January 3, 2005
From the desk of Jane Galt:Do we have a social security crisis?
The new meme on the left is that we don't have a social security crisis; the system, taken by itself, is solvent until 2042, and then we'd only need a 25% cut in benefits, or a 75% increase in social security taxes, to cover the gap.
As snotty social scientists are fond of saying, this is true, but not interesting. Yes, if we define the parameters narrowly enough, by looking only at the social security administration's books, Social Security will be solvent until (gulp!) two years after yours truly is scheduled to join the Gray Panthers. But who cares?
[Of course, this requires some rather heroic ignorance of what 25%, or 75%, actually looks like. For your median income household pulling in 43,527, that means that their share of social security taxes goes from 2,698.67 to 4,722.67. Know many households making $43K that have an extra $1,000 lying around? And if you argue, as I do, that payroll taxes ultimately fall upon the worker, then that bite is doubled, to more than $2,000 a year. On the other end, the average social security benefit is just $900. How many seniors getting this average benefit can afford to take a $250 haircut off their monthly expenses? Neither of these solutions take into account the horrifying, exploding cost of health care for seniors, which dwarfs teh social security problem, and which will be making it even harder for workers and seniors to make ends meet.]
What proponents of this argument are mostly arguing is that we don't have a social security crisis, we have a budget crisis. And indeed, I have been saying basically the same thing for as long as I've had this blog: the social security administration is basically an accounting system. But the "sky-is-not-falling" crowd is trying to make this argument without admitting that the social security administration is not a pension system, doesn't act like a pension system does, and cannot be treated as a pension system for the purpose of talking about our coming demographic crisis.
What we have coming is a budget crisis, and it is a budget crisis caused by the massive, expensive demographic shift that is coming down the pike. So while saying that social security is not in trouble is trivially true, it is not true in the important way that advocates are implying, which is that it is somehow not going to be damned tricky to have more than 1/3 of the population living off the remaining less-than-2/3 for decades, even without the deadweight loss and moral hazard problems caused by our outmoded state "pension" scheme. And that's even before we get to the 9 zillion pound elephant in the living room, which is health care, a problem I will leave to another day.
Now, as it happens, I think that there will always be a minimal safety net for the poor elderly, no matter what sort of forced savings scheme we adopt (and I'm in favour of adopting one). But I think better a minimal safety net and a forced savings scheme than a generous middle-class entitlement. Along with most liberals, I'm in favour of abolishing the payroll tax, with its ridiculous illusion of saving, rolling it all into a progressive income tax structure, and paying safety-net benefits out of general revenue. I don't think that liberals have thought through their support for getting rid of FICA, since that's clearly a milestone on the road to getting rid of Social Security As We Know It (that's why the AARP, which has thought it through, is vigorously opposed), but I'm happy to have fellow-travelers on the road, whether or not they're misguided as to our final destination.
And I think that all of this will be as expensive as hell, but not nearly as expensive as the current mishmash of misaligned incentives. What I don't think is that if I ignore the demographic problem, it will simply go away (though in fairness I should note that Tyler Cowen, who is about a zillion times smarter than I am, thinks that there is a fair change that it will).
Posted by Jane Galt at January 3, 2005 11:24 AM | TrackBack | Technorati inbound links[Of course, this requires some rather heroic ignorance of what 25%, or 75%, actually looks like. For your median income household pulling in 43,527, that means that their share of social security taxes goes from 2,698.67 to 4,722.67. Know many households making $43K that have an extra $1,000 lying around?
$1,000 is 2.3% of $43,527. Since you read Marginal Revolution I trust I don't need to remind you of the study posted there that found out how many people will permit their take home pay to be cut by 2% or more simply by switching the default choice to be to contribute to their 401K.
Of course these numbers are a little fishy. Even in the future the ratio of workers to retirees is still nearly 2 to 1. A $1,000 tax increase per worker will generate $2,000 per retiree per year. How could a $250 cut per retiree per year be equilivant? Even if the ratio falls to 1:1?
Here's a proposal; simply enact a 2% tax increase today but mandate that the money go into an IRA of the person's choice. If social security is in crises then people will have nice little nest eggs 10, 20, 30 years from now to bear a benefit cut or tax increase. If it isn't in crises then people will have all the more retirement resources & in the meantime the economy will benefit from the increased savings.
Jane Galt wrote:
Now, as it happens, I think that there will always be a minimal safety net for the poor elderly, no matter what sort of forced savings scheme we adopt (and I'm in favour of adopting one). But I think better a minimal safety net and a forced savings scheme than a generous middle-class entitlement.
I don’t know about “always” but that does seem to be the current political consensus and that framework that we have to work within. I think it is entirely doable to move from the current ponzai scheme to a forced savings plan while providing minimal safety net for the elderly without growing leviathan. To do that I think we need to tailor any changes in the current system by:
1) Opposing any sort of tax increases for either Social Security or Medicare (including raising the earning limits on income subject to the payroll tax or establishing some new “wealth” tax or whatever nonsense is proposed). These two programs already consume well over 40 percent (and growing) of the federal budget as it is and our focus has to be on making government smaller rather than automatically signing on to new spending.
2) Phasing in a higher retirement age for Social Security and Medicare that won't affect current retirees or those about to retire while still providing some sort of "safety net" for those workers that are truly physically incapable of continuing to work (similar to the disability portion of OASDI and Medicaid). People are living longer and it is ridiculous (particularly since about the mid-1990’s most people are classified as white collar rather than blue collar workers) to keep the same retirement age. Grandfathering it in and allowing those who cannot physically continue working to receive disability payments will still keep the safety net function of the program.
3) Slowing down the rate of growth of Social Security while still keeping benefits current with inflation by fixing the COLAs (which overstate inflation) and/or indexing benefits to prices rather than wages.
4) Means testing Social Security and Medicare so that those who truly "need" it receive benefits while those who cannot afford to go without receive none. I think Senator Kerry established the benchmark when he said that people earning more than $100,000 a year (or we base it on assets or some combination of the two) don't "need" to keep more of their own money. At the very least they don't "need" to get more of someone else's money by receiving Social Security and/or Medicare benefits. This would acknowledge that both Social Security and Medicare are ultimately welfare programs and you no more have a “right” to receive what you “paid into” these programs than you have a “right” to receive ethanol subsidies or food stamps.
5) Letting younger worker opt out (thereby reducing the programs' unfunded liabilities) and invest a portion of their payroll taxes in order to provide for their own retirement and health care in exchange for less government "benefits" in the future. That's the option we're talking about now and while it means less benefit cuts than if we don't do it, it alone is probably not enough to fix the entire problem. But it does reduce the problem to a more manageable size than if we don't while at the same time putting more focus on personal responsibility and letting at least younger workers work towards building their own nest eggs.
Minor problem but security net for the upper middle class and beyond is no problem.
For the non-(classes) named above try living on $21,753l per yearl
BTW, according to http://www.heritage.org/Research/Budget/BG1710.cfm the Federal Deficit was $3,520 per household in 2003. This during a period when Social Security is in surplus and decreasing the deficit per household!
Can Jane seriously assert that $1,000 per household in 2042 is a serious issue when we are currently taxing the economy's investment potential today by over $3500!
"...which is that it is somehow not going to be damned tricky to have more than 1/3 of the population living off the remaining less-than-2/3 for decades ....
There's no trick to the extent those 1/3rd have savings, because upon liquidating their savings they will live upon the output of the entire world (where did most the clothes you are wearing right now, and most of the parts in the computer you are using, come from?)
The trickiness results only to the extent that one tries to *finance* the retirements of 1/3rd of Americans from the wages of the other 2/3rds.
"...And that's even before we get to the 9 zillion pound elephant in the living room, which is health care, a problem I will leave to another day."
The accrued present value of new Medicare liabilities in 2004 was $9.6 trillion, with a "t" .... for just one year!
A newly released Treasury financial statement (that they pretty much buried) gives the deficit of the US gov't in 2004, if calculated using accrual accounting and GAAP private-sector-type accounting rules, as not the $412 billion officially reported but $11.1 trillion. For one year.
The $11.1 trillion was $9.6 trillion Medicare, $880 billion Social Security, everything else penny ante.
For perspective, total National Income was $10.3 trillion. These numbers give the general picture of things and where we are headed.
Details and link to the Treasury statement at:
http://www.scrivener.net/2004/12/you-thought-2004-federal-deficit-was.html
As we've discussed before, there are very good reasons why GAAP & private company accounting procedures should NOT be applied to gov't accounting.
Be that as it may, there are two possible responses to Jim's figures. One is that the market is aware of them, hence the cost has already been discounted into bond yields. This would indicate that the market feels the US economy is more than adaquate to handle its liabilities...both direct and indirect. Another possibility is that the market is ignorant of Jim's figures and we are observing a market failure more spectaculor than the gov't's budget failure!
Jim left this little footnote out from the site:
(Note: Medicare and Social Security net liabilities are computed over 75-years -- not using an unlimited horizon under which they are much larger.)
Unfortunately I cannot find a year by year basis for this accrual. I wonder how much of the figure Jim provides us with is coming from the tail end of that 75 years. If so then we should seriously discount the doomsayers predictions.
Put 75 years into perspective. We aren't worried about the retirement of our current elderly. We aren't worrying about our (the 25-40 crowd) retirement. We aren't worried even about our children's retirement (25 and under). In 75 years, assuming lifespans remain constant, we will be just finishing up the retirement of people born today. In other words, the 0 year old crowd!
Does GAAP require that GM fund its pension plan for workers who aren't even born yet?
Another way to think of it, what accurate predictions could have been made about 2005 given the information available in 1930. Yet the web site bemoans the fact that this data was estimated on a 75 yr timeframe and not an infinite one!
"Does GAAP require that GM fund its pension plan for workers who aren't even born yet?"
Come on Boonton! That is such a fallacy...
If you pay your money now for people that are retiring is obvious that you need to worry about who will pay for your retirement. Other plans are not Ponzi schemes (at least shouldn't be).
I am not sure if this privatization proposal is really the best way to go, but I can't understand postponing just for the sake of it a change that by design will eventually happen.
Thanks for the breakout, but for those of us who (still!) don't think it's our government's job to provide for us in our dotage all this is water under a libertarian bridge.
The only Social Security "fix" that interests me is how I can opt out. If Uncle Sam offered me this option right now (I'm about 10 years short of retirement) I'd take it -- and they can even *keep* what they've extorted from me to this point. I wonder how many of us middle-agers-who'll-never-see-a-dime-of-this there are who feel similarly?
"... there are two possible responses to Jim's figures. One is that the market is aware of them, hence the cost has already been discounted into bond yields. This would indicate that the market feels the US economy is more than adaquate to handle its liabilities...both direct and indirect. Another possibility is that the market is ignorant of Jim's figures and we are observing a market failure more spectaculor than the gov't's budget failure!"
~~~~~~~~~
You forgot the obvious third possibility: The market is fully aware of the liabilities, knows they are unsustainable and fully expects the government to not pay them all, to reneg on its promises.
Which indeed is a remarkable argument just put forth in favor of the Social Security status quo in a position paper from the CBPP by Fruman, Gale, and Orszag: under the status quo, the government can *get out* of paying benefits it can't afford to pay! It is free to reneg!
They say "privatizing" SS accounts would be bad policy because then the government would actually become "stuck with" (their words!) paying all the benefits it has promised!
Whereas under the status quo, we all know the government is going to cut back benefits when the cost of paying them actually comes due. Which is a good thing, because it can't afford them.
Really, a remarkable argument coming from Democrats and defenders of the status quo!
Link to their paper and related items:
http://www.scrivener.net/2004/12/are-promised-social-security-benefits.html
So what you are basically saying is that the Social Security trustees erred in the 1980s when (after the Greenspan-led Social Security "fix") they took in surpluses and were foolish enough to invest them in US Treasuries (considered by the rest of the world to be the safest, least risky investment known to man). They should have (instead) bought stocks or corporate or foreign or municipal bonds so that the budget crisis would have been upon us sooner and the US government would not have been in a political position to default on its obligations to Social Security. That's certainly a common argument these days, but, to me, it doesn't pass the laugh test.
It does, however, suggest to me a political strategy for Democrats - propose a law converting the Treasury bills in the Social Security into preferred debt (so any bonds the trustees wish to redeem must be paid before the debt held by the public). I don't expect it to pass, but with an effective media strategy (an optimistic assumption, of course, given that we are talking about Democrats) it would make everyone's motives clear: one party wants to default on the trust fund's obligations to future retirees and one party doesn't. Then we can let the American people decide.
The accrued present value of new Medicare liabilities in 2004 was $9.6 trillion, with a "t" .... for just one year!
That figure is a one-time anomaly due to the new Medicare prescription drug benefit, Jim.
Also, the point Boonton makes about the softness of far-in-the-future estimates of Social Security or Medicare liabilities is very important.
It's hard to believe that nobody has mentioned the earnings cap for contributions.
Raising the annual cap could end the problem altogether. That would, of course, require the highest wage earners to postpone that part of their disposable income a few weeks each year.
Of course speaking out loud about such a thing would let a political wildcat out of the bag, since the vast majority of wage earners don't have a clue what I'm talking about.
So far, the earnings cap is one of the best-kept non-secrets in America. For those who benefit, the topic is taboo. For those who don't, we may as well be discussing IPO's, commodities futures or hedge funds, none of which are of any consequence to the working poor.
For most wage earners contributions to Social Security start with the first dollar they earn and continue for their entire working lifetime. Those who regularly exceed the cap breathe a bit easier toward the end of every year, except those who start to breathe easier after the first or second quarter...
"a political strategy for Democrats - propose a law converting the Treasury bills in the Social Security into preferred debt (so any bonds the trustees wish to redeem must be paid before the debt held by the public) ... "
~~~
Three problems, it's ...
1) Unconstitutional, you can't put conditions on paying off bonds owed to the public.
2) Ineffective, as the whole point about the trust fund bonds being merely IOUs that the govt owes to itself is that even if the govt *doesn't* default on them, they provide no financing for SS other than what the gov't would have used anyhow if they didn't exist -- taxes.
And the tax pressure that will result from paying off $5 trillion of trust fund bonds *on top of* the *even much greater* tax increases that will be needed to fund Medicare is going to create a lot of pressure from taxpayers for benefit cutbacks.
3) Pointless, because even if Congress doesn't in any way default on the trust fund bonds it can still reduce benefits as much as it wants, to please the taxpayers of the future.
Where so many people have gotten the idea that the trust fund bonds in any way or form secure any level of SS benefit payments is beyond me. They surely don't (Flemming v. Nestor) and they were never intended to.
"...it would make everyone's motives clear: one party wants to default on the trust fund's obligations to future retirees and one party doesn't".
Well, if the Democrats want to propose a Constitutional amendment prohibiting Social Security benefits from being cut, that might make your point. They could add Medicare benefits to it too.
But at the moment the people talking openly about cutting benefits are Democrats like Fruman, Gale, and Orszag -- and Krugman, who says today's benefit schedule is a mere "suggestion" to future Congresses. They probably wouldn't sign on board.
"That figure is a one-time anomaly due to the new Medicare prescription drug benefit, Jim."
Yes, as I noted in my post -- and as I also noted, after adjusting for that "anomaly" we're back to an annual accrual of a mere 5 or 6 trillion, about 50% of national income and twice the size of the entire federal govt, and growing faster than the economy. Only. ;-)
If you're buying that that's sustainable, I have magic beans for sale too.
"Also, the point Boonton makes about the softness of far-in-the-future estimates of Social Security or Medicare liabilities is very important."
Gee, does that mean things might be much more expensive than current projections? Things could be a lot worse?
It's remarkable how so many feel the govt should be held to such *lower* standard than the private sector.
Sure, there's softness in every pension plan's projections. GM has to project 50 years ahead for its pension. So why was it under such pressure to fund it last year? In 50 years, who knows has any idea what's going to happen? So why fund it?
But in the private sector we make every business make best estimates going forward -- so investors and stakeholders can judge the credibility and sustainability of arrangements -- and then adjust as they go along on the basis of new information it comes in. And act on every year's new information as if their commitments are real.
Yet that seems too high a standard for gov't.
Why bother, when the results are uncertain -- and will likely just get everybody so upset? ;-)
Raising the annual cap could end the problem altogether. That would, of course, require the highest wage earners to postpone that part of their disposable income a few weeks each year.
John Ballard: that would only be true if the "problem" at issue is the particular taxation arrangements used to fund the transfer to retirees. That "problem" isn't unsolvable in the same sense as some esoteric mathematics theorem -- there are plenty of folks capable of coming up with this or that "solution" (usually involving tax hikes) to the challenge you're describing. Hiking the FICA tax in the manner you outline is one of the "solutions" most commonly preferred by the system's defenders.
The real problem is the suckiness of Social Security's current structure, and its negative impact on prosperity and living standards. To paraphrase our host, it's going "to be damned tricky to have more than 1/3 of the population living off the remaining less-than-2/3 for decades, even without the deadweight loss and moral hazard problems caused by our outmoded state "pension" scheme."
Again, we can all imagine schemes capable of generating enough cash to fork over to retirees if we follow the status quo's schedule of future payments. The question is: do we want to?
Your point is well-taken. You are correct, of course.
I, too, would like to live in a system in which everybody is not only willing but able to provide for a time when working is out of the question. (I guess that's why we call it "social security" instead of "individual security.") Those who for one reason or another never work, for reasons that range from crippling handicaps to laziness, would definitely be left out, as well as those whose unemployment was mandated by an economic system that regards five percent unemployment as "good."
I have run across the term "pensioner" at least three times in the last twenty-four hours reading from sources from Ukraine, Iraq (!) and Israel. I doubt they were referring to elderly people who had been prudent enough to set up individual retirement arrangements for themselves in those diverse economies.
Allowing a bigger pile of crumbs (cash "forked over"?) for those at the bottom of the economy when they are no longer able to work does not strike me as "esoteric."
3) Pointless, because even if Congress doesn't in any way default on the trust fund bonds it can still reduce benefits as much as it wants, to please the taxpayers of the future.
The voters of the future, as a set, are more important than the taxpayers of the future. What share of the voters will be drawing SS or on the verge of drawing SS in 2018, and what is the comparable percentage now?
A citation for the unconstitutionality of issuing preferred debt would be appreciated. I just read the Constitution and I saw the power to issue debt and to levy taxes to pay it off and I saw nothing restricting Congress's ability to set the terms of that debt repayment. If you were being creative I can see an argument that it might be an unconstitutional "taking" under the 5th amendment, but:
a) The government could easily argue that it had no intention on defaulting on any bonds, that this was merely a measure to strengthen public confidence in the financing of Social Security.
b) It is less than a decade from the time that the federal government was actually in danger of defaulting (remember the Congress that didn't want to raise the debt ceiling?) and no one suggested an actual default would be unconstitutional (remember no money is spent without a congressional appropriation) so I can hardly see how preferred debt (which is far less of an issue than a default) could be considered unconstitutional.
"3) Pointless, because even if Congress doesn't in any way default on the trust fund bonds it can still reduce benefits as much as it wants, to please the taxpayers of the future."
Of course. But even if the Social Security trust fund had bought stocks, Congress could have decided to sell all those stocks and give the proceeds to me. But at least then no one would have been under any illusions about what had happened...
Looks like the Bush administration may have decided to go along with my #3 Suggestion!
http://www.chron.com/cs/CDA/printstory.mpl/nation/2976442
Under the proposal, the first-year benefits for retirees would be calculated using inflation rates rather than the rise in wages over a worker's lifetime. Because wages tend to rise considerably faster than inflation, the new formula would stunt the growth of benefits, slowly at first but more quickly by the middle of the century.The White House hopes that some, if not all, of those benefit cuts would be made up by gains in newly created personal investment accounts that would harness returns on stocks and bonds.
But by embracing "price indexing," the president would for the first time detail the painful costs involved in closing the gap between the Social Security benefits promised to future retirees and the taxes available to fund them.
I’m delighted of course that the administration seems to have already begun to move ahead with fixing the ponzai scheme’s problem and it makes sense to show the PRA (personal retirement accounts) as the sweetener to fix this problem. However I would prefer it if we opted for phasing in a higher retirement age and/or means-testing as those reforms could also be applied to Medicare (the larger long-term problem).
Thorley, I must speak up. It pains me more to see the word "Ponzi" misspelled than to see the concept misapplied. :)
Ponzai = Ponzi then, however the term is correctly applied even if misspelled in the initial comment.
http://en.wikipedia.org/wiki/Ponzi_scheme
[quoted material below]
It has been suggested that some state pension systems, such as the U.S. Social Security system and the U.K. State pension systems are actually large-scale Ponzi schemes. Under these systems, incoming payments (taxes) are not saved or invested to pay for future benefits. Instead, the taxes (perhaps with some general government revenues) are used to pay for current benefits. (Any excess receipts may result in the creation of government bonds that are "held" by the system, but these bonds are essentially "IOUs" from one part of the government to the other.)
State pension systems lack a number of basic features that define Ponzi schemes, and so are fundamentally different:
* There is no belief that there are large profits coming from something; rather, it is clear that these are pay-as-you go systems, where workers (at any given time) are providing money to those who have retired (and paid into the system earlier).
* There is no growth driven by the enticement of high returns over a short period of time, with new investors continually entering in order to support payouts to early investors.
* Because receipts (taxes) and payouts (entitlements) can be calculated quite accurately in the short term (five to ten years), and predicted (with a range of assumptions) for periods beyond that timeframe, there will never be a sudden collapse.
* General tax revenues can be used to supplement worker payments into the systems, although many taxpayers will be unhappy with such supplementation.
The SS scheme of "pay as you go" (it's not a ponzi scheme) can be made balanced and sustainable ad infinitum by the simple rule of paying out just what is collected in taxes, and no more.
For example: The average worker earns 40k$ and pays in SS taxes 15% = 6k$ (payroll and employer contribution). There are 2 workers for each retiree (in year 20xx), so the retiree gets 12k$ per annum - and the system bokks are balanced forever.
Simple.
Is that a good bargain for average Joe ? No.
Try: you work for 40 years, pay into the system 40x6k = 240k$, then draw benefits for some 20 years = 20x12k = 240k$. Seems you break even. But no - where is the interest ? If you could save those 6k$ and get a modest 3% or so on it (in Treasury bonds) your benefit almost triples.
That's the core of the problem: the SS pay as you go scheme is a very poor deal for all.
It's not that it is unsustainable or catastrophic. There are no catastrophes in economy, just losses. SS isn't a gamble. It a sure and proven loss, to the tune of 1/2 to 2/3 of your money.
So really in a nutshell the only “fundamental difference” per Wikipedia (hardly a reliable source) between a private ponzi scheme and the one we’re forced into visa vi Social Security is that the latter is compulsory and hence there is no “enticement” of “investors” because their participation is already compulsory and theoretically more can be forced to participate or up their “contributions” via the power of taxation.
This of course is meaningless to the essential characteristics of a ponzi scheme which are that the payments are not invested to provide for future benefits and we are merely paying one group of recipients with the payments of the current “contributors.” You take away the power to force people to enter the scheme or pay more and it would be the same as a private ponzi scheme except that the brain trusts that came up with this would be rotting in prison.
Thorley,
SS is a Ponzi scheme if you consider it's current feature whereby the Government legislates to pay out more than it takes in (in the future). This is, of course, unsustainable, and dishonest.
But, if you balanced the system, by raising taxes and reducing benefits to the point of equilibrium - you would get a pay as you go system which is not a Ponzi scheme.
But the pay as you go system is a poor deal not because it cheats (it does, but this can be corrected), but because it denies us the interest that we could earn on our pension savings.
No, there are several differences listed. What's really key is what people find objectionable about Ponzi schemes, because that gets to the root of why people try to associate the term "Ponzi scheme" with Social Security, even though it is nothing of the sort. People associate Ponzi schemes with a sudden collapse, the total loss of the original investment to late investors, all because the plan requires a geometrically increasing number of investors at each level. None of this applies to Social Security, which (as the wikipedia article states) can keep running to the end of time with tweaks to benefit levels and taxations.
The real reason people choose to liken SS to a Ponzi scheme is to manipulate the public by association with something that is commonly known to be deceitful, illegal, and fundamentally unsustanable. It's an emotional frame, not a logical analogy. As a logical analogy it fails on multiple points. Social Security isn't deceitful, illegal, or unsustainable; it doesn't rely on the greater fool theory or impossible ratios to survive. It does require mandatory participation, but that's because it's a socialist program. Debate it on that points, not by analogy to something inappropriate.
It's rather like if I tried to call No Child Left Behind a law that legalizes child abuse. Lots of kids hate taking tests. Some even consider these tests a form of abuse! Therefore, George Bush favors child abuse.
This line of reasoning, while emotionally powerful, is basically dishonest and manipulative.
Allowing a bigger pile of crumbs (cash "forked over"?) for those at the bottom of the economy when they are no longer able to work does not strike me as "esoteric."
John Ballard: And describing the program as something aimed at those "at the bottom of the economy" does not strike me as a very accurate description of Social Security.
If you pay your money now for people that are retiring is obvious that you need to worry about who will pay for your retirement. Other plans are not Ponzi schemes (at least shouldn't be).
Ed, we are talking about the retirement of the people who will come AFTER the people who are currently 0 years old now! There's a crises because we have a $1,000 per household per year liability in 2040 while we are currently borrowing $3500 per household per year today?!
All retirement plans require the next generation to pay for the current generations retirement.
They say "privatizing" SS accounts would be bad policy because then the government would actually become "stuck with" (their words!) paying all the benefits it has promised!
Jim, I still offer my challenge. Let Bush create his 2% privitization accounts on top of the current social security system. If these liabilities are real then the only real way to address them is to increase savings. If SS is really in crises then requiring people to build up a nest egg today will make it easier to cut benefits or raise taxes tomorrow. If SS isn't in crises then retirees tomorrow will benefit from both SS and the nest egg.
But in the private sector we make every business make best estimates going forward -- so investors and stakeholders can judge the credibility and sustainability of arrangements -- and then adjust as they go along on the basis of new information it comes in. And act on every year's new information as if their commitments are real.
By this standard SS is in reasonably good shape. Medicare and Medicaid are not. Again I ask what are the accrued liabilities of excluding 50+ years into the future? GM cannot even reasonably project itself existing 50 years into the future (this is a simple exercise, look at corporations that existed 50 years ago and see how many exist today....a 'reasonable' projection would be for a private corporation to assume it will be insolvent by 50 or 75 years into the future).
Of course. But even if the Social Security trust fund had bought stocks, Congress could have decided to sell all those stocks and give the proceeds to me. But at least then no one would have been under any illusions about what had happened...
What is to prevent Congress from abolishing the tax preferred position of 401K's? In fact, what is there to stop Congress from imposing a special tax on particularly successful 401K's (say with balances in excess of $1.5M)? I can easily see future politicians argue that the tax preferred position of 401K's was to let regular people provide a retirement for themselves, not enrich multi-millionaires. This is especially easy to see if we experience a prolonged bear market which results in a lot of 401K 'losers'.
This is called 'political risk' and it applies to privitized accounts as much or even more than SS.
State pension systems lack a number of basic features that define Ponzi schemes, and so are fundamentally different:
Here's an easy way to see why the Ponzi scheme accusation is bullshit. Imagine an economy with 100 people. The state system works by taxing the 80 youngest people and giving the benefits to the oldest 20 people. Explain why such a system could not work literally forever???? If you can't then you know why SS is not a Ponzi scheme.
Try: you work for 40 years, pay into the system 40x6k = 240k$, then draw benefits for some 20 years = 20x12k = 240k$. Seems you break even. But no - where is the interest ? If you could save those 6k$ and get a modest 3% or so on it (in Treasury bonds) your benefit almost triples.
I've been reading a very interesting paper on SS's 'rate of return'. The interesting idea it presents is that the systems overall rate of return must be 0. This is because, duhhh, every dollar raised in taxes is spent in benefits (minus a very small administrative fee). The reason that some people are projected to experience negative returns is very simple, some people experienced very positive returns hence the equation must balance out to zero.
Of course the gov't could 'invest' the money and share the interest with the retirees. Suppose the gov't purchased Eurobonds. Then in the future the system will have in it not only money from taxpayers but also interest payments from European taxpayers (or dividend payments from companies if stocks or corporate bonds were purchased).
But there's no reason why this savings couldn't be done in the private sector as it is now. By reducing the budget deficit, the savings is literally put in the private sector which will go and buy those Eurobonds and other types of instruments. Since both the gov't and private sector saving in the US is very low SS is doing the sensible thing by also serving as a form of forced savings. The 'return' though isn't going directly to benefits but to the entire economy in terms of increased capital.
Boonton, thanks for posting that hypothetical! I'll try to use it in the future. I feel like I've had to crush this particular "ponzi scheme" cockroach a few dozen times over the last several years, but it keeps coming back...
Brittain33 wrote:
No, there are several differences listed.
All of which amount to saying that the only difference between a government-run ponzi scheme like Social Security and a private one is that the private one relies on fraud whereas the government one relies on force. Which is a distinction without a difference (except that arguably the latter is worse) since fundamentally Social Security is a ponzi scheme for the reasons stated above.
What's really key is what people find objectionable about Ponzi schemes, because that gets to the root of why people try to associate the term "Ponzi scheme" with Social Security, even though it is nothing of the sort. People associate Ponzi schemes with a sudden collapse, the total loss of the original investment to late investors, all because the plan requires a geometrically increasing number of investors at each level. None of this applies to Social Security, which (as the wikipedia article states) can keep running to the end of time with tweaks to benefit levels and taxations.
Actually people recognize that a ponzi scheme is bad because while a legitimate investment system gets its return from increases in productivity/value of the initial investment; a ponzi scheme is simply using the current “contributions” to pay current “benefits” which is ultimately unsustainable. Which is why Social Security is a ponzi scheme.
The real reason people choose to liken SS to a Ponzi scheme is to manipulate the public by association with something that is commonly known to be deceitful, illegal, and fundamentally unsustanable. It's an emotional frame, not a logical analogy. As a logical analogy it fails on multiple points. Social Security isn't deceitful, illegal, or unsustainable; it doesn't rely on the greater fool theory or impossible ratios to survive. It does require mandatory participation, but that's because it's a socialist program. Debate it on that points, not by analogy to something inappropriate.
Actually the real reason people refer to Social Security as a ponzi scheme is because it is one. People recognize that the privately run ponzi schemes are ultimately economically bad which is why those who are caught creating them are rightfully punished. Trying to argue that it is somehow okay for the government to do it and that it really isn’t the same as the criminal enterprise because, by golly, you’re using force rather than fraud to bring people in really isn’t a persuasive counter-argument. Nor is saying it isn’t a ponzi scheme because they are by definition illegal and the government can simply excuse it by saying it isn’t illegal for government to do it.
It's rather like if I tried to call No Child Left Behind a law that legalizes child abuse. Lots of kids hate taking tests. Some even consider these tests a form of abuse! Therefore, George Bush favors child abuse.
An analogy that doesn’t meet the laugh test because taking a test isn’t child abuse. On the other hand an economic scheme that uses current “contributions” to pay current “beneficiaries” rather than investing the “contributions” to pay “beneficiaries” is a ponzi scheme.
This line of reasoning, while emotionally powerful, is basically dishonest and manipulative.
That’s an accurate description of Brittain33’s analogy but not of those who have rightfully called Social Security a ponzi scheme.
A 25% cut in benefits to achieve balance would appear to imply a 33% increase in revenues to achieve balance. So where is 75% coming from?
By current parameters, as fixed by current legislation, the SS system is promitting benefits above it's income. It is unsustainable, therefore a false promise, therefore a Ponzi scheme.
If it were adjusted and balanced it would cease to be a Ponzi scheme.
But, by depriving most retirees of potential interest earnings, by force, it is more akin to highway robbery.
"The reason that some people are projected to experience negative returns is very simple, some people experienced very positive returns hence the equation must balance out to zero."
Wrong. The equation really balances out to zero.
The problem is not A's gains vs. B's losses.
The problem is that everybody, A as well as B are deprived of interest.
(It is true that a very large group of people, in the past, got huge amounts of benefits, while having contributted little. But this was in the past. We look from now ahead).
We put aside money while we work, we use it years later, after retiring. We are entiteled to interest for our delayed use (or savings). SS deprives us of the interest.
Boonton wrote:
Jim, I still offer my challenge. Let Bush create his 2% privitization accounts on top of the current social security system. If these liabilities are real then the only real way to address them is to increase savings. If SS is really in crises then requiring people to build up a nest egg today will make it easier to cut benefits or raise taxes tomorrow. If SS isn't in crises then retirees tomorrow will benefit from both SS and the nest egg.
This is wrong of course because there is another way to address the liabilities and that is to let workers opt out either partially or completely. Letting a worker invest two points (or whatever it turns out to be) of their FICA taxes in exchange for agreeing to a reduced “benefit” mitigates in part the program’s unfunded liability. Keeping them in the system completely while requiring them to save another two percent on top of that does not reduce the program’s unfunded liability. Hence “privatization” would serve a dual purpose of (a) letting workers build their own nest eggs with their own money while (b) reducing the liability of the taxpayer. A supplemental investment plan only does the first.
"Of course the gov't could 'invest' the money and share the interest with the retirees."
Wrong.
Under the pay as you go system there is no money to invest. Every penny of income (and then some)is immediately distributed to retirees. Nothing left to invest.
Wrong. The equation really balances out to zero. The problem is not A's gains vs. B's losses. The problem is that everybody, A as well as B are deprived of interest.
The overall gain has to be zero for the simple reason that every dollar taxed equals a dollar in benefits (minus admin. fees that are trivial). Since currently more dollars are taxed than benefits given this means the interest is accumulating to the taxpayers in the form of reduced debt service costs as well as to the general economy in the form of increased savings.
Unlike GM, the gov't is tied directly to the entire economy. GM must meet all of its liabilities with income earned from its assets. It doesn't matter how good the economy is, if GM can't make money off the cars coming out of its factory it is insolvent. A gov't, though, has only trivial assets and its underlying solvency is the strength of the entire economy.
Actually the real reason people refer to Social Security as a ponzi scheme is because it is one. People recognize that the privately run ponzi schemes are ultimately economically bad which is why those who are caught creating them are rightfully punished.
Privat ponzi schemes burn themselves out quickly. I'm unaware of anyone that managed to last more than a few years. A gov't ponzi scheme wouldn't last much longer just because it could mandate 100% participation. The more that enter a ponzi scheme the faster the demand for new members. It would literally be impossible for a national ponzi scheme to last even a decade let alone 75 years.
Necessary follow up, I agree with the earlier post that Medicare is worse off than Social Security in terms of the unfunded liability. Hence my preference for means testing and phasing in a higher retirement age as it could be done for both programs whereas the proposed changes to the COLA’s and letting younger workers opt partially out is pretty much limited to the particulars Social Security. However not being one to let the perfect be the enemy of the good, since we finally have someone who is serious about dealing with the Social Security, we ought to take it and try to encourage our politicians to deal with Medicare as well.
Keeping them in the system completely while requiring them to save another two percent on top of that does not reduce the program’s unfunded liability.
If the problems with SS are accurate then no reform that does not directlly increase savings will solve the problem. Taking two points off the top simply cuts savings at one end and increases at another with additional gov't debt mopping up any new funds to the capital markets. Doing two points into a private account is more intellectually honest if privitization advocates are serious. Since increased gov't debt is simply a delayed tax increase (with interest due in the future on top of principal) it makes sense to increase savings right now.
Like I said, if the dire predictions don't pan out at least that 2% additional savings will result in some nice economic growth and nest eggs in 2040. If they do pan out the benefit cuts will already be partially funded by the nest eggs that people wouldn't have had otherwise.
Boonton wrote:
Privat ponzi schemes burn themselves out quickly. I'm unaware of anyone that managed to last more than a few years. A gov't ponzi scheme wouldn't last much longer just because it could mandate 100% participation. The more that enter a ponzi scheme the faster the demand for new members. It would literally be impossible for a national ponzi scheme to last even a decade let alone 75 years.
Sure it could, instead of increasing the number of participants, it just has to increase their “contributions” since it isn’t really the number of bodies that sustain the program but the number dollars. Hence the proposals for increasing taxes or “contributions” to keep Social Security afloat.
Doesn't matter, in a real Ponzi scheme getting the original members to increase their investments doesn't change the dynamics. The collapse comes all the faster the more people that are in it. A gov't run Ponzi scheme wouldn't last decades but probably even less than a private one.
The few remaining Ponzi-like schemes that are still legal stay in business not by having lots of members but relatively few. Amway comes immediately to mind but its not a true Ponzi scheme 'cause they don't promise you anything in exchange for putting your money into them.
Sure it could, instead of increasing the number of participants, it just has to increase their “contributions” since it isn’t really the number of bodies that sustain the program but the number dollars. Hence the proposals for increasing taxes or “contributions” to keep Social Security afloat.
Which is a problem caused by changing demographics since the 1930s and 1960s, not a problem inherent to the system itself.
You're free to now redefine "Ponzi scheme" to exclude this defining trait, I guess.
All of which amount to saying that the only difference between a government-run ponzi scheme like Social Security and a private one is that the private one relies on fraud whereas the government one relies on force.
Blah blah blah. You aren't even going to try to acknowledge the disagreement here... much easier to say "and that's why Social Security is a ponzi scheme" six or seven times.
A mandatory ponzi scheme would collapse as easily as a voluntary one because even once every human being was enrolled, you'd then need to go find new worlds of investors to keep the scheme afloat. That's not the case for Social Security, which does not promise geometrically-increasing rewards that are mathematically impossible among a finite population. Again, this is a distinction between Social Security and a real Ponzi scheme. If you're tempted to dismiss it and go back to assertion, I recommend you read this paragraph again until you understand the distinction. It's at the root of why Social Security is not subject to catastrophic collapse the way that a real Ponzi scheme is. A second distinction you're eliding.
Actually people recognize that a ponzi scheme is bad because while a legitimate investment system gets its return from increases in productivity/value of the initial investment; a ponzi scheme is simply using the current “contributions” to pay current “benefits” which is ultimately unsustainable.
You and I will go up to 100 grandmothers and give our explanations of what defines a Ponzi scheme. You give your explanation, I'll describe a pyramid scheme that relies on impossible rewards, the constant search for greater fools, and the final collapse where the original guy runs off with the loot. I know which explanation's going to ring more bells with our audience. That's the association that people pushing Bush's SS platform are relying on, after all.
Actually the real reason people refer to Social Security as a ponzi scheme is because it is one.
Now, that's a convincing argument. "Social Security is a ponzi scheme" is "A=A." If I can accept it as axiomatic, it is true.
Privat ponzi schemes burn themselves out quickly. I'm unaware of anyone that managed to last more than a few years. A gov't ponzi scheme wouldn't last much longer just because it could mandate 100% participation. The more that enter a ponzi scheme the faster the demand for new members. It would literally be impossible for a national ponzi scheme to last even a decade let alone 75 years.
Indeed.
Boonton wrote:
Doesn't matter, in a real Ponzi scheme getting the original members to increase their investments doesn't change the dynamics. The collapse comes all the faster the more people that are in it.
Not necessarily. The scheme collapses when either (a) people want out when they realize it’s a fraud (not feasible when they’re forced into it via the government) or (b) when there are no longer sufficient “contributions” to cover the “benefits” (something we’ve forestalled with raising FICA taxes). There’s no set rule as to when either (a) or (b) occur and since (a) cannot happen in a mandatory system and (b) is determined by when the outlays actually exceed the revenue.
Brittain33 wrote:
Which is a problem caused by changing demographics since the 1930s and 1960s, not a problem inherent to the system itself.You're free to now redefine "Ponzi scheme" to exclude this defining trait, I guess.
Actually my reference to raising FICA “contributions” was in response to Boonton’s suggestion that SS could not qualify as a ponzi scheme based on the number of members. I pointed out that what was necessary to sustain the system was the “contributions” from the members rather than the actual number of members itself. I made no allusions as to whether raising FICA taxes in and of itself was a determining factor as to Social Security’s status a ponzi scheme.
Blah blah blah. You aren't even going to try to acknowledge the disagreement here... much easier to say "and that's why Social Security is a ponzi scheme" six or seven times.
Actually you should have stopped with “blah blah blah” since that seems to be the most useful part your argument.
A mandatory ponzi scheme would collapse as easily as a voluntary one because even once every human being was enrolled, you'd then need to go find new worlds of investors to keep the scheme afloat. That's not the case for Social Security, which does not promise geometrically-increasing rewards that are mathematically impossible among a finite population. Again, this is a distinction between Social Security and a real Ponzi scheme. If you're tempted to dismiss it and go back to assertion, I recommend you read this paragraph again until you understand the distinction. It's at the root of why Social Security is not subject to catastrophic collapse the way that a real Ponzi scheme is. A second distinction you're eliding.
And as I pointed out in my response to Boonton which you’ve managed to successfully misread the number of bodies enrolled is not the issue, it’s the dollars. So long as you can (presumably) keep money rolling into the scheme faster than it’s going out, it will stay afloat. The difference being in a private system at some point there’s going to be a feedback mechanism in which the “investor” is going to say “gee, it seems that I keep having to pay more for this ‘investment,’ I wonder if the ‘return’ is going to be worth it.”
But if you’re the government, you can just raise taxes.
You and I will go up to 100 grandmothers and give our explanations of what defines a Ponzi scheme. You give your explanation, I'll describe a pyramid scheme that relies on impossible rewards, the constant search for greater fools, and the final collapse where the original guy runs off with the loot. I know which explanation's going to ring more bells with our audience. That's the association that people pushing Bush's SS platform are relying on, after all.
Why 100 grandmothers? I’d say go to 100 younger workers who are stuck in the scheme you’re defending and ask them if they think there is something inherently crooked about a system that promises one person a “benefit” on their “contribution” but rather than investing the money productively to pay for the “benefits”, finances them solely from the “contribution” from another “investor.” That’s a ponzi scheme. You only need to search for a bigger fool that believes false promises of “impossible rewards” when you have to trick someone into participating. When you can force them into it, you don’t have to bother with the deceit.
"It would literally be impossible for a national ponzi scheme to last even a decade let alone 75 years."
Which is just how long it's taken for Social Security to go from giving *positive* returns to every retiring cohort to *negative* returns to every retiring cohort.
Good estimate!
~~~
"What's really key is what people find objectionable about Ponzi schemes, because that gets to the root of why people try to associate the term 'Ponzi scheme' with Social Security, even though it is nothing of the sort."
Nah...
Paul Samuelson, 1st-tier Nobelist, called SS "actuarially unsound" and "the greatest Ponzi game ever contrived" in his Newsweek column, and he was arguing FOR it, he thought it was great!
And of course Krugman wrote that Social Security "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..."
See, one can recognize the Ponzi element in Social Security and still be for it, you just have to be honest enough to be able to.
Milton Friedman *completely* agreed with Samuelson about SS being "the greatest Ponzi game ever contrived" ... oh, but he didn't take that to be a virtue like Samuelson did, forget him.
Not necessarily. The scheme collapses when either (a) people want out when they realize it’s a fraud (not feasible when they’re forced into it via the government) or (b) when there are no longer sufficient “contributions” to cover the “benefits” (something we’ve forestalled with raising FICA taxes). There’s no set rule as to when either (a) or (b) occur and since (a) cannot happen in a mandatory system and (b) is determined by when the outlays actually exceed the revenue.
Except if B happens it doesn't mean the thing was a Ponzi Fraud. Every time a company goes bankrupt or a person finds he is broke do you think its because it was a Ponzi scheme? Please....
Again, imagine a simple economy of 100 people. They agree the 80 youngest people will pay a tax and the 20 oldest will get a benefit. Is this a Ponzi scheme? If so explain why it would collapse?
And as I pointed out in my response to Boonton which you’ve managed to successfully misread the number of bodies enrolled is not the issue, it’s the dollars. So long as you can (presumably) keep money rolling into the scheme faster than it’s going out, it will stay afloat.
False, the dynamics would be the same. Ponzi schemes require geometrically increasing sums to pay the 'returns' to the original investors. The more people who are members in the beginning all it would result in is the need for even more newer members in the future. It goes the same for dollars. Even if you tried to satisfy the Ponzi's thirst by increasing the investment from existing members instead of finding new ones you'd still see the demands escalate faster than the income of its members.
ALL IN ALL, A BIGGER PONZI SCHEME COLLAPSES FASTER THAN A SMALLER ONE.
Winston is confusing running out of money with a Ponzi scheme. It is quite easy to run out of money. For example, Medicare promises to pay for medical treatments for older people and pays for it with a payroll tax and premiums paid by older people. It's quite possible for the cost of the treatments to become greater than the two resulting in the program running out of money.
Likewise, a life insurance company promises to pay people's families should they die while covered. The company builds up a fund to cover these expenses from premiums paid by those covered plus earnings on investments. The insurance company can quite easily end up with more payouts due than money coming in. In that case they, like social security, will be faced with the choice of raising premiums or cutting back on benefits.
These examples are similar to a collapsed Ponzi scheme only in the sense that the organization cannot pay its liabilities with its revenue & assets. This is a much larger class, though, than a Ponzi scheme.
The Anti-Ponzi people seem to be confused about the essential nature of a Ponzi scheme, which is not "sudden collapse", but "use of current intakes to pay returns, rather than investments". Lot's of things suddenly collapse, from undercapitalised banks to simple fraud; only a Ponzi scheme has the central characteristic of an investor pyramid where capital invested pays current beneficiaries, rather than being invested in some productive activity.
A pension scheme, by contrast, takes money, invests it in an external investment that generates a positive return, and then uses the returns, not the original capital, to pay beneficiaries. Financially, Social Security has the exact structure of a Ponzi scheme.
Now, one could argue that it is not a Ponzi scheme because beneficiaries are not deluded about the source of their funds, as are investors in a classic Ponzi scheme. While this argument has some merit, it rests on the belief that social security payers and payees are not deluded about the nature of their payments. Even a casual perusal of the literature seems to indicate to me that this is false to fact; most social security beneficiaries are extremely confused about the nature of their benefit, believing that it is a return to which they are entitled because they paid in (a view which has been explicitly denied by the Supreme Court; they receive their benefits at the discretion of the government.) Similarly, payees seem largely to be under the delusion that their FICA taxes are entitling them to some payout in the future. Moreover, both sides seem to share the erroneous belief that the trust fund has assets upon which they have a claim, another idea that has been explicitly denied by the courts.
[Side note: are people really unable to understand the difference between a third party investing in government bonds, and the government doing so? Is anyone under the delusion that IBM could fully fund its pension plan by giving the pension plan its own bonds, or would they not recognise that this is no better than giving its pensioners a big fact IOU? (And it's worse in the case of the government, since the government, unlike IBM, has the power to change the rules under which its pension is governed.)]
So the financial structure is that of a Ponzi scheme, and the willingness of payees to participate seems to be largely based on a fundamental misunderstanding of the plan's nature, which makes it look a lot like a Ponzi scheme from where I'm sitting.
As for Boonton's claim that "It would literally be impossible for a national ponzi scheme to last even a decade let alone 75 years", you are assuming that because Ponzi schemes in the private sector generally collapse quickly, that this is intrinsic to the nature of a Ponzi scheme. But there's no reason that a Ponzi scheme can't go on for decades, so long as you can persuade investors to wait decades for their payout. In the private sector, of course, it is hard to persuade people to wait forty years for their investment to start paying off, but the longer duration of the Social Security's pyramid scheme results only from a shift in the time horizon of those who pay into it, not some fundamental difference in its operation.
So Jane,
Simple question. Suppose a gov't sets up the following program:
1. The youngest 80% of workers will be taxed.
2. The oldest 20% will receive the revenue raised from those taxes. (the distribution of those benefits can be a complicated formula giving more weight to poorer workers and those that paid more taxes when they were in the 80% bucket)
A. Is this a Ponzi scheme?
B. If so, why would it collapse?
C. If not then how is this different than the current system?
A pension scheme, by contrast, takes money, invests it in an external investment that generates a positive return, and then uses the returns, not the original capital, to pay beneficiaries. Financially, Social Security has the exact structure of a Ponzi scheme.
GM takes the money it gets from selling cars today and pays off bonds it issued years ago.
GM borrows by issuing bonds today that it plans to pay off in the future with money it will get from selling cars in the future.
Ponzi Scheme?
Even a casual perusal of the literature seems to indicate to me that this is false to fact; most social security beneficiaries are extremely confused about the nature of their benefit, believing that it is a return to which they are entitled because they paid in (a view which has been explicitly denied by the Supreme Court; they receive their benefits at the discretion of the government.) Similarly, payees seem largely to be under the delusion that their FICA taxes are entitling them to some payout in the future. Moreover, both sides seem to share the erroneous belief that the trust fund has assets upon which they have a claim, another idea that has been explicitly denied by the courts.
True there is a lot of confusion but what about private pensions. Do you have a right to a private pension? Only inasmuch as the provider of that pension is able to pay it. If they are not then you can only turn to the gov't guaranteeing your pension. Something the gov't currently does but that can be changed at Congress's whim.
Ok, how about your own personal 401K?
Are you guarantted its tax preferred status? Do you have a property right in it? Nope, if Congress changes the law in 2010 to revoke 401K's tax preferred status you have no recourse in the courts.
AS for assets, social security does have assets upon which it has a claim against the Fed. gov't. Individuals, of course, do not have a direct claim on those assets. That's exactly the same as a pension fund. If GM's pension fund does great in its investments it is only responsible for paying out promised benefits to its retired workers. It isn't required to give them a bonus because they picked great stocks.
Can Congress refuse to fund SS's benefits? Sure. Can Congress revoke or even create special taxes on 401K's? Sure. There's a lot less difference than you think.
BTW, don't think taxing 401K's can never happen. WE've had plenty of ten year periods where stocks have generated negative returns. If such a thing happened in a 401K centric world there would be incredible pressure to bail out the losers by taxing the 'winning' 401K's.
One final note on Ponzi schemes, the simple example I gave of a gov't program that taxes the youngest 80% and gives to the oldest 20% can and has been reproduced in the private sector.
There are, for example, Christian 'healthcare co-ops' where members send in money to be used to pay healthcare costs of members who become sick. Instead of age what is effectively happening is the sickest 20% get paid and the healthiest 80% pay. A football pool also operates along the same lines, the best pickers get paid and the rest pay. Hell, even an Amish barn raising would fit....the family poorest in barns receives the manpower and everyone else provides manpower!
All of these systems feature 'current benefits paid from current contributions' yet they are similar to a Ponzi scheme only because that happen to share one trait...might as well equate a bear and a mouse 'cause they both have spines & fur.
I'm not really moved much by mass misconceptions about social security. I often encounter perfectly intelligent people who believe, for example, that the gov't is just going to print $350M for the aid it plans to give the Tsuammi victims. Since most people do not have to understand how gov't finances & the economy as a whole work in their day to day lives, they don't.
I'm sure a 10 year bear market will uncover many people who believe their 401K's come with guarantees of any sort.
but the longer duration of the Social Security's pyramid scheme results only from a shift in the time horizon of those who pay into it, not some fundamental difference in its operation.
Interesting segue in the last sentence... is Social Security a pyramid scheme now? The SEC would disagree.
http://www.sec.gov/answers/pyramid.htm
"The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same."
Going out into the public to repeat that Social Security must be abolished because it is a Ponzi scheme (or, God help you, a pyramid scheme) is as honest as saying that teenagers shouldn't take evolution seriously because "it's a theory."
"1. The youngest 80% of workers will be taxed.
2. The oldest 20% will receive the revenue raised from those taxes. "
Is this a Ponzi scheme ?
No.
But, if you promise the oldest they will receive TWICE the sum paid into the scheme, and also promise the youngest they will get double money when they get old that ** IS ** a Ponzi scheme.
That is what SS legislation does.
It could be corrected, but hasn't been so far. Maybe it hasn't been corrected, because under the balanced and sustainable terms it loses it's attraction, and people will pressure politicians to cancel it entirely.
Re all this Ponzi business:
We must again remember Samuelson seriously *praised* Social Security for being a Ponzi scheme -- I'm not kidding, and neither was he.
But he was writing before Congress upped benefits *again*, finally too high, and the economy turned bad in the 70s. So he made a mistake in projecting how long it would be sustainable.
Jane is right -- nothing about a Ponzi scheme logically requires immediate or quick collapse. That was Samuelson's point. So "Ponzi means fast collapse" is a bogus argument.
The key issues for sustainabiliy are how much of a postive return one promises investors in it, and how for how long you can get more people to join it. If the answer to #1 is "modest" and #2 is "a long time" then the game can run a long time. But not forever.
This was the original situation with SS, which spent some decades gradually expanding the percentage of the work force it covered, as the work force itself grew, and the while amounts it paid in positive returns were modest in dollar terms (the really big positive payouts, contrary to popular myth, not being made until the 1970s).
That's what Samuelson was writing about.
As to Boonton's...
"1. The youngest 80% of workers will be taxed.
"2. The oldest 20% will receive the revenue raised from those taxes.
"A. Is this a Ponzi scheme?"
If workers aren't promised a positive return, then no. Ponzi promised people *profits*.
If workers are promised profits on their contributions to the game, yes.
"B. If so, why would it collapse?"
Because, if workers are promised profits, any significant rate of profit will compound to outgrow the working population in a finite amount of time.
At that point all will see the early players to be "winners" who won at the *personal expense* of the late players who are "losers", who wind up getting less back than they put in.
This is EXACTLY and PRECISELY what has happened with Social Secrurity, of course.
At this point any scheme that depends on people *voluntarily* participating in it will collapse, obviously, since everyone will see that they can only lose money by joining it, so they won't.
Of course, if people are legally compelled to continue participating it they will have to do so, all losing money. But the game will continue.
Here's a question...
If Charles Ponzi had bribed the legislature so that citizens become legally compelled to participate in his scheme, so it carried on, would it *not* have been a Ponzi scheme?
It is very revealing about the defenders of the status quo -- Krugman, DeLong, the whole lot of them -- how *not one* of them has had the courage to mention *one word* about how SS provided $10 trillion dollars of *above market* returns to retirees during the 60 years to date, but will provide only *negative returns* going forward to retirees in the future.
What?? Social Security has been politically rooted on paying *above market* returns for 60 years, and now we are going to have it pay ever more negative returns to the young??
Isn't that a major change???
"Shhhh... not worth mentioning."
Didn't Franklin Roosevlent, Altmeyer, and the rest of the founders of SS *explicitly* promise "fair returns" on contributions to all, and "intergenerational equity", with every generation receiving the same, sustainable rate of return, that on bonds???
"Shhhh... not worth mentioning."
Side note: Is Jane really unable to understand the difference between a question about whether or not "real" assets are held in the Social Security Trust Fund not and a question about the *moral obligation* created when our elected representatives imposed a tax whose public justification was to provide Social Security benefits? Whether IBM (or the US government) should be permitted to fund a pension plan with self-written IOUs is one issue. But surely we can all agree that if IBM were presented with an IBM-written IOU and refused to provide the money owed then IBM would have *defaulted on an obligation*? Why doesn't the same apply to a Treasury bond? And if it does, what is the moral (not legal) difference between a Treasury bond in the Social Security Trust Fund and one held by the Bank of Japan?
If Charles Ponzi had bribed the legislature so that citizens become legally compelled to participate in his scheme, so it carried on,
Ponzi was promising 400% profits to new investors. As has been said multiple times, making his scheme mandatory wouldn't have solved the problem that his scheme needed an infinite supply of potential investors before any of the original investors died off to succeed.
To make the point clearer: If Ponzi got all 100 million Americans to sign on to his plan, he would then need to find 400 million new investors to keep it going. The U.S. government couldn't help him there.
That is what SS legislation does. It could be corrected, but hasn't been so far. Maybe it hasn't been corrected, because under the balanced and sustainable terms it loses it's attraction, and people will pressure politicians to cancel it entirely.
Really? Then you should ask Jim Glass why he is showing a negative return in his analysis of the typical SS benefit. Those analysis use the benefits as per current law in doing the analysis.
SS really promises no such thing. How much you get back is a function of a host of variables. How long you live, whether you are disabled, whether you are a widow(er), whether you elect to start taking benefits at 62 or 65 and so on.
We must again remember Samuelson seriously *praised* Social Security for being a Ponzi scheme -- I'm not kidding, and neither was he.
Argument from authority Jim is just as much a logical fallacy as any other...even if Samuelson is the authority.
If workers aren't promised a positive return, then no. Ponzi promised people *profits*.If workers are promised profits on their contributions to the game, yes.
Workers are not promised profits. You have some quotes from some politicians saying workers should see profits but the benefits are based on the variables I stated above. These may or may not result in a economic profit for any particular individual.
But if you insist profits can be built into the system:
Step 1
Youngest 80% are taxed. The taxes are used to purchase Eurobonds.
Step 2
Oldest 20% get benefits from the tax dollars plus the tax dollars from Europeans paying off their bonds.
Is this a Ponzi scheme? If so how would it collapse? (Remember, like SS this program would start with just taxes & then start paying benefits later on).
If Charles Ponzi had bribed the legislature so that citizens become legally compelled to participate in his scheme, so it carried on, would it *not* have been a Ponzi scheme?
Yes. As I said, though, the legal compulsion would have simply caused his program to collapse sooner. The unique feature of a Ponzi scheme is that it collapses not because people want out (a Bank run, by that definition, would be a Ponzi collapse too) but because each additional member adds to the systems debts rather than netting out to zero or being positive.
What?? Social Security has been politically rooted on paying *above market* returns for 60 years, and now we are going to have it pay ever more negative returns to the young??
No it hasn't. Show me where in the benefit rules it takes the contributions and applies an 'above market' rate of return?
Didn't Franklin Roosevlent, Altmeyer, and the rest of the founders of SS *explicitly* promise "fair returns" on contributions to all, and "intergenerational equity", with every generation receiving the same, sustainable rate of return, that on bonds???
Fair is in the eye of the beholder. SS serves many principles including being progressive. By definition that is going to give some 'excessive returns' and others lesser returns. If you know anything about bonds then you know they do not have a constant rate of return. In fact it is quite possible to see negative realized returns on bonds.
Social security's total rate of return has to be zero over the long run. This is simply because every dollar going in is a dollar going out. Therefore if one person gets a large return someone else must get a negative return. This explains the excessive returns seen by early members of the system.
Whether IBM (or the US government) should be permitted to fund a pension plan with self-written IOUs is one issue.
While we are on the subject, let's keep two things in mind about private companies.
1. Unlike gov't, a private company can only generate revenue from its assets. A gov't, on the other hand, generates revenue from the underlying economy. Therefore if a gov't does something to stregthen the economy, it expands its capacity to service liabilities. A private company, though, is only giving away its money if it helps others without helping itself.
2. The requirements for funding private pensions are hardly agreed upon. The accounting and mathematics is extremly complicated and no one can ever really be sure if a private pension plan is properly funded or not, only if it is funded sufficiently according to the imperfect rules.
Finally I'm not 100% sure about this but I believe pension funds only have to be managed independantly of the company funding them. This means IBM probably does have IBM corporate bonds and stock in their pension fund assets. Considering that IBM is a major part of the market it would be mismanagment not to. What IBM cannot do is put all of its pension fund assets into a single security (like IBM Bonds) because unlike a gov't, IBM cannot call upon the economy to pay its pension fund debts.
After something thinking I decided to model the accusation that SS is a Ponzi scheme. Here's a very simple model.
Imagine an economy with two people at all times, young and old. This economy establishes a simple social security program. The young person pays 10% tax on his income and the old person gets the benefit. No one dies young in this economy and each young person spawns one child before passing into old age so the worker/retiree ratio is 1:1.
Assume also that the economy grows at an even average of 5%.
Year Income Tax Benefit to older
1 $100 $10 $0
2 $105 $10.5 $10.5
3 $110.25 $11.03 $11.03
Now look at the return or profit each generation makes:
Year 1 contributed $10 received $10.50. Return 5%
Year 2 contributed $10.50 received $11.03. Return 5%
Now this system has the feature of paying the old 'investors' with 'new investors'. It also has the feature of providing participants with a built in return equal to income growth.
1. Is this a Ponzi Scheme?
2. If so, explain why it would collapse? Will it ever?
Mathematically the system remains stable. The SS fund is always equal to:
Fund = Tx*Yt - Tx*Yt-1
Where Tx is the tax rate and Yt is income of todays young and Yt-1 is the income of yesturday's young. As long as Yt > Yt-1 you're able to keep the system in balance for any arbitrary amount of time.
This also nicely illustrates the intergenerational aspect of SS. It is in the interest of the older generation to see the younger generation succeed since increases in their income can permit a better 'return' on the older generations 'investment.'
So I'm happy to announce that Mr. Ponzi can return to his grave!!!!
"'Social Security has been politically rooted on paying *above market* returns for 60 years, and now we are going to have it pay ever more negative returns to the young??'"
'No it hasn't. Show me where in the benefit rules it takes the contributions and applies an 'above market' rate of return? '
~~~~~~~~~
In the very benefit formula, my friend. Though now of course the formula provides below market return.
FDR, Altmeyer, and the other founders of SS *explicity* promised "intergenerational equity" with a "fair return" for all future generations of participants -- which they assured by setting the formula to provide every retirement cohort the federal bond rate as a rate of return on contributions. That was the SS Act of 1935.
With that rate of return, SS could have continued *forever*. FDR pronounced SS to be "actuarially sound and out of the Treasury forever."
Ah, but starting in 1939 Congress decided to start giving particpants *more for less*. They started increasing benefits and cutting the taxes collected to finance them, depleting the trust fund that was supposed to be built up. FDR vetoed the first changes but Congress overrode him.
What did changing the program to give participants *more for less* do to the rate of return on contributions, which originally was the bond rate?? It pushed that rate *up* of course, to 10% back there. Pretty darn good for those participants.
But as SS is paygo, this meant that as a matter of arithmetic that for every retiree cohort that
got more than the bond rate a future ones would have to get that much *less*. And everyone involved damn well knew it.
Altmeyer, the first head of SS, went and complained to Congressional leaders that they were going to cause SS to make future SS participants *poorer* on a lifetime basis -- and when he came back famously reported that they told him, who cares? "We'll be dead" and out of politics.
Congress kept hiking the benefits to tax ratio until the late 70s when they went to far, and SS went bust. The biggest positive returns *by far* in dollar terms were paid to those retiring in the 1970s and 1980s.
But then SS was bankrupt -- and Congress sure didn't want to cut the benefits of any *voters*.
So it imposed major benefit reductions on people who *weren't in the work force yet* -- today's young workers, while increasing the tax rate to 12.4%.
So people retiring *then* and soon after, after starting their careers paying only a 3% tax on a low wage base, got the biggest benefits ever.
While young workers got to pay a 12.4% tax from their first paycheck, for much reduced benefits.
What did *that* do to rate of return on contributions for the young, eh??
For the first time ever it plunged -- but only for those not yet voting! For the future workers it plunged. So much for intergenerational equity, Congress knew what comes first, the next election.
So Social Security paid *$10 trillion above the bond rate* on contributions to those retiring before 2000.
And anyone who doesn't think that had a pretty dang BIG role in making it *politically popular* is naive beyond all reason -- or is in total, abject denial.
After all, why did all those politicians slash the original SS tax rate in half, raise benefits, and then keep raising them.
Because it was *unpopular*? ;-)
Ah, but now the whole process is going into reverse, and every cohort retiring after 2000 will be *losing* money at an accelerating rate, say the SS actuaries, since as long as SS stays paygo that entire $10 trillion has to be paid back. And that's what's happening now, just like Altmeyer said -- and as FDR promised in 1935 would never happen.
And anyone who doesn't believe that SS *costing* future participants $10 trillion isn't going to have the mirror-image reverse effect on its political popularity that *giving* $10 trillion to them had in the past, has got to be a charter member of the Axis of Ostrich.
BTW, has Krugman in his defense of the SS status quo mentioned FDR's promise of "intergenerational equity" yet -- or the SS actuaries' projection that today's 30-year old workers will get as little as 50% back on contributions?
"Really? Then you should ask Jim Glass why he is showing a negative return in his analysis of the typical SS benefit. Those analysis use the benefits as per current law in doing the analysis."
When SS started there were - how many ? 6 ? 7 ? 8? workers for each retiree. And retirees died off not long after retirement. Therefore, at it's inception, SS promised a hefty return to the participants. That was it's appeal, and that's why it was adopted.
Now - demographics interferred. There are now how many ? less than 4 workers for each retiree, and retirees draw benefits for many years. There will be maybe 2 workers for each retiree 30 years from now.
So now the equation has changed, and EVEN NOW, under current legislation, the rate of return is negative, and the public refuses to hear of any tax raises or benefit reduction.
Over the long run, current promised benefits are unsustainable, and every one knows that a big adjustment is needed (more tax, less benefits) to acheive the balanced, long range sustainable state. This will not be accepted by the people, as there is no reason for them to accept steady and big negative returns. SS is doomed to die sooner or later.
The first participants in past years got their trillions of bonanza (benefits way above their contributions) out of the system. The loss has already been sustained, in the form of gov. debt and liabilities. The coming generations will have to pay for it in the form of benefits way below their contributions AND raised general taxes.
First in - big profit, last in - big loss. If that's isn't a Ponzi scheme I don't know what is.
The ideal that you describe in your model, of a balanced program, is maybe possible, but is not what exists now. And it will NOT be adopted because private savings afford people better returns. People are not fools. They adopted SS when they could make a big profit from it, and they will dump it when they no longer can.
Using force or deception on people can go only so far, especially in free societies. When people feel SS generates only losses they will dump it.
"Is Jane really unable to understand the difference between a question about whether or not 'real' assets are held in the Social Security Trust Fund..."
The US Treasury ITSELF says the trust fund bonds are NOT assets.
Their asset value is exactly and precisely $0.00 on the Treasury's balance sheet of the U.S. government. Because they are owed by the Treasury TO the Treasury, which means they are *liabilities* exactly as much as assets, netting out to exactly $0.00.
See for yourself. http://www.fms.treas.gov/fr/
And as the Treasury explains...
"At the time Social Security ... redeems these instruments to pay future benefits not covered by future income, the Treasury will have to turn to the public capital markets to raise the funds to finance the benefits just as if the trust funds had never existed.
"From the standpoint of overall Government finances, the trust funds do not reduce the future burden of financing Social Security."
_Analytical Perspectives on the 2005 Budget_, p.199
http://www.whitehouse.gov/omb/budget/fy2005/pdf/spec.pdf
That's pretty clear.
"... just as if the trust funds had never existed."
How "real" is that?? Why do so many people insist on arguing with the Treasury about this?
~~~~~~~~~
"But surely we can all agree that if IBM were presented with an IBM-written IOU and refused to provide the money owed then IBM would have *defaulted on an obligation*? "
Don't be silly. How would IBM default on an obligtion to *itself*? How could you default on an obligation to *yourself*??
Try it! Write out a legally binding note, secure it by your savings account and your house. But write it to *yourself*.
Then go TRY to default on it. How would you? How would you get the credit rating agencies to notice and lower your credit rating?? If you sued yourself what would your damages be in dollar terms?
C'mon, everybody knows full well that a note you write to yourself is worth $0.00 because you have to pay yourself just as much on it as you recieve. Net $0.
And a note that IBM writes to *itself* is worth $0.00, because it has to pay itself just as much on it as it receives. Net $0.
And you can't default on a liability of $0!!!
But somehow so many of these same people think that a note the government writes to *itself* can be worth a trillion dollars!
When even the TREASURY says it has net asset value of ZERO.
It's like some strange religious cult.
~~~~~
"Why doesn't the same apply to a Treasury bond?"
The exact same rules *do* apply to a debt IBM owes to *itself* and one the Treasury owes to *itself*. That's the point!
~~~~
"And if it does, what is the moral (not legal) difference between a Treasury bond in the Social Security Trust Fund and one held by the Bank of Japan?"
What's the moral & legal difference between a debt *you* owe to the Bank of Japan and one you owe to *yourself*?
Don't argue with the Treasury. The Treasury is right, it knows what its "real" assets are.
boonton has asked about systems that he argues are analogous to SS. In the modified version of the first, he asks:
Step 1
Youngest 80% are taxed. The taxes are used to purchase Eurobonds.
Step 2
Oldest 20% get benefits from the tax dollars plus the tax dollars from Europeans paying off their bonds.
This is indeed stable but is not the way SS works. This model would require a floating retirement age. Also, where does the money for the Eurobonds come from. It can't be used both for the older 20% and to pay the benefit. I suppose it' stable if you apportion part of what comes from the young to benefits, and part to Eurobonds, but this will reduce the net benefit.
This second model is:
Imagine an economy with two people at all times, young and old. This economy establishes a simple social security program. The young person pays 10% tax on his income and the old person gets the benefit. No one dies young in this economy and each young person spawns one child before passing into old age so the worker/retiree ratio is 1:1.
So, if I understand this, you get to go from a payer to a receiver when the person you've been paying for dies. Note also that the worker has to make $100K in your system for the retiree to get a benefit comparable to the current one.
I'm not sure if your schemes are Ponzis or not...but they aren't models for SS either. Don't believe me - ask AARP if they'd replace SS with one of your models!
Paul Samuelson on the beauty of Ponzi schemes, Newsweek, 1967, quote:
~~~~~
The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times (or five times counting employer payments)!
[Hey, Boonton, does *that* sound like SS is being sold on the basis of above market returns? ;-) ]
How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population ... the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired...
A growing nation makes possible the greatest Ponzi game ever contrived.
~~~~~~~~~~~~~
Ponzi and proud!!
Benefits equal 10 times (or 5 times) contributions for "EVERYONE"!
Isn't it just amazing how what Samuelson described as THE great thing about Social Security has now been totally *forgotten* by Krugman, DeLong, CBPP, the blogging party liners like Drum and Yglesias, and all?
Positive returns?? Who ever promised positive returns from Social Security?? The young will be happy to take losses, of course...
I agree about the earnings cap for contributions. Also, how about investing the current (and growing) trust fund in index funds? If such investments would do well for individuals, they will do as well for the trust fund. But will the government guarantee the result in either case? The point of Social Security is to provide an insurance plan for old age, not to allow people to win or lose in the stock market.
See my own post: here.
It would appear that Samuelson was too pessimistic. SS works even in a stable population with a growing economy. The problem with SS is that the benefits are slated to increase too fast. There's an easy solution to that problem, slightly decrease the benefits and it appears that the Bush admin. is about to propose this thereby ending the 'horror in 2040' routine.
Since every dollar put in is a dollar paid out the returns on SS cannot be negative. Every person who experiences a negative return has to be offset by a positive return. SS's return is also split between the sytem itself (those paying in and taking out) & the taxpayers who experience reduced interest payments on SS's surplus (as well as the general economy).
So, if I understand this, you get to go from a payer to a receiver when the person you've been paying for dies. Note also that the worker has to make $100K in your system for the retiree to get a benefit comparable to the current one.
Its actually quite simple...its equilivant to a tax on current workers earnings. As long as the economy is growing everyone sees a positive return equal to the growth of the economy. How can the system earn a return when it isn't investing in anything?
Because, as I said before, unlike a private company a gov't is wedded to the underlying economy. If this program is funded with a 10% tax on earnings then this is functionally equlivant to an investment in the economy as a whole. In order for a private pension to mimic this return it would need to fund a pension plan that choose a porfolio that was able to mimic the overall economy's growth. This step is unnecessary for the gov't...in fact its better if the gov't doesn't even take this step.
I used a simple example where income started at $100 and grew at 5% per year, not $100K. The purpose of the model was to demonstrate how even a SS sytem with a return built into it does not have to collapse & doesn't turn into a Ponzi scheme even over an arbitrarily large time frame.
http://russabbott.blogspot.com/2005/01/social-security.html has a fascinating graphic that he got from http://www.cbo.gov/showdoc.cfm?index=5666&sequence=0.
As a % of GDP, SS's outflows grow to about 6% while its inflows will only be in the high 4%. What's fascinating is how this gap vanishes after the 2040's leaving both SS's in and outflow at just under 5% of GDP.
As I showed in my example of the simple SS model (http://www.janegalt.net/blog/archives/005106.htm), if you are transferring a constant % of GDP you will have a social security system that is stable for an indefinate period of time & will generate a return equal to economic growth (which IMO is about as 'fair' a return as you can ask.
Perhaps the optimal is to simply prepare to asorb the upcoming deficit by increasing savings today as much as possible (by taming the general budget deficit)...adding the 2% 'private account' as an optional for extra credit...but just leave SS alone as long as it remains roughly an even portion of GDP taxed and given out.
This isn't as easy as doing nothing because the tax and benefit formulas are complicated and will have to be constantly tweaked to keep the line steady but it looks like it isn't so off as it is.
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Jim, you do understand IBM and a pension plan for IBM's workers are not the same thing, right? To take a more contemporary example, US Airways and the (now-defunct) pension plans for their unions are clearly separate entities. If an IBM pension trustee shows up with an IBM-written IOU and IBM doesn't pay it, IBM has, in fact, defaulted. The pension trustee would be justified in employing whatever debt-recovery options he wanted, including suing IBM. And IBM's credit rating would be affected whether the bond was held by IBM's pension plan or GE's pension plan. Now, I'll agree that companies that borrow from their pension programs to finance ongoing operations tend not to survive, leaving no one to redeem the IOU (which is why we don't let them do that), but a pragmatic concern that such a transaction is unwise for a pension does not mean that such a transaction has no meaning.
I'll try one more time to explain the moral obligation involved with the Social Security trust fund: Trillions in taxes were (and are) collected whose public justification is that they were going to be used to finance Social Security benefits. For years (because of the early 1980s reform) Social Security has collected more revenue than required to pay current benefits. That excess was loaned to the rest of the government. When (in 2018 or whenever) Social Security collects less revenue than is required to pay current benefits, a Social Security trustee is going to go to the federal government and attempt to redeem these bonds (he'll start by merely not reinvesting the interest on those bonds). At that point the federal government can raise taxes, cut spending or borrow money as necessary to redeem that bond (I'm not sugarcoating the options for the federal government at that point) or it can refuse to pay. If the government refuses to pay, the people whose Social Security benefits are cut as a consequence have been lied to and stolen from just as much as if the Social Security surpluses were just given to me in the first place. I may come out ahead in that scenario (and plenty of people come out ahead in the scenario where the Social Security surpluses make possible lower income, capital gains and other tax rates than would otherwise be possible), but that doesn't make it right. I'm not debating the economic or legal status of the assets in the SS trust fund and I'm not denying Congress can retroactively change the rules. What I am pointing out is that our government has made a moral commitment to the millions of workers who have paid Social Security taxes to use that money for Social Security benefits. We may be lousy people who abandon past moral commitments when they turn out to be inconvenient, but we should at least be honest about what we are doing.
Jim, I'll also note that you *still* haven't provided a citation for the unconstitutionality of preferred debt...
Ravi,
I agree with your point. Whether or not IBM's pension plan is allowed to buy IBM corporate paper the corporate paper would remain a valid asset for the pension fund.
What is missing here are a few simple ideas:
1. If you are taxing and giving out a constant % of GDP then you automatically will generate a return equal to the growth rate of GDP. How this return is distributed is another issue.
2. When the gov't buys its own bonds, it automatically generates two returns. The first return is equal to the rate it would have paid to the private market if it had sold those bonds to the public, the second is the increased economic growth due to a smaller public debt.
3. A gov