Social Security | Wine, Physics, and Song

Since I'm in South Africa this month as a Fellow of the Stellenbosch Institute for Advanced Study (about which more later), I came across this interesting article from a main South African paper, Business Day, about Joseph Stiglitz' involvement in South African economic issues. According to the article he "voiced strong support for the government’s R840bn infrastructure programme, which he said could create a "virtuous circle" of investment and growth and set SA on the path to a more productive and equal society." (Link added.) 840 billion rand is 108 billion US dollars at today's rate. That is roughly 25% of South African nominal GDP as forecast for 2012, but this article, also in Business Day, refers to it as a 20-year rolling program, in which case it is on the order of 1% of GDP annually, depending on the spending profile, future GDP growth, and how the total nominal value of R850bn in planned spending is calculated. Also interesting is the plan to finance it with mandatory retirement plan savings; while there are probably further details, it sounds on the face of it similar to a social-security type plan. However it lacks, one suspects, the (rather inappropriate, in my view) feature of US social security as currently (but rather recently, in historic terms) formulated, of being officially described as a trust fund invested entirely in central government securities. From the second Business Day article cited above:

In the final session of the conference, business leader Bobby Godsell and Zwelinzima Vavi, general secretary of the Congress of South African Trade Unions, both made guarded commitments to this. Mr Godsell said a society-wide discussion was needed on the concept of "a reasonable return" for investment, while Mr Vavi said he backed plans to introduce mandatory savings for all employees.

This sounds like how it should be done.

I have picked up a widespread sense that there is a lot of corruption and siphoning off of funds in the awarding and performance of goverment contracts in South Africa. Obviously a big infrastructure programme provides big opportunities for more of this, which can of course be damaging economically and perhaps even more, politically; I suspect, and certainly hope, Stiglitz has factored in this aspect of the South African scene, and still thinks the plan worthwhile but it would be interesting to see it addressed directly as it is certainly not a minor issue.

Here’s Greg Mankiw’s preferred fiscal stimulus plan.

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

I recognize that some state governments are now struggling in light of the macroeconomic crisis. For the next two years, I would let each state governor have the authority to divert a portion of the payroll tax cut in his or her state and take the funds instead as state aid.

Would the equal present value of the payroll tax cut and the gas tax increase be discounted by consumers, who would save in anticipation of the effects of the future increase, resulting in no stimulus to aggregate demand from the policy? I doubt it; I think it would have some Keynesian multiplier effect nonetheless. But much of it may be saved, in the form of paying down debt. It does also give a straightforward reduction in the cost of keeping people employed, a microeconomic incentive effect that might prove to have positive macroeconomic consequences in the present situation. I still tend to think government spending will, as the simplest Econ 1 Keynesian theory suggests, have a bigger multiplier (a point Greg does explicitly address---he thinks the empirical evidence, though not conclusive, casts some doubt on this).

I’d be most concerned, though, with what would happen to the programs normally funded by payroll taxes: Social Security and Medicare. Social Security in particular is at least nominally supported by paying payroll tax receipts into a fund reserved for Social Security payouts to retirees; would the program continue to pay out at current rates, now funded by general revenues or the gasoline tax? That might not be such a bad idea, but I’m not sure it’s what Mankiw has in mind….

Note that even if the increased-state-spending-for-payroll-tax-cut exchange would be macroeconomically benefical globally, it might have some negative micro effects if only a few states adopted it, as it would put them at some competitive disadvantage for jobs.