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January 28, 2005

Comments

eh.

I've been one of your most consistent critics, and i think i've been pretty consistent.

1. SS is a public pension. Cato and Heritage have posted calculators asserting just how catastrophically bad it is in that capacity, but those calculators (a) are pretty clearly grossly inaccurate and (b) fail to cover the disability and survivor benefit component and (if i'm guessing correctly about benefit calculation) the hidden antipoverty (essentially EITC equivalent) component.

2. i'm glad you've decided not to make elder poverty worse. but the rest of your post in para 2 assumes your conclusion. You've NEVER clearly argued why public pensions are bad. you simply assert -- "We can ask 25 and 30 year olds to plan for their own retirement". I disagree. I look forward to your explanation how 25 yr old high school drop out single mothers working part time as grocery clerks and united airline pilots whose pensions are getting slashed should have done / be doing things differently.

3. political assets or economic assets? the 14th amendment created the legal environment to create the first without creating the second.

4. highly equitable changes -- please describe your expectations of a fair economic system; the implication of your vaguely sketched out system is very nice for the middle class and up; not so nice for the bottom 40%.

5. wilkinson is a hard-core libertarian who never saw a govt program that somehow the private sector couldn't do better. thus his utterly inaccurate characterization of SS as brittle. that's simply false. there are something like 150 million taxpayers, paying in over 2 trillion dollars into the federal treasury. there's enough money in the system to afford a public pension.

hey, virtually every other industrial country does. since we apparently cannot learn from our allies in foreign policy, maybe we could pick up a couple lessons about domestic policy.

Francis

I want to apologize for my bit of snark at the tail end of the Soc Sec rmx thread. I appreciate your position here and I appreciate you taking the other side. I think that many people's frustration with your position is that it doesn't really look like what the admin is proposing and people are taking that frustration out on you. In a sense, you are defending the admin's position (which seems to change every day) by creating a new one, which is probably intensely frustrating for those who both question the admin's motives, which is why this debate gets so heated (though not as heated as others, thank god)

My feeling is still: If it's not broke, why fix it?

Your Social Security program is clearly working fine: no one has managed to make a serious, reality-based case that at any time in the future it's going to crash. It doesn't need "saving" - except perhaps from President Bush.

So, why this feeling that it needs to be fixed?

The quote you have there is nonsense, Sebastian.

No, we can't predict that people won't start having 12 kids. Or that everyone won't become immortal mutants from coal dust radiation. Or that our Alien Overlords won't land and take us all off to Stromigon 5 to work in the foozlebip mines.

We can however make pretty good forecasts about the future. They're not predictions. They're forecasts. They're the only reasonable thing to make today's policy decisions on. It's not possible to design a retirement system that can survive all possible events. We have to settle for good enough.

Even the forecasts on the most pessimistic end of reasonable say that Social Security is in perfect health until at least 2040. Then there will only be something like a 1/3 cut, not a complete collapse. If you change the assumptions even slightly, the system is fine, indefinitely. End of story.

However, the fact remains that no one knows what the growth rate is going to be in ten years.

If the growth rate drops to below zero, Social Security is doomed and so is the stock market.

If the growth rate is 5%, SS will be fine and so will the stock market.

"Loans by one branch of the federal government to another aren't assets. They may be promises to pay of some sort, but when it comes down to it cashing them out doesn't help the economic situation one bit. If there are T-bills cashed to pay Social Security liabilities these will be paid for by taxes. If there are not T-bills cashed to pay Social Security liabilities, they will be paid for by taxes of the exact same amount. Pretending that everything is fine just because the Administration has bonds is silly."

So you are OK with the government using SS contributions over the years, especially after they were raised to help "save" the system, to offset current account losses in the general fund, but failing to use other taxes or bonds to return the money taken when the anticipated need for those funds becomes reality?

There is a name for such conduct.

There is also a name for those who would condone such conduct.

1.) Right now, SS is more of a safety net than a pension. If we wanted to make it an actual pension we could increase the benefits (which we could pay for by increasing the cap on the payroll tax, for instance). This has nothing to do with a forced savings account. Nothing at all. Taking money out of the system and putting into stocks and bonds that require pretty optimistic (read "pie-in-the-sky") growth levels (less transaction fees, of course). (see Yglesias.

2.) Assuming Bush's plan would do this (a big assumption, IMHO), he would have to find a way to pay for it. Which means either raising taxes or borrowing. No points for guessing which one Bush will pick. None of this would happen if we left the system alone.

3.) Perhaps I'm just an ignorant yokel, but I'm not quite sure what you are getting at here. I'll try in any case. Every single projection of SS I have seen shows that will have no problem for a long, long time. And if we assume the worst case scenario I think we will have much, much worse problems than how to make the ~30% benefits cut from SS. Assuming we end up somewhere between that and the best case scenario, the only thing we will have to do is tinker with some taxes. (And the gov't having to raise taxes slightly does not constitute a crisis, no matter what Bush might think.)

4.) Right. Social Security isn't a problem. In fact, its a wild success and will continue to be so thanks to the foresight of Clinton (unless, of course, Bush et al get there hands on the trust fund) The problem is health care. Our system stinks. Perhaps we should have a system where you can go to any doctor you want and the gov't will pick up the check. Or regulate the insurance companies so that they charge everybody, regardless of health, whatever the actuarial average is. But this is the debate we need to be having.

My take:

1. It's a safety net. Unfortunately, we have seen congressional Republicans undermine too many other safety nets by attacking the "welfare queens" who benefit from them. Therefore, keeping all retirees eligible is necessary to keep popular support. I am not thrilled with this, but until we have a group of Republicans in power who can be trusted not to try to keep power by engaging in class warfare on the poor, it should stay.

2. The President's proposal doesn't break our promises to the elderly. It breaks the promises to the young. The young are induced to pay the regressive social security tax with the promise of a later benefit. By phasing out the benefit and replacing it with direct contributions, you are asking the young to pay for 2 sets of retirements, for their elders and themselves.

3. Please learn some accounting before you continue to repeat this nonsense. Loans between related parties are assets and liabilities for the parties. The President is trying to have the Treasury keep the asset (the loan of current tax revenues) while disowning the liability (duty to repay it). Anywhere else, this would be criminal.

4. I agree so what. I am open to proposals which may actually make things better. The President's proposal makes things worse.

Why can't it be a pension program that functions as a safety net? A real problem with means tested 'safety nets' is that there are always going to be those that need the support but are either (a) unable to navigate the process to prove that they need it, or (b) are too proud to ask for it, despite the fact that they need it. Getting welfare is a difficult and humiliating process, and there's an argument (that I have mixed feelings about--I'm not endorsing it here, just recognizing it) that it should be, so as to encourage people to be self-supporting. Social Security isn't like that -- no one's embarassed about receiving it, no one (at least, very few people) is unable to prove that they're entitled to it, and so it has worked fantastically well for keeping old people out of poverty.

Even aside from the very real problem that programs that benefit only the poor have no politically powerful constituency, and so a means-tested Social Security would be terribly vulnerable to cuts, once we apply a means test to Social Security, we're going to see many needy seniors falling through the cracks.

For an example of how the business world handles loans between related companies, see this excerpt from a recent quarterly report of Charming Shoppes, Inc. filed with the SEC (apologies to all for the length and dull subject matter):

"Charming Shoppes Receivables Corp. ("CSRC") and Charming Shoppes Seller,
Inc., our consolidated wholly-owned indirect subsidiaries, are separate
special-purpose entities created for the securitization program. As of October
30, 2004, CSRC held $27.8 million of Charming Shoppes Master Trust certificates
and retained interests and Charming Shoppes Seller, Inc. held retained interests
of $7.5 million (which are included in the $53.5 million of short-term
available-for-sale securities we held at October 30, 2004). These assets are
first and foremost available to satisfy the claims of the respective creditors
of these separate corporate entities, including certain claims of investors in
the Charming Shoppes Master Trust. Additionally, if either the Trust or Charming
Shoppes, Inc. fails to meet certain financial performance standards, the Trust
would be obligated to reallocate to third-party investors holding certain
certificates issued by the Trust, collections in an amount up to $17.3 million
that otherwise would be available to CSRC. The result of this reallocation would
be to increase CSRC's retained interest in the Trust by the same amount.
Subsequent to such a transfer occurring, and upon certain conditions being met,
these same investors would be required to repurchase these interests. As of
October 30, 2004, there were no reallocated collections as the result of a
failure to meet these financial performance standards."

As you can see, they cannot report these as being fictitious liabilities. Instead they are dealt with as true laibilities.

I agree with Jes. If it ain't broke, why falsely claim it is in crisis and propose ways to "fix"it? Not that Sebastian is falsely claiming a crisis--Bush is.
The Bush administration wants to change SS for ideological reasons. They adhere to an ideology that doesn't support programs like SS. Therefore SS has to be phased out. Rather than openly and honestly discuss their economic ideology with the American people , Bush is using a stealth approach. He is creating an imaginary crisis so that he can incrementally move toward his real goal of recreating the Robber Baron Gilded Age economy preferred by free trade capitalists or ownershipship society people or whatever you want to call the economic true believers.

fdl: the simple, principled argument against government pensions is that they are not an appropriate purpose for government in a free society.

It's not the job of government to ensure that everyone or even nearly everyone has a comfortable retirement, or a retirement in line with what they expected to have in their working life, or a retirement in which they have a standard of living not too much lower than their neighbors. It's not the job of government to make things "fair" in some cosmic egalitarian sense, or to save everybody from the consequences of their own bad luck, still less from their own bad choices (and a high school dropout single mother, to take one of your examples, has already made a couple of those).

It may be the job of government to put an absolute minimum floor under people, to make sure they aren't starving or homeless. But even if we accept this premise, it still doesn't justify Social Security as it now stands; the program could be much smaller and less expensive without providing any less protection against absolute destitution. It wouldn't even have to adopt any complicated means-testing formula to do this; it could simply cut all retirees' benefits to the same level, rather than paying higher benefits to those who need them less as the current program does.

And that's important because Social Security imposes a very large tax burden and thus a very significant limitation on people's ability to plan their own lives as they see fit. 12.4 percent of one's income is a lot. If the system were reduced to a minimal safety net, not only would that be more fiscally sustainable going forward, it would also leave people more free to do as they pleased with their own money: to save more for retirement, to pursue other ways of increasing future financial security (education and job training, for example), to provide better opportunities for their children, or whatever else they chose to do.

Yes, this would expose people to more risk; it would mean that some people who expected a middle-class retirement would instead be, though not destitute, much less well off than they expected. So what? Risk is the inevitable corollary of freedom.

Nicholas: the simple, principled argument against government pensions is that they are not an appropriate purpose for government in a free society.

The problem with that argument is that Social Security is an extremely popular program. So while of course you're entitled to your opinion, since the majority of people in the US think that Social Security (considered as a government pension) is an appropriate purpose for government in the US, democracy votes you down: in a democracy, it's the majority who get to decide what the appropriate purposes of government are.

One thing I'd like to add is that I, and I'm sure every other Democrat, don't trust the GOP a nanometer on this issue. Ever since SS was passed the GOP has had it in its crosshairs. It will take a lot, lot more than a change in rhetoric to convince me that anything the GOP does to SS isn't some ploy to dismantle it.

When the President is being obviously dishonest to sell a specific "reform" that would obviously make the fiscal situation of our country worse, people are going to call him on those specific misrepresentations, and it will inevitably influence the whole debate.

If you want to have a purely theoretical discussion about designing a good social security reform, I would suggest you make it clear that you a) are not talking about and b) do not support or actively oppose President Bush's proposal. Otherwise the debate will be heavily influenced by, and maybe even center on, that proposal and the utterly dishonest case the President is making for it. You may find that frustrating but that's just the way it's going to be.

(Yes, I know he hasn't put forth a specific proposal, but we have a pretty good idea of what it will look like and we have an excellent idea of his dishonest way of selling it. We know that no tax increase of any kind is being complicated to finance the private accounts. We know they can't be funded by the general fund because it's already running a gi-normous deficit. This means that it wil be funded by either benefit cuts to current retirees, or borrowing.)

As to whether it's a safety net or a pension program: both.

And if that's too confusing: think of it like an insurance program. It's true that if you take away my health insurance and I have a catastrophic illness I could suffer and might even die. It's also true that if I pay my premiums on time and meet the deductible, I legitimately expect my allergy medicine and checkups and other expenses to be covered, and even if I could finance those things without becoming destitute, it would be unfair for the insurance company to breach that contract.

So while of course you're entitled to your opinion, since the majority of people in the US think that Social Security (considered as a government pension) is an appropriate purpose for government in the US, democracy votes you down: in a democracy, it's the majority who get to decide what the appropriate purposes of government are.

Jes, I know in my heart that you don't believe in this argument in the general sense that whatever the majority wants is either morally right or the proper purpose of government -- you certainly don't believe it in the case of the recent spate of anti-gay state constitutional amendments. Why would you resort to advancing it in this particular case? You aren't making an argument for SS, you're making an argument for mobocracy. (If I could get my Senator to introduce and get passed a bill proposing that the government buy everyone a hi-def TV, I could probably muster up 70-90% popular support for it. That doesn't make it a proper purpose of government.)

oy. no tax increase is being contemplated.

I have to agree with some of the others who've said this isn't the debate the Administration is trying to have, and that I don't trust the Bush Administration at all on this. It would be one thing to have a discussion about Social Security, but we're not. We're getting scaremongering about a "crisis" that doesn't exist. The government maybe having to raise taxes slightly in the future isn't a "crisis" unless you're opposed to any kind of tax increases, ever. In fact, that's how Ronald Regan and Alan Greenspan designed it to work, back in the 80s, they jacked up payroll taxes to make the Trust Fund, which would be cashed in down the road with slightly higher income taxes.

As for the Trust Fund being imaginary, no. Yes, the money has to come from the government, but Treasury Bonds are still real. If the government defaulted on Treasury Bonds it owed itself, why would anybody else trust it to pay the bonds they have? Up to and including central banks of other countries, who own trillions of dollars of our debt in Treasury Bonds.

How do you react to the argument that the huge surplus built up by SocSec over the past couple decades amounts to a loan from lower-income workers to higher-income (because it was financed by a payroll tax on the first X dollars of income) and that higher-income are obligated to repay this loan when it comes due? -- Spending which was financed with SocSec bonds, which hit low earners harder, will need to be paid for out of income taxes, which hit high earners harder.

Phil:

The proper purpose of government is, among other things, to collect taxes from its citizens, in agreed-upon amounts and by agreed-upon methods, and to disburse them as required for purposes properly agreed-to.

Freeloaders (who sometimes try to pass themselves off as libertarians) have argued with me in the past that taxation is equivalent to theft, and that the government ought not to be allowed to take money away from people to do things that the freeloaders don't perceive any direct, immediate benefit from. (Education, for example. Many freeloaders appear not to realize the incredible benefits to all of living in a society in which the children of even the poorest parents are guaranteed an education.) Freeloaders think that they can pick and choose on an a la carte basis where their money goes to. They perceive living in a democracy as not living in a free society, because it means that actions which have been collectively agreed-to as necessary to the functioning of their country (such as paying taxes) can be forcibly imposed upon them. What they want (they think) is to live in an anarchy, where no one will ever be able to tell them what to do. (That any working society requires people to act together as a collective is something that has, apparently, never occurred to them.)

Now, what Nicholas is arguing (it appeared to me: I may have misunderstood him, and if so, I apologise) was an example of that kind of freeloader mentality - that people ought not to be allowed to mutually agree to put funds together for essential support in their old age, because that entails requiring some people to pay up even if they don't want to. He may call this "living in a free society" if he wants: but mutual support, collective action, is intrinsically a very good, very human thing to do. Taxes are the price you pay for not living a life that's "solitary, poor, nasty, brutish, and short": and as most of the people who protest against having to pay taxes are generally (invaribly, if you meet them online) quite willing to benefit from living in human society, just unwilling to pay up for the benefits they get, that's why I call them freeloaders.

And I was arguing against the freeloader argument, which may not have been where Nicholas was coming from: I may have misunderstood him.

"3. The trust fund and assets. Loans by one branch of the federal government to another aren't assets. They may be promises to pay of some sort, but when it comes down to it cashing them out doesn't help the economic situation one bit. If there are T-bills cashed to pay Social Security liabilities these will be paid for by taxes. If there are not T-bills cashed to pay Social Security liabilities, they will be paid for by taxes of the exact same amount. Pretending that everything is fine just because the Administration has bonds is silly"

1. Either this is a bad faith argument, or the 1980s deal was made in utter bad faith by conservatives. Or both. Either way, one less reason to trust you guys now.

2. If this is correct, then the problem is the general fund, not social security. So to make the general fund problem much worse to "save social security" is simply idiotic. And to trust the president who created the general fund problem to "save social security" would also be quite stupid of us.

the simple, principled argument against government pensions is that they are not an appropriate purpose for government in a free society.

Present that argument. So far, all you've given us is an assertion.

So what? Risk is the inevitable corollary of freedom.

Advancing civilization is all about the elimination of 'risk' (the risk of succumbing to disease, the risk of of being killed by the neighboring tribe, the risk of starvation) through various collective organizations, some governmental, some private. With these risks pushed aside, we have been free to chase all manner of pursuits, commercial, intellectual, and artistic, in whichever manner we see fit. Risk is not a consequence of freedom -- risk stiffles it.

Very well put, NotYou.

Nicholas: I don't want to get into a long theoretical discussion about the pros and cons of libertarianism here, so I'll just note that you're relying on extremely contentious assumptions about "what the job of government is." Phil: I accept a bunch of constraints on what the US government can legitimately do, most of which are based on the need to protect the rights of minorities against majorities who want to do away with those rights. (E.g., the first amendment.) But the case of the government buying everyone a high-def TV is different. I would work against it, on the grounds that it would be fiscally irresponsible if not paid for (and I suspect it wouldn't pass if it were accompanied by the necessary tax increases), and that there are more important things to do with government funds in any case. But I see no reason to say that if our elected representatives did pass such a law, if would be not just unwise but illegitimate.

Sebastian: About your first point: I don't care what it's called, and I am not sure why I should care. I think it works pretty well as it stands, and if it serves both functions, that's great. Maybe it could get a better return if it were invested in some different way. (I have problems with this because when I try to think through the details, I find I am not at all clear how to prevent any proposal involving investing the trust fund in stocks from leading to market distortions.) But I do not, and will not, support, any change that has the effect of changing SS from a system that guarantees some level of support to the elderly to one that does not. If this leads to a conflict between my views and what Social Security 'really' is, so be it.

2: Not having made this argument myself (the one you address, I mean), and not having seen it made, I have no problem with what you say here.

3: I and others have been over this before. The basic facts, it seems to me, are: we decided, back in the 1980s, to try to plan for the future and amass a Social Security surplus to deal with the baby boom retirements. To do this, we raised the (regressive) payroll tax that funds SS. We invested it in bonds, largely to avoid the 'market distortion' problem. That had the effect of allowing various administrations not to raise other taxes as much -- taxes that would have hit higher-earning people more than the payroll tax does. If you assume that the SS trust fund bonds will be honored, then what we did has, in fact, dealt with the baby boom retirement problem, as witness the fact that the Social Security Trust Fund is not projected to run out of money until most of the baby boomers will be dead.

However, now we are told, by an administration that has pushed us into deficits, that the trust fund we set up is not "real", and that they were kidding when they told us that by prudently building up a surplus in advance, we were doing anything other than funding current government programs. Gosh, they say, if we have to actually pay back the money we borrowed from the trust fund, then we will have to raise taxes to pay for the spending programs we have put in place -- spending programs that we would have had to raise taxes for a long time ago had it not been for the trust fund. And then they add: because we're not going to honor our debts, it's not a general funds crisis brought on by the Bush tax cuts, it's a Social Security crisis, and we have to change Social Security to deal with it. I refuse to go along with this.

4: I agree with you that just because some problem is not the biggest problem we face doesn't mean that we shouldn't deal with it. I do think it's disingenuous of the President to go on and on about the looming crisis of Social Security without addressing much more urgent problems, but oh well. My real problem with his plan is that the 'problems' with SS only arise given certain economic forecasting assumptions, and are far enough into the future that any such assumptions are dubious. Moreover, supposing they're real, they can be dealt with by minor tweaks, without changing the entire nature of Social Security.

About the Flybottle post: first, the differences over forecasts don't show that the system is brittle. It isn't. What they show is that when you make forecasts over a 75 year period, let alone infinity, small changes have large effects because your time horizon is so huge. Second, the argument against private accounts (conceived of as a substitute for SS, not a supplement to it) does not depend on any particular forecast. As I understand it, it goes like this: suppose the economy grows like crazy, and stock returns are therefore high. Well then, there will be no problem, since that would (by the Trust Fund and CBO's own figures) mean that the Trust Fund had enough money to be solvent as far as the eye can see. Suppose on the other hand that growth is low, and thus the return on stocks is low too. Then the Trust Fund faces problems, but on the other hand private accounts do a lot less well, and SS as currently constituted looks like the best deal. We think the argument for replacing SS with private accounts depends on assuming that (a) stock yields will be high, so that private accounts do well, but also (b) growth will be slow, so that the trust fund is in trouble. We then point out that if you take the assumption behind either (a) or (b) and apply it to the other, the need for private accounts disappears.

Further, the libertarian argument might make sense (I would still disagree with and disapprove of it, but would recognize it as reasonable) if we (and thank goodness we don't) lived in a society that actually had the political will to watch old people starve. If we transfer all the responsibility for and all the risk of retirement planning to individuals, eventually we're going to have a substantial (maybe small as a percentage of the population, certainly large in absolute terms) group of seniors with no food money and no way to earn it.

At this point, the government will step in, and will end up filling the same role of mitigating risk that libertarians object to, it will just be doing it badly and ineffectively rather than doing it well, as the current Social Security program does.

Jes, that's fine -- I was just surprised to see you relying on "What the majority wants to do is automatically the right thing." It's a lazy argument and I don't think you really believe it. I certainly don't!

I have no problem conceptually with Social Security, despite my natural aversion to taxation generally. Although it pains me as a libertarian to say so, I'd rather it be a straight-up, means-tested transfer payment if we're going to have it. There's no real reason for Donald Trump or Bill Gates to ever see a SS check, regardless of how much they ever paid for it.

(But a very mean, hard part of me would really just rather have that 12% of my paycheck back. I'd like to own a house before I'm 50, and I'd like to pay off my student loan debts one day, and having that income would sure help. But that's a personal thing, and neither here nor there in the larger debate.)

And if that's too confusing: think of it like an insurance program. It's true that if you take away my health insurance and I have a catastrophic illness I could suffer and might even die. It's also true that if I pay my premiums on time and meet the deductible, I legitimately expect my allergy medicine and checkups and other expenses to be covered, and even if I could finance those things without becoming destitute, it would be unfair for the insurance company to breach that contract.

Terribly poor analogy. I am aware of no medical insurance where I will get the full catastrophic benefits even if I only need allergy medicine. Do you know why I know of no such insurance? Because it would be too expensive to exist on a large scale.

2. If this is correct, then the problem is the general fund, not social security. So to make the general fund problem much worse to "save social security" is simply idiotic.

See my point 4. As for transition costs, they will be financed out of debt with rates which are historically low (now) to pay costs which you claim are mandatory in the future. Therefore the transition cost of whatever plan we end up talking aabout is very close to zero.

When the President is being obviously dishonest to sell a specific "reform" that would obviously make the fiscal situation of our country worse, people are going to call him on those specific misrepresentations, and it will inevitably influence the whole debate.

See my point 2. Democrats have perverted the debate for decades by pretending that whenever we talk about making long-term changes we are putting the benefits of current seniors at risk. The position that we must always make the same promises to every generation despite the dramatic changes in life expectancy and medical care that have taken place since the 1940s is ridiculous.

The reason Bush's plan has come to the fore in the way it has is because of complete denial of a problem on the part of Democrats ten seconds after Clinton lost power. This is especially true with respect to means testing--the most equitable way of reducing Social Security liabilities. Democrats have made it clear that they will oppose means testing with scare tactics whenever proposed and have done so since the 1970s--necessitating other strategies. Your party's resistance to addressing the issue for decades and threats to play scare tactic games with seniors whose benefits aren't even at issue has helped pervert the nature of the debate. So if you force me to address the debate on that level instead of addressing my actual issues, I am completely unimpressed by complaints of untrustworthiness or underhandedness.

Jesurgislac, are you aware that a desire for low taxes is a very popular democratic position? The problem is that in a world of limited resources we can't have absolutely everything we want. Americans have a strong desire for low taxes AND a strong desire for spendthrift social programs. Suggesting that one or the other is 'popular' without realizing that they both are popular misses a huge part of the dynamic. The problem is that the impulses are opposed to one another. That suggests that you can restrain one OR the other (or perhaps limit both somewhat). Merely noting that social security is popular is rather unhelpful if you aren't attentive to the interplay with a desire for lower taxes.

Dantheman, please identify what the certificates are to the parent company from the following choices: asset or liability. Then please tell me if you disagree with the following statement which I am reproducing from above: "If there are T-bills cashed to pay Social Security liabilities these will be paid for by taxes. If there are not T-bills cashed to pay Social Security liabilities, they will be paid for by taxes of the exact same amount." Am I exhibiting some financial confusion in that statement?

"If the government defaulted on Treasury Bonds it owed itself, why would anybody else trust it to pay the bonds they have?"

You don't have to default. You can fix the system so that redeeming them is never necessary.

"The young are induced to pay the regressive social security tax with the promise of a later benefit. By phasing out the benefit and replacing it with direct contributions, you are asking the young to pay for 2 sets of retirements, for their elders and themselves."

Quite a bit of this is inevitable when the Baby Boomers retire because they are such a large group people. The nice thing about contribution programs is that it sets up a system where each group after the transition group is actually funding their own retirement--removing much of the brittleness out of the system. My generation is screwed no matter what we do. That isn't an excuse to keep screwing everyone.


Many commenters on this thread have already made the points that I would have (and more succintly as well). In response to the libertarian argument, I'd just like to point folks to the report submitted by the Committee on Economic Security that was set up in 1934 to recommend proposals "which in its judgment will promote greater economic security". The introduction of the report describes the conditions at that point in the Depression starkly:

The need of the people of this country for "some safeguard against misfortunes which cannot be wholly eliminated in this man-made world of ours" is tragically apparent at this time, when 18,000,000 people, including children and aged, are dependent upon emergency relief for their subsistence and approximately 10,000,000 workers have no employment other than relief work. Many millions more have lost their entire savings, and there has occurred a very great decrease in earnings. The ravages of probably the worst depression of all time have been accentuated by greater urbanization, with the consequent total dependence of a majority of our people on their earnings in industry.
But it also paints a portrait of pre-New Deal economic security that is sobering. Focusing on the retired:
... At least one-third of all our people, upon reaching old age, are dependent upon others for support. Less than 10 percent leave an estate upon death of sufficient size to be probated...

For those now old, insecurity is doubly tragic, because they are beyond the productive period. Old age comes to everyone who does not die prematurely and is a misfortune only if there is insufficient income to provide for the remaining years of life. With a rapidly increasing number and percentage of the aged, and the impairment and loss of savings, this country faces, in the next decades, an even greater old-age security problem than that with which it is already confronted.

And part of the low level of savings leading into the Depression may have been because:
... When earnings cease, dependency is not far off for a large percentage of our people. In 1929, at the peak of the stock-market boom, the average per capita income of all salaried employees at work was only $1,475. Eighteen million gainfully employed persons, constituting 44 percent of all those gainfully occupied, exclusive of farmers, had annual earnings of less than $1,000; 28,000,000, or nearly 70 percent, earnings of less than $1,500. Many people lived in straitened circumstances at the height of prosperity; a considerable number live in chronic want. Throughout the twenties, the number of people dependent upon private and public charity steadily increased.
Those who would like to roll back the reforms of the New Deal are talking about a return to the golden era described above. Is it any wonder that many of us have dug in our heels to resist these efforts?

Phil: I was just surprised to see you relying on "What the majority wants to do is automatically the right thing." It's a lazy argument and I don't think you really believe it. I certainly don't!

Well, I don't believe that, no. But I don't believe, either, that it's the mark of a free society to allow some people to refuse to contribute to a system from which they inevitably benefit - which is the classic freeloader argument. Social Security is an excellent example of a collective system that works - everybody contributes, everybody benefits. What I have persistently asked is "Why do right-wingers want to 'fix' it, when it works just fine?"

Although it pains me as a libertarian to say so, I'd rather it be a straight-up, means-tested transfer payment if we're going to have it. There's no real reason for Donald Trump or Bill Gates to ever see a SS check, regardless of how much they ever paid for it.

I think it's more important to ensure that everybody benefits and that it works efficiently, than it is to try and cut off the very richest people from it systematically. Making a benefit means-tested always makes it more expensive to run and less effective in making sure that everyone entitled to benefit does so. It may be ironic that Donald Trump and Bill Gates get social security checks, but it's not much of a price compared to having to pay for a massive bureaucracy to run a means-tested system.

(But a very mean, hard part of me would really just rather have that 12% of my paycheck back. I'd like to own a house before I'm 50, and I'd like to pay off my student loan debts one day, and having that income would sure help. But that's a personal thing, and neither here nor there in the larger debate.)

There's a little bit of the freeloader in all of us, I know: it's just that so-called "libertarians" make their wish to freeload into a virtue.

Sebastian,

Why do you say that the Dems position is to never make any changes to the program? In fact the program has changed many times over the years with the retirement age pushed out. Many Dems are open to making continued small changes if needed.

The problem I and many others have is that SS does not have a problem for decades, maybe even never. SO before we start making drastic changes to such a succesful program that has enough money for another 40 or 50 years (and maybe even more than that) we should make damn sure that any changes will be for the better.

To worry today about something that may or may not happen in 50 years makes little sense when there are so many other more urgent fiscal issues to focus on.

Sebastian: "As for transition costs, they will be financed out of debt with rates which are historically low (now) to pay costs which you claim are mandatory in the future. Therefore the transition cost of whatever plan we end up talking aabout is very close to zero."

This is just wrong. The transition costs arise from the following; we now use incoming payroll taxes (from, say, me) to pay for the current recipients of Social Security (say, my parents.) If we allow my generation to move to private accounts without eliminating the benefits to my parents' generation, we must provide those benefits without the revenue stream which currently pays for them. (Similarly for a partial move to private accounts.) So we will have to pay those costs from some new source. One option would be to raise taxes to cover the roughly $2trillion that this is estimated to cost in the next decade alone. Another is to borrow money. But this money will not be spent to cover the benefits of my generation, but those of the present generation of retirees. And while you're right to note that these costs would be there anyways, that's not the point: the point is that the revenues we now use to pay them would be diverted.

As for today's historically low interest rates, most borrowing is done in short- to medium-term bonds (under 10 years), and so while we might initially borrow all that money at low rates, we would have to roll them over at whatever rates then existed.

Sebastian,

"Dantheman, please identify what the certificates are to the parent company from the following choices: asset or liability. Then please tell me if you disagree with the following statement which I am reproducing from above: "If there are T-bills cashed to pay Social Security liabilities these will be paid for by taxes. If there are not T-bills cashed to pay Social Security liabilities, they will be paid for by taxes of the exact same amount." Am I exhibiting some financial confusion in that statement?"

The certificates are assets to the subsidiaries and liabilities to the master trust. Since they are not held by the parent company, they are neither to the parent. This question becomes applicable to Social Security only if you believe there is a unified budget to which Social Security is a part. If that is true, then there is no Social Security funding crisis, only a a general fund funding crisis.

The remedy for the general fund funding crisis is not to accelerate the time the liability is due unless you are planning to pay for them now. The current administration is not, as shown both by its floating trial balloons of having the costs be off budget, and by the fact that it's running a current deficit of nearly 4% of GDP, and all of its fiscal proposals are to make that larger, predominantly by making its temporary tax cuts permanent.

" think it's more important to ensure that everybody benefits and that it works efficiently, than it is to try and cut off the very richest people from it systematically. Making a benefit means-tested always makes it more expensive to run and less effective in making sure that everyone entitled to benefit does so. It may be ironic that Donald Trump and Bill Gates get social security checks, but it's not much of a price compared to having to pay for a massive bureaucracy to run a means-tested system."

Hmmm, flat tax?

Sebastian (cont'd),

""The young are induced to pay the regressive social security tax with the promise of a later benefit. By phasing out the benefit and replacing it with direct contributions, you are asking the young to pay for 2 sets of retirements, for their elders and themselves."

Quite a bit of this is inevitable when the Baby Boomers retire because they are such a large group people. The nice thing about contribution programs is that it sets up a system where each group after the transition group is actually funding their own retirement--removing much of the brittleness out of the system. My generation is screwed no matter what we do. That isn't an excuse to keep screwing everyone."

While it is inevitable that X'ers will pay more than prior generations to cover the Boomers' retirement, that is no reason for them to pay the cost of the Boomers' retirement, and then have no one pay for their retirement. In other words, it's not screwing everyone. It's each generation paying the previous one and being paid by the following one.

It would help, also, if employment went up, rather than down. In fact, maybe an outsourcing disincentive would be to require companies that move jobs overseas to pay a SS tax penalty, to make up in a small way for the loss of SS revenue from those jobs lost.

Dantheman -- How are birth rates these days?

Sebastian: Hmmm, flat tax?

If you want to change a fair system where people pay according to their means to an unfair system where (effectively) the rich pay far less and the poor pay far more, sure.

Do you have a yen for an unfair system?

Jesurgislac, I think you miss the point of bringing up the flat tax. Your argument about the problems of making a benefit means tested apply equally to trying to tax people progressively. And ironically it uses the exact some data. Which means if you try to tax people progressively you are already collecting a huge portion of the data required to means test things.

Phil,

Birthrates are not the whole story. Add immigrants and it changes considerably, which is why the US's population is growing far faster than France or Japan's.

Sebastian's reasoned approach to social security is essentially irrelevant since the GOP "plan" has nothing to do with such concerns of social policy. The intent is to cripple social security and thereby eventually kill it.

What is so absurd is the fraudulent "crisis" that is used to hype the GOP program. The same people that spin such nonsense also seem to have no problem ignoring a real and immediate fiscal crisis -- the structural $400 billion annual deficits. These are sure to wreck the economy eventiallly just as they helped do so in the late 80s. Sebastian seems to be on board with this logic -- since he views loans to finance the new social security programs as cost free.

Beginning in the 1980s, GOP fiscal policy has been to wreck government by creating deficits and using the fiscal crisis to ax social programs. (Compared to Clinton in 1993 who balanced the budget -- GOPers claim that the resulting 8 economic year boom was just coincidental).

The current social security debate is more of the same. Reasoned thinking about possible changes are interesting but irrelevant since they are not motivating the issue.

Sebastian: Your argument about the problems of making a benefit means tested apply equally to trying to tax people progressively.

No, they don't. Don't try to claim they do: you're deliberately looking away from the two main problems in means-testing any benefit. One is that it massively increases the expense of administering it. Two is that it considerably increases the likelihood that people who need the benefit won't get it. I can sort of see how you get the idea that progressive taxation is more expensive (though much fairer) to administer than a flat tax, but it has nothing to do with the second argument.

Which means if you try to tax people progressively you are already collecting a huge portion of the data required to means test things.

Only if you assume that people have identical incomes after they retire as they do before they retire.

Well, exactly. Collecting information on income is one thing; it's much easier to do than collecting information on wealth, which is what you would need to do to means-test Social Security.

"Which means if you try to tax people progressively you are already collecting a huge portion of the data required to means test things.

Only if you assume that people have identical incomes after they retire as they do before they retire."

We've had this discussion before. Since many people think the test should be wealth, not income, the information is not the same.

Do you have a yen for an unfair system?

I read Jesurgislac in the handle but I hear TTWD in the comment...

Yeah, I'm sure that Sebastian wants an unfair system. People (many here) have convinced me that our current system is right--morally, but don't try to claim its "fair". Fair would be way, way, way too hard to do.

And of course, you need to collect the information on how much income people make even to collect a flat tax, if by 'flat' you mean 'fixed percentage' rather than 'fixed amount'. Making that tax progressive adds precisely nothing to the difficulty of ascertaining what each taxpayer's income is.

Point taken, Dan. Now let's just make sure that the U.S. continues to be a place to which people want to immigrate. And I guess maybe we probably should do something to help convert illegal workers to legal ones so that SS taxes can be collected on their wages.

WRT, to means testing for SS eligibility it seem that it would penalize the frugal and benefit the profligate, hardly the result I would expect Sebastian to support.

OTOH testing means might make means taxable, and I think I could support a flat tax levied on overall wealth...

Criona: Yeah, I'm sure that Sebastian wants an unfair system.

He has certainly, consistently, argued for one, yes.

People (many here) have convinced me that our current system is right--morally, but don't try to claim its "fair". Fair would be way, way, way too hard to do.

No system in the real world will ever be perfectly fair, no. But there seems no reason to replace a not-perfectly-fair system with a grossly less-fair one.

Sebastian says: "The nice thing about contribution programs is that it sets up a system where each group after the transition group is actually funding their own retirement--removing much of the brittleness out of the system."

But what does "funding their own retirement" mean? It means that they're accumulating assets in the form of legal rights to future income, documented as equity and debt securities. Down the road, somebody has to be working to generate the income to meet those obligations. Right now, Social Security provides legal rights to future income by using the government's taxing authority to move income from working people to retirees. On the scale we're talking about, is there really any meaningful difference between the two sorts of legal rights, other than the fact that "funding" retirement by owning securities involves much higher administrative costs? Either way, x number of workers have to produce enough stuff for y number of retirees.

Good point, DaveL.
I don't get why people need to fund their own retirements. Do we make children pay for their own public school educations? Everyone pays for it, not just parents with school age children, because everyone used to be a kid at one point, and it was there for them. So it's unfair to immigrants with no kids, but they aren't complaining.Let's say we abolish public schools. Who would be the ultimate loser -- the economy in general, I would think. Although maybe not. A large pool of unskiled workers could be paid signifcantly lower wages and hey, maybe we could compete with China in manufacturing. :(

DaveL: exactly so.

Off-topic: I really hate it when "flat tax" is brought up as if it were the only possible simplification of the tax system. AFAICT, the simplicity of flat tax proposals comes entirely from dumping the complicated system of deductions and credits (and accompanying complex forms, auditing, etc.). Of course, without all of that baggage, a progressive system is really just as simple...

I therefore have a hard time taking flat-tax proposals seriously. They seem to be nothing more than cheap attempts to trick people into replacing 1040 forms with an even more vile regressive tax system.

Now I'm trying to wrap my head around why I'm, apparently, a "freeloader" for wanting to own a home and retire my student loan debt, and believing that keeping an extra 12% of my pay would go along way towards accomplishing that goal? It's a weird world you live in, Jes.

Jes,

"Your Social Security program is clearly working fine: no one has managed to make a serious, reality-based case that at any time in the future it's going to crash."

Obviously, you aren't on S.S.

Smlook: Obviously, you aren't on S.S.

Obviously not, nor ever will be. But what relevance does this have to my pointing out the basic facts of the matter?

"Jes, I know in my heart that you don't believe in this argument in the general sense that whatever the majority wants is either morally right or the proper purpose of government -- you certainly don't believe it in the case of the recent spate of anti-gay state constitutional amendments."

Hilzoy actually gave a very good answer to this:

"Phil: I accept a bunch of constraints on what the US government can legitimately do, most of which are based on the need to protect the rights of minorities against majorities who want to do away with those rights. (E.g., the first amendment.)"

The founders of our nation knew that pure majority rule had the potential for a "tyranny of the majority", and so created an addendum to our Constitution to guard against such tyranny: the Bill of Rights. But the fact that in some instances a majority faction "acting in concert may exercise its plan of oppression" (close to Madison's exact words, I think) and therefore need to be proscribed from such impositions (a la the Bill of Rights) doesn't justify the proposition that the majority should NEVER be allowed to get its way on any particular matter.

I didn't say it should, Lewis. I said that appealing to majoritarianism is a lazy form of argument, and a scant one in any particular case. It's hardly sufficient to argue "X is good, and a proper function of the government, because <50% of the people want it." That was the entirety of what I was getting it, and if it seems obvious, I brought it up only because I was surprised to have seen Jes advance it.

Phil: I said that appealing to majoritarianism is a lazy form of argument, and a scant one in any particular case.

I don't disagree with that. But I think I adequately explained where I was coming from in a later comment, in response to yours. Which I took as a perfectly valid call for me to clarify my position.

Sebastian,

On the matter of the existence or non-existence of the trust fund, your analysis is accurate as far as it goes, but does not go far enough. Your argument, as I understand it, is that repaying bonds with general revenue and then using those repayments to pay Social Security benefits is effectively no different than simply paying benefits with general revenue.

This leaves out a lot. The bonds exist because there was a decision made two decades ago to increase payroll taxes for the express purpose of collecting more money than was then needed to pay benefits, with the idea that the excess would be saved for the future date when payroll tax collections were inadequate. You now argue that the excess funds were not saved – that the purchase of treasury bonds was a sham and that the money was “replaced with worthless IOU’s,” as the formulation goes.

But this is false. The excess money in fact was saved, in that it reduced the government’s need to borrow elsewhere. Suppose that payroll taxes had not been increased to provide a surplus. Then today the debt would be what it is plus the amount in the trust fund, and we would still face the problem of paying the Social Security benefits. The fact is that the accumulation of excess payroll taxes, represented by the bonds SSA holds, in fact makes it easier – much easier - to pay these benefits than would otherwise be the case. In that sense it is an asset of the government. If you prefer, in a strict accounting sense, you might say it has reduced government liabilities instead, but that’s not much of a difference.

Try a different line of logic. Suppose payroll taxes had been increased, but the money invested in private securities. Remember that under this scheme again the debt would be larger than it now is, by the amount invested in these securities.
There are those who suggest that this would have been a true trust fund.

But then this argument would be heard: “The so-called trust fund is a myth. The assets of SSA are assets of the government, not of some entity that exists only in an accounting sense. We face a serious fiscal problem which can be partly solved by liquidating these securities, which are after all the property of the government, and using the proceeds to reduce the debt.” In other words, the "no trust fund" position essentially is that it would have been impossible for SSA to accumulate excess funds to meet future benefit payments.

Let me also add my voice to those expressing deep distrust of the Bush Administration statements and plans. Social Security is not the highest priority fiscal problem, yet it is the one being attacked. It is not in crisis, yet Bush continues to claim that it is. Irresponsible terms like "bankrupt" are tossed about. Let’s be blunt and recognize that this program has always been unpopular among conservatives. It is very hard to escape the suspicion that, far from seeking an improved retirement system, lots of self-described reformers simply have the knives out for it. It is impossible to believe that Bush and Republican Congressional leaders are going to improve the program. Remember that a big part of our fiscal problem was their doing in the first place. Let them cut missile defense and agricultural subsidies, and restore some sanity to the tax code and I will be prepared to listen to changes to Social Security.

Finally, as to flybottle's "wisdom," let me point out that there is no seventy-five year, or infinite, financial projection that is not extremely sensitive to assumptions about a variety of matters. Small changes in discount rates or productivity assumptions can produce big changes in present values. This is not a flaw in Social Security - it is a flaw in any long-term projection. Thus the trustees rightly use conservative projections to avoid having to "thread the needle," as flybottle puts it. And let's note that and adding stock-market uncertainties into the mix makes it worse, not better, because it introduces another large source of variability. So I am unimpressed with his call for a robust system.

Absolutely, Jes -- I'm not intending to further criticize or stretch a pointless argument. It was more surprised -- and probably ill-advised -- metacomment than anything else.

Now let's all forget our troubles with a big bowl of strawberry ice cream!

"I didn't say it should, Lewis. I said that appealing to majoritarianism is a lazy form of argument, and a scant one in any particular case. It's hardly sufficient to argue "X is good, and a proper function of the government, because <50% of the people want it." That was the entirety of what I was getting it, and if it seems obvious, I brought it up only because I was surprised to have seen Jes advance it."

Phil,

I don't doubt your sincerity and didn't mean to extend your position in extremis to distort it. But I don't think that majoritarianism in itself is necessarily a "lazy form of argument". In fact, I think majority rule is the a priori rule in democracy, to be amended either more or less by protections for the minority, republican representation etc.]

The fact of the matter is that in a democracy, the people have the Constitutional right to be "wrong". You can argue for one position or the other, but at the end of the day, the opinion of the people determines soveriegnty.

Now, you can argue that the majority's popular opinion on something is "wrong" in some objective sense, but in this particular case, I don't see exactly where the people are wrong in perceiving Social Security as a successful program. So I suppose it comes down to why one thinks >50% of the poeple "want it". What is irrational or incorrect about this "want" in this case?

It means that they're accumulating assets in the form of legal rights to future income, documented as equity and debt securities. Down the road, somebody has to be working to generate the income to meet those obligations. Right now, Social Security provides legal rights to future income by using the government's taxing authority to move income from working people to retirees. On the scale we're talking about, is there really any meaningful difference between the two sorts of legal rights, other than the fact that "funding" retirement by owning securities involves much higher administrative costs?

Quite a few people in the thread have expressed approval for this statement, but unfortunately it is flat wrong.

When you raise money through investment, it contributes to innovation and efficiency which improves the overall health of the economy--reflected in a higher growth rate. When you raise money through taxation, it does none of that. To treat money raised thorugh taxation as the equivalent (in terms of economic health) to money raised through investment is an enormous mistake and unfortunately not a surprising one for those on the left to make.


Bernard, you write,

The excess money in fact was saved, in that it reduced the government’s need to borrow elsewhere. Suppose that payroll taxes had not been increased to provide a surplus. Then today the debt would be what it is plus the amount in the trust fund, and we would still face the problem of paying the Social Security benefits.

And in fact we face the debt that we have now plus the amount in the trust fund plus the problem of paying Social Security benefits. The other money was raised through increased taxes (payroll taxes) just like it would have been if the 'trust fund' did not exist. So far you have not pointed out a single economic difference between a trust fund and a non-trust situation. All you are showing is that A-B+C-D=C-B+A-D.

The whole 'rich people' are trying to get out of their promises thing is lame too--people age. We aren't talking about the same people over that period. The whole thing is structured such that people retiring soon had the best deal while everyone else got screwed. When they were low wage earners the FICA tax was low and income tax high so they paid the relatively low rate. At their peak earnings the FICA taxes were high and income taxes low so again they paid the relatively low rate. Right after they retire the bonds will 'come due' and other people will be paying the high rates during their prime years but with fewer people compared to retirees. The 'rich' aren't getting out of anybodiy's agreement, it is just the Baby Boomers getting the best deal out of all three situations. There isn't anything noble about that. That doesn't require all this rhetoric about inergenerational promises. That is just the boomers getting more out the government than anyone before did and more than anyone afterward will be able to. There isn't much we can do about that, I'm not for making drastic changes in people's retirement plan right before they retire. But let us not elevate it to some ridiculous and false moral plane either.

“When you raise money through investment, it contributes to innovation and efficiency which improves the overall health of the economy--reflected in a higher growth rate. When you raise money through taxation, it does none of that.”

The purchase of equities is not “investment” in the sense of adding to the stock of real capital. The impact on the real economy is indirect. Increased demand for equities pushes up share prices, reducing the cost of capital for any firm issuing new shares. Putting it another way, it puts downward pressure on interest rates.

If the Treasury decides to tax instead of borrowing that reduces the supply of T-bills, pushing up their price. In other words, it puts downward pressure on interest rates.

To treat investment in the financial sense as equivalent (in terms of economic health) to investment, in the sense of growing the capital stock and thereby raising labour productivity, is an enormous mistake and unfortunately not an unusual one for those who are sloppy in their economic analysis.

Ok, if you think taxes and investment are both equally good for the economy I can't really argue with you any more than I can argue with someone who believes the Earth is 4000 years old and that God put the bones of dinosaurs in fossil form just to fool people. I will simply have to note that your interpretation is flatly wrong and move on.

SH sez: "When you raise money through investment, it contributes to innovation and efficiency which improves the overall health of the economy--reflected in a higher growth rate. When you raise money through taxation, it does none of that. To treat money raised thorugh taxation as the equivalent (in terms of economic health) to money raised through investment is an enormous mistake and unfortunately not a surprising one for those on the left to make."

oh where to start?

how 'bout the slam against those "on the left". I have consistently tried to keep my comments focused, but if THE RIGHT is going to continue to defame / slander / libel THE LEFT then I don't see any reason to behave either, even if the poster has banning privileges.

private vs. public investment

Even a non-economist like me can tear holes in this one. How many billions of dollars of private investment have vanished in recent years due to the discovery of corporate malfeasance? Remember the dot-com bust? Private investment, if not done wisely, is simply a waste of money.

And despite the best efforts of the current administration to prove otherwise, public investment through tax dollars is ESSENTIAL to the private economy.

For example, SH lives in San Diego. He gets his potable water from the Colorado River, and it ain't delivered for free. He drives on I-5, part of the federally funded interstate highway system. His sewage is carried out to sea by a public agency. If it weren't for public investment, San Diegans would be parched, stranded, befouled and uneducated.

hmmm. maybe that's the republican strategy for getting California to turn back to a red state -- turn it into Mississippi.

what's even weirder about SH's post is that his remedy for SS -- impose risk on the sub-35 cohort -- does not target the wrongdoers -- the Baby boomers.

it was bad enough when the bush admin invaded iraq as a result of 9/11. (Hey guys, wrong country.) Now he's planning on punishing the young to solve SS. (hey, wrong age group.)

focus, please.

Francis

When you raise money through investment, it contributes to innovation and efficiency which improves the overall health of the economy--reflected in a higher growth rate. When you raise money through taxation, it does none of that. To treat money raised thorugh taxation as the equivalent (in terms of economic health) to money raised through investment is an enormous mistake and unfortunately not a surprising one for those on the left to make.

But the money raised by taxation does not disappear into some black hole. It is returned to the country/economy through any number of useful projects - the interstate system, the TN Valley Authority, our education infrastructure, and (who could forget?) the many internets.

Sometimes collective gov't action is the only way to improve innovation and efficiency in some areas. Funding scientific research is a good example. Like research into areas of questionable immediate utility but which will ultimately be used as basis for profitable practical inventions.

When you raise money through investment, it contributes to innovation and efficiency which improves the overall health of the economy--reflected in a higher growth rate. When you raise money through taxation, it does none of that. To treat money raised thorugh taxation as the equivalent (in terms of economic health) to money raised through investment is an enormous mistake and unfortunately not a surprising one for those on the left to make.

The equivalence is not between raising funds through investment and raising funds trough taxation as such. The equivalence is between both system's promise to repay tomorrow the money borrowed today. Both promises are claims against future revenue.

To the degree that the 'investment' option results in greater economic growth, that option may be more efficient than taxation. The looming collapse of the private pension system -- today's enterprises struggling to pay for promises made to yesterday's employees (see GM) -- suggests the government may be the only entity capable of meeting the obligation, without respect to efficiency.

And in fact we face the debt that we have now plus the amount in the trust fund plus the problem of paying Social Security benefits. The other money was raised through increased taxes (payroll taxes) just like it would have been if the 'trust fund' did not exist. So far you have not pointed out a single economic difference between a trust fund and a non-trust situation. All you are showing is that A-B+C-D=C-B+A-D.

No. I think you are double counting. Let's try a numerical example.

Total liability for SS benefits: $1000.
Trust fund value: $800
Rest of Government (ROG) debt: $2800. (Including debt to trust fund)

Total net government liabilities are $3000. This is because ROG's $800 payment to the trust fund reduces the amount that SSA must pay to $200. In other words, the $800 is an asset of SSA and a liability of ROG, hence a wash from the point of view of the entire government.

But suppose the excess payroll tax had not been collected. Now it would like this:

Total liability for SS benefits: $1000.
Rest of Government (ROG) debt: $2800.

Total liabilities now are $3800. If ROG had not borrowed the money from SSA it would have had to borrow it elsewhere, so would owe those lenders $2800. In addition, SSA would stillface a $1000 liability for benefits.

The excess payroll tax collected reduced the government's borrowing, taken as a whole, hence it is in fact an asset, or an offset to liabilities if you prefer.

Of course this money was raised through increased payroll taxes. And then it was saved. The increased taxes served to reduce government debt, and hence the money offsets liabilities.

Sebastian: As I read Kevin, he wasn't arguing that taxes and investment (in the usual econ. sense) are equally good for the economy. He was arguing that puttting money in the stock market is not investment in the usual econ. sense, which is quite different. And as I understand it, he is right.

His argument for the claim that when the government borrows money and then puts it in the stock market, the effect on the economy is roughly the same as if it just raised the money through taxes comes (correct me if I'm misreading you, Kevin) not from the claim that taxes are good, but from the claim that borrowing is bad, and the taxes let you borrow less. Which is, again, right, as I understand it.

I also take exception to the claim about 'the left'. Mild and polite exception, but exception nonetheless.

When you raise money through investment, it contributes to innovation and efficiency which improves the overall health of the economy--reflected in a higher growth rate.

You seem to be saying that a retirement system funded through private investment is better for the economy than one that involves transfer payments handled by the government, because it would stimulate investment.

As I pointed out in a previous thread, this does not necessarily hold. Workers will invest, yes, but retirees will liquidate investments. Why the net should be positive is unclear. In fact, given the central problem of a decline in the worker/retiree ratio, it seems likely the net investment would be negative.

Think of it as retirees handing over their portfolios to workers in exchange for cash. The retiree sells 100 shares of Microsoft to meet expenses; the worker buys 100 shares to add to her retirement portfolio. Where is the net gain? Isn't this just a different sort of transfer?

Sebastian, you're playing a bait and switch game here with all the harrumphing about how investment is better than taxing and spending, as if that had anything to do with the Social Security debate. Yes, it's trivial and obvious that putting your money into capital goods instead of current consumption is likely to mean more stuff to consume tomorrow. But we're talking about the whole economy here, and if we're looking at the whole economy, the only way to have more investment today is if we have less consumption. Yet you're positing a free-lunch world where we can fund our "investment" with borrowed money rather than reduced consumption. That's not at all the same thing. So no, the original point is not wrong, and your response just shows that you haven't thought the thing through. We're not starting from zero and defining the perfect system for financing the retirement of our generation, we're starting from what we have, and we can't change that by just sprinkling a bunch of free-market fairy dust.

"I will simply have to note that your interpretation is flatly wrong and move on."

Since my interpretation is utterly conventional you may wish to notify the backwoodsmen who teach monetary economics how it is that you have left them so far behind.

When I buy shares in Microsoft or Oracle my purchase does not create so much as a byte of new software. Increased demand for equities impacts on the real economy through its effect on prices in financial markets. Ultimately it promotes spending on physical capital and on research.

But if the Treasury offsets that demand for equities by issuing bonds then the cash simply comes back out of the market for financial assets (bonds and equities).

If you claim that dollars which go to fund managers for investment in equities do more good than dollars which go to the Treasury for the redemption of bonds, then you presumably think that a mere shift in the composition of America's stock of financial instruments represents a Pareto improvement. Evidently on your planet those poor suckers on Wall Street cannot engineer that without help from Congress.

What are you peddling here, Luskinomics?

If it weren't for public investment, San Diegans would be parched, stranded, befouled and uneducated.

Off-topic, but I call the false choice fallacy on this one. The fact that government provides a service doesn't mean government is the only entity that can, even if it does so more efficiently than the next-best alternative. I seriously doubt that, in the absence of a taxing government, San Diegoans would simply sit there like coma victims and dehydrate.

Anyway . . . Lewis, I guess I'm not really articulating well what my argument was or was supposed to be, so unless you think it's worth pursuing in depth in the thread, I'll drop it. Otherwise I'll think of a more coherent way of putting it.

So, investing in bonds and investing in company securities is precisely the same thing in terms of economic effect? Ridiculous. And I mean that in the absolute fullest version of the word. Do bonds and stocks have the same return rate? No? Hmmm. If all or nearly all people invested in bonds would that help Microsoft raise money? Clearly no. Do investments in government bonds help sort out bad companies from good? Clearly no. Can the management of a corporation be forced to change its direction through influencing investment in government bonds--unless they are a hedge fund or bank, no. Why do lower interest rates make investing in stocks more valuable? Because the return on stock in a good company when offered is more valuable than the return on government bonds. Why does this help the economy? Because the more valuable than government bond company is contributing to the economy.


Hilzoy,
"I also take exception to the claim about 'the left'. Mild and polite exception, but exception nonetheless."

If there is anything that defines the differences between the American left and right, it is that the former is more likely to make mistakes in favor of government intervention while the latter is more likely to mistakes against government intervention (and if you saw how many times I had to edit this post perhaps the latter is more likely to make spelling errors). So I'm not going to feel bad about that one.


Next post for you Bernard.

Seb: point taken (about the left.) But not about what Kevin said. What he said was not that investing in stocks and investing in bonds had the same effect. It was that if you raise the money through stocks, that raises the price of stocks and provides more money by which investment in the economists' sense (adding to the stock of real capital, etc.) can occur. But if you also have to borrow, then that adds to the deficit, which sucks money out of the stock market and into bonds, and produces a drag on the economy.

If, by contrast, you raise the money through taxes, it both provides less money to the stock market, which slows the economy down, but also requires less borrowing, which has the opposite effect.

Sebastian, if we pushed your argument a little further, we could eliminate all taxes and fund the government at any desired level by issuing Treasury bonds, dumping the proceeds into the stock market, and running the goverment on the difference between the stock returns and the interest payments on the bonds. I think you'd agree that wouldn't be a good idea. I'm having a harder time understanding why you think a smaller-scale version of the same process will work miracles for Social Security.

Bernard,

The problem is earmarking and then spending it on other things.

Since I don't know how to do colors I'm going to put brackets around immediate liabilities and square brackets around debt.

Year 1. (without a 'trust fund')
FICA $150
SS Liabilities ($100)

Total Non-SS Government Outlays ($600)
Total Non-FICA Federal Tax $350
Total Debt Needed to cover year 1 [$200]

Year 1. (with a 'trust fund')

FICA $150
Trust Fund [$50]
SS Liabilities ($100)

Total Non-SS Government Outlays ($600)
Total Non-FICA Federal Tax $350
Total Non Trust Fund Debt Needed to cover year 1 [$150]

Year 2 (assuming no payments to any debt, this is without a trust fund)
FICA $150
SS Liabilities ($200)

Total Non-SS Government Outlays ($600)
Total Non-FICA Federal Tax $350
Total Debt Needed to cover non SS Outlays [$250]
Total Debt Needed to cover SS Liabilities [$50]

Total Debt needed to cover year 2 [$300]

Year 2 (assuming no payments to any debt, this is without a trust fund)
FICA $150
SS Liabilities ($200)
Trust Fund $50


Total Non-SS Government Outlays ($600)
Total Non-FICA Federal Tax $350
Total Debt Needed to cover non SS Outlays [$250]
Total Debt Needed to cover Trust Fund [$50]

Total Debt needed to cover year 2 [$300]

If you spend the excess money in year 1, you calling the $50 payment to SS in year 2 a 'trust fund' payment has zero effect on the actual outcome.

You can raise taxes in either year in either the FICA portion or the non-FICA portion to decrease the debt amounts. You can lower the benefits in the SS portion or the non-SS portion to decrease the debt amounts.

In neither case does calling the excess in year one 'trust fund' or paying the shortfall in year two under 'trust fund payment' change anything.

Just a reminder, I'm not a big fan of privatizing accounts. I think they may or may not be successful but that they will absolutely cause unuseful governmental meddling with the markets. (I'm happy to see that they agree with me at marginalrevolutions). I'm a fan of completely eliminating SS payments to rich and upper class retirees after a suitably long phase out period because they should be able to handle their own retirement. I'm in favor of Social Security being ONLY a safety net--ONLY an anti-poverty program.

So all this talk of me WANTING to borrow money and invest it is incorrect. But the long term transition cost for the plan I do not desire is still likely to be near zero because it amounts to paying now a liability which would have to be paid for in the future. Unless you want to argue that we don't have to pay future Social Security benefits...

If there is anything that defines the differences between the American left and right, it is that the former is more likely to make mistakes in favor of government intervention while the latter is more likely to mistakes against government intervention

Hmmmm, you may have a point, but if you look at what the purpose of the government intervention is, I think it undercuts it. Speaking in broadbrush terms, government intervention called for by 'the left' is as often as not to prevent localities from overstepping bounds. It also fails to note that many of the deregulation measures that Reagan is lauded for were initiated by Carter. It also ignores the role of 'the right' in questions of education and Homeland Security, which should also be classified as government intervention. I would accept the caveat that these are special cases, but I would ask that you extend the same generosity of spirit before making a blanket statement like that.

the long term transition cost for the plan I do not desire is still likely to be near zero because it amounts to paying now a liability which would have to be paid for in the future.

Crap! I have a hockey game to get to. But can I understand this to mean that you expect to cut benefits for baby boomers in the next few decades? Because otherwise I don't understand your logic.

Hate to hit and run, but I'll play master of the obvious here. I'm pretty sure that Sebastian and Bernard are talking past each other. Given the requirement that the trust fund invest solely in T-bills, if you look at the overall government debt at any point in time Sebastian is correct. However, part of the way that SS was sold was with the intent that it pay for itself via the FICA tax. As far as I can tell, Sebastian considers this to be a fiction that should be ignored, while Bernard does not. Until there's an agreement on that point, I'm afraid that you'll just keep on going back and forth.

So, investing in bonds and investing in company securities is precisely the same thing in terms of economic effect? Ridiculous.

Only sort of ridiculous, and not really in the way you describe. The important actor here is the government, not the investor. The government is going to borrow a certain amount of money - the only question is the interest rate - and that is money that will not be available for private investment. That Kevin, or hilzoy, or I, choose to buy a treasury bond rather than a share of stock is immaterial to the economic well-being of the country. If we didn't, someone else would, and if there weren't exactly the right amount of Treasury buyers then stock prices and Treasury rates would adjust until there were.

What does matter is the total volume of government borrowing. This is first of all "dissaving." It reduces national savings, in effect making less money available for private investment. It affects interest rates. More government borrowing means higher rates, which has all sorts of effects. In other words, it is the deficit that reduces our economic well-being, not individual investment decisions.

As for our arithmetic duel, it seems to me that the upshot of what you are saying is that so long as the government is operating at a deficit there can be no trust fund because, in your view, all the money is commingled and distinctions and legal requirements that some types of collections be spent only for certain purposes are meaningless. This implies that the 1983 understanding was a sham, and that a huge regressive tax increase was foisted on labor income only under false pretenses. I don't agree with that.

Evidently Sebastian has some peculiar model of the economy in his head, but since he will not write it down it is impossible to see how he gets the weird result he does. He envisages an issue of government bonds and the proceeds going to the purchase of equities. Somehow this increases America’s productive capacity so that there is a greater surplus available for distribution in the future. Forget all you have learned about how saving is defined in economics as the portion of income which is not consumed. Just shuffle the economy’s mix of financial assets and somehow, painlessly, investment happens. The guys who compute the national income accounts are going to have a problem of course; the good old accounting identity I=S no longer holds. (But since assets are not assets when Sebastian thinks they shouldn’t be, perhaps he can solve that difficulty with a nifty redefinition.)

From the comments it is clear that there are few takers for this stuff. But what is going on here? It may be the greatest breakthrough in economic theory since Keynes, but most likely it is a version of the fallacy of composition. An individual can shift her wealth from bonds into equities for a higher expected return (and risk). So, by a leap of logic, the economy as a whole can do the same thing. Alas, not so on planet earth.

I think that is what is going on, but unless Sebastian can go beyond derisive comments about the bones of dinosaurs and actually explain how his model economy performs this astonishing trick, we will never know.

Sorry to take so long to respond here, but Jes's total mischaracterization of libertarianism needs some responding to, and notyou asked for some elaboration on the argument for limiting government.

Government is organized force. That is what distinguishes it from every other kind of social institution. All government action inevitably involves the use or threatened use of force against large numbers of peaceful, unoffending adults. Democracy does nothing to change this; all democracy means is that the ones who are threatened with force are those who dissent from majority opinion.

Jes's bit about people having the right to get together and pool their resources to create retirement security is thus both completely true and completely irrelevant. Absolutely people have that right, and they can and do exercise that right through a variety of *voluntary* institutions, and no libertarian anywhere has ever objected to this. SS is different because it uses force on a mass scale; it takes people's money whether or not they have individually consented to be part of it.

Now the core moral premise of libertarianism is that using force against peaceful, unoffending adults is a Really Bad Thing (tm). It may be a necessary evil in some circumstances, but it's still a great evil, and so you need a really great excuse to justify it. Preventing an invasion by the Nazis, for example, is probably such an excuse. Keeping people from starving or freezing in the street may even be one. But ensuring that people's living standard in retirement is not too much below what it was in their working life, no matter how poorly they plan for their retirement, is not even close.

"Freeloading" has nothing whatsoever to do with the question. Not even if we accept, arguendo, the vicious protection-racketeer's claim that giving someone a benefit they never asked for and do not want can morally oblige them to pay for it. It is *not* the case that "everyone benefits" from Social Security. It is *not* the case that Social Security represents a solution to a collective action or public good problem, since retirement insurance is both rivalrous and excludable, and can be (indeed already is!) provided effectively on the private market.

There are millions of people in this country who could and would, if given back the 12.4 percent of their income now taken from them for SS, make investments that would get them a better expected return, or use the money to procure other things that they value more highly than retirement security. They *do not benefit* from SS. Many of them would willingly take on much more risk without it. That is their right. To forcibly stop them from doing so in the name of greater economic security is wrong even if a majority wants it done.

Now of course all of the above only follows if you accept the premise about use of force being a Really Bad Thing. I am aware that many people don't accept it. But I can't let such blatant misrepresentation of the idea pass.

Jes's total mischaracterization of libertarianism needs some responding to

People who would willingly take back their 12.4% Social Security payments know that they live in a country where the government will not actually let them starve to death on the street if they have no money in their old age. They accept the benefits of this society: they do not insist that they will go live a hermit's life in the wilderness where no one will be compelled to help them. So, they are willing to freeload the system - they know that others will pay for them to stay alive.

I'm perfectly willing to grant the concept that not all libertarians are freeloaders. But anyone who thinks they ought to be able to refuse to pay their taxes, yet still takes all the benefits of living in a taxpaying, collectively-acting society, is a freeloader.

"Anyway . . . Lewis, I guess I'm not really articulating well what my argument was or was supposed to be, so unless you think it's worth pursuing in depth in the thread, I'll drop it. Otherwise I'll think of a more coherent way of putting it."

No Phil, my bad I think. From what I gather now, I was misunderstanding your disparagement of majority rule by interpreting it as an illegitimate determinant of what policy will be. I see now that you weren't claiming that it's an illegitimate rule or starting point for democracy, just a bad argument for why Idea A is a good or bad one for the country.

In fact, reading back my last comment, I obviously distinguished between the two interpretations and, rather than jumping to the less generous interpretation, should have read more carefully what you wrote.

Mea culpa.

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