June 18, 2003
From the desk of Mindles H. Dreck:Found: $12 Trillion
Michael Boskin has calculated that the deferred taxes that will be paid on the boomers' retirement will be worth $12 Trillion in revenue (link requires WSJ subscription), and that Social Security doomsayers of all stripes have been seriously undercounting this future revenue source:
THE SOCIAL-SECURITY TIME BOMB could very well prove to be a dud. The doom and gloom red-ink budgetary forecasts of recent years have overlooked some astoundingly good news for the government: pensions, IRAs and other tax-deferred accounts should generate some $12 trillion in taxes by 2040. This mind-boggling pot-of-gold is larger, at a minimum, than the sum of the 75-year actuarial deficits in either Social Security or Medicare, according to Stanford economist Michael Boskin , who has written a pioneering paper on the subject for the National Bureau of Economic Research. We could end up with enough to offset both shortfalls, he says.The $12 trillion is based on a conservative, base-line forecast. Boskin also entertains scenarios in which the number is as low as $9 trillion and a high as $19 trillion. His point is that this contingent asset, which isn't on the government's books, will be very large. Only an economic disaster, like 10 consecutive years of down stock markets, would torpedo his rosy projection.
The cash could offset a major portion of the national debt through 2050, the paper says. Boskin , however, isn't trying to challenge the need for serious reform of Social Security, in particular, or government spending in general. The Republican scholar believes improvements in the government's operations are needed to free up money for more productive uses.
Boskin , who declined to comment on his work, expects to publish the paper in about two weeks. He has given private readings to White House, Treasury and Federal Reserve Board officials. In fact, the President's Office of Management and Budget and a former Treasury official directed us to Boskin's research.
Well, Barron's may think it is all hush-hush, but I just googled a 131-page NBER working paper made available in January. So much for the tenacious financial journos.
This paper builds a simple model of the various (positive and negative) revenue effects of deferred taxes and, together with data from numerous sources, develops estimates of the deferred taxes already accrued and likely to accrue in the future under alternative assumptions about impacts on personal saving, budgetary responses to changes in revenues, capital formation effects of changes in national saving, contribution rates, rates of return on assets, inflation, age of withdrawal, discount rates, tax rates, management fees, etc. Generally conservative assumptions imply that 1) the deferred tax vehicles have already recouped foregone revenue and interest costs; 2) the deferred taxes already accrued in tax-deferred saving vehicles amounted to about $3 trillion at the start of 2003, about equal to the privately held national debt; 3) the real present value of the net budgetary impact of future deferred taxes is likely to amount to an additional five to ten trillion dollars, more than the actuarial deficit in Social Security and Medicare; 4) withdrawals from tax-deferred accounts will increase so dramatically relative to wages and salaries in coming decades that, cet. par., government forecasts of projected deficits are seriously overstated; 5) the deferred taxes add a major new element with a strong interest in lower tax rates, at least on their withdrawals, to the future political economy of budget policy.
There are so many ways I can think of to manipulate this number I'm going to remain skeptical until I've digested this. It would be extraordinary if the rest of the world has been working with such seriously flawed assumptions.
There is one very interesting implication regarding the President's savings account plan (one aspect of his fiscal program I rather like):
An awareness of this hoard of legally owed tax money is beginning to circulate on Wall Street because of a Bush administration proposal to phase out six tax-deferred retirement and savings accounts and replace them with two accounts similar to Roth IRAs. Under this plan -- proposed in the President's budget and now being promoted by the Treasury -- there would be no tax deduction for deposits to the accounts, but money would accumulate tax-free and withdrawals would be tax-free.The Bush plan would allow conversion of existing tax-deferred accounts into the new accounts, accelerating the collection of future taxes. Pamela F. Olson, Treasury's assistant secretary of tax policy, says that although more taxes would flow into Uncle Sam's coffers up front, the long-term effect would be a "wash." Boskin doesn't estimate the effect on deferred taxes of the Bush proposal, which he favors, other than to say that it would "shift the timing of tax collections toward the present."
So if Boskin is right, passage of the President's savings plan this year would kick off a rapid improvement in the government's balance sheet.
Posted by Mindles H. Dreck at June 18, 2003 9:39 PM | TrackBack | Technorati inbound links
It's mine. Thanks for finding it, must have dropped it when I pulled out my wallet.
No, no, no.
It can't be there because if it were there someone would have seen it before and taken it - because $12 Trillion is so big.
Right now baby boomers have been puring money in to 401ks and mutual funds etc etc to save for their retirement.
What happens when the inflows become outflows? It very well could wipe out all the capital gains underlying all the assumptions.
Does this model factor in this demographic trend?
The engine of this paper is the simple fact that there is no "demographic time bomb"; future generations will produce enough to allow current generations to retire and we simply have a question of the most equitable and efficient way to get the money from workers to the retired. If this paper cleras away some of the more egregious bollocks surrounding this issue it will have done good work.
D2
I think this article ignores the possibility that when baby boomers start selling stock instead of buying stock on a net basis, there will still be a lot of capital gains left. What if there were not? What if stocks crash downwards because of this adverse demographic trend.
Also, I understand the order of magnitude of the future problem is somewhere around 44 trillion. Gotta' find a lot more than 12T for me to ever see a dime...
The selection of what to include, and what to "overlook," reminds me of how the states' tobacco settlement was based upon their false claims about costs, for what were in fact net SAVINGS to those states. When a 49-year-old male smoker bites the dust, our society avoids the quite substantial cost of handling his age-related debilitating ailments 15 or even 30 years later - - societal costs which far exceed the cost of fatal cardiac, oncologic, or repiratory ailments. Now that's NOT to say that earlier death is not calamitous -- the tobacco bastards PLUS the smokers cause avoidable expedited deaths. But the FINANCIAL effects are exactly OPPOSITE to what was claimed in court! Economics is not a dismal science; those who sloppily work with numbers create a dismal, even embarrassing, set of results.
hi larry,
"When a 49-year-old male smoker bites the dust, our society avoids the quite substantial cost of handling his age-related debilitating ailments 15 or even 30 years later - - societal costs which far exceed the cost of fatal cardiac, oncologic, or repiratory ailments."
what abot those 70 or 80 year old lung cancer or respiatory illness sufferers who clog up the system after years of cigarette smoking? also, those cancer patients who are 45 years old, have to suffer through months and sometimes years of chemo, long hospital stays, heroic interventions, etc. so, they don't avoid them, they just bring them forward 30 years... i don't know how much money society really saves, but i do know that society loses 30 years of productivity from the dearly departed (and the taxes!). do you think that a fatal heart attack is much cleaner from society's point of view? we miss the productivity, but the ending is quicker...? just wondering.
cas,
Jacob Sullum has covered this argument in-depth. Click on the "Bob Dobalina", and buy the book cited at the end of the article. Do some good.
Wait a minute. Capital Gains are not subject to SS taxes, so taxes on them will not directly close the funding gap. If Boskin is saying that everyone forgot about the income taxes that will come due that can be used to buy the "special bonds" in the SS trust fund then:
1. I find that hard to believe.
2. He's essentially proposing cuts in SS benefits to high income retirees. They'll simply be taking money out of one pocket (their 401Ks) to put into another pocket (their SS benefits).
And if we elect more Democrats and RINOs, they can raise tax rates on this money in the meantime, thus allowing even more income to be 'earned' by the government!
Such taxes must be highly progressive, of course, to be in accord with Item #2 of the Communist Manifesto's list of instructions for such matters.
A slave is just a person with a 100% tax rate...
(I know I'm a little off topic - consider the above to be a related rant, something like a rhetorical hiccup...)
This post (and my response) centers on 2 issues:
1. the nature/source of the deferred tax assets not on the government's books;
2. to use the actuarial term, the extent of the Projected Benefit Obligation (PBO) not on the government's books.
Soc Sec is a pay as you go system, meaning that it neither accounts for future expected revenues nor for future expected obligations (expenses). Instead, like all entities using GASB methods (Govt Acctg Stds Board), its focus is currently available resources. Translation: this year's budgeted expenses and revenues.
There is no trust fund, except on paper, as we all know. Instead, there are present-year obligations which are satisfied, nominally, by FICA taxes, and secondarily, through other taxes. Practically speaking, there's just a big lump of tax revenue, and they carve off the SS money. This is also how the USG gets away with counting FICA revenues in excess of current year obligations against the deficit.
Now, as to #1. I haven't read the study, but it's quite possible that there are $12T in deferred taxes on nongovernmental retirement assets out there. Of course, relying on taxing people's personal retirement funds to shore up Soc Sec is hardly a statement that Soc Sec is actuarially sound. It just means that there might be enough other federal revenue to fill the gap.
Then again, there are a ton of moving pieces to this issue, not the least of which is that the market supports the continued growth in value of these assets. Also, it presumes that the boomer retirement cycle doesn't, through a substantiall sell-off of assets forced at least annually by tax-deferred plan structures, among other things, cause a substantial value reduction in the market as a whole. If the majority of owners of various asset classes are cashing out, the class as a whole will suffer.
Who knows? there might be $12T in there. If there is, Bush's plan to shift all retirement plans to nondeductible, taxed-as-earned, not as withdrawn Roth-like vehicles would actually remediate my concerns by moving that cash flow stream forward in time, and recovering it through conversion of retirement plans, rather than through sell-offs of securities.
#2, PBO, is another ball of wax. The government doesn't actually account for PBO. As I mentioned above, they focus solely on present-year issues. If I recall correctly, Alan Greenspan was recently quoted as stating that the present value of future Soc Sec cash flows revealed a structural deficit of $19T. I've heard estimates as low as $6 and as high as $40, so Greenspan's number seems reasonable.
The basis for that variance is entirely discount-rate-related.
Pension revenues are assumed to grow at a particular rate of return. For a private pension fund, like, say, General Electric's, they'd probably assume a blended return of mostly investment grade bonds, plus a bit of equity and/or equity-linked debt and/or high-yield debt, and come up with an expected rate of return of 7-8%. Since Soc Sec is nominally capitalized with US Treasury Bonds (an IOU from the USG to the USG, it merits mentioning), the appropriate discount rate for Soc Sec is long-dated Treasury paper. Let's peg that at around 3%-4%, on average, for argument's sake.
Once you have this rate, given what you have now, you need to know 2 things: how much you have now, and how much you need to have in the future to pay for the cost of retiree pensions (the aforementioned PBO).
Calculations of PBO involve a series of actuarial assumptions which I don't do (i'm not an actuary), but suffice to say it's based on life expectancies and other miscellany, so demographic trends are the key factor. Every year in increased life expectancy is another year added to the PBO assumptions, etc.
The PBO is a series of future cash outflows to retirees. Because a dollar today is worth more than a dollar tomorrow (the whole of finance theory in one shiny sentence), future cash flows are discounted back to present value using a discount rate, compounded annually. The size of the discount rate is a major issue here. If one uses a treasury rate of 3% to discount those flows, rather than 7%, the value of those future flows is far larger than if one uses the smaller rate, because they're discounted less. This is the crux of the argument about Soc Sec's actuarial soundness.
The long and short of the matter is that because Soc Sec assets aren't really invested, they're properly confined to a long-term rate of return and discount rate of long-dated treasury bonds, meaning that the returns are very low, and the PBO is very high. While deferred taxes may benefit from some of the same growth curve as privately invested funds, it nonetheless is a non sequitur to the observation that Soc Sec is fundamentally insolvent as a standalone program.
Assuming that it's desirable to maintain this program rather than dismantle it, step one is to force the program to run like a real pension, with funding requirements that can't be touched by politicians - in other words, to create a lockbox.
Frankly, the idea that politicians could sit on a multi-trillion dollar pension fund and not crack open the cookie jar with increasing regularity ranks high in the annals of fantasyland, so I'd say we're better off cutting our losses. Let those dependent on it get through retirement, and the rest of us will find another way that doesn't involve a doubling of taxes or a halving of benefits. I'm 30, and I'm never going to see a penny of my FICA contributions. I'm willing to let that money go, if the USG is willing to set me free from the bonds of Social (In)Security.
One more thing: Greenspan was quoted last week as saying that the more conservative of the new Medicare prescription drug plans would increase the actuarial deficit of Soc Sec/Medicare by two-thirds. So much for the $400B advertised price tag. As with all entitlement programs, the ultimate cost is ultimately far more than anyone's worst nightmares.
cas,
"what abot those 70 or 80 year old lung cancer or respiatory illness sufferers who clog up the system after years of cigarette smoking?"
You wisely pointed out that people die of similar smoking-related ailments at considerably greater age, so when Joe Average dies at age 49, we likely have to deal with the cost-of-Joe's-fatal-ailment at an earlier date than expected; there's no substantial statistical NET cost increase, because(according to rumor) we all eventually die of something. Actually, not only would we need to factor in the time value of money(in dealing with the strictly financial aspects of smoking-related morbidity and premature demise,) but older patients TEND to have more "smoldering" forms of any particular pathology. Society therefore has more time to deal with the (recognized-in-hindsight) fatal illnesses of older persons. So despite the elderly being more physiologically fragile, the elderly tend, counterintuitively, to live longer following the diagnosis of their fatal ailment and therefore statistically receive more health care EVEN for what ultimately kills them.
Despite these two offsetting factors, it turns out that early demise is a (grotesquely?) net savings to society from a strictly FINANCIAL point of view, if one diligently accounts for the ever-increasing envelope of "plusses and minusses" that go into assessing that matter which various state attorneys-general chose to bring up in court.
Incidently, it is fine with me if the tobacco companies have to divert funds from stockholders in order to account for the ravages of smoking. On the other hand it is SO PREDICTABLE that those groups which presented fraudulent financial claims before the courts, have now begun diverting those "winnings," to programs far afield from what they CLAIMED they needed the blood-money for. What a lose-lose situation.
Likewise if there are trillions of dollars that have remained unrecognized, it is likely that state and federal legislatures will work earnestly go get ahold of it.
The only thing I disagree with about pdb's post is this:
" The long and short of the matter is that because Soc Sec assets aren't really invested, they're properly confined to a long-term rate of return and discount rate of long-dated treasury bonds, meaning that the returns are very low..."
Since SS assets are also, and equally, liabilities, they are worth a net of zero, so it doesn't matter what interest rate you use.
Though I do hope Boskin turns out to be right that he's the only one who thought about the deferred taxes from the 401Ks, since they would be the answer to the (phony) transition cost argument against moving to an investment based SS. And dsquared is happy about this?
"Wait a minute. Capital Gains are not subject to SS taxes, so taxes on them will not directly close the funding gap."
Everything that comes out of a tax deferred retirement account (401(k), Keogh, traditional IRA, etc.) gets taxed at ordinary rates, not at capital gain rates, even if the money comes from capital gains. These accounts convert capital gains into ordinary income.
One of the effects of the new tax law is to increase this spread, so a lot of people from now on are going to be investing for capital gains outside of these accounts (and for interest income inside of them). That could marginally reduce the effect Boskin is talking about by reducing the tax rate on such savings, but I think one would need a crystal ball to have any idea by how much.
Also, Congress has taken at step towards making retirement savings tax-free rather than tax deferred. Roth IRAs pay completely tax-free distributions (while contributions to them aren't deductible). If they grow like some other plans have, and Congress encourages them to please the influential senior lobby, that could have a significant effect on the tax take on retirement savings.
A more fundamental consideration is that with trillions and trillions of dollars going into retirement savings accounts (not to mention homes and other investments) many seniors of the future aren't going to *need* the gov't to pay their health insurance premiums and top off their pensions with revenue collected through increased taxes imposed on those poorer than themselves.
Expect the class warriors of the day to say "why should we be increasing the deficit and raising taxes on working people to pay for transfers to retirement plan millionaires?!"
I can't wait for Krugman to bring that up. ;-)
By my back-of-the-envelope calculations, means testing the 20% richest out of these programs would save the nation from all these "national bankrupty" worries to restore a happy fiscal future, and 20% is about the proportion who will be retirement millionaires maybe 20 years from now.
And it's the progressive thing to do, too!
For all those that brought up the red herring of the rate of return on social security, remember that it is an insurance plan, not a pension plan. When was the last time you figured out the RoR on your car insurance?
Mr Sullivan makes a good point, save one factor: While assets are nominally equal to liabilities, SS is the only pension scheme around that attempts to be both defined contribution (fixed tax rates, though they do seem to creep ever-upward) and defined benefit (clear benefit structure blah blah blah). Any actuary will tell you that's fundamentally impossible, a fantasy. You can't fix both variables. Either you pay in a defined amount and get the investment result, or you get a defined payout.
While SS tries to mandate both, the fact is, it can't. Ultimately, either it falls short on payouts (cuts benefits) or must increase contributions (raise taxes).
Consequently, while assets=liabilities (or revenue=expense) should mean discount rate is irrelevant, the fact that it's actuarially unsound means rates of return vs. PBO do matter in determining the likely surplus or shortfall, and how much is required to cover it.
Again, we're left with the perpetual question: do we cut benefits, increase taxes, or both? It's this question into which the discount rate factors, because it's the best available means by which to estimate future resources and benefit obligations, the projected shortfall, and how to deal with it.
Anyway, I'm shocked anyone read my last post, as, in hindsight, it was ludicrously long.
Mr Sullivan makes a good point, save one factor: While assets are nominally equal to liabilities, SS is the only pension scheme around that attempts to be both defined contribution (fixed tax rates, though they do seem to creep ever-upward) and defined benefit (clear benefit structure blah blah blah). Any actuary will tell you that's fundamentally impossible, a fantasy. You can't fix both variables. Either you pay in a defined amount and get the investment result, or you get a defined payout.
While SS tries to mandate both, the fact is, it can't. Ultimately, either it falls short on payouts (cuts benefits) or must increase contributions (raise taxes).
Consequently, while assets=liabilities (or revenue=expense) should mean discount rate is irrelevant, the fact that it's actuarially unsound means rates of return vs. PBO do matter in determining the likely surplus or shortfall, and how much is required to cover it.
Again, we're left with the perpetual question: do we cut benefits, increase taxes, or both? It's this question into which the discount rate factors, because it's the best available means by which to estimate future resources and benefit obligations, the projected shortfall, and how to deal with it.
Anyway, I'm shocked anyone read my last post, as, in hindsight, it was ludicrously long.
Insurance vs. Pension?
Semantics vs practice. Yes, SS is part of OASDHI - Old Age, Survivors, Disability, and Health Insurance. But, what else does one call a program into which one contributes one's entire working career, then is promised a stream of income post-retirement. Sounds a lot more like a pension than car insurance to me.
At worst, I'll concede it's like a whole-life insurance plan, which is still an annuity, which still means that rates of return and discounting assumptions matter for the provider of the plan, as, once more, it bears directly on the likely future revenues and benefit obligations.
Besides, and perhaps more importantly, what other methodology would you use for analyzing the future cash flows of the program? The NBER guy takes the present value of the cash flows he's found, so clearly he's using that method.
If SS is "insurance", what is it that's being insured against? Well, let's see: someone who makes more money while working will be paying higher premiums than someone who's making less money; and a retiree who made more money while working will be getting a bigger payout than someone who made less money. So it appears that SS is insuring you against the possibility that you will be able to provide for your own retirement. Wouldn't it make more sense to insure against the possibility that you won't?
"The engine of this paper is the simple fact that there is no "demographic time bomb"; future generations will produce enough to allow current generations to retire and we simply have a question of the most equitable and efficient way to get the money from workers to the retired. If this paper cleras away some of the more egregious bollocks surrounding this issue it will have done good work."Now that's bollocks. This is not money workers are earning, this $12T, if it exists, is a function of taxing the retiree's savings. Unfortunately, they will be the most powerful lobby in the U.S. by then and I expect they will be relieved of their obligation.
I had no idea D^2 wa so optimistic, but I am not. If every two workers produce enough income for each retiree, as they will have to do in 2050 in the U.S., it would be a miracle if that weren't a major hit to standards of living. I can't even imagine countries like France, Spain and Japan where the ratio will get closer to 1:1 and almost nothing has been set funded at present (see pages 8 and 14). In general, D^2, you have spoken like a Brit, since the UK is the only country that has funded its retirement promises adequately. In fact, it's amazing to observe the perfect negative correlation between the generosity of national retirement promises (as percent of final pay) and the amount of money actually set aside.
Every Ponzi scheme creates a timebomb. It's the plans' timebomb, not a 'demographic timebomb'.
As noted above, Mr. Sullivan, there is no payroll tax on retirement accounts, but they are subject to income tax when withdrawn.
I'd have to agree with the (a bit younger) 'pdb' when he says:
Frankly, the idea that politicians could sit on a multi-trillion dollar pension fund and not crack open the cookie jar with increasing regularity ranks high in the annals of fantasyland, so I'd say we're better off cutting our losses. Let those dependent on it get through retirement, and the rest of us will find another way that doesn't involve a doubling of taxes or a halving of benefits. I'm 30, and I'm never going to see a penny of my FICA contributions. I'm willing to let that money go, if the USG is willing to set me free from the bonds of Social (In)Security.
I'm not a big fan of raising tax rates to fix the system, but the damage is done once the taxes are taken, so I have little problem making the benefits more progressive. It's already a wealth transfer program. We have yet to overcome the challenges of means-testing, however, as it has substantial moral hazards (look at medicaid and nursing homes, for instance).
Oh, and Paul is right, SS is a wealth transfer program ('pay-as-you-go is a euphemism), not a savings plan or an insurance policy. Insurance mutualizes risk, savings plans let you reclaim your own money. I'd have to live to 100 to break even on SS, based on the assumptions they sent me a while ago.
I am 53 years old and when I calculate the numbers for "retirement" I do not add anything for SS. Ponzi schemes always collapse. I do not know anyone under 30 who believes they will ever get one thin dime from SS. My father is 85. When he began working in the 1930s until 1950 the maximum SS tax per month was something like $20.
He took all of the money he paid in plus interest out when he had been retired less than 2 years. My 19 year old comes up to me with a pay stub and says, "What is FICA Dad?" I explain. She gets out her HP calculator works out the numbers and says,
"Wouldn't it be more honest if I just sent the money to Granpa rather than routing it through Washington?"
hi larry and bob,
"Jacob Sullum has covered this argument in-depth. Click on the "Bob Dobalina", and buy the book cited at the end of the article. Do some good."
i haven't got the book, and if i get a chance, i would love to read it. if you have a richer article than the one you linked to that made clear his assumptions in coming to his conclusions, i would like to examine it.
so, i went wandering over to that whacko left wing think-tank, the cato institute, and read the following:
"Thus, one must "discount" future costs and benefits when comparing them with current ones. A zero discount rate would mean that current and future costs and benefits are valued equally. A discount rate of 50 percent, however, would mean that very little value is placed on future benefits and little account is taken of future costs.
The Manning estimates on the net costs of smoking use discount rates of 0 percent, 5 percent, and 10 percent. Viscusi’s estimates use 0 percent, 3 percent, and 5 percent. The new literature finds that at a discount rate of 4 percent or less smokers subsidize nonsmokers, and that above 4 percent the reverse is the case. We will use the 0 percent and 5 percent rates in our discussion since they span the range at which the change occurs."
http://www.cato.org/pubs/regulation/reg20n3c.html
out of curiosity, how do you square these observations with what you have both been saying? what is the real rate of discount that you are assuming in making your claims?
>>SS "is an insurance plan, not a pension plan".
Funny, the Social Security Administation describes the retirement beneffit in some detail as a "defined benefit pension plan".
>>"When was the last time you figured out the RoR on your car insurance?
Warren Buffett is collecting SS right now. Bill Gates will be in about 16 years.
When was the last time you had car insurance that promised to pay off for you whether you had an accident or not?
>.Wait a minute. Capital Gains are not subject to SS taxes, so taxes on them will not directly close the funding gap
Money is fungible, and presumably will be in twenty years' time.
>>He's essentially proposing cuts in SS benefits to high income retirees. They'll simply be taking money out of one pocket (their 401Ks) to put into another pocket (their SS benefits).
Congratulations Sherlock, it's called the tax system.
>>This is not money workers are earning, this $12T, if it exists, is a function of taxing the retiree's savings.
Those savings only have any value because they are claims on future production. Red herring.
>> Unfortunately, they will be the most powerful lobby in the U.S. by then and I expect they will be relieved of their obligation.
You now realise that you have retreated completely from any falsifiable proposition.
>>If SS is "insurance", what is it that's being insured against?
As with any annuity, you are being insured against living too long (for your savings).
I think that's cleared it up.
And I reiterate my promise made on another site to never talk about "the transition problem" again as long as everybody else promises to stop talking about "Social Security being bust". The "transition problem" and "the insolvency of Social Security" are the same problem, and anything which solves one solves the other.
I'm glad to see d squared graciously conceding that he has been wrong about the solvency of SS, and about the nature of the "transititon cost".
So, we're all agreed that there is no reason to go on pretending the SS has been anything other than a welfare program. And that there is no reason not to change it to a defined contribution investment program.
"The new literature finds that at a discount rate of 4 percent or less smokers subsidize nonsmokers, and that above 4 percent the reverse is the case. We will use the 0 percent and 5 percent rates in our discussion since they span the range at which the change occurs."
http://www.cato.org/pubs/regulation/reg20n3c.html
out of curiosity, how do you square these observations with what you have both been saying?
"
One can conceptualize a process akin to a predator-prey relationship between smokers and nonsmokers. Ditto for tobacco companies and The State. Many pedators are also prey; many prey are also predators. So go ahead and obfuscate ad infinitum.
The tobacco companies(QUITE wisely) did not press the point about this economic relationship, because they would have appeared to be even more crass and cut-throat than they already appear.
The Boskin paper referenced here makes no claims as to how the deferred tax revenues from IRAs and the like that it has identified are to be used in the future. It is somewhat premature to make any assumption that these deferred tax revenues will in fact impact the unfunded liabilities of SS and Medicare at all.
While the so called SS Trust Fund is known to have NO assets of economic value, and no impact on the ability of SS to meet its future obligations, the Trust Fund may turn out to have a significant value in an entirely different sense.
In particular, the ability to fool oneself and others that Social Security is an insurance program as opposed to a welfare program seems to me to depend, at least superficially, on every SS payout dollar being sourced through the mechanism of the Trust Fund. In this sense, the Trust Fund MAY play a valuable role in preventing future tax deferred dollars from flowing directly into SS payouts. At the least, it may help provide pressure to transition the scheme into oblivion.
It needs to be emphasized that the tax deferred payments forseen have a large component of taxes on nominal inflated withdrawals. Thus Boskin and others can predict strong political pressures to reduce the tax rates on withdrawals.
The reaction of people to this apparent hidden future tax revenue windfall seems to be glee. This is entirely inappropriate if the result is a larger, less restrained government.
Regards, Don
"Boskin and others can predict strong political pressures to reduce the tax rates on withdrawals."
It's already started. Driving 700 miles this weekend people on talk radio stations I passed were already complaining about how unfair it will be to have their hard-earned lifetime savings taxed at discriminatory rates (35% versus 15%) to bail out SS and the retirement costs of people who haven't saved. It's only been a week! This is going to be a powerful lobby in a few years.
"The reaction of people to this apparent hidden future tax revenue windfall seems to be glee. This is entirely inappropriate if the result is a larger, less restrained government."
In this regard it's worth remembering that FDR's Social Security Act of 1935 set up a funded program that wasn't to pay full benefits for decades, was actuarially sound permanently, and was scheduled to build up a $500 billion reserve surplus by 1980.
Then in 1939 Congress said "why wait to spend all that money?" In a classic liberal-conservative compromise, they divied it up by increasing and accelerating benefits to make SS "paygo" rather than funded, while simultaneously cutting the tax rate in half. The suprplus of 1980 was wiped out right then, SS was broke in 1980 instead and had to be "saved", and we were already on the road to where we are now.
The same thing will surely happen to the Boskin Boon *unless* taxes collected on income from tax deferred plans are placed in a segregated account and invested in real assets, not gov't bonds.
Fortunately there is precedent for the first part of this. The income taxes now collected on Social Security retirement benefits don't go to the Treasury for general spending but are sent back to the SS Administration (imposing the income tax on benefits was really a carefully disguised means-tested benefit reduction). Sending taxes collected on retirement accounts to a segregated account should be no more difficult than this.
Saving those taxes in real investments rather than in govt bonds that make them available to finance current gov't spending will be a lot more tricky -- politicians and interest groups left and right are going to want that money just like they did in 1939. But the arguments for placing such funds in real economic investments have been much practiced in recent years, so there's hope there too.
Ignoring Patrick's bizarre declarations of victory, which appear to be driven by elapsed clock time rather than anything else:
>>So, we're all agreed that there is no reason to go on pretending the SS has been anything other than a welfare program. And that there is no reason not to change it to a defined contribution investment program.
No reason other than that to do so would transfer risk away from the investing class and onto the working class, which seems like a fairly silly thing to do.
cas,
There is an ongoing misperception that lung cancer is the primary risk from smoking. It was the big thing thing in the first serious studies because lung cancer was pretty rare among non-smoking non-coalminers.
THe real killer is heart disease. Since there are so many contributing factors on that front it took a lot longer to make any definitive findings connecting deaths by cardiac arrest to smoking. A major portion of those who lose a major portion of their life span to smoking do so by means of a big walloping heart attack that knocks them dead before anyone has a chance to react and leaves little hope of summoning help in time for resuscitation. Remember what happened to Douglas Adams. AFAIK a non-smoker and healthy specimen, he collapsed and died very suddenly from a heart attack, in a gym of all places. That was pretty surprising.
If a guy like me, 50 pounds overweight and very lacking in exercise, were to keel over at the age of 39, there would be no cause for surprise. If I were a smoker I'd be a star candidate for such a fate within the next decade. A tragedy, I'm sure, but very inexpensive compared to those malingering lung cancer people.
And while we're at it, I'd make the following point; we seem to be fundamentally in agreement that the problem more or less solves itself if benefits can be transferred from rich retirees to poor retirees in the future.
I'm saying (and the guts of the Boskin argument appear to be) that this problem appears to look after itself given a reasonably progressive income tax and the deferred tax savings accounts. I admit that I hadn't spotted the deferred tax accounts myself, but I think I've always been consistent in saying that the tax increases needed in order to sort out the retirement system weren't that worrying. The mechanism appears to be that we transfer income from workers to rich retirees via dividends and coupon payments, and then from rich retirees to poor retirees via tax and Social Security.
Why is it a better idea than this to impose a means-test on Social Security? I'm assuming that none of you guys want to humiliate the poor for the sake of it, and also assuming that you don't regard the creation of a massive means-testing bureaucracy as a good in itself. Your only remaining argument appears to be that rich retirees will be so numerous and politically organised that they will be able to set their own tax bill, and that they will be short-sighted enough (with respect to the effect of a fiscal crisis on their own savings) that they will choose to do so. This seems like a very gloomy view of the world.
Boskin's idea is neither new nor valid and here is a letter I sent this weekend to Barron's on this topic:
"Re: T.G. Donlan's Editorial Commentary on June 23, Michael Boskin's idea is
not new and it is something that I had looked into earlier. Besides Donlan's
comment about potential future political resistance against heavy taxation,
I had dismissed the idea for three other reasons:
(1) When the baby boomers start selling the securities in their various
tax-deferred accounts who is going to buy these securities? Afterall,
Generation X is only half the size of the boomers and has been losing
economic ground relative to the boomers. There is also an academic paper [1]
which makes a similiar negative conclusion regarding the stock market and
demographics. Related to this is the additional burden of increasing average
life expectancies, and the inherent future uncertainty of the stock market.
(2) According to the Urban-Brookings Tax Policy Center [2], if left
unchecked, then the alternative minimum tax (AMT) will grow at a high
exponential rate for years. The AMT and its unfair burdens could become the
dominant tax system in the US and whould distort some of Boskin's estimates.
Currently, there are no serious attempts underway to reform the AMT because
it is too much of a cash cow for Washington. The exponentially growing
amount of new people who will become subject for years to the AMT will be especially upset if they then have to fork over about a third of their retirement savings to Uncle Sam.
(3) Both recent and previous history have shown that attempting to make
long term predictions about the economy or federal spending is a foolish and
misleading endeavor. After getting burned from investing in the South Seas
Bubble, Sir Isaac Newton wrote, "I can calculate the motions of heavenly
bodies but not the madness of people". Meanwhile, there are hard working
Americans who are trying to build and grow real businesses instead of
castles in the air.
[1]
http://papers.ssrn.com/sol3/delivery.cfm/SSRN_ID329840_code020920590.pdf?abstractid=329840
[2] http://www.fortune.com/fortune/print/0,15935,457263,00.html
Charlie Stromeyer Jr."
Remember that the ancient Greek, Democritus, was correct when he said "The only constant is change". Speaking of the ancients, you should see the classic comedy "History of the World" in which one of Mel Brooks' characters is an ancient Roman philosopher who has to apply for unemployment benefits.
When the clerk behind the desk asks Brooks' character for his occupation Brook's reply is "stand-up philosopher", to which the clerk responds "Oh, so you're a bullshit artist." Now, just substitute "bullshit artist" for "economist" and you're half way on the road to enlightenment.
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