I don’t think of the long-term budget fight as being between Democrats and Republicans or between rich and poor. I look at it as a fight between people with funded retirements and unfunded retirements.
If I have saved enough to support my lifestyle in retirement, then I have a funded retirement. If my neighbor who teaches in public school wants to support a similar lifestyle based on her pension, then she has a retirement that is somewhat unfunded. That is, as of now, her pension plan has only about fifty cents for every dollar of promised benefits.
Social Security and Medicare also are unfunded. Their “trust funds” consist of government bonds. If I took care of my own retirement the same way, the drawer where I keep statements from mutual funds that I own would instead be filled with IOU’s from myself. More important, the actuarial shortfall in Social Security and Medicare, like that in my neighbor’s pension plan, is very large.
Down the road, someone is going to get the shaft. It could be my neighbor, it could be me, or it could be both of us. That is, people who are relying on the unfunded systems–public sector pensions, Social Security, and Medicare–might find their benefits cut. Or people who are relying on personal savings could wind up having those savings taxed away in order to address the shortfalls in the public systems. Or all of us could have our savings eroded by inflation, from which we may not be able to protect ourselves.
Have a nice day.
READER COMMENTS
Tracy W
Apr 18 2011 at 9:33am
An alternative way of looking at it:
Our standard of living in 2030 is going depend mostly on what we produce in 2030, and 2029, and perhaps 2028. Yes, there are some long-term capital goods, eg houses, but these typically require continued maintenance to maintain quality.
Consequently production in 2030 is going to be shared between the people who are producing stuff, and retirees and any other unproductive people (in the economic sense).
So if a lot of people save fully for their retirement and then retire, sending the retiree-worker ratio soaring, then the demand for labour will be high, wages will rise, and thus effectively the return on their assets will fall (i.e. return on equities will fall as labour is paid more, some bond issuers will default as labour is too expensive to deliver spare money to pay bonds as they previously planned, capital assets will sell for less as every retiree is trying to sell).
Probably I’m missing something obvious. But I don’t see how everyone saving can get around the problem of a falling worker to retiree ratio, except to the extent that investing in more productive capital raises everyone’s standard of living in 2030, which seems a moderate effect.
Neil S
Apr 18 2011 at 10:13am
Given that the eventual determination will be political and that those of us with funded retirements are vastly outnumbered by those with unfunded retirements, I fear that the answer is self-evident.
In light of which, Megan McArdle’s advice to put savings into areas that are less likely to be confiscated (pay off your house and any other debts) makes enormouse sense to me.
Regards,
Neil
Andy
Apr 18 2011 at 10:17am
Yes, someone will get the shaft. Think of this in terms of generations. The Boomers, despite having squandered much of the nation’s wealth, will get their promises kept. They have the political power and the “you can’t change things right before we retire” argument to ensure that.
So the burden will fall to the post-boomer generations who will not only have to pay for the Boomers in retirement, but also will have to somehow save for their own. I’m predicting Gen X, Y and Z will all get screwed, but Y will probably get it the hardest.
Yancey Ward
Apr 18 2011 at 11:03am
A big VAT is the goal of those defending the unfunded (or, perhaps the term “communally owned” is better) retirement benefits. A VAT is essentially a tax on accumulated savings for transfer to the unfunded retirements. Of course, this always combined with the promise of the elimination of other kinds of taxes, but only a fool would believe this promise.
As for who wins the battle, I think numbers matter, and those with unfunded retirements greatly outnumber those with funded ones.
effem
Apr 18 2011 at 11:07am
Andy – I agree. As a member of Gen X I can only hope we become more politically active in a hurry but I am not optimistic. The boomers got wealthy via a massive decade-long drop in real interest rates (and thefore rising asset values). They have now most likely set in motion a decades-long rise in rates yet they want to keep the wealth they “earned.” That is simply not just. The illusion of “earning” wealth is a powerful one.
Arnold, the bigger question is why some retirements are funded and others are unfunded. If I went to work in a labor-intensive industry 20 years ago, my real wages have gone nowhere as China held its currency down and “free trade” became unassailabe. Luckily I could hang on knowing I had a decent pension. That pension is now at risk as my industry is politically unimportant.
If I went to work in finance 20 years ago I did not have a pension but my bank was saved at every hint of a recession as “dont let banks fail” became unassailable. My savings (stocks and bank equity) are now safe. Further, as my industry is politically important I can count on a “funded retirement.”
I think society’s big grief is not that some people’s savings are in jeopardy but that the process of determining who is at risk and who is not has become increasingly about political connections, lobbying, borderline-corruption, etc. If I had a state-funded pension that was in jeopardy I would be demanding some form of claw-back from those who gained over the years via political means and as a result have safer savings.
Thomas DeMeo
Apr 18 2011 at 11:15am
I would say that your perception that your retirement is “funded” is flawed.
In the real world, these retirement accounts are supposed to reflect how much we have contributed to the future. Did we contribute to the future enough to justify the bargain that others should take care of us?
How well do our accounts represent this bargain? If we all have accounts that say we have enough, but our real world contributions to the future fail to measure up, then the future won’t be all that impressed with our “funding”.
I would say the link between money and our real contribution to the future is getting weaker fairly quickly.
Tracy W
Apr 18 2011 at 12:10pm
Hmm, my take on the political trade-off is a bit more positive (from the point of view of a member of one of the younger generations). Basically, the worker generation has the threat of being able to stop working, or work less hours (or show up for work but spend it enjoying themselves), in the face of rising tax rates on income.
The real political play will be between those with fully funded retirements, and those without, as retirees can’t threaten not to come into work tomorrow.
ThomasL
Apr 18 2011 at 1:11pm
History would tend toward blaming the responsible (funded) for the plight of the irresponsible (unfunded).
That provides the sought after moral justification for taking from the funded to give to the unfunded.
Lord
Apr 18 2011 at 2:56pm
Those IOUs to yourself would not be valueless though since you would still be working in your retirement. Individuals can save against each other but society as a whole cannot to a very large degree.
John Voorheis
Apr 18 2011 at 4:41pm
There are many differences, of course, between Arnold kling and the US Government. The most salient, though, is that the United States Government has its own currency, while Arnold Kling does not (that I’m aware of.)
DougT
Apr 18 2011 at 4:48pm
Tracy, I agree. Social insurance is *always* a pay-as-you-go system. The expansion of the labor pool via immigration reform is critical to reducing the fall of the labor/retiree ratio. Why the right can’t see this has more to do with ideology and politics than anything else.
Productivity gains are very important. If we can manage 3% productivity gains rather than 1% gains, the Social Security problem goes away, even under current law.
kyle
Apr 18 2011 at 4:59pm
I agree that the fact that the trust funds are filled with government bonds is a problem, but it isn’t the only problem. If they were filled with dollar bills or gold or gems or chests of pirate booty both programs would still be spectacularly unfunded, because there just isn’t nearly enough there to support the system were it to be frozen.
Personally I find the issue of the trust funds “realness” to be something of a distraction. When faced with someone who claims they’ve been “paying into” SS & medicare I simply state the fact that they didn’t – those programs are pay-go, have always been pay-go and have never pretended to be anything but pay-go. The money necessary for them to be funded pension plans wasn’t stolen or spent, it was never there. You don’t pay “into” them, you just pay them, like you do defense or education or foreign aid. The money just passes through.
SS & Medicare are pay-go. Pound it into people who believe otherwise until they quit or give in.
Demaratus
Apr 18 2011 at 7:16pm
I’m glad that someone brought up the cold logic that if the workers of the future (like me, I’ll be 47 in 2030) have enough of their wealth confiscated, because they’ve lost at the ballot box, they have the option of not working at all and bringing everything to a stop (of course, this means working much less, not at all).
Any so-called solution to this problem that doesn’t take into account that confiscatory levels of taxation on the workers of the future just to provide transfer payments to the elderly of the day will not work because the workers have the power to not work is a fantasy. Any solution that doesn’t take into account that a Road to Serfdom like solution of forced work will not work is a maniac. But I’m sure, if we get to that point and people aren’t working and “doing their fair share” to give their wealth to those who were “promised” entitlements, someone will propose forcing those workers to work.
If we don’t solve the problem today and readjust expectations now, than this is the inevitable result–drastically lowered benefits in the future or slavery of the workers of the future. It will be the dissolution of the nation.
So, let’s just readjust now and save ourselves the trouble.
Jerry
Apr 18 2011 at 10:17pm
Fund your own retirement with confidence by buying and holding physical gold. The gov’t can’t confiscate what they can’t track, there’s no counterparty risk, the more they inflate the more your gold is worth, and its portable. Just a few reasons its been a safe haven for a few thousand years.
If $1500/oz is too high to get started, buy silver and if it gets too bulky as you accumulate trade some for gold.
Tracy W
Apr 19 2011 at 4:02am
Demaratus, it’s one thing to propose forcing people to work, it’s another thing to do it. After all, how do you force people to work? That requires someone to work. And it’s one thing to force other people to do work hard at raw manual labour, it’s far more difficult to motivate people to work hard at skilled work.
Kenneth A. Regas
Apr 19 2011 at 10:34am
I disagree with the claims that retirements are always pay-as-you-go. A funded retirement amounts to ownership of productive assets, such as apartment buildings and factories. The funded retiree asks no more of future generations than that they pay their rent, distribute the profits from their factories, etc. The unfunded retiree asks that future generations to do all those things and remit part of their remaining earnings to support the retiree.
Social Security’s phony “trust fund” has always been used to confuse the two. It appears funded because it “invests” in government bonds, but those bonds are really just a claim on future taxes, taken out of the hides of future generations after they have paid their rent, etc. At the time these bonds were “purchased” they financed deficit spending, thereby sheltering the (now-retired) taxpayers from taxes they’d otherwise had to bear.
Ken
WhiteyC
Apr 19 2011 at 11:16am
Looks like I am the first to point out another consequence: a substantial expansion of the black economy. Besides the refusal to work, there is the refusal to perform work that is visible to the tax system.
SDN
Apr 19 2011 at 11:33am
Neill, they will simply raise your property taxes, or treat the rent you aren’t paying as “imputed income”. There’s only one solution for thieves.
rhhardin
Apr 19 2011 at 11:43am
The IOUs you write to yourself aren’t marketable unless your earnings support them.
The Government IOUs in the trust fund are marketable depending on credit rating then; that is, it’s backed by full faith and credit, not FICA income, and so are not necessarily worthless.
FICA goes into general revenue, whatever the bookkeeping arrangement; and payments therefore come out of general revenue.
Raising the retirement age is a trivial solution that doesn’t screw anybody. You live longer, you retire later.
You can always retire sooner, but bridge the gap on your own dime.
PamK
Apr 19 2011 at 12:13pm
Many of those “boomers” with unfunded retirements will stay in the system and compete for jobs against young people with little or no experience, and often a very different work ethic. Those “boomers” with funded retirements will spend down their savings,support the generation “x,y,and z” family members with housing, vacations, and gifts to grandchildren and try to pass along what is left as inheritances. The pooling of generations into boomers,x,y, and z is simplistic and a form of class warfare that those looking for serious solutions should avoid.
As a “funded” retiree who saved and invested half of what I earned over 40 years of continuous employment, I find this finger pointing at “boomers” irritating and unserious. When times are tough it is best to pull together for solutions.
Jim_
Apr 19 2011 at 12:23pm
I’d bet on both you *and* your neighbor get the shaft, just to varying degrees. There is some evidence that, in a casino, the house always makes a profit off the rubes eventually, and winners are rare but well-publicized, to give the rest of the rubes a notion that they too can win. It would be interesting to hear your thoughts on Megan McCardle’s instincts about putting money that would have gone into retirement funding, into real assets.
SPM
Apr 19 2011 at 12:49pm
I agree with PamK. This finger-pointing between generations is counter-productive. There are productive and not so productive types in every generation.
rhhardin has one of the simplest solutions to start fixing this problem — raise the retirement age.
But let’s also look at alternatives to the standard workweek too. How can we make part-time work fit better into our system? It would benefit not only those who are delaying retirement (but perhaps don’t quite need to make a full salary any longer — just supplement), those in the midst of raising a family and those that are willing to adjust their spending given the trade-off of time.
There are options out there that can benefit all generations — let’s look for them.
Charles R. Williams
Apr 19 2011 at 12:55pm
Arnold, your funded retirement is in mutual funds that own government debt and government-guaranteed debt. Some of the equities these mutual funds own are dependent on government protected rents. The neighbor-teacher’s pension may be 50% unfunded but that’s your responsibility as much as his. It is partially a claim on your house. And then there is social security. It is a political question rather than a legal question as to who has the prior claim to government revenues – the retiree or the bondholder. After all, there is no bankruptcy court to which the bondholder can appeal. The bondholder has nominal claims whereas the social security recipient has “real” claims. It will be easy to satisfy bondholders by printing money.
As you say there will be a political struggle between various holders of more or less funded claims. Another way to look at it is that the struggle will be between people who invested in their own children and people who did not. The young support the old. People who have raised virtuous and capable children have truly funded their retirements. Others are relying on more or less dubious claims.
richard40
Apr 19 2011 at 2:58pm
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richard40
Apr 19 2011 at 3:07pm
One thing I can’t quite comprehend. Obama and the dems still get strong support from generations X,Y,Z. Dont you realize that you will be the ones that get taxed to death paying all the bills? You should all be deserting the dems in droves, and clamoring for the Ryan Plan, or at least Simpson-Bowles. Those plans at least give you some chance of keeping some of your future income, instead of having it all spent on entitlements, and gov jobs and pensions, all of which will not be there for you since they will broke by then. The only possible explanation is too many of you have been brainwashed by the leftist educational establishment. We should be seeing hordes of young people at Tea Party rallies, since it is your future income we are trying to save, but we dont.
Andy Freeman
Apr 19 2011 at 3:24pm
> The neighbor-teacher’s pension may be 50% unfunded but that’s your responsibility as much as his.
The “responsiblity” argument is that some govt promised him a pension and that I have as much responsiblity as he does to pay taxes so that said govt can keep that promise.
When keeping that promise takes a significant amount of that govt’s current resources, its taxpayers are going to look at whether they’re willing to continue to keep that promise. It’s one thing to pay taxes for current services, but it’s quite another to pay taxes for past services.
Some govts have already broken such promises because their current taxpayers weren’t willing to pay for past services.
pat hendershott
Apr 19 2011 at 3:28pm
Agreed that the battle is between those with unfunded and funded pensions. BUT, this is also Reps versus Dems because the latter support (and are funded by) those with unfunded pensions.
Don Levit
Apr 19 2011 at 3:48pm
rhhardin:
So you do agree that the trust fund is backed only by the full faith and credit of the U.S. Government, goodwill if you will, other than hard assets?
This is certainly not what Roosevelt envisioned, a self-supporting system, that does not rely on general revenues.
If the surplus FICA taxes had remained in the trust fund instead of being lent to the Treasury AND the interest was paid in cash, Roosevelt’s vision could have been a reality.
What laws allowed the Treasury to borrow from the trust fund and pay the interest in debt rather than cash?
Don Levit
Andy Freeman
Apr 19 2011 at 8:04pm
> If the surplus FICA taxes had remained in the trust fund instead of being lent to the Treasury AND the interest was paid in cash, Roosevelt’s vision could have been a reality.
How, exactly, would that work? What does it mean to keep the surplus FICA funds “in the trust fund”?
Are you suggesting that SSA should have kept piles of $1M bills?
Or, that they should have deposited it at private banks?
Or, that they should have invested in some private biz via either loans or stock purchases?
Or, should they have bought something, such as gold, land, or somesuch?
Mike Mahoney
Apr 19 2011 at 8:35pm
Mr. Kling, try on creditor vs. debtor for size. See what you think. These bills could only possibly be paid by impoverishing the debtor class among whom are taxpayers, by the way. I use the term possibly as loosely as imprudence would allow.
QB
Apr 20 2011 at 7:26am
@Andy:
“It’s one thing to pay taxes for current services, but it’s quite another to pay taxes for past services.”
That’s fascinating logic. I encourage you to take logic down to your local Best Buy, buy something on an installment plan, stop paying and see what they think of it.
After all: It’s one thing to use my wages for current purchases, but it’s quite another to use them for past purchases.
Don Levit
Apr 20 2011 at 8:04am
Andy:
I don’t have a particular answer to what the SS trust fund should have been invested in.
I think we could use the states’ pension funds for their employees as an example.
At least when their trust funds are tapped, assets are liquidated to provide the cash.
The same cannot be said of the federal employees. Unfortunately, their trust funds have been lent to the Treasury as well.
This could be illegal, in that the FASAB, the accounting advisor for the federal government, considers federal employees’ pensions as exchange transactions – employees willingly exchange lower salaries for future pension benefits.
How would you react as a federal employee if you found out the way your trust fund was “liquidated” was the same way all federal expenses are paid -out of the current budget!
Don Levit
Troll Feeder
Apr 20 2011 at 10:49am
Andy Freeman @8:04
The funds aren’t cash; they never were. They are just entries in ledgers.
What it means is that you keep two sets of books and that you have two budgets: the FICA budget and the general budget.
It means that for general budget purposes, you list federal revenues without including the receipts from FICA. It means that you do not assume that FICA funds are available to spend on non-FICA projects.
Payroll taxes made up about 40% of 2010 federal revenues, so it means that the general budget shows a 40% decrease in funding. The general budget would also show a ~$770B decrease in spending for the SSA, and a ~$450B decrease in spending for Medicare.
It means that the excess general account spending that occurred for decades would have been obvious for all to see, rather than disguised because the government was spending FICA-payers’ retirement savings to cover it up.
Kyle
Apr 20 2011 at 11:31am
Kenneth Regas makes a common mistake when he says
This is false – it does not appear funded. Even if the money was not invested in gov’t bonds – say, it was in gold, or silver, or cash, or whatever – it would still not be funded. Merely having some money stored somewhere does not make a program funded – it has to have enough money.
If you froze social security it would last a few years before it shut down, cutting everyone off. Medicare wouldn’t make it 12 months. That’s even assuming you deny all new claims, regardless of their “contributions”!
They’re pay-go programs and have always been pay-go programs. The trust fund’s “realness” has no impact on this because they’re too tiny to matter.
Lord
Apr 20 2011 at 12:43pm
@Regas
“The funded retiree asks no more of future generations than that they pay their rent, distribute the profits from their factories, etc. ”
No. Social Security has a claim on real assets and asks no more than people pay their taxes. See the flaw now? They ask not only they pay their rent but also for enough renters, enough rentals, enough rent, and enough asset prices to cover their costs. The reason some want to cut Social Security is not that they are concerned about the taxes the next generation will pay but that they haven’t saved enough and are afraid the next generation won’t have enough to pay them what they need for the assets they already own. See why the next generation should be highly skeptical?
Fortune may smile, the weather may be fair, crops may be abundant, resources flush, creativity unbounded, and progress advancing making for plenty to go around. Fortune may frown, the weather inclement, crops scarce, resources depleted, creativity absent, and progress stagnant making less for everyone. We can try our best but the result is not necessarily within our power, funded or not.
beezer
Apr 20 2011 at 4:07pm
Or, of course we could stop whining and just pay the bills. A novel idea here in tax cuts pay for themselves America, land of illusions.
“The Fourth Great Awakening and the Future of Egalitarianism.
Instead, Fogel proposes the outline of a new mandatory pension system that would sharply increase freedom of choice later in life. For instance, under reasonable growth assumptions he calculates that a household that was required to put aside 14.7 percent of its annual income into retirement savings would accumulate enough at age 55 to fund a pension paying 60 percent of peak earnings. Want to cover their health-care needs in retirement as well? It would take another 9.4 percent in savings. Low-income people would get help through a progressive tax of 2 percent or 3 percent on the better-off half of households. The money would belong to the individual and be completely portable.”
or this:
“Unfortunately, the Social Security legislation doesn’t make the increase mandatory. And politicians being what they are, they don’t want to be accused of raising taxes–even though the SS payments taken from wages are not taxes but are contributions to a common pension fund. So they don’t make the smaller increase sooner. They wait until there’s a problem.
Fortunately, even today the contribution increase needed isn’t large by any definition. It is literally less than a dollar increase per week. Or the government could remove the $106,000 cap on wages subject to SS contributions. Either would ‘solve’ the SS funding issue.”
Don Levit
Apr 21 2011 at 11:02am
Beezer:
SS contributions are taxes – they are not contributions to a pension fund.
I have the governmental links to back that up.
Do you?
My understanding of the various bend points of SS, is that at the maximum wage, paople are paying in $1 of taxes, and receiving only 90 cents back in benefits. This is a heavy tax to pay.
(Bear in mind, that benefits received have nothing to do with taxes paid in, and everything to do with earnings history). Benefits, theoretically could be paid, if no taxes were paid in.
Don Levit
Don Levit
Apr 21 2011 at 11:04am
Excuse me for the typo – They pay in $1 of taxes and receive back only 10 cents in benefits.
Don Levit
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