Social Security Myths

That brings us to my proposal – eliminate the retirement age entirely, and just have 65 and ups qualify the same way the rest of us do, by disability. An 80 y/o who can work shouldn’t be on the government dole – if he wants retirement, he can save for his own. A 40 y/o who has been permanently blinded – why not pay him instead?

Arnold,
Your Accounting argument lacks validity, because of the basic use of SS taxes over time. The Federal government simply spent the revenues. Such expenditure should be considered true liability, just like the National Debt. Social Security revenues should have been placed in a National Bank forum from the start, and assets used as lending capital. This would have led to more valid Government expenditures, and left the SS system secure. You, like the Government, pretend there is an excusable liability.

I personally like ruman’s suggestion of relying solely on disability for benefits receipt. This alone could establish the financial viability of the SS system. Medicare will never be secure, until a limitation of benefits is derived. lgl

Bernard: We will have to pay this cost either way. If we privatize, we start paying it out sooner, but we start getting the returns on the excess savings this will encourage as well. If we don’t privatize, we will just have to pay it out later, anyway, by raising the payroll tax or income tax or whatever.

Visualize the following (hypothetical numbers): current cost of Medicare/SS is 100. Assume no gains from interest on accounts, but also neglect time cost of money (they partly offset one another) The time series looks roughly like:

now: 100, 10 years: 120, 20 years: 140, 30 years, 160

Privatization looks like:
now: 120 , 10 years: 125, 20 years: 130, 30 years 145.

The extra money early is going to accounts to pay off the later years, kind of like the “Social Security Trust Fund” is allegedly doing, only at the end of the day, the assets in these private accounts will actually exist – putting assets in private hands will actually decrease future federal liabilities. (I am of the “The trust fund is just a way of hiding debt and is actually empty” school – the trust fund is full of federal bonds, when the SS comes to collect, what will happen has to be that the Feds will have to incur debt or raise taxes to pay SS just like they would if the TF didn’t exist, but that is irrelevant here.)

So at worst you are equally well off as before – at the end of 30 years, the total cost is at worst the same. Preferably, the accounts are getting a return better than the time cost of money and are generating increased savings, and so the 30 year number should look more like 135 or 140 and privatization is long-run cheaper. It is just that you are BOOKING the cost earlier, to avoid a harder hit later. It LOOKS expensive, but in actuality the price is the same, or less.

What we are doing now is the equivalent of going to Best Buy and taking the “Buy now, pay nothing until 2010” option. As we all know, those options come with a price tag.

rvman,

Thanks. I do understand Arnold’s argument that the promised benefits have to be paid one way or the other. What I am asking is this: If you put what are now payroll taxes into private accounts for workers, where do you get the money to meet the benefit obligations? If you’re going to borrow it, where do you get the money to repay the loan?

As far as I can tell the privatizers have not seriously addressed this issue.

Social Security revenues should have been placed in a National Bank forum from the start, and assets used as lending capital. This would have led to more valid Government expenditures, and left the SS system secure. You, like the Government, pretend there is an excusable liability.
Thanks. I do understand Arnold’s argument that the promised benefits have to be paid one way or the other. What I am asking is this: If you put what are now payroll taxes into private accounts for workers, where do you get the money to meet the benefit obligations? If you’re going to borrow it, where do you get the money to repay the loan?

As far as I can tell the privatizers have not seriously addressed this issue.

From what I understand the SSI accounts will be ‘frozen’. In other words, if privitization comes tomorrow I will get an amount equal not to the present value of my SSI benefits but only what the present value of my SSI benefits would be if I stopped working today (I’m 31). Net effect would be to freeze the SSI liability as it is right now and not let it grow any more.

Social Security revenues should have been placed in a National Bank forum from the start, and assets used as lending capital. This would have led to more valid Government expenditures, and left the SS system secure. You, like the Government, pretend there is an excusable liability.

For all intents and purposes they were. By decreasing gov’t borrowing the SSI surplus was in fact ‘invested’. Interests costs to the taxpayers are lower today because SSI surpluses decreased debt in the past. This is a return, believe it or not.

And what I am saying is that that same question exists now, and is just as unanswered. My answer is “general revenues and debt”. If we privatize correctly, the total cost in combined forced savings and taxes by 2040 should be lower than the cost of our current program. We WILL have to pay the taxes to cover SS/Medicare under the current program.

It is not unanswered. Current benefits are paid out of payroll taxes. If there is no payroll tax a substitute must be found. I don’t understand your use of the word “we.” Are you referring to the government, or to individuals?

It’s true that at some point the trust fund (yes, there is one) will begin to cash in its bonds, and taxes will have to be raised to do that, but that problem would exist if there were no Social Security at all. My point is that for now at least we have the payroll tax available and it is more than adequate to pay benefits. What happens when the tax is abruptly cancelled, or redirected?

“Current benefits are paid out of payroll taxes”

Well, sort of, yes. Money is fungible – the only numbers that truly matter to our long run debt level are “How much present-value revenue does the goverment collect from all sources?” and “How much (present-value) liability does the government incur in all programs?” There is no serious incentive link connecting payroll collections to current benefit payouts, so the dollar that went out to grandma has a heritage which could be from payroll, but it could be from income taxes, tariffs, whatever – it just doesn’t matter. Privatization reduces the first number, but decreases the second number by more. It does also have a timing issue – a lot of the reduction of revenue is front loaded, and the reduction of liability is back-loaded to later liabilities. So yes, the government will have to beg, borrow or steal more in the short run to cover that. But on net, the TRUE government net liability – the present value of all future liabilities minus the present value of all future revenues – will be smaller with private accounts, because we will be taking advantage of compounding interest and all that.

What we are really discussing is a “writ large” version of the decisions we all face – do we start saving when we are young with relatively low income, or do we wait until our income increases, and it is “easier” to save? The responsible decision is to start saving as early as possible, but because it involves sacrificing the big screen TV and the 10,000 cable system, people don’t do it. The responsible decision by government would be to stimulate savings by giving people control over their own SS, but it is costly in political terms, today. So I don’t expect them to do it. Government rarely, if ever, does the right thing, after all.

As for the trust fund – it is just a tax increase with a funny name. They couldn’t just increase the payroll tax as the extra costs come because that was irresponsible. They didn’t want to say “we are going to increase the payroll tax and take the extra money into general revenues so the debt is smaller when the crunch comes” because that was impolitic, and would raise the question of “why not cut spending in other areas?”, and they didn’t want to say “we will pay for the SS deficit when it comes out of general revenue” because that destroys the fiction that SS is a pension, not a welfare program. So they created this fiction – the Social Security Trust Fund. The below are two scenarios:

Revenues from Payroll Tax = X1
Revenues from all other sources = X2

SS costs = Y1
Other costs = Y2

Contents of Trust fund =Z

Without trust fund: Deficit is total liabilities minus total revenues, that is Y1+Y2 – X1 – X2.

With trust fund: Trust fund balance Z = X1-Y1

“Other” deficit is Y2-X2. Government takes Z and applies against Y2-X2, replacing it with “bonds”.

Deficit remaining is Y2-X2 – (X1-Y1) which is

Y1 + Y2 – X1 – X2, the same as without a trust fund.

the trust fund contains Z, government assets, in the form Z in bonds, which are government liabilities. Net contents, from the perspective of government = 0.

In other words, the trust fund was an accounting fiction to “cover up” a tax increase. They could have just as easily raised a less regressive tax, but they didn’t – they knew people didn’t want a government which ate that much of their incomes, so the creators of the Trust pretend they are keeping “our” money on deposit, while really just raising taxes.

And we wonder where Enron got their ideas…

Aren’t you contradicting yourself? If people generally save less than what they should then the problem doesn’t seem to be lack of control but the need for control. Paternalism isn’t always bad…unless you take a strong libertarian position.

But on net, the TRUE government net liability – the present value of all future liabilities minus the present value of all future revenues – will be smaller with private accounts, because we will be taking advantage of compounding interest and all that.

Aye but if the SSI Trust fund reduced the gov’ts debt then we are already benefiting from compound interest.

In other words, the trust fund was an accounting fiction to “cover up” a tax increase. They could have just as easily raised a less regressive tax, but they didn’t – they knew people didn’t want a government which ate that much of their incomes, so the creators of the Trust pretend they are keeping “our” money on deposit, while really just raising taxes.

In other words, gov’t saved the money since running a surplus (or decreasing a deficit) is by definition increasing savings.

Your argument lacks some validity, as you assume the bond market and American taxpayers would not have responded to a total increase of national debt, if the SS tax revenues had been separated. Does Anyone know the exact liability owed from those expended revenues? I have heard some wild estimates, and some which are too low to be even marginally practical. It seems these liabilities should be in excess of $1 trillion, but less than $3 trillion. lgl

Lawrence, you’ve presented an argument that the SSI trust fund caused gov’t spending to increase because it made gov’t’s deficits ‘seem’ smaller. This is an ‘ATM’ view of how gov’t behaves. Imagine you go to the ATM and take out $20…the receipt shows you have $100 more than you thought so you say what the hell and take out another $60 not realizing the ATM is a day behind. That’s not how gov’t spending decisions are made IMO. IN fact, I suspect that surplus’s actually end up constraining spending while deficits encourage it. After all, if you’re already maxing out the credit card why not order desert with dinner?!

But to your other point, I’m not assuming perfect information or perfectly rational actors in the bond market but it is rather silly to think a simple account ‘trick’ could fool the entire bond market. If this is the case then you should be able to make a fortune shorting T-bonds because the market has been ‘tricked’ into thinking the gov’t is at less credit risk than it really is.

Lawrence,

Assume for the sake of the argument that gov’t spending would have remained exactly the same regardless of how the Trust Fund was set up. By definition, if gov’t borrowed less in…say…1978…because the surplus was used to partially cover the deficit then every year since 1978 the taxpayers have enjoyed less interests expenses than they would have otherwise had to incur. That’s your compound interest.

The distinction between domestic versus foreign lenders is a distraction in this discussion. In both cases lenders are putting their money at stake, there is no reason to think they would be fooled by a simple accounting trick into thinking that the gov’t’s debt was any different than what it really is.

Let them keep more of their income, and promise them less future money, and they’ll be a lot more inclined to save.

1. Money put into 401K’s or IRA’s reduce your tax bite.

2. Money put into Roth IRA’s eliminate taxes on capital gains and other earnings on that money.

3. Capital gains are not taxed until realized as opposed to being taxed for paper gains (or credited for losses) thereby making it cheap to ‘buy and hold’ (i.e. save).

4. There’s a slew of tax free savings plans for medical care, sending your kids to college and so on.

With all these incentives, why hasn’t the savings rate gone up?!

The SS issue is a huge problem that accounting will not fix. I’ve already decided not to count on SS being available when I retire, even though I’ve contributed tens of thousands to the program over the years.

This is the issue – When SS started, 42 people contributed to the SS check of 1 senior. Today it’s less than 4. By the time I reach retirement, it will be 1 or less than 1. – How can any senior citizen expect that a single person making an average salary contribute enough $$ to support one senior until death – much less 1.1 seniors? It’s not economically feasible under any circumstances. The senior will either suffer because SS benefits will be cut drastically, or the worker will suffer under the burden of taxes. I guess we should not be borrowing from Peter to pay Paul, huh?

The second problem that hits us is the fact that as a society we are living longer but not dying very quickly. Our life-saving strategies (curse the Hippocratic oath) keep people living years past when an illness might previously have killed the senior. Instead of having a life expectancy of 67 (read this to be a 2 year SS income) as we did when SS started, we now have a life expectancy of 78 – a 16 year SS income, and this is only getting longer. So the people who are contributing to SS are expected to pay more $$ for longer periods of time because the numbers of senior citizens are increasing while the numbers of workers are not.

Fixing the SS was partly on politicians’ minds when they gave illegal aliens a free ticket to our country. They figured that would increase the tax base. They didn’t figure on two things – that the new citizens would continue finding jobs that pay “under the table” and so wouldn’t contribute to SS, that the new citizens would shop for products mainly at garage sales – thus eschewing state sales taxes, and that the new citizens would continue to send their cash out of the country to their families. (Keep in mind – this is a general picture – not everyone has held to this, but a lot of them do.) So, the ploy failed at upping the tax base and helping out SS.

I’d say we levy a national sales tax of 1% and levy a special tax on anything tourists do (rental cars, hotels, state parks, etc.) and use the income to pump up SS. (Why not levy against tourists? Just go to Italy and see the enormous taxes you have to pay on renting a car. They use it for their citizens, why shouldn’t we?)

Medicare is a health care insurance program that has not kept pace with health care costs. It’s too bad that we have had no caps on lawsuits against doctors, which could have reduced E&O insurance premiums and in turn not required those costs to be passed through to patients. Do you know that Medicare pays about $38 to a doctor or hospital if a nurse cuts that patient’s toenails? You can get an entire pedicure for about half that. It’s really too bad that we’ve set up a system where there are multiple middlemen between the pharmaceutical companies and the patients. We’ve got to peel back those layers in order to reduce the costs of medicine. We could also have the government create a program for young people to apply to become doctors – pay for their education as long as they spend 15 or 20 years as a Medicare doctor with a controlled salary, a promise of a decent pension and experience to go into private practice after the fact. We could insist that Medicare patients use only Medicare doctors, if they do go out of the Medicare network, then they would be penalized and required to pay for a much larger portion of the medical costs. Why not? That’s what private health insurance does. It’s how you control your spending. It’s really the only way to do so.