Social Security

Social Security has been a very good deal for the first few generations of participants.

All I need to hear in order to support its continued existence is that neither the contribution nor benefit calculations will change in any way, and that there will be no higher taxes of any other kind to make this happen.

I need a solid contract.

I want to hear that other government programs will be cut, or that other types of government debt will be allowed to default, in order to sustain Social Security.

Without a solid contract, I am absolutely in favor of letting the system gradually devolve into a minimal welfare program.

It’s intersting that conservatives want to put the cart before the horse. They want to debate how to phase out Social Security rather than why.

At this point let us ignore the libertarian arguments against social security. Yes it does alter the outcome of the free market. Yes it does infringe to a degree on the freedom of the market.

Social Security provides a degree of social stability by serving not only as a guarantee against poverty in old age but also as a basic income for all retireed people. Yes Warren Buffet doesn’t need social security but the Buffets of the world are less than 10% of the top 1%.

Let the Right come up with a convincing rational that Social Security could really be phased down. Say we let people ‘opt out’ as soon as they hit 30. Assume a large portion of the population does.

1. Does Arnold agree that the ‘opt out’ has to be real? In other words, if your investments go bad you can’t ‘opt in’ again at 60.

2. Does Arnold agree that if the gov’t doesn’t hold firm to ‘opt out’ as a rule, if it let’s people call ‘do over’, it will set up a horrible case of moral hazard. In other words, people will seek higher returns by taking excessive risks with their portfolios knowing that the gov’t is going to cave in and bail them out.

3. Considering how horrible even a Rightist gov’t like ours does in reigning in entitlements, how can Arnold seriously have us trust that a gov’t will seriously honor an opt-out provision for th enext 75 years? How can Arnold convince us that all this ‘reform’ does is keep a forced savings regime but make the savings optional? (In other words, turn it into a deficit machine)

Social Security is currently running a surplus, not a deficit. If the Trustees are even slightly wrong about economic growth, productivity, or a decline in immigration then it will run a surplus forever (or at least as far as we can reasonably project).

You can call the non-Social Security budget a deficit machine but at least that one is decided on by current voters. Planned benefits for tomorrows retirees are at least partly being meet by forced savings today thru SS.

What happens with an ‘opt out’ system? People opt out of paying payroll taxes today but there’s no reasonably way to guarantee that a Congress 30, 40, 50 years from now won’t agree to bail them out (especially during a bad year for the market) rather than let them face poverty or even a slightly less affluent retirement. In fact, there’s good reason to think that a future congress would bail out losers in a privitization scheme.

So what are we talking about? Granting a goodie today (no payroll tax for ‘opt-outs’) without any real guarantee that benefits won’t be paid tomorrow (you got hit in the crash of 2030? ok, you can have your check as if you never opted out in 2010). Cut through all the rhetoric about freedom and choice and all you really have is yet another case of the right using the gov’t’s borrowing power to give people $1.25 of gov’t for $0.89 in taxes.

Social Security TODAY is generating a surplus, in the future it goes into massive deficit and the “trust fund” is really an accounting fiction as it’s entirely comprised of bonds bought with the surplus: bonds that in the future will have to be paid back, with interest, out of other government intake (READ: Other Taxes). I suppose the SS trust-fund bonds could be sold on the secondary market to cover some costs at some point, but that’ll just drive up interest rates and they’ll still have to be paid off with other taxes. What was used to buy those bonds? Oh yeah, taxes. Just forwarding the liability along, but demographic shifts and benefit growth keep it from being indefinite. Seems about 2041 we start to have a problem.

1. If the surplus is an accounting fiction then why will bonds in it have to be sold to the public in the future? Which is it? Are the bonds real, deferring borrowing from the public into the future or are they not real? If they are not real then they should cause no borrowing in the future.

2. Using projections that are probably too pessismistic, SS does indeed generate deficits nearly a half century from now of around 2% of GDP. Why will funding this deficit be some type of nightmare while today we happily run deficits of 4% of GDP with hardly a peep?

3. If SS’s projections are to be believed then it is mathematically impossible for stock returns to meet future projections. You can’t assume a crappy economy to project SS into deficit and then assume a rosy economy for 401K returns.

4. By definition Social Security’s overall return has to be approximately the economic growth rate of the entire economy.

Bob,

Re; Convincing past generations was easy – “We’ll pay you a fantastic return.”

Exactly. And if they’ll promise me the same I’m totally on board. Put it in writing. Make it a law that the government cannot increase taxes, decrease benefits, or raise the retirement age. Make Social Security as firm a promise as T-Bills are now. If they’re willing to do that, I’m sold. If not, then I see no reason to trust them.

Personally, I am sympathetic to your moral hazard point. But that position – the losers will demand relief and Congress won’t be able to resist – can be used to justify pretty much any Fed Gov program/regulation. So I decline to accept it on the grounds that the possibility that Congress will screw up and create a moral hazard problem is far better than writing a blank check for any program Congress can think up.

Except privitization is being sold by the idea that the stock market is just another type of bank account that gives you 7% returns instead of 1%. We are asked to accept that SS is much riskier than it is because ‘some future politician’ can vote to cut benefits. Isn’t it proper to look at what is likely political behavior under an altnerate scheme?

only holds if they are wrong in the “right” direction. Again, the thread here is to go beyond the question of SS’s (in)solvency, accept that the program’s outsized historical returns are history, and to discuss whether support for the program has a solid intellectual foundation or just represents inertia (or in your case, a distrust of the Bushies).

Many people have made what I consider valid arguments that the Trustees are wrong in the pessismistic direction. If the Trustees are wrong in the optimistic direction then you have to bring those projections over to stock returns as well. Stock returns will be even worse if the Trustees are overestimating growth but ironically it will probably be easier for the Gov’t to borrow. Slow economic growth usually means low interest rates which lowers the cost of financing SS benefits.

ES,

Your argument presupposes “security” as the greatest good.

I prefer “arete” – virtue, excellence, quality. What great artist, athlete, warrior, explorer, or entrepreneur ever placed security first?

Your vision of life and mine are incompatible. You want me to die warm in bed. I prefer to die on a mountain top. It would not surprise me if you do not understand – but by what right do you apply your preference to me?

Im sure I should think about this some more before I reply because I will probably reply too quickly and leave myself open to being shot down.

First, I look at SS as a combination of several things that are much more then an alternative investment. SS provides three things: retirement income, disability payments and survivors benefits. Every comparison I have seen from the ones that want to do away with SS seeems to ignore the later two. But somewhere between a quarter to a third of SS payments are for these and I saw one calculation that for an average person this is the equivalent to having both a half a million dollar life insurance policy and a half a million dollar income protection insurance policy. These need to be added to the calculations. It is one reason all the comments about blacks getting a raw deal from SS because they have a shorter life span is incorrect.

Much of the problem with the analysis I see here is it sort of assumes the perfectly competitive model and we know that when it comes to human endownment that the perfectly competitive model does not apply. We do not start life on a level playing field. Some people are born into wealth or other advantages of intelligence, education, health, etc., that give them an advantage in the game of life. It all boils down to the old saying back in the rural hills, “them that has gets”.

I see SS as more a policy of protecting those that do not have. All the arguments about returns and the freedom of free market are great for the members of society that have a superior endownment of abilities. The law in its wisdom bans the wealthy as well as the poor from sleeping under bridges. If you are a college educated 30 year old from a prosperous family you can assume that you will be in the highly successful group that does not need SS.

But you can not be sure. My 35 year old son is now experiencing a failing business largely because his partner has a bad stroke last fall that left him unable to work — guess what, the partner had thrown everything in the business and has no disability or income replacement insurance.

So what it comes down to is that all the right wing argument about poor returns from SS are true for the winners in out society. And of course if you ask any 25-30 year old he will strongly believe he will be a winner. But we know everyone can not be a winner and many who now think they will end up being a winner will fail.

The entire argument is that SS is valid as a social safety net that protects the losers in our market system from the worse costs of their bad luck or poor decisions. Moreover, in the real world many people will be losers even though they have done everything right. Bad things happen to good people. As a humane — I will not say christian –society we owe it to our fellow citizens to provide this protection and ss, while not perfect, does a very good job of doing this at a relatively low cost.

Essentially every pre-capitalists society saw feeding and taking care of the elderly as part of the social fabric. But in a free market capitalist society that part of our social fabric was destroyed and SS is one of the ways we rebuilt that social fabric.

The poor return accusation needs to be addressed. By definition returns have to be benefits over contributions. If benefits are increasing then returns have to be positive.

If the doomsayers are correct, if Social Security will run huge deficits a half century from now then returns cannot be negative. How can the system run deficits unless tax receipts are smaller than benefits. If benefits are greater than tax receipts then those getting the benefits have to have paid in more than they got out!

Take the surpluses currently piling up in the Trust account. If those surpluses are depleted in 2041 that means benefits were greater than the surpluses plus the interest earned on the Treasury bonds. Hence a rate of return that has to be greater than the Treasury rate.

Mathematically, here is a simple model. Assume a very simple SS system with two time periods. The tax rate is 5% of GDP and the system simply pays out everything it takes in (a true pay as you go system).

Generation 1 Tax = 0.05 * GDP
Generation 2 Tax = 0.05 * GDP * (1+r)
r= the growth rate

Return for generation 1 = Benefits / Taxes = Generation 2’s taxes / Generation 1’s taxes = 0.05 GDP * (1+r) / 0.05 GDP

Which reduces to just 1+r. If economic growth is positive then SS’s returns are as well.

What may not be positive is an individual’s return. As has been pointed out SS’s returns are structured so that some people get more than others. An upper middle class earner may see negative returns but that is because the returns are given to others such as the widower and her children or a lower income earner is giving a disproportonate return and so on.

So does the economic interest of the state outweigh the interest of the individual in directing his or her own fate? I think not, but even if you think it does, why can’t we have a system that allows both? I.e., a welfare based program to provide both a minimal safety net and maximum individual choice.

Randy, you can’t have both. To the degree that your libertarian minded any social security system is going to be offensive and vice versa. There’s a trade off between providing for welfare and maximizing individual choice.

There is an argument that gets you out of the trade off. Some people have written that humans tend to overestimate ‘long shot risks’. In other words, they will worry more about being in a plane crash than a car accident. The implication would be that a free market economy will be a bit less than perfectly efficient. Why? Because people will devote excessive resources to avoiding ‘irrational risks’. For example, they might spend more on driving than plane tickets even though taking a plane is much more rational from a safety perspective.

If a gov’t policy addresses an ‘irrational’ risk and provides some security against it then the cost of that intervention in the free market might be smaller than the benefit derived from it. For example, imagine gov’t intervenes to regulate airline safety as well as car safety. By coming down harder on car safety they can correct the imbalance caused by people behaving irrationally when it comes to measuring the two risks. If, say, the regulation costs $150B per year but GDP increases by $200B per year due to the improved efficiency then you can argue that no one’s liberty has really been infringed. It would be a Pareto improvement for everyone.

Likewise, I think there’s a case to be made Social Security gives people a bit of an appetite for healthy risk taking. It’s subtle and hard to detect but I believe the economy today is probably stronger than it otherwise would have been because the ‘safety net’ allowed people to take a few more chances than they otherwise would have.

A rigerous economist will chide me for speculating. If such an effect existed I think it would be easy to overdo it, like adding some salt and pepper to a meal. Let’s say for the sake of argument that the effect is real. How much an imposition on liberty is it if the person making $75K a year and paying all these taxes would have made $45K per year in some type of libertarian alternate universe?

Boontown:

The surplus is an accounting fiction precisely because it’s all bonds. Taxes were collected, those taxes were used to buy bonds, the bonds are held by SS. However, the revenues from the sale of the bonds went into the GENERAL FUND like all of that stuff does and the money was spent.

What’s happened, then, is that the “surplus” consists entirely of promises to pay (that’s what bonds are, after all). Where do the revenues come from to pay the bonds back? Why, future taxes!

The bonds exist, sure, and could in theory, not in actual practice or under current legality (see massive upward preassure on interest rates), be sold on the secondary market to recoup some of the costs of social security. HOWEVER, those bonds would still have to be paid back eventually by revenues from future taxation. Meaning, of course, that this ponzi scheme has forced everyone to be taxed twice to achieve the same result.

And I never said I particularly liked the current huge budget deficit. I will say that there’s a difference between this sort of typical Keynesian manuever done to stimulate GDP during a downturn and the sort of structural problem we see with Social Security, but I don’t really think government should be in the habit of trying to manage the business cycle through fiscal policy.

In short: I’m concerned about the current government deficit incurred through wanton spending and the massive unfunded liability with social security hanging over our heads in the future.

First, let’s be honest with these 25-year olds ab out what Bush is proposing. He is not proposing to jointly phase out their government benefits AND their contributions to the system. Rather he wants to keep payroll TAXES at 12.4% but cut benefits as in the backdoor tax increase I’ve been mentioning. Let’s see how many young workers want that? Incidentally, I do suspect most folks would wish to keep at least some of the insurance aspects of the current system. But then the rightwingers who wish to sell privatization have horribly confused the issue so young workers think this is nothing more than a retirement program.

Randy wrote:

Your argument presupposes “security” as the greatest good.

I prefer “arete” – virtue, excellence, quality. What great artist, athlete, warrior, explorer, or entrepreneur ever placed security first?

Your vision of life and mine are incompatible. You want me to die warm in bed. I prefer to die on a mountain top. It would not surprise me if you do not understand – but by what right do you apply your preference to me?

Randy, please re-read my post, where I wrote:

one might oppose SS as a youth (like I do, and like I am)

I *specifically* said 2 things there:

1) I oppose SS (or rather, the idea of forced-savings, but SS too, given a better alternative, which I think does exist).

2) unlike Posner, I am a “youth” (under 25 years old)

I was merely presenting another highly-respected author’s view regarding Arnold’s solution; I did not say I necessarily *agreed* with Posner (not entirely, at least), as you assume. I have to say, however, that yours is the first time in about 2 years that I’ve been painted (inferentially, not directly) as a socialist; normally I receive the criticism of being a “market fundamentalist”, invariably from people the left…

Anyway, you can promote the great athlete, entrepreneur, etc. all you like, and we should (so as to give heroes to which we may all aspire), but the truth is, 99% of people are not great athletes, entrepreneurs, etc., to whom security is easy to achieve because they are extremely-wealthy. Most people are roughly-average types (check out a Bell Curve sometime) to whom security (particularly the security of having enough to live on once out of a job), typically employed by those “greats”, and if we are to base our economic policy in reality, we must base our policies around those people. But in order to promote excellence among individuals of the public, we also must tailor the policies such that the promote independence from the state (or more accurately, independence from other, average taxpayers), as much as possible.

Which, I might add, is why I believe Arnold’s solution — making SS voluntary — is exactly the right way to go (making the default setting, however, an opt-out one), and for the very reasons he stated in his TCS article.

Although I once used to agree with the idea, I am no longer in favor of abolishing all govn’t social safety nets (in absence of a better solution that is, e.g. a negative income tax – more on that in a moment), primarily because in my previous 2 years pursuing a pretty standard level of libertarian ideology (which has now moderated to more of a “classical liberal” position, in recognition of the occasional market failure and in recognition that the concentration of power, whether in the hands of government or anybody else, is the greatest threat to freedom), I’ve seen virtually *no* evidence that private charity will pick up the slack if we eliminate SS or welfare entirely.

And I’m not the only person to observe this problem/ideological inconsistency (particularly as I myself am not very charitable).

I’ve sought examples from time-to-time, and the only significant one I can think of involves the system of churches, acting as collection points for a variety of charitable causes. But that system doesn’t please me, because if we are to rely more on churches, that increases the amount of theocracy which governs our society — and I see “creeping theocracy” as just as bad, if not a worse problem than creeping socialism (which is without a doubt a serious problem in itself). This is a secular nation by design (1st Amendement, external statements of Washington and Jefferson, etc.), and it damn well ought to remain that way. I don’t know about you, but I really don’t want the U.S. becoming a theocratic hell-hole like Iran or Saudi Arabia, particularly given how far we’ve come as a result of the Enlightenment…

Yet, a system of increased religious determination over whether needy individuals receive help is sometimes exactly what libertarians offer as the solution:

It should be noted that there is one sure cure for the welfare problem—a solution that would eliminate the problem in one fell swoop: by the radical but connative measure of having every church and synagogue in the land become responsible for just one family receiving welfare. Just think what such a plan would accomplish!

I can’t agree with such a system (ignoring the fact that the author appears to be talking out his ass, with very little historical evidence of workability – only merely lots of ideological diatribe), unless we can secularize it, and we can’t really secularize it, because then people have no reason to contribute (assuming the always-rational homo economicus, as I tend to) — after all, church gives incentive by telling people that Jesus wanted people to help each other, and that if they do not, they are sinners in the eyes of the Lord (and depending on the sect, may or may not make it into Heaven; Lutherans believe you could have sex with the skull of Jesus and still make it into Heaven as long as you believe in God, for example).

But in absence of that teaching, of that indoctrination and (often) fear-mongering, what incentive is there to do so? “Why should I care about the starving man in the city sewer pipe – he’s not anybody I know, so who cares?”

In that secularized, rational-person model, there must be a real reason for Alice to give to Bob, not one based on 2000 years of religious mysticism and voodoo. Are they friends or relatives? Those relationships would certainly be incentives. But in urban areas, where one finds many of the poorest people (e.g. East St. Louis, which, if you’ve never been there, really *is* like a 3rd-world country), nobody knows anybody else, hence, there’s no incentive to be charitable to those people. Cities tend to be anonymous societies.

Here, I think the private charity works better in rural communities, because IME, those sorts of relationships are stronger than they are in urban areas. Not coincidentally, the libertarian claim of when private charity worked so well (the 18th and 19th centuries) were also the periods in which America was most-agrarian, or, compared to all the time since then, most-rural…

Invoke the Dec. 2004 tsunami tragedy as an example of private charity rising to the occasion if you like; I contend that is an exceptional example, as were the 9/11 attacks. They are exceptions in which people immediately recognize the need for charity – very much unlike the general case of the homeless man on the street with a cardboard sign begging for food/money, which we see (in urban populations, and (for some reason) San Francisco particularly) on a fairly-regular basis. It’s the problem of statistical irrationality: we in the U.S. worry more about terrorism, which has killed approx. 3,500 people on our soil in the last 11 years, than we do about car accidents (40,000/year) or smoking (430,000/year), because an act of terrorism is a much-more shocking event. The same problem, in my view, applies to other problems, e.g. poverty.

Moreover, it seems clear to me that if we are to be a risk-taking, entrepreneurial society, then we can encourage greater amounts of risk-taking and entrepreneurship by ensuring that some small, minimalist safety net exists for those who fail… I’m told by a staunchly leftist friend that the majority of the people he’s talked-to in food pantries, etc. are actually businesspeople whose businesses failed and which, after investing every penny they had into said businesses, bankrupted them. That is, they are people who took a risk on a business and failed; that sort of risk-taking, quite-obviously, ought to be encouraged if we are to have a market-oriented economic system, so as to bring more competitors into the market, but simultaneously, there must exist some punishment for failure (and therefore, incentive against failure) – e.g., living in a poorhouse with little/no property to one’s name and only crappy food to eat.

I’m not advocating massive safety nets, only minimal ones, smaller than those we have today. (I’m still wide-open to the private charity argument, BTW; my point is that I’ve found no serious evidence of it actually working as a free-man’s replacement for welfare, etc.).

Welfare ought to provide a monetary payment capable of subsidizing only little more than a drafty, non-air-conditioned dorm room (or whatever the cheapest housing is that is within, say, a 20 mile radius of their current location (so they can maintain contact in their current social relationships which will help them find another job)) and dorm-quality food (as Bryan Caplan suggested here recently), and only so long as one proves they are making a worthy attempt at finding work. It absolutely must be a system which emphasizes getting back to work, not lounging around on the taxpayer’s dole; yet we cannot ignore entirely that poor people inevitably will arise in any economy for any variety of reasons, and dealing with this fact is one of the weakest pillars of libertarian thought.

SS ought to be optional (at least perhaps 50% of one’s payments normally allocated to it ought to be), but opt-out by default, and integrate, to some considerable degree, a system of privately-owned accounts into which the owner may invest however they see fit. I also think SS ought to pay out on a graduated scale, based on one’s lifetime income (determined from IRS tax returns, seeing as we won’t be abolishing that abominable agency anytime soon); lower incomes receive more, higher incomes receive less, but the difference should not be so much that it unduly encourages people to take lower-paying jobs and allow them to live off other, higher-paid people (indeed, that’s partly where the voluntary participation and lack of tax hikes comes into play, seeing as SS already is not generous enough to do this). Additionally, the SS recipient age needs to be raised from the current 67.5 to something recognizing our longer lives. When SS was created in 1935, the life expectancy was about 62 years. Today it’s 77, and should approach 83-90 years by 2072. Even so, SS’s pay-out age was 65 when SS was first created.

Still, like it or not, so long as there are those living in poverty (an ever-decreasing amount since the Reagan-era, I might add, due to his policies which grew the economy), there will need to be some amount of redistribution to keep those people from starving to death, freezing to death, etc.. We should greatly encourage private charity first, but where that fails (and it will never be 100% successful, and nor can any program be), inevitably government must fill in the cracks, unless we want people dying and rotting in the streets (literally). Charity is a first-line safety-net above the floor; govn’t *is* the floor.

As a real-world example of why IMO this is necessary, take the example of the high-schooler who gets leukemia. Assuming he/she survives, in the state of IL, at least, there is not a *single* private insurance company who will insure them. None, period. A preexisting condition like that is much too expensive for them to consider insuring.

For such extreme cases, we have a govn’t-run, state-level healthcare system to cover them. Your alternative would be, what? Private charity? To cover $500,000 medical bills? Let’s be serious… Again, let the market work, whereever possible and as much as possible, and where the market fails to provide critical (not “convenience” or “comfort”, but “critical”, i.e. health, housing, or retirement) services, let the state handle those remaining outlier cases.

Finally (and this more-directly addresses your concern of forcing SS down peoples’ throats), IMO both programs ought to be restructured such that they are implemented at no higher than the state-level; this allows some states to eliminate SS entirely, whereas others may expand it, but regardless, I know of nothing in the Constitution which permits them at the federal level. This restructuring would allow you the freedom to decide which sort of system under which you would like to live. Of course, I don’t see such a federalist idea occurring anytime soon, hence I rarely raise it…

I am quite in favor of making such welfare-oriented programs more-voluntary in structure, and at least on paper, I’m a big proponent of replacing them entirely with Milton Friedman’s negative income tax idea (although, given some flaws people cite relating to it, the plan may need some tweaking). Whether the NIT could replace SS or welfare in actuality, I don’t know, but if it could, I would be all in favor of doing so… And even if the NIT is ultimately unworkable, I think the general thrust of the idea of a NIT is the right one.

In any case, you can count on me as one of those young people who Cato says is more likely to believe in UFOs than in the idea that I’m going to receive SS “benefits” upon retirement… 🙂 I favor *minimal* government, not *no* government.

My challenge to the Left is to come up with a convincing rationale for young workers to renew Social Security, either voluntarily as individuals or collectively as a group.

There is no rationale. If you ask a group of 20 year olds if they want to pay money to SS or take a pay raise in the form of keeping their SS payroll taxes – they will take the pay raise.

I do not intend this statement as a SS put down, but common sense tells me that most would take the raise.

ES,

You are correct, I did not read your post carefully. For that I apologize.

I did read your last post. There is too much to comment on all of it, but there is one line I would like to respond to;

…yet we cannot ignore entirely that poor people inevitably will arise in any economy for any variety of reasons..,

Why can’t I ignore them? There are 7 billion people in this world and I ignore nearly all of them. The belief behind Social Security is that it connects us all in some sort of greater national good. I think it is more accurate to say that it has unified us as tools of the state. Those who value security over freedom have power, so I must accept their laws – but I do not accept their values.

“Eppur si muove”

“Convincing past generations was easy – “We’ll pay you a fantastic return.”

You betcha!

But the bill for that is now coming due, which promises all future SS participants the inverse, miserable to negative returns.

And their political effect will be just the opposite of that of the former “great” returns — how are you going to keep voters happy with that?

(Especially when they realize how negative their returns will be after paying for their benefits twice, first through payroll taxes and then again through income taxes to remimburse themselves for all the payroll taxes the gov’t consumed rather than saved)

Of course the negative return is what is going to do SS in, end it as we know it, in another generation.

I can see why liberals would be in denial about that, for purposes of short-term political expediency. But why so many conservatives think the political problem with SS is the 75-year funding gap is beyond me.

~~~~~~~

Except privitization is being sold by the idea that the stock market is just another type of bank account that gives you 7% returns instead of 1%.

Well, look: you can invest your IRA and 401(k) and everything else in short-term T-bills to get near zero return (probably more than you’ll get from SS!) with absolute safety until the day you retire and beyond. The Treasury will be happy to roll the T-bills over for you automatically forever.

But if you instead invest your actual IRA, 401(k) etc., in some kind of diversified portfolio of market investments earning returns higher than zero, then your jibes at those who want the very same in SS are not very persuasive.

Which is it?

We are asked to accept that SS is much riskier than it is because ‘some future politician’ can vote to cut benefits.

Hey, the Democrats are already demanding benefit cuts as policy!

Pelosi and Reid are all over the place repeating their mantra: “When the shortfall hits we should just should do like Ronald Reagan and Tip O’Neil did when they faced their shortfall”

Well, Ron and Tip cut benefits by 50% of their shortfall. So we know the Democrats want future returns to be even more negative than they are scheduled to be now.

And when that future arrives, they’ll get credit for it!

During the 1990s, much of the SS surplus was not spent, but instead, was used to pay down publicly held debt. Publicly held debt declined from 49% of GDP in FY 1993 to 33% of GDP in FY 2001.

Since then, all of the SS surplus and then some has been spent, with most of that going to tax cuts.

So we’ve got one of two outcomes. One, the money has been squandered on tax cuts. Or two, the Social Security trust fund surplus is now incorporated into growth of the economy at large.

If it has been squandered, the logical thing to do is to cancel the tax cuts immediately, so the $2 Trillion of surplusses that the trust will generate in the next 15 years will be used to pay down publicly held debt.

Edge: you said that the surplus was used to lower the publicly held debt during the 1990s from 49% to 33% of GDP.

I certianly don’t challenge the validity of your facts. But how much of that was because we paid off the debt, and how much was due to the fact the the economy was growing faster than our debt. Very little of our existing debt was paid off. The problem with the concept of “prepaying”, as Greenspan learned, is that additional goverment revenues lead to future expenditure increases that are greater than the increase in revenue! (Ex. a 5% increase in tax revenue leads congress to increase spending by more than 5%) Ken Smetters (sp?) has a paper documenting this phenom.

Edge,

1. A tax reduction that results in growth of GDP is not “squandered” because it reduces the debt as a percentage of GDP. Recommend we look for ways to reduce government spending in ways that would allow the tax cuts to be made permanent. If the economy stops growing, Social Security will fail – no matter what course of action we choose.

2. The bonds in the trust fund are not real bonds because they have no owners. You could say that the government owns them, but what kind of an owner has an incentive to not pay itself back?

(Especially when they realize how negative their returns will be after paying for their benefits twice, first through payroll taxes and then again through income taxes to remimburse themselves for all the payroll taxes the gov’t consumed rather than saved)

Let’s think about this paying twice concept.

Take my simple model. Let us suppose that Generation 1, in addition to paying for generation 0’s retirement, wishs to ease the burden on Generation 2. So in addition to taxing themselves 5% of GDP they also tax themselves $100B. This $100B is a surplus and assume the interest rates are 10% per generation. Furthermore, let us assume that some foreign bank like China’s central bank purchses all gov’t debt.

When Generation 2 arrives on the scene they find generation 1 retired and no longer paying taxes. Their ‘debt’ is 5% of GDP to pay for generation 1’s retirement. However, they have a bonus. Since generation 1 reduced their borrowing from China by $100B the interest bill for generation 2 is now $10B less. Generation 2 may indeed choose to borrow $100B instead of paying their full 5% of GDP tax. In that case the cost to generation 3 will be $10 (10% of $100B). If this surplus did not happen then the accumulated costs would be $31B ($10B for generation 2 (10% of $100B) and $121B for generation 3 (10% of $110B)).

Just delaying the borrowing for a generation takes the cost from $31B down to $10B. A dramatic difference.

How did this happen? Simple, anything that reduces gov’t borrowing today reduces accumulated interest expenses tomorrow. The Social Security surplus does not in itself increase Social Security benefits. Hence Greenspan was correct to have pushed SS into a surplus in the 80’s.

beakburke, the public debt increased by $71 Billion from 1993 through 2001. We increase the public debt by that much every couple of months now.

Public debt actually fell by $450 Billion between FY 1997 and 2001. We’re increasing the public debt that much every year now.

Spending during the three Reagan/Bush terms averaged about 22% of GDP. Spending in Clinton’s second term was about 18.5% of GDP.

Revenues during the three Reagan/Bush terms averaged about 18% of GDP; during Clinton’s second term, revenues averaged 20% of GDP.

I’ve no doubt that Smetter’s econometrics on the Social Security surplus are factually correct, but all it tells you is that Reagan, Bush, and Bush ran up big deficits during the period when the Social Security trust fund was running surplusses.

The fact that most of the surplus was saved during the Clinton years, with a combination of an increase of revenues and constrained spending, was not enough to overcome the sixteen years of profligacy.

Hence the econometrics tell you Social Security surplusses increase overall spending, as if that were some sort of mathematical constant like the speed of light, when in fact, it simply reflects political choices made by specific administrations, with different adminstrations making different choices.

Several reasons why I don’t buy the “more revenue means more spending argument”

1. Much of the gov’t budget is on autopilot. Spending like SS benefits, disability, unemployment, welfare and so on tend to go up in bad economies and down during expansions. Many sources of tax revenue go in the opposite direction. When the economy is doing good income taxes, payroll taxes all bring in more revenue while many sources of automatic spending go down.

2. IMO it is an unrealistic model of the spending constraints policymakers face. Suppose you take $40 out at the ATM. You look at the balance and notice it is $200 higher than you expected. You figure what the hell and take out another $60 forgetting that you wrote a check for $200. This holds for individuals but large organizations face different constraints. One side determines what needs to get spent while another side simply figures out how to finance it. There is no ‘pot of money’ that everyone can dig into and spend as they please.

3. Many explanations have revolved around weak psychological theories. They go something like this: The public will tolerate a $300B deficit but not a $400B one. Therefore politicians produce a $400B deficit but lump SS’s $100B surplus into it. Since these numbers are so huge why would the public differentiate between the two? For those beyond casual news watchers, people like bond traders who make a living following the gov’t deficit it is hard to believe they would be fooled by such a simple ploy.

Total government debt during that time increased when you include intra-government holdings.

OK. But if you adjust for inflation, the total federal debt decreased from FY97 to FY01. If you state as a fraction of GDP, the total debt decreased from about 66% of GDP to 58% of GDP.

Put another way, the fiscal trend of the Clinton years was good to excellent. The recent fiscal trend can only be described as a crisis.

I agree with you about the gov’t’s shift away from long-term, stable rate debt (30 year bonds) to short term debt. Like many of Bush’s economic policies, it suffers from a short term focus at the expense of the long run. Short term debt is cheaper than long term debt but carries with it interest rate sensitivity. Also, the 30yr bond was discontinued when it appeared we might have actually paid off a significant portion of the national debt. Bringing it back would be politically embrassing for Bush even if it is the right policy. I would add 50 year bonds to the mix as well.

The policy of financing debt with shorter maturities started under Clinton, and Bush has continued those policies.

The policy of financing debt with shorter maturities started under Clinton, and Bush has continued those policies.

Yes, it was the right policy at that time. If you’re paying down debt it makes sense to shift it to shorter term since that reduces interest costs & the fact that you’re on a trend towards repayment lessens the need to worry about interest rates going up. Now that we are in borrowing phase (massive borrowing to be more specific) we should lock in rates while we can with long term debt.

The debt’s more or less the same whatever you do. If your debt is $1T and it is all in 3 month bills then every 3 months you are going to have to refinance and pray that interest rates haven’t gone up. If it is all in ten year bills your rates are locked in much longer.

There’s an interest savings to borrowing short term since short term yields are usually less than short term yields but I don’t see how that reduces overall borrowing. Whether you finance your $300K home with a 15 yr mortgage or 30 yr mortgage it is still borrowing $300K.

I agree that reducing interest expenses by borrowing short results in less borrowing…obviously any spending cut including cutting interest expense will lower gov’t borrowing. I think we also agree that this is only true in the very short term. In the long term there is a risk that borrowing short will result in increased interest cost when the debt you’re rolling over gets caught in a period of rising rates.

I don’t see the application to the social security surplus. Since rates are always positive any decrease in the deficit will always decrease interest costs unless that decrease actually causes more increases in spending down the road. That would cover the case of borrowing short to save on interest and getting caught when refinancing.

“Social Security is currently running a surplus, not a deficit. If the Trustees are even slightly wrong about economic growth, productivity, or a decline in immigration then it will run a surplus forever…”

If they are only slightly wrong in one direction. Of course, if they are slightly wrong in the other direction, then its deficits will be massively larger.

And here’s the one place where they are most obviously likely to be wrong: they are projecting 3% real return on T-bonds going forward when…

(1) the actual real-world average return on T-bonds since 1946 has been less than 1.6%; and

(2) we now have the Baker/DeLong/Kruman claim that future returns will likely be lower in the future than the past.

As Arnold has pointed out right here, lower future bond returns than projected mean the future SS deficit will be bigger than currently calculated. A 1.6% return means the 75-year SS deficit facing the Treasury is $11 trillion current value rather than the officially calculated $5.5 trillion, and the open ended deficit is much larger than that.

And if B/D/K are right about future returns being even lower than that … ouch.

Jim,

I poked around http://www.ssa.gov/OACT/TR/TR05/V_economic.html#wp168823 and found the following:

In developing a reasonable range of assumed ultimate future real interest rates for the three alternatives, historical experience was examined for the 40 years, 1964-2003, and for each of the 10-year subperiods, 1964-73, 1974-83, 1984-93, and 1994-2003. For the 40-year period, the real interest rate averaged 2.9 percent per year. For the four 10-year subperiods, the real interest rates averaged 1.6, 0.8, 5.6, and 3.7 percent, respectively. The assumed ultimate real interest rates are 3.7 percent, 3.0 percent, and 2.2 percent for the low cost, intermediate, and high cost assumptions, respectively. The ultimate real yields are assumed to be reached by the end of the short-range period. These annual real yields are the same as those assumed in the 2004 report. These ultimate real interest rates, when combined with the ultimate CPI assumptions of 1.8, 2.8, and 3.8 percent, yield ultimate nominal interest rates of about 5.5 percent for the low cost assumptions, about 5.8 percent for the intermediate assumptions, and about 6.0 percent for the high cost assumptions.

It would appear they used reasonably accurate historical data to construct an estimate of interest earnings. A prolonged decline in real interest rates would likely be meet with a prolonged increase in real investment (or perhaps a depression). In that case incomes should generally rise so while one aspect of SS’s projection may worsen other aspects should improve.

It may be useful to look at Table V.B2 on http://www.ssa.gov/OACT/TR/TR05/V_economic.html#wp168823. As far as interest rates are concerned, periods of high rates (such as 80-85) were meet by high unemployment, periods of low rates (see 60-65, 65-70, 95-00) were meet by low unemployment.

It is more likely that if interest rates fall (which by itself is bad for SS) that unemployment wouldn’t also fall (which is good for SS). Of course, an overall decline in interest rates is good for the entire budget since the Fed. is a net debtor so even if rates fall with all other variables remaining the same SS’s projected deficit would increase but so would the Federal budgets ability to handle a larger deficit.

Yes it is possible to construct a perfect storm scenero but you have to ask what is likely to happen. Interest rates do not usually change without other important variables such as unemployment, income etc. also changing.

“Yes it is possible to construct a perfect storm scenero but you have to ask what is likely to happen.”

You consider the average since 1946 to be a “perfect storm”?

Return today is a lot closer to 1.6% than 3%. Are we living in a continuous perfect storm?

As to what’s likely to happen, Baker/DeLong/Krugman are on record as saying the trustees are too optimistic about returns and what is likely is that the average return going forward will be less than the average since 1946.

Of course, whether you believe them is up to you.

come up with a convincing rationale for young workers to renew Social Security, either voluntarily as individuals or collectively as a group.

There is no convincing rationale. As a twenty something, why should I pay for your retirement? It shouldn’t come as a suprise to anyone that you will get old and one day want to stop working. There is no need to insure against an event that is predictible and likely. Plan ahead and quit heaping your irresponsibility on others. There is no way my generation will be able to get anywhere near the deal that current retirees have and that reason alone is why the program should be eliminated. If you cannot take responsibility for yourself you deserve to starve to death in your old age. And another thing, the arguement that it is an intergenerational covanent is complete B.S. What you are basically saying when you make that statement is “It is okay for me to forcible take a portion of your paycheck (steal from you) because someday you will be old and you can steal from someone else” How about we create an intergenerational system for old people to pay for young people’s first home purchase? Sound like a good idea Boonton? How about you pay off my generation’s student loans too while you are at it? How about buying me a car too? For some reason I don’t think the 65+ set would go for that. Finally, I place the value of the disability and survivors benefits at ZERO. It is very easy to purchase both a disability policy and a term life insurance policy at rates that are far lower than those built into SSI. End social security now and let those who refuse to save do so at their own peril.

Jim, I poked around … It would appear they used reasonably accurate historical data to construct an estimate of interest earnings.

The problem you’ll find with a little more poking is that the interest rate is only a portion of the return on bonds — the rest being change in capital value.

The average return on federal bonds since 1946 has been under 1.6%.

Stephen Goss, the chief actuary, has defended the projection of a 3% return by citing the period since 1981 when it was like 6% real. However that was the historic bull bond market of the last 100 years — as both nominal and real rates fell from the all-time highs of the oil crisis years, driving bond prices up all the way until 2003. And it took that bull market to get the post-WWII average return up to 1.6%.

But now that goes into reverse. Rate rises starting from the 2003 40-year low drive the value of bonds down — including the bonds in the trust fund. Long-term investment mavens like Bill Gross and Jeremy Siegel are predicting minimal to negative returns for years to come from the long bonds such as are held in the trust fund.

And if B/D/K are right about returns being lower in the future than the past, then they’ll be even lower.

And if Krugman was right in his “mortgage” column about the “train wreck” coming with exploding inflation and nominal interest rates rocketing upward within the life of his mortgage, then you are going to be able to write down the value of the bonds in the trust fund to zip — nobody will even be able to pretend they are worth anything — while the cost of the benefits they are supposed to pay for surges ever upwards.

I doubt the political effects of negative returns will be as great as Jim depicts. First of all returns are distributed so even in a generation that may experience a negative return there will be some who will get great returns and others that will get poor ones (likewise, even in the period of excellent returns there were people who experienced worse returns than others).

Jim agrees that a true pay-go system must have returns equal to the growth of the system’s revenue base (payrolls which are tied to economic growth). As you recall, a pay-go system simply pays out in benefits everything it takes in in taxes.

Therefore in order to have excessive returns to a generation the system has to pay them more than was taken in by taxes. To my knowledge, Social Security has never run a serious deficit…having to tap funds from general revenue. The only significant deviation from a pay-go system was the Trust Fund surplus which generates a return as we have also seen.

So the problem with projected negative returns are probably more due to low projected economic growth as well as the fact that many attempts to project returns do so for a ‘normal male worker’. The returns for such a person are below par by design. The benefit system is progressive so some of what would have been better returns for the ‘normal worker’ are going to low wage workers, disabled, widowed spouses, and surviving children.

This isn’t going to cause some type of great political backlash because these decisions were made by politics to begin with.

Borrowing Delayed

So instead of borrowing the $1,000 10 years from now, one decides to buy a 10-year zero-coupon bond that will mature with a $1,000 value. Say that bond earns 5%, then one has to come up with $614 to buy it today — which one might do by issuing $614 of regular bonds.

So should an individual buy the 10 yr zero coupon for $614 on his credit card? Obviously that would be silly unless he happens to have a card with a long term rate of less than 5%. The gov’t borrowed money this year, the social security surplus caused it to borrow less. Even if it simply delayed the borrowing for 10, 15, 20 years the surplus generates a return in reduced interest expenses.

If the gov’t can get returns on its money in excess of its borrowing rates then it should borrow money and reap the profits. Social Security has nothing to do with it, if project X will yield the gov’t 7% and the gov’t borrowing rate is 4% then its a no brainer.

If stock portfolio’s will yield 10% and the bond rates are 5% and there’s no other complication then gov’t should simply borrow lots of money & give it to everyone in ‘private’ stock accounts. If gov’t borrows $1,000 per person why not make it $10K, $100K? At its gut that is what Bush’s plan is. You’ll note that Social Security is just a smokescreen. If Social Security never existed Bush could propose this plan.

Stephen Goss, the chief actuary, has defended the projection of a 3% return by citing the period since 1981 when it was like 6% real. However that was the historic bull bond market of the last 100 years — as both nominal and real rates fell from the all-time highs of the oil crisis years, driving bond prices up all the way until 2003. And it took that bull market to get the post-WWII average return up to 1.6%.

If real rates fall then the bonds in the Trust fund will experience capital appreciation. Lower interest rates are associated with higher bond prices and vice versa. Inflation & nominal interest rates matter a lot less here because the whole system is indexed to inflation. If the SS bonds are not and inflation picks up significantly in the future then who is really costing us what? Inflation without a supply shock would almost certainly mean Bush’s huge deficits are being paid for by inflating them away. Is that Social Security’s problem or the rest of the budget?

Back to basics, Budget = A + B. A is in surplus and B is in deficit. Is the problem with A or is it with B?

Andy, Sorry I called you Jim up above. But again, well said.

Jason, “…my benefit is assured by the government’s ability to tax me. Try as I might, I can’t get excited about that argument.”

Well said – funny too.

Boonton;

Re; How exactly has it become more burdensome for you to save for retirement?

Perception Boonton. Perception is everything. Are you seeing it now? The Democrats were so sure they were going to be allowed to raise taxes to make everything seem alright. Its not gonna happen. The younger generations aren’t going to allow it.

Boonton:

What you seem to be missing is that the shortfall will be paid by ME, not by my children, because I have the misfortune of having to fund retirements for the largest group of unemployed old ever seen by the system and with the least help from other workers ever seen by the system. Bonds will need to be redeemed long before I retire. 2018 or so is what the SSA is talking about. Every bond that gets redeemed will be coming out of my pocket. Every interest payment will be coming out of my pocket. It doesn’t matter to me if you call it a payroll tax hike or an income tax hike. I don’t care. The only way around this is to ‘refinance’ the debt by writing IOUs on top of IOUs to screw my children.

That is on the taking side. On the giving side, there is no ‘fix’ to the problem that doesn’t come out of my pocket, too. Some say we change the index. That reduces my benefit. Some say we means test the program. That reduces my benefit to zero. Some say there is no problem. That leaves me holding the bag for the shortfall or passing it on to my children.

The medicare problem is relevant in the sense that it is yet another unfunded entitlement that the most powerful lobby in the history of America is giving themselves. There is no way to fix Medicare without it coming out of my pocket. The only way people get free drugs is to take them from my pocket. Social security remedies should absolutely be considered in this context, because all of these drains on earned income of young workers add up to an absurd burden once we consider that I am supposed to be able to save for my own medicine (which apparently no one else is responsible for) and I am supposed to be able to save for my own retirement (which apparently no one else is responsible for, either). I am NOT complaining that I don’t have access to savings vehicles. I am complaining that entitlements to the Grey Hoard are directly eroding the amount of money I can afford to put into those vehicles.

The private account, for me, is a hedge against the AARP demanding more and more absurd welfare from fewer and fewer workers. It is a guarantee that some small portion of the tax rate I’m going to have to endure actually gets returned to me. To answer the question in advance – yes, I’d be fine with a tax cut that put the same amount of money in my hands so I could put it in an IRA or medical savings account.

Concerning the Bush Tax Cuts:

1) They are the tax rate I have paid for the meaningful years of my employment so far.

2) The alternative is not higher taxes and less structural problem in social security and medicare – it is higher taxes and the same problems in each. The government spends what it gets. If there is one, that is the lesson to be learned from the social security trust fund.

3) They were enacted with the knowledge of what was coming for young workers. Every time the AARP opens their mouths, more money flies effectively out of my wallet. The only question is when I have to pay.

The gist of the problem can be summarized in the Trustees report.

Under the intermediate assumptions, OASDI cost will increase rapidly between about 2010 and 2030, due to the retirement of the large baby-boom generation. After 2030, increases in life expectancy and relatively low fertility rates will continue to increase Social Security system costs, but more slowly. Annual cost will exceed tax income starting in 2017 at which time the annual gap will be covered with cash from redeeming special obligations of the Treasury, until these assets are exhausted in 2041. Separately, the DI fund is projected to be exhausted in 2027 and the OASI fund in 2043. For the 75-year projection period, the actuarial deficit is 1.92 percent of taxable payroll, 0.04 percentage point larger than in last year’s report. The open group unfunded obligation for OASDI over the 75-year period is $4.0 trillion in present value, $0.3 trillion more than the unfunded obligation estimated a year ago.

We see two problems:

1. The Baby Boomers.
2. After the boomers, longer lifespans and lower fertility slowly raise costs (i.e. raise benefits).

#1 is already addressed easily by having SS run a surplus today. In essence the Baby Boomers are paying today for their low fertility by paying more in SS tax than is going out in benefits. This is generating a return via delayed/reduced borrowing that will primarily be reaped by future workers…who will pay for the Boomers retirement.

#2 is by definition less of a problem because:

A: The increases are more mild.
B: They are farther out in the future, which by definition makes them less real today.

Assuming they are a problem then the solution is to simply maintain the system as a true pay-go system. Index the retirement age to lifespan or raise taxes 1.9% of payroll.

What the former does is keep SS a roughly constant 5-6% of GDP (and as we have seen ‘returns’ are not an issue with a pay-go system that stays at a roughly constant level of GDP). What the latter does is let SS increase to be a larger portion of GDP (still less than 10% I believe). The necessity for drastic overhauls simply does not exist. The ‘crises’ atmosphere being put forth is nothing more than an attempt to distrct from rational debate for those with an agenda.

Finally if productivity growth is higher than projected then this argument will become moot. Benefits can increase but since GDP will increase just as fast or faster they will not eat up more of income.

We’re refinancing the rest of the public debt all the time.

We’ll have to refinance most of the $1.2 Trillion of debt that the Bush administration has issued to the public within about three years. That’s almost as much as all of the assets accumulated in the Social Security trust fund, and we racked up that debt in just four years.

The White House projects it will have issued about $2 Trillion of public debt by the end of 2006. Thus, the Bush administration will have placed as big a burden on your future earnings as redeeming all of the trust fund bonds by the end of next year.

The lesson we’ve learned the past four years is that Democratic Presidents tend to pay as they go, while Republican Presidents tend to bring in less revenue and spend more, deferring the burden of paying until after they leave office.

It’s too bad you do not differentiate between Medicare and Social Security since they are two very different animals. Social Security’s ‘risk’ to the taxpayer is that individuals will live longer than expected. That’s about it. Demographics is not a very exciting science. They knew in the 1930’s the portion of Americans over 65 in the late 90’s within a margin of error of less than a percent. Barring any revolution in medical care, life expectancy changes very slowly.

Medicare is different. Not only must you project all the elements you have to project for SS but you must also project the cost of healthcare. In reality you aren’t even projecting the cost of healthcare but the cost of undiscovered healthcare. The drugs and procedures of today will be generic tomorrow, it will be the stuff that we don’t even know about that will be costing the real money.

This makes straight-lining Medicare difficult & its projections a lot less reliable. If Medicare was redone along the lines of a voucher system where each person gets a set medical benefit then it would be easier to control and project.

It is all money coming out of my pocket and going to old people who didn’t save anything. They didn’t pay for themselves and the older generation. I am being told not only that I have to pay for both, but that the demographics don’t matter. The need to cash in the debt in the trust fund in my lifetime means that I will be paying this bill and not my children.

You could not have paid for both. The surpluses started in the 80’s & will end around 2017. That’s a nearly 40 year difference. If you were paying the taxes that generated the surpluses then its unlikely you’ll be working when the bonds will get cashed in (either thru taxes or borrowing). You may straddle both periods a bit but assuming a 45 year working life (age 20-65) it ain’t happening.

http://www.ssa.gov/OACT/TR/TR05/VI_cyoper_history.html#wp77658 shows the fund began its modern increase in 1984. (Actually there were surpluses before that so the balance wasn’t $0). That means if you started working then you would already be 41 now (assuming you start at age 20). If the surplus starts getting cashed in in 2017 you’ll be 62. Maybe you’ll be paying taxes another 5 years but that’s it. If you started working after 1984 that means you’ll be benefiting from the accumulated surpluses of those who paid taxes before you so your ‘double taxation’ burden in 2018 or whatever will be that much less.

I am not demanding that benefits remain the same and that taxes never go up. I am pointing out that any combination of those two things make social security a worse deal for me.

True but this is due to the fact that the worker/retiree ratio is not a measure of returns but a trade off. We are moving towards a society where people work a smaller portion of their total lifespan than they used to. This is happening on both ends, people stay in school longer before entering the workforce than they used to and while they may work later in life they are living longer on the other end.

If you rise the retirement age (or keep it the same but cut benefits) you make the benefit end of SS worse but you make the tax end better. Even in a world of nothing but private account the fact remains the consumption of non-workers (retired, severely disabled, children etc.) has to be provided by workers. If a society decreases the proportion of workers then the burden per worker must increase. This need not be painful for the workers, though. If the workers increase their productivity faster than the increase in the ratio of non-workers then their standard of living can still go up despite the fact that they have to ‘care’ for more people.

Boonton,

I ran the numbers. I didn’t calculate on needing private savings – it would have been extra.

What has changed; I’m no longer certain that I can count on the original estimate from Social Security, and I no longer believe it is moral to burden my children with paying for my retirement.

Solution; take care of my primary responsibilities first and forget about retirement.

Its just the right thing to do. I give you some credit for helping me reach this decision. Our discussions have been enlightening. If you are right and Social Security is fine, then I have no worries. And if you are wrong, better me living out of the Jeep than my daughters.

Brad de Long cites a great essay today on Social Security from Gene Sperling http://www.j-bradford-delong.net/movable_type/

Privatization Plans Are All Designed to Devalue the Progressive Social Insurance of Social Security. Advocates of partial privatization have long been guilty of ignoring, underestimating, and undermining the social insurance value of Social Security – providing a deceptive picture of the true significance and benefit of the program. Social Security is a compact among all Americans to ensure a modicum of economic dignity no matter what life may bring. Much of the value of Social Security lies in its role as insurance against the threat to economic dignity that can come though disability, through the early death of a provider, poverty, or longevity that can drain savings. For example, currently one-third of payouts go to survivors or workers who have become disabled.

Despite this, privatization advocates continually paint a distorted picture of Social Security’s value by describing it only in terms of its return on investment. Everyone would think it was absurd to tell parents who had bought auto and fire insurance that they had been terrible investors and had robbed their children of their inheritance because – with no accidents or fires – they had a negative return. Everyone understands that this is a distorted frame for assessing the true value of insurance; while you hope you never need it, insurance can make all the difference for a family if life takes a difficult turn.

Virtually every partial privatization plan is designed to make Social Security recipients undervalue this social insurance benefit of Social Security and to over-value the private account. Each plan is designed to make people think the individual account is a better deal than it is, by hiding the fact that it offers no disability, survivor, or poverty insurance or by obscuring the reality that benefits are being reduced or debt is being increased to pay for it.

I think we should separate the retirement part of Social Security from the welfare part.

Make the retirement part a private account, and the welfare part completely progressive.

Remember that the SS actuaries say that a low-income male now age 35 or younger will get less back from it than contributed — and even that formula benefit is 25% underfunded.

It’s always depressing to see Republicans play the class warfare card. Are there really so many Buffetts & Gates out there that the Norm from Cheers guy must be consigned to a low income retirement????

As we have seen, returns on SS equal economic growth. What is a political question is how those returns are distributed. At the moment, a good portion of returns are diverted to widows benefits, disabled benefits, and surviving children benefits. Since a low wage worker is also more likely to become disabled or die early an honest estimate of his return should include the implicit coverage given to his spouse and children. Jim ignores the essence of the passage I quoted.

An additional factor that Jim overlooks is that it is not settled what portion of the employers share of the payroll tax gets passed onto the employee in the form of lower wages. We debated this at length over on Jane Galt’s site & the consenses was that while a good portion of the employers share of the tax was paid by employees in the form of lower wages it was unlikely all of it was. Since Jim assigns 100% of the cost to the employee (as does the Trustees) estimates of returns suffer from an inflated cost basis for the individual retiree.

Finally, we are left with a bizaar situation where Jim is telling us that returns on SS are going to be horrible yet the system is heading towards massive deficits. If the system is heading towards massive deficits then outflows (benefits) have to be much greater than inflows (taxes). Since the surpluses are credited to the SS Fund (along with interest) there is no way overall returns can be negative. Obviously someone is getting back more than they put in and it’s not the baby boomers. If the Trust Fund runs out in 2040 that is the year people born in 1975 will start retiring. These people would have started paying into the system in 1995.

If Jim wants more progressivity in the system then it is simple to advocate it. Simply alter the benefit formula to be more progressive than it currently is. Nothing in the privitization programs are progressive though. 2% of Bill Gates’s salary into a private account will not result in a better retirement for Norm but for Gates.

That’s true Randy but irrelevant if we really want to talk about a particular individuals return.

Take your ‘typical low-income white male worker under 35’…whatever that is. If the payroll tax was eliminated tomorrow he obviously would get additional after-tax take home pay equal to his SS contribution. Would his employer automatically increase his pay by exactly the employer’s share of the payroll tax? I suspect the answer would be no except for cases of perfect competition…

In that case the workers true contributions are less than the sum of his & his employers payroll taxes. Since return is basically Benefits / Contributions this can have a dramatic effect on the individuals return.

Of course someone else is paying the difference (either consumers in the form of higher prices or stockholders in the form of reduced dividends / retained earnings). But Jim narrows the focus when he zeros in on just one specific demographic (i.e. ‘low wage male worker 35 or under’), he can’t try to expand it just to suit the needs of his argument.

We have seen if taxes = benefits & if they are kept at roughly a constant proportion of GDP then the return has to mathematically equal the growth rate of GDP. How this larger return gets distributed is another matter.

Fundamentally all of society has to net out somehow to be somewhat regressive. If it wasn’t then there’d be no rich people and no poor people.