Asymmetrical Information

The key word there being "relatively".

I don't even buy "relatively". Saying that we're not as bad as other countries is like saying that we're terminal in 6 months and they're terminal in two.

Shock and awe, toys cost money -- and expensive toys cost more. Healthcare in the private market may be distributed more unevenly, but at least when the funding belt tightens, it's, you know, available.

Ah, well having treatable cancer is better than terminal cancer, but I still wouldn't want it...

I am not pessimistic, though. I do believe that we will reach a crisis, and we will solve it. The question is really what will trigger it, and how painful will the treatment be.

In some perverse way, we may eventually be thankful the prescription drug plan pulled the day of reckoning in sooner, rather than later. SS is already too entrenched, if it goes much longer before reform, everyone alive will never have known a time without it (we are already nearly there...)

In a sense it is good that other countries (Japan, Germany, etc.) will have to confront the problem before the U.S, does. We can "go to school" on how their cultures resolve it and maybe evade gender "warfare" here. But, given how reforms have been demonized by the likes of the AARP, boomers will have to be more rational and less-sheep like than "the greatest generation" in order to resolve this coming crisis without a lot of pain and anxiety.

The first step in solving the problem of a family in debt is to get all the family members to realize that the debt is a problem. Often one or more are perfectly happy with the situation, not realizing or not caring that a crash is approaching.

Apply this to Social Security and we greatly increase the number of family members who don't care due to the intergenerational nature of the program.

In a dysfunctional family, a crash is the most likely scenario.

No reason at all to worry about SS now. It won't be a problem for decades, if ever. And with GDP and productivity growing as fast as they are (not to mention continued immigration) the intermediate scenario is looking more and more out of touch. Even the low cost scenario, which says SS won't have any probems for the next 75 years, may turn out to be too pessimistic.

Last time I looked social security is indexed to wages, which grow at roughly the same rate as productivity and GDP. It thus seems impossible to grow our way out of the demographic problem.

Jane,

I don't know how the formula works, and am too lazy to go check it out, but I do know that the SS Trustees consider higher immigration and higher productivity growth as reducing the ultimate cost of SS. That's why they have a Low Cost scenario, in which we actually do "grow our way out" of this problem.

As I recall in the last 10 years the Low Cost scenario has been the most accurate of all. As George Will said a few months ago, if the Trustee's Intermediate assumptions of how the economy will perform in the next 75 years are true SS is the least of our problems.

GT - Higher productivity does help SS solvency. It should translate into average wage growing faster than the cost of living.

Immigration helps, but only for a period of time. Most immigrants are of working age, not retirees. Their SS withholding contributes to the SS benfits received current retirees. But, what happens when the immigranst retire? We'll need even more immigrants to pay for their benfits. That process cannot continue indefinitely.

A similar process occured when women more fuly entered the workforce. That was a windfall for SS, because the women paid full assessents, but a working wife's benefits aren't much more than if she hadn't worked.

Jane,

Upon retirement, social security indexes to prices. As a result continuing productivity growth increases inflows more than outflows, and thus improves the finances of Social Security.

Tom

David,

I understand.

The SS Trustee's report lists several factors but I don't know if they list the relative contributions of each.

My point is that we can very much grow ourselves out of this which is what the Low Cost scenario is all about.

David,

I understand.

The SS Trustee's report lists several factors but I don't know if they list the relative contributions of each.

My point is that we can very much grow ourselves out of this which is what the Low Cost scenario is all about.

David,

I understand.

The SS Trustee's report lists several factors but I don't know if they list the relative contributions of each.

My point is that we can very much grow ourselves out of this which is what the Low Cost scenario is all about.

David,

I understand.

The SS Trustee's report lists several factors but I don't know if they list the relative contributions of each.

My point is that we can very much grow ourselves out of this which is what the Low Cost scenario is all about.

David,

I understand.

The SS Trustee's report lists several factors but I don't know if they list the relative contributions of each.

My point is that we can very much grow ourselves out of this which is what the Low Cost scenario is all about.

Anybody remember the good old days, before Bush suggested doing something about Social Security? You know, back when liberals considered it the worst looming crisis since unsliced bread and used it as a stick for beating around the Bush?

Ephemerality, thy name is politics.

GT,

I don't understand how Social Security has funds to cover 75 years of benefits. In 2018 Social Security outflows begin to exceed its tax revenues. That's when the crisis begins. Here's the explanation from the CATO Institute:

"Crisis deniers have made much of the trust fund recently, suggesting that it guarantees Social Security's solvency until 2042, or even 2052, according to some projections. However, it was President Clinton — not President Bush — who pointed out that: 'These trust fund balances are available to finance future benefit payments … but only in a bookkeeping sense.'"

"Clinton's fiscal year 2000 budget explained that trust fund assets are not 'real economic assets that can be drawn down in the future to fund benefits.' Rather, these funds are 'claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.'"

"Thus, in less than 15 years, the federal government will have to begin finding billions of dollars to continue paying benefits — by cutting benefits, raising taxes or borrowing even more money. Overall, Social Security's unfunded liabilities total nearly $12 trillion, and the longer we wait, the worse it gets. Estimates suggest that each year that we wait to reform Social Security costs between $150 billion and $600 billion more."

"That sure looks like a crisis to me."

http://www.socialsecurity.org/pubs/articles/tanner-050201.html

Jezz, sorry Jane. I thought the post had not gone through.

The SS system has been running a surplus for years that can be used to fund the projected deficit from the boomers in the 2015-2045 period.
If growth and productivity are good the low cost scenario says SS is fine for as far as we can see.

The real problem is that Washington has been using the SS surplus to fund other government spending. But after rougly 2015 that source of financing for other government spending will go away. Consequently, while SS probably is not a real problem and will be fine, the rest of government will face a major problem after 2015 when the SS surplus will no longer be availabe to finance other spending. That will be the real crises point and the real future problem we are not facing.

Actually, Spencer, that's an understatement of the problem. You see, all of that Social Security funding for other programs wasn't a gift. It was a loan. After 2015, not only will the government's general account no longer have this revenue stream, it will have a negative revenue stream as it pays money back to Social Security as the latter whittles down its "surplus".

Problem occurs before 2015. Problem will start when the surplus of SS begans to decline which is I believein 2009 or so. If SS is running a surplus, but it's less than the amt being spent this year by Congress, then Congress will have a tough choice in how to make up the shortfall.

SS will affect the federal budget in the next 2 years as Congress wrestles with declining SS revenue to pay for other projects.

Bill & Hoo are right. I was just doing numbers off the top of my head without trying to be exact -- just roughly at the right order of magnitude.

The reason Social Security is a problem right now is that corrections cannot be delayed. 30-year-olds and 40-years-olds must start doing something else to fund their retirement. If they don't start now - if they believe their leaders lies that Social Security is solvent - they will be living in poverty for their last 20 years.

The federal government will just not be able to fund Social Security and Medicare at the levels our leaders have been promising. Congress may propose taking an additional 6% or 7% out of the nation's earnings. If they raise taxes that much, the economy will stop growing, and probably decline. So the government will almost certainly get less revenues: they will be on the downward slope of the Laffer curve.

The only remaining option is to not raise taxes and cut some spending. Cuts in retiree benefits will not make up all of the reduction, but it will likely be part of it.

Eliminating benefits to the wealthy will be first, but that's not going to help too much. A reduction in SS COLA will probably be next, but that won't help the medicare underfunding. My guess is that our medical system will become more segregated, with those dependent on medicare receiving very poor service.

I'm not convinced that privatizing social security can solve all the problems. But I will praise the Republicans for at least trying to do something, unlike their opponents who continue to deny a problem exists.

"Relatively" is an extremely important word in this discussion.

Our public pension system is not only in better shape than that of many other countries, it is also in far better financial shape than the rest of the federal government. Which is why a lot of people in Washington would like to "repair" Social Security. They would like to further exploit the payroll tax to solve non-pension problems.

JohnDewey,

As the Trustee's report makes clear we can grow our way out of this problem and, in fact, have been doing so for many years. In 1997 the expected date for SS to be unable to pay back all promised was 2029. Today it is 2042 (from memory so numbers may be off a bit).

And that's the Intermediate Scenario which in the last 10 years as proven woefully pessimistic. The Low Cost scenario shows there are no problems with SS for many decades.

GT,

I mean this question entirely in good faith, because I don't know the answer: do these "scenarios" require that the "trust fund" actually exist? Because it isn't a pile of cash, or even of securities with independent value generated by a viable business. It's T-bills, which are IOU's from Congress to the SS system.

If anyone's depending on that, then they're depending on thin air.

Rob,

The scenarios assume that the SS debt is honored, like any other US government debt. If you go to the Treasury website and look up our debt (total public debt) it includes what the Treasury owes everyone, including SS.

All debt is an IOU.

GT - you didn't really fully answer Rob's question.

Yes it's true that all debt is an IOU, strictly speaking. However, the trust fund is a unique kind of debt, since the assets are IOU's from the very entity that owes the benefits - i.e the US government. They are borrowing out of the right pocket into the left pocket.

We rightly don't allow corporations to fund their pension obligations with their own stocks and bonds. Instead they are supposed to use a diversified group of investments.

Gazzer,

Actually we do allow corporations to fund their pension obligations with their own stocks and bonds. They are limited on how much due to risk reasons but that hardly applies to the US government, the standard for risk free debt.

GT,

In 2018, when Social Security starts to pay out more than it takes in, the cash has got to come from somewhere. The Social Security Trust Fund might send those T-Bills to the U.S. Treasury to redeem for cash. But the Treasury has to get the cash from somewhere.

It's true that the Treasury can expand the money supply. But if they do expand it, here's what happens:
- inflation rises;
- Social Security and Medicare liabilities rise along with inflation;
- the governemnt is further in the hole.

So how will the Federal Government fund the Social Security and Medicare obligations? That's the impending crisis, and it gets here much sooner than the 2042 date that some Congressmen hope we're gullible enough to believe.

My post at 3:38 PM provided my guess at what will happen. Do you have a suggestion to offer? I'm not implying that you're obligated to do so. It's just that I will start collecting Social Security in 2017, and I really would like to know how the next generation will come up with my money.

(My apology if I'm incorrect in assuming you are younger than me.)

Rob Lyman: It is true that the dividing line between Social Security and the general budget is a financial artifice. However, the very people who like to emphasize that are the ones who most blatantly abuse the overlap between these two structures.

Even if it is just an abstract model, the fact is that the general budget is in far worse shape than Social Security. Non-pension spending — mainly Medicare and defense — is where the real crisis lies. The solution that some radicals in Washington want is to cut Social Security benefits in order to use the payroll tax for other purposes.

John,

What you say is true of all government debt. Not sure why you think SS debt is any different than the debt we owe the Chinese or the Treasuries you may hold in your portfolio.

An outcome of feminism in Britain is that the state pension age for women is being shoved up from 60 to 65, so that it equals the men's. And then on to 67 for both, presumably, and then 70.

Eliminating benefits to the wealthy will be first, but that's not going to help too much. A reduction in SS COLA will probably be next, but that won't help the medicare underfunding. Eliminating benefits to the wealthy will be first, but that's not going to help too much. A reduction in SS COLA will probably be next, but that won't help the medicare underfunding.

Good point, I think that any means-testing needs to be applied to both Medicare and Social Security (we can use the $200,000 annual income suggested by Senator Kerry in the 2004 election for when people “don’t need” to keep more of their money for a tax cut as the benchmark for when they “don’t need” to take more of someone else’s money via Medicare and Social Security). We also should look at grandfathering in a modified* retirement age for both programs as well. Any serious reform of Social Security or Medicare that tries to control the costs is going to be fought tooth and nail by the AARP anyway, so we may as well fix them both. Cutting off those who don’t need to be on the program and adjusting the retirement age to take into account longer work lives are two of the least painful ways of doing it.

* By “modified” I mean phasing in a higher retirement age while still making allowances for those workers who are physically incapable of continuing to work another 2, 3, or 5 years. Perhaps by making them eligible for the disability portion of OASDI.

GT,

A debt you owe me is an asset to me; I record it on my balance sheet as having probable economic value because you will have to exert yourself in order to pay it, but I need not do anything to get the benefit. Thus I may save for retirement by loaning money to parties likely to pay it back.

A debt that I owe to myself is not an asset in any meaningful sense. I cannot save for my retirement by issing notes to myself, promising to pay myself in 40 years' time, unless I am simultaneously creating something of value which backs those notes (something which corportions do, which explains why their stocks and bonds are not insane investments for their pension funds).

T-bills in the "trust fund" are IOUs which the government has written to itself, which are backed not by anything tangible of any economic value (such as a product line or real property), but rather by the promise to raise income taxes to pay them.

Maybe SS is in good financial shape, but that just means that the general fund is in bad shape, as the burden shifts from payroll to income taxes.

Either way, the money has to come from taxes imposed somewhere, and you don't seem to recognize that.

Maybe SS is in good financial shape, but that just means that the general fund is in bad shape, as the burden shifts from payroll to income taxes.

Yep. That's what happens when you borrow. Sooner or later you need to repay.

BTW Rob if you are saying that the money owed by the Treasury to the SS Administration is not an asset of the government as a whole I completely agree.I never said otherwise.

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