Asymmetrical Information

I have no idea where you get some of your ideas about the Roosevelt Administration's policies from. The reason Social Security was created was simply in response to widespread popular pressure for various forms of social insurance, such as the far more radical Townsend Plan, as well as long standing concern within the Progressive movement on that issue. I'd suggest that you read the chapter titled "The Birth of Social Security" in Schlesinger's The Coming of the New Deal. Better yet, immerse yourself in all three volumes of The Age of Roosevelt

I would suggest that anyone getting his history from Schlesinger refrain from making snide comments about other's sources of information. Now, I'll let Tom Sargent explain it:

"The U.S. social security system was conceived during the 1930's, when many
academic economists believed that excessive saving and overaccumulation of
capital were fundamental macroeconomic problems.

"Because it depressed the prospective returns to new physical investments, a
large capital stock promoted unemployment. This was the stagnation thesis. An
unfunded social retirement system, could 'cure' the problem of capital
overaccumulation by diminishing incentives to save: taxes from young workers
were to be transferred to retirees. The promise that they too should expect to
receive transfers when they were old would dissuade the young from saving.

"This cure for too much capital was later formalized by the analysis of Paul
Sauuelson's (1956) overlapping generations model....

"With the passage of years, concerns about capital overaccumulation and
stagnation have receded into memeory, to be replaced by public concern over a
low U.S. saving rate. But we continue to live with a social retirement system
that was designed to ARREST SAVING." [My emphasis]

FDR's Social Security Act of 1935 was established as a *funded* and actuarially sound -- FDR *insisted* on that -- defined benefit retirement plan for workers.

Its basic principles were that all workers were to receive a fair positive return based on the amount of their contributions to SS, a return comparable to that provided by insurance products, and that there was to be *no* burden placed on future generations. FDR was *adamant* about that.

The idea was to provide a broad retirement benefit progam that markets could not provide at the time. Full benefits were not to be paid until the 1970s!

When defenders of the SS status quo today claim they are defending "FDR's Social Security", FDR pops a wheelie somewhere, wherever he is.

SS was converted to the paygo model that went broke in 1975, and then again in 1981, with a $10 trillion burden on the future today, by legislation enacted from 1939 through the 1950s.

Of course, that didn't help anybody who was poor in the Depression. The really *big* winners from it were those who retired in the mid-1970s, just before the first insolvency crisis hit.

Sure, FDR's SS was developed in the political era of the absurd if popular Townsend plan -- but to say it was "simply" a response to it is silly. Better than read three volumes on the New Deal, one might read one volume on the actual history of Social Security, such as _The Real Deal_ by Schieber and Shoven.

As to Drum, be makes the 101 error that all people who invoke the "transition cost" argument make...

"The reality ... is that private accounts will be funded by increasing the federal deficit..."

Hey, the reality is that *without* private accounts SS will have to be funded by increasing the federal deficit! Remember that $10 trillion of underfunding? That exists in the status quo. How does Drum propose to close that?

The transition cost fallacy as invoke by the defenders of the status quo:

There's a $10 T funding hole in SS that privatizers propose this way at cost of $X. We defenders of the status quo have no proposal at all for closing that hole. Therefore, we don't incur $X and our non-solution is cheaper!

BTW, this was amusing...

"So all this extra invesment has a positive effect, but only for a few decades or so. "

That's wrong, but even if it was right -- gee whiz, we wouldn't want an economic benefit that lasts *only* a few decades!

Yes, a conspiracy theory about tying down investment rates is much more plausible, Patrick.

This is simply untrue. Even at the peak of the 1929 bubble, there were only around a million people invested in the stock market, out of a population of 124 million.

It seems to me that you're jumping on a misstatement by a commenter to try to make the right point for the wrong reasons.

Not many people lost their retirement savings in the 1929 crash. Far more people did lose their retirement savings in the Great Depression, either through bank failures (pre-FDIC, of course) or the loss of pensions affiliated with companies that went belly-up.

You can make the argument that stock prices had nothing directly to do with Social Security, but it is highly misleading to say "it had nothing to do with replacing retirement savings lost in the market," ergo it was only an anti-unemployment measure, when there certainly were many people who lost their retirement savings outside of the market whose plight was causing problems.

Yes, FDR instituted Social Security for a variety of reasons, which included co-opting a political idea from opponents and trying to reduce unemployment. But how does one separate these pressures from the backdrop of lost savings, which had little to do with the stock-market-crash straw man you've taken to pieces?

The importance of President Bush's plan is to give young people s reason to continue to support social security as it becomes a pay as you go system.

I think real reform will have to wait for crisis since it will cause pain--either force later retirement, means test,or cut benefits are so toxic politically that no politician will do these things until they are forced.

My mom is old enough to remember the debates at the time. Roosevelt was stealilng the Townsend thunder, and Townsent was quite frank is his assertion that by removing the oldsters from the employment pool wouled free up jobs for the people trying to support a family with kids.

If you go to the Social Security history information sources, they talk about Townsend a lot.

The primary reality of Social Security is that it was based on a life expectancy of 50, and a payout after 65. Even with a payout at 67, a life expectancy of 75 makes the system unsubstainable.

BTW, my mom is 82 now. Her Social security contribution was 35 cents a week during the time she worked prior to and during the war..

"The importance of President Bush's plan is to give young people a reason to continue to support social security as it becomes a pay as you go system."

It's already a paygo system. That's the inherent problem.

But you are correct about the purpose being to give young people a reason to support it -- and the Democrats are really cutting their own throats on this, risking losing what has for years been their best issue, by being in denial on it.

Social Security's actuaries say it will be giving the young *negative* returns from now on. Who is going to support that? It is going to make SS as unpopular in the future as positive returns made it popular.

Private accounts are the remedy for that, even just 2% private accounts are enough to make the net return from SS positive, and thus save it politically. If the Dems had any sense they'd have been out front on this to *save* SS. I mean Sweden's done it, but Sweden is too right-wing for today's Democrats.

"I think real reform will have to wait for crisis since it will cause pain--either force later retirement, means test,or cut benefits are so toxic politically that no politician will do these things until they are forced."

You are right about that. Private accounts solve the rate of return problem but not the $10 trillion current value funding gap problem.

The politicians aren't going to touch that until SS goes cash-flow negative, stops sending them cash to spend and starts just sending them bills. *That's* when they'll touch the funding gap, about 10 years from now. When it touches them!

Here's an interesting factual tidbit about SS legislation: In every year from the 1940s on, it was passed in even-numbered years, *election* years, because it always primarily increased benefits.

But starting in the 1970s when the insolvency issues first hit, all the legislation switched to being passed in odd years, *off* election years, because it involved increasing taxes and timidly restricting benefits.

History indicates the major steps needed to close the funding gap won't be dealt with until there is a gun at Congress's head and the trigger is cocked.

"Private accounts are the remedy for that, even just 2% private accounts are enough to make the net return from SS positive...."

You can make the return on just about anything positive if you forget to include some of your costs. Diverting 2% of current social security income to private accounts pretty much leaves a 2% funding gap, no? You're claiming you've found free money here, Jim.

Sure, Patrick, someone from the Hoover Institute doesn't have their mind made up about a social program. I wouldn't trust Sargent anymore than you would trust Schlesinger.

Here's Sargent's homepage with his e-mail address, Jason.

http://homepages.nyu.edu/~ts43/

Feel free to tell him he's a conspiracy kook.

One way or another, the money from social security taxes is going to have to be invested in assets with a greater return than government bonds and spending they fund. They should start investing the surplus funds in private investments to actually get a decent return-on-investment and payout some of the gains into workers savings accounts in years when surplus funds have a positive return on investment. Over time, the dividends from investment income from the surplus funds might be enough to offset a significant fraction of the SS taxes workers pay and allow younger workers to accumulate wealth.

"Diverting 2% of current social security income to private accounts pretty much leaves a 2% funding gap, no? You're claiming you've found free money here, Jim."

No. And no again.

One can believe this "creates" a funding gap only by somehow being blind to the fact that the >$10 trillion funding gap exists in the *status quo*.

This merely recognizes, and pays for, a portion of the existing funding gap that apologists for the status quo refuse to recognize or deal with by saying how *they* will pay for it, and what "transition costs" *they* are willing to incur to do so -- since this lets them claim private accounts "create" the gap and transition costs.

Rather disingenuous of them, eh? ;-)

And to believe that 2% accounts *worsen* the funding gap, one must somehow believe that "free money" will appear to close that >$10 trillion gap in the status quo.

The relevant comparison is between the funding gap with 2% accounts and the funding gap in the *status quo*.

Clearly, private investments can reduce the funding gap because the higher rate of return on real investments over the *very low* return on contributions to SS, in the form of future benefits, can be used be to pay those future benefits leaving the excess to be used to reduce other future financing needs.

In short, borrowing $1 today, at low rates when borrowing is easy, can save the need to borrow $2 in 2040, when deficits will be huge and borrowing conditions figure to be horrendous.

Now, speaking of "free money", what's *your* proposal for closing SS's $10 trillion current- value funding shorfall that won't incur a "transaction cost" of higher taxes or lower benefits?

If it will assure positive returns on contributions to SS participants (as FDR promised, and is surely necessary to preserve SS politically in the future) as private accounts will ... *and* it will reduce the current value of SS's unfunded liabilities, and future borrowing, by more than private accounts will, I'm open to be all for it!

Details, please!

To answer Kevin Drum's two questions, and also Jason's, clearly, one needs to use real data and numbers provided by sources like the Social Security Administration's actuaries and GAO, using more space than a blog comment field allows.

I've done this here...

http://www.scrivener.net/2004/11/social-security-privatization-basics.html

... for anybody who might be interested.

Here are some excerpts from D Roberts of Depaul University at Senior Citizen Website.Com as to privatization Bush style-

Diverting new money into private accounts might benefit new younger participants upon their distant retirement, but this would probably come by shortchanging those who have paid into the current system for their entire working lives. Simply put, if the problem is that there will not be enough money to pay already-promised benefits at a particular date using all of the tax revenue, how would it help to use even less?

Some privatizers acknowledge that there would be a huge transition cost, saying that the transition could be funded from government's general revenues. But the total shortfall will ultimately be trillions of dollars. If privatizers have some secret plan to come up with this money, they should tell us. Thus far, they have typically avoided addressing this critical question.

With President Bush's tax cuts, the government budget is showing record dollar amounts of red ink. And the national debt, representing the accumulation of over 200 years of government borrowing, is up an almost unbelievable 28% under Bush. So where will the money come from to fund the transition?

Of course those with private accounts could generate higher returns on those accounts than Social Security generates. Most of the Social Security tax revenues are not invested; they simply go right back out to pay old-age, survivor and disability benefits. There is relatively little investment upon which to have any return. So how would privatizers pay all the promised benefits and come up with the new money to invest?

Note that when privatizers promise a higher "return", they frequently ignore the tremendous value of the present survivor and disability coverage that has helped so many families through tough times. If privatizers plan to end these important aspects of the social safety net, they should say so.

Making matters worse, privatizers usually promise an expensive new benefit--the ability to leave the account balance to heirs upon death. If government can't afford the present set of benefits, how can it afford this new inheritance benefit?

Current participants should be particularly concerned that good returns on small private accounts would lead younger workers to demand full privatization. Greater privatization would further drain the new tax revenues needed to pay benefits promised under the present system.

President Bush and most Republicans favor some degree of privatization. Some believe that it is not the role of government to provide a safety net; people should be on their own to sink or swim. And it is easy to see how the financial services industry--major Bush campaign contributors--would benefit from getting its hands on those private accounts. But it is hard to imagine how privatization would help older workers and seniors, and it is easy to see the potential for tremendous harm.

AARP will crush Bush.

"...If privatizers have some secret plan to come up with this money, they should tell us. Thus far, they have typically avoided addressing this critical question..."

Of course this is backwards to the point of being psychological projection -- or as someone at the NY Times would say with much less provocation, "a lying lie".

There are numerous specific detailed proposals from "privatizers" for funding SS -- from Moynihan, Kotlikoff, Feldstein, others ... proposals that have been scored by the SS actuaries and GAO as doing the job.

It is the defenders of the status quo who have no plan but for "magic money" to appear to close their $10 trillion-and-growing-every-year funding gap.

Neither do they ever want to talk about how their taking out of SS so much *more* than they put in is what will cause the young to get back so much *less* than they put in.

'We got ours, to hell with you!', the Inter-generational Compact!

FDR, who *insisted* on *no* backward intergenerational payment that would be a burden on the future, is popping wheelies in his grave. ;-)

"AARP will crush Bush."

Well, they've certainly gotten off to a great start at that over the last four years. ;-)

"...and that there was to be *no* burden placed on future generations. FDR was *adamant* about that."

Which is absurd. Retirement plans necessarily involve making future generations work to support past generations. That's the nature of the thing. The only question is how to allocate the costs amongst the younger generation.

"Neither do they ever want to talk about how their taking out of SS so much *more* than they put in is what will cause the young to get back so much *less* than they put in."

Which is a tautology. Those who come after a population spike necessarily have to do more to support a given retirement structure. The situation does not admit any other possibilities.

"AARP will crush Bush."

The markets will crush the AARP. As idle capacity is taken out of the economy, prices will rise and put the squeeze on their fixed incomes. No percentage of the electorate can vote a free lunch.

In the immortal words of Ronald Reagan, "facts are stupid things". BTW, I love the Gipper, and I especially loved his sometimes inadvertant honesty.

I thought one purpose of Social Security was that private pension plans were inherently unreliable. That is, bankruptcy of the company, or bank failure, embezzlement or the company just deciding it would rather not pay (a phenomenon the WSJ recently reported on) or probably lots of other things could mean that a private plan wasn't necessarily that secure.

Maybe back in the days before FICA and whatnot, when you couldn't even trust your bank to hold onto your money, a private pension plan was a little risky. Today, that's hardly the case. Nor do you need to put all your eggs in the one basket of a pension plan, there are better options for retirement savings. Such as mutual funds, stocks, IRAs, etc.

Robin: "Maybe back in the days before FICA and whatnot, when you couldn't even trust your bank to hold onto your money, a private pension plan was a little risky. Today, that's hardly the case."

Tell that to the retirees of the steel industry, the retirees and current employees of the airline industry, and in the not-too-distant future, those of the Detroit auto industry and the old-school telecommunications industry. Ask the former employees of Dresser-Rand what happened when they were sold to Halliburton. Ask the long-time employees of IBM, who had to go to court to keep their pension benefits intact.

A trip through bankruptcy court, as our laws are currently structured, gives a company an almost iron-clad guarantee that they can dump pension obligations but continue to operate. Unless extraordinary precautions were taken, such as putting the pension fund in an irrevocable trust, an acquiring company can almost arbitrarily change the pension rules to extract money from the fund. The rules for converting plans from defined benefit to defined contribution are immensely popular with corporations because they can reduce their obligations. Private pensions in the US continue to be very much at risk, on an almost daily basis.

The SS system is broken and underwater. There will be no solution that fixes the system without causing pain. The real question is how to distribute the pain. There are no Pareto optimal solutions here guys.

It is also clear to me is that those who paid in are not entitled to payouts above contributions if that means that we must abuse someone in the future.

Thus benefits may drop as part of any equitable solution. This may mean lower monthly payments, upping the retirement age (a no brainer), etc. In addition, we must take corrective action to make a future system solvent. Pay as you go approaches are not the answer. A solution will not likely have "silver bullet" qualities assocaited with it. Rather, it will have components of free market and government in it.

Finally, if we cannot fix this problem we are doomed to economic decline

Jim, thanks; it's nice to see a coherent argument laid out. I still disagree, thoough, because I think you're assuming some rather implausible things:

1) That the only alternative to privitiziation is doing absolutely nothing, and this means that without privitization the interest on the federal deficit will expand to 20% of GDP (driven chiefly by Medicare, I believe, not SS, btw). There are alternative courses of action, you know.
2) That for the nation as a whole, it is possible for the government to borrow money from the bond market, give the cash to the public with the mandate that they invest it in the stock market, and come out ahead. I guess the phrase for this is "vulgar exploitation of the equity premium puzzle".

If you step back for a minute and look at the demographic changes driving SS's problems, note that the fundamental problem here is that for the average worker, time in retirement keeps expanding, while time working stays constant, due to longer lifespans.

Imagine for a second that our social security system didn't exist. Retirement as a whole would suffer the exact same problem - expanding time in retirement, constant time working.

The solutions are the same for both the "no social security" and "social security" scenarios - either you keep the ratio between retirement and working time constant, or increase investment during the the working time enough to make up for the life expectancy changes.

Jason, don't you ever find it tiring evading answering simple questions?

Eh? What question?

"Tell that to the retirees of the steel industry, the retirees and current employees of the airline industry, and in the not-too-distant future, those of the Detroit auto industry and the old-school telecommunications industry."

Stupid: Putting all your eggs in one basket.

Suicidal: Not bothering to get even a basic stewardship contract for guarding the basket.

Diversify, diversify, diversify.

Michael: I wouldn't think that things like an irrevocable trust are "extraordinary steps." They sound like perfectly ordinary and obvious steps - for a business that truly intended to honor its defined-benefit pension contracts. However, apparently government regulators didn't require good stewardship. And one of the things about government regulations is that it gets hard to find anything that's much better than the minimum the law allows.

Of course, the other issue is that defined benefits always have been a crock. No one can guarantee a return on investments decades into the future. Even less can they guarantee that X$/month will still be enough to live on. I've got a name for people that make promises like that - "liars".

Jane,

Why do you read Kevin Drum? Much less be concerned about anything he may write? He's a lefty moron. Read his #2 and you will see that he doesn't know crap about economics.

Company Pension Plans and Govt pension plans are not Private Pension Plans. A Private Pension plan is Owned by the the individual whose plan it is. Private pension plans don't have to be concerned by a Corporate takeover or a change in govt whims. They would be Private Property just like your house.
The opponents of privatization are extremely adept at mounting "Straw Dog" arguments.
They only thing a Private Pension Plan should be concerned with is how to maximize the return on the money in the plan. Taking the Govt and the Company out of the picture can only lead to good things.

Stupid: Putting all your eggs in one basket.

Suicidal: Not bothering to get even a basic stewardship contract for guarding the basket.




That's an awfully obnoxious comment to make concerning people who grew up understanding the world to work a certain way, never had the benefit of midnight college dorm room sessions in a faraway state to learn about the wonders of libertarianism and the ownership society, and then had the rules change on them thirty years after they thought they had signed an ironclad agreement. Not because they were stupid, but because society redefined "ironclad" when no one was paying attention.

"Unfortunate" is the word that best fits. You shouldn't try too hard to blame the victim.

I can't decide which argument I want to make...hmm...I'm going to just stick with FDR's intentions:

As said in the post, Keynesians were advocating social security as a method of reducing the workforce. Using the Keynesian models, we can see social security benefits would decrease the labor supply and therefore increase the real wage. This increase in the real wage would shift the Short Run Aggregate Supply curve outward and increase real GDP. Seeing this increase in real GDP would increase consumer confidence which would cause the Aggregate Demand curve to shift outward and further increase real GDP.

This was the only alternative FDR's economists had since the ineptitude of the Federal Reserve at the time had caused the great depression. Inactive monetary policy had led to a dramatic fall in the money supply, leading to an inward shift of the LM curve, a rise in the interest rate, a fall in investment and therefore an inward shift in Aggregate Demand. We can ignore net exports in this model because at the time it made up less than 1% of real GDP.

"I'm going to just stick with FDR's intentions:

As said in the post, Keynesians were advocating social security as a method of reducing the workforce. Using the Keynesian models, we can see social security benefits would decrease the labor supply and therefore increase the real wage."
~~~~

No, no, that was not FDR's intention at all.

Hey, Keynes wrote his GT in 1936, FDR passed the SS Act in 1935, after starting work on it in 1933. So how could it be driven by Keynesians?

Keynes wasn't Keynesian in 1933!

FDR's Social Security Act of 1935 was the *opposite* of Keynesian. Just look at it:

(1) It was *funded* -- so collecting the new payroll tax pushed the budget into *surplus* in 1937, during the middle of the Depression!

How anti-Keynesian can one get? The Keynesian economists around FDR then in fact howled in protest about how this was stifling the economy, and it may in fact have caused the setback in 1938.

(2) Because it was funded, it wasn't going to pay full benefits to anyone until 1970(!).

So how was decreasing labor supply 35 years in the future supposed to increase wages then?

Now fun with shifting LM curves is nice, but we should check basic factual reality first.

The Keynesians had their influence on SS, such as they ever did, later, in the 1940s and 1950s.

And frankly, they didn't have much then. SS was always driven by *politics* and *interest groups* all the way, baby.

Orgainized labor loved SS because it gave them pensions they *didn't have to pay for* with reduced wages.

Big Business loved SS because SS saved it from having to pay for basic pension packages while giving it a way to pension off old low-productivity workers *without paying them*.

The old loved SS for obvious reasons.

The young loved SS because it saved them from having to pay to support grandma.

So with Labor and Business and the young and old *all* agreeing they *loved* Social Security benefits -- surprise! -- Congress from 1939 into the 1950s dished out ever more of them, and turned FDR's funded, actuarially sound system into the paygo system that went broke for the first (but not last) time in 1975.

Now, does anyone really think Congress needed a Keynesian economist to tell it to do that? ;-)

As Congress was collecting chits from the AFL-CIO and Chamber of Commerce *at the same time* for the latest round of benefit hikes, when some Keynesian economist spoke up with "You know, this is good because..." , it said, "Yeah, yeah, that too, listen to Poindexter over there...".

I'll speculate (with no historical references to back me up at all!) that in the days before SS, old people faced the following possibilities.

1. Work till you drop in your tracks
2. Work till you're physically unable, though still alive.

In the case of 2, there were a number of possibilities.

a) you managed to save enough in a safe enough way that you could provide for yourself
b) throw yourself on the mercy of your children
c) throw yourself on the mercy of a rest/poor house
d) die

I'll agree that one consideration in founding SS might have been to make the work force smaller (and possibly increase productivity since the working aged are not known for physical strength or stamina).

But I think a larger goal was to take the intense pressure off those with aged relatives and spread it around to the whole population (life spans probably meant that a relatively smaller percentage made it to the golden years then as well).

I don't know enough about economics to argue for particular policy choices, but the basic idea of SS is socially sound, making supporting the very aged a smaller shared burden of all rather than a concentrated burden on a few (though changing life spans, differing birth rates and some other factors may make it more burdensome at some times).

One thing I might reccommend is to rethink the ages involved, increased lifespan and healthcare mean a lot of people can (and want to) work longer. If that's what they want, by all means let them.

Some sort of income ceiling (so that the relative minority that absolutely don't need SS can be taken off the rolls) is also a good idea though in a non-saving country like the US that number might be smaller than some people think.

I don't think a tracked system necessarily works that well (IIRC, such a system was introduced in Chile some years ago, anyone know how it's doing? the last I heard it was a mess that left people without much money, but that was a while ago).

Concerning future changes in SS -
SS already estimates it can pay only 73% of future benefits.
Medicare B is deducted from SS payments. This year the inflation adjustment for lower income retirees was taken up entirely by the medicare inrease.
Taxes affecting SS are not adjusted for inflation.
It appears to me that SS is already on its way to becoming fully income taxed fixed income.

Argh! Ok, I had to study this stuff for an actuarial exam recently. There's a lot of stuff going on, so I'm not going to talk about transitional costs that Jim Glass explains very well.

Michael Farris is close to the mark. Simply put, few people had =any= retirement savings in the early 20th century. At all. In stocks or in the banks. The amount of money most workers had in the bank would definitely not be enough to retire on, even for a few years. People used to work until they were physically unable to. Private pensions were rare, as well. Private defined benefit pensions did not become popular until after WWII for a few reasons (favorable tax treatment, a way to attract employees, etc.)

There are lots of reasons to have a Social Security system, especially if you include disability and survivor's benefits (which the U.S. system does). It =can= be a fully-funded plan, not necessarily pay-as-you-go. Fully-funded means that contributions made by an individual will cover their future benefits. Actuaries make a living figuring out the actuarial liabilities in pension plans, whether public or private. Many defined benefit plans have gone kerplooey of late, because of underfunding that regulators let pass and due to a huge drop in interest rates. There is a reason many companies have converted their pension plans to defined contribution plans, where the employee takes on the investment risk. (There are also problems with medical plan liabilities companies took on in union contracts, which grew much faster and less predictably than pension payouts)

Back to Social Security. The current Social Security benefits were never fully funded. High cost-of-living adjustments (COLAs), low retirement ages, and overly generous wage indexing have created a big problem when it comes to liabilities. Congress could have kept SocSec fully funded, but it's just =so= easy to vote for higher benefits when the plan has a huge surplus on a paygo basis. Companies aren't allowed to do this, according to pension regulations--as per usual, Congress can ignore the restrictions they put on businesses, as they can always vote on higher taxes or try to push the pain off on later, non-voting generations.

The only way to cut the SocSec liabilities is to reduce COLAs, ratchet back the benefit formulas, and/or increase the full retirement age. The SocSec tables I have indicate that a man currently age 65 on average will live 16 more years, and a woman age 65 will live 19 more years. These are averages. A 65-yr-old woman has a 25% chance of living 26 more years. And all that time receiving Social Security benefits, with payments increasing every year. This is unsustainable.

So, I predict that the benefit formulas in years to come will be less generous. No one's payments will be cut - they will just increase less quickly. As well, I expect my generation's full SocSec retirement age to be raised to 70 (I'm 30, and as the formulas stand now, the full retirement age for me will be 67. The boomers have a normal retirement age of 66.) However, to get all this through, they're going to have to sweeten the deal - we're going to have to be able to have private accounts, that we own, that we can track. 2% of salary is a pittance - you can't retire on that, even with current SocSec benefits - but it's more than nothing.

I look forward to the Social Security reform debates. I want them to take care of this now. Because the boomers will learn the meaning of generational warfare if they wait 10 more years to fix this. And this is easier to fix than Medicare.

"the basic idea of SS is socially sound, making supporting the very aged a smaller shared burden of all rather than a concentrated burden on a few"

Not really. We're headed for two workers paying taxes for one retiree. It's about three for one right now, down from five or six to one in the 1950s.

It would be even worse but for immigration.

"Imagine for a second that our social security system didn't exist. Retirement as a whole would suffer the exact same problem - expanding time in retirement, constant time working."

Why? Without Social Security, there'd be no reason in the world for people to keep retiring at 65. They'd retire whenever their remaining life expectancy no longer exceeded the length of time they could live off of their savings.

The choice may not be between Bush's proposal and doing nothing, but that shouldn't allow anyone to ignore that doing nothing is estimated to cost more than five times what the Bush plan is estimated to cost. And those opposing the Bush plan (e.g., Kerry during the campaign) rarely put forward an alternative proposal to doing nothing, so that the alternative's costs can be estimated.

If one rules out partial private accounts, the alternatives generally include some or all of the following: greatly higher payroll taxes (what effect would they have on employment, I wonder), reduced benefits (hey, that's a political winner) and getting BLS to reformulate the COLAs (to which I would not necessarily be opposed, though I suspect the Left would decry it as a backdoor benefit reduction). Let's have the Dems and the AARP put their substitutes on the table.

"We're headed for two workers paying taxes for one retiree"

And, it is important to note, that's not just Social Security -- the *bear* is going to be Medicare.

Medicare is going to cost multiples of Social Security.

So every working couple that takes on two jobs to raise their kids and pay their own medical bills can be viewed as having an other adult living with them too -- for whom they will be paying both the Social Security pension and medical bills in full, an amount equal to hundreds of thousands of dollars current value at age 65. A liability equivalent to taking on the mortgage on an *expensive* house and having to pay the whole thing off without ever getting any equity in it.

And they'll have to do it even if that senior they adopt is a millionaire.

Somebody's paying these bills for Warren Buffett right now. I wonder who's going to be the lucky couple who gets to pay the SS pension and Medicare bills of Bill Gates?

It really seems like there could be more savings in the system.

The ominous thing is that the Social Security problem is *simple*. First, close the funding gap by pushing the retirement age back a couple years and means testing multi-millionaires -- there are a surprisingly large lot of them over 65 these days, with 401(k)s, $500,000 tax free in homes, etc., the elderly as a class are now the richest of all -- out of the system. Or use other similar arithmetic fixes. Then provide maybe 4 points of private real economic investment to shore it up politically by giving everyone a positive return from the system. Done.

The fact that the political system has been totally unable to cope with even this simple situation is a real warning sign.

Because Medicare compared to SS is big, mean and hungry. If we really can't cope even with the house cat of Social Security, then Medicare is going to be the bear that eats us all.

It really comes down to doing away with the concept that wealthy or able-bodied people have some sort of "right" to enjoy the fruits of the labor of others, simply because they were born earlier. It is a ridiculous notion. If someone wishes to retire at age 66, while they are still able to work, they best get busy accumulating the assets in order to allow that to happen. I'm all for a social safety net, but the same net should be used regardless of whether someone is 75 or 25.

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