Asymmetrical Information

Jane, this is preposterous.

First, how can you write "programme" and "y'all" in the same paragraph?

Second, how can you say that Paris Hilton ever had dignity?

Outrageous.

Unless the programme is changed, in 2042 that independant entity will not have enough money coming in to cover the benefits it has promised to pay out.

Ah, but there is the rub. The money is not promised, it is scheduled. Given that the schedule can change, there's no bankruptcy required.

Hey, Jane? I'm reading your posts in reverse order, and I must say you are on a roll.

Why should people be forced to save if they have better uses for their money? Take away the crutch of a government bailout (i.e., Social Security in some form) and people will learn for themselves just how much to save to balance present and future needs.

Jane Galt, your calculation is incorrect. You are dividing 6.65 by 4.35 to get a payroll tax increase of 53%. This ignores the fact the current payroll taxes are 4.97% of GDP. Even if you assume (for no good reason) that .62% of GDP will continue to be diverted to other things the correct calculation of the increase is (6.65+.62)/4.97 or 46%.

Tom,

Sadly, they don't. That's why SS was started in teh first place. Forced private accounts are the only way to go; the majority in the country simply won't let the elderly starve even if they deserve it.

Rex, the perfect Republican. He knows that some people deserve to starve. Why? Because in his ideal world nothing bad ever happens to anyone that they couldn't have allowed for. There are no people who make so little money that by the time they pay for necessities (And yes, maybe some "luxuries".) there isn't enough left over to save enough for retirement. Or maybe they had a good start but since they had no insurance a hospital stay or two wiped out their savings.

"...social security payouts go from 4.35 percent of GDP in 2003 to somewhere between 5.35 to 9.08 percent of GDP in 2075, with a median estimate of 6.65 percent. A mere 3.73 percent increase, at the highest!"

GDP numbers are very poor at giving people any sense of perspective. In my experience income tax numbers have much more impact -- people know how much they and their businesses pay in income tax.

Income taxes are also how current law mandates that SS and other entitlement program shortfalls be financed, so they are the correct way to put things in perspective (until we adopt a national VAT or something).

All federal income taxes today amount to 8.5% of GDP. So a 3.73 point of GDP increase in liability for SS indicates a 44% increase in everybody's income taxes -- just to keep SS on its current schedule, not giving anybody anything extra for the 44% tax hike.

Moreover, the need for this income tax hike arrives not when the trust fund "runs out" in 2042 or whenever, but begins in 2018 or thereabouts when income taxes become needed to fund the trust fund.

The SS trustees say a 35% increase in income taxes as a % of GDP from today's levels will be needed by 2030 just to fund the operation of the trust funds (SS and Medicare HI, which everyone overlooks but is also funded with payroll taxes, the other 2.9% taken out, and is just as bust as the SS trust fund for the very same reason.)

And, of course, the cost of Medicare/Medicaid is going to demand tax increases a lot bigger than that, at the same time.

So when Kevin Drum & Co. say "Social Security will be just fine as it is even if we do nothing at all about it until 2050", their definition of doing "nothing at all until 2050" is increasing income taxes by 35% by 2030 (just as income taxes are headed up by another 65% or so for Medicare.)

Which will leave the 50-year-olds of 2030 paying for their SS benefits twice: first through payroll taxes for their entire working lives, and then again through income taxes -- to replace all the payroll taxes they paid into the trust fund over the prior years that the government spent -- for the rest their lives, including retirement.

And even after paying for them twice, their benefits will still be 25% underfunded.

All of which will make SS a very popular program with that generation, no doubt. ;-)

And as all those 55-and-under-year-olds then contemplate how the Democrats of today and tomorrow kept telling them over and over that we had to do nothing to preserve SS as Americas most successful social program ever, the Democrats are likely become very popular too -- about as popular as the Whigs.

It's amazing to me that no Democrat cares at all about 20 years from now. If Karl Rove wants to destroy SS not today but in a generation, then he really is the master -- he's got the Democrats lined up to do it for him, and to do in themselves in the process.

...the need for this income tax hike arrives not when the trust fund "runs out" in 2042 or whenever, but begins in 2018 or thereabouts when income taxes become needed to fund the trust fund.

I suspect new bonds will simply be sold to replace the ones held by the Social Security Administration. The difference will be that the numbers will be on the books. But we all know the debt exists (about 1.7 trillion as I recall), even if it's not counted in the 7-something trillion debt the US puts on paper.

That 7 trillion all comes due within the next 30 years. Think we're going to raise income taxes and pay it? Or just float more bonds? I don't think I'm going too far out on a limb to predict the latter.

Which will leave the 50-year-olds of 2030 paying for their SS benefits twice: first through payroll taxes for their entire working lives, and then again through income taxes -- to replace all the payroll taxes they paid into the trust fund over the prior years that the government spent -- for the rest their lives, including retirement.

This is exactly right, Jim, and those of us who are young are pretty goddamn pissed about it. I'd be willing to pay payroll taxes my entire life and not get anything from SS so long as the program was sunset and I didn't have to pay for it twice.

Jane,

Re; "But why on earth should we continue with this mad attempt of the middle class to get rich by picking its own pocket?"

Very well said!

Timothy,

The ethical question for the baby boomers is whether to take the "pay for it twice" problem on ourselves, or to pass it on to you. I'd like to say I expect that my generation will do the right thing - but I honestly don't. I expect that my generation will do exactly what our parents are doing, pretend it isn't happening and keep on spending.

Remember the bumper stickers, "I'm spending my children's inheritance"? Doesn't seem so funny now, does it?

"But why on earth should we continue with this mad attempt of the middle class to get rich by picking its own pocket? "

The first two generations paid themselves a huge windfall - benefits way beyond what they contributed to the system. That's why they adopted it.

"But why on earth should we continue ..."
SS will not continue indefinitely. When the next generation sees how much they are going to lose they will scrap it.

So I'm with Jim Glass on this. Don't touch SS now. Let it go on it's natural course. Let retirees try to force the young to pay - and we'll see who has more political power, or where the balance of political power will take SS.

No need to install now a new elaborate government scheme (forced savings). These schemes tend not to work as planned.

Fat chance, Jacob. Ask yourself why nobody has proposed the one measure that would be entirely fair: indexing COLAs for retirees only to prices, not to wages. It would not be a solution, nor even the better part of one, but it would tell retirees who paid in far less than current workers that they shouldn't get increasing real incomes at the expense of workers who have, for the most part, had decreasing real wages for decades. Ask yourself if you could even dream of a situation in which Congress discusses this change. That is why reform is impossible.

Reform seems impossible because most people think like Mattew Yglesias - nothing wrog with SS, if it ain't broke - don't fix it. They are RIGHT. Nothing wrong NOW.

In 2016 income won't cover benefits, so THEN political jockeying will happen as to how much to raise taxes and how much reduce benefits. Fine by me.

Timothy is also right. Forget about SS and benefits. Those 12.4% is lost money, taxes paid down the drain. You'll get something when you retire, but not much. Don't count on it, plan accordingly, or you'll end your days in poverty.

Jim S,

You must really hate hearing the fable about the ant and the grasshopper.

Jane writes:

Now, it's possible to argue, and some have, that the Social Security problem is pretty trivial; over the next 75 years, they say, social security payouts go from 4.35 percent of GDP in 2003 to somewhere between 5.35 to 9.08 percent of GDP in 2075, with a median estimate of 6.65 percent. A mere 3.73 percent increase, at the highest!

She then goes on to calculate that this will require an increase in the payroll tax of 33%, which would represent a 4 point increase.

So in 2075 the people collecting this will not be today's retirees. It won't even be today's 20 yr olds (they will turn 67 in 2052 and will be 90 in 2075). It will be people who are -3 years old right now who will be collecting and those paying will be our children's children. It seems to me that keeping SS on the level for say a half century is quite fine. Let the next generation decide whether they want to keep SS at around 5% of GDP or ramp it up to 9%. In either case there are always trade offs and the trade off of providing a fancier retirement to more of the population is that the workers have to pay higher taxes. However, since 1930 looked quite different than today I would be skeptical of any plans to save the world in 2075.

In the meantime I find it interesting that Jane fails to calculate the implicit tax increase caused by the current deficit. After all, if 3.73% of GDP means such a huge tax increase in 70 years what does it mean today when we run deficits of 4% of GDP?

"I suspect new bonds will simply be sold to replace the ones held by the Social Security Administration. The difference will be that the numbers will be on the books...."

The difference is that bonds sold to the public, unlike the ones in the SS trust, must be serviced by taxes. So taxes then go up.

"That 7 trillion all comes due within the next 30 years. Think we're going to raise income taxes and pay it? Or just float more bonds? I don't think I'm going too far out on a limb to predict the latter."

It comes down to the same amount of taxes either way.

You have the choice of paying benefits with $X raised through taxes immediately or $X raised through a bond issuance. But the bond issuance must be serviced with interest payments financed with taxes -- and the present value of the future interest payments on $X of bonds that are rolled over indefinitely is exactly $X.

So, however one comes up with the $X of SS payments, the tax cost is $X. The only difference is the timing of when the taxes are collected, right away or spread out.

This is what Friedman means when he says "the cost of government is spending, not taxes". Spending determines the amount of taxes to be collected. However much the government spends, it will collect that much in taxes in the end.

Jane says that we, as a nation are "converging" towards a solution, and I think that's right. By acting as naysayers, the Democrats are performing a very useful function by helping this convergence to happen.

(Of course, there is the possibility that the Dems are merely gainsaying anything the GOP proposes because they cannot allow the GOP to lay claim to "fixing" Social Security. I don't want to believe that the Dems are this craven and shallow. Onward.)

I have always maintained that SS cannot be fixed in any meaningful way until the country generally agrees that it is *not* insurance, it is *not* a pension plan, it is *not* a savings plan; Social Security is Welfare. We are willing to be taxed to help those who need a hand as long as they don't abuse it; why shouldn't we do the same for the elderly?

But Welfare should only go to those that need it, and we should not believe that we have a right to those funds. Therefore, Bill Gates should not collect SS. Tiger Woods shouldn't collect it. My father-in-law, who retired at age 55 after a distinguished career with the Navy and with McDonnell Douglas (later Boeing) shouldn't collect it. But my grandmother, whose sole possession is 55 acres of land in Oklahoma, *should* collect it because she has no savings to speak of.

"Means testing" is considered a dirty word, but it will be the salvation of the system. Forced savings into relatively safe investments, such as market index funds and bond funds, will be the vehicle that will reduce the numbers of those that need Social Security payments. Redirecting that money into the private sector as well as municipalities will provide a tremendous boost to the economy as well.

As with a lot of issues in life, there isn't one big move that can be made to solve this problem. A combination of means testing, forced savings into private accounts, and rules regarding what recipients can invest in (much like current 401K programs) will ensure Social Security's survival.

The difference is that bonds sold to the public, unlike the ones in the SS trust, must be serviced by taxes. So taxes then go up.

Odd lots of bonds have been sold to the public in the last 5 years yet taxes have gone down? Anyway using the above logic, Jim, taxes have to be lower today because of all those bonds that have not yet been sold to the public due to the trust fund surplus.

If taxes are lower today because of the trust fund surplus then that amount has to be added into any 'return' estimates you care to make. It also means that the trust fund is very much real. If it wasn't then how could taxes be lower?

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