to them, 02:45.690 --> 02:48.930 but on the whole, they're substantially wrong, 02:48.930 --> 02:52.320 completely wrong, and once we clarify what stage 02:52.324 --> 02:54.934 the system is in, we'll be able to think about 02:54.925 --> 02:56.075 what the right solution is. 02:56.080 --> 02:58.900 I'm going to tell you my solution which, 02:58.895 --> 03:03.155 as I said, is not universally admired, but I'll see what you 03:03.157 --> 03:04.527 think about it. 03:04.530 --> 03:10.150 So the program came into effect in what was the greatest or the 03:10.149 --> 03:14.409 biggest of the New Deal advances made by FDR. 03:14.408 --> 03:19.568 And I just thought I'd play you this tape of him signing it into 03:19.574 --> 03:22.144 law, and behind him is the Secretary 03:22.141 --> 03:23.871 of Labor, Frances Perkins, 03:23.870 --> 03:27.000 who you'll see in a second, played a huge role in this, 03:26.996 --> 03:29.166 since she was the first woman in the Cabinet. 03:29.169 --> 03:31.729 And by the way, in my generation, 03:31.727 --> 03:36.197 there are many women named Frances, because their parents 03:36.202 --> 03:38.202 named them after her. 03:38.199 --> 03:43.119 So here's the--let's see if this works. 03:43.120 --> 03:54.290 > 03:54.288 --> 03:58.158 Franklin D. Roosevelt: Today a hope of many years' 03:58.163 --> 04:00.933 standing is in large part fulfilled. 04:00.930 --> 04:04.950 The civilization of the past hundred years, 04:04.951 --> 04:10.411 with its startling industrial changes, has tended more and 04:10.411 --> 04:13.381 more to make life insecure. 04:13.378 --> 04:17.708 Young people have come to wonder what would be their lot 04:17.706 --> 04:19.906 when they came to old age. 04:19.910 --> 04:25.860 The man with a job has wondered how long the job would last. 04:25.860 --> 04:31.650 This Social Security measure gives at least some protection 04:31.649 --> 04:37.039 to thirty millions of our citizens who will reap direct 04:37.038 --> 04:41.828 benefits through unemployment compensation, 04:41.829 --> 04:46.759 through old-age pensions and through increased services for 04:46.764 --> 04:52.044 the protection of children and the prevention of ill health. 04:52.040 --> 04:56.380 We can never insure one hundred percent of the population 04:56.382 --> 05:01.112 against one hundred percent of the hazards and vicissitudes of 05:01.113 --> 05:04.403 life, but we have tried to frame a 05:04.401 --> 05:09.791 law which will give some measure of protection to the average 05:09.785 --> 05:14.625 citizen and to his family against the loss of a job and 05:14.629 --> 05:17.859 against poverty-ridden old age. 05:17.860 --> 05:21.940 It seems to me that if the Senate and the House of 05:21.939 --> 05:26.689 Representatives in this long and arduous session have done 05:26.685 --> 05:30.595 nothing more than pass this security bill, 05:30.600 --> 05:35.140 Social Security Act, the session would be regarded 05:35.137 --> 05:37.637 as historic for all time. 05:37.639 --> 05:39.619 > 05:39.620 --> 05:41.550 Prof: Okay, well, it was regarded as 05:41.550 --> 05:45.510 historic for all time, and let me now explain what 05:45.511 --> 05:49.401 Social Security does, and what the rules are. 05:49.399 --> 06:06.889 And I have to open another file. 06:06.889 --> 06:10.679 I forgot where I put--I hope it's--I wonder whether 06:10.675 --> 06:14.155 it's--sorry, I opened the wrong year, I see. 06:14.160 --> 06:21.560 I'm living in the past. 06:21.560 --> 06:23.560 Sorry, that was last year's. 06:23.560 --> 06:47.750 06:47.750 --> 06:55.310 Okay, so we went through all this last time. 06:55.310 --> 06:59.710 So, after passing legislation, a massive publicity campaign 06:59.709 --> 07:03.049 was launched, convincing people that this was 07:03.045 --> 07:04.255 a good idea. 07:04.259 --> 07:06.279 And not everybody thought it was such a good idea, 07:06.283 --> 07:06.823 by the way. 07:06.819 --> 07:09.689 And so, you know, this is an example of the 07:09.689 --> 07:12.969 advertisements that were plastered everybody, 07:12.970 --> 07:15.260 you know, telling you about how much you were going to get, 07:15.259 --> 07:17.379 money after you retired. 07:17.379 --> 07:20.589 Now what was the idea of Social Security? 07:20.589 --> 07:23.439 The idea was that lots of people, when they were young, 07:23.444 --> 07:26.194 didn't really have the foresight to imagine what life 07:26.192 --> 07:28.522 was going to be like when they were old. 07:28.519 --> 07:32.489 In fact, in the late 1930s, the most destitute of Americans 07:32.485 --> 07:35.475 were the old, and so the idea was to force 07:35.483 --> 07:37.933 them to save when they were young, 07:37.930 --> 07:41.150 and then the money would be there--would be invested in US 07:41.148 --> 07:43.518 Treasury bonds and accumulate interest, 07:43.519 --> 07:45.999 and the money would be there when they got old. 07:46.000 --> 07:49.280 So it was imagined to be a prefunded system, 07:49.279 --> 07:52.659 prefunded meaning the money comes in and it's that money 07:52.661 --> 07:56.041 which is going to then pay people later when they get to 07:56.041 --> 07:56.781 old age. 07:56.779 --> 07:58.949 And the idea was, you were going to collect 07:58.954 --> 08:01.394 enough taxes so that when you got to be old, 08:01.389 --> 08:04.299 you would get 40 percent--every year, 08:04.300 --> 08:06.770 you would be receiving, the average person, 08:06.769 --> 08:09.789 recipient, retiree, would be receiving 40 percent 08:09.786 --> 08:12.926 of the average wage of the average young worker. 08:12.930 --> 08:14.670 And, you know, the idea is that when you're 08:14.672 --> 08:16.002 older, you have less expenses. 08:16.000 --> 08:20.010 You probably already own your house, your children are out of 08:20.007 --> 08:24.147 the house, so 40 percent should be enough to keep you going. 08:24.149 --> 08:26.949 It was certainly more than the average old person had at the 08:26.947 --> 08:27.277 time. 08:27.278 --> 08:31.228 Now this you would get for your entire life, so when Roosevelt 08:31.233 --> 08:34.343 called it insurance, what was the main thing that 08:34.344 --> 08:35.774 you were insuring? 08:35.769 --> 08:39.879 Well, there's a side part of the program which he mentioned, 08:39.879 --> 08:42.669 which is insuring people of disabilities, 08:42.667 --> 08:44.127 things like that. 08:44.129 --> 08:49.579 But that's a 1--out of the 12.4 percent tax, it's something like 08:49.578 --> 08:50.788 1.8 percent. 08:50.788 --> 08:55.138 But the main part of the program is insurance against 08:55.143 --> 08:55.733 what? 08:55.730 --> 08:56.490 Yes? 08:56.490 --> 08:57.210 Student: Living too long. 08:57.210 --> 08:58.180 Prof: Living too long. 08:58.178 --> 09:01.158 So you get the money your entire life, no matter how long 09:01.158 --> 09:04.348 you live, so you're being insured against living too long. 09:04.350 --> 09:05.500 Exactly. 09:05.500 --> 09:09.180 So what happened was, of course in the first year, 09:09.179 --> 09:12.559 a lot of people were starting to pay taxes. 09:12.558 --> 09:15.348 And in the second year, they were paying more taxes, 09:15.350 --> 09:17.070 and of course, they were still not retired 09:17.066 --> 09:18.656 yet, so they weren't actually giving 09:18.663 --> 09:21.983 out the money to anybody, and this fund was starting to 09:21.977 --> 09:22.877 accumulate. 09:22.879 --> 09:25.649 So Frances Perkins said, "Well, what are we doing 09:25.653 --> 09:26.023 here? 09:26.019 --> 09:28.499 The whole point is that we've got all these old people, 09:28.504 --> 09:29.014 you know. 09:29.009 --> 09:30.059 It's just the Depression. 09:30.058 --> 09:32.268 We haven't come out of the Depression yet."--World War 09:32.268 --> 09:33.028 II hasn't started. 09:33.029 --> 09:35.339 It won't, for the US, start for a few more years, 09:35.335 --> 09:35.955 by the way. 09:35.960 --> 09:39.120 "So there are all these old people sitting here, 09:39.120 --> 09:41.920 totally destitute, and we've got all this money 09:41.918 --> 09:43.558 also just sitting here. 09:43.558 --> 09:45.608 It really doesn't make sense," 09:45.610 --> 09:46.470 she said. 09:46.470 --> 09:49.630 "What we ought to do is take the money the young people 09:49.633 --> 09:52.743 are paying in and give it to the old people who are already 09:52.743 --> 09:53.283 there. 09:53.279 --> 09:56.409 That way we are going to be saving these old people and the 09:56.407 --> 09:58.287 young people, when they get old, 09:58.285 --> 10:01.415 they'll be saved themselves, because there'll be more young 10:01.423 --> 10:04.073 people coming along afterwards who can pay taxes in when 10:04.072 --> 10:05.892 they're young, and today's young, 10:05.893 --> 10:08.193 when they're old, will then collect those taxes. 10:08.190 --> 10:12.130 They'll be reimbursed for what they contributed when they were 10:12.125 --> 10:13.025 young." 10:13.028 --> 10:17.888 Well, so Roosevelt resisted for a while. 10:17.889 --> 10:21.319 Frances Perkins was apparently, incredibly persuasive person. 10:21.320 --> 10:25.600 One person at the time named Witt, who was on the Social 10:25.596 --> 10:29.166 Security commission, tried to tell her that was 10:29.173 --> 10:32.053 going to lead to budget problems. 10:32.048 --> 10:36.458 She said that he was a half-Witt, and that we had a 10:36.458 --> 10:38.398 more urgent problem. 10:38.399 --> 10:40.819 Not that she doubted him, but the problem was more 10:40.822 --> 10:43.642 urgent, and so that was the only way to solve the problem, 10:43.642 --> 10:44.782 the current crisis. 10:44.779 --> 10:48.379 So they finally agreed to move the system from a prefunded 10:48.383 --> 10:50.663 system, to a pay as you go system. 10:50.658 --> 10:53.688 So the money coming in from current workers is used to pay 10:53.692 --> 10:55.292 directly to the old workers. 10:55.288 --> 10:59.578 So I don't want to get into all these little variations that got 10:59.581 --> 11:00.061 made. 11:00.058 --> 11:04.338 So the program's called the Old Age Survivors and Disability 11:04.336 --> 11:05.566 Insurance Plan. 11:05.570 --> 11:08.310 The insurance is mainly for living too long, 11:08.308 --> 11:11.558 but also in case you get disabled, or in case you have 11:11.563 --> 11:15.623 children and you're disabled, you die, they get something. 11:15.620 --> 11:18.620 Okay, so it's a combination of insurance, disability, 11:18.618 --> 11:21.558 but the main insurance is for living a long time. 11:21.558 --> 11:25.908 So as I said, the tax now is 12.4 percent, 11:25.908 --> 11:29.408 up to a cap of 106,800 dollars. 11:29.408 --> 11:32.598 So if you make more than 106,800 dollars, 11:32.596 --> 11:35.616 you pay, you know, 13,000 or something, 11:35.624 --> 11:39.214 and then nothing more on Social Security. 11:39.210 --> 11:42.910 Okay, so the Social Security tax stops at 106,800. 11:42.908 --> 11:46.508 So the income tax, I'm losing track of what it is, 11:46.509 --> 11:48.859 and whether we're going to go back to the old one, 11:48.860 --> 11:51.500 but let's say it was 38 percent, 39 percent, 11:51.500 --> 11:54.400 something like that, if you had to pay that income 11:54.399 --> 11:58.189 tax and on top of it pay Social Security tax of 12.4 percent, 11:58.190 --> 12:00.260 you'd be over 50 percent taxed. 12:00.259 --> 12:04.029 So needless to say, some of the people who think we 12:04.028 --> 12:08.478 can solve our Social Security problem by eliminating the cap 12:08.477 --> 12:12.767 would be imposing a gigantic marginal tax rate on a lot of 12:12.774 --> 12:16.474 people who don't have a marginal tax rate-- 12:16.470 --> 12:18.310 who have already high marginal tax rate. 12:18.308 --> 12:21.488 That would make it sky high, so that's been resisted. 12:21.490 --> 12:24.570 So 94 percent of workers are below the cap anyway, 12:24.570 --> 12:26.450 so we're talking about the top 6 percent, 12:26.450 --> 12:29.670 most of which--you'll be in that top 6 percent, 12:29.668 --> 12:34.688 so you won't have to pay on the margin Social Security tax. 12:34.690 --> 12:36.960 So there's the taxes, 12.4 percent, 12:36.960 --> 12:39.230 and then there are the benefits. 12:39.230 --> 12:40.760 Now how do the benefits work? 12:40.759 --> 12:41.869 How are they determined? 12:41.870 --> 12:46.230 So the tax, as I said, you just take your income below 12:46.230 --> 12:49.440 106,000 and you pay 12.4 percent tax. 12:49.440 --> 12:51.610 So how do the benefits work? 12:51.610 --> 12:55.300 This is a little bit complicated, but it's actually a 12:55.303 --> 12:57.013 very interesting plan. 12:57.009 --> 13:00.849 What they do is they look at your entire lifetime earnings. 13:00.850 --> 13:03.100 You're not going to get benefits till after you retire, 13:03.100 --> 13:05.660 so you've got your whole life history behind you, 13:05.658 --> 13:08.568 and they say, "Let's look at, 13:08.570 --> 13:13.000 every year, what the fraction of your wage was relative to the 13:13.001 --> 13:15.111 economy wide average." 13:15.110 --> 13:16.640 So it's your relative earning. 13:16.639 --> 13:20.909 So when you're young, it's probably going to be .8, 13:20.912 --> 13:21.342 .9. 13:21.340 --> 13:24.180 If you go to Yale, it's probably going to be 13:24.184 --> 13:26.304 1.5,2, you know, soon thereafter, 13:26.302 --> 13:27.232 all right? 13:27.230 --> 13:29.790 Okay, and it might get even higher, but anyway, 13:29.789 --> 13:32.739 so that's the relative earning you have every year. 13:32.740 --> 13:35.800 So then they say, "Let's average your 35 13:35.804 --> 13:40.124 best relative earning years and just take the sum and divide by 13:40.124 --> 13:41.034 35." 13:41.029 --> 13:44.489 So what is your average lifetime relative wage, 13:44.491 --> 13:45.321 you know? 13:45.320 --> 13:47.140 For the average person, it's going to be 1. 13:47.139 --> 13:48.979 For some people, it might be .8, 13:48.984 --> 13:51.424 for some people, it might be 2 or 3 or 10, 13:51.423 --> 13:51.963 okay. 13:51.960 --> 13:54.770 Now the first--all right, so you've got your average 13:54.770 --> 13:56.150 relative lifetime wage. 13:56.149 --> 13:57.799 What do you make when you retire? 13:57.798 --> 14:01.498 Well, when you hit an age, which, you know, 14:01.496 --> 14:05.276 they're adjusting now, but it used to be 65, 14:05.283 --> 14:08.803 when you hit 65, they compute the average 14:08.804 --> 14:10.394 wage--sorry. 14:10.389 --> 14:13.509 When you hit 65, you're going to be paid a 14:13.509 --> 14:18.149 fraction of the average wage in the economy when you're 65. 14:18.149 --> 14:21.589 So what is the fraction that you're paid? 14:21.590 --> 14:25.430 Well, that depends on what your historical average wage was. 14:25.428 --> 14:28.348 So let's just see what the function is. 14:28.350 --> 14:33.090 So, if your average wage was 1, equal to the average wage of 14:33.092 --> 14:35.122 the economy, your entire, 14:35.124 --> 14:38.494 over those 35 years, so you're the average guy, 14:38.490 --> 14:41.220 then you get, you see, that's near .4. 14:41.220 --> 14:46.190 It's actually .44, so you get 44 percent of the 14:46.192 --> 14:50.952 average wage at the time you retire, okay? 14:50.950 --> 14:56.720 If on the other hand, you made 10 percent of the-- 14:56.720 --> 14:59.620 your relative wage historically was 10 percent of the average 14:59.618 --> 15:02.848 wage in the economy, you would get 9 percent of the 15:02.846 --> 15:05.456 average wage at the time you retire. 15:05.460 --> 15:07.850 So you can see that this is what's called a concave 15:07.850 --> 15:10.630 function, just like our utility function, those diminishing 15:10.625 --> 15:11.625 marginal returns. 15:11.629 --> 15:15.399 So it means that if you're earning very little through your 15:15.397 --> 15:18.447 life, you're going to get a much better deal. 15:18.450 --> 15:21.740 You're going to be paid--the ratio of relative wage 15:21.740 --> 15:25.890 historically to what you get of the young people's wage is going 15:25.888 --> 15:28.898 to be .9, then the slope drops to .32, 15:28.899 --> 15:32.409 then it drops to .15 and after you're double-- 15:32.408 --> 15:35.828 it's actually, I think, 1.99--after you're 15:35.832 --> 15:39.982 double the average-- if your historical average wage 15:39.979 --> 15:44.449 was more than twice the average wage in the whole economy, 15:44.450 --> 15:45.840 it doesn't do you any good. 15:45.840 --> 15:47.100 Might as well have been twice. 15:47.100 --> 15:50.620 If it's 4 times, 10 times, you don't get any 15:50.619 --> 15:51.519 increase. 15:51.519 --> 15:55.379 Okay, so you can see why it makes some sense to have a cap 15:55.375 --> 15:58.795 to the taxation, because people who are making 15:58.801 --> 16:02.481 10 times the average wage, you know, let's say they're 16:02.480 --> 16:04.630 making a million dollars nowadays, 16:04.629 --> 16:08.099 they aren't going to see any benefit from having contributed 16:08.101 --> 16:09.811 so much to Social Security. 16:09.808 --> 16:15.908 Their benefits would be just the same as if they only made 16:15.905 --> 16:18.575 200,000 dollars a year. 16:18.580 --> 16:21.070 Okay, so anyway, you see that there's a 16:21.065 --> 16:24.985 connection between how much you made when you were young, 16:24.990 --> 16:26.980 how much you get paid when you're old, 16:26.980 --> 16:29.050 but the connection is a concave thing. 16:29.049 --> 16:31.169 So it redistributes income. 16:31.168 --> 16:34.868 People who had very low average wages when they were working get 16:34.873 --> 16:37.993 a better deal from Social Security than people who had 16:37.988 --> 16:40.808 high relative wages while they were working. 16:40.808 --> 16:43.728 And that's a cornerstone of the idea. 16:43.730 --> 16:49.480 It's meant to help protect the people who are very poor. 16:49.480 --> 16:52.700 And so it doesn't pay everybody equally. 16:52.700 --> 16:57.040 Still, you get some return from having contributed more, 16:57.038 --> 16:59.618 but definitely you don't get a completely fair return, 16:59.620 --> 17:02.760 because the whole idea is to redistribute wealth and help the 17:02.759 --> 17:03.649 least well off. 17:03.649 --> 17:07.089 Okay, so that's one of the cornerstones of Social Security. 17:07.088 --> 17:12.568 All right, going back, now what happens to you after 17:12.569 --> 17:15.579 the first year you retire? 17:15.578 --> 17:17.858 After the first year you retire, so when you're 65, 17:17.861 --> 17:19.911 you're getting 40 percent of the average wage, 17:19.914 --> 17:22.384 if you're the average worker throughout your life. 17:22.380 --> 17:24.470 You know, it's 44 percent, something like that. 17:24.470 --> 17:28.780 After that, your Social Security benefit is indexed to 17:28.776 --> 17:32.836 inflation, so it grows at the rate of inflation. 17:32.838 --> 17:34.928 The wage is probably growing faster than the rate of 17:34.928 --> 17:35.418 inflation. 17:35.420 --> 17:41.590 So as you get to be 75,80 and 85, your average benefit is down 17:41.586 --> 17:47.546 to 36 percent of the average wage of the workers when you're 17:47.550 --> 17:49.550 85, but it starts off at 44 17:49.546 --> 17:52.226 percent, assuming you were average your whole life. 17:52.230 --> 17:56.220 It'll be 44 percent and gradually decline if wages grow 17:56.218 --> 17:57.768 faster than prices. 17:57.769 --> 18:02.209 So it's insuring you against living long, because the benefit 18:02.207 --> 18:03.757 carries on forever. 18:03.759 --> 18:06.519 It's insuring you against inflation, because it's 18:06.516 --> 18:07.776 inflation corrected. 18:07.778 --> 18:12.088 It's in a way insuring you against feeling like a loser, 18:12.087 --> 18:16.937 because you're always going to start off with a fraction of the 18:16.943 --> 18:18.593 new average wage. 18:18.588 --> 18:21.288 So if your children, if the whole country grows 18:21.294 --> 18:24.534 incredibly fast and your children are incredibly wealthy 18:24.528 --> 18:28.118 and getting high average wages and every young person's making 18:28.115 --> 18:30.515 a lot, the old won't feel totally left 18:30.516 --> 18:30.776 out. 18:30.778 --> 18:34.028 They'll be keeping up with them, 40 percent of them anyway, 18:34.029 --> 18:36.619 and similarly, if the young have a horrible 18:36.618 --> 18:39.208 time and aren't making very much money, 18:39.210 --> 18:41.910 the benefits to the old also go way down, 18:41.910 --> 18:44.700 because they're getting 44 percent of a much lower number. 18:44.700 --> 18:49.080 So it's every generation in it together and redistributing 18:49.083 --> 18:52.393 wealth from the richer to the less rich, 18:52.390 --> 18:56.990 protecting you against long life, making sure that you have 18:56.993 --> 19:00.253 some money no matter how long you live. 19:00.250 --> 19:01.480 That's the idea of the system. 19:01.480 --> 19:06.760 So are there any questions about how this mechanically 19:06.761 --> 19:07.561 works? 19:07.559 --> 19:17.329 Okay. 19:17.328 --> 19:19.618 Now it's very hard to do this in the market, 19:19.617 --> 19:20.307 by the way. 19:20.308 --> 19:22.918 If you wanted to, for example now, 19:22.920 --> 19:26.640 think to yourself, "Oh, I'd like to protect 19:26.636 --> 19:29.006 myself against my old age. 19:29.009 --> 19:32.019 I'm three years out of Yale and I've fallen into an incredible 19:32.016 --> 19:33.886 job that's paying me a huge fortune. 19:33.890 --> 19:37.370 I might want to retire early and be a writer the rest of my 19:37.368 --> 19:38.148 life." 19:38.150 --> 19:43.600 You can't easily find an annuity in the private market 19:43.595 --> 19:48.625 that's going to tell you that when you hit 65, 19:48.630 --> 19:50.710 it will continue paying you for the rest of your life. 19:50.710 --> 19:54.120 You can actually find them, but they're incredibly bad 19:54.115 --> 19:54.625 deals. 19:54.630 --> 19:58.890 The reason that they're bad deals is that the people who 19:58.894 --> 20:03.554 would have to take the money now and give it back to you when 20:03.548 --> 20:05.998 you're old, first of all you have to worry 20:06.000 --> 20:08.340 whether they're going to be around and still be able to pay 20:08.340 --> 20:09.310 you when you get old. 20:09.308 --> 20:12.098 And secondly, they're worried that the only 20:12.096 --> 20:15.876 people who come to them are people whose families live 100 20:15.880 --> 20:17.900 years, and so they're going to have to 20:17.898 --> 20:20.268 pay a lot longer than they would for the average person. 20:20.269 --> 20:22.539 So they're afraid of getting a bad selection, 20:22.540 --> 20:25.590 that is, a selection of super healthy people wanting to make 20:25.586 --> 20:26.306 that deal. 20:26.308 --> 20:29.308 And so they basically assume that you're going to live to 100 20:29.305 --> 20:32.295 and so they're giving you a very low annuity year by year. 20:32.298 --> 20:36.788 So Social Security is doing something that's very hard to 20:36.787 --> 20:38.627 obtain in the market. 20:38.630 --> 20:45.170 Now, so what went wrong? 20:45.170 --> 20:47.970 Oh, I should say a couple other things about it, 20:47.970 --> 20:49.520 some interesting things. 20:49.519 --> 20:52.019 You can choose to retire early if you want. 20:52.019 --> 20:54.979 If you retire before 65 and you want to get your payments 20:54.981 --> 20:56.971 starting earlier, they say, "Okay, 20:56.965 --> 20:58.935 you can do that, but we're going to cut the 20:58.942 --> 21:01.402 payments every year," and they make some actuarial 21:01.402 --> 21:04.642 calculation so that it's fair, based on how long the average 21:04.635 --> 21:05.445 person lives. 21:05.450 --> 21:07.860 So if you start at 63, you get 2 extra years, 21:07.858 --> 21:10.308 but they know if you live the average amount of time, 21:10.308 --> 21:12.748 how much to cut it down, so that on average, 21:12.750 --> 21:15.340 you'll get the same amount as if you did the normal thing 21:15.335 --> 21:16.115 retiring at 65. 21:16.118 --> 21:18.678 They've actually raised this age to 67. 21:18.680 --> 21:23.660 Now another thing is the spousal benefit. 21:23.660 --> 21:25.670 This is actually quite amusing, I think. 21:25.670 --> 21:31.820 So I had a secretary 20 years ago who got married three times. 21:31.819 --> 21:35.049 So she consulted me about this. 21:35.048 --> 21:37.728 If you're a spouse, you know, traditionally, 21:37.729 --> 21:41.219 one of the spouses wouldn't work, typically the woman. 21:41.220 --> 21:48.000 And so the wife has the right to 50 percent of her husband's-- 21:48.000 --> 21:50.770 or the husband has the right--one spouse has a right to 21:50.767 --> 21:53.327 50 percent of the benefits of the other spouse, 21:53.328 --> 21:56.668 just by virtue of being married or having been married. 21:56.670 --> 22:00.050 So the rule is that if you've been married for more than 10 22:00.054 --> 22:01.764 years, then you can either take your 22:01.763 --> 22:04.123 own Social Security benefits, or if they're bigger, 22:04.123 --> 22:06.313 you can take 50 percent of your spouse's. 22:06.308 --> 22:09.088 And if you've been married to several different guys, 22:09.088 --> 22:13.068 say, and you're not married to any of them anymore, 22:13.068 --> 22:16.208 you can pick the guy who had the highest income and get 50 22:16.208 --> 22:17.088 percent of it. 22:17.088 --> 22:22.528 So she tracked down her first husband she hadn't talked to in 22:22.532 --> 22:24.622 30 years, and anyway. 22:24.618 --> 22:30.568 So okay, and there are a bunch of other rules. 22:30.568 --> 22:33.538 Anyway, that's not really the heart of the matter. 22:33.538 --> 22:37.388 The heart of the matter is--just to give you an idea of 22:37.385 --> 22:38.165 the size. 22:38.170 --> 22:39.790 This was in 2005. 22:39.788 --> 22:44.148 So 157 million workers are paying into it. 22:44.150 --> 22:48.510 There are 48 million beneficiaries. 22:48.509 --> 22:50.109 It's a gigantic program. 22:50.108 --> 22:54.488 So imagine the cost of keeping track of just who's alive, 22:54.489 --> 22:55.349 you know. 22:55.348 --> 22:57.648 When somebody dies, they're supposed to stop 22:57.654 --> 22:59.214 collecting Social Security. 22:59.210 --> 23:00.980 How do they know that the guy's died? 23:00.980 --> 23:03.940 I mean, that by itself is not an easy thing to keep track of. 23:03.940 --> 23:05.650 They have to send the checks to everybody. 23:05.650 --> 23:07.630 Somebody moves, they have to figure out where 23:07.632 --> 23:09.392 to send the check to the new address. 23:09.390 --> 23:12.310 They have to get the taxes, they have to make sure people 23:12.313 --> 23:13.883 are paying the right amount. 23:13.880 --> 23:19.380 It's a huge thing involving basically the entire population, 23:19.380 --> 23:20.820 a couple hundred million people almost, 23:20.818 --> 23:24.398 either getting taxes, paying taxes or receiving 23:24.395 --> 23:26.595 benefits, you know, over 200 million 23:26.598 --> 23:26.988 people. 23:26.990 --> 23:30.340 It's an incredible amount of paperwork and moving stuff 23:30.343 --> 23:32.333 around and figuring stuff out. 23:32.329 --> 23:36.069 So how much does it cost? 23:36.068 --> 23:38.208 How much money do they waste running the whole thing? 23:38.210 --> 23:42.140 Less than 1 percent of the benefits. 23:42.140 --> 23:46.930 Okay, so it's one of the most efficiently run programs, 23:46.933 --> 23:51.993 maybe the most efficiently run program government has ever 23:51.993 --> 23:53.063 devised. 23:53.058 --> 23:55.768 So it isn't that the thing is going broke, 23:55.769 --> 23:58.319 as you might believe listening to George Bush, 23:58.318 --> 24:01.908 because somehow they're pissing away the money and just losing 24:01.914 --> 24:02.214 it. 24:02.210 --> 24:04.020 That's not the reason. 24:04.019 --> 24:07.819 Something else is happening, because they don't waste much 24:07.815 --> 24:09.675 money running the program. 24:09.680 --> 24:11.920 Okay, this gives you an idea just of the size of it. 24:11.920 --> 24:15.050 So this is 2005, so you have to add 20 percent 24:15.050 --> 24:17.070 or something or 15 percent. 24:17.068 --> 24:20.388 So the benefits, the contributions, 24:20.392 --> 24:21.762 593 billion. 24:21.759 --> 24:25.189 Remember, there's a tax rule of 12.4 percent. 24:25.190 --> 24:27.700 Then you have to pay out the benefits, which is some other 24:27.696 --> 24:29.716 rule, depending on what you earned in the past, 24:29.720 --> 24:31.700 so there's no connection between the two. 24:31.700 --> 24:34.300 And in fact, the contributions are bigger 24:34.295 --> 24:37.535 than the benefits, so the trust fund is growing. 24:37.538 --> 24:40.918 Now look at the administrative expenses, tiny. 24:40.920 --> 24:42.870 And there are some, the railroad, 24:42.868 --> 24:46.108 when the law was first passed, railroads were in trouble, 24:46.106 --> 24:48.416 so in order to get some senator to vote for it, 24:48.420 --> 24:50.040 they had to hand money over to the railroad. 24:50.038 --> 24:51.748 So anything, something's going on with the 24:51.749 --> 24:52.249 railroads. 24:52.250 --> 24:56.610 But the other benefit is the trust fund makes returns, 24:56.613 --> 25:00.403 because it's a 2 trillion dollar trust fund. 25:00.400 --> 25:02.670 It was a little smaller than that 2005, so it's earning 25:02.666 --> 25:03.126 interest. 25:03.130 --> 25:04.990 That's part of the extra returns. 25:04.990 --> 25:07.970 You see why the surplus is quite big now, 25:07.973 --> 25:10.663 but it's headed to be quite small. 25:10.660 --> 25:15.550 Okay, so now what is the argument about? 25:15.548 --> 25:18.018 What is the crisis of Social Security? 25:18.019 --> 25:20.939 What do the Democrats and the Republicans say? 25:20.940 --> 25:22.830 Well, you've just heard what the program is. 25:22.828 --> 25:25.708 How attractive do you think it is, and do you really think it's 25:25.714 --> 25:26.744 such a good program? 25:26.740 --> 25:30.380 So the main thing is, it's going broke. 25:30.380 --> 25:32.260 Okay, so now why is it going broke? 25:32.259 --> 25:33.239 It's not broke now. 25:33.240 --> 25:35.170 It's making more money than it's paying out. 25:35.170 --> 25:37.380 But in the future, it's very obvious, 25:37.383 --> 25:39.723 you can just look at the demography. 25:39.720 --> 25:42.340 It's very obvious that it's going to-- 25:42.338 --> 25:46.068 the benefit formula is so big, and there are going to be so 25:46.073 --> 25:50.003 many people retired that the payments you make to the old, 25:50.000 --> 25:52.110 when I'm retired, are going to be way bigger than 25:52.113 --> 25:54.363 the payments that the young are making in taxes, 25:54.358 --> 25:56.138 provided the rules stay the same. 25:56.140 --> 25:58.130 So that's the main problem. 25:58.130 --> 26:02.480 Somehow the system got out of whack and we have to figure out 26:02.482 --> 26:04.662 how to put it back together. 26:04.660 --> 26:07.700 Now it's no surprise in one sense that there's an imbalance, 26:07.700 --> 26:10.740 because there's nothing about the rules that balanced it. 26:10.740 --> 26:13.640 I mean, the taxes you pay--we'll look at this in a 26:13.640 --> 26:16.540 second--that's just some formula, 12.4 percent. 26:16.538 --> 26:20.038 What's that got to do with the benefits you're paying? 26:20.038 --> 26:23.728 Well, the benefits are 40 percent, on average of what 26:23.732 --> 26:25.582 young people are making. 26:25.578 --> 26:27.988 So basically, somehow the system must have 26:27.990 --> 26:31.460 assumed that there would be three young people for every old 26:31.461 --> 26:32.111 person. 26:32.108 --> 26:35.188 So the young people paying 12 percent each, 26:35.193 --> 26:39.163 the old guy getting 40 percent, you know, 3 times 12.4, 26:39.160 --> 26:41.290 it's close to 40 percent. 26:41.288 --> 26:44.398 So if the ratio of young to old, young workers to old 26:44.397 --> 26:48.047 retirees getting benefits is 3 to 1, then the systems going to 26:48.045 --> 26:49.595 sort of be in balance. 26:49.598 --> 26:52.338 But if that ratio is very different from that, 26:52.338 --> 26:54.808 the system--for example, two young people for every old 26:54.811 --> 26:56.661 person-- the system's going to be way 26:56.663 --> 26:57.463 out of balance. 26:57.460 --> 27:00.380 And the formula has nothing to do with how many children people 27:00.381 --> 27:02.031 are having or anything like that. 27:02.028 --> 27:06.768 So it's not so surprising it's gotten out of balance. 27:06.769 --> 27:08.589 But we're going to see, there's a much more fundamental 27:08.594 --> 27:09.714 reason why it's out of balance. 27:09.710 --> 27:12.650 Okay, so the first problem is, it's not in balance, 27:12.645 --> 27:14.755 but there are many other problems. 27:14.759 --> 27:17.109 So why do Democrats like it so much? 27:17.108 --> 27:19.438 Democrats say, "Oh, it's wonderful. 27:19.440 --> 27:20.860 We're helping poor people. 27:20.858 --> 27:24.398 We're redistributing things on the basis of lifetime earnings. 27:24.400 --> 27:26.760 We're sharing risks between generations. 27:26.759 --> 27:27.839 We're all in this together." 27:27.838 --> 27:30.438 As I said, if the young people have bad wages, 27:30.441 --> 27:32.351 then the old get less benefits. 27:32.348 --> 27:35.038 If the young are booming along, making huge wages, 27:35.038 --> 27:39.278 then the old guys keep up with them, 27:39.279 --> 27:42.179 so there's less--so it's not only insurance, 27:42.180 --> 27:46.110 but it's less jealousy and less disparity in the population. 27:46.108 --> 27:49.098 And then you're protected against long life, 27:49.098 --> 27:52.308 you're protected against inflation, 27:52.308 --> 27:55.058 and you can't blunder away your money, 27:55.058 --> 27:57.378 because you have no choice about where your investment 27:57.383 --> 27:57.693 goes. 27:57.690 --> 28:00.440 The government's taken care of it, so if you're a bad investor, 28:00.438 --> 28:03.008 you can't suddenly find that you've lost all your money. 28:03.009 --> 28:08.309 So now what do Republicans say? 28:08.308 --> 28:11.728 And surprisingly--well, anyway, you'll be surprised 28:11.733 --> 28:14.203 where I come out on this, I think. 28:14.200 --> 28:18.310 So Republicans say, "This stuff is much less 28:18.307 --> 28:21.557 good than it sounds at first glance. 28:21.558 --> 28:23.918 For one thing, there are no property rights. 28:23.920 --> 28:26.760 I mean, who's to say what I'm going to get when I'm old? 28:26.759 --> 28:29.229 Nobody even knows what they're going to get when they're old. 28:29.230 --> 28:31.090 I defy you," a Republican would say, 28:31.088 --> 28:33.428 "to tell me exactly what your benefits are going to be, 28:33.430 --> 28:36.130 or even to explain to me how they're calculated." 28:36.130 --> 28:38.490 "Virtually nobody in the population can do that. 28:38.490 --> 28:41.670 That's just not right, and you have no control over 28:41.673 --> 28:42.123 them. 28:42.119 --> 28:43.109 So what's going to happen?" 28:43.109 --> 28:44.059 a Republican would say. 28:44.058 --> 28:46.558 "One of these days, the Democrats are going to say, 28:46.557 --> 28:47.737 'Oh, the system's broke. 28:47.740 --> 28:50.080 We can't afford to pay everything, so we're going to 28:50.075 --> 28:52.405 cut all the benefits in half' or something." 28:52.410 --> 28:54.210 So a Republican would say, "You know, 28:54.209 --> 28:55.569 they're not even my benefits. 28:55.568 --> 28:58.828 In order for me to really feel good about participating in 28:58.825 --> 29:01.315 Social Security, I want to know that when I put 29:01.323 --> 29:03.593 the money in, what I'm getting out, 29:03.592 --> 29:05.232 and I want to own it. 29:05.230 --> 29:07.850 I don't want it to be some vague promise that can be taken 29:07.845 --> 29:09.855 away from me, and probably will be taken away 29:09.864 --> 29:10.694 from me." 29:10.690 --> 29:13.630 Okay, so it's a matter of property rights and 29:13.627 --> 29:14.627 transparency. 29:14.630 --> 29:18.870 Then another thing is, even if you did know this 29:18.865 --> 29:23.415 formula that I just explained, people who want to retire and 29:23.422 --> 29:26.372 want to figure out how to plan for their retirement, 29:26.369 --> 29:28.019 what does a normal person do? 29:28.019 --> 29:30.119 He says, "How much money have I got in the bank? 29:30.119 --> 29:33.519 I've saved on my work; I've got 100,000 dollars in the 29:33.522 --> 29:33.892 bank. 29:33.890 --> 29:36.900 Please tell me what the value today is of my future Social 29:36.902 --> 29:37.962 Security benefits. 29:37.960 --> 29:43.080 If those are 8 million dollars, then I know that my 100,000 29:43.078 --> 29:45.398 dollars, I don't want to waste too much 29:45.395 --> 29:47.725 time trying to accumulate money out of my savings, 29:47.730 --> 29:50.040 because I'll never catch up to 8 million dollars. 29:50.038 --> 29:52.708 If it's 50,000 dollars, today's market value of my 29:52.707 --> 29:55.807 future Social Security benefits, I know that I'd better be 29:55.809 --> 29:57.769 putting in a lot of money today. 29:57.769 --> 30:01.729 And I know how much money today is, how big my savings are, 30:01.730 --> 30:05.620 relative to what the market value is of my Social Security 30:05.622 --> 30:06.922 benefits." 30:06.920 --> 30:09.500 So the Republicans say people just don't have any idea what 30:09.500 --> 30:12.450 the value of their benefits are, even if they happen to know the 30:12.453 --> 30:15.843 formula I just explained, nobody really can calculate 30:15.843 --> 30:16.813 what it is. 30:16.808 --> 30:20.398 Then thirdly, the rich are giving money to 30:20.404 --> 30:21.374 the poor. 30:21.368 --> 30:23.238 Everybody knows Social Security is doing that. 30:23.240 --> 30:27.520 Can you tell me, what's the effective tax rate? 30:27.519 --> 30:29.309 Let's say I'm in the top tax bracket. 30:29.308 --> 30:32.548 What is my effective tax rate on Social Security? 30:32.548 --> 30:36.298 What fraction of my taxes are being taken away from me because 30:36.295 --> 30:40.095 my benefits are going to be less good, because I was one of the 30:40.102 --> 30:41.332 highest earners? 30:41.328 --> 30:44.538 There's virtually no one in the country who's able to answer 30:44.538 --> 30:45.408 that question. 30:45.410 --> 30:48.050 A Republican would say, "What kind of a program is 30:48.053 --> 30:49.183 this if nobody knows? 30:49.180 --> 30:51.260 Okay," they'll say, "we may sign on to the 30:51.259 --> 30:53.949 idea that the rich should give some of their money to the poor, 30:53.950 --> 30:56.440 but at least tell us how much of our money we're giving to the 30:56.442 --> 30:56.732 poor. 30:56.730 --> 30:58.630 We don't even know." 30:58.630 --> 31:02.660 And then the Republicans say, "We'd like equity-like 31:02.660 --> 31:03.380 returns. 31:03.380 --> 31:05.530 You know, why is it--" This is what George Bush said. 31:05.528 --> 31:07.408 "Why is it that our returns are going to be 2 31:07.405 --> 31:07.785 percent? 31:07.788 --> 31:12.248 I'd like to know that my money is being invested in the stock 31:12.250 --> 31:17.010 market and earning what I could get in the stock market." 31:17.009 --> 31:20.289 Anyway, Republicans, savvy investors like to think 31:20.294 --> 31:24.254 that the money that they're being forced to save can get the 31:24.249 --> 31:28.069 same rate of return as they could get for themselves. 31:28.068 --> 31:30.178 Why should they be cheated in a government--never mind that they 31:30.183 --> 31:31.463 have to give away part of the money. 31:31.460 --> 31:33.570 The part that they're not giving away at least ought to 31:33.569 --> 31:34.429 earn equity returns. 31:34.430 --> 31:38.640 And then Republicans tend to think that choice is a good 31:38.640 --> 31:40.070 thing, not a bad thing, 31:40.068 --> 31:42.288 and so if you let people decide how to invest, 31:42.288 --> 31:47.318 it'll be better for them than if you-- 31:47.318 --> 31:49.638 even if some of the people make mistakes. 31:49.640 --> 31:52.360 Okay, so those are the two--maybe some of you can add 31:52.363 --> 31:53.623 some other criticisms. 31:53.619 --> 31:55.249 Yeah? 31:55.250 --> 31:57.970 Student: Wouldn't any system that 31:57.974 --> 32:01.264 insures against living longer than expected, 32:01.259 --> 32:03.769 that annuity type system, have that problem in terms of 32:03.770 --> 32:05.400 caring >? 32:05.400 --> 32:08.030 You'd be unable to calculate the present value, 32:08.028 --> 32:11.628 precisely because you're unable to predict how long you live. 32:11.630 --> 32:16.680 So any system that successfully > 32:16.683 --> 32:21.743 is supposed to perform, that's just an inherent issue. 32:21.740 --> 32:22.280 Prof: Yes. 32:22.278 --> 32:27.428 So no, I don't think so, because--so his question is, 32:27.430 --> 32:29.430 since we don't know how long we're going to live, 32:29.430 --> 32:32.970 and the program continues to insure you for your entire life 32:32.970 --> 32:35.130 and pay you for your entire life, 32:35.130 --> 32:38.910 how can you figure out what the market value of that is? 32:38.910 --> 32:42.330 Well, the fact is, there is no general market. 32:42.328 --> 32:45.278 So you're right, there is no general market you 32:45.284 --> 32:48.234 can look at now today, that will tell you, 32:48.230 --> 32:52.470 suppose we pay a fixed amount of money for the average person 32:52.468 --> 32:55.088 in the economy, what's the present value of 32:55.094 --> 32:55.384 that? 32:55.380 --> 32:58.960 However, that doesn't mean we couldn't have a market like 32:58.961 --> 32:59.411 that. 32:59.410 --> 33:04.230 And so my solution is going to involve precisely a market like 33:04.227 --> 33:04.777 that. 33:04.778 --> 33:09.478 So to answer his question, it's not inherently impossible 33:09.480 --> 33:14.350 to attach a market price to paying somebody for the rest of 33:14.347 --> 33:15.437 his life. 33:15.440 --> 33:19.480 After all, you could imagine Social Security now, 33:19.480 --> 33:22.540 paying, let's say 50 million people, 33:22.538 --> 33:24.718 the people who are now retired, each of them is going to be 33:24.723 --> 33:26.723 paid for the rest of his life according to a rule, 33:26.720 --> 33:27.940 which we all understand. 33:27.940 --> 33:29.490 It just goes up with inflation. 33:29.490 --> 33:32.890 So you could say, suppose you owned 1 percent of 33:32.886 --> 33:36.276 all those payments, what would the value of that 33:36.284 --> 33:36.794 be? 33:36.788 --> 33:38.378 You could trade a security like that. 33:38.380 --> 33:40.620 Somebody could say, "I want to buy today a 33:40.615 --> 33:43.675 security that gives me 1 percent of all the payments everybody's 33:43.675 --> 33:46.105 going to get," or it could be 1 percent of all 33:46.105 --> 33:48.965 of the payments every 70 year old today is going to get from 33:48.972 --> 33:50.142 Social Security. 33:50.140 --> 33:52.480 That's a well-defined thing and it could trade in the market. 33:52.480 --> 33:53.880 You're going to see that the market, 33:53.880 --> 33:55.120 as soon as we start talking about this, 33:55.118 --> 33:58.468 there is an incredible number of derivative instruments, 33:58.470 --> 34:00.180 they're called, that trade in the market. 34:00.180 --> 34:02.670 That could be a new one, and then there would be a 34:02.674 --> 34:03.444 market price. 34:03.440 --> 34:07.060 You're going to see, when I propose my plan, 34:07.063 --> 34:10.353 that it involves something like that. 34:10.349 --> 34:13.099 Any other questions about the rules of Social Security or 34:13.097 --> 34:16.137 whether you think they're bad or good for some other reason? 34:16.139 --> 34:18.679 I've tried to list the ones that struck me as the most 34:18.684 --> 34:19.264 important. 34:19.260 --> 34:19.990 Yeah? 34:19.989 --> 34:22.049 Student: What does it mean by a return? 34:22.050 --> 34:25.820 Does it mean that you invest in government bonds and then you 34:25.818 --> 34:29.148 get back taxes from another part of the government? 34:29.150 --> 34:30.200 Prof: Equity-like returns? 34:30.199 --> 34:30.999 Is this what you're referring to? 34:31.000 --> 34:32.550 Student: > 34:32.550 --> 34:33.250 define the return. 34:33.248 --> 34:35.418 Isn't the interest you're getting just taxes from another 34:35.418 --> 34:36.348 part of government? 34:36.349 --> 34:40.179 Prof: Okay, so you can always do this 34:40.181 --> 34:42.961 calculation, which has historically been 34:42.963 --> 34:46.123 done, and I'm going to show you those numbers in a second. 34:46.119 --> 34:50.549 You can always look at how many tax--let's take someone my 34:50.552 --> 34:51.722 father's age. 34:51.719 --> 34:53.389 My father actually died, but a couple of years ago, 34:53.389 --> 34:55.859 my father, he could look back at his whole life, 34:55.860 --> 34:59.270 and he could look at how much money he paid in Social Security 34:59.273 --> 35:00.733 taxes when he was young. 35:00.730 --> 35:04.120 Then he could look at what benefits he got every year until 35:04.119 --> 35:04.879 that point. 35:04.880 --> 35:06.510 Let's say it was the day after he died. 35:06.510 --> 35:08.730 I could look at what he got every year until he died. 35:08.730 --> 35:12.920 So then I could just--that's just a sequence of cash flows. 35:12.920 --> 35:15.950 We know how to calculate the internal rate of return of that 35:15.945 --> 35:16.505 sequence. 35:16.510 --> 35:17.940 That's his rate of return. 35:17.940 --> 35:21.420 And I showed you in the graph a long time ago that that was 35:21.420 --> 35:23.160 actually done historically. 35:23.159 --> 35:24.069 We've done that. 35:24.070 --> 35:28.100 Leamer did that here. 35:28.099 --> 35:29.739 He did that for every generation. 35:29.739 --> 35:31.519 Every birth cohort, the average person, 35:31.518 --> 35:33.108 what their return was, and you see, 35:33.110 --> 35:35.780 it was very high to begin with and it become pitiful. 35:35.780 --> 35:40.470 If you forecast the future for you, it's going to be less than 35:40.467 --> 35:41.387 2 percent. 35:41.389 --> 35:43.339 So Bush is saying, "Why should you, 35:43.340 --> 35:45.940 young Yale undergraduate, why should you be satisfied 35:45.940 --> 35:47.390 with less than 2 percent? 35:47.389 --> 35:49.769 Instead of paying those taxes to Social Security, 35:49.768 --> 35:52.778 you put them in the stock market, you get lots more than 2 35:52.775 --> 35:56.415 percent probably, so why be satisfied with 2 35:56.416 --> 35:57.906 percent?" 35:57.909 --> 36:00.129 And Gore would say, "Well, now we've got this pay as you 36:00.125 --> 36:01.615 go system, you can't possibly put it in 36:01.621 --> 36:05.741 the stock market, because then the old people 36:05.740 --> 36:09.510 aren't going to get it." 36:09.510 --> 36:12.810 Okay, any other questions? 36:12.809 --> 36:15.999 Any other reasons you think the program is good or bad, 36:15.996 --> 36:17.056 Social Security. 36:17.059 --> 36:22.069 What's your feeling about whether we should get rid of it 36:22.070 --> 36:25.470 or not or privatize it or change it? 36:25.469 --> 36:27.239 Yeah. 36:27.239 --> 36:30.369 Student: It discriminates against people 36:30.373 --> 36:32.763 who are predisposed to die early. 36:32.760 --> 36:38.400 It favors couples whose ages are really far apart. 36:38.400 --> 36:41.140 It's extremely > 36:41.139 --> 36:43.079 Prof: Yes. 36:43.079 --> 36:46.639 He's saying other problems with Social Security is that it 36:46.639 --> 36:47.639 discriminates. 36:47.639 --> 36:50.909 It doesn't treat everybody equally. 36:50.909 --> 36:53.649 His first example was, people who you can reasonably 36:53.650 --> 36:56.770 expect to die sooner are going to get a less good deal than 36:56.766 --> 36:59.556 people you can reasonably expect to live longer. 36:59.559 --> 37:07.159 So what is the most basic class that's being discriminated 37:07.159 --> 37:09.959 against, therefore? 37:09.960 --> 37:14.700 Who among you can you predict are going to live less long than 37:14.697 --> 37:17.957 others among you, at least historically? 37:17.960 --> 37:20.210 Presumably that will stay true. 37:20.210 --> 37:21.440 Student: Men. 37:21.440 --> 37:22.340 Prof: Men. 37:22.340 --> 37:24.850 Okay, so men live 6 years less long than women, 37:24.846 --> 37:26.586 so men are getting a bad deal. 37:26.590 --> 37:30.530 Now black men, historically--although this is 37:30.528 --> 37:33.798 rapidly changing, but black men lived even less 37:33.802 --> 37:35.982 long, even worse by a considerable 37:35.983 --> 37:41.063 degree, so you'd think it discriminated 37:41.057 --> 37:43.807 against black men. 37:43.809 --> 37:46.489 Black men also tended to be poorer on average though, 37:46.492 --> 37:49.592 so they were getting a better return per year than rich white 37:49.586 --> 37:49.996 men. 37:50.000 --> 37:53.470 But anyway, a black man with the same earnings got a much 37:53.465 --> 37:57.055 worse deal historically on Social Security than a white man 37:57.056 --> 37:59.766 with the same earnings, because on average, 37:59.773 --> 38:01.903 the black man died before the white man. 38:01.900 --> 38:05.970 That probably had a lot to do with healthcare and nutrition 38:05.974 --> 38:09.634 and stuff like that, and this is rapidly changing. 38:09.630 --> 38:12.130 But anyway, certainly it seems like men are going to get a 38:12.128 --> 38:13.178 worse deal than women. 38:13.179 --> 38:16.469 So yeah, there are all kinds of little problems with Social 38:16.469 --> 38:17.659 Security like that. 38:17.659 --> 38:18.389 Anything else? 38:18.389 --> 38:23.649 He mentioned a couple of others too. 38:23.650 --> 38:26.500 I regard those as less critical though, than the problem of the 38:26.503 --> 38:28.583 thing going broke, and these things which have 38:28.576 --> 38:29.586 split the country. 38:29.590 --> 38:32.400 It's been impossible--so basically, everybody thinks this 38:32.396 --> 38:33.846 is a logical contradiction. 38:33.849 --> 38:35.879 You can't do what the Republicans want, 38:35.878 --> 38:38.388 at the same time, do what the Democrats want. 38:38.389 --> 38:43.129 So what should you do? 38:43.130 --> 38:44.700 Anything else anyone wants to say? 38:44.699 --> 38:48.639 Someone else had their hand up before. 38:48.639 --> 38:49.169 All right. 38:49.170 --> 38:52.850 So why did the system become such a mess? 38:52.849 --> 38:53.989 How did it go broke? 38:53.989 --> 38:57.239 How should we have expected it to go broke? 38:57.239 --> 39:04.719 Did it all happen because there was the baby boom? 39:04.719 --> 39:08.099 All right, so I want to tell a little parable. 39:08.099 --> 39:11.609 It has nothing to do with the baby boom. 39:11.610 --> 39:15.450 Okay, so imagine that--and I'm saying it in terms of fathers 39:15.447 --> 39:18.697 and sons, but I could say mothers and daughters. 39:18.699 --> 39:21.939 So historically, it was men working most of the 39:21.940 --> 39:24.970 time, but let's do mothers and daughters. 39:24.969 --> 39:30.579 So suppose a mother is old now and sick and she needs an 39:30.583 --> 39:36.713 incredibly expensive operation, a million dollars to save her 39:36.706 --> 39:39.356 or to extend her life. 39:39.360 --> 39:42.350 She doesn't have the money, so she goes to her daughter and 39:42.351 --> 39:44.881 she says, "I need a million dollars." 39:44.880 --> 39:46.480 And of course, the daughter who loves her 39:46.480 --> 39:48.840 wants to come up with the million dollars to pay for her. 39:48.840 --> 39:51.680 But, you know, that's a lot for her to pay. 39:51.679 --> 39:54.449 So she thinks to herself, "My mother not only gave 39:54.445 --> 39:55.945 me life, but let's face it, 39:55.947 --> 39:58.077 without her, my daughter wouldn't have any 39:58.083 --> 40:00.743 life and her daughter wouldn't have any life and her 40:00.740 --> 40:02.930 granddaughter wouldn't have any life. 40:02.929 --> 40:05.729 My mother's responsible for not just me, but for all these 40:05.730 --> 40:06.860 generations after me. 40:06.860 --> 40:10.890 Why should I be the one to pay the entire benefit of my 40:10.891 --> 40:12.461 mother's operation? 40:12.460 --> 40:13.930 So you know what I'm going to do? 40:13.929 --> 40:17.259 I'll give her the million dollars, but when I get old, 40:17.260 --> 40:19.220 I'm going to go to my daughter and say, 40:19.219 --> 40:21.829 'Daughter of mine, I sacrificed for your 40:21.833 --> 40:23.583 grandmother, my mother. 40:23.579 --> 40:25.629 I put up a million dollars to save her. 40:25.630 --> 40:27.140 I'm broke now. 40:27.139 --> 40:30.199 Maybe I don't need an operation, but I'm basically 40:30.195 --> 40:34.245 totally broke because I spent so much money rescuing my mother. 40:34.250 --> 40:37.660 Why don't you do the same for me that I did for my mother and 40:37.664 --> 40:39.264 give me a million dollars? 40:39.260 --> 40:41.840 And by the way, you could use the same argument 40:41.836 --> 40:44.186 with your daughter, and so it's really not so bad, 40:44.190 --> 40:46.170 because you're going to get the money back when you're 40:46.168 --> 40:48.638 old.'" And so the granddaughter agrees 40:48.635 --> 40:51.645 and pays the daughter, and then when she gets old, 40:51.648 --> 40:53.308 she does the same thing. 40:53.309 --> 40:56.829 It goes on for generation after generation. 40:56.829 --> 40:58.849 Now let's say it went on forever. 40:58.849 --> 41:00.619 How did this happen? 41:00.619 --> 41:06.459 Did nobody lose anything and we paid for the operation to begin 41:06.460 --> 41:07.120 with? 41:07.119 --> 41:11.829 Is this some kind of Ponzi scheme or something? 41:11.829 --> 41:13.889 Where did the million-dollar operation get financed? 41:13.889 --> 41:17.819 How did that happen? 41:17.820 --> 41:22.360 Who paid for it? 41:22.360 --> 41:24.550 Yes? 41:24.550 --> 41:26.030 Student: Don't you pay the opportunity 41:26.025 --> 41:27.025 cost > 41:27.030 --> 41:28.640 million dollars and > 41:28.639 --> 41:32.029 individual lifetime when the money could have gone and made 41:32.030 --> 41:35.130 money itself rather than spending on the operation? 41:35.130 --> 41:36.900 Prof: Well, you got a million dollars back, 41:36.896 --> 41:37.976 remember, when you were old. 41:37.980 --> 41:38.730 Student: > 41:38.728 --> 41:39.368 nothing more than a million dollars 41:39.365 --> 41:39.905 > 41:39.909 --> 41:41.949 Prof: Okay, exactly. 41:41.949 --> 41:43.129 So that's the whole point. 41:43.130 --> 41:48.980 The point is that the daughter--just to repeat what he 41:48.976 --> 41:49.746 said. 41:49.750 --> 41:52.870 The first daughter paid a million dollars when she was 41:52.869 --> 41:53.339 young. 41:53.340 --> 41:55.050 Yes, she got the million dollars back, 41:55.054 --> 41:57.514 but when she was old, and that's a long time later. 41:57.510 --> 42:00.970 So for that whole time, she made a 0 percent interest. 42:00.969 --> 42:04.359 Now maybe the interest rate was, let's say, 42:04.355 --> 42:08.545 over that many years, we're talking about 30 years or 42:08.547 --> 42:11.527 40 years, a large amount of time. 42:11.530 --> 42:14.540 So the interest rate could easily, over 40 years, 42:14.538 --> 42:17.608 you divide 40 into 72, you know, it's like 1 and 3 42:17.610 --> 42:19.240 quarters or something. 42:19.239 --> 42:21.919 So if the real interest rate was 1 and 3 quarters, 42:21.920 --> 42:24.370 something like that, you could easily imagine, 42:24.369 --> 42:28.429 that was the doubling rule, that 100 dollars could have 42:28.429 --> 42:30.159 been turned into 200. 42:30.159 --> 42:33.799 So the first daughter who took her 100 dollars could have had 42:33.800 --> 42:35.620 200 by the time she was old. 42:35.619 --> 42:37.659 She only got 100 when she was old. 42:37.659 --> 42:41.009 So in present value terms, she gave up 100 when she was 42:41.012 --> 42:41.512 young. 42:41.510 --> 42:44.790 She got, in present value terms, 50 dollars when she was 42:44.791 --> 42:45.151 old. 42:45.150 --> 42:47.190 So she gave away 50 dollars. 42:47.190 --> 42:51.580 She paid for half the operation. 42:51.579 --> 42:54.159 Now where did the rest of the 50 dollars come from? 42:54.159 --> 42:57.289 Well, the granddaughter gave 100 when she was young, 42:57.289 --> 43:00.479 got 100 when she was old, so in present value terms, 43:00.480 --> 43:03.780 she also lost 50 dollars, exactly the same amount as the 43:03.780 --> 43:04.800 first daughter. 43:04.800 --> 43:06.120 She gave up the same thing. 43:06.119 --> 43:07.889 Her contribution was just as big. 43:07.889 --> 43:12.799 Of course, it came a lot later, so in present value terms, 43:12.800 --> 43:15.290 at the time of the operation, the granddaughter's 43:15.291 --> 43:17.161 contribution is discounted twice, 43:17.159 --> 43:18.649 so it's 1 half of 1 half. 43:18.650 --> 43:22.940 So she only contributed in present value terms 25 dollars 43:22.943 --> 43:24.403 to the operation. 43:24.400 --> 43:26.460 And then the great granddaughter, 43:26.458 --> 43:29.998 she herself looks at it as a 50 dollar contribution, 43:30.000 --> 43:32.280 but from the point of view of the original operation, 43:32.280 --> 43:35.820 it's discounted 3 times, so by 8, so it's 12 and 1 half. 43:35.820 --> 43:38.760 So 50 25 12 and 1 half 6 and 1 quarter, blah, 43:38.755 --> 43:41.555 blah, blah, forever, adds up to the 100. 43:41.559 --> 43:45.069 So basically, this parable shows how a 43:45.068 --> 43:51.138 daughter could share the cost of her mother's operation among all 43:51.137 --> 43:54.197 the descendants, pay completely for the 43:54.202 --> 43:57.232 operation with each generation making the same contribution, 43:57.230 --> 43:58.620 the same sacrifice. 43:58.619 --> 44:01.929 Of course, the generations who make it earlier are helping the 44:01.925 --> 44:03.925 mother more, but the point is, 44:03.927 --> 44:07.767 every generation has made exactly the same sacrifice and 44:07.773 --> 44:11.903 that's how the original mother's operation got paid for. 44:11.900 --> 44:14.560 Now what happens in generation 10, 44:14.559 --> 44:16.699 the great great great great great great granddaughter is 44:16.697 --> 44:18.067 going to say, "You know, 44:18.072 --> 44:20.282 I never even heard of this original mother. 44:20.280 --> 44:23.110 I couldn't care less about her operation. 44:23.110 --> 44:25.880 It wasn't a very good operation anyway, because she died three 44:25.880 --> 44:28.380 years later, because medicine was so bad at the time. 44:28.380 --> 44:32.360 So why should I be paying my contribution to that original 44:32.355 --> 44:33.815 mother's operation? 44:33.820 --> 44:35.700 Yes, I know that she's responsible for my life, 44:35.699 --> 44:37.329 but you know, I don't know anything about 44:37.333 --> 44:37.663 her. 44:37.659 --> 44:39.069 I don't even know her name any more. 44:39.070 --> 44:41.390 How come I have to keep paying for it? 44:41.389 --> 44:43.409 So I just want to stop." 44:43.409 --> 44:47.729 Now why is it going to be actually difficult for that 44:47.733 --> 44:49.483 generation to stop? 44:49.480 --> 44:51.240 "I just don't want to give my money to that first 44:51.237 --> 44:51.667 generation. 44:51.670 --> 44:52.580 I couldn't care less. 44:52.579 --> 44:54.089 Let's stop right now." 44:54.090 --> 44:54.610 Yes? 44:54.610 --> 44:56.920 Student: She's not giving the money to 44:56.916 --> 44:59.636 her great great grandmother; she's giving it to her own 44:59.637 --> 44:59.987 mother. 44:59.989 --> 45:01.889 Prof: Her own mother, exactly. 45:01.889 --> 45:05.739 So you can't stop just in the middle because it's like the 45:05.737 --> 45:08.707 gift is being re-enacted every generation. 45:08.710 --> 45:12.090 So the new generation that stops, even if they understand 45:12.090 --> 45:15.590 where the whole thing began, they're not going to screw the 45:15.592 --> 45:16.802 original mother. 45:16.800 --> 45:19.910 They're going to screw their own mother, which they probably 45:19.909 --> 45:22.439 don't want to do, so they're not going to want to 45:22.438 --> 45:23.438 stop the thing. 45:23.440 --> 45:26.310 So to say the parable very shortly, 45:26.309 --> 45:29.689 the first generation that got taxes-- 45:29.690 --> 45:33.510 got benefits without contributing anything, 45:33.510 --> 45:35.560 that was a huge amount of money that they got. 45:35.559 --> 45:38.869 Every generation after that lost money, 45:38.869 --> 45:42.319 but that was all a way to pay the first generation, 45:42.320 --> 45:45.490 and you can't stop the cycle without screwing your own 45:45.490 --> 45:46.090 parents. 45:46.090 --> 45:50.350 So it's very difficult for the thing to be stopped. 45:50.349 --> 45:56.469 Now you could make it a little bit more realistic by saying 45:56.469 --> 46:01.219 every generation, wages grow every generation, 46:01.215 --> 46:06.065 say between 1 and 2 percent in real terms. 46:06.070 --> 46:07.880 That's the historical rate of growth. 46:07.880 --> 46:10.170 By the way, it hasn't been so great lately, 46:10.173 --> 46:13.183 but anyway, historically, say 1 to 2 percent real growth 46:13.179 --> 46:13.889 of wages. 46:13.889 --> 46:18.489 So on an annualized basis, if you did the same thing with 46:18.489 --> 46:23.499 each generation paying 12 percent of their youthful wages, 46:23.500 --> 46:27.540 you would find that--now we're coming closer to reality-- 46:27.539 --> 46:31.669 that every generation was going to get between 1 and 2 percent 46:31.666 --> 46:35.616 return on their contributions, because the young would 46:35.617 --> 46:38.527 contribute 12 dollars out of 100 say, 46:38.530 --> 46:41.590 but their daughter, that lady's daughter, 46:41.590 --> 46:44.040 30 years later, the wages would have grown by 1 46:44.041 --> 46:46.441 to 2 percent every year for those 30 years. 46:46.440 --> 46:49.480 So 12 percent of that bigger number would go to that 46:49.483 --> 46:53.243 daughter, and so there would be a rate of return between 1 and 2 46:53.242 --> 46:53.962 percent. 46:53.960 --> 46:56.160 And that's exactly what Bush and everybody else is 46:56.157 --> 46:56.737 predicting. 46:56.739 --> 47:01.219 So now you understand where the 1 to 2 percent comes from that 47:01.222 --> 47:02.842 you're going to get. 47:02.840 --> 47:05.810 If the population is stable, the ratio of young to old, 47:05.813 --> 47:09.123 the rate of return on Social Security is going to be equal to 47:09.117 --> 47:10.877 the rate of growth of wages. 47:10.880 --> 47:13.470 So it's not 0 as in the first parable, because wages are 47:13.472 --> 47:14.372 actually growing. 47:14.369 --> 47:17.339 It's between 1 and 2 percent, which is a bad return compared 47:17.342 --> 47:20.112 to the rate of interest, and that's why every generation 47:20.114 --> 47:20.824 is losing. 47:20.820 --> 47:26.030 Okay, so let's do one more thing. 47:26.030 --> 47:28.860 So the baby boom, does the baby boom make things 47:28.856 --> 47:29.936 worse or better? 47:29.940 --> 47:31.460 How can you think about it? 47:31.460 --> 47:34.030 It's so simple minded to think this way. 47:34.030 --> 47:36.210 It's amazing; the public is so confused about 47:36.208 --> 47:36.488 this. 47:36.489 --> 47:39.439 Suppose you have a baby boom generation. 47:39.440 --> 47:41.410 So you're going on with all these mothers, 47:41.407 --> 47:44.237 we're back to the mother and the daughter with 1 million. 47:44.239 --> 47:46.819 So let's say there's one mother, one daughter, 47:46.824 --> 47:48.724 one person in every generation. 47:48.719 --> 47:52.199 All of a sudden, there's a baby boom generation, 47:52.202 --> 47:55.542 but of course, to be old, you have to be young 47:55.538 --> 47:56.278 first. 47:56.280 --> 48:00.690 So let's say in some generation after a bunch of times, 48:00.690 --> 48:04.450 there are 2 daughters instead of 1 daughter. 48:04.449 --> 48:13.289 Each of them is not going to pay--if the tax rate stays the 48:13.288 --> 48:20.448 same and the young daughters now each pay 1, 48:20.449 --> 48:23.899 the mother who's alive then only needs 1 when she gets old. 48:23.900 --> 48:27.750 So 2 daughters now have 1 to contribute, so half of their 48:27.748 --> 48:31.178 money goes to paying off the mother when she's old, 48:31.182 --> 48:34.072 just like would have usually happened. 48:34.070 --> 48:36.980 But the baby generation, because it's young first, 48:36.983 --> 48:40.493 that means when I was young, my generation was making a huge 48:40.489 --> 48:41.679 amount of money. 48:41.679 --> 48:42.409 We're doing it now. 48:42.409 --> 48:43.759 That's why there's a surplus. 48:43.760 --> 48:46.870 There's this gigantic surplus being put in to Social Security, 48:46.869 --> 48:49.799 and so when my generation gets old, 48:49.800 --> 48:52.530 the dollar that didn't have to go to the mother, 48:52.530 --> 48:54.820 because there was an extra dollar there, 48:54.820 --> 48:57.230 that could be earning the rate of interest. 48:57.230 --> 48:59.510 And so at the end, when we get old, 48:59.510 --> 49:02.750 there are going to be 2 of us, and there's only going to be 1 49:02.753 --> 49:04.973 child next generation to contribute 1, 49:04.969 --> 49:06.639 and we're going to be expecting 1. 49:06.639 --> 49:09.709 But see, the 1 that was put in when we were young has now grown 49:09.713 --> 49:10.063 to 2. 49:10.059 --> 49:11.819 You've got 2 there, plus another 1, 49:11.824 --> 49:14.264 that's 3, so there actually should be a surplus, 49:14.264 --> 49:15.204 not a deficit. 49:15.199 --> 49:16.009 Did you follow that? 49:16.010 --> 49:17.180 Did that go too fast? 49:17.179 --> 49:20.689 So I'm saying that every generation, you give 1, 49:20.693 --> 49:23.983 you get 1, you give 1, you get 1, you give 1, 49:23.983 --> 49:25.033 you get 1. 49:25.030 --> 49:27.660 All of a sudden, there are 2 people, 49:27.655 --> 49:31.625 so they're each giving 1, so none of them is worse off 49:31.630 --> 49:32.830 than before. 49:32.829 --> 49:34.599 When they get old, they're going to need 2. 49:34.599 --> 49:36.649 You've only got 1 person contributing. 49:36.650 --> 49:39.990 So here's the baby boom, double the size of all the 49:39.992 --> 49:41.332 other generations. 49:41.329 --> 49:43.869 When they're old, it looks like a problem. 49:43.869 --> 49:45.189 Who's going to take care of these people? 49:45.190 --> 49:47.060 There're not enough young people to take care of them. 49:47.059 --> 49:49.069 But remember, they were young before they 49:49.074 --> 49:49.634 were old. 49:49.630 --> 49:52.190 So since this mother only needs 1 and there are 2 of these 49:52.186 --> 49:54.286 daughters, the extra 1 could be invested 49:54.286 --> 49:57.316 and the 1 that's invested is going to make a rate of return 49:57.318 --> 50:00.048 and become more than 1, like close to 2. 50:00.050 --> 50:03.270 And so you'll have the 1 from the new daughter, 50:03.266 --> 50:07.456 plus almost 2 that was saved, that was in the Social Security 50:07.461 --> 50:09.981 trust fund and earning interest. 50:09.980 --> 50:12.610 So you'll actually have 3 dollars to make up for the 2, 50:12.606 --> 50:15.276 and so it's not a problem at all that you have this baby 50:15.282 --> 50:15.722 boom. 50:15.719 --> 50:18.179 In fact, it's a benefit that we had the baby boom. 50:18.179 --> 50:20.139 So basically, what did the baby boom do? 50:20.139 --> 50:22.449 It staved off the original problem. 50:22.449 --> 50:26.029 So let's just think about this one more time. 50:26.030 --> 50:28.900 Suppose that you have a slightly more realistic example, 50:28.896 --> 50:31.446 the kind you're going to do in the problem set. 50:31.449 --> 50:38.169 Suppose that you've got--people live from 20 to 80 and they pay 50:38.168 --> 50:44.778 taxes and work from 20 to 60 and they retire from 60 to 80. 50:44.780 --> 50:48.300 Everybody's paying 12 dollars in Social Security taxes when 50:48.302 --> 50:50.472 working, and there's a 0 rate of 50:50.472 --> 50:52.762 interest, and they're getting 24-- 50:52.760 --> 50:55.680 maybe I have a rate--they're getting 24 dollars when they're 50:55.684 --> 50:56.924 retired, in benefits. 50:56.920 --> 50:58.790 Okay, so the system balances every year, 50:58.789 --> 51:02.409 because in every generation, these are the birth years, 51:02.409 --> 51:08.439 the thing started in 1938, and then they collected taxes 51:08.438 --> 51:10.738 for a little while. 51:10.739 --> 51:14.179 Frances Perkins got in action and so they decided to go to pay 51:14.181 --> 51:14.861 as you go. 51:14.860 --> 51:17.450 To--let's just assume it started pay as you go from the 51:17.445 --> 51:18.255 very beginning. 51:18.260 --> 51:22.260 So in 1940, you see in 1940, the people who are 60, 51:22.255 --> 51:26.565 the 1880 generation, would have two decades to live. 51:26.570 --> 51:32.370 So these guys--oh, I'm sorry, I never put this. 51:32.369 --> 51:34.939 Not that it mattered, but it would have been a little 51:34.943 --> 51:35.393 better. 51:35.389 --> 51:39.059 So these guys, the 60 year olds here, 51:39.057 --> 51:44.147 and these 70 year olds, the 70 year olds and the 60 51:44.152 --> 51:47.722 year olds are collecting money. 51:47.719 --> 51:50.269 Now the original start of Social Security was a little 51:50.273 --> 51:50.663 fuzzy. 51:50.659 --> 51:53.159 They didn't want to pay people who had never contributed, 51:53.155 --> 51:55.645 so these 70 year olds weren't really getting anything. 51:55.650 --> 51:58.850 Okay, let's just keep for the simple, steady state. 51:58.849 --> 52:03.519 So the point is, the 60 year olds are collecting 52:03.518 --> 52:04.808 24 dollars. 52:04.809 --> 52:07.989 The 70 year olds are collecting 24 dollars, and each of these 52:07.990 --> 52:09.850 generations, the 50,40, 30s and 20s, 52:09.847 --> 52:11.647 they're all paying 12 dollars. 52:11.650 --> 52:15.340 So the contributions are exactly matching the benefits. 52:15.340 --> 52:16.990 So the system is perfectly in balance. 52:16.989 --> 52:20.389 Now what happens the next decade? 52:20.389 --> 52:24.379 You've got the new 70 year olds. 52:24.380 --> 52:27.450 It's this next generation, plus these guys, 52:27.452 --> 52:30.972 who have now turned 70, who had been contributing 52:30.965 --> 52:31.765 before. 52:31.768 --> 52:33.978 Now they're in their 60s, sorry, they're in these 60s. 52:33.980 --> 52:36.260 These guys in their 70s, these guys in their 60s, 52:36.260 --> 52:38.020 and then here are the contributors. 52:38.018 --> 52:40.518 This new generation has now come on board to contribute. 52:40.518 --> 52:42.958 So again, there's balance every generation. 52:42.960 --> 52:45.640 Okay, but now who are the winners and the losers? 52:45.639 --> 52:48.049 Well, you know, it's much worse than it sounded 52:48.050 --> 52:50.510 at first glance, because people live longer than 52:50.512 --> 52:51.092 1 year. 52:51.090 --> 52:54.610 So you see these people, in the '40s, 52:54.612 --> 52:57.552 all these guys were gaining. 52:57.550 --> 53:01.120 So this generation of 1870, they have almost an infinite 53:01.117 --> 53:02.217 rate of return. 53:02.219 --> 53:04.429 They made no contributions. 53:04.429 --> 53:07.919 These guys, they also made no contributions and they're 53:07.916 --> 53:11.136 getting huge returns, because they're getting them, 53:11.143 --> 53:13.343 you know, 20 years of returns. 53:13.340 --> 53:16.080 But it's worse than that, because when we go to the next 53:16.081 --> 53:18.351 generation, these guys, they actually 53:18.353 --> 53:21.003 contributed when they were in their 50s, 53:21.000 --> 53:25.260 but that wasn't very long before they retired and they got 53:25.259 --> 53:29.219 24 dollars of benefits and 24 dollars of benefits, 53:29.219 --> 53:31.649 having paid only 12 dollars of taxes. 53:31.650 --> 53:34.450 Of course, this came later, but 48 compared to 12, 53:34.447 --> 53:36.557 they got a gigantic rate of return. 53:36.559 --> 53:39.659 You go to the next generation, and they're making out like 53:39.663 --> 53:42.443 bandits too, because they only contributed twice. 53:42.440 --> 53:44.820 Okay so in the '40s, a bunch of people were making 53:44.822 --> 53:46.912 money, getting benefits, who didn't make any 53:46.914 --> 53:47.794 contributions. 53:47.789 --> 53:49.809 In the '50s, a bunch of people were 53:49.806 --> 53:52.946 making--getting benefits who made no contributions. 53:52.949 --> 53:55.539 In the '60s, there are still people getting 53:55.543 --> 53:57.833 benefits who made no contributions. 53:57.829 --> 54:02.509 It's not till you get to the '80s, once people are fully 54:02.514 --> 54:06.694 retired, having made 40 years of contributions. 54:06.690 --> 54:09.620 So from 40 to 80, it's not until the '80s that 54:09.615 --> 54:13.125 the people who are getting benefits were all people who 54:13.128 --> 54:14.558 fully contributed. 54:14.559 --> 54:18.589 Okay, so all these people were getting an incredibly good deal. 54:18.590 --> 54:23.890 We had 40 years of people getting extra returns. 54:23.889 --> 54:27.449 If you just do the distributive law of arithmetic, 54:27.449 --> 54:29.799 and you realize that all these things go off to infinity 54:29.797 --> 54:32.577 because they're discounted, you can sum them in either 54:32.576 --> 54:33.206 direction. 54:33.210 --> 54:36.330 You can sum down the columns, and that's always 0. 54:36.329 --> 54:38.939 The benefits and the contributions always net to 0, 54:38.940 --> 54:41.820 but therefore, if you add up the rows, 54:41.820 --> 54:44.050 which is what each generation gets, 54:44.050 --> 54:45.720 they also have to add up to 0. 54:45.719 --> 54:47.869 But you see, there's so many original 54:47.871 --> 54:48.711 generations. 54:48.710 --> 54:50.450 This one got a huge benefit. 54:50.449 --> 54:52.279 This one got huge benefits. 54:52.280 --> 54:55.020 The present value of their contributions relative to their 54:55.021 --> 54:57.621 benefits is incredibly positive for that generation. 54:57.619 --> 55:00.119 For this generation, it's still incredibly positive. 55:00.119 --> 55:03.369 Remember, this is 12,12, and this is 24,24. 55:03.369 --> 55:05.479 For this generation, it's probably still positive. 55:05.480 --> 55:08.070 Not till you get to here has it become--well, 55:08.067 --> 55:10.947 not till you get to here does something change. 55:10.949 --> 55:13.659 So this is a positive number, this is a big positive number. 55:13.659 --> 55:15.109 This is a gigantic positive number. 55:15.110 --> 55:16.640 This is a huge positive number. 55:16.639 --> 55:19.179 You add up over all these things positive. 55:19.179 --> 55:22.889 The rest of these generations have to be negative to just 55:22.885 --> 55:24.535 balance the thing at 0. 55:24.539 --> 55:27.579 So that's why every generation from here down to here is going 55:27.577 --> 55:29.417 to have to earn a negative return, 55:29.420 --> 55:32.280 basically in steady state, they'd all earn the same 55:32.275 --> 55:35.835 negative present value, or the same bad rate of return. 55:35.840 --> 55:38.260 And there were so many generations that got positive 55:38.257 --> 55:39.157 amounts of money. 55:39.159 --> 55:41.689 So in today's dollars, can you tell me how much money 55:41.686 --> 55:43.966 that we gave away to these early generations? 55:43.969 --> 55:49.349 Can you take a guess, just order of magnitude? 55:49.349 --> 55:51.969 So I'm asking in today's dollars, today's present value 55:51.974 --> 55:52.464 dollars. 55:52.460 --> 55:54.840 Whatever the number is, you have to assume it grew at 55:54.835 --> 55:56.385 the rate of interest since then. 55:56.389 --> 55:59.089 So what do you think that is? 55:59.090 --> 56:00.060 Student: Couple trillion. 56:00.059 --> 56:00.839 Prof: Couple trillion. 56:00.840 --> 56:02.240 Does someone want to guess? 56:02.239 --> 56:04.989 Reasonable guess, but someone want to make 56:04.987 --> 56:06.057 another guess? 56:06.059 --> 56:10.249 Just so you get an idea of the size of the program. 56:10.250 --> 56:14.130 Does anybody know what GNP is in the country? 56:14.130 --> 56:15.060 Student: $15 trillion. 56:15.059 --> 56:16.629 Prof: Okay, $14 trillion, 56:16.625 --> 56:18.085 something like that is GNP. 56:18.090 --> 56:23.210 So what do you guess this number is? 56:23.210 --> 56:25.340 Okay, it's $17 trillion. 56:25.340 --> 56:26.400 He guessed $2 trillion. 56:26.400 --> 56:27.710 It's $17 trillion. 56:27.710 --> 56:31.260 So we made a staggering transfer of income to these 56:31.255 --> 56:34.405 people at the beginning, and now somebody's got to pay 56:34.405 --> 56:36.575 for that and it's not a trivial thing to pay for, 56:36.579 --> 56:38.639 because $17 trillion, if everybody gave, 56:38.639 --> 56:41.139 every corporation, every person in the whole 56:41.141 --> 56:44.401 country gave away all the money they made for a year, 56:44.400 --> 56:45.980 we still wouldn't pay it down. 56:45.980 --> 56:49.700 So that's a big amount that's hanging over everybody, 56:49.697 --> 56:53.197 and that's what the Social Security problem is. 56:53.199 --> 56:55.739 We gave away so much money at the beginning, 56:55.744 --> 56:58.884 if we keep the system in balance, we have to gradually 56:58.882 --> 57:00.542 give all the money back. 57:00.539 --> 57:03.039 And we can't stop it, because then some old guys are 57:03.041 --> 57:04.171 going to get screwed. 57:04.170 --> 57:07.710 So there's no way of stopping the thing and each generation 57:07.713 --> 57:08.573 has to lose. 57:08.570 --> 57:11.630 So the reason why you're getting such low rates of return 57:11.628 --> 57:14.628 is because the system was designed--Frances Perkins knew 57:14.632 --> 57:15.892 what she was doing. 57:15.889 --> 57:18.459 She wanted to help all those old people in the '40s. 57:18.460 --> 57:20.410 Now she was out of power in the '50s and '60s, 57:20.411 --> 57:22.841 you know, when we were still helping all those people. 57:22.840 --> 57:24.660 But the point is, there was a tremendous transfer 57:24.664 --> 57:26.434 of wealth, so there were entire 57:26.432 --> 57:29.422 generations of that era, and that's the reason why 57:29.422 --> 57:32.142 everybody's getting such a bad rate of return now. 57:32.139 --> 57:36.419 It's not because the money's being lost or thrown away. 57:36.420 --> 57:40.140 So what I'm telling you now is not controversial. 57:40.139 --> 57:42.719 I don't think many people understand it, 57:42.724 --> 57:46.244 but everyone who does understand it agrees with it. 57:46.239 --> 57:48.319 When come to my solution, they're not going to agree. 57:48.320 --> 57:52.010 But anyway, so what I'm telling you, just to compute, 57:52.014 --> 57:55.714 in the problem set you have to compute an example. 57:55.710 --> 58:00.410 So let's just see how this would work. 58:00.409 --> 58:03.529 So suppose from the point of view of a 10 year old, 58:03.530 --> 58:06.450 just doing the example I did, suppose there's a 15 percent 58:06.445 --> 58:09.365 rate of interest, and you're going to contribute 58:09.371 --> 58:12.471 in your 20s, 12 dollars, 12 percent, 58:12.474 --> 58:15.274 so no growth in the economy. 58:15.268 --> 58:18.658 So it's 12 dollars all the time when you're in your 20s, 58:18.659 --> 58:19.829 30s, 40s and 50s. 58:19.829 --> 58:23.609 So what would you do from the point of view age 10? 58:23.610 --> 58:27.640 That's 10 years before your 20s. 58:27.639 --> 58:29.499 You're going to contribute 12 dollars in your 20s. 58:29.500 --> 58:32.550 You discount it at the 15 percent rate of interest. 58:32.550 --> 58:36.830 You're going to be contributing 12 dollars in your 30s, 58:36.829 --> 58:38.819 so you discount it at 15 percent twice, 58:38.820 --> 58:41.450 and in your 40s, you're giving up 12 dollars, 58:41.449 --> 58:44.389 you're discounting it to 15 percent 3 times, 58:44.389 --> 58:46.179 and in your 50s, you're doing it, 58:46.184 --> 58:48.274 12 dollars, so you're discounting it 4 58:48.268 --> 58:48.618 times. 58:48.619 --> 58:52.899 So that's the present value. 58:52.900 --> 58:56.090 From the point of view of a young girl, 58:56.090 --> 58:58.390 looking at what you're going to be forced to contribute over 58:58.391 --> 59:00.551 your life, those are the taxes you can 59:00.552 --> 59:02.882 expect to pay in present value terms. 59:02.880 --> 59:05.230 Now of course, when you get old, 59:05.230 --> 59:08.950 in your 60s and 70s, you're going to get benefits, 59:08.945 --> 59:12.885 24 dollars, much higher than the taxes you paid. 59:12.889 --> 59:14.869 But by then, it's 5 decades later, 59:14.871 --> 59:18.241 so you're discounting it 5 times, and when you're in your 59:18.235 --> 59:20.575 70s, you're discounting it 6 times. 59:20.579 --> 59:24.499 So you have to discount by 6, so the present value of that is 59:24.496 --> 59:27.236 way less than the present value of this. 59:27.239 --> 59:31.549 So you see that the loss in present value terms is going to 59:31.554 --> 59:34.164 be 11 dollars, 11 dollars out of 34, 59:34.157 --> 59:36.907 which is what your benefits were. 59:36.909 --> 59:39.759 So your loss is something like 34 percent. 59:39.760 --> 59:42.670 So this is just--I made up these numbers. 59:42.670 --> 59:46.290 The actual loss, which I computed for the real 59:46.286 --> 59:48.856 economy, is around 25 percent. 59:48.860 --> 59:52.650 So that's how big each generation, 1 quarter of the 59:52.648 --> 59:55.298 typical--so here it's 34 percent. 59:55.300 --> 59:58.650 1 quarter to 1 third in this example of each generation's 59:58.654 --> 1:00:01.474 Social Security taxes are simply being lost, 1:00:01.469 --> 1:00:06.349 frittered away, and basically used to pay off 1:00:06.346 --> 1:00:10.776 the debt from the original generation. 1:00:10.780 --> 1:00:14.970 Now if you want to look at the total present value loss, 1:00:14.969 --> 1:00:20.129 starting in the 1930s, for people born in the 1930s, 1:00:20.130 --> 1:00:24.050 you have to look at every generation's losing the same 1:00:24.054 --> 1:00:28.504 11.95 and so you take the infinite future of generations, 1:00:28.500 --> 1:00:32.020 and they're losing 79.68, if you add up to infinity, 1:00:32.018 --> 1:00:36.008 and of course, that's the gain that was given 1:00:36.014 --> 1:00:38.744 to the original generations. 1:00:38.739 --> 1:00:43.939 Okay, so that's the kind of example you're going to work 1:00:43.936 --> 1:00:47.806 out, except for with realistic numbers. 1:00:47.809 --> 1:00:50.539 Okay, and so I just do--you're going to do that anyway. 1:00:50.539 --> 1:00:52.139 All right, so that's it. 1:00:52.139 --> 1:00:56.019 So now, if you look at which generation's got the most money, 1:00:56.018 --> 1:00:58.468 at the beginning, there weren't many people in 1:00:58.472 --> 1:01:01.672 Social Security, and so the amount of money that 1:01:01.672 --> 1:01:04.052 they got, the benefits that the really 1:01:04.052 --> 1:01:05.792 old got, there were so few of them that 1:01:05.786 --> 1:01:07.736 if you add it up, it wasn't that big. 1:01:07.739 --> 1:01:10.999 So the generation that benefited the most was my 1:01:10.996 --> 1:01:14.526 father's generation and James Tobin's generation. 1:01:14.530 --> 1:01:17.130 Tobin, as we'll see in a second, he used to tell me all 1:01:17.130 --> 1:01:18.810 the time-- he was Yale's most famous 1:01:18.811 --> 1:01:20.791 economist, and I happen to be the James 1:01:20.788 --> 1:01:23.288 Tobin professor, so I have quite a fondness for 1:01:23.288 --> 1:01:23.548 him. 1:01:23.550 --> 1:01:27.370 I also went to the same high school he went to in Illinois. 1:01:27.369 --> 1:01:31.289 Anyway, he used to tell me that the problem with Social Security 1:01:31.293 --> 1:01:32.963 was, we didn't have enough--I didn't 1:01:32.963 --> 1:01:35.013 have enough children, and I would tell him the 1:01:35.009 --> 1:01:37.219 problem with Social Security was we gave him, 1:01:37.219 --> 1:01:38.809 his birth date, too much money, 1:01:38.807 --> 1:01:40.977 and that's why we're all suffering now. 1:01:40.980 --> 1:01:43.680 So you can see all the generations and which ones, 1:01:43.677 --> 1:01:46.317 which generation got the most amount of money. 1:01:46.320 --> 1:01:49.070 So that I also calculated. 1:01:49.070 --> 1:01:53.960 Now this parable is not exactly accurate. 1:01:53.960 --> 1:01:56.030 So you know, in the parable, 1:01:56.029 --> 1:02:00.319 we should have had a crisis in 1970, it should have been, 1:02:00.320 --> 1:02:01.240 or 1980. 1:02:01.239 --> 1:02:05.239 I told you the people in 1980 should already have realized-- 1:02:05.239 --> 1:02:07.969 the generation starting to work in 1980, 1:02:07.969 --> 1:02:10.929 so born in 1960, a lot younger than you are, 1:02:10.929 --> 1:02:13.419 they should already have realized that they're getting a 1:02:13.423 --> 1:02:16.203 bad deal in Social Security, and so we should have had all 1:02:16.195 --> 1:02:17.275 this come much sooner. 1:02:17.280 --> 1:02:24.250 So what kept the problem from manifesting itself until now? 1:02:24.250 --> 1:02:26.800 Well, what kept the problem from manifesting itself until 1:02:26.802 --> 1:02:28.492 now is actually quite easy to see, 1:02:28.489 --> 1:02:32.799 is there were a lot more young people per old in the historical 1:02:32.804 --> 1:02:33.784 generations. 1:02:33.780 --> 1:02:37.590 Now we're leveling off and everybody thinks we're going to 1:02:37.594 --> 1:02:39.874 be 2 young people for every old. 1:02:39.869 --> 1:02:42.839 The story I sort of told, working from 40 to 60 and 1:02:42.835 --> 1:02:45.445 retired from 60 to 80 in a stable population, 1:02:45.445 --> 1:02:48.525 that's coming close to what we're converging to. 1:02:48.530 --> 1:02:51.200 So there are going to be 2 young for every old, 1:02:51.204 --> 1:02:53.244 where there used to be 3,4 and 5. 1:02:53.239 --> 1:02:56.059 Now how could there have been so many young for all the old? 1:02:56.059 --> 1:02:59.439 Well, you know, women at the beginning, 1:02:59.438 --> 1:03:02.638 in this period, they were working. 1:03:02.639 --> 1:03:04.909 Women were surging into the labor force. 1:03:04.909 --> 1:03:06.799 There were a huge number of young women working, 1:03:06.795 --> 1:03:08.595 but their mothers actually weren't working. 1:03:08.599 --> 1:03:11.649 They had not worked and so they were getting half their 1:03:11.648 --> 1:03:14.648 husband's benefits, not the full benefit that these 1:03:14.646 --> 1:03:18.216 daughters who were working their whole lives are going to get. 1:03:18.219 --> 1:03:19.939 They're not going to take half their husband's benefits. 1:03:19.940 --> 1:03:21.380 They're going to take all their own benefits, 1:03:21.384 --> 1:03:22.604 which are going to be a lot higher. 1:03:22.599 --> 1:03:27.329 So then there was the baby boom generation. 1:03:27.329 --> 1:03:30.039 The baby boom generation, far from causing the problem, 1:03:30.036 --> 1:03:31.386 has deferred the problem. 1:03:31.389 --> 1:03:35.589 There are all these surpluses, because we were working so 1:03:35.585 --> 1:03:36.105 long. 1:03:36.110 --> 1:03:37.930 I don't want to get into all the details. 1:03:37.929 --> 1:03:44.279 People are living longer now too, so that's another problem. 1:03:44.280 --> 1:03:47.140 Too much complication here. 1:03:47.139 --> 1:03:49.139 Okay, so what can you do about this? 1:03:49.139 --> 1:03:57.429 Well, there are obvious things to do, which are bad. 1:03:57.429 --> 1:03:59.449 So one thing you could do is, you could say, 1:03:59.449 --> 1:04:02.849 if we're supposed to be paying the average young [correction: 1:04:02.847 --> 1:04:04.657 old] person 40 percent of the new 1:04:04.659 --> 1:04:07.459 generation's wages, and there are only going to be 1:04:07.458 --> 1:04:09.278 2 young people for every old person, 1:04:09.280 --> 1:04:13.730 we could maybe shave the 40 percent down a little bit. 1:04:13.730 --> 1:04:16.530 Let's make the Social Security tax 18 percent instead of 12 1:04:16.527 --> 1:04:17.007 percent. 1:04:17.010 --> 1:04:23.440 So you could raise it by 6 percent. 1:04:23.440 --> 1:04:27.720 Nobody wants to actually do that, because an increase of 6 1:04:27.722 --> 1:04:31.932 percent in a tax rate is an astronomical increase and you 1:04:31.929 --> 1:04:36.289 can read in the newspapers how loath Congress is to raising 1:04:36.288 --> 1:04:37.188 taxes. 1:04:37.190 --> 1:04:41.910 Another obvious thing you could do is, you could raise 1:04:41.914 --> 1:04:43.434 retirement age. 1:04:43.429 --> 1:04:47.309 So instead of saying it's 65, because people will live till 1:04:47.307 --> 1:04:49.127 80, make it start at 67, 1:04:49.126 --> 1:04:53.156 so you'll only have to pay them for 13 years instead of 15 1:04:53.161 --> 1:04:53.801 years. 1:04:53.800 --> 1:04:56.970 In this example, 18 years instead of 20 years. 1:04:56.969 --> 1:04:59.579 So you could keep raising the retirement age. 1:04:59.579 --> 1:05:02.099 The problem with that is--not the retirement age, 1:05:02.101 --> 1:05:04.571 the age you start collecting Social Security. 1:05:04.570 --> 1:05:08.170 The problem with that of course is that people are retiring not 1:05:08.166 --> 1:05:10.606 later and later, even younger and younger, 1:05:10.614 --> 1:05:13.054 believe it or not, and so you're getting this huge 1:05:13.050 --> 1:05:15.550 gap between when people retire and when they start getting 1:05:15.554 --> 1:05:16.394 Social Security. 1:05:16.389 --> 1:05:18.529 So there's a limit to how--obviously you should do a 1:05:18.527 --> 1:05:20.627 little bit of that, but there's a limit of how much 1:05:20.625 --> 1:05:21.585 of that you can do. 1:05:21.590 --> 1:05:25.220 So you need to make not just a parametric reform, 1:05:25.219 --> 1:05:27.979 you know, like adjusting a number, changing the tax rate a 1:05:27.981 --> 1:05:30.061 little bit, but I believe you need a 1:05:30.056 --> 1:05:32.426 fundamental reform, and the Republicans have 1:05:32.434 --> 1:05:33.114 proposed one. 1:05:33.110 --> 1:05:35.160 They've said, "Let's privatize. 1:05:35.159 --> 1:05:37.309 Let's change the whole system." 1:05:37.309 --> 1:05:46.149 Okay, so what does it mean to privatize? 1:05:46.150 --> 1:05:47.860 How are they going to do that? 1:05:47.860 --> 1:05:53.050 So what Bush had in mind was the following: 1:05:53.054 --> 1:05:57.884 he said, "What is privatization? 1:05:57.880 --> 1:05:59.500 It involves three things. 1:05:59.500 --> 1:06:03.080 It's the creation of individual accounts, so your name goes on 1:06:03.076 --> 1:06:03.366 it. 1:06:03.369 --> 1:06:05.849 So it's your account, your money and no one can take 1:06:05.849 --> 1:06:06.529 it from you. 1:06:06.530 --> 1:06:09.500 It's your money and your money's what's going to pay for 1:06:09.501 --> 1:06:11.611 your own benefits, so it's prefunded. 1:06:11.610 --> 1:06:14.750 So it's individual accounts and prefunded, and it's 1:06:14.748 --> 1:06:15.878 diversification. 1:06:15.880 --> 1:06:18.660 You're supposed to invest not just in government bonds, 1:06:18.657 --> 1:06:21.537 but in the stock market, whatever else you want." 1:06:21.539 --> 1:06:23.439 So those are the three cornerstones, 1:06:23.442 --> 1:06:26.542 at least the way I've explained them, of privatization. 1:06:26.539 --> 1:06:27.679 Three things that it accomplishes. 1:06:27.679 --> 1:06:29.469 It gives you your name on the money. 1:06:29.469 --> 1:06:30.699 It's your money. 1:06:30.699 --> 1:06:33.139 That's the money that's going to pay you when you get old, 1:06:33.139 --> 1:06:36.679 prefunding, and you can invest in a wider range of assets, 1:06:36.679 --> 1:06:38.879 especially the stock market, which is what everybody seems 1:06:38.884 --> 1:06:41.164 to want to put their money in, or at least used to, 1:06:41.155 --> 1:06:42.645 until we had this last crash. 1:06:42.650 --> 1:06:44.140 On the other hand, the stock market's going up a 1:06:44.141 --> 1:06:45.761 lot, so people are getting less nervous about it. 1:06:45.760 --> 1:06:51.990 So those things are different, they're not the same. 1:06:51.989 --> 1:06:54.779 So how is Bush going to handle this? 1:06:54.780 --> 1:06:56.930 How would you think he was going to do this? 1:06:56.929 --> 1:07:01.369 How could you possibly--so Bush said, "I want to privatize. 1:07:01.369 --> 1:07:05.059 I want the 12 percent that you pay in Social Security taxes, 1:07:05.059 --> 1:07:08.259 I want 4 percent of that for you to be able to put that in 1:07:08.260 --> 1:07:11.460 your private account in the stock market with your name on 1:07:11.460 --> 1:07:12.190 it." 1:07:12.190 --> 1:07:15.010 So Gore said, "Well, that's ridiculous. 1:07:15.010 --> 1:07:18.560 If it's only 8 percent then, left to give to the old people, 1:07:18.559 --> 1:07:20.099 the old people are going to get cheated, 1:07:20.099 --> 1:07:23.419 so how is Bush going to handle that?" 1:07:23.420 --> 1:07:28.850 What did you think he was going to do? 1:07:28.849 --> 1:07:29.969 Student: Borrow the 1:07:29.969 --> 1:07:31.179 > 1:07:31.179 --> 1:07:31.889 Prof: Could you say that again? 1:07:31.889 --> 1:07:33.099 It sounds right, but I couldn't-- 1:07:33.099 --> 1:07:34.469 Student: Borrow to make up the 1:07:34.472 --> 1:07:34.932 shortfall. 1:07:34.929 --> 1:07:36.469 Prof: Exactly. 1:07:36.469 --> 1:07:40.119 So I don't know what Gore was thinking, especially since I was 1:07:40.123 --> 1:07:43.063 supposedly advising Gore about Social Security. 1:07:43.059 --> 1:07:47.179 But he just said in the debate, "That's impossible. 1:07:47.179 --> 1:07:48.599 You'll just screw all the old people." 1:07:48.599 --> 1:07:51.979 Okay, so you're supposed to be giving 12 percent, 1:07:51.980 --> 1:07:55.430 you know, 12 here, -12 here, and then getting some 1:07:55.431 --> 1:07:56.911 return over here. 1:07:56.909 --> 1:07:59.529 And now Bush is saying, "I only want to give you 8 1:07:59.525 --> 1:08:02.335 dollars, and the other 4 you put in your 1:08:02.338 --> 1:08:05.478 Social Security account, and then you're going to get 1:08:05.478 --> 1:08:06.968 maybe a much bigger return here-- 1:08:06.969 --> 1:08:09.029 sorry, in your stock market account, 1:08:09.030 --> 1:08:12.360 in Social Security, so you can't take it out." 1:08:12.360 --> 1:08:14.450 So Bush would say, "Yes, let people put their 1:08:14.449 --> 1:08:16.919 names on it, force them to save and contribute the whole 12 1:08:16.921 --> 1:08:17.691 dollars." 1:08:17.689 --> 1:08:19.809 Bush agrees that you've got to force young people to save, 1:08:19.805 --> 1:08:21.545 because they're not going to do it otherwise. 1:08:21.550 --> 1:08:23.910 So you put the 4 dollars in their private account, 1:08:23.908 --> 1:08:26.598 but it's their name on it, and then it grows to some huge 1:08:26.599 --> 1:08:28.899 number, you know, 20 instead of just 1:08:28.896 --> 1:08:31.166 doubling by the time they get old. 1:08:31.170 --> 1:08:33.810 And so that huge account is their money. 1:08:33.810 --> 1:08:38.150 So that's what Bush would say. 1:08:38.149 --> 1:08:40.309 So Gore would say, "If you take these 4 1:08:40.305 --> 1:08:44.455 dollars and give it to them, how are you going to pay the 1:08:44.460 --> 1:08:48.360 old people who need the 12 right up here? 1:08:48.359 --> 1:08:49.729 The old people are supposed to get 12. 1:08:49.729 --> 1:08:51.889 How are you going to give them their 12 when the young aren't 1:08:51.890 --> 1:08:52.970 handing over the 12 anymore? 1:08:52.970 --> 1:08:54.440 They're only handing over 8." 1:08:54.439 --> 1:08:57.509 Well, it's not like Bush and his advisors didn't think about 1:08:57.506 --> 1:08:57.866 that. 1:08:57.868 --> 1:09:00.338 That would be a colossal blunder. 1:09:00.340 --> 1:09:01.700 Of course they thought about that. 1:09:01.699 --> 1:09:03.709 So what were they going to do? 1:09:03.710 --> 1:09:07.180 They were going to have the government go out and borrow the 1:09:07.175 --> 1:09:10.635 other 4, so the government contributes 4 that it borrows. 1:09:10.640 --> 1:09:13.220 And now of course over here, the government's going to have 1:09:13.216 --> 1:09:15.416 to owe 8, because it's got to pay back 1:09:15.420 --> 1:09:18.140 the 4 it owed in 30 years, at we're assuming, 1:09:18.136 --> 1:09:20.286 100 percent interest over 30 years, 1:09:20.289 --> 1:09:21.399 has got to pay back the 8. 1:09:21.399 --> 1:09:22.079 You're all with me. 1:09:22.078 --> 1:09:26.548 So where are they going to get the 8? 1:09:26.550 --> 1:09:30.020 Who are they going to get the 8 from? 1:09:30.020 --> 1:09:30.580 What? 1:09:30.579 --> 1:09:31.829 Student: Taxpayers. 1:09:31.829 --> 1:09:32.849 Prof: Which taxpayer? 1:09:32.850 --> 1:09:34.310 Student: All of them. 1:09:34.310 --> 1:09:36.060 Prof: Everybody. 1:09:36.060 --> 1:09:37.390 Really? 1:09:37.390 --> 1:09:38.790 Student: The same people who are paying 1:09:38.792 --> 1:09:39.482 the Social Security. 1:09:39.479 --> 1:09:41.129 Prof: Okay, these people. 1:09:41.130 --> 1:09:45.210 So if you chose to take 4 of your dollars out of Social 1:09:45.211 --> 1:09:49.521 Security and put it into your Social Security stock market 1:09:49.520 --> 1:09:52.710 trust fund, your personal trust fund, 1:09:52.710 --> 1:09:55.700 the deal is, you have to pay the interest at 1:09:55.697 --> 1:09:56.967 the end of 30 years. 1:09:56.970 --> 1:10:01.110 So this 8 comes out of your 20. 1:10:01.109 --> 1:10:04.769 So these people pay back the 8. 1:10:04.770 --> 1:10:07.530 So basically, to say it in a different way, 1:10:07.529 --> 1:10:10.729 the way you get to invest in the stock market, 1:10:10.729 --> 1:10:13.319 according to the Bush privatization rules, 1:10:13.319 --> 1:10:16.409 is these people effectively, they're giving the 12 dollars 1:10:16.411 --> 1:10:19.081 anyway to the old, but they get to borrow 4 1:10:19.082 --> 1:10:22.792 dollars and put it in their private stock market account. 1:10:22.788 --> 1:10:25.278 And then they have to pay back the amount they borrowed with 1:10:25.279 --> 1:10:26.249 interest, which is 8. 1:10:26.250 --> 1:10:30.190 But if the stock market does better than the interest rate, 1:10:30.194 --> 1:10:32.784 then of course they make out better. 1:10:32.779 --> 1:10:37.099 They get 20 - 8, which is 12. 1:10:37.100 --> 1:10:39.170 Okay, so is that clear how he did it? 1:10:39.170 --> 1:10:41.330 So it's not a logical impossibility. 1:10:41.328 --> 1:10:43.068 The problem with the Bush plan, of course, 1:10:43.069 --> 1:10:46.829 is that if the money you put in the stock market earns the same 1:10:46.828 --> 1:10:49.978 rate of return that you would have gotten anyway, 1:10:49.979 --> 1:10:52.789 if the stock market earns the same rate of return, 1:10:52.788 --> 1:10:55.418 100 percent over all those years as the bond market, 1:10:55.420 --> 1:10:58.630 then this private stash you have just goes back to paying 1:10:58.625 --> 1:11:02.115 off the government debt and you haven't gained anything in the 1:11:02.115 --> 1:11:03.085 stock market. 1:11:03.090 --> 1:11:05.690 You get the same Social Security benefits you would have 1:11:05.685 --> 1:11:06.295 had anyway. 1:11:06.300 --> 1:11:09.220 So these guys who opt into the privatization program, 1:11:09.222 --> 1:11:10.912 let me repeat the Bush plan. 1:11:10.908 --> 1:11:13.528 If you opt into the privatization program, 1:11:13.529 --> 1:11:16.919 you effectively do everything you did before in Social 1:11:16.917 --> 1:11:17.747 Security. 1:11:17.750 --> 1:11:19.690 You pay your taxes that go to the old people. 1:11:19.689 --> 1:11:21.989 You get the benefits just like you did before, 1:11:21.988 --> 1:11:24.438 but on top of it, you have the right to borrow 4 1:11:24.435 --> 1:11:27.255 dollars from the government, invest it in stocks, 1:11:27.259 --> 1:11:29.969 and then at the end, you have to pay back the 1:11:29.966 --> 1:11:32.486 government out of your stock market return. 1:11:32.488 --> 1:11:35.228 So you're betting on whether the stock market is going to do 1:11:35.234 --> 1:11:36.634 better than the bond market. 1:11:36.630 --> 1:11:39.010 That's effectively what the plan was. 1:11:39.010 --> 1:11:43.380 Okay, so it's not a logical impossibility like Gore said. 1:11:43.380 --> 1:11:45.420 On the other hand, if you don't think the stock 1:11:45.420 --> 1:11:47.550 market's going to do better than the bond market, 1:11:47.548 --> 1:11:49.188 you could end up being worse off. 1:11:49.189 --> 1:11:51.359 You could put in 4 dollars here, get only 6, 1:11:51.363 --> 1:11:53.693 and then you'd have to owe the government 8. 1:11:53.689 --> 1:11:55.969 Where's the government going to get the other 2 dollars from? 1:11:55.970 --> 1:11:58.150 It's going to reduce your Social Security contributions 1:11:58.149 --> 1:11:59.359 [correction: benefits] by 2. 1:11:59.359 --> 1:12:01.209 So that's the government plan. 1:12:01.210 --> 1:12:04.550 So in the problem set, I gave you three problems. 1:12:04.550 --> 1:12:05.910 You can only do two of them now. 1:12:05.908 --> 1:12:08.158 The last one I didn't get far enough to have you do. 1:12:08.158 --> 1:12:11.978 So just do two of them, and I'm going to give my own 1:12:11.976 --> 1:12:15.716 plan next time and also do a little mathematics. 1:12:15.720 --> 1:12:18.980 It's going to turn out that it's quite interesting to math 1:12:18.983 --> 1:12:20.303 this up a little bit. 1:12:20.300 --> 1:12:25.000