Evan Soltas
Jan 30, 2013

What the Squirrels Taught Me

This post is a response to Matt Bruenig's response to my piece in Bloomberg about generational inequities in the financing of social-insurance programs. You should probably read them both first.

Bruening: "In his argument, Soltas groups Medicare and Social Security to make a point about old-age entitlement costs. That’s a terrible thing to do as their budget impacts are majorly different."

I agree completely that the two programs have very different budget problems. I agree that the magnitude of Social Security's problems is comparatively small, and that Medicare's is comparatively large. The reason I group them, however, is that they are both underfunded old-age transfer programs where policy fixes necessarily entail choices about generational equity.

I attempt no deception.

Let's deal with the meat of your argument. Here I propose a different model of the economy, which we'll assume is populated by squirrels who hoard non-spoiling acorns in a vast public store. And let's assume two totally separate squirrel populations.

In the first squirrel population, there's a store of acorns under a tree. The lifetime consumption cycle of a squirrel goes like this. When young, the squirrel eats 80 percent of the acorns he finds and deposits 20 percent of them in the public store. When old, the squirrel consumes an amount of acorns commensurate with the amount he deposited in youth. Then the squirrel dies. They're not the exact same acorns -- no pre-funding individual acorn accounts -- such that acorns are always flowing through the store from young to old. But over the lifetime of the squirrel, his net contribution to publicly-held capital is zero. An equivalent statement of this is that the squirrel's net tax burden for social-insurance is zero, or also that there is no net transfer of acorns from one squirrel to another.

Now let's visit the other population of squirrels. Their lifetime cycle is initially the same, except they contribute only 10 percent of their acorns when young and and therefore eat twice as many as the acorns they deposited when old.

What happens to this community? If you concede that we are in a different situation than the first squirrel population, then I have won every part of this argument I have set out to prove. Without corrective action, the public store of acorns will diminish to zero.

When it does, there are two broad-brush correctives, assuming that we will not attempt to replenish the public stock, and merely maintain a zero steady state:

(1) Tell the old squirrels to halve acorn consumption.

(2) Tell the young squirrels to double their acorn contribution.

For the generation that shifts from young to old at the instant the acorn store goes to zero, option (1) will render their net consumption of public acorns zero. Option (2) will make their net consumption of public acorns positive. Option (2) will, by extension, increase the total consumption of acorns for this generation.

So the first problem we're dealing with between the two squirrel populations is not merely a problem of money. It's a shifting of real consumption.

And the reason your argument is flawed is because this shifting of real consumption occurs even without the change in the percentage of total acorns consumed in any unit of time by the elderly squirrels. That's important, so I'm going to write it again: A constant fraction of consumption going to the elderly does not equal zero generational transfers.

The reason why is because the elderly squirrels spent down the public store of acorns. This is easily seen by adjusting option (2) such that the tax is increased sufficiently as to restore the acorn inventory to its prior level within a given time frame. This version of option (2) also renders the net public acorn consumption of young squirrels within that time frame negative and depresses their total lifetime acorn consumption.

So what does this all mean? It's simply not true that generational inequities are irrelevant as a distinction between what I want and what exists -- i.e. between the first and second squirrel populations. There is a shifting of real consumption and a reduction  in the capital stock of the second population which does not occur in the first.

We can suppose that any solution will leave the young, then, with some reduction in lifetime real consumption and some reduction in the capital stock. The point of my op-ed was to argue that either one is a really rotten deal for the young squirrels.

Let's also consider what I object to in the behavior of the older squirrels. Basically, it's granting themselves the right to deplete the capital stock to finance their current consumption -- and then to shift other squirrels' consumption. The adjustment to their behavior I would have made would have been to either raise their contribution rate, such that they eat fewer of their acorns and increase the capital stock instead -- or they should just not have promised themselves as much in the future, such that they do not reduce the capital stock on net.

Let me also talk about why I think this is a normative wrong. I would apply a contract test of normative wrong in transfers. If we could bring all of the squirrels in any population together from the beginning of time until the day of judgement, would such a scenario be judged as acceptable in advance by all members of the community? I think the first population would, whereas the second population would not. I think the receiving of net transfers of public acorns between generations bears the burden of justification. And I do not think it can be, assuming that no generation is less able to earn. (Suppose that half the squirrels in one generation were maimed by owls but were still alive and hungry. I believe in a sufficiently robust welfare state as to say that net transfers would be justified to those squirrels, and therefore that would be to me an acceptable case for an generational net transfer of public acorns.)

(As a side note, when we introduce features to the model such as interest, all of the squirrels can increase their lifetime acorn consumption by saving, i.e. they can all have positive lifetime net public acorn consumption. But the net present value of their acorn consumption at birth must always be zero for this to work.)

All this should make it clear why I object to a payroll tax fix -- whether you raise the rate or lift the cap -- for Social Security or Medicare.