Asymmetrical Information

On a first read this seems like a very moderate, reasonable plan that 85% of Americans could live with, and that has no chance in Hell of ever being reality. But one part bothers me:

3) The funds diverted from the trust fund would be replaced, once the Social Security surplus was not adequate, by raising the cap on earnings subject to the Social Security payroll tax so that 90 percent of earnings were taxed. Workers would receive no incremental benefits for paying these additional taxes.

Como se wha'? Not being a CPA or an economist I'm sure I'm just reading this wrong, but the red-blooded tax payer in me has Bull-@#%$ flags popping up over "so that 90 percent of earnings were taxed". And to add insult to a kick in the nuts "Workers would receive no incremental benefits for paying these additional taxes". I'm of the ilk that believes Soc Sec is so screwed up that I'll never see a dime of it as it is, and under plans such as this fiscally responsible types like me will actually have less money to invest on our own for retirement. Does anybody else have issue with the idea of throwing more cash at a problem instead of making the really hard decisions like cutting benefits to those hight income earners who can whether it now, allowing individual accounts immediatly, euthanizing aging Baby-boomers, etc. (Just kidding on that last one).

The plan is all about screwing the "rich" to help the "poor". This is non-partisan?

Increase tax flows in, reduce benefits out. That's about it. Everything else is politics.

3) The funds diverted from the trust fund would be replaced, once the Social Security surplus was not adequate, by raising the cap on earnings subject to the Social Security payroll tax so that 90 percent of earnings were taxed. Workers would receive no incremental benefits for paying these additional taxes.

Anyone who takes the trust fund seriously as anything other than a political masking device self-identifies himself as someone whose ideas should be ignored.

The SS surplus contributes absolutely nothing to the future funding of SS.

The exhaustion of the trust fund is much more analogous to making your last auto loan payment than any kind of insolvency.

Regards, Don

Yep, like all "moderate" reform plans, it's just a bunch of massive tax increases on the young to reward the old for screwing us first.

I agree with the first poster. I'm not getting anything out of this anyway, so why should I have to throw yet more money at this? Actually, if we're going to raise taxes with no increase in benefits, why should there be a payroll tax cap at all? For that matter, why should it be a payroll tax? You can't separate the tax from the benefits without making the system a farce.

There is no concensus that there is a problem with social security so it is silly to talk about about achieving a concensus to fix it.

Just a few days ago you were writing about how SS was fine.

So what made you change your mind? Is this some new meme I am not aware of?

"Increase tax flows in, reduce benefits out. That's about it. Everything else is politics."

Absolutely correct. The debate should be about the allocation of tax increases and benefit cuts; instead it seems to be about how to obfuscate the fact that either is happening at all. Means testing should be a no-brainer: conservatives should oppose *handouts* to the wealthy, and liberals should oppose handouts to the *wealthy*.

If you read Samwick's comments, or the actual proposal, "90% of total earnings" doesn't mean "90% of individual earnings". It's essentially raising the cap to $171,600 of individual income from $90,000 (which is where it was in 1982, the year of my birth).

There are things I don't like about the plan (like yet another mandatory savings scheme), but it's better than the current situation because I have a nonzero chance of getting benefit. Currently my P(seeing a red cent) is absolutely nill.

What is this "handouts to the wealthy" nonsense? The security security formulas are already biased against high earners and you want to increase the bias.

I'm also no fan of mandatory annuitization.

We're not getting old later, we're living longer as old people.

Raising the retirement age is not going to fly. Or if it does, people will just be living on welfare until social security kicks in.

Thanks for linking to the plan and for the comments so far. Let me provide a little background.

The problem doesn't get any easier by waiting. In fact, it's the reverse. See this post from my blog.

If we do nothing in the next decade or so, we precipitate a situation in which future generations of workers have to pay far more in taxes than what we are proposing here and/or future generations of retirees have to accept lower benefits on a large scale or with little notice. We should be acting now to avoid that outcome.

So I don't disagree with the characterization:

"Increase tax flows in, reduce benefits out. That's about it. Everything else is politics."

But that is the necessary course of action, and if you agree, then you have to move on to considering how to use our political system to bring it about. I believe the politics matter here. We're trying to give that political process an assist by demonstrating the sort of compromises that could work, if they were done by a bipartisan group anchored in the center politically.

Thanks again,

Andrew

I don't think the term "handout for the wealthy" is a proper term to use here, and I don't think the system is "biased" for the wealthy either. High income earners, by definition, pay much more into the system. By any stretch of fairness, they should get more out of it at the other end. Arguing against this is similar to committing the tax-break fallacy: the wealthy did not get a disproportionate tax break, they actually got MORE screwed on the percentages and overall tax burden. It's a simple fact that the wealthy pay MUCH MORE in taxes, and any tax break gives them back a larger sum, but is totally unreflective of the actual picture. Anyone who can scrape through 6th grade math can understand that basic principles, if unbiased by the politics. Sorry for the tangential rant, just been saving it up for a while.

"High income earners, by definition, pay much more into the system."

Sure. They also pay much more in income taxes, but that doesn't mean they should get more food stamps than the poor. The main purpose of SS is to alleviate poverty, i.e. redistribution of wealth. As a conservative I'm not thrilled about that, but I recognize that it's necessary to some extent. What is absolutely not necessary is taxing the hell out of future generations so middle class and wealthy retirees can get their "investment" back. The welfare component of SS is justifiable; the "retirement savings" component is not. In my ideal world, SS taxes would go away completely, and there would be a minimum guaranteed income for retirees, funded out of general revenues. Obviously that isn't going to happen in one shot, but means testing is a first step (and of course should be phased in over several years so as not to screw people who are close to retirement).

"We're not getting old later, we're living longer as old people."

This is largely true, and one of the many reasons we need to be more aggressively investigating ways to slow and ultimately halt the entire aging process. I suspect such research would pay for itself many times over in health care savings.

What you Americans have to do, first of all, is change the name.

No really. You have what is called an "insurance" and that means everyone has, in the back of their mind, this idea that it is an investment they have made, and they should get their money back.

In Australia it was called a "pension" and so it was possible (not easy) to introduce asset tests, income tests, and mandatory private accounts. Because the middle class will not stand up and say "I belong on welfare".

So change the name first, and then people's minds will slowly follow.

Yes I know it isn't logical, it is meaningless. Which is exactly why it will help in the illogical, emotion charged problem you have.

And because it is meaningless, you should be able to get it through without too much opposition: anyone fighting a simple name change looks very silly.

"But that is the necessary course of action, and if you agree, then you have to move on to considering how to use our political system to bring it about."

But I don't agree. "Reduce benefits to the degree that taxes don't need to be raised to pay for them" is a much better plan as far as I'm concerned.

'The plan is all about screwing the "rich" to help the "poor". This is non-partisan?'

Democratic & liberal plans are non-partisan, Republican & conservative ones are partisan. Got it?

Not that real conservatives should have much of a problem with stopping government handouts to the rich. OTOH, raising taxes on the rich to fund handouts is something conservatives will scream about. But it might be the best deal available.

I'll take issue with Brian's comment that the purpose of social security is to alleviate poverty by redistributing wealth.

In fact, FDR was quite explicit that this was a program for WORKERS, and that it was intended to alleviate the problem of old age poverty. This was done mainly through the fact that most people did not survive until retirement. Thus, it worked very much ilke a pension scheme.
The higher contributions by higher workers (and not quite so much higher benefits) were a nice tweak to ensure that there was enough money to give everyone the bare minimum (while recognising that the bare minimum would be higher for those accustomed to drinking Starbucks).

It was very definitely not intended to be a welfare scheme. It was never sold as such. Most people would bridle at the thought of paying 6% or so of their income to some unknown "needy" beneficiary. Hence the fiction of the "trust fund" (it's neither a fund, nor is it trustworthy).

Current retirees are the last group to feed at this trough by collecting far more than they ever paid in. For the rest of us, we know the gig's up.
That's why the notion of higher taxes will no longer fly.

GWB tried the honest approach of partially weaning us off, but got shot down. At this point, the only acceptable solution is to cut the growth of benefits. And we might as well start with the current "greatest generation"

Apologies for the rant.

I meant to say that SocSec worked like an insurance scheme (not a pension scheme)

That sounds like a plan

And it would have worked if it hadn't been for those meddling kids.

1) Pay-as-you-go benefits would be gradually reduced to keep the costs of the traditional system to what can be afforded by the 12.4 percent payroll tax. The cuts are structured such that cuts are larger for high earners than for low earners.

Why not just go all the way and means-test benefits? If high earners are able to do with less benefits at a certain level, then surely there are some who can deal without any benefits?

2) The plan would establish mandatory personal retirement accounts (PRA) in the amount of 3 percent of taxable payroll. The accounts would be funded by a combination of diverting 1.5 percent of taxable payroll from the Social Security trust fund and requiring workers to contribute an additional 1.5 percent of payroll into their PRAs.

The problem with this is that (a) 1.5 percent is too low, (b) it?s mandatory rather than voluntary (as all of the major/serious PRA proposals are) and (c) it seems to misunderstand the rationale behind the PRA?s ? namely in giving younger workers who are set to lose money under the current system, a chance to partially opt and reduce OASDI?s long-term unfunded liability.

3) The funds diverted from the trust fund would be replaced, once the Social Security surplus was not adequate, by raising the cap on earnings subject to the Social Security payroll tax so that 90 percent of earnings were taxed. Workers would receive no incremental benefits for paying these additional taxes.

Tax increases are or ought to be a deal breaker. Instead we ought to just implement means testing of OASDI (and Medicare which is in worse shape) and be done with it.

4) The plan would gradually increase the normal retirement age (currently scheduled to reach 67 in 2017) to 68 and the earliest age at which retirees could collect Social Security benefits from its current 62 to 65. People would be able to tap into their PRA assets beginning at age 62.

Why not make it an even 70 and be done with it? The AARP is going to fight tooth and nail against any sort of increase in the retirement age (and presumably we?re going to have to have modify it or allow those workers who are physically incapable of continuing work to go on the disability portion of OASDI or retire at the original age anyway), so let?s push for an age that would actually make a dent in the problem.

5) In order to minimize risks and administrative costs, accounts would be tightly regulated and full annuitization of account balances would be required.

Pretty much goes without saying since no one who proposed PRA?s has suggested that workers would be picking individual securities.

6) Total replacement rates from the remaining traditional benefits and the new PRAs are comparable for most workers to those promised but currently underfunded in present law.

Fair enough.

"I meant to say that SocSec worked like an insurance scheme (not a pension scheme)." In either an insurance or a pension scheme, if I paid in 10 times as much as someone else, I'd get 10 times as much if and when I qualified for payouts. (The last time I looked it up, the requirement for "full vesting" in SocSec amounted to working at minimum wage for three months a year for ten years, so anyone who works steadily in a legal job will put in far more than 10 times the bare minimum.) Maybe FDR's original proposal did make the payouts proportional to the pay-ins, but it hasn't been anywhere near that way in my lifetime. So SocSec is neither insurance nor a pension; it's welfare.

First, if they want the hoi-polloi (i.e. those of us that will pay for this) to understand it, some of the jargon needs to be defined in the paper.

Second, it is my understanding that one simple change could fix the majority of the social security funding gap: Change benefit increases from being tied to wages to being tied to inflation. I was flabbergasted that this was not the case. As the current system is set up, the elderly get an increasing standard of living -since wage increases of the economy as a whole are tied to productivity in the economy and they usually rise faster than inflation. An increase solely due to inflation freezes their standard of living at their retirement year. If they want a higher standard of living, they need to save for it.

Why isn't anyone suggesting this as the first step?

Second, it is my understanding that one simple change could fix the majority of the social security funding gap: Change benefit increases from being tied to wages to being tied to inflation. I was flabbergasted that this was not the case. As the current system is set up, the elderly get an increasing standard of living -since wage increases of the economy as a whole are tied to productivity in the economy and they usually rise faster than inflation. An increase solely due to inflation freezes their standard of living at their retirement year. If they want a higher standard of living, they need to save for it.

Why isn't anyone suggesting this as the first step?

You mean why should retirees (who had far lower payroll tax rates than we do) get a rising standard of living in retirement when real wages for most American workers have barely moved in 30 years? It's simple. 21% of the population is over 55, they all vote, and they will all vote the same way.

Unfortunately, even a plan that doesn't lower promised benefits for anyone over, say, 35 (and should thereby attract a majority of votes) will be demonized by AARP which, in turn, will scare the "greatest generation" and their Boomer offspring into voting against it. If only enough had listened to Goldwater in 1964, SS could have possibly been reformed on a sustainable basis as a safety net for those who couldn't save or who suffered reverses not of their own making.

Unfortunately, even a plan that doesn't lower promised benefits for anyone over, say, 35 (and should thereby attract a majority of votes) will be demonized by AARP which, in turn, will scare the "greatest generation" and their Boomer offspring into voting against it. If only enough had listened to Goldwater in 1964, SS could have possibly been reformed on a sustainable basis as a safety net for those who couldn't save or who suffered reverses not of their own making.

AT: No they(we) will not all vote the same way. My wife and I have saved to provide for ourselves. One of our bigger concerns has become ballooning general revenue taxes during our retirement to pay for those who have not. I would gladly give up all of our SS in return for lower taxes. Of course that will happen when pigs fly.

"In fact, FDR was quite explicit that this was a program for WORKERS, and that it was intended to alleviate the problem of old age poverty.

Right and that is the strongest reason for its continued existence. But paying vast amounts of money to the rich and upper-middle class doesn't alleviate the problem of old age poverty.

Er, so what's the difference between this and Bush's plan? In a nutshell, he was going to:

1) Reduce future benefits by indexing to CPI instead of wages.
2) Divert a few percentage points of payroll tax into personal accounts.
3) Raise the salary cap on payroll taxes.
4) Work with Democrats to include anything they wanted that didn't involve eliminating personal accounts or dramatic tax increases.

~~ What you Americans have to do, first of all, is change the name.

No really. You have what is called an "insurance" and that means everyone has, in the back of their mind, this idea that it is an investment they have made, and they should get their money back.

In Australia it was called a "pension" and so it was possible (not easy) to introduce asset tests, income tests, and mandatory private accounts. Because the middle class will not stand up and say "I belong on welfare". ~~

?? Seems backwards to me.

"Insurance" pays out only if one has the bad luck to fall afoul of an "insurable event".

E.g., if I buy fire insurance, I don't expect to get my money back unless I suffer a fire, with car insurance I don't expect to get it back unless I crash, with health insurance I don't want it back unless I get sick ... frankly, I don't want to recover my investment in any of those.

Yet here's Warren Buffett collecting today on his "social insurance" against poverty. How odd.
What was his insurable event??

(He wouldn't be rich if Geico had to pay out to every car owner who didn't crash.)

Now as to pensions, if you put money in a pension that's your investment and you are entitled to it, rich or poor, Warren too.

So I'd think the impact of the rhetoric would work the other way.

Now, as a mater of historical fact FDR created Social Security as a defined benefit pension system. He insisted that it be funded and fiscally sound indefinitely (the original plan had a substantial surplus planned by the 1980s) and not be a paygo plan that imposed a burden on future generations.

While lobbying for it he used the "insurance" rhetoric to fight the paygoers -- assuring the public that SS would be "financed on sound insrurance principles" -- that is, provide a return to each retiring cohort equal to the return on government bonds on its contribution.

And so the original enacted SS Act of 1935 was, funded on "insurance" principles, not paygo, with full benefits not to be paid until the 1970s(!). The idea that it was designed to pull the retirees of the Depression out of poverty is a myth.

Ah, but in 1939 Congress saw that payroll tax money coming in, said to hell with "insurance principles", cut the taxes, raised benefits, and turned it paygo. All over FDRs veto at first, then he dropped the whole thing to manage WWII.

By the 1980s it was bankrupt and had to be bailed out, and we know where we are now again.

SS's problem is that as "insurance against poverty" it sucks -- going forward it will make even the poor even poorer by giving them back less than they pay in -- because it pays so much to all the rich; and as a "pension" it sucks because all the backward transfers leave it paying pensioners of the future negative amounts, less than they could get by saving in US bonds directly.

From 1939 until 2000 SS paid participants (at all income levels) $10 trillion more than they put into it -- that's why so many people from then have such fond memories of it, of course!

From 2000 on it will pay them $10 trillion less than they put in. That's a $20 trillion swing.

If from 1939 to 2000 SS had paid people $20 trillion less than it actually did, and had made them $10 trillion poorer on the whole, would they have such fond memories of it?

That's the political future of SS -- be it "insurance" or "pension".

I had an idea strike me when I first started to read the article. It may not be novel, but I have not heard it before.
What if you increased legal immigration and with the extra numbers put a high emphasis on immigrants in the age range where there is currently deficits. This would help balance out the number of workers for each retired person and possibly make the numbers easier to manage.
As with all "lets not make this too painful over a given period" proposals, early adoption would be important.

Comments are Closed.