Asymmetrical Information

I remember that the last time I wrote here about how the money was plain gone and that wholesale reform (ie transition to complete privatisation) beginning with recognition of these facts was the solution, some obnoxious pillock here went on and on and on about the oh-so-precious promises and that really the answer was taxes (and of course these are the same kind of mongrels who whine endlessly about the need to emphasise substance over form in regards to interpretation of tax law). *disgusted snort*.

Fine, keep the promises, go ahead and raises taxes... raise them only upon those drawing social security, dollar for dollar, plus admin fees. Promises kept, problem solved, and in a perfect reflection of the true nature of the 'trust-fund.'

JJM

Our pension system (Social Security, for those following along at home) isn't underfunded--it's unfunded. And there isn't any way to fund it, in the sense of storing up assets to cover the liabilities, unless we change the law so that the government can hold stocks or other assets. As P.J. O'Rourke has said, "the people of Eastern Europe had some very pungent names" for government ownership of economic assets.

"Are there any actual proposals on the table for individuals taking actual ownership of the instruments that will make up the personal/private/whatever accounts? Every proposal I've heard or seen consists of the government holding such things in a sort of trust."

The trustee has title to the assets and a fiduciary duty to manage them to the beneficiary's (taxpayer's) advantage. The trust can be held by any organization that follows the government retirement fund rules. The proposals would basically be the same as existing tax-advantaged retirement accounts, except that they would be compulsorily funded.

Fund: A sum of money or other resources set aside for a specific purpose

A fund does not have to be intrest bearing/earning to be a fund. All it requires is that funds be put into it.

You seem to be confusing the concept of interest bearing accounts with the concept of fund. My office had a coffee fund. It was not interest bearing, it was a FUND.

Many good arguements against the present SS system. This however, just seems like dictionary abuse.

Plus, if it is not a fund, then why did congress/senate debate using the funds from the SS trust fund for other purposes a few years back? As far as I can tell, I can find no one willing to talk about that particular illegality. Nor the illegality of the gov refusing to pay back the "funds" it borrowed. Or are we still in denial on that particular point?

johnny:

for another bloody time: it is a matter of law that SS is not legally enforceable, that no one has an individual right to any benefits "promised" to them.

also, who makes the law? Congress. Who can change the law? Congress. If Congress wants to change a benefit program what can be done through the courts about this? nothing. What can be done? vote them out.

Ergo, changes to SS benefits are no more or less illegal than changes to SS taxes. Why do you think we've been harping on the fact that this is a ponzi scheme? it's illegal for a reason when a private individual does it: it just doesn't work. This is a massive fraud, and the saddest part about it is that too many of the architects of the plan are dead so that we can't deal with them like the criminals that they are.

Get used to the fact that most people working today will not collect their social security checks.

"for another bloody time: it is a matter of law that SS is not legally enforceable, that no one has an individual right to any benefits 'promised' to them...

"Get used to the fact that most people working today will not collect their social security checks."

Now, take that thought and *multiply it* for Medicare.

Hey,

This is hardly likely to be literally true, although perhaps you did not mean it that way.
"Get used to the fact that most people working today will not collect their social security checks."

Benefits may need to be reduced, taxes may need to be raised, but I am aware of no scenario or plan that imagines eliminating the social security for 'most people'. We can not even get rid of absurd agricultural subsidies.

Tom

Jane Galt, you appear to have messed up the attributions. The quoted material is not from Gross's article.

Sure but the government with a wave of its hand can also change the tax status of current tax deferred accounts or the protection of privet accounts for that matter since the money will never level that hands of the SS administration. So what? Hell the stock market is a Ponzi scheme if you want to broaden the definition to an absurd level. When Boomers start cashing in their 401ks to retire and there are on two workers putting money into the market for every one boomer taking it out, and more then half of those workers won’t be making that kind of income that facilitates investment of any kind what do you think is going to happen to the stock market? It also kind of gives one a notion of why, when we are running deficits of 600 billion a year that the government is so keen to start pumping money into the stick market.

Jane,

You write:
"And there isn't any way to fund it, in the sense of storing up assets to cover the liabilities, unless we change the law so that the government can hold stocks or other assets. As P.J. O'Rourke has said, "the people of Eastern Europe had some very pungent names" for government ownership of economic assets."

Is it really a big deal if the government holds 1% of the S&P 500? (I get it's a big a deal if the government holds 100% but I don't know what percent should make me queasy). And is there a big difference between the government owning, say 5%, and the government forcing individuals to save money and directing them to choose a specific index fund or two? What benefits do all the exta administrative costs buy us?

Tom

Rick DeMent

You seem to be suffering from a lack of distinction between investment and consumption. The money the boomers put into their 401(k)s was invested in growing the economy. That economic growth is what allows the economy to shoulder the burden of supporting them in their dotage.

The money that goes into Social Security is consumed immediately (either in the form of benefits or government spending). It does very little to expand the productive capacity of the economy.

Let me explain with an example. Imagine I invest money in building a company that owns a factory which generates income. I take the company public and sell shares at a huge markup to what I invested, but inline with the income generated by that factory. Did I take those shareholders for a ride? What if they allow the company to retain it's earnings and use them to build a second factory, which generates more income, and then they sell their shares to others at a huge profit. That's effectively how the stock market works, and it's not (barring fraud or hysteria) a ponzi scheme.

When the Baby Boomers start selling off their 401ks to fund their retirement it in no way reduces the amount of productive capital built up by their investment. The income stream from the factories of the example above keep flowing. In a really extreme case perhaps it does drive down the market price of shares in the example company above, but that just means that new investors are getting a better yield (ie, more income for their investment dollar). More likely the retiring shareholders bring pressure to pay more of the income out as dividends and reinvest less of it.

A ponzi scheme would be me selling a bunch of people bonds which I promise will double their money in 5 years, and then taking the money and spending it. When it comes time to pay off the original bondholders, I sell twice as many bonds, and take the money and pay of the orininal bond holders. Barring fraud, this is not how the stock market operates, but it is how Social Security operates.

The important point here is the distinction between investment (which on average, increases wealth) and consumption (which does not).

"Hell the stock market is a Ponzi scheme...

"When Boomers start cashing in their 401ks to retire and there are on two workers putting money into the market for every one boomer taking it out, and more then half of those workers won’t be making that kind of income that facilitates investment of any kind what do you think is going to happen to the stock market?"

Aside from the fact that the stock market and other investment markets represent investment rather than a pyramid of consumption, as noted just above, one might also note that they are international -- and most of the world is loaded with people a heck of lot yougner than the average in the US.

So unless one excludes Asia -- where China alone figures to grow to 3x the GDP of the US within 50 years, with India not far behind -- and other such places, there figure to be a lot more than two workers in the world for every one US boomer retiring.

So we might reasonably expect the stock market and other investment markets to continue along pretty much the same path for the next 100 years as they have for the last 200.

Quadrupole,

"The money that goes into Social Security is consumed immediately (either in the form of benefits or government spending). It does very little to expand the productive capacity of the economy."

I disagree. The surplus of Social Security taxes over benefits reduces the net government borrowing need. That frees up savings for private investment.

Alternatively, if the surplus of Social Security was invested in private securities, an equivalent amount of private capital would have to be diverted to buy the extra government debt.

"When the Baby Boomers start selling off their 401ks to fund their retirement it in no way reduces the amount of productive capital built up by their investment"

Again I disagree. When private savings falls (e.g. Boomers spending down their assets), less money is available for investment. To be explicit, when they sell their stocks someone has to buy them. The person buying them is not investing their money elsewhere raising the cost of capital and reducing investment levels.

Tom G.

Tom G.

"I disagree. The surplus of Social Security taxes over benefits reduces the net government borrowing need. That frees up savings for private investment."

Actually, you are right, but for a more subtle reason than I think you mean. In a very broad sense it doesn't matter where the government get's the money it spends. You can make a case that the US GDP can be divided into two piles consumption (of which government spending is an example) and investment, and that it doesn't matter whether the government borrows a dollar or taxes a dollar to spend, it's reducing the amount of investment. That case is slightly coarse though, as it ignores the marginal propsensity to save or consume. Clearly dollars borrowed have a marginal propensity to be saved of 100%. Dollar's taxed have some average marginal propensity to be saved of less than 100%. Since the lower one's income, the lower the marginal propensity to save, and since FICA is a highly regressive tax, it is probable that it does produce more net investment by taking dollars the poor would use to consume and using them to offset dollars from the rich that will therefore be available for productive use.

I find this somewhat troubling though...

"Again I disagree. When private savings falls (e.g. Boomers spending down their assets), less money is available for investment. To be explicit, when they sell their stocks someone has to buy them. The person buying them is not investing their money elsewhere raising the cost of capital and reducing investment levels."

Certainly when private savings falls (e.g. Boomers spending down their assets) less new 'real' capital is accumulated. However the 'real' capital behind the 'financial' capital that the boomers are liquidating doesn't go away because they are selling it. It might decline in value, but it doesn't go away.

Quadrupole,

You are right that I was not considering that the taxes would slightly reduce private savings. With current US savings rates though this seems likely to be a pretty small effect.

I am uncertain what you find troubling though.

I think I understand what you were originally saying now about the boomers retirement. I would suggest that the distinction between preventing the formation of new physical capital and getting rid of the old physcial capital is not particularly meaningful.

Cheers,
Tom

Congress could also take everyone's home and land because of the power they have. They won't do it, no more than they will refuse to honor the debt on the Social Security.

The money from our trust fund is backed by the full faith and credit of the US government. We drew 89 billion interest on it last year.

At this time, they only owe the Social Security Trust fund about 1.9 trillion. That will double if they keep borrowing it until 2018.

Just because some will have to pay more taxes is no reason to cheat on a person's retirement. It would be highly unethical. Those who have paid in up to the cap should not have to pay themselves back.

Using the trust fund has saved people paying a lot more taxes, now it is time for them to step up to the plate.

I keep getting a message that the above cannot be posted due to questionable content. Talk about freedom of speech. If someone disagrees, then they don't post, is that it?

Media matters if it says what you want, huh? disgusting.

Tom G.

"You are right that I was not considering that the taxes would slightly reduce private savings. With current US savings rates though this seems likely to be a pretty small effect."

That depends on which dollars you are taxing. If you tax populations with a high propensity to save and invest (the rich) you get a strong reduction in savings and investment. If you tax populations with a weak propensity to save and invest (the poor) you do relatively little to suppress savings and investment.

"I am uncertain what you find troubling though."

I am troubled by mounting an argument that maintains it is better in the long run to tax the poor (low marginal savers) more harshly because it encourages investment and eventual wealth.

"I think I understand what you were originally saying now about the boomers retirement. I would suggest that the distinction between preventing the formation of new physical capital and getting rid of the old physcial capital is not particularly meaningful."

You are still failing to make the distinction between 'real' and 'financial' assets. When someone sells off a financial asset the 'real' asset backing it (the factory) is not gotten rid of, it merely changes owners. The value of the asset may decline if it is sold cheaply, but the 'real' asset itself, and that assets capacity to produce income, is not diminished. The point is, the boomers own 'financial' assets that are backed by 'real' assets that produce income. When they sell out of those assets, the 'real' assets and the income the produce are not diminished. That capacity to produce income is what really matters in the final analysis.

Quadrupole,

There is no population with a high propensity to save in the United States. Our aggregate savings rate is below 1%. (http://www.bea.gov/briefrm/saving.htm) It has been above 3% for only one quarter since 2000. The rich can't be saving that much, given how large a share they have of total income.

I had trouble getting good data on savings by income level but check out http://www.federalreserve.gov/pubs/feds/2001/200121/200121pap.pdf
page 29. Their data suggests the richest are actually saving less on average than other quintiles as a % of income.

It is hard to believe the marginal propensity to save can be high when the average is so low. So while in theory I understand your concerns, in practice the effect is, as I said, neglible.

Please note that I have not advocated for regressive taxes. I have merely disputed your point that "The money that goes into Social Security ... does very little to expand the productive capacity of the economy."

Cheers,
Tom

Quadrupole,

I have not confused financial and physical assets. My point is simply this - when the boomers spend down their assets, they reduce the national pool of savings available for investment. As a result, there will be less investment. I am not pretending that existing factories will disappear - merely that fewer new ones will be built.

Tom

"The surplus of Social Security taxes over benefits reduces the net government borrowing need. That frees up savings for private investment."

Or the surplus was simply consumed by Congress, increasing gov’t spending, freeing no savings.

Or it was more than consumed by Congress, enabling it to borrow even more than it would have otherwise, thus increasing the public debt and reducing savings available for private investment.

"We find that there is no empirical evidence supporting the claim that trust fund assets have reduced the level of debt held by the public. In fact, the evidence suggests just the opposite: trust fund assets have probably increased the level of debt held by the public....

"... each dollar of Social Security surplus appears to have actually increased the debt held by the public in the past by $1.76." [Kent Smetters, NBER & Wharton, pdf]

Well, no, there’s a takings clause in the Constitution that prohibits the gov’t from "taking" anything without paying fair compensation.

"The money from our trust fund is backed by the full faith and credit of the US government. We drew 89 billion interest on it last year. "

Really? Who paid all that interest that “we” drew? Just who was it that forked over that $89 billion money to us??

"Just because some will have to pay more taxes is no reason to cheat on a person's retirement. It would be highly unethical. Those who have paid in up to the cap should not have to pay themselves back."

Exactly!!!

And what’s going to happen in 2030 when all the then 50-year olds are told they have to pay a 35% income tax increase to cover the operation of the trust funds, precisely to pay themselves back for all the money they already paid through payroll taxes into the trust fund over the prior 30 years, that Congress consumed? So they have to pay for their benefits twice.

(And remember, they are going to have to pay these income taxes not only for the rest of their working lives, but after they retiree too –to finance their own Social Security!)

They are indeed sure to say: "This is highly unethical! We should not have to be taxed now to pay ourselves back to get benefits we already paid for! Why should we be forced to pay twice for our benefits??"

No, they are not going to like it one bit. They are going to agree with you about that being wring and unethical. And as a result, they are more than likely to change the law and end SS as we know it today.

All of which could have been easily avoided if real economic investments instead of the govt’s IOUs to itself had been used to finance either the trust fund or private accounts, because then the 50-year-olds of 2030 and later wouldn’t have to face a 35% income tax increase just to pay themselves back for taxes they’d already paid.

Jim,

Before you take the regression in the paper you cited too seriously think about this:

If we cut Social Security taxes this year significantly, do you think the deficit would decrease?

If you truly believe the regression result, then you should. Regression results over such a small data sample should always be taken with great care.

I am capable of believing a milder version of your point - without the Social Security surpluses I believe the general fund deficits would have been smaller.

But that's just another way of saying that any effort to reduce the deficit is difficult and something of a three steps forward, two steps back type of task.

Tom G.

"Our aggregate savings rate is below 1%."

It depends on how you define "savings". Many families are sinking every spare dollar they have into their house, which is an asset that will last a long time and will almost certainly sell at a profit. I doubt that most people could find other investments with a better average rate of return. Of course, there are two disadvantages:

1) To realize your gains, you have to move out - which is something old people are often reluctant to do. And to end up with enough money to finance your retirement, you've got to find somewhere else to live that is a whole lot cheaper. That's OK for someone now making payments on a half-million dollar mortgage that hopes to retire to a backwoods cabin northern Michigan, but you'll need other savings if you want to move to Miami Beach.

2) It's putting all your eggs in one basket. If the neighborhood goes to the dogs or if the house is badly damaged by something not covered by homeowner's insurance (termites?), then you lose. I think SS makes risky strategies like this more acceptable.

2)

SS estimates paying 73% of expected benefits, from which Medicare B is deducted, probably using up the inflation adjustment, making SS fixed income, fully income taxed when 401k withdrawal begins.

The SS annual reports seem to indicate that at any productivity growth over 1.9% the sustem will be fully funded, historically growth is about 2.5-3%. Most reports show the 'crisis' moving farther out each year.

Is it possible that for political convenience the SS reports are treated as predicting lower future growth, when in fact SS sets the low cost model to always be funded, meaning only low growth is needed for full funding?

http://bruceweb.blogspot.com/

Mark - the "crisis" has moved back to 2017, which is the currently projected year that SS will have to start borrowing instead of contributing a surplus to general funds. It is overoptimistic IMO.

At that point, we borrow more or raise taxes. The population of wage earners will be falling. Medicare is already running a deficit, which will be much higher by then. The projected impact on our budget is monumental. We are facing a complete revolution in our economy WITHIN 15 YEARS whether we like it or not.

By 2020, there will be no room for discretionary spending at all in our budget using current assumptions. The last CBO report projected that things looked very bad by 2013. Believe me, by 2015 we will have cut SS benefits for the wealthiest retirees. There is no way out.

I would strongly urge everyone to read the Medicare/SS report and the CBO analysis. The media is just not covering the story.

MarkM,

Are you sure that the government does not include retiring mortgage debt as savings?

I really don't know, but it's not obvious to me that they would not.

Beyond that I keep reading about a housing bubble and an increasing number of interest only mortgages.
Cheers,
Tom

Those who have paid into the fund should not have to pay themselves back. No one who is paying into FICA for Social Security should have to pay more to pay the trust fund back.

Add a surcharge on federal taxes on all those who make over the earnings cap. People have saved 1.9 Trillion on their taxes by using the trust fund. Now it is time for them to pay it back and it should be those of higher income.

Most importantly we should all demand the government quit borrowing it.

"No one who is paying into FICA for Social Security should have to pay more to pay the trust fund back."

Yes, indeed ... that's what a whole lot of people are going to be saying around 2030.

"Add a surcharge on federal taxes on all those who make over the earnings cap."

Ha! That won't come close to doing it.

Servicing ("repaying") the trust funds is going to require a 35% increase in all income taxes paid by everybody, say the Trustees.

And that's still going to leave Social Security 27% underfunded, of course.

"People have saved 1.9 Trillion on their taxes by using the trust fund. Now it is time for them to pay it back and it should be those of higher income"

Get real. The people you want to tax with your (pitifully inadequate) surcharge are not the same people who you claim 'saved on their taxes' -- so why should they have to repay anything??

Lifetime incomes on average start low and rise to end high.

Joe Average worker starts with an income low in the second-lowest quintile and 30 years later gets to the second highest.

So the average guy at age 50 who's lucky enough to be over the wage threshold is just getting there after paying payroll taxes all along -- and, of course, he's still paying them.

Just how do you figure he should get hit with your surcharge to repay his own payroll taxes that he paid for the prior 30 years -- and everyone elses' too!? How much do you claim he 'saved' on taxes during all those years when he was below the tax threshold?

Those taxes you claim people saved date back to 1984 -- when a 50-year-old of 2030 was all of four years old! Just what benefit did he get at the age of four that you think he should have to repay??

This 'they saved taxes so they should repay' is the dumbest rationalization for the status quo I've heard yet.

If you really think the people who benefitted from the 1983 SS law changes should be the ones to pay in 2030, when the cost of the trust fund comes due, then fine, I'll tell you who they are!

In the 1970s Congress hiked SS benefits to the highest level ever -- paying the hihgest-dollar positive returns ever. Then Congress found it couldn't raise taxes enough to pay for them and the system ran out of cash, SS went broke (note how demogrophics had nothing to do with it -- a lesson there!)

Retirees of course didn't want to lose any of their benefits, and Congress didn't want to lose any of the retirees' votes.

So they made a "deal", keeping the benefits and the votes by sticking it to the 50-year olds of 2030 -- by slashing their benefits, upping their lifetime payroll taxes, giving them negative returns from SS ... and making them pay for their benefits twice through the trust fund, pushing their return from SS even more negative.

Who profitted from the 1983 deal? The retirees of the 1980s who got the highest-dollar positive returns from SS ever ... and the politicians of the 1980s, who got those retirees's votes.

So you should want to tax them to repay the trust fund. Except in 2030 they'll all be dead, of course.

They got away with it.

Jim,

Well said!

Tom G: I see no way that you could get a national savings rate of 1% if retiring mortgage debt was counted in it - unless everything else put together gave a negative savings rate. For a very rough estimate, consider that most families have mortgages taking huge bites out of their pay checks (25% or more). Then you've got to guess at the average % of the mortgage payment that goes to capital. I'm not an economist or accountant and I wouldn't know where to find these stats, but I cannot see how much less than 5% of the national income could be going towards mortgage capital. OTOH, maybe this is offset by people refinancing and borrowing more against the inflated value of their house... (I've done that, but it was to invest in a new home site, and by now both houses are free and clear - OTOH, I can see certain people getting a second mortgage just to make the down payment on their next Porsche...)

MarkM,

I actually don't have any trouble believing the rest of the savings rate could be negative. I believe the aggregate number has gone negative briefly in the recent past.

Cheers,
Tom

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