Non-Presidential Election Politics

I was seraching the blogosphere for a topic that wasn't directly tied to the presidential elections. I found it in another of Kevin Drum's suggestions that there is no Social Security Crisis. I wish he were right. But he isn't. I'm going to repost my thoughts from last time he said that:

I'm not going to dispute the data he uses, not because I think that the Trustee's have perfect data, but because even the numbers he is using suggest that there is a crisis.

The Social Security crisis is really a budget crisis with three major components that are Social Security-related. For purposes of this post I am using data from the same report that Kevin uses. But first you have to understand something about Social Security. It is common knowledge, but I want to make it explicit. Social Security is not a retirement fund. It is principally an age-based income subsidy which uses a special tax system to ear-mark funds to support it. For quite a few years, the revenues raised by the ear-marked funds have exceeded the mandated benefit levels. The US government spends that money and issues Treasury bonds to the Social Security Trustees. From the point of view of the Social Security System these bonds are investments. From the point of view of the US government as a whole they are not investments. They are not investments because the US government is both payor and payee of the same bonds when the Social Security trustees hold the bonds.

The above paragraph is completely uncontroversial. Seriously, the politically charged stuff doesn't come in till below. Also for the purposes of this post I am assuming that not one single non-Social Security budgetary item increases over the next 20 years. (A ridiculous assumption if you have heard of Medicare)

The Social Security crisis has three major components, all of which are based on the fact that the baby boomers are retiring very soon.

First the current ear-marked tax will not cover ear-marked expenditures in the fairly near future. In order for the Social Security expenditures to be met with the incoming revenue stream Kevin notes that we will probably have to do all of the above: cut the cap on the tax, raise the minimum retirement age, and engage in means testing. That is fine, and I agree with all of it (though I want far more extreme means testing) but it only solves the first part of the crisis. Also, considering the extreme (though in my mind inexplicable) Democratic aversion to means-testing I don't find even the easy fix that likely.

Second, the Treasury Bonds 'owed' to the Social Security Trustees have to be paid back in order for the above solutions to be enough to allow expenditures to equal the incoming revenue stream. In Table II.B1 of the link above, you will see in the Total Income section of the report a $71.2 billion entry labeled "Interest". From the point of view of the US Government as a whole, this is not income at all. It is a liability to be paid through taxation. I have been unable to find data indicating likely interest payments in the future. These interest payments have to be paid out of new taxes. Furthermore in order for Kevin's supposedly easy plan to work, Social Security will be cashing out the principal of these bonds. If I am reading the chart correctly that totals out to $1.07 trillion dollars. This too will have to be covered by new taxes.

Third, Social Security cash has been used for decades to support the general budget. In 2002 Net Contributions (the ear-marked tax) were $455.2 billion. Total expenditures were $393.7 billion. That is $61.5 billion in cash that has to be replaced in the budget, every single year. (And before someone mentions Iraq, please realize that the Iraq expenditure is in the $80 billion range over multiple years (I believe 20)).

In short there is a Social Security budget crisis. And that doesn't even touch on the other demographic bombs waiting in our future: the effect of baby-boomer retirements on the economy (slower growth as experience leaves the market), Medicare (so scary I don't even want to touch it right now), unexpected expenditures (who would guess), or medical advances which make the Social Security expenditures dramatically increase as people live even longer while causing ballooning Medicare expenses (likely I would think).

Also, in his comments, I have seen a common objection. Here is the objection and my response:

So, tell me again why the Trust Fund is non-existant. Oh, its assets are merely Treasury bonds and they really aren't assets?

Hogwash. Tell it to the Japanese and Chinese who've been buy those same bonds to fund these new-fangled massive deficts. You want to see some real economic problems: tell our creditors in the East that we're never going to pay them back. Yeah, that's the ticket.

This is a typical misunderstanding. Loans to other people count as assets for those people. Loans to yourself don't count as assets to yourself because you are the one who has to repay them. When the Chinese borrow money from us in the form of Treasury Bonds, that is an asset for them and a liability for us. When the Social Security Administration of the US government borrows from the general account, that is an accounting fiction. US Treasury bonds are an investment for Chinese buyers because they don't have to repay the bonds. Relying on US Treasury Bonds is not an investment for the US because it is the entity that has to repay the bond. You can either count the 'trust fund' as non-existant or a liability depending upon what you are tracking. Whatever it is, it is most definitely not an investment for the US Government.

Comments

[sidereal]

Not that it's conclusive evidence either way regarding Social Security's status as a 'retirement fund' or a 'redistribution mechanism', but I'm curious if anyone knows how it started out. In the first few years, was money immediately moved from payers to retirees? Or did people not get benefits if they hadn't payed in?

[von]

Thanks for pointing this out, Sebastian. I've been meaning to post a response to Drum, but you beat me to it (and wrote with far greater authority).

I don't know the answer to your query, Sidereal.

[Bruce Wilder]

Using the current Social Security surplus to accumulate Treasury Bonds reduces government borrowing from other sources.

At some future date, when SS is in deficit, general revenue will be diverted to meet that deficit. By reducing government debt, general revenue, which otherwise would have be used to pay interest will be used to pay SS benefits. To run a SS surplus now is simple prudence, and improves the future ability of the government to sustain SS expenditures, which are in excess of SS tax revenue.

The bottom line, here, is the government's future ability to divert general revenue to pay SS benefits. If the government's obligation to pay interest on debt is less in the future, then that money is available to pay SS benefits.

Bush's deficits, of course, jeopardize the ability of the government of the future to divert revenue to SS benefits, without raising taxes, by increasing the government's future obligations to pay interest on the debt.

Medicare's problems are huge by comparison to SS's problems, as well as being infinitely more complex. SS's problems can be solved by modest increases in SS taxes, a modest increase in the retirement age, tweaking the extent to which SS income increases taxable income, for income tax purposes, etc.

[Fabius]

There is no Social Security problem. The problem is the US government doesn't generate the revenues to spend on the military, entitlements and all other things the government spends it's money on. Social Securities revenues covers Social Security. Other revenues do not cover other spending. Why do you say it's a "Social Security" problem? Rather, we have a Military Spending problem. We have a Federal Payroll problem. We have a Farmer Subsity problem. And we have a Republican Problem because they are the ones trying to steal the Social Security revenues.

[Katherine]

"In the first few years, was money immediately moved from payers to retirees? Or did people not get benefits if they hadn't payed in?"

I'm 90% sure benefits began immediately.

[Fabius]

Sidereal - in the thirties we had alot of destitute seventy-year-olds. Social Security relieved their stress. First generation got money though they didn't pay. Krugman has a good rundown dating back to 2000 when he first started sounding the alarms of the transition cost in privatizing SS.

[Steve]

So, the basic argument here is Greenspan's plan to "save" Social Security by doubling the payroll tax on wage earners since 1983 was really a scam to shift the cost of government onto the wage earning public and away from the capital gains, muni bond interest, earning public.

As I remember the arguments at the time the payroll tax would "saved" and paid back with future tax reciepts and controlled government spending. It wasn't supposed to be a way for the landed gentry to avoid taxes.

Dang, what a sap I was to work for a paycheck for the last 21 years, I should have inherited a couple mil and taken the income on Tax Free Muni's. I blame it on Dad and Grandpa for not investing in RCA and IBM when they should have, at least Jenna and Barbara won't be taken for a ride.

[sidereal]

Hmm. . looks a little convoluted, with the first few years of lump payments being proportional to participation

The earliest reported applicant for a lump-sum refund was a retired Cleveland motorman named Ernest Ackerman, who retired one day after the Social Security program began. During his one day of participation in the program, a nickel was withheld from Mr. Ackerman's pay for Social Security, and, upon retiring, he received a lump-sum payment of 17 cents.

But starting in 1940, it went to monthly payments, irregardless of contribution.

On January 31, 1940, the first monthly retirement check was issued to a retired legal secretary, Ida May Fuller, of Ludlow, Vermont, in the amount of $22.54. Miss Fuller died in January 1975 at the age of 100. During her 35 years as a beneficiary, she received over $22,000 in benefits.

So I think it's safe to say that barring a couple years of feeling out, Social Security has never been an investment vehicle.

Further, you could argue that since the first generation received without paying, closing the circle requires a generation that pays without receiving, but good luck trying to sell that.

[juststopping]

Sebastian, you are so wrong here it's hard to know where to start.

The Social Security Trust Fund brings in more money than it expends. That's expected to hold until around 2017, according to the Trustees estimate. But that estimate uses absurdly low growth rates in the economy. After 2008 or so, the expected growth rate used in the calculations fall to something like 1.8 percent, lower than they were in the Great Depression.

Why Democrats oppose means testing? Because the program enjoys near-universal support. If you start means-testing, it means that people who put in money all their lives won't get any of it back later. That makes it seem unfair.

Here's the thing I've never heard answered by those who support the privatization of Social Security.

If the program is intended to make sure that seniors always have a base level of income and does so by pooling contributions, what happens when you have an individual account.

So now when I retire, I might get $500 a month in support based on the amount of money I put in. I get that every month till I die, regardless of whether I live to age 72 or 102.

Now if I have a private account, I retire and I have $25,000 I got from the money I put aside and from the investment income.

How do I decide how much to take out a month? And what happens when I reach age 85 and its all gone? Do I end up on hungry on the streets or do states and local agencies or charities have to step in?

What about the person who decides to take all the money out at age 66 and spends it, thinking they won't live long and then inexplicably does? Does the federal government or states step in then? If not, do we as a society then just live with the specter of homeless old people?

And as to the bonds, it's a specious issue. The problem isn't with SS; it's with the federal debt. Yes it will cost money to pay off the bonds, but it will be the same as the bonds held by private investors. The fact that another component of the government holds them is irrelevant.

[John Thullen]

Thoughtful post, Sebastian, by which I man we have several areas of agreement. I agree with you and Drum that we must "cut the cap on the tax", which I take to mean "raising the cap" on the revenue side. Is that what you mean?

"(inexplicable ...)Democratic aversion to means testing.." explained: Once you cut or eliminate SS payments to the more well-off while still collecting their taxes, rational as it may seem, you create and/or enlarge a political window for the usual demagoguery toward the less fortunate, ie. why should I be paying for these welfare leeches with my redistributed income?

Would you resort to this? Probably not. But it will be easier to recruit new Republicans by pounding on the so-called undeserving poor if the well-off are denied their SS payments as well. True, you haven't received the talking points yet; but Tom Delay and Grover Norquist have them in the outbox. They appeal to the "why should I care" crowd. To which I answer: "I don't care that you don't care".

I'm not against the principle of means testing; I believe its implementation will mean the political death of the system.

As to who owes whom what: If private accounts are established, and I borrow my money from my account, as I might do with a 401K, whom do I owe? Is the loaned money an asset to me? Or a debt? Both, you say? If I borrow money from me to invest in education for me, is that an asset or a liability? What if I'm not required to pay back the loan to me for, say, medical expenses?
Is that an asset, an investment, or just an empty account when I need it for retirement?.

It's a little like (very little) the Woody Allen film wherein he frets over a suspicious mole, visits the doctor who confirms the mole is harmless, and concludes that's great, now I have to worry about the same damned thing 20 years from now. Well, maybe it's not like that at all.

But I wanted to end with humor.

[fdl]

I have a somewhat different take.

1. Assume that the SSA is a separate legal entity from Treasury. Payroll taxes bear a rational relationship to the govt service. Since the Moynihan fix of a few years back SSA has been lending money to Treasury and receiving bonds in return. (Much like the Chinese govt.) Someday soon ('12 or '13 IIRC) SSA will not have any surplus revenue. Instead of lending money and getting bonds, it will start calling on the bonds.

At that point, Congress has the option of (a) making changes to the SocSec system; OR (b) having Treasury borrow money from whomever is lending at the time; OR (c) cutting spending; OR (d) raising general revenue taxes; OR (e) a combination thereof.

(of course, there is nothing special about the day on which SSA has no extra revenue to send to Treasury. The "crisis" could mature in the year in which SSA loans start dropping, for example.)

2. Alternatively, SSA is not a legally separate entity. The bonds are a pure fiction. Payroll taxes are a grossly unfair form of regressive income taxes. The SocSec system is not in crisis, BECAUSE THERE IS NO SUCH THING.

On a unified basis, either the budget as a whole is in crisis or it's not. The concept of "earmarking" certain revenue sources for certain govt obligations is purely a budgetary fiction; there is no particular reason to tie one to the other.

This year, we ran a unified budget deficit of over $400 billion. This is not sustainable, but the surplus expenditures aren't necessarily in the area of entitlements.

The Congress decided a while back to go with option 1. If Sebastian wants to go with option 2, that's a legitimate choice. But he needs to be willing to face the consequences of that choice. No payroll taxes. A significant increase in income taxes. A system, like the old welfare system, subject to sharp attack and, ultimately, dissolution. An increase in hidden, elder poverty.

There are two complex policy questions here: 1. what is the appropriate level of financial support by the govt for all those poor bastards who were unable to save enough for their retirement? (and no, i don't expect minimum wage workers to be able to save enough. and eliminating minimum wage would only make matters worse).

2. What is the best political structure to allow people to be able to rely on that financial support, although it's decades in the future?

SocSec is a little like term limits; it's an institutional fix to prevent a voluntary action in the future which we know now will appear to be a good idea at the time but is in fact a bad idea.

Francis

[Sebastian Holsclaw]

I'm ok with Democrats not liking means-testing, so long as they don't appeal to the 'safety net' as a rationale. It is when I have to wade through arguments where I get accused of 'not caring for the elderly poor' that I have a problem. I have nothing against a safety net. We could afford a system which set even a relatively nice minimum living level for retirees. The current system isn't a safety net, it is a redistributive tax which distributes on the basis of age--not poverty.

[juststopping]

Here's the productivity measures the Trustees use to generate their prediction of when SS outlays and inlays meet up.

Productivity (total U.S. economy)

Best case: 1.9% growth per year.
Middle case: 1.6%
Worst case: 1.3%

Compare that to:
Productivity from 1950-73 2.8%, 1973-95 1.4%, 1995-00 2.5%.

Thus from 1950 to 2000, productivity gains were about 2.3% a year.

Why does that matter? Take a look at Figure II D7 in this year's trustee report.

See when the trust funds go broke (3 is worst case, 2 middle, and 1 best case)... Oh I see in the best case estimate that assumes 1.9 percent productivity growth, SS NEVER goes bankrupt. And that assumption is actually worse than the historical average...

Hmm, tell me again, why do we need to "reform" social security?

Medicare is a whole 'nother story, though...

[Sebastian Holsclaw]

"At that point, Congress has the option of (a) making changes to the SocSec system; OR (b) having Treasury borrow money from whomever is lending at the time; OR (c) cutting spending; OR (d) raising general revenue taxes; OR (e) a combination thereof."

The problem I have with the accounting fiction is that it makes it very easy to put off the tough choices until the crisis is already upon us. It lets people say things like "Not only do we have huge Social Security taxes, but we ALSO have one trillion in 'investments'." But we don't have one trillion in investments. We have one trillion commemorative investment replicas attesting to the fact that SS tax money was spent 15 years ago.

The problem is that we need to do a, c, and or d 10 or 20 or 30 years ahead of time so that people won't rely on one form of Social Security for 40 years only to have it change at the last second. We need to be able to tell 30 year-olds like me that we can't sustain the program in its current format, so make some retirement plans that don't count on Social Security.

Once again, I'm not against a real safety net.

[Sebastian Holsclaw]

Juststopping, I think you problem is that productivity is measured per worker. As the baby-boomers retire, the ratio of workers to non-workers increases dramatically. As that ratio increases, productivity has to increase dramatically just to stand still.

[Edo]

Apologies for nit picking, but

"When the Chinese borrow money from us in the form of Treasury Bonds..."

I believe you meant to state "When the Chinese lend money to us..."

And one for you Sidereal,

"But starting in 1940, it went to monthly payments, irregardless of contribution."

irregardless isn't a word; "regardless" would work just fine is this context.

Having made those next to worthless notes, thanks to you both for your thoughts on this topic. I had always thought that Social Security was in worse shape than Krugman, Drumm, et.al. have claimed. And I didn't know about the earliest recipients. Again, thanks to both of you.

Finally, FWIW, I think Social Security should be means tested as well. Its a travesty that millionares over 65 recieve checks from our government.

[liberal japonicus]

I was trying to find a cite for how much illegal immigrants put into the Social Security system, but came across a number of articles on the totalization agreement with Mexico and screeds about "Social security for illegals!" Chilling, because they present the notion that illegal aliens (often referred to as simply "illegals") are going to get something for nothing. Here is a CBS news article with some figures.

[Bernard Yomtov]

Sebastian,

A few comments:

A big source of the problem understanding this issue is the unfortunate practice, begun I think during the Johnson Administration, of presenting a "unified" budget wherein Social Security is lumped in with all other government expenditures. This has created a perception that the government's finances are in better shape than they are. It would be wiser to report these items separately.

This has led to the situation where the government borrows from SS but the contribution of this borrowing to the national debt is obscured.

But this does not mean there is no trust fund. The fact that the government may find it difficult or unpleasant to pay off the bonds does not change that. juststopping puts it clearly: the SS bonds are a component of the federal debt.

Suppose SS money had been invested in private securities of some sort. The government would then have had to borrow the money it now borrows from SS in the capital markets. Its debt and interest payments would be just what they are now, and we would be facing the same problem meeting them. In other words, the problem that you describe as a crisis of SS is not a crisis of SS at all. It is a crisis of government finance.

We would have the same problem if Social Security did not exist.

All federal debts have to be paid. If you owe large amounts on various credit cards it is not accurate to say you have "a Visa problem," but not "A MasterCard problem," or "an American Express problem." You have a debt problem.

[sidereal]

"irregardless isn't a word"

Au contraire

Morphological minimalism is noble, but not my bag.

[Harris]

Of course, it should also be noted that much of the surplus of 2000 came directly from the overpayment of Social Security taxes (anticipating, hypothetically their use when the boomers retired). Seen in this light, the tax cuts essentially took this money from the wage earners and re-distributed it upwards, robbing the middle class. This is the unspoken crime of the tax cuts.

[hilzoy]

I agree with some of the people who have already posted. If we consider Social Security to be a separate entity from the general treasury, with its own revenue stream, obligations, and funds, then it is not now in crisis, and will not be in crisis for decades. The rest of the treasury may have a problem, but that's not Social Security's fault. If, on the other hand, we consider it to be just a part of the US government, so that SS payroll taxes are just part of the general tax burden, SS obligations are just part of our general obligations, and the SS funds are just normal old funds, then Social Security does not have an independent crisis; the US government does. We have it already, since we are running a large structural deficit. Social Security has been masking the severity of this crisis for a while, and at a certain point will begin to make it worse, but there is no separate 'Social Security crisis', any more than there is a 'US Army funding crisis consisting in the fact that the US Army has no dedicated revenue stream and yet requires that we pay for it every single year.

The only way to make it look as though there is a "Social Security crisis" is to try to have it both ways. Social Security is distinct from other government programs in that we expect it to pay its own way from its own revenues; but oddly enough when it accumulates a surplus, that surplus is given, not lent, to the general treasury (it can't be "lent", since on Sebastian's view the government cannot "repay" it.) This doesn't work the other way, though: any deficit it runs does not just 'flow' to the rest of the government; it generates its own special crisis.

The reason we have to pay the bonds held by the Social Security trust fund is that government programs other than social security cost more than we were willing to pay for them (at the time), and so we borrowed money, which the Social Security Trust Fund lent us. It could have kept that money in a (very large) shoebox, in which case it would still have it. It could have lent it to, say, the French, in which case it would be collecting French interest and would eventually be redeemed from the French government. In this case, someone else would have had to lend us the money, and we would have to pay that money back, with interest, to that other lender. The "crisis" would be exactly the same, with different parties involved; and Social Security would be solvent for decades into the future. But because we were foolish enough to lend the SS surplus to our own government, people like Sebastian are claiming that we don't actually get to be repaid at all, and so we -- the ones who believed that running a surplus in advance was the way to prepare for the retirement of the baby boomers -- are screwed. We thought we were being prudent when in reality all we were doing was financing Republican deficits. (Why Republican? See the table I posted here.)

But you can't really have it both ways. If Social Security really is just part of the general treasury, then what we have is a general fiscal problem, not a 'Social Security crisis'. We can solve this problem in any of the usual ways: raising taxes, cutting spending (not necessarily on Social Security), and so forth. It's obvious that we do have such a problem already, for reasons that have nothing to do with Social Security and everything to do with the fiscal policies of our current President..

[hilzoy]

Sebastian: "The problem is that we need to do a, c, and or d 10 or 20 or 30 years ahead of time so that people won't rely on one form of Social Security for 40 years only to have it change at the last second. We need to be able to tell 30 year-olds like me that we can't sustain the program in its current format, so make some retirement plans that don't count on Social Security."

(a) We did do a fix well ahead of time. That's why we have a Social Security surplus. The entire idea was to build it up ahead of time so that this wouldn't be a problem.

(b) We have not, however, begun to face the tough fiscal problems in other areas of the budget. There is no reason at all to think that we have to fix this problem by changing Social Security.

(c) As I noted, your claim about our not having to repay SS only makes sense if you assume that SS is just a part of the general treasury. But if it is, then there is no reason to think that the only way to fix the problem is by cutting or changing Social Security, as opposed to eliminating other programs, raising the income tax, or what have you.

[juststopping]

Sebastian:

You wrote: "productivity is measured per worker"

That's absolutely true. But it is not measured in any way against the number of non-workers, whether they are children or retirees. Thus the issue of how many workers per retirees is not the problem (also note that that problem goes away after the baby boom generation).

"As that ratio increases, productivity has to increase dramatically just to stand still." This is just statistically false, there's no relation.

Thus, if productivity growth stays above 1.9% year (and other factors remain historically about where they have been), there is no crisis looming in 20, 40 or 75 years.

Go read the Trustee reports and look closely at their estimates.

[Sebastian Holsclaw]

"Suppose SS money had been invested in private securities of some sort. The government would then have had to borrow the money it now borrows from SS in the capital markets."

Assuming that we never cut programs, or that the overt borrowing did not cause us to be wiser in the implementation of new programs, yes. But I don't make that assumption.

"If Social Security really is just part of the general treasury, then what we have is a general fiscal problem, not a 'Social Security crisis'."

This would be true if Social Security were not sold to the American public as a self-funding retirement package. As it is now, it get an emotional attachment that other taxes don't have. People feel they are 'paying into it' when in fact they are not.

[Dave Schuler]

Bruce Wilder is absolutely correct that Medicare is a more pressing problem than Social Security. Medicare is already in deficit. And none of the solutions proposed to solve Medicare's problems will have the substantial effects on the increases in costs that need to happen.

I, for one, think that we should abandon the fiction of the Social Security Trust Fund. But assuming that it is retained there are several ways of resolving the problem (insofar as there is a problem):

1. You can increase the FICA rates. This is regressive and will become more so as the benefits paid out of the Social Security Trust exceed revenues.
2. You can increase the amount of income that is subject to FICA by raising (or eliminating) FICA max.
3. You can expand the pool of workers contributing into the system by putting some of the workers who are currently exempt from FICA into the system.
4. You can expand the pool of workers contributing into the system by importing lots of workers (as Europe is doing).
5. You can borrow to make up the deficit.

We can also attempt to reduce the liability by means testing, raising the Social Security retirement age, etc. all of which I oppose for reasons that would appear to be outside the scope of this thread. I agree with Brad DeLong's reasoning on the futility of private accounts. I suspect we're going to do some of all of the above.

[Sebastian Holsclaw]

"We have not, however, begun to face the tough fiscal problems in other areas of the budget. There is no reason at all to think that we have to fix this problem by changing Social Security."

I agree with your first sentence absolutely. The reason to think the problem should be addressed by making changes in Social Security is that it is one of the largest portions of the budget. I can't find the numbers right now, but last I checked Social Security was 1/6th of the budget and projected to grow to almost 1/4 within 15 years. That is a huge outlay.

[hilzoy]

Sebastian" ""If Social Security really is just part of the general treasury, then what we have is a general fiscal problem, not a 'Social Security crisis'."

This would be true if Social Security were not sold to the American public as a self-funding retirement package. As it is now, it get an emotional attachment that other taxes don't have. People feel they are 'paying into it' when in fact they are not."

Well, as I said, IF it is supposed to be self-funding, then I do not see why when it runs a surplus, that surplus can be drained away into general treasury funds and never repaid, but when it runs a deficit, suddenly there's a crisis. It ran a surplus. It lent the money. The general treasury, to which it lent the money, should pay it back.

[Dave Schuler]

As the peroration to my previous comment let me mention that regardless of the strategy we take on dealing with Social Security there's going to be a dramatic reordering of federal spending priorities over the next twenty years.

[Dave Schuler]

Bruce Wilder is absolutely correct that Medicare is a more pressing problem than Social Security. Medicare is already in deficit. And none of the solutions proposed to solve Medicare's problems will have the substantial effects on the increases in costs that need to happen.

I, for one, think that we should abandon the fiction of the Social Security Trust Fund. But assuming that it is retained there are several ways of resolving the problem (insofar as there is a problem):

1. You can increase the FICA rates. This is regressive and will become more so as the benefits paid out of the Social Security Trust exceed revenues.
2. You can increase the amount of income that is subject to FICA by raising (or eliminating) FICA max.
3. You can expand the pool of workers contributing into the system by putting some of the workers who are currently exempt from FICA into the system.
4. You can expand the pool of workers contributing into the system by importing lots of workers (as Europe is doing).
5. You can borrow to make up the deficit.

We can also attempt to reduce the liability by means testing, raising the Social Security retirement age, etc. all of which I oppose for reasons that would appear to be outside the scope of this thread. I agree with Brad DeLong's reasoning on the futility of private accounts. I suspect we're going to do some of all of the above.

[Dave Schuler]

There's another point that I've never seen addressed by anyone who proposes either forced savings schemes or schemes for motivating increased savings by the American people as a method of dealing with the liability side of the Social Security issue. Our economy is dependent on domestic consumer spending. Savings come from somewhere. As the rate of savings goes up the rate of consumption necessarily goes down. This will have a depressive effect on future economic growth. Not just here but worldwide. We're not the only ones whose economy is dependent on U. S. consumer spending.

[radish]

I'd really like to see hilzoy's point addressed seriously please. Emotional attachment and bookkeeping are two different things.

When I was a pup on my first foray into corporate capitalism I spent the first year alternating between borrowing money from the corporation when I was broke and postponing my paycheck when the corporation was broke. And I wasn't the only one either. We all agreed that the corp was for our benefit and not the other way around but that we would make sacrifices when necessary.

But if I had created an account called "radish rent" on the corporation's books or even (for whatever reason) written a personal check to pay company rent my partners, which included a couple of grizzled veterans of corporate warfare, would have (quite rightly) been very upset, and might well have kicked me out for screwing up the books. Even if it all worked out in the end.

For the purposes of this conversation, either SS is part of general funds or it isn't. Let's decide, and proceed accordingly.

[Sebastian Holsclaw]

"Well, as I said, IF it is supposed to be self-funding, then I do not see why when it runs a surplus..."

I'm not saying that it functions as self-funding, I'm saying that it is sold to people as self funding. Furthermore, we shouldn't have taken from its surplus to fund other ongoing programs.

[fdl]

"sentimental attachment" is needed for an intergenerational program. that's a reason it was called a Trust Fund.

if i thought that all voters were as rational as the posters on this thread, i wouldn't mind turning soc.sec. into just another general revenue program. but they ain't; given all the irrational talk about privatizing doesn't give me confidence that politicians of either party are trying to be rational.

so we're stuck with a somewhat inefficient program. inefficiencies cannot be completely solved. they could be addressed by: removing the cap on which contributions are calculated; and counting distributions as taxable income.

now medicare, that's a hard problem. huge sums are spent on treatments within six months of death. but who among us wants to start advocating for eliminating extraordinary measures and using just palliative measures, if you're not sure the patient will be dead in six months.

ugh. too depressing. how 'bout them yankees?

Francis

[Sebastian Holsclaw]

Radish, as far as I'm concerned Social Security is a general fund program which has been misleadingly sold as a separate entity.

I speak of the 'Social Security Crisis' because it is becoming a huge portion of the budget--inappropriately in my mind. It was originally a sidenote for the government, and now it has become one of the biggest outlays from the government.

If you have budgetary problems, and we do, looking to a huge portion of the budget (about 1/6th now, 1/5th in the near future) makes sense. It especially makes sense because it is defended as a safety net, but functions as a wholesale redistribution scheme.

It is a Social Security Crisis because it theatens to crowd out almost all other forms of government spending. If I spent 1/5th of my income on a car payment, it would make sense to consider getting a cheaper car. If I spent more on my car than I did on housing, my priorities would be out of whack.

My judgment is that the government does not need to take money away from middle class workers for the retirements of rich and middle class people who ought to have been able to provide for themselves. If we want a safety net, make one.

[Sebastian Holsclaw]

"so we're stuck with a somewhat inefficient program. inefficiencies cannot be completely solved."

Somewhat inefficient is ok. Paying over half the benefits to the middle and upper classes to protect a safety net isn't.

[felixrayman]

Savings come from somewhere

So does investment.

[JadeGold]

The whole trust fund issue is a red herring. The SSTF is backed by US Treasury securities; if we are to assume US Treasury securities are worthless--we have a much, much larger problem than worrying about SS.

As James K. Galbraith noted recently it would make more sense to claim the Pentagon is running out of money than to claim SS is going bankrupt.

justtalking raised some important points above; the fact is the trustees use abysmally low rates of economic growth to make their forecasts. In fact, for the past 75 years, the US economy has grown at average rates exceeding the rates needed to keep SS solvent indefinitely.

Yet, when you speak to privatization-advocates--they seem unwilling to use the same low rates of economic growth they use to project SS's demise. Why? Because their rationale for privatization disappears like vapor.

Frankly, the pro-privatization folks may be heading down a road for which the destination is undesirable. You see, there's a moral component to SS; our society has determined it desirable to provide a certain, guaranteed minimum benefit for the aged, parentless children, and/or disabled. In a democracy, we're able to make a determination--via the political process--as to what and how much this minimum benefit ought to be.

Directly.

Bringing the stock market into the equation may necessitate having the Govt. subsidize certain industries or companies in order to meet the moral component of a certain benefit for the elderly and disabled. Anybody thinking this is a far-fetched scenario should read up on "widows and orphans" stocks. Such stocks (usually utilities) were excluded from federal and state regulation and often adjusted rates, not out of market pressures, but in order to maintain a certain dividend.

[felixrayman]

I speak of the 'Social Security Crisis' because it is becoming a huge portion of the budget

Perhaps you should speak of the 'budget crisis'.

You are trying to pass off ideological opposition to Social Security as some sort of fiscal restraint. It isn't working. Kevin Drum is exactly right here:

"If Democrats and Republicans really wanted to "fix" Social Security, they could do it in about a week of good faith effort — and then move on to other, more real, problems".

According to the trustees report, doing nothing until the year 2020, and then, if conservative estimates of growth have proven true, raising the contribution rate by 1.5% for employers and workers completely solves the problem. If more reasonable rates of growth have occured? Worry about in 2050, if then.

That is not a crisis, in any way, shape, or form. That an administration would be so completely incompetent as to cut taxes at the same time as entering into expensive and lengthy foreign wars...that's a crisis. Social Security? No.

[radish]

Radish, as far as I'm concerned Social Security is a general fund program which has been misleadingly sold as a separate entity.

Ah, thank you. I confess that that strikes me as having some awkward political and social consequences, but it helps me understand where you're coming from.

So given that SS is part of general funds, how do you expect to solve the kind of political problem that juststopping was talking about? If SS payouts stop, a lot of people who have been told they won't will have to be placated somehow.

[fdl]

is there any analysis as to who receives SS benefits, and what percent of the household budget those receipts comprise?

more simply, just how inefficient is SS?

Francis

[John Thullen]

Sebastian:

I thought I made it clear that you were not the one making the "I don't care about the poor" argument.

But there are plenty of people who will. And Ronald Reagan and his even more radical ideological heirs have proved the "safety net" issue can be demagogued by the Republican Party. It will be a long time before many in the Republican Party stop conflating "safety net", "welfare", redistribution of income". That you have is a sign of progress but the ideological demagoguery appealing to baser motives has gone on for too long and is too deeply ingrained for me to trust the Republican Party with systemic change to this system.

Take Social Security away from higher income taxpayers (I congratulate their higher incomes) and make them pay SS taxes too?

Then you've got one dead program.

So, again, good post. I did not require you to do any heavy wading.

[JerryN]

Radish, as far as I'm concerned Social Security is a general fund program which has been misleadingly sold as a separate entity.

Not to be snarky, but Sebastian, apparently you consider the FICA tax to be part of this deception?

If ever there was a program that was intended to be kept separate from general revenues and expenditures, this was it. You've got it exactly backwards - it is a separate entity that has been misleadingly rolled into the general funds to mask the terrifying size of the general deficit.

[Bernard Yomtov]

we shouldn't have taken from its surplus to fund other ongoing programs.

Perhaps we shouldn't have taken from its surplus to fund tax cuts either.

I think we can all agree that the government's accounting in this matter has not been wholly honest, but I refuse to accept the proposition that the fog has been used only to promote new programs.

The question I have for you, Sebastian, is this: If you assume that the government is over-extended, then why single out the obligation to SS recipients as the one it should not meet?

[Michael Cain]

fdl: "is there any analysis as to who receives SS benefits, and what percent of the household budget those receipts comprise?"

I cannot lay my hands directly on the reference immediately, but I believe that one study shows that if SS payments were stopped today, the poverty rate amongst the elderly would go from the current rate to something just over 50%. SS payments do keep a large number of elderly above the poverty line.

Another point that no one has made is the "hidden" assumption that if SS payments and taxes were suddenly discontinued, the intergenerational transfers would stop. This seems unlikely to me; more likely that transfers would still occur, but at an individual level. Most people who pay FICA taxes today have one or more elderly relatives who would be living in poverty. Has anyone looked at the potential size of such transfers? Would the individual transfers produce a system that is more or less fair than the group transfers that are occurring now?

[Fabius]

If SS is not self funding then I want to quit paying these regressive payroll taxes. I wouldn't mind an increase in income tax if I could shake the bonds of this opressive tax. Hey, maybe the reason they sell it as a self funding benefit is because it is.

[Sebastian Holsclaw]

"Hey, maybe the reason they sell it as a self funding benefit is because it is."

That would be nice, but then we wouldn't have to talk about it.

[Edo]

sidereal,

"...Although one might reasonably argue that it is no different from words with redundant affixes like debone and unravel, it has been considered a blunder for decades and will probably continue to be so."

from the link you provided. I suppose it is a word, but can't for the life of me understand why you would chose to blunder so.

[sidereal]

"can't for the life of me understand why you would chose to blunder so."

von, the God of Grammar, could have told you that 'you would chose' was an inevitable consequence of linguistic demagoguery.

It's clear that it's considered a blunder by some, including yourself. That does not ipso facto mean that it is a blunder. In fact, irregardless occupies a unique semantic nook which I am more than happy to itch.

[TomR]

Nobody said we don't have a national debt problem, and that part of the national debt is owed to the Social Security system.

Social Security is paying for itself nicely and is not in crisis. I think you got that part of it. I think you even understand that social security and medicare are separate programs with separate fund, even though you tried to obscure the difference in greenspanian fashion.

But you are buying into the 'so the obvious way to cure our debt problem is to make social security recipients pay for it'. Uh, no, that again is Greenspan's plan. Social Security did not cause the debt problem, it merely financed it.

Pretending that other bond holders will not notice if the US Government defaults on bonds held by an internal agency is somewhere outside the reality-based circle on the Venn diagram.

Actually, some people have maintained that there is no debt problem (didn't Reagan prove that deficits don't matter). It is possible for them to think that because they are planning on undermining social security before the bill comes due.

You should not help them.