Asymmetrical Information

Jane,

I would be willing to give up ALL of the thousands of dollars I have paid into the Social Security system and never take one dime from the system in my retirement, if (and only if) the government returns the favor by not taking any of my childrens' earnings to fund the system. In otherwords, I paid in and I get nothing, but my kids don't have to pay in to get nothing.

Would you be willing to make the same sacrifice? Would any of you? This is the question that we will be asking ourselves in 2017. I hope you have another retirement nest egg somewhere.

In the early 80's social security was "fixed" assumming reasonable projections about demographics and the economy. Now the same sort of projections predict a massive deficit. One thing that has changed is the fraction of gdp that is subject to social security taxes. The cutoff is about at the income level of the 90th percentile. But the total income of earners(irs data) below the 90th has fallen from 42% of gdp to a little above 30% of gdp. see graph at
visualizingeconomics.com
What assumptions are they now making about future revenues?
One of my economics professors pointed out that the problems with an aging populaion is not the accounting, but whether we can improve our efficiency enough to maintain or improve our standard of living with a reduced work force, "you can't eat a hamburger in 2050 that was made today, someone has to make it 2050".

Paul, I'd take that deal in a heartbeat, even though I don't, strictly speaking, have any children. (Just nieces and nephews and stepkids and quasi-ex-stepkids.) I've always done my retirement planning with the assumption that Social Security would have gone belly-up by the time I could collect. That view is looking overly pessimistic now that I'm just five years away from eligibility, but I'm still prepared to retire on that basis if need be.

Paul:

Almost, but I still don't see why I should be responsible for the liabilities that people who retired between 1940 and 1980 accrued. They screwed us, why can't we pass it on?

Almost, but I still don't see why I should be responsible for the liabilities that people who retired between 1940 and 1980 accrued. They screwed us, why can't we pass it on?

Because it's wrong.

Yes, Thorely is right, it is wrong. That is why we can't pass it on.

Our grandparents didn't know any better. They still don't. They are limited in their understanding of the system and it is much too late for a nasty lesson.

Our parents now know better but haven't properly prepared (for the most part.) So, because our parents vote, they are going to make sure that their children support them in their retired years.

We could screw our kids, but that is wrong. Our children have done nothing to warrant inheriting all our debt to force them to pay for it. We can be the bigger people, the better generation. I think we are going to have to be like it or not. Math will fix everything and force us to be accountable.

Would you be willing to make the same sacrifice? Would any of you?

I've always assumed I'd be paying in and getting nothing. So I'm not really in a position to strike that bargain, as I see it.

But sure, if the government would like to give my kids a tax break in addition to taking my money and giving me nothing in return, sounds good to me.

Yep. It’s wrong. And for those of you who think that politicians hoping to curry favor with voters this November should think twice about dipping into Social Security surpluses for grants to combat teenage “goth” culture or the Rock & Roll Hall of Fame, please sign the For Our Grandchildren Challenge to Congress at:
http://ga1.org/campaign/congress

Our grandparents didn't know any better. They still don't. They are limited in their understanding of the system and it is much too late for a nasty lesson.

Why is ignorance an excuse? Surely they must have had some idea that getting a lifetime pension in exchange for a 2% tax paid for as little as three years was a rigged deal? It's wrong that this system ever started, but I didn't start it any more than my nonexistent children did. Why is it more wrong for me? Right and wrong are path-dependent.

Regardless, like everyone else here, I assume I will continue to pay the full tax and receive nothing. As I have also said here repeatedly, a pragmatic analysis of the sizes and interests of the various constituencies of American voters makes it clear that social security cannot be abolished, not with our current unrestricted franchise for all adults.

AT:
The people who retired between 1940 and 1980 build the country you were born in, fought and died to for the freedom you enjoy. If you feel they screwed you need to learn a little history.

AT:
How can you simultaneously believe that you'll never collect any Social Security benefits, and also that Social Security will never be abolished? If it's not abolished, doesn't that mean you're likely to collect benefits?

Jane argues for treating all government spending and taxes as relating to single unified account. That's a perfectly reasonable perspective but it clearly rejects the concept of dedicated taxes.

She then goes on to talk about the shortfall between Social Security revenue and expenses in the future. But that shortfall is only meaningful if we expect Social Security taxes to pay for Social Security benefits. But Jane has just rejected that proposition. From her perspective, if Social Security revenue exceeds expenses than that money is lost (without private accounts - which also makes no sense to me), but if Social Security expenses exceed revenue, Social Security is in trouble.

Tom

> government borrowing in domestic markets raises interest rates and lowers growth because it sucks up money that productive enterprises would otherwise use for investment.

Taxes do the same thing.

The current effect of taxes and borrowing is exactly the same. The difference is in the future - presumably borrowed money will be repaid.

The people who retired between 1940 and 1980 build the country you were born in, fought and died to for the freedom you enjoy. If you feel they screwed you need to learn a little history.

They also reduced our status in the world by fighting and dying in ill-conceived wars, polluted our lakes and rivers, (possibly) caused global warming, threw hundreds of thousands of pot smokers behind bars, and created a grand scheme to fleece their children. Bravo!

I'm dating myself, but wasn't Brad Setser the lead singer for the Stray Cats?

I was born after 1980, and I'm counting on legalized euthanasia.

SS was a legitimate program, in that it was set up as a tontine, rather than a ponzi scheme. The math works as long as people die before, or right after, they collect. The big problem is that people didn't die... 3 of 4 grandparents made it to their 80s, 1 is still going at 86... that takes your actuarial predictions and throws it out the window (25 year olds didn't exactly have the highest life expectancy in 1944...).

As to whether dedicated taxes work... erm no, they don't. There is no such thing as a dedicated tax. Since we now get a higher spending out of headline taxes than we otherwise would, the makeup taxes to pay the SS deficit are going to hurt extra bad. We'll be paying the same amount of money for less "service", as cash payments to oldsters never feels like real spending, and it's supposedly paid for by SS taxes.

Tom G, it's not the fact that that money is lost, it got spent (notably on the Robert C. Byrd State of West Virginia and the Trent Racist Lott State of Mississippi) as normal government revenue. So the SS surplus funded regular government spending, making it seem like the regular government cost less than it really did. As mentioned above, the reverse side of that effect is a real killer.. higher taxes for less goodies... crappy deal, unless you run a nursing home.

The government is one big maw. Taxes will go up, benefits will go down, other spending will go down, to cover this idiotic program. The best thing that we can do is to kill it ASAP by stopping all accrual of benefits. Transition from payroll taxes to a higher income tax rate to make the cost fully transparent.

The SS/Medicare debacle is an example of why taxes need to be explicit and as painful as possible, so that people see the true costs of programs and can debate their worth intelligently. The multiplicity of taxes is a trick of despots who are trying to pluck the goose without it squawking. The Liberals and Democrats have done this to enact programs that we can't afford and don't truly want for their own sociological purposes. An amendment that required the government to have one, and only one, tax paid annually (I'll even allow progressivity, though it would be best if it was a no deductible flat tax) would get peopel to truly understand what the costs of government programs are. For cash flow purposes you could make people's birthday the tax due date while still retaining the shock effect.

How can you simultaneously believe that you'll never collect any Social Security benefits, and also that Social Security will never be abolished?

In my case I believe Social Security will be means-tested, which means that -- since I'm saving for my retirement independently and expect to be relatively well off at retirement -- I won't be getting jack shit in the way of benefits.

And GM.

Jane,

Either this peice was very poorly written or I'm not smart enough to understand it. Although you can rarely go wrong overestimating the breadth of my ignorance, I suspect a bit of the former is also true.

The problem: I can't determine if you're supporting SS as is or calling for something to change. I'm sure it's in there somewhere, but I can't piece it together through all the strings of numbers and jargon and overly complicated sentences.

But again, whether that's my ignorance or poor writing (or both) is not clear to me. It's entirely possible it's entirely me.

Respectfully,
mjh

I think Paul has found the End SS campaign slogan:

"We could screw our kids, but that's just wrong. End Social Security."

I always assumed I would get nothing. If SocSec still existed when I was 70, there would be means-tested, and I'm hoping (and acting) to have the means at that age that I would probably be tested right out of any benefit. Just as Dan said.

SocSec is hard to kill outright, but it is possible to give it the death of a thousand cuts. It already started with the taxing of benefits. I expect it will just be another welfare program by the time I'm old.

Jane, It makes sense to use trust fund accounting if you assume that working age people are counting on SS to help fund their retirement. In that case, they forego saving that they would do in the absence of SS. The government doesn’t really borrow the money, but the public, in effect, does. You can say that the trade deficit is high because people aren’t saving enough, not because the government is running a primary deficit. But, under my assumption, the two propositions are logically connected. By balancing the primary budget, the government could get rid of most of the trade deficit (or crowd out less investment). The interest payments to the trust fund are not “just” an accounting entry; they represent interest that the government really would have to pay if SS didn’t exist. That’s part of the money that working age people are counting on to help fund their retirement, and if their investments were made privately instead of through SS, they would be receiving that money from the government.

As I pointed out earlier, even assuming a rather improbably large effect on the budget deficit, the lion's share is still accounted for something other than the budget deficit.

Yes, theoretically this could be a proxy for accrual accounting, which I agree we should be doing. But as I said, it is a very bad proxy; it bears no relation to the added liabilities we have taken on this year. Nor does it point us to some change in policy we should be making: we've already not borrowed the money in public markets. We can't go back and undo it.

But more to the point, it doesn't change the fact that *the problem happens later, not now*. We don't do accrual accounting, and furthermore the United States is not a public company. The pension liability is not creating a problem for us now, except insofar as it is causing traders to charge us higher interest rates in the bond markets. I defy you to argue that this is happening with a straight face. The time horizon is too long, and there are too many unknowns about hte government's finances in 2025 for this to be a serious consideration.

There is another effect, of course: people may be saving too little. But again, how does this accounting affect it? Its a piss-poor proxy for the gap between necessary and actual savings. It's not a good proxy for anything, except telling the American public "the Social Security trust fund is an accounting fiction; we've spent the money, and taxpayers are going to have to foot hte bill for retirees." Which a) we already knew and b) is exactly what Setser et al are denying when they ask "Why is 2045 more important than 2007?"

First, I strenuously object to the use of the term "contributions" to describe Social Security tax payments. My social security taxes were never voluntary. I paid the maximum tax in every year of my entire working life. Now, in my view, my SS benefit is no more a "contribution" to my quality of life than the taxes I paid were a "contribution".

Second, I question the common use of the term "entitlement" for Social Security when discussing the possibility that I will be "dis-entitled" because I also contributed to my own retirement and thus don't "need" the Social Security payments to which I am supposedly "entitled".

Third, many defined benefit corporate retirement plans based their benefits calculations on "Social Security" plus a corporate benefit to produce a "defined benefit" in retirement. If the SS piece goes away, so does the "defined benefit".

The "Unified Federal Budget" was created in the last budget submitted by LBJ - the federal budget for the first year of the first Nixon Administration. Its purpose was to disguise the budget deficit resulting from the "guns and butter" approach to dealing with the Vietnam War. Arguably, it has been more successful than most federal programs.

Social Security was one of the most racist programs ever enacted by the federal government, in that the lower average life expectancy of blacks at the time of its enactment meant that few would ever receive the benefits they had paid for so dearly. Much of that life expectancy disparity has now disappeared, but that does not change the intent.

Government, at some point, must learn not to "begin vast programs with half-vast ideas". I plan not to hold my breath in anticipation.

As I pointed out earlier, even assuming a rather improbably large effect on the budget deficit, the lion's share is still accounted for something other than the budget deficit.

This argument is circular if you’re using it to argue why we should use the unified deficit rather than the primary deficit. If one does use the primary deficit, then the budget deficit can explain most of the trade deficit.

Although personally I think there are good reasons for not reducing the deficit right now, for those who don’t accept those (Keynesian) reasons, trust fund accounting does point to a policy change we should be making. We should (again, assuming away my Keynesian objection) be shooting for a zero primary budget deficit, which would get us down to a very small trade deficit (and/or allow more private investment, assuming private saving doesn’t change). You can say it’s just a coincidence that the primary budget deficit is comparable in size to the trade deficit, but it strikes me as a very interesting coincidence.

Jane: I'm going to have to semi-agree with you on one point: While I'd like to believe that today's traders have discounted for the massive reaming to come from the future Social Security shortfalls, I just don't see that they did. It would have resulted in a massive "correction" of stocks. Still, it's hard to believe all these traders are just waltzing into a trap.

The comment about SS being racist is completely wrong. When you add back in or adjust for the lower earnings of blacks and the survor benefits they much more then offset the impact of blacks dying younger.

You are entitled to your own opinion, but not your own facts.

Spenser,

SS benefits are a function of earnings and time in the program, even though they are somewhat progressive. However, if benefits are not scheduled to begin until after you have died, on average, you are getting screwed. It is no longer the case, but it was when "Saint Franklin" set up the program. Deal with it!

Tom. T.,

I believe that you're thinking of Brian Setzer, "cat class, cat style," etc.

Ed Reid,

Re; "Government, at some point, must learn not to "begin vast programs with half-vast ideas"."

Good one.

Paul,

I think you're on the right track, but going just a bit too far. I don't think we should end Social Security and Medicare, but rather reduce both to the level of a true safety net. So rather than ending contributions and benefits, I would support cutting contributions in half and making benefits entirely needs based. And I would support doing so immediately. The middle and upper classes don't need Social Security or Medicare. What is needed is welfare - nothing more or less.

Jane,

Isn't the SS problem even more proximal than 2017? As I understand it (and I'm an amateur here, I admit) SS currently runs a surplus of annual SS tax revenues over benefits paid. That annual surplus will stop growing and start shrinking as early as 2009-2010. But since the Congress currently spends the entire amount of the surplus (and MORE), won't tax increases or benefit decreases be required as early as 2010 to addres that budget shortfall, not 2017?

Paul,

Thanks. However, if you use the caution in a speech, your diction must be impeccable, lest your audience (mis)understand. Trust me on that!

The post by "Paul" just above this one, is not mine.

Why is ignorance an excuse? Surely they must have had some idea that getting a lifetime pension in exchange for a 2% tax paid for as little as three years was a rigged deal?

No, they didn't know. You and I know. They didn't. Our Greatest Generation was willing to die for you and I, but they need to be cared for AT.

They were simple people who came of age when labour and Unions were much stronger. Today with information so readily available, it is different. They get a pass and you and I don't.

They also reduced our status in the world by fighting and dying in ill-conceived wars, polluted our lakes and rivers, (possibly) caused global warming, threw hundreds of thousands of pot smokers behind bars, and created a grand scheme to fleece their children. Bravo!

Bravo indeed. We have a moonbat in our midst.

I was born after 1980, and I'm counting on legalized euthanasia.

Soylent Green is people.

SS was a legitimate program, in that it was set up as a tontine, rather than a ponzi scheme. The math works as long as people die before, or right after, they collect. The big problem is that people didn't die... 3 of 4 grandparents made it to their 80s, 1 is still going at 86... that takes your actuarial predictions and throws it out the window (25 year olds didn't exactly have the highest life expectancy in 1944...).

Well, that is half of it. The other half is that we aren't breeding like we used to. Our families of 5 or 6 children have given way to a family with 2 (or fewer) children. Much fewer workers paying in breaks the Social Security bank.

I think Paul has found the End SS campaign slogan: "We could screw our kids, but that's just wrong. End Social Security."

Thank you.

In a nut shell, one generation has to take it up the preverbial @ss. That is the only way this FDR created, irresponsiblity-nightmare, can be drawn to a close. If it is my generation that must pay in to receive nothing, that is fine. Just make sure that if we are being sodomized, that our kids will be spared all this financial death spiral. I don't want my kids to pay one penny.

I think you're on the right track, but going just a bit too far. I don't think we should end Social Security and Medicare, but rather reduce both to the level of a true safety net. So rather than ending contributions and benefits, I would support cutting contributions in half and making benefits entirely needs based.

I don't think you can do that. You do that, and you just motivate people to NOT SAVE for their retirement.

It's kind of like your kids education. Either you save every penny, or you save nothing and claim poverty. I actually knew someone whose parents decided that they wanted their four sons to get a top notch education but they refused to prepare for it. Instead, they played the system. One year before the oldest boy was to enter college the family took all the home equity out of the house and bought 6 "distressed" rental properties that were worth less than what they paid for them. Then, they could claim that they were penniless just to get the maximum allowed financial aid for their boys. I think we'd have a lot more of that nonsense if you turn it into a safety net (which is what is bound to happen anyway.)

Paul,

Re; "I don't think you can do that. You do that, and you just motivate people to NOT SAVE for their retirement.

There will be some free riders. The solution is to keep the payments very minimal. How many will plan on retiring on $750/month? Its enough to stay alive on, but it isn't going to be "Plan A" for very many.

Social Security is a mess because its creators deliberately avoided treating it as a welfare plan - presumeably to avoid hurting anyone's feelings. But by making it a welfare plan, the benefit calculation is placed into the hands of the voting majority. Too many living in squalor and the voters will raise the payments. Too many free riders and the voters will lower the payments. The opposite is true of today's programs. Everyone has an interest in being a free rider - and so they vote accordingly.

P.S. Paul,

And I did say (or meant to) that the programs should be needs based. One must qualify for payments - and again, the qualifications would be at the discretion of the voters.

'... it starts in approximately 2017, when the outlays exceed the income.'

As another poster has already pointed out, the problem starts when the SS surplus begins to shrink (probably about 2010), and Congress has to either cut other spending or replace the SS tax revenues. 2017 is merely the year the surplus becomes negative. It'll be obvious to politicians well before that.

And it is almost certainly impossible to replace the revenue. We've only had revenues of 19% (or more) of GDP 9 times in the last sixty years. Even with tax rates of 91%.

The more I learn about Social Security, the less concerned I am about it for a couple of reasons. First, relatively small changes can make a considerable difference in reducing the unfunded liability. For example, we could tax all benefits, regardless of income, once the beneficiary has recovered his or her lifetime contribution in nominal dollars. Or, we could raise the retirement age a little more beyond the 67 years it is scheduled to reach (for full benefits) by 2027. Or, instead of calculating the initial benefit based on the highest 35 years of covered earnings, we could make it the highest 38 years.

I prefer the dedicated payroll tax from a transparency standpoint rather than bundling the cost of the program into general federal revenues (mainly the individual income tax). The need to raise the payroll tax further or the covered wage base to which it applies at least stops the more liberal members of Congress from improving benefits beyond the current formula.

With respect to the so-called trust fund, as I understand it, the way the law is written, the Social Security Administration can only pay benefits to the extent that there is money in the trust fund. So, when it runs dry in 2045 or whenever and then current year payroll taxes only equal 73% of covered benefits, they would have to cut benefits by 27%.

As one who will be eligible to start collecting Social Security in a few more years, I think the people entering retirement during that timeframe will be more amenable to making some benefit "adjustments" as the AARP calls them. Most of current generation of retirees either lived through the depression and/or fought in World War II or Korea. By contrast, my generation grew up in more prosperous times and while some of us fought in Viet Nam, the tour of duty was only for a year. Since we were dealt a considerably better hand in life, on balance, than our predecessor, it stands to reason that we should have less of a sense of entitlement and should be more willing to accept changes to Social Security (and Medicare) that will reduce costs to a more affordable and sustainable level.

No, they didn't know. You and I know. They didn't. Our Greatest Generation was willing to die for you and I, but they need to be cared for AT.

Fine, let's increase benefits for the male cohorts of 1897 to 1927 and decrease them for everyone else.

Payroll taxes and trust-fund accounting make it absolutely impossible to have a rational discussion about social security.

Put another way, I'm fairly confident that we are going to spend at least 2.5% of GDP on defense each year for the next 40 years. Assuming a conservative 2% annual growth rate in GDP, that means that in 2046 we'll be spending at least $700 billion on defence, having spend at least $20 trillion on defence over those 40 years. Somehow, just like welfare for old people, we're going to have to come up with some way of paying all that money, and doing everything else we want to do.

Pretending to add one of those costs to the national debt now doesn't really change the political decisions that are going to have to be made.

Oh, and the first person to tell me that I don't understand the difference between discretionary spending and entitlement spending gets a black mark in my little book.

Since World War II, federal taxation has averaged 18% of GDP and is estimated at 18.4% for the fiscal year just ended. While I'm no fan of either high taxes or big government, I think reasonable people could differ as to whether the appropriate size of government today needs 18% or 20% or 22% of GDP to sustain itself and do all the things people seem to want.

Over the years, I've had a chance to ask several leading economists how high federal taxation would have to get before it began to hurt the economy's ability to grow. The short answer is, nobody knows precisely, though at some point, it clearly hurts as the Europeans can attest. That said, given the economy's current size, each one percentage point of GDP amounts to $130 billion per year which is a lot of money to argue over.

As for the annual federal defict, it has averaged 2.3% of GDP over the last 40 years or so and has been as high as 6%. I've heard reputable economists argue that has long as the federal deficit to GDP ration is below the economy's real growth rate, it's OK because the total debt is not rising, and may be falling slightly, as a percentage of the economy. That, in turn, means that our ability to service the debt has not deterioriated. So, according to them, deficits in that range are nothing to worry about. Furthermore, with current publicly held debt only about 37% of GDP, it has considerable room to rise before it becomes alarming.