Asymmetrical Information

Great article, although it took me a long time to read it, as my eye kept wandering to the vision of beauty at the top of the page...

I've always laughed at Gore and the other Democrat dwarves when they characterize privatization as "risky", since Federal employees participate in a "risky" scheme themselves called the Thrift Savings Plan. TSP has, I think, three mutual fund options- money market, stock and bond. That would be the model that SS could follow- no individual issues, but well managed, diversified portfolios.

You could even do a forced reallocation when the account holder reached 70, for example, from stocks to bonds and the money market if you were worried about downturns when the retiree was older.

This is not rocket science...

If you assume that privatization is a significant part of the solution, you are inherently assuming present and future economic progress are being limited by a shortage of investment capital.

While this is possible, it seems far more likely that the additional capital will tend to allow more and more marginal enterprises to be born, each less and less likely to survive. But even to the extent that they succeed, one of their effects will be to bid up the prices of all factors of production. Another effect will be to compete for disposable income. These effects will damage all of the earlier and less marginal enterprises that have previously come into existence.

In the end, how much assurance is there that a system of forced and mandated increased investment will be any more rewarding than just continuing to inflate the money supply?

I have a strong suspicion that the growth rate of real financial profit per capita is effectively limited, even if productivity and an improvement in the standard of living through lower prices is unlimited.

The only solution that I see would be to terminate the system as soon as possible, meeting existing obligations by the auction sale of Federal assets that serve no meaningful purpose

Regards, Don

Means testing is not without costs, either. Some sort of bureaucracy is going to have to be in place to verify eligibility, investigate fraud, etc... If only a small number of retirees are excluded, then the costs could eat up any savings.

Privatization is basically what should have been done from the beginning... take the payments and actually invest them so that people funded their own retirement instead of that of whoever happened to be retired now.

Bolie IV

I plan to plant a roof garden on my garage and am considering raising some chickens or other livestock.

Another answer might be to make a dramatic play like the following:

Pick an age, say 35 (I am of course 36), and announce that if you are under this age you will not be receivieng SS benefits. Most people under this age don't beleive they will be receiving them anyway. Also this will not agitate the current or near future members of AARP. This at least limits the backend liability and gives everybody time to react. Then wait. As insolvency approaches, the voting demagraphics will be more favorable to upping the eligability age. Everybody under say 45-50 will not be eligable anyway by then and those older than 70 will want to protect their income. This will allow us to slowly get rid of this beast. I can see no other way.

Jim English
Chicago

I am curious why you used (hypothetical) income as the basis for means testing instead of wealth. It seems fairly certain that a large number of people of the relevant age have large assets and small incomes, and could easily be means tested out. Of course that doesnt say anything to the actual political possibility of such testing, but I am curious as to why you didnt bring it up.

TSP has 5 plans now.
the 2 new ones are an international fund and a small cap fund.
www.tsp.gov

My favorite part was the "sucking chest wound" bit. But I haven't finished the first paragraph yet.

For those interested in info from actuaries who have been studying this problem, check out this paper from the American Academy of Actuaries:
Social Security Individual Accounts: Design Questions.

Actuaries are the people who calculate things with regards to insurance products (we bet on death & interest rates...) The Office of the Chief Actuary at the Social Security Administration has a lot of info, too:
Solvency issues -- the research papers, and a simple FAQ on Social Security's future... though there are some misleading items in the FAQ (like about the joke that is the "Trust Fund".)

For those interested in info from actuaries who have been studying this problem, check out this paper from the American Academy of Actuaries:
Social Security Individual Accounts: Design Questions.

Actuaries are the people who calculate things with regards to insurance products (we bet on death & interest rates...) The Office of the Chief Actuary at the Social Security Administration has a lot of info, too:
Solvency issues -- the research papers, and a simple FAQ on Social Security's future... though there are some misleading items in the FAQ (like about the joke that is the "Trust Fund".)

Two comments:

1. The claim that "Social Security is basically a Ponzi scheme" is not accurate. Ponzi schemes are always doomed to fail because you eventually run out of new participants. Intergenerational income transfer programs need not fail, because there will always be new participants. The fact that such transfer programs can fail if their revenue and payment streams are not balanced does not mean that they are per se fraudulent like Ponzi schemes are.

2. The claim that "private accounts increase our national savings" is true as far as it goes, but JG ignores (though is surely aware of) the fact that to fund those accounts, we will need a mandatory payroll deduction or similar device that must reduce either savings or consumption.

The only difference between SS and a ponzi scheme is that people who consider themselves too smart to fall for a ponzi scheme have fallen for Social security. All ponzi schemes work on paper which is why so many people fall for them. The problem is making sure that you have a lot of new people paying into the scheme forever. Thats the demographic problem that so many people don't understand. Longer lifespans combined with fewer children per person means that the ponzi scheme will fail.

JayH says "Federal employees participate in a "risky" scheme themselves called the Thrift Savings Plan. TSP has, I think, three mutual fund options- money market, stock and bond."

1. Nobody is required to participate in TSP.
2. The Government chips in 1/2 of the employee's contribution, up to 5%, thus significantly reducing the risk of an employee losing principal.
3. Federal employees also have Social Security. TSP is the equivalent of a 401(k).

So, I'm not convinced a TSP-like system would work as a Social Security replacement. It would take so much revision that it wouldn't end up looking much like TSP.

Robodruid is right. Small caps and internationals were added recently (it took about 5 years to implement, government bureaucracy being what it is).

MSD -- I also wondered about retiree wealth being measured in terms of income.

alkali

2. The claim that "private accounts increase our national savings" is true as far as it goes, but JG ignores (though is surely aware of) the fact that to fund those accounts, we will need a mandatory payroll deduction or similar device that must reduce either savings or consumption.

Jane has it right here. You are ignoring the fact we already have a mandatory payroll deduction that does not increase our national savings, because a large part of it is spent immediately and the rest is "invested" inefficiently in government bonds. Our savings and consumption is already reduced by this device. Diverting that forced deduction to private accounts that allow holders to make more efficient investment choices would indeed increase our national savings, although some of the benefit would necessarily be lost by the tax increases and/or expanding deficit that would be required for the government to meet obligations to those for whom it would be too late to reasonably privatize.

"Diverting that forced deduction to private accounts that allow holders to make more efficient investment choices . . ."

Do the accounts allow people to make poor investment choices?
If so, what do you do about those people?
If not, how do you avoid it? How do you guarantee for any given time frame that other investments will have a better return than government bonds?

Damon -

Do you by any chance have a life insurance policy? Whoops. fell for another ponzi scheme! Stop the madness!

Of course, neither SS nor any other kind of insurance is a "ponzi scheme", since both simply depend on current payments being able to pay current benefits. As long as the actuaries are able to accurately model how many people will die in a given year, an insurance company can charge premiums sufficient to pay the policies that come due.

Similarly, SS is a transfer of current income from current workers to current retirees. That's all it is, and all it will ever be. (the "trust fund", is, of course, a fiction, since governement cannot transfer wealth before it is actually generated) If demographic shifts change the underliing dynamic, the tax and benefit structure may have to be changed (or may not, depending on the increase in productivity that occurs from now until then - the reports of the SS trustees are notoriously pessimistic) If so, it's not the end of the world - it's not like the US government, which prints its own money, can "go bankrupt".

(No, it can't. I can hear you out there. Repeat after me: a soveriegn power that prints it's own currency and collects taxes in the same has no financial limits on it's ability to spend. Not to say that they can't be real effects, like inflation, due to mismanagement, but it can never "run out" of money. The concept is inoperative - its equivilant to saying Parker Brothers will "run out" of Monopoly money. So sit back down.)

And as for Jane's contention that privatization will increase growth by "increasing savings", it's absurd. Investment is not now, and never has been, savings-constrained. The act of financing new investment is what creates the money that leads to new savings - there isn't limited "pool" of money sitting around that can only be used for certain projects. It's counterintuitive, but that's what macroeconomics is about - sometimes the aggregate works differently than things on an individual scale.

Jane, I think you're staring at the trees here. Let's look at the forest.

The current system - where retirees setup retirement income for themselves by paying the last generation's retirement through tax transfers, and then taking their retirement from the next generation's workers through tax transfers - is bad. This is because the tax rate must be proportional to the retiree/worker ratio.

Yet a privatized system - where retirees setup retirement income for themselves by *buying capital goods from the last generation*, and then taking their retirement from the next generation's workers by *selling capital goods* - is good. This is because the percentage of income workers must devote to buying capital goods is proportional to the retiree/worker ratio.

So what happens in the systems when the worker/retiree ratio drops? The exact same thing. The public or private nature of the system doesn't matter a damn when it comes to long-run demographics.

Oops. Pretend that last sentence says:

"So what happens in the systems when the retiree ratio/worker ratio increases? The exact same thing. The public or private nature of the system doesn't matter a damn when it comes to long-run demographics."

Anyway, if you want to criticize the public Social Security system for deadweight loss, that's a valid argument. "Public retirement systems deal with demographic changes more badly than private systems" isn't; they respond in exactly the same way and proportions.

Jane:

"Privatization will be a major component of any long-term solution to the Social Security crisis. Why? Because private accounts increase our national savings....."

Steve:

"Jane has it right here. You are ignoring the fact we already have a mandatory payroll deduction that does not increase our national savings, because a large part of it is spent immediately and the rest is "invested" inefficiently in government bonds. Our savings and consumption is already reduced by this device. Diverting that forced deduction to private accounts that allow holders to make more efficient investment choices would indeed increase our national savings, although some of the benefit would necessarily be lost by the tax increases and/or expanding deficit that would be required for the government to meet obligations to those for whom it would be too late to reasonably privatize."

Can either of you explain to me how shifting to a privatized system changes the national income accounts? Net savings is unchanged; you've got to pay for the last generation's retirement whether you transition or not. I think you're double counting one generation's earnings.

Damon writes:

Longer lifespans combined with fewer children per person means that the ponzi scheme will fail.

There's no "failure": there will always be people paying into the system. You may have to cut the **** out of benefits, raise the FICA tax, or both, but the system won't "fail." Why would it?

"So what happens in the systems when the worker/retiree ratio drops? The exact same thing. The public or private nature of the system doesn't matter a damn when it comes to long-run demographics."

It's amazing that the implications of this fact are ignored by Jane even as she casually mentions it in the first part of her article. Keynes had a good point, there is no such thing as society undertaking savings. The medical care, golf outings, clappers & other consumption goods of tomorrows retired generation will be produced by tomorrows workers...not out of 'savings'!

The problem SSI is facing is not a failure of SSI but the consquence of our decision to expand retirement so a larger portion of the population is not in the labor force. If you increase the portion of people who are not working then that means the products produced by those that are must be divided over a larger population. End of story.

In a 401K world this means as the baby boomers retire, they will seek to sell their assets. Todays workers will have to 'save' a large portion of their income to buy these assets at high prices....or todays workers will not and the assets will sell for much lower prices. This is exactly analogous to SSI's 'problem' of raising taxes or cutting benefits. If SSI is a ponzi scheme then so is life!

Steve Waldman writes:

You are ignoring the fact we already have a mandatory payroll deduction that does not increase our national savings, because a large part of it is spent immediately and the rest is "invested" inefficiently in government bonds. Our savings and consumption is already reduced by this device. Diverting that forced deduction to private accounts that allow holders to make more efficient investment choices would indeed increase our national savings, although some of the benefit would necessarily be lost by the tax increases and/or expanding deficit that would be required for the government to meet obligations to those for whom it would be too late to reasonably privatize.

I don't think I'm overlooking anything.

My view of how privatization would work:

Existing tax revenues --> pay current obligations
New tax revenues --> fund private accounts

Your view:

Existing tax revenues --> pay part of current obligations + find private accounts
New tax revenues or borrowing--> pay remainder of current obligations

There is no substantive difference here. In my model, the lost savings due to new taxes offset new savings due to private accounts. In your model, there are new savings due to diversion of the existing revenues into private accounts, but you yourself concede that these would be offset by a reduction in savings caused by new taxes or borrowing. Same result.

The key fact is that substantially all current social security revenues go to pay current obligations (except for a relatively small surplus fraction which is currently being used to fund the deficit). There is no secret stash of money that could be used to set up a private accounts system. That has to be new money; it has to come from somewhere.

It is probably true that imposing what amounts to a nationwide mandatory savings obligation (i.e., a tax that would fund private accounts) would displace some existing savings as well as some existing consumption, and would therefore raise the national savings rate. I don't really feel qualified to say whether this would be a good thing: it would certainly slow down the economy in the short term but would have some long term economic benefit.

"This is exactly analogous to SSI's 'problem' of raising taxes or cutting benefits. If SSI is a ponzi scheme then so is life!"

Heh, I'll remember this.

My goodness, so much labor over so fine a variation in connotative meanings.

Ponzi scheme: An investment swindle in which early investors are promised high profits, which are paid out by an ever-increasing base of subsequent investors, the latter tiers of which receive nothing when the scheme collapses.

The semantically righteous correctly note that Social Security is not "actually" a Ponzi scheme (at least not by the above typical definition), but if it has the institutional structure of a duck and the potential to die like a duck, why berate the observer for calling it a waterfowl?

From the perspective of an end-user I fail to see how it matters. If ~2.3 workers are presently sustaining one retiree, then the supporting population base must always increase to accommodate the ever increasing number of retirees the system supports.

Failing that and barring a significant structural alteration, the system (a) collapses or (b) suffers reductions in the benefits structure or (c) suffers a notable increase in confiscations from the "investors" or (d) some combination of B and C. In any of these four cases, by varying degrees the effective "investors" will not see the effective "return" they were promised relative to the original terms of the "investment."

And why might that be? Because the incoming number of "investors" did not increase relative to the burden of promised "return." Essentially the same failing point of a Ponzi scheme, except unlike Social Security those are intended to be temporary, and offer no hope of return to the last investors.

I honestly can't see a serious reason for fighting this aspect so enthusiastically except perhaps the label twinges the egos of persons who wish to support and defend the current system (which they are welcome to do IMO, so long as they can present sound arguments).

"The problem SSI is facing is not a failure of SSI but the consquence of our decision to expand retirement so a larger portion of the population is not in the labor force. If you increase the portion of people who are not working then that means the products produced by those that are must be divided over a larger population. End of story."

But in a private system, "we" don't make a decisions to expand retirement. Individuals make their own decision as to when to retire, and those decisions are influenced by the wealth they own at any given time - wealth that they trade to their fellow citizens in exchange for food, electricity, medical care, trips to Florida, etc.

"It's amazing that the implications of this fact are ignored by Jane even as she casually mentions it in the first part of her article. Keynes had a good point, there is no such thing as society undertaking savings. The medical care, golf outings, clappers & other consumption goods of tomorrows retired generation will be produced by tomorrows workers...not out of 'savings'!"

But the means to produce tomorrow's consumption goods are created today, out of today's savings and investments. If people save and invest for their own retirement, then at retirement they are simply getting a cut of increased production made possible by those same investments.

"2. The claim that "private accounts increase our national savings" is true as far as it goes, but JG ignores (though is surely aware of) the fact that to fund those accounts, we will need a mandatory payroll deduction or similar device that must reduce either savings or consumption. "

We don't need a mandatory anything. The whole notion that we need a mandatory retirement scheme led us into this mess in the first place.

The best estimate I can find is that Social Security benefits will be reduced by 30% several decades down the road if no alternate funding sources are found for the program. This doesn't seem all that bad.

It would be very easy to means test the system by using a lower COLA rate for those with higher benefits.

"If you increase the portion of people who are not working then that means the products produced by those that are must be divided over a larger population. End of story."

Hardly. First, even if you just look at the domestic US economy as a closed off thing, I've pointed out before here that the middle estimate of the Social Security Administration is that by 2045 GDP growth will be sufficient for workers to have covered wages 40% higher than today even *after* paying the 64% increase in payroll taxes needed to pay SS benefits then. That's a domestic pie growing fast enough to provide plenty of additional income and wealth to everyone.

And that's only covered SS wages, which themselves are only less than half of personal income, all of which will be growing into the future. So there is going to be *plenty* of new income and wealth to go around to fund retirees and everyone else in the US.

Moreover, it's the *world* economy that counts here. The larger portion of the people in the US who won't be working will be part of a *diminishing* portion of the people in the world who won't be working, on world demographics. There will be literally billions more people working in developed economies in 2045 to provide goods in exchange for US retirees' savings and income. That story has just begun.

SS has only one problem, and it is a *political* problem. The funding formula legislated by law must provide young workers with negative returns going forward. No way around it. That is where the demographic argument is real. And political complications will abound from that once SS starts consuming general revenue around 2016 or so, while at about the same time those earning negative returns from it become a majority in the work force.

SS has always been sold as providing big *positive* returns to participants. That's what accounts for its popularity. Everybody likes a government program that gives them money!

But nobody likes government programs that take money away from everybody. Negative returns will work as effectively to destroy SS's popularity in the future as positive returns did to build its popularity in the past. And simple fixes like upping the retirement age won't avoid the negative returns -- in fact, they will only make them clear, which is why the politicians have run away from them.

The political pressure from negative returns will inevitably change SS significantly, one way or another. After all, it is a political program. The only question is whether people will face up to the need for change and adopt it in a more reasonable and measured manner now or more traumatically later.

"The claim that Social Security is basically a Ponzi scheme is not accurate."

Well, I figure that when both Friedman and Krugman agree on something it has just *got* to be true, and they've both use the word "Ponzi" to describe SS.

"Social Security ... does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today's young may well get less than they put in)." Krugman, Boston Review, 1/97.

Friedman, http://www-hoover.stanford.edu/publications/digest/992/friedman.html
~~~~

"Do the accounts allow people to make poor investment choices? If so, what do you do about those people? If not, how do you avoid it? How do you guarantee for any given time frame that other investments will have a better return than government bonds?"

Alert! Alert! Social Security participants do *not* get the return on gov't bonds. They get a return by formula which will be negative for today's young workers.

Market investments can be risky but it takes a government to *guarantee* negative returns on retirement contributions over 45 years.

When young workers see that they will get back from SS as little as 50% of what they put in, they will see it as the failure it is and insist that the system be changed. And it will be.

~~~~

"Can either of you explain to me how shifting to a privatized system changes the national income accounts? Net savings is unchanged; you've got to pay for the last generation's retirement whether you transition or not. I think you're double counting one generation's earnings."

Current system:
Tax transfers pay all obligations, past and future. There is never any saving involved at all.

Simplest model privatization reform (as per Friedman):
Tax revenue -- > pays all future obligations incurred through today.
Saving --> finances all future benefits earned starting tomorrow.

Taxes are used either way to pay off all incurred obligations as of today, and obviously the amount of taxes used for this purpose is the same either way to the penny. (Although the kind of tax used could change from payroll to say income tax.)

However, going forward taxes are replaced with real savings. The mandatory savings would be greater than the resulting net saving increase, since some people would doubtless reduce other savings in an offsetting manner. But there would be some net saving increase. And some savings is more than never any savings.

~~~~~~~~~

"The public or private nature of the system doesn't matter a damn when it comes to long-run demographics."

A public payroll tax system can fund retiree benefits only by tapping the wages of workers subject to tax. It is trapped in the demographics of the US.

A system using real investments can fund retiree benefits by tapping the capital resources of the world. The world is in a very different demographic situation than the US.

I loved the subtle humor of the column. Me thinks that Jane's alter ego needs librarian style glasses for full effect. Also, you need to slip an option of just killing people who are fortunate enough to reach a certain age. Don't endorse it (nobody would), but slip it in. I think the repetitive quick dismissal of silly ideas combined with the librarian glasses would be great theatre!

Great column too! I could share this with my grandparents and they might not even write me out of their will for badmouthing Social Security.

-Brad

I loved the subtle humor of the column. Me thinks that Jane's alter ego needs librarian style glasses for full effect. Also, you need to slip an option of just killing people who are fortunate enough to reach a certain age. Don't endorse it (nobody would), but slip it in. I think the repetitive quick dismissal of silly ideas combined with the librarian glasses would be great theatre!

Great column too! I could share this with my grandparents and they might not even write me out of their will for badmouthing Social Security.

-Brad

Alkali,

Note that payment of grandfathered obligations under privatization would be a finite, one-time thing that, yes, would have to be offset by new taxes or borrowing. A privatization would not need to include any permanent increase in federal spending or taxation. It would cost one lump sum, the net present value of current SS obligations to current retirees or near retirees. It would be large, but it is money we're going to have to spend sooner or later, and sooner would cheaper than later.

Privatization would not, as you imply, require continuous extra taxation to translate into extra savings.

Jason McCullough writes:

Yet a privatized system - where retirees setup retirement income for themselves by *buying capital goods from the last generation*, and then taking their retirement from the next generation's workers by *selling capital goods* - is good. This is because the percentage of income workers must devote to buying capital goods is proportional to the retiree/worker ratio.

This makes no sense. Capital goods are traded widely, on many timescales, and not just intergenerationally. No current workers are required to buy anything off retirees -- they will do so if they think they can profit from those assets, and do something else with their money otherwise.

Of course it is true that "savings" at a certain level is an illusion, that in any case retirees will be eating food that fewer current workers are growing. And, yes, to that degree demographics is destiny -- if there are more retirees per worker, somehow each worker will share a greater part of the burden of the feeding them. But when workers invest to "save" assets for retirement, it is accurate to say they are helping the workers who will follow them. Because when those assets to grow, it is because they are contributing to productivity increases that diminish the cost of keeping a person fed relative to the larger share of a larger economy a future worker takes home. When those assets fail to grow -- whether due to an individual's poor choices or because the larger economy tanks -- a private savings scheme reduces the payment expected of current workers, also easing the burden on future workers in a sadder way.

And no, I do not propose that it is okay that working people who make poor investment choices should be let to starve, and that's how we'll get our savings. But there are lots of practical possibilities between a laissez-faire let-'em-starve-if-their-stocks-drop system and a defined benefits system that discourages the efficient allocation of present resources, but saddles younger or yet unborn workers with all of the pain should the economy fail to grow or collapse as a consequence of that.

"A public payroll tax system can fund retiree benefits only by tapping the wages of workers subject to tax. It is trapped in the demographics of the US.

A system using real investments can fund retiree benefits by tapping the capital resources of the world. The world is in a very different demographic situation than the US."

The first thing is that comes to mind is that any gains in the US system will have to come at the expense of the "rest of the world" system, which is rather odd for something so analogous to free trade.

The second thing is that I don't see how this works in a model. Assume you have two independent systems, same income level, different retiree/worker ratios. What happens when they "combine" their systems by going to a private capital market one? I don't see how the transition changes anything, whether you add differing income levels or not.

Oh, and I still don't see how privitizing "increases savings"; you've still got that debt hangover. It just sticks it in a different accounting column.

I'm not convinced that you didn't consider another alternative, but I certainly understand why you wouldn't put it in writing with your name on it. Probably the only longterm solution to every government Ponzi scheme is the same. They have to collapse under their own weight.

The necessary reforms aren't politically possible. Senior citizens can be counted on to reliably vote against any threat to their income stream. This is understandable, and even ethically defensible. In the early days of Social Security, there were people receiving it who had paid little for the privilege. At this point however, my parents in their 70's paid for it all their working lives. They also were allowed to base their retirement plans on assumptions about what they would receive. Pulling that rug out from under them now that they are retired just won't work. And that logic extends down to people who aren't retired but are too close to retirement to easily make other plans. That's a sizeable portion of the population that will vote against any rollback of the benefits.

On the other side, anyone working, and that overlaps with the first group, is going to resist increases in the taxes they pay to support the system. That is even easier to defend than seniors voting for their benefits. Why on earth should I be paying to fund a comfortable retirement for people who refused to take care of themselves?

These two factors conspire with the demographics to force a crisis on the system. And as the Soviet Union demonstrated, the heavier the burden of the the needs of each, the less the willingness of each to be able to contribute. Redistribution doesn't work. Eventually the system itself will force a crisis which requires radical change. It isn't a pretty picture. There will be live television coverage of senior citizens freezing in the streets and starving. I intend to be there to say loudly and clearly that they are the victims of a political fraud. The politicians who have created and perpetuated Social Security at best deserve infamy in our history books. I don't know what a truly just penalty for their actions would be. They can never repay all of the people they have robbed.

Steve Waldman responds to me:

Note that payment of grandfathered obligations under privatization would be a finite, one-time thing that, yes, would have to be offset by new taxes or borrowing. A privatization would not need to include any permanent increase in federal spending or taxation. It would cost one lump sum, the net present value of current SS obligations to current retirees or near retirees.

I see what you're saying, but by definition the cost of the system's future obligations to the previous generation is equal to the net present value of those obligations. That's what net present value means.

By way of example: suppose you rent an apartment for $100 a month. You cannot save any money by borrowing a lump sum of money to buy an annuity that pays $100 a month to your landlord, because the lifetime cost of paying that debt will by definition be no less than the net present value of your future stream of rent payments.

To clarify, I don't contend that back-funding Social Security's obligations so that going forward we have individual accounts is necessarily a bad idea; in fact, I think there are a number of reasons to think it might be a good idea. I just don't agree that you would see a net increase in national savings.

Name Withheld, do you honestly think Americans are so tax-averse that we'd let people starve in the snow? What I think more likely is that Social Security will get means-tested to the point of welfare (it'll keep you out of the street but only just), we'll pay through the nose for even that, and my generation will fund our own retirement through mandatory private investment accounts. Mind you, we won't get to retire until we're 80, but hey, we'll live past 90, so what the heck.

Katherine, I am not nearly that hard-hearted, nor do I believe most people are. What I am pointing out is that real reform of the Social Security Ponzi scheme will be precipitated by a crisis. There will be sob-stories in the news about seniors suffering. Some of those stories will be true, others will be grossly exaggerated. Sorting out the true ones and reaching the point were social programs just barely prevent them will hopefully be the result of the crisis.

Every time I think about this the stories about people who lost their entire 401(k)'s in Enron's death-spiral come to mind. I personally know dozens of people who lost money on their own companies' stock when the tech bubble burst. I did myself. But just as I am not counting on Social Security to make my retirement possible, I didn't put all my chips on one company either. Yes, we are going to be faced some day with supporting the Enron employees who bet the farm and lost. A few of them made collosally stupid bets hoping to win big and they lost big. Either we have some charity (government or otherwise) to support them when they can no longer work or we face the prospect of watching them starve.

Where I grow hard-hearted is when I have to make hard decisions about how much support I can give my own family (children and parents) because I am supporting other people's bad decisions. If they had won their bet, they'd be living large. If we provide them that luxury anyway, we as a society are subsidizing bad judgement and failure.

"This makes no sense. Capital goods are traded widely, on many timescales, and not just intergenerationally. No current workers are required to buy anything off retirees -- they will do so

if they think they can profit from those assets, and do something else with their money otherwise."

I could have phrased it better; what it comes down to is retirement is *always* funded by taking some of the production of current workers; capital can't very well operate by itself. If the supply of workers to claim production from (through previous capital purchases) goes down, you're going to have to buy more capital to get your desired retirement income.

Forgive me my ignorance of jargon, Jason, but I can't understand your point because it's hiding behind your words.

If I understand correctly, you are saying that a retiree heavily invested in, say, the stock market, must fund his retirement by selling stock. This, of course, requires a buyer, who is most likely a younger worker trying to save for his retirement. But if there are fewer younger workers than before, there are fewer buyers, and therefore the expected return on investment isn't what it might have been were more young people working and buying.

Is that correct? If not, could you provide a similarly concrete explanation of your point?

Where to productivity increases fit into your analysis? Fewer workers may be able to produce more wealth thanks to present-day investment--doesn't that at least partially solve the problem you describe?

"Note that payment of grandfathered obligations under privatization would be a finite, one-time thing that, yes, would have to be offset by new taxes or borrowing."

No, new taxes or borrowing would *not* be needed.

As Friedman pointed out in his "SS Chimeras" article, the tax cost of paying off SS's "backwards transfer" obligations (presuming we don't reneg on them) is a sunk cost that remains unchanged to the penny whether SS stays as is, is privatized, or is totally closed down and abandoned.

When one realizes that this sunk cost that must be financed by taxes remains unchanged *whatever* option is elected in the future -- and that this is the *only* cost that must be financed by taxes -- then the mistaken illusion that there is a "transition cost" involved in moving from the status quo to a privatized system that must be finance by a "new" tax goes away. The eyes can see clearly again.

After all, one can hardly call something a "transition cost" if the very same cost is incurred without any transition!

Friedman:

"To see the phoniness of 'transition costs' (the supposed net cost of privatizing the current Social Security system), consider the following thought experiment:..."
http://www.ioptout.org/articles/990111.asp ...

~~~~~
*"A public payroll tax system can fund retiree benefits only by tapping the wages of workers subject to tax. It is trapped in the demographics of the US.

*"A system using real investments can fund retiree benefits by tapping the capital resources of the world. The world is in a very different demographic situation than the US."*

"The first thing that comes to mind is that any gains in the US system will have to come at the expense of the "rest of the world" system, which is rather odd for something so analogous to free trade."

What "expense" to the rest of the world? Investments are made on voluntary terms that are expected to be mutually beneficial. So when an investment is wound down, repaid at the end of its term, and both parties are better off for having participated in it, it can hardly be considered to have been an expense to one of them.
~~~

"I still don't see how privitizing "increases savings"; you've still got that debt hangover. It just sticks it in a different accounting column."

Old system: No savings in the system ever, 100% tax-and-transfer forever.

New system: Benefits earned in the future to be financed by savings, with only the already-earned "backwards transfer" benefits financed by taxes.

Some savings > no savings.

Jim Glass:
Very good insight. Thank you.

As to wether SS is a Ponzi scheme: a Ponzi scheme is entered voluntarily. You are enticed to enter by arguments which are often (but not allways)fraudulent. You have the option to stay out. If you enter you gamble, and you know it. SS drags you in by force. You can't stay out. It's an entirely different beast; what Friedman and Krugman meant is that it is **at least** as bad as a Ponzi scheme.

As to the "final" solution to the SS scheme - there need not be a traumatic crisis - it's only money after all. Taxes will go up, benefits will go down. Some compromise or equlibrum might be reached that is acceptable both to the old and the young, and maybe politically and financially feasible. Of course, SS will be a net loss producing scheme, for all involved but this is not reason enough to be sure it will be abandoned. In the end it will turn into another wellfare program, which it allways was anyway.

Denise,
The goal isn't to provide absolute protection to the investments, but to provide "good enough" protection. There is a standard in banking known as the prudent man standard. There is a higher standard sometimes known as the prudent fiduciary standard. Let me give an example. Municipal bonds are backed by assets (to protect the principal) and cash flow (to protect the bond's interest payments). Any assets held by the bond trustee, usually cash designated for the interest coupon payout, are restricted by the bond indenture as to what investments they can be put into. Typically such investments include any securities backed by the full faith and credit of the fed or state governments as well as AAA, AA, and A rated securites. A jumbo CD from a bank for $100,000 or less is such a security, but a jumbo CD for more than $100,000 is not because it is not covered by deposit insurance.

So, what you do is restrict the permissible investments for all (100%) or part (75-85%) of the private SocSec fund to those "safe" investments, and maybe let people play around with the small remaining portion, whether with absolute freedom or maybe just permitting a lesser grade investment. Even restricting the investment to government securities would be a big improvement over the calculated rate of return on your social security withholding taxes.

If we placed a small amount, say 5% of the FICA into private accounts each year, at the end of 20 years the accounts would be completely privatized. I think that people would put up with being taxed an extra 5% of their FICA each year if they knew it would go into a private account with their name on it that could be left to their heirs in a will.

Rex makes a really good point about the accumulation of heritable wealth. I'd like to see what the pro-SS posters have to say about that point, in particular the disparate impact of the non-heritable nature of SS on minorities and the poor with life expectancies which are lower than the rich and white.

Rex -- I had never heard what types of investments would be allowed under a privatized SS plan. In fact, the closest thing is the oft-repeated analogy to the federal TSP, in which people invest in what amount to index mutual funds. Much broader (especially factoring in the new small cap and international funds) than permitted investments for bond proceeds. If we're limited to the kinds of investments that bond trustees are usually limited to, then that's much less troublesome, I think.

BTW, you picked a hell of an example; I'm a bond lawyer. Kind of spooky.

Jason, as long as we retain the current SS system we are, as Jim says, trapped in the demographics of the U.S. because we can't tax the payrolls of foreigners to pay retirement benefits to Americans.

We can get out of the trap by allowing Americans to invest in foreign lands, thus increasing the incomes of foreigners, AND earning profits on that investment. We will thus have increased the number of workers supporting American retirees.

"If I understand correctly, you are saying that a retiree heavily invested in, say, the stock market, must fund his retirement by selling stock. This, of course, requires a buyer, who is most likely a younger worker trying to save for his retirement. But if there are fewer younger workers than before, there are fewer buyers, and therefore the expected return on investment isn't what it might have been were more young people working and buying."

More or less, yeah. A better way to think about it, maybe:

Assume people want to smooth income over their entire life, working and non-working. During their working years they'll need to earn future capital income equivalent to (retirement income / lifetime income)% of their lifetime income.

If you think about it, each generation needs to effectively lay claim to (retirement income/lifetime income)% of the next generation's production to pay for their retirement. One way to do it the current laws, taxes, and social contract method we have; another is by just investing enough.

That's the no-productivity, flat propulation growth idea, I think. Now what happens if the next generation decreases in size?

1) The next generation's total production decreases.
2) The share of the next generation's production that the retirees have laid claim to goes up a little bit (capital productivity isn't linear), but this is outweighed by the fewer number of workers. Expected retirement income drops.
3) The retirees, if they want the same retirement income, have to spend more of their income on capital investments.

I don't think adding productivity growth back in, or switching to "a drop in the still-positive growth rate" instead of "a shift from zero to negative growth" changes anything. In other words, a privatized system will need to increase investment just as much as a public system would need to increase taxes.

'"The first thing that comes to mind is that any gains in the US system will have to come at the expense of the "rest of the world" system, which is rather odd for something so analogous to free trade."

What "expense" to the rest of the world? Investments are made on voluntary terms that are expected to be mutually beneficial. So when an investment is wound down, repaid at the end of its term, and both parties are better off for having participated in it, it can hardly be considered to have been an expense to one of them.'

Jim, why wouldn't these investments have been already made anyway? Are you arguing that the effective "mandated domestic investment" from public social security is actually preventing capital from going abroad? US foreign investment is really small; I can't figure out how it'd be constrained by social security. I also can't figure out how this would work for two populations with the same per-capita income but different growth rates, much less adding different incomes.

"Old system: No savings in the system ever, 100% tax-and-transfer forever.

New system: Benefits earned in the future to be financed by savings, with only the already-earned "backwards transfer" benefits financed by taxes.

Some savings > no savings."

.....except in the new system, you're paying interest forever on the debt you took on to privatize the system! It's the same, dang it.

Public system:
1) Outstanding debt always equal to the cost of financing the retirement of the first generation to enter the system. There's no real savings (permanent income doesn't increase); it's all just to shift income forward.

Private system:
1) Outstanding debt always equal to paying off....the cost of the financing the retirement of the first generation to enter the old public system. There's no real savings (permanent income doesn't increase); it's all just to shift income forward.

Unless you violate promised claims at some point, I don't see how the capital stock changes in size.

Anyway, there's perfectly valid arguments for privitization along the lines of deadweight loss, risk management, and self-determination. I think both systems respond in the exact same way and proportion to demographic shifts, though, so criticizing it for that is a bit specious.

Ponzi Scheme Redux:

"From the perspective of an end-user I fail to see how it matters. If ~2.3 workers are presently sustaining one retiree, then the supporting population base must always increase to accommodate the ever increasing number of retirees the system supports."

Actually the population never has to increase. If the population hits zero growth the retirement age can simply be adjusted upwards as needed to return to the radio of 2.3 workers to 1 retired. Insurance works exactly in this way, if the insurance company is paying out more than it is taking in it can raise its premiums or it can get tougher on claims.

A Ponzi scheme, on the other hand, is not designed as a simple transfer system (which is what SSI & insurance is). 'Investors' are sold that they have an account that earns a return. In reality the return is other people's accounts so the system could never work mathematically unless you had access to an infinite population. I dare one person here to explain why a SSI system could not function with a steady population. Imagine a population of 100 people with 0% growth. 90% of the people are 'workers' who pay a SSI tax and 10% are 'retired' that collect benefits. Such a system could go on indefinitly whereas a Ponzi scheme could not mathematically function even with 3 people putting in just a penny.

The "Ponzi scheme" part refers to the ammount of promised benefits in relation to the tax or cost. The SSI does not say in abstract: pay something now and you'll get some benefits later. It says specifically: pay x tax now, and we assure you will get y benefits later. This promise is not economically sustainable - therefore it is a false promise.

** "Some savings > no savings."**

".....except in the new system, you're paying interest forever on the debt you took on to privatize the system! It's the same, dang it."
~~~

What "interest" and "debt"? SS is tax-and-transfer, not debt financed. If you mean the promise to pay off the "backward transfer" of benefits already earned, ok. But that cost is the same as in the current system with no additional "interest", is finite, and gets paid down over time.

Current system:
Joe Worker earns $30k and pays about $3,600 SS payroll tax that gets transferred to some retiree. In time he expects other workers will pay similar transfers to him. The process lasts indefinitely. No savings ever enter the picture.

Friedman-type sudden stark privatization:
As of 10/23/03 the old Social Security system ceases to exist except that all benefits earned through 10/22/03 will be paid by the gov't when they become due financed from, say, income taxes. (Kotlikoff prefers a national sales tax but it's the same principle.) All benefits earned after 10/22/03 will be financed with savings.

Now Joe Worker's payroll tax drops to $0. If the new system requires 6% mandatory savings he saves $1,800 a year that he wouldn't save otherwise and his current cash flow goes up by the other $1,800 that is no longer taxed. And in the end he'll get a larger return on his savings than he would have on payroll taxes. So he's a winner at least.

The $3,600 in taxes that Joe formerly paid to fund retiree benefits now become income taxes that fall on Warren and Bill and other people richer than Joe. However they consist of exactly the same amount and are used in exactly the same way as if they had been collected from Joe under the old payroll tax system.

There is no "interest" expense that doesn't exist in our status quo. There is no increase in taxes, just a shift in who pays them. There's no change at all except income taxes replace payroll taxes.

These income taxes are not collected "forever". The promises made as of 10/22/03 are finite and paid down over time -- exactly as they are under the status quo system. Except this is not readily visible under the status quo system because payroll taxes commingle funds used to finance benefits incurred up to 10/22 (or any other date) with those incurred forever after.

The pay-down period for functionally 100% of SS promises made as of 10/22/03 would be what, maybe 65 years? It would require no more taxes than otherwise -- exactly the same in fact as our status quo. But at the end of that period SS benefits would be financed 100% from savings and 0% from taxes, having moved gradually over that period from the reverse.

And if SS is financed 100% from savings I think it's clear that total savings will be larger than if it is financed 0% from savings (though not one-for-one so as there will be some portfolio shifting among those who have other savings, no doubt.)

"The pay-down period for functionally 100% of SS promises made as of 10/22/03 would be what, maybe 65 years? It would require no more taxes than otherwise -- exactly the same in fact as our status quo. But at the end of that period SS benefits would be financed 100% from savings and 0% from taxes, having moved gradually over that period from the reverse."

Then over the next 65 years people would both have to pay the Social Security tax and pay for their own retirement; I thought you were just assuming we'd throw it on the national debt. That's what I'd do if I had to, as it'd equalize the cost across all forthcoming generations.

If you're arguing that mandating people double the percentage of income they devote to retirement funding for the next 65 years - which is what this is, near as I can tell - then yes, that'll obviously increase total savings by about the cost of one generation's retirement. You're *way* far afield from the way proponents usually talk about this.

"If the new system requires 6% mandatory savings he saves $1,800 a year that...."

So one generation has to seriously take it in the ass (paying for retirement twice) so unborn generations can have the benefits of.....a very slight increase in permanent income (the estimated amount is controversial), at the cost of much higher risk exposure?

"If you're arguing that mandating people double the percentage of income they devote to retirement funding for the next 65 years"

Actually, it would start off doubled, and then gradually taper off as current beneficiaries keeled over.

And of course there's no reason we have to keep any sort of mandatory system in place. I'd rather see people free to make those decisions on their own.

My preferred plan is to disband the FDA, deregulate the medical market, then when they come up with an anti-aging treatment, shut down Social Security.

Jason,

Exactly! The first generation paid almost nothing for their SS benefits. Each generation after has been promised more than they contributed. Somewhere down the road the piper has to be paid for the free rides. The current system is on the road to disaster. Hard choices have to be made. The sooner we get on a sound basis the better.

The transition is going to require pain. We can argue over who should incur how much, but the sooner we stop lying to people the less pain we'll have to endure.

Right. The social security system is in such dire straights that DOUBLING SOCIAL SECURITY TAXES FOR A GENERATION is the best way of sorting it out.

Jesus.

Jason, as you've pointed out, we can do it now, or do it later. In any corporate finance textbook, "now" is the preferred time for stabilizing investments. Any amount of extra taxes we have to pay out now simply represents part of the unfunded liability we've assumed for future retirements. Pragmatically, it's probably better to be someone who paid for two retirements than to be the 80-year old guy who paid for someone else's when the next generation decides they just can't afford to pay for yours.

As for the point about capital returns, you're arguing a statement I didn't make. I wasn't arguing that, on a society wide scale, capital gains made for better retirement than a government check; I argued that private investment increases productivity, while public spending doesn't. Yes, there will be some decline in capital gains when the baby boomers start selling capital assets. But that shouldn't have anything to do with the real return on the assets, which is what I'm interested in.

of course the congress could cut spending in order to pay back the money pilfered from the "trust fund". ....nah

"Pragmatically, it's probably better to be someone who paid for two retirements than to be the 80-year old guy who paid for someone else's when the next generation decides they just can't afford to pay for yours."
That is true.
Take also into account that the current generation is better off, thanks to SS, than it would have been without it - because the SS checks their parents received, which exceeded what the parents paid into the system, were added to the estates left to the younger generation. So there is some sense in having this generation pay back some of that money, to clear the mess. They have to pay it anyway, if not now in increased taxes, they will pay it in the future when they retire, by receiving drastically reduced benefits.

Jason,

if I need to pay higher taxes and forgo SS benefits so that my gradchildren will have the freedom to plan their own lives, I'll do it. I value their freedom that highly. And I've got my retirement planned on the assumption of no government assistance anyway, because the whole damn thing will collapse I get there (I hope!).

I'm not saying this is a popular stance, but it isn't a crazy one, either. The less influence the government has in what ought to be personal decisions (spending and saving), the better.

"if I need to pay higher taxes and forgo SS benefits so that ..."
There is no "if". We will all have to pay higher taxes and forgo a great part of the promissed SS benefits. There is nothing we can do about it. This is a fact. The money isn't there, you cannot create benefits out of thin air.

Jane, thank you for bringing the secret word back into the discussion. You don't have to be an Objectivist to know that "Productivity" is the only, I repeat, only, solution to the future of this great country.

Grover Norquist and his legacies will ultimately drag government into the bathroom and drown it in the tub. And I know, I know, government and its machinations are necessary for all those important cultural issues (abortion, death penalty, file sharing, etc.), but the real rub will be capitalists finding ways to continue to do more with less.

Arguing about government and those nasty entitlements takes time away from the discovery of how the law of variation (and its practical cousin, continuous improvement) will free us forever from the excesses of management by objective (MBO). Please, everyone, take a deep breath and get back to work!

*"Then over the next 65 years people would both have to pay the Social Security tax and pay for their own retirement"*

"I thought you were just assuming we'd throw it on the national debt. That's what I'd do if I had to, as it'd equalize the cost across all forthcoming generations."

You are switching topics back and forth. You asked how "some savings > no savings", and that extreme example illustrated the answer.

The same thing is true to the appropriate extent if you just add 2% private accounts to solve the current system's political problem by giving everyone a positive return from SS on net. As those radical right-wingers in Sweden have done.

By having most of SS continue to be paid tax-and-transfer, that would spread the "pain" of the backward transfer out over a longer time -- sort of, remember how interest *would* compound then.

BUT if you think that you really are avoiding that pain by continually having each generation pass it off onto some future generation indefinitely, you are kidding yourself.....

Advocates of continuing the current Social Security scheme in the U.S. really ought to take a look at what's going on over here in Europe with our equivalent systems. Here's what we're at in Germany, for example: 1) Contributions that (in terms of percentage of wages) have reached a historical high in recent years, 2) an energy tax that was specifically introduced a few years ago in order to funnel more money into the system and stabilize it (that tax has been rising each year, and is expected to do so again in 2004 and 2005, at least), 3) the regular increase in payments to current retirees has just been suspended for next year, and 4) despite all this, it's expected that part of next year's payments will need to be financed through debt for (I believe) the first time.

The sad thing is, people had been warning of exactly these developments for over a decade, but seeing as this is Europe where people like reforms even less than elsewhere, nothing much has been done. In fact, as mentioned above, most "fixes" to the system simply involved creating more streams of money into the system, and lately decreasing payouts, which is already drawing the expected protests from retirees.

Things haven't quite reached the crisis stage that Name Withheld postulated yet, but we're certainly getting there rather quickly. The demographics of the U.S. may still be in better shape than Italy's or Germany's, but it likely won't last forever, and I don't think the United States really wants to make the same mistakes that "Old Europe" has made.

"If you're arguing that mandating people double the percentage of income they devote to retirement funding for the next 65 years - which is what this is, near as I can tell..."

Hello? Even Friedman's extreme example that I gave does nothing of the kind.

This is the great fallacy of the "transition cost" argument -- it ignores that this double cost of pensions must be paid WHATEVER we do in the coming generations, *including* if we stay with the status quo. It is not a transition cost -- it is a cost of the *current system*.

[] If SS is abandoned altogether today, 10/23, people in the future must pay for all retirement benefits earned through 10/23 AND for their own retirements too, somehow.

[] If SS is privatized today, 10/23, as per the extreme example above, people in the future must pay for all retirement benefits earned through 10/23 (through income taxes) AND for their own retirements too (through the new mandated savings accounts.

[] IF SS stays *exactly as it is*, people in the future must pay for all retirement benefits earned through 10/23 (through payroll taxes) AND for their own retirements too (through payroll taxes -- though these will be insufficient by 25%, so they will have to pay income taxes too, anyhow!).

There's no difference at all in the amount of the double payment required in the future. It's just simple arithmetic.

A backward transfer of retirement benefits worth $X trillion is made by the retirement system for benefits earned before 10/23. Ergo, all persons who make contributions to the retirement system after 10/23 must get back in benefits $X trillion *less* than they pay into the system -- as they must pay for their own retirements AND another $X trillion.

There's no way around it. You can try to "spread" it into the future if you want, but with interest accumulating as you do the current value loss to the future generations will always be $X trillion. It's a *sunk cost*. It can't be changed.

"So one generation has to seriously take it in the ass (paying for retirement twice)"

That's right! And you can thank the politicians who converted FDR's original fully funded SS system into a "backward transfer" system for that. That's the status quo.

But we do have choices as to *how* the younger generations get reamed.

E.g.: Rather than pay for the entire backward transfer through payroll taxes that fall entirely on lower-income workers and tax only about 40% of personal income, we could pay for it through income taxes that tax 100% of income -- and have billionaires who are part of the younger generation share in the reaming too.

And that would free us up to make private SS savings truly attractive for all workers.

" so unborn generations can have the benefits of ... a very slight increase in permanent income (the estimated amount is controversial), at the cost of much higher risk exposure?"

Hello again? Under the status quo young workers are *guaranteed* losses of up to 50% of their SS contributions by the benefit formula. And even those benefits are 25% underfunded. Well, if such losses are guaranteed then there's no "exposure risk" at all regarding them, eh?

Those losses result from currently paying the $X trillion backward transfer through payroll taxes, on top of using the *same* payroll taxes to fund the younger generations's retirements. *Everything* is trying to be funded through payroll taxes on just the lower 40odd% of income.

Which is the wrong thing to do.

Friedman points out that the cost of financing the backward transfer is just like that of financing WWI, the National Reconstruction Act, WWII, the cold war, the space program... whatever. The result was debt that the nation chose to incur for good or ill.

But in none of those other cases was the debt paid off only through payroll taxes that hit only around 40% of personal income -- basically, the *lower* 40%.

SS is supposed to be a basic retirement program that provides a fair positive return to everyone who participates -- to *workers*. That was stated by its founders. Grafting the cost of the backward transfer onto it destroys its ability to be any such thing -- and in time will destroy it politically.

Moving the backwards transfer out of the program and funding it from general revenue would not cost $1 of extra tax on net, but would free SS to become again what FDR's original SS program was, a *funded* and actuarially sound program providing positive returns to all worker participants.

Yes, it would cost Warren and Bill and others more in income taxes -- the exact same taxes that now are being collected from low-wage workers through payroll taxes, forcing so many into negative returns from SS. But that's a feature, not a bug.

It would also increase national savings to make the nation richer in the future.

And it would stop the backward transfer from continuing to accrue as it is now through transfer benefits still being earned by today's older workers -- so the reaming of future generations would at least be brought to a halt, we wouldn't keep on making it *worse*, as we are now.

So I think the Swedes with their 2% private accounts are weenies.

"The "Ponzi scheme" part refers to the ammount of promised benefits in relation to the tax or cost....It says specifically: pay x tax now, and we assure you will get y benefits later. This promise is not economically sustainable - therefore it is a false promise."

Benefits are actually not a promise but a projection. More than that, SSI is probably stable as far as the eye can see. Yes the baby boomers will put stress on the system but only using the most negative estimates of economic growth do you produce an insolvent system.

Jane's argument is that private accounts will expand the US's capital base. I'm not sure this will be the case for several reasons:

1. By keeping the deficit lower than it would other wise have been, the SSI surplus acts as a form of savings driving down interest rates thereby making investments more attractive.

2. The US has already seen a large inflow of investments from overseas. Capital, like anything else has diminishing returns. Adding a new machine may increase output by 100% but two machines may only increase output by 150%. Is there any evidence that the US is suffering from a lack of capital? IF so why is this the case?

Boonton,

As Jane's orignal TCS post pointed out, the system is far from solvent--because the "trust fund" doesn't actually exist (it's composed of debt owed by the government to itself), and revenues will be lower than projected outlays in something like 10 years.

Expenses > income with $0 in savings = insolvent.

Actually the Treasury has the legal right to sell debt to redeem the bonds that the Trust fund is holding. In effect, the baby boomers paid for the national debt to be lower during their earning years and will cash it in during their retirement.

The trust fund is an accounting device but accounting devices are very real and serve a real purpose.

"I wasn't arguing that, on a society wide scale, capital gains made for better retirement than a government check; I argued that private investment increases productivity, while public spending doesn't."

I was mostly arguing the above with Jim; I think his position that "we can increase total savings by mandating the next generation save twice for retirement" is politically crazy and would have tiny benefits for the costs (both in cash and increased future risk to retirees), but it's internally consistent. If you're going to go private I think it'd be a heck of a lot fairer to spread the cost across all forthcoming generations instead of fucking the next one, though.

What I don't see is how transitioning to a private system increases productivity. Are you arguing it'd increase total capital (by forcing people to save more along Jim's lines), or that it'd somehow improve the rate of technical innovation? Switching to investment instead of taxes would fix some deadweight loss inefficiencies, but that appears to be orthogonal to your position.

A bit more:

I think the framing of social security as an investment device "that will get you a positive rate of return" is fairly recent, and originated on the right, not the left. I can't find anything resembling it on this page of FDR speeches about social security, for example. It's all framed as "social insurance", "security," "insurance principles", "pension", and so on; no where do I find anything resembling a statement about rates of return or investment, positive or otherwise. The framing here is way off.

"Take also into account that the current generation is better off, thanks to SS, than it would have been without it - because the SS checks their parents received, which exceeded what the parents paid into the system, were added to the estates left to the younger generation. "

Except that those checks came from that same younger generation!

"Except that those checks came from that same younger generation!"
Sure. But the young generation paid into the SS system and expected to see some returns only at retirement. In fact, on top of those expected returns, they also got some real returns, before retirement,in the form of enhanced estates they inherited.

"I argued that private investment increases productivity, while public spending doesn't."

The assumptions here seem to be that:

1. Savings determines investment.
2. SSI fuels gov't consumption spending.

Mr . Friedman tells us that Social Security is a system that takes money from black men and gives it to white woman. Black men contribute all their working lives and then unfortunately die young. White woman, some who may never have contributed to the system, live the longest and therefore collect the most from SS. Wouldn't it be better to let black men keep their money so that they could leave it to their children. Thus building wealth generation to generation.

Jim English
Chicago

Jason
"I think the framing of social security as an investment device "that will get you a positive rate of return" is fairly recent..."
A pension plan (the term you say FDR used) IS an investment plan. The efficiency of various pension plans is measured by the rate of return.
If it is an insurance scheme - it's efficiency can also be measured, comparing it's cost and the contracted benefits to other available insurance policies.

I'm only disagreeing with "Social security was sold as an investment plan with a positive rate of return." It wasn't; the basis was explicitly based in risk-pooling.

Yes, but SS also provides disability insurance as well as retirement income. So comparing it's "rate of return" to a pure investment is not a fair comparison.

In fact, when one factors in the value of disability insurance and what is effectively life insurance, the rates of return aren't negative at all. Which explains why the critcs of SS never manage to factor them in.

SS is not an insurance scheme and not a pension plan. We must dump the false rethoric. It is an income transfer program, whereby income is transferred from the active population to the dissabled and retired.
It is very simple to make it economically sound and indefinitely sustainable: the amount to be paid out to retired people must be exactely the amount taken in by contributions, each year.
Each retired (or dissabled) person will get an equal share of the available pie. Congress will determine the percentage of income each active person is required to contribute (6%, 10%, 15%...).
I'm not saying this program is desirable or good or politically feasible. I'm only saying it's the ONLY economically sound program.

SS, as it now exists is a fraud, because it promises a certain level of benefits regardless of income, it promises the impossible.

Boonton,

You are suggesting that the Treasury finance SS with new bonds to pay off the old bonds that SS bought. Fine, that's possible. But that's a rather weak kind of "solvency," comparable to the guy who gets a new credit card every 6 months to pay the debt on his old cards. Technically, he's not "bankrupt." But if he doesn't either increase his income or decrease his spending, he's in a hell of a fix. Kind of like we will be in a few years.

Bones,

You really don't want us to talk about the disablity/life insurance side because that's a bigger swindle than the investment side--I can buy good term life insurance and solid disability insurance for a fraction of the price of SS. I can also decide that I don't need these things, and then keep my money to spend or save as I see fit. Furthermore, insurance companies have a contractual obligation to their customers, wheras SS doesn't--Congress can cut you off anytime it feels like it.

Whenever anyone starts talking about what a great deal SS is, I always suggest making it optional and letting it compete in the market with other insurance/pension products. How long do you think it would last? Given that the government has never been willing to make it optional, I think the answer isn't hard to guess.

"Mr . Friedman tells us that Social Security is a system that takes money from black men and gives it to white woman...Wouldn't it be better to let black men keep their money so that they could leave it to their children. Thus building wealth generation to generation."

Actually isn't the problem here that Black men don't live as long as their white counterparts or white women? Shouldn't we address the issues that are causing the poorer life expendancy?!

The above line of reasoning surprises me. Usually conservatives object to attempts to play the race card in reference to outcomes. For example, if I referred to Colleges and Universities without affirmative action as a system to provide education to white women, Asians and white men but not blacks the right would jump up and down. They would tell me racially different outcomes that are produced by decisions that are made with color-blind rules should not be considered racist...

It would appear this doesn't apply to pet causes of the Right.

I'm only disagreeing with "Social security was sold as an investment plan with a positive rate of return." It wasn't; the basis was explicitly based in risk-pooling.
~~~

The Social Security Act of 1935 created a defined benefit pension plan that was...
. funded.
. paid benefits at the time one retired based on how much one had contributed during one's working years.
. paid an aggregate positive return equal to the interest rate received on US bonds (with some recieving a little more than others since benefits were modestly larger for lower-income earners).
. wasn't going to pay maximum benefits to anyone for 40 years, almost 1980.
. by which time it was projected to have a reserve of $500 billion (1980 dollars).

It was in the words of FDR "actuarially sound ... out of the Treasury forever"

It involved "risk sharing" to the extent that any funded defined benefit pension plan does, no more and no less -- with the one major difference that as private securities markets at the time were deemed incapable of funding a national defined benefit pension program, the goverment had to do it, thus nationalizing all risks inherent in such a pension scheme.

That's how Social Security was "sold" and enacted.

That model lasted all the way until 1939 when Congress started re-writing the program by slashing the tax funding that was supposed to be used to build the reserve, adding on new benefits and so on.

Virtually every Congress thereafter amended the Social Security Act, changing some portion of SS in some way, until 1980 -- when Social Security went broke and had to be "saved" by the Greenspan Commission.

As to how all the Congresses "sold" all those changes they made -- well, that's quite a mish-mash.

"You are suggesting that the Treasury finance SS with new bonds to pay off the old bonds that SS bought..."

This has been done for over a hundred years. In theory we are still selling new bonds to pay off old bonds of debt going back to WWII.

Accounting wise SSI has built up a trust fund of Treasury bonds that it has a legal right to sell in the open market. During the Baby Boom generation this resulted in the net national debt being lower than what it otherwise would have been.

If you accept orthodox economic theory, then decreasing national debt would result in increases in the nations capital stock via lower interest rates & lower 'crowding out' of private investment. In this sense the baby boomers have paid for their retirements by passing along a nation richer in its capital stock than it otherwise would have been.

i know it is off topic, but i am really impressed by megan's faith in privatization. i will be especially interested in the follow up essay that she must be working on that will explain how she would set up the institutional structure of this privatization, in order to ensure that the interests of consumers will be aligned with the interest of the institutional investors who will no doubt be responsible for large chunks of a phenomenal amount of money. because if they get that wrong, as has been the case with other privatization ventures (electricity anyone?) than the fallout won't be about black and brown-outs, it will be about folks starving in the streets because their hard earned retirement funds have gone up in ... smoke? or should that be a "ponzi scheme" of another kind?

yes, privatization sounds like a panacea, but if the result of it is a political & legislative process that allows perverse incentive structures, then this very best of intentions will have led us straight to hell.

why do folks think that we will get privatization right?

"i know it is off topic, but i am really impressed by megan's faith in privatization. i will be especially interested in the follow up essay that she must be working on that will explain how she would set up the institutional structure of this privatization, in order to ensure that the interests of consumers will be aligned with the interest of the institutional investors who will no doubt be responsible for large chunks of a phenomenal amount of money."

That's easy.

Step 1: Stop collecting FICA
Step 2: Individuals choose from among competing investment firms, and pay them to manage retirement savings.
Step 3: Investment firms profit from happy customers continuing to pay them and lose when unhappy customers stop paying them. Interests are aligned.

The neat thing is that those investment firms not only compete against each other, they compete against every other possible use of that money.

"because if they get that wrong, as has been the case with other privatization ventures (electricity anyone?)"

Well, hopefully we're not going to be stupid enough to select a protected monopoly investment firm for each region of the country the way we did with electrical transmission facilities.

Boonton,

On the question of bringing up race, that is called "making an argument you think will appeal to your opponent."

Anti-war types who are arguing with conservatives do well to argue that, say, war in Iraq will reduce the US's security, rather than going off about the military-industrial complex.

Likewise, conservatives arguing with liberals are apt to make racial-disparity arguments they think will be convincing to liberals. They are likely to have better luck with that than, say, a straight economic liberty argument that won't convince anyone on the more collectivly-minded Left.

That's not hypocrisy, it's Rhetoric 101.

So even the person making the race argument does not believe it is founded on legitimate principles. Is the post even worth the space it takes up on my screen?

"On the question of bringing up race, that is called "making an argument you think will appeal to your opponent.""

I think it is really making an argument that will appeal to a sterotype of your opponent. The idea behind the post seems to be:

1. Anyone who supports SSI is liberal.
2. Liberals believe any policy whose outcome negatively effects blacks is racist.
3. Therefore, I can demonstrate that liberals are hypocrites by showing how the program they support has a negative effect on blacks!

The only person this is meant to appeal to is people who share the sterotypical view of the author.

The statement, of course, is probably not even true about blacks because (as was noted previously) a lot of analysis of the returns on SSI do not include benefits such as disability coverage, payments to surviving spouses and payments for surviving children. These elements would be more significant to a population group suffering from early death.

Boontown,

Poor analogy. Conservatives believe that the government cannot and should not attempt to equalize outcomes. In my example,government interference causes the problem. In your example, the government interfernce attempts to cure a perceived problem. Not at all the same.

"It would appear this doesn't apply to pet causes of the Right."

This statement is completely unwarranted. My philosophy is consistent. The federal government should stay out of areas not mandated in the Constitution. When you find in inconsistency in my philosophy let me know.

Lastly, I didn't play the race card. I cited an example of how Social Security is unfair. You chose to see it as a race issue. Its actually a demographics issue.

Jim English
Chicago

Boontown,

If you die and you children are over eighteen, there are no support payments for dependents. If you die and you have savings in the bank, you can will it to your children. I know many people who were left small but substantial amounts ($50000.00) of money by parents or grandparents. They used this money to buy houses and start businesses. It doesn't take much. But if the government has taxed it all away, and FICA is a tax, you are SOL. But its OK. You just have to beg some clown in Washington and if you play the game, they might get you a grant or something.

Not my idea of freedom. But maybe you enjoy it.

Jim English
Chicago

hi ken,
"Step 1: Stop collecting FICA
Step 2: Individuals choose from among competing investment firms, and pay them to manage retirement savings.
Step 3: Investment firms profit from happy customers continuing to pay them and lose when unhappy customers stop paying them. Interests are aligned."

this sounds wonderful in theory. unfortunately, in practice, depending on the rules of the game, one can generate perverse incentives that will not align investor and firm interests. example one: enron. example two: the recent scandals involving brokerage firms & mutal funds in ny. example 3: betting against exchange rates movements and losing billions.

yes, in the long run, i might change my affiliation from one firm to another, but it is not much help if a large chunk of my savings have gone down the gurgler, in the short run. the issue here is one of moral hazard.

as such, from your olympian perspective, yep, interests can be aligned, but a lot of blood can be spilt in the short run while we get there...

Privatization should _not_ be expected to increase the savings rate. Jane should know this--repeated exposure to the Cato Institute is no excuse.

It would be nice if Tech Central Station used a modicum of intelligence in editing its columnists' work--but after this effort, and the shabbily corrected column by Reynolds, and the imbecile rant by the Sage of Arlington against Krugman, I have little hope . . .

For the real story on savings rates and privatizing pensions, see (among much else)
http://www.epf.org/research/newsletters/1997/ff3-6.asp

"Poor analogy. Conservatives believe that the government cannot and should not attempt to equalize outcomes. In my example,government interference causes the problem. In your example, the government interfernce attempts to cure a perceived problem. Not at all the same."

Social security causes black males to have a shorter lifespan than white females?

Oh, great-- another anonymous name-calling lefty. Where do they all come from?

This one, however, either hasn't read his own source or is counting on no one following the link:

Despite the uncertainty about whether a funded, privatized Social Security system would necessarily increase long-term national savings rates, there are several reasons to favor adopting such a system. For example, there would be an increase in savings during the transition period, leading to an increase in the capital stock and more rapid growth in living standards for at least the next 70 years.

"If you die and you children are over eighteen, there are no support payments for dependents. If you die and you have savings in the bank, you can will it to your children..."

So if you were making an honest evaluation of SSI's benefits you would have to include the value of support payments of kids under 18, of your spouse later on in life and on disability coverage. Guess what, you can already leave your kids $50K, $100K even $1M tax free.

"Lastly, I didn't play the race card. I cited an example of how Social Security is unfair. You chose to see it as a race issue. Its actually a demographics issue."

Yes you did try to play the race card. Your argument is that SSI is unfair because it has a different demographic outcome for the average white woman than the average black male.

Be honest, if SSI was privatized and 10 years later someone produced a study showing that white women were losing from it (say because they typically earn less than men and have longer lifespans to fund retirements for) you wouldn't say 'this is sexist and racist against white women'. If SSI was privatized and it was shown that black males didn't progress but whites did you wouldn't say 'bring back old SSI because the current system is racist!'.

You want to apply a standard of unfairness to SSI that you would not apply anywhere else.

Boonton,

1) I didn't make the race-based argument. I have no idea if the person who made it sincerely believes it.

2) Sincere belief has nothing to do with either an argument's validity or its persuasion value. Being an effective persuader doesn't mean saying what you believe, it means saying what you think your opponent will take seriously.

3) One has to make certain assumptions ("stereotypes") about one's opponents in order to address them meaningfully. For instance, right now I'm stereotyping visitors to this web site as people who read and write English. And yes, I would endorse stereotyping SS supporters as mostly liberals, since conservatives are mostly on the "privatize everything" bandwagon (if you will forgive my use of a stereotype).

4) It certainly isn't crazy to think that liberals like to avoid racially disparate outcomes, given that race preferences are a major "liberal" issue. In fact, it isn't crazy to assume that conservatives would prefer to avoid racially disparate outcomes, especially when those outcomes are mostly beyond the control of the individuals involved (unlike, for instance, college admissions, where individual effort can overcome most barriers (Please, let's not turn this into an AA fight pit--just acknowldge that death and getting A's in school are significantly different)).

So Boonton, the race argument might not be the best--and in particular, it might be subject to economic criticism based on death benefits, as you suggest but don't follow up--but it is a perfectly valid point to raise, and one which no one has bothered to address other than to call it hypocritical.

"You want to apply a standard of unfairness to SSI that you would not apply anywhere else."

And you, Boonton, are exempting SS from the standards that you would (probably) apply elsewhere. (And, you're stereotyping your opponents views on race!)

Enough hypocricy to go around. Anyone care to address the quesion, or shall we continue name calling?

"And you, Boonton, are exempting SS from the standards that you would (probably) apply elsewhere. (And, you're stereotyping your opponents views on race!)"

Ask the reverse question, if a privitized SSI system was found years later to have left a particular demographic group worse off (black males, white women etc.) then would those touting the 'SSI is racist' line shift position and declare their old positions racist?

You're applying a standard to SSI that you probably do not apply to any other policy. Look, if you want to argue that racial outcomes determine whether or not a policy is racist then please go for that argument. But please do not make that argument just for SSI because you 'think' it is the 'type' of argument that people 'like me' will find appealing. Well, I have used up my quota of ' marks so I will end there.

"Take also into account that the current generation is better off, thanks to SS, than it would have been without it - because the SS checks their parents received, which exceeded what the parents paid into the system, were added to the estates left to the younger generation."

How many of you expect to inherit back any significant portion of what you've paid in SS tax? If you think your parents are saving up their income to leave you a big estate, you might have really, really great parents but more likely you need a reality check. If your parents are poor enough after retirement to really need their SS checks, they aren't likely to leave you enough of an estate to matter anyhow. If they are well-off, the extra income just pays for a couple more sets of plane tickets every year.

The question that is more difficult to answer is how is the economy today different from what it would have been without SSI. SSI, like many New Deal reforms that have survived, is more about Security than generating a return on investment.

Because people know and knew they would be guaranteed checks by the gov't when they got old, they took risks that would have otherwise been ill advised....I imagine a nagging wife screaming at her husband 'don't quite your job to start a computer company from your garage, what are you going to live on in 15 years when you have to retire!'.

I don't know how you could quantify this but a portion of our general wealth today was because people did take risks that they otherwise wouldn't have taken. Today there are a lot of people who are staying in dead-end jobs and not taking risks on better jobs or their own businesses because of the cost of health care. Whatever the down sides of a universal healthcare plan, one upside that should be considered is the freedom it would bring to the labor market.

"Oh, great-- another anonymous name-calling lefty. Where do they all come from?

"This one, however, either hasn't read his own source or is counting on no one following the link:"

Coming from a fellow slamming others for lack of comprehension and shoddy editing, that *was* amusing!

**"Adopting a Social Security system in which returns are not limited to the growth of taxes paid by workers, that remains in long-run balance and has the potential to raise net savings rates and productivity growth has much to recommend it."**

Never mind. ;-)

Boonton,

I cited a specific example from Milton and Rose Friedman's book "Free to Choose". It happened to be about black men and white woman. It is a function of demographics. Anyway, it wasn't my choice.

"So if you were making an honest evaluation of SSI's benefits you would have to include the value of support payments of kids under 18, of your spouse later on in life and on disability coverage. Guess what, you can already leave your kids $50K, $100K even $1M tax free."

Not if you happen to die at 50 when you children are 19. The government has no mandate and frankly no business taking money from working people and re-distributing to other people (some of whom have far greater wealth than the worker). What else should the government have the right to take? At what cost? From who?

Jim English
Chicago

"Because people know and knew they would be guaranteed checks by the gov't when they got old, they took risks that would have otherwise been ill advised....I imagine a nagging wife screaming at her husband 'don't quite your job to start a computer company from your garage, what are you going to live on in 15 years when you have to retire!'. "

How many 50 year olds were quitting their jobs to start computer companies in their garages?

And how much more risk taking could have taken place if the money sucked into Social Security had instead been saved in a manner that one could draw on at any time of life in which a financial emergency occured. I'd say that people would be more willing to risk having to retire later (or not at all) than they would be willing to risk going broke next year.

And rightfully so.

"Today there are a lot of people who are staying in dead-end jobs and not taking risks on better jobs or their own businesses because of the cost of health care. Whatever the down sides of a universal healthcare plan, one upside that should be considered is the freedom it would bring to the labor market."

You can get the same advantages, with a lot less trouble, by eliminating the tax advantages of getting health care coverage from employers.

Dear Paul Zrimsek and Jim Glass,

Look again. The article you claim I'm distorting
(www.epf.org/research/newsletters/1997/ff3-6.asp)
begins by _italicizing_ the claim that "there is little reason to believe that Social Security reform will solve the problem of historically low U.S. savings rates." The authors of the article are strong proponents of privatization, which in my opinion makes them all the better as critics of what Jane Galt's column casually asserted. (Indeed, the EPF regularly receives funds from the John M. Olin Foundation, and praise from the US Chamber of Commerce, two institutions beloved of all us anonymous name-calling lefties!)

Any savings-rate increase, this article indicates, would come not from privatization but from the necessity of paying for the transition away from a pay-as-you-go system. Simply put, "savings-rate increase" means "decrease in consumption." Whether we honor current commitments and privatize, or say with pay-as-you-go Social Security and add funds to cover demographically-generated shortfall, the result is a temporary boost in the savings rate, so long as the transition is funded with taxes and not more borrowing.

You could say the good news is that the savings rate is likely to rise whatever fiscally responsible policy we adopt. It's also the bad news, since consumption is likely to fall.

If you'd like to see a libertarian damn various privatization plans for statism, have a look at
www.lewrockwell.com/rockwell/privatizers.html.

And for a critique from the left of the "let's compare apples to oranges" arguments for privatization, such as Feldstein's, check out
www.cbpp.org/pubs/socsec00.htm, especially the
pieces by Orszay.

To get serious for a moment about the problem of funding retirements in light of the demographics:
1) how about more flexible good-quality part-time jobs for folks as they get older? Something that universal health care might help make happen.
2) how about more flexible visas for guest-workers and immigration? They're coming anyway!
3) how about changing tax policy so that we don't have an endless structural deficit? The EPT article I originally cited imagined that privatization might produce a greater savings rate only because it would give the federal government the incentive to run smaller deficits--but that was 1997, before the budget temporarily went into surplus, and a long time ago fiscal-policy-wise. Rolling back the Bush tax cuts would be a great way to increase the savings rate, don't you think?

--T.D.

(PS, my secret identity, which seems to irritate you so, is Keith Nightenhelser, DePauw University, Greencastle In.--easily decodable from the email address at the end of my posting).

My understanding is that the bonds held by the SS trust fund cannot be sold on the open market, and that Congress can arbitrarily decide not to honor them. Supreme Court decisions have made it clear that Social Security benefits need not be paid should Congress decline to do so. The obligation may be a moral one, but it is not a financial one. The full faith and credit of the US government backs treasury obligations. Nothing backs Social Security's obligations. The trust fund is all trust and no funds. The only thing in it is a promise to raise taxes at a later date.

Actually the trust fund cannot raise taxes without Congress and the government can choose not to honor its regular treasury bonds. What backs SSI up is what backs gov't debt up, namely nothing more than the taxing authority of the Federal Govt.

"Look again. The article you claim I'm distorting
(www.epf.org/research/newsletters/1997/ff3-6.asp)
begins by _italicizing_ the claim that "there is little reason to believe that Social Security reform will solve the problem of historically low U.S. savings rates."
~~~

It won't "solve" the problem of urban traffic congestion or countless other problems either. But that wasn't the question.

The questions were whether privatization would *help* solve problem of low savings by increasing savings -- and whether it would be a good idea generally. And the study you quoted concluded...

"Adopting a Social Security system in which returns are not limited to the growth of taxes paid by workers, that remains in long-run balance and has the potential to raise net savings rates and productivity growth has much to recommend it."

... which is good enough for me!

"My understanding is that the bonds held by the SS trust fund cannot be sold on the open market, and that Congress can arbitrarily decide not to honor them. Supreme Court decisions have made it clear that Social Security benefits need not be paid should Congress decline to do so.."

It's not that Congress can choose to dishonor the bonds but that the bonds are payable to the Treasury, not to Social Security recipients. Then the proceeds of the bonds payable to the Treasury can be spent by Congress on anything it wants, including things other than Social Security.

This is the very same thing as you promising to pay a debt to someone in the future, him demanding security, and you saying "OK, I'll just write out a prommisory note to myself here (not to you) for that amount."

The myth that Social Security recipients get the return on US bonds, or benefit in some way from the security of them, is widespread -- from Michael Kinsley to people in this thread.

*If only* young workers had US bonds in private accounts they'd be much better off than they are now. US bonds would of course be an investment option in a real-savings system.

The trust fund has zero (0) impact on financing SS in the future -- without it future SS benefits would have to be financed through tax collections totalling $X, while with it future SS benefits will have to be financed through tax collections totalling $X. Wow, that's some difference!

~~~
"Congress and the government can choose not to honor its regular treasury bonds."

I don't think so -- not without a Constitutional crisis.

Amendment 14, Section 4:

"The validity of the public debt of the United States, authorized by law ... shall not be questioned."

"What backs SSI up is what backs gov't debt up, namely nothing more than the taxing authority of the Federal Govt."

Wrong. US governnment debt *is* backed up by the taxing authority of the federal government, as per the Constitution.

OTOH, Social Security's promises of future benefits are backed only by the willingness of future politicians to use the taxing authority of the government to finance them. Which will of course be voluntary with them, a matter of their political convenience.

And being that Congress has already significantly reduced benefits once, it would seem a pretty sure thing that it will do so again once the mega-deficits hit and SS needs financing from general revenue. As a "reasonable compromise" among competing national interests, as well as a matter of "fiscal responsibility". ;-)

The trust fund is an accounting device. As such it doesn't guarantee anything except as a useful measure to keep track of amounts & to provide a measure of fiscal restraint which would not exist if the the funds just flowed into the general account.

The fundamental problem of SSI is demographic which exists regardless of whether or not it is privatized. If a society intends to shift away from a worker based population and towards a retired one, then the stress point in the system will be the benefit. It doesn't matter if the 'accounts' are kept privately.

"Congress and the government can choose not to honor its regular treasury bonds."
Jim Glass stated:

I don't think so -- not without a Constitutional crisis.

Amendment 14, Section 4:

"The validity of the public debt of the United States, authorized by law ... shall not be questioned."

If the bonds held in the "Trust Fund" are to represent a "promise" made to present/future SSI recipients, then how does this section of the 14th Amendment square with the SCOTUS decision Fleming v Nestor (1960), which states there is no property right inherent in SSI.

Which, to say, means you do not own it. Which means, IT'S NOT YOURS.

The trust fund is an accounting device."

You don't need a trust fund to do accounting. Note they don't call it "an accounting device".

They specifically call it a "trust fund" -- even though, as the Treasury itself explains, it has none of the legal or financial traits associated with a trust fund in any other area of life -- and zero of the financing capabilities that real trust funds have.

The use of the term "trust fund" for an accounting device is a political PR device.

"The fundamental problem of SSI is demographic which exists regardless of whether or not it is privatized."

No funded retirement plan has the problems that SS has, whatever the demographics. FDR's original funded SS program wouldn't have had them either.
~~~~~

"If the bonds held in the 'Trust Fund' are to represent a 'promise' made to present/future SSI recipients, then how does this section of the 14th Amendment square with the SCOTUS decision Fleming v Nestor (1960), which states there is no property right inherent in SSI.

"Which, to say, means you do not own it. Which means, IT'S NOT YOURS."

Of course it's not yours! Those bonds are payable by the government to itself. How could any participants in Social Security *possibly* believe that they have *any* legal rights or interests in those bonds??

Oh, because they are held in a "trust fund". ;-)

See, politicians know the power of words.

"No funded retirement plan has the problems that SS has, whatever the demographics. "

No the problem just belongs to a different player. Imagine a '401K world' that has the same demographics as our world. All the retirement plans are 'funded' with stocks and bonds purchased by the individual throughout their working lives.

As far as the gov't budget is concerned, everything is fine. No one gets SSI checks from the Treasury and no one pays into SSI through the Treasury. However the story is different from the individual perspective. As more and more people retire they sell their 401K assets to fund their retirement. Since the raio of sellers to buyers is increasing, the only way for the selling price (which is the same as 'benefits') to remain stable is either for some people to defer retirement or for those still working to devote a larger portion of their income to savings.

The 'funding' problem has not been eliminated. Just like there are fortunes made in every bear market and fortunes lost in every bull market, some people will have just the right stocks in their 401K's to come out richer than average. Overall, though, the typically 401K holder will see pressure on their retirement as too many cash out at once.

The political response to this by some (especially the type that typically supports SSI privatization) will be 'tough luck, you picked the wrong stocks'. It's more than likely that the AARP and other lobbying groups will respond by demanding that gov't increase the % of income it requires workers to put into their 'private' accounts. In effect that would be the same thing as the SSI taxes but just in the more convoluted form of 'private' accounts that are really not private.

"Adopting a Social Security system in which returns are not limited to the growth of taxes paid by workers....."

"The growth of taxes paid by workers" is linear with GDP growth, right? Where the hell does the extra money come from?

"Since the raio of sellers to buyers is increasing, the only way for the selling price (which is the same as 'benefits') to remain stable is either for some people to defer retirement or for those still working to devote a larger portion of their income to savings."

And both things will happen voluntarily. The people who are capable of working longer will tend to do so, while current workers will take advantage of depressed equity prices and put more money in the market.

This is preferable to the current system, where the younger workers are all compelled to support the entire over-65 population, including those capable of working longer.

Comments are Closed.