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December 07, 2004

Comments

Social Security does not ensure our way of life, Edward. Nor is it "irrational greed" to perhaps acknowledge that people could be taken care of in their old age with a better return on their money. Meanwhile, while Bush's tax cuts were inadequately targeted, I do not think it's in our economic best interests to essentially preclude any tax cuts (for the middle class, let's say) for all time so that we can continue to fund a program that takes money from poor people and gives that money to old people regardless of their need. This is completely absurd.

Nor is it "irrational greed" to perhaps acknowledge that people could be taken care of in their old age with a better return on their money.

Again, SS is not a retirement plan for the elderly. There is also a component of SS which would help you and/or your family if you died or became disabled.

And a guaranteed benefit beats the heck out of the returns you'd get if you invested unwisely or the market goes south at the time you wanted or needed to retire.

I also question whether you'd get a better return on your money once the various management fees are factored in.

Again, SS is not a retirement plan for the elderly. There is also a component of SS which would help you and/or your family if you died or became disabled.

Who cares? I have life insurance - stop giving me these ridiculous entitlements.

And a guaranteed benefit beats the heck out of the returns you'd get if you invested unwisely or the market goes south at the time you wanted or needed to retire.

Would you let people decide how much risk they would like to take with their money, insteading of mandating a 100% safe investment with a return worse than most bonds or CDs?

I also question whether you'd get a better return on your money once the various management fees are factored in.

I question whether you could possibly be serious.

The problem with the "we only need to raise taxes a little to save SS indefinitely" line is that they peddled the same line twenty years ago. Krugman himself acknowledges this in his column, when he describes the Greenspan-engineered tax increase of the '80s and says that it wasn't big enough.

Now, presumably the size of that tax hike was calculated based on the best long-term projections of program costs, economic growth, etc. available at the time. But those projections, like virtually all long-term fiscal projections made by the government, turned out to be wrong. (Medicare cost projections have, notoriously, been even worse than the SS ones).

So: why should we believe that this time the "it's no problem, we just need another little dinky tax hike" people are right? Why should SS be an exception to the general pattern that prevails in entitlement programs, of costs continually exceeding expectations and requiring new, unanticipated infusions of cash?

Also, even if you believe that *some* minimal degree of redistribution is needed to stop poor people revolting and thus preserve the general security of property, it does not follow that anything like the *current* degree of redistribution is required. Why not, as a tiny start, at least index SS benefits to price inflation only rather than to wage growth? If a modest tax increase would really go a long way to restore fiscal health, so too, surely, would a modest restriction of benefit growth; and somehow I don't see such a change resulting in lawless marching armies of the destitute.

Critics of social security do so mostly on the basis of misrepresentations. A good example is Jonas Card's description of social security as "a program that takes money from poor people and gives that money to old people regardless of their need."

An accurate rephrasing of this misconception would be that social security is a program where people working today pay taxes so that people too old, sick or disabled to continue working can have some modest amount of income. A caveat should be added that the taxes people pay today also pre-refund a portion of their own retirement income through 2052.

Any solution for Social Security can easily be had with a very modest tax increase between now and then.

Who cares? I have life insurance - stop giving me these ridiculous entitlements.

Raise the gangplank and set sail, Cap'n. I've got mine.

Would you let people decide how much risk they would like to take with their money, insteading of mandating a 100% safe investment with a return worse than most bonds or CDs?

I've an aversion to poor, elderly folks--even if they're libertarian.

I question whether you could possibly be serious.

Question away! I keep hearing about these fantastic returns--usually in the 6 to 7% (and higher) ranges--after management fees. I'd ask you or anyone to enlighten me on the kind of dividend or capital gains necessary to see these kind of returns.

Actually, there's pretty good reason to believe that a large pooling of money is going to be more efficiently invested than millions of individual accounts. There are several reasons for this:

Basically, it's in direct opposition to economies of scale. Dividing millions of dollars among millions of accounts means that you have added administrative costs, since tracking million of accounts is harder than tracking one pool of money.

Furthermore, a million 1000 dollar stock transactions accrues far more fees and other administrative costs than a single billion dollar transaction would. (or, say, 10 100 million dollar ones.)

As it currently stands, very little of the cost of social security goes into paying administrative costs, transfer fees, etc, whereas, set up in privatized investment accounts, a much larger chunk of the money would be eaten up by brokerage fees of various kinds.

There's a reasonable case to be made for diversifying the holdings of the Social Security Trust Fund in order to increase the yield of its investments and thus enable either lower payroll taxes or higher payouts to beneficiaries. But if the money is going to be invested instead of just used to prop up the General Fund, it can be invested much more efficiently as one large pool instead of being divided into millions of tiny pools.


I still wonder how many people need soc. sec. For example, if soc. sec. were held to be taxable income, how much revenue would the USG collect on those taxes?

and if we are going to go to a means-tested system, how do we account for illiquid assets? does grandma have to sell her jewelry, or get a reverse mortgage?

Francis

Would you let people decide how much risk they would like to take with their money..

Not entirely, no. Do what you want with your 401(k) or IRA or non-retirement assets. But I think there is a case for controlling what people do with their base retirement assets.

First of all, investment outcomes are generally random (with a positive mean). That makes it certain that some people will do very poorly. Contrary to libertarian orthodoxy, this will not, in many cases, be because of poor decisions but because of unlucky ones. Will we let them starve?

Second, investment seems complicated. Actually, it's not complicated at all. Figure out how much risk you want to take, and divide your assets accordingly. Diversify, buy and hold, minimize fees. That's it. It's the best you can do. Unfortunately there is a fog that surrounds the activity that few can see through. There are charlatans, and semi-charlatans, and just plain bad ideas, everywhere. Most people get taken in, at least a little. Figuring out who to believe isn't that easy. Try my formula on a stockbroker and see what response you get. Who do you believe? How do you decide whether to believe a guy commenting on a blog or someone with a fancy title who exudes financial expertise? (I'm right, by the way). Again, we are talking here about money for basics, not your whole portfolio.

Third, there is a serious systemic risk, using the term somewhat broadly. Markets go down, sometimes for long periods. A cohort that retires after such a period will, by and large, have done poorly. This will surely create political problems. It is often overlooked that the argument "the stock market has returned x% over n year periods," etc. Is only partly applicable to evaluating this risk. Assets build up over time. A downturn that comes as an individual nears retirement (or any time before the individual moves into more conservative assets) will be quite harmful, no matter what the average return over the working lifetime.

What it comes down to is that I think society has a right to insist on certain arrangements to protect itself from having to deal with the consequences of their absence. (I favor mandatory health insurance for the same reason). I think it has a right, to say the least, to provide some protection for the weak and unlucky, even if there is some efficiency cost.

So under the most pessimistic assumptions, SS will run out of money on 2052. (Does this allow for raising the earnings cap? That'd provide a bunch more money without even a "tax increase")

What else is the Administration worried about for 2052? Global warming? Nope. Running out of oil? Nope. Global competitiveness? Nope. Running out of water for agriculture? Nope. Preservation of the environment? Nope. The only oher thing I can see is repeal of the inheritence tax, to allow the formation of enormous European- style family fortunes.

So why are they so worried about *this* issue?

Jadegold,

Raise the gangplank and set sail, Cap'n. I've got mine.

I know it's fun to make everyone who disagrees with you out to be greedy. Listen carefully - I've got mine; so don't give it to me anyway; give it to people who actually need it.

I would like to refuse benefits I don't need so the poor can keep more of their money.

Ken,

Critics of social security do so mostly on the basis of misrepresentations. A good example is Jonas Card's description of social security as "a program that takes money from poor people and gives that money to old people regardless of their need."

Misrepresentation? Does it happen or not? Are the working poor paying regressive payroll taxes? Are wealthy people who don't need benefits getting them anyways?

Bernard Yomtov,

I think it has a right, to say the least, to provide some protection for the weak and unlucky, even if there is some efficiency cost.

But why are we providing protection to the strong and lucky?

I would like to refuse benefits I don't need so the poor can keep more of their money.

You can effectively refuse benefits. Today. There's absolutely nothing stopping you. There are several ways of doing just as you wish.

Of course, you dodged the disability and survivors question.

"Again, SS is not a retirement plan for the elderly. There is also a component of SS which would help you and/or your family if you died or became disabled."

Can we stick to one or another or another rationalization while talking about Social Security? Whenever we want to talk about general retirement we get reminded of its anti-poverty functions. Its main function is as post-retirement income. It also has a function as safety net by providing post retirement income to poor people and it also functions as a safety net for death or if you became disabled.

In my opinion it would be great to fund the safety net. It would also be affordable. We don't need to fund rich people's retirement and we don't need to fund the retirement of the middle class. My objection to Social Security is NOT an attack on the safety net. It is an attack on forcible wealth distribution to people who shouldn't need it.

BTW, John Biles has made some very cogent remarks above.

You can effectively refuse benefits. Today. There's absolutely nothing stopping you. There are several ways of doing just as you wish.

Good. Now I'd rather see the other greedy rich people denied these benefits when they don't need it.

Of course, you dodged the disability and survivors question.

My survivors get the life insurance, as I assume I'll have little use for it. Pay disability to the disabled - that's fine by me. It is simply not right to take real money from working families to pay for a program that doesn't screen out people who are wealthy and doing fine.

The religious worship of FDR's programs prevents principled liberal thought when it comes to this issue.

It is an attack on forcible wealth distribution to people who shouldn't need it.

Nothing 'forcible' about it. Hyperbolic rhetoric.

By John Biles' logic, the government should just make all capital-investment decisions in the country through one giant pool. Who needs those silly stock exchange things with all those traders making their petty little trades every day? Look how well economies of scale worked in Magnitogorsk!

I got pretty well smacked around last time I tried posting, but I guess I'm a glutton for punishment...

Maintenance costs are a good argument in favor of safety net programs. The issue is whether Social Security is a good one.

Social Security right now is what's called a Defined Benefit pension plan, administered by the federal government, funded on a current basis (with some accrual savings we call the "trust fund") through payroll taxes.

The President and many Republicans want to make it into a Defined Contribution program, a la 401k. So whatever I put in and invest on my own is what I can take out. In theory, I can manage my risk profile to maximize the risk/return (Sharpe) ratio, which is what the President touts as the financial upside of such a shift.

JadeGold represents, accurately, that not everyone invests wisely, and fraud can and does (Enron?) happen. So a defined contribution plan can have varying returns that could fall below that of a defined benefit plan, perhaps leading us back to ground zero.

Jonas points out that the defined benefit plan right now is handing out the pension to everyone. That's what a pension does. He suggests that a government program should be in the business of providing a safety net, rather than just managing an OAP. Hence the means testing argument.

Isn't there a logical mix here? Extend access to defined contribution plans to allow upside, but mitigate the downside through providing a means-testing pension for those who don't invest wisely?

And wouldn't that mix of ownership and safety net be furthering the cause of an economically free society, while paying appropriate maintenance costs, so nobody gets left behind?

Arguments as to the efficiency of individual accounts, management fees etc are well-taken, but seem kind of pointless - the market sorts out this stuff. Note that Fidelity Magellan is no longer the leading mutual fund - the identity of the leader makes my point on this front.

"But why are we providing protection to the strong and lucky?"

1. because means-testing is a great way to get a program killed.

2. because effective means-testing is impossible / over-intrusive.

3. because means-testing is irrelevant, because so few elderly have enough income.

i'll bet that there's some truth in each of those.

and i'm still looking for Jonas to answer HOW he proposes to screen for wealth.

Francis

One more quick objection-handle: Extending DC options really just means increasing the opportunity for deferring taxes on income. So even if you stick the retirement contribution in the bank (or under the mattress) you still wind up with more dough than doing the same with your take-home pay. Nobody has to "play the market." That's true of 401k, IRA, etc (though the mattress option per se usually isn't available).

Bernard and Jadegold: your comments illustrate a fundamental streak of half-acknowledged paternalism in the defense of entitlements. The underlying sentiment is: "we can't let people fail, at least not too badly, because that would be icky." This inevitably runs up against the fact that all real freedom must include freedom to fail. The philosophical question then becomes: why should the aesthetic revulsion of the paternalists at the sight of failure be sufficient justification for them to restrict the freedom of others? If you don't like to see poor elderly people, you are free to give to organizations that alleviate their poverty; but why should you get to force others to do so?

Now I'll admit that the pragmatic "if we don't, the destitute will rise up in revolution" argument has some force. But its force extends only to the provision of a very minimal safety net indeed, one much less extensive than the current welfare state. Even a substantial cut in the level of guaranteed SS benefits would not result in widespread starvation.

I've got to admit that I'm pretty skeptical about Social Security privatization. I also have a dumb question: wasn't there a proposal back in 1998 (IIRC) to invest part of the “Social Security Trust Fund”? Why was it a bad idea then and a good idea now? Or is it that government investment is bad and private investment is good? I'm not being snarky here. I really want to know the answers.

The underlying sentiment is: "we can't let people fail, at least not too badly, because that would be icky."

Not to all liberals. In fact to many of us who like capitalism, it's much more practical than that: we can't let people fail, at least not too badly, because if we do they'll rise up and take what we have from us. Again, it's a matter of maintenance costs. If you want everyone to play nice and follow the rules so that the more entreprenueral (sp?) among us can make all the money our ambition allows within the law, then you have to pay a certain fee to ensure your fellow citizens aren't so miserably poor they say "screw the law, to the barricades, off with their heads" circa late 1700's Europe. It's a balancing act.

Besides, it's not just "icky"; if you have more than your fair share, it should also weigh on your conscience...provided you have one.

fdl,

because means-testing is a great way to get a program killed.

This is a byzantine, overly technocratic reason for continuing to regressively tax poor people.

and i'm still looking for Jonas to answer HOW he proposes to screen for wealth.

How does the IRS do it? Good lord, it's not rocket science.

Any person with sufficient wealth to pay themselves more than Social Security provides will likely do so, which should be entirely easy to detect.

Edward,

The problem is that you and everyone else defending SS aren't even letting people invest their own money for their retirement and then fail. Giving people a safety net for that makes sense. Making people put their money in SS assuming that they will fail does not.

And "more than you really need" is a better way to put it than "more than your fair share," I'd say. Oy...

BTW, meaux, thank you for the extremely succinct and lucid explanation.

My misgivings about the privatization proposals I've seen are because I see both certainties and uncertainties in the proposals. The certainties include large (unearned) windfalls for fund managers and top management of Fortune 1000 companies. The uncertainties include whether there will actually be any improvement in the retirement circumstances for most people. Not only are there no guarantees that investments will rise universal participation may ensure that they do not. Brad DeLong had an interesting post on this very subject a while back. I don't have a link; go over there and search for “equity premium”.

Jonas,

If there were some way to protect current benefit levels, not increase the deficit, and allow those who choose so to opt out of Social Security, I'd still have problems with it. The value in this program is in the name: "Security"

What if some of those people who were ambitious and optimistic about their chances in the stock market DO fail...do we say, "Bzzzt, I'm sorry, you're plum out of luck...sorry you got to eat Alpo 'til you die now, but thanks for playing"? The idea behind social security came out of this notion that the economy, which we trust our government to steer as competently as it can, affects us all when it tanks...but that if we pool a portion of our collective resources...just a bit, not so much that it makes those allergic to socialist values squirm, we can, as a nation, muddle through any harder-than-usual fluctuations...especially our older citizens, who may not have the ability to pull themselves back up by the boot straps and / or tighten their belts again, and/or take a second job, and/or whatever again.

Why is that so "icky" to some people?

Besides, it's not just "icky"; if you have more than your fair share, it should also weigh on your conscience . . .

What's my fair share?

Edward,

We agree, yet we don't, it's very confusing.

What if some of those people who were ambitious and optimistic about their chances in the stock market DO fail...do we say, "Bzzzt, I'm sorry, you're plum out of luck...sorry you got to eat Alpo 'til you die now, but thanks for playing"?

No, instead of Alpo, you give them Social Security. But not to those who feed Filet Mignon to their dog. It's not exactly a safety net if you wind up in it even when you're already safe, is it?

What's my fair share?

More than you can spend in your lifetime on things you need.

OK Jonas, I'm starting to see where you're coming from...but how do you decide who collects from the pool they've paid into and who doesn't?

Edward: if you reread my comment, you'll note I explicitly acknowledged the "welfare as a means for preventing peasant revolts" argument. And countered that it's an argument for a minimal system only, not for what we now have.

To the people who say means-testing would be too bureaucratically complicated and expensive: you're ignoring the fact that the current system *already* means-tests, and in reverse. Social Security benefit payouts vary according to a formula involving your average annual earnings over your highest-earning 35 years in the work force. So people who earned more (and are thus probably in a better position to provide for their own retirement needs) get bigger welfare checks. This is part of the fraudulent scheme designed to make people think that they somehow own their SS benefits and are "getting out what they paid in".

So if SS just sent everyone over 65 a check for whatever the current minimum benefit level is, regardless of past or present income, that would be both less costly and less bureaucratically complicated than what we have now. It would also provide the same level of protection to the catastrophically unlucky and would be less regressive. What's not to like?

More than you can spend in your lifetime on things you need

Oh, OK. What do I need?

(We've had this conversation before, and I don't think you were able to decide then. Maybe you know me better by now. I just want to know so that when I pass the threshhold, I can start feeling appropriately guilty.)

. . . how do you decide who collects from the pool they've paid into and who doesn't?

I guess at the same time you figure out what they need and what their fair share is.

Sorry to be so glib, but you see what a minefield this can quickly become?

OK Jonas, I'm starting to see where you're coming from...but how do you decide who collects from the pool they've paid into and who doesn't?

The figure cited by supporters of Social Security is that majority of recipients (50-60% ?) need it to survive. Only those people get it. Meanwhile, the 40-50% savings can cut the payroll taxes accordingly on the lower income brackets, maybe even shore up and raise the EITC. That's like $200 billion a year back in the hands of people who need it.

That makes sense to me as a liberal. What we have now does not.

I'm in favor of means testing, but between the AARP crowd (who've fought it off for years) and the hard-right crowd (whose idea of "means testing" is "You can only have SocSec if you'll starve without it") finding a fair income level cut-off is impossible.

Some economists say there's nothing wrong with SocSec that a small - emphasis on small - increase in the salary cap won't fix. The cap is now, what, $88K? Raise it to $92K.

Nick,

Sorry for not reading your comment more closely. The peasant revolting issue is key here...and we need look no further than Peru to see it's still very important. But to address your concern the current system is not minimal enough, there's an equalitarian aspect to Social Security I like (and this is directed partially at Jonas as well). Everyone pays in, everyone receives when they retire...no one is made to feel they're receiving "charity"*...you collect your SS check whether you were a chimney sweep or CEO. I like it...the fact that it happens to help those who need it more is icing on the cake, but no one need feel embarassed by cashing their checks.

Phil,

We have gone rounds on this. I remember now.

Your fair share is exactly what I say it is...everyone else, who seems to understand when they're more fortunate than others, can decide for themselves. ;p

*When my father was unemployed for a few years in the 70s and my brothers and sisters and I were elligible for subsidized lunches I refused to stand in the special line with the other poor kids. My friends all brought their lunch or bought something in the regular line, and I was too proud and stupid to go to the one line, get my food, and then join them at our regular table. So I went without (I was one of the skinniest kids you've ever seen). The fact that I should have been embarrassed to sit there just talking while my friends were all eating didn't occur to me until many years later.

I now understand what an insult it was to my father to refuse to eat the food his previous taxes had paid for during our brief period of need, but the system was also stupid and cruel.

Edward,

I like it...the fact that it happens to help those who need it more is icing on the cake, but no one need feel embarassed by cashing their checks.

We're going to take $200 billion that could help the working poor to avoid embarassment at the check cashing place? Count me out... the scope of this sort of liberalism is far too broad for me.

"The idea behind social security came out of this notion that the economy, which we trust our government to steer as competently as it can, affects us all when it tanks...but that if we pool a portion of our collective resources...just a bit, not so much that it makes those allergic to socialist values squirm, we can, as a nation, muddle through any harder-than-usual fluctuations...especially our older citizens, who may not have the ability to pull themselves back up by the boot straps and / or tighten their belts again, and/or take a second job, and/or whatever again."

Actually no. The idea behind Social Security was to provide money to the very few people at the time who lived long enough to get the checks some money for the last one or maybe two years of their lives. It wasn't a 10-20 year commitment of support for a huge percentage of the population.

If the main purpose of Social Security is to make everyone feel better about the small percentage that actually goes to poor people count me out. And furthermore when I argue against it, I would like to avoid getting labeled as some one who wants to throw old poor people on the street. I'm arguing against spending money on your feel-good part, not the safety net part. Which is to say that I am against the money-wasting and largest portion of Social Security, not the safety net.

Jonas, the IRS does not screen for wealth on any ongoing basis. Just when you die, and only then on the few estates high enough to be taxed. Identifying retired people making less than, what, 50,000 per year would be much more intrusive. Like welfare. Only many more people.

I'd really be interested to know what the effects on the long term are of raising the caps -- I presume that for every $5k of increase, we get some additional length of time that the program is viable. I don't see any intrisic reason that it should stop at 88 rather than, say 125. Other than having it at 88 means that big law firms don't have to give their associates Xmas bonuses, because their checks are bumper up in the last quarter or so.

I'm in agreement with Sebastian that longer lives have changed the original calculus very substantially. I also think, though, that elderly poverty would be much worse today without SS, because people would outlive their savings, no longer are living with their children, and don't have pensions to the degree seen previously. It's a very different world than the 1930s.

Can you get political support for a fully means-tested benefit (assuming you can figure out how to deal with wealth)? Given the generational differences in electoral participation. If the answer is no, then we can all stop wasting time worrying about how we're giving money to a few older folks who don't really need it, and concentrate of figuring out how to make a safety net that'll work.

Finally, I wonder if the people who are saying that the equity market can provide better benefits are making the same assumptions about the economy, and the demographics, as the folks who are seeing the SS system collapse. Generally, if the problem with SS is that there will be too few workers putting in to support the many retirees taking out, we still have to worry about too few working adults buying stock owned by too many retirees. I suppose we can try to get foreigners to buy our stock -- a net improvement because we can't (yet!) get them to pay our taxes, but the same ultimate problem exists. (Sure the equity folks want to assume growth and productivity gains. Fine. Do the same when you figure out how long SS goes forward in its current configuration).

Charley,

Identifying retired people making less than, what, 50,000 per year would be much more intrusive. Like welfare. Only many more people.

I don't think the cutoff would be 50K, I'm guessing it would be lower. Nor do I think it intrusive, when administering a benefit of need, to have that need demonstrated. Meanwhile, if it were intrusive and wrong, I don't think that a difference in scale would ameliorate the wrongdoing, so I guess we'd have to consider giving everyone welfare to avoid this "intrusiveness."

Sure the equity folks want to assume growth and productivity gains. Fine. Do the same when you figure out how long SS goes forward in its current configuration.

Upthread, Nicholas mentioned that SS benefits are pegged to wage growth. So if we assume healthy gains in the stock market and there are commensurate gains in income - it's going to be really, really, hard to grow our way out of the problem. As Nick mentioned, indexing to inflation or some other cost of living index would be vastly preferable.

Might I suggest that you all explore how Australians have handled the situation through superanuation.

As for Krugman, he should have stuck with his book, Tom takes a wack and scores.

Nicholas Weiniger said:
By John Biles' logic, the government should just make all capital-investment decisions in the country through one giant pool. Who needs those silly stock exchange things with all those traders making their petty little trades every day? Look how well economies of scale worked in Magnitogorsk!

Collective pooling of money is not the perfect solution to everything, but it is more efficient in a variety of contexts. Modern corporations are, after all, based on the ideal of pooling one's money in order to produce a level of functioning capital higher than what individuals could do individually (and to remove the liabilities for failure from those individuals.)

I think that in the case of a government program set up for millions of people to pay money in, then get payments back at some future point, that it's much more efficient to pool that money and exploit the leverage and economies of scale, rather than to have millions of accounts run by people who mostly won't know what they're doing at a higher administrative cost.

The point was that if the federal government invests a huge pool of tax money

(a) it has very bad incentives to invest in an economically efficient, as opposed to a politically popular, way
(b) it is likely to distort the rest of the market by the way it invests, because it would be much bigger than the biggest private investor.

Market efficiency is at least as much about information and incentives as it is about administrative cost; while no individual has as much good information as a Federal Investments Board would, collectively they are a much better information-processing machine.

Yes, sometimes, as in a firm, it makes sense to pool resources. But there are market-determined limits to how large a firm can be and still be reasonably efficient; and making a political entity not subject to those limits into a market player is a really bad idea.

Identifying retired people making less than, what, 50,000 per year would be much more intrusive.

Federal means testing is already here to some extent with the Prescription Drug Discount Card program, which subsidizes up to $600 per year of drug costs for qualifying Medicare beneficiaries (< $12,569 for singles, $16,862 for marrieds); more is on the way in connection with the part D benefit in 2006. I don't know how or to what extent CMS is verifying eligibility right now for the card subsidy, though -- the enrollment form simply asks you to enter your total income and sign at the bottom.

There's also means testing for Medicaid and Child Health Plus, but those are state-administered. In New York, anyway, prospective beneficiaries have to submit documentation on income, assets, & expenses showing that they qualify -- pay check stubs, bills, etc.

Yes, yes, of course it CAN be done. We shouldn't pretend that it'll get done for free, though, or at the same cost that the current system runs. And my line, quoted twice above, was a serious mis-wording on my part because, as can be seen from the context, it was about verifying wealth, not income.

Assuming a broad based program, ie more than just elderly on the verge of poverty, but not subsidizing people feeding filet mignon to their dogs, the costs (financial and otherwise -- we're talking about the elderly here, and some people are going to have a harder time with this stuff) of imposing means testing are not inconsiderable. And, as had been said above, politically impossible.

I would be interested in the Australian solution. Care to offer more than a one liner?

I could write a book on this and rant and rave, but let me cut to the chase.

I don't agree with much of what Jonas Cord puts forth on this issue for 611 reasons which I don't have time to go into.

But, if Jonas Cord were named tomorrow to the post of CZAR of reforming SS, I would sit at a table with him and compromise.

But let me know when Jonas gets the nod, because I ain't discussing the issue with the current crowd. They are not to be trusted.

But, if Jonas Cord were named tomorrow to the post of CZAR of reforming SS, I would sit at a table with him and compromise.

John Thullen is a wise, handsome genius, by the way.

But let me know when Jonas gets the nod, because I ain't discussing the issue with the current crowd. They are not to be trusted.

Five devalued dollars says that the Bush plan will make investment accounts without taking into consideration the structural problems that would result - not unlike his tax cuts - and lead to a crisis sooner that some other guy (or gal) will have to deal with.

Meanwhile, Democrats will be too busy making silly "old people will eat Alpo" arguments so their opposition won't be taken seriously by the public - with the possible exception of old people who inexplicably don't enjoy Alpo that much.

Having seen elderly relatives into the grave, I realize how fragile they can be and incapable of conducting business. Will means testing require a widow to make her way out on to icy streets to xerox documents, add up figures that she is too blinded by cataracts to see, and go to the city to wrangle with bureaucrats?

The lucky eldery will have children to fill out the forms; the others might just lose out on their benefits.

"John Thullen is a wise, handsome genius, by the way."

What a nice substantial thread - all hope for the blogosphere is not lost.

Assuming the administration costs of means testing are zero, means tested retirement benefits are the way forward.

Administration costs of means testing are obviously not going to be zero, though. If the USA has to implement a bureaucratic department of similar size and scale to the IRS in order to find out who gets SS payments at retirement or not, that comes with a huge cost in and of itself. It is also worth considering that the IRS is not perfectly efficient; it fails to collect 14% of the taxes it should be collecting each year.

Further, means testing biases against poor recipients because it involves a) an increased level of complexity which can dissuade people from making a claim, and b) it puts the burden of proof regarding income on the claimant, whose task it is to provide details of their own financial situation. Those at the bottom end of the income scale who cannot afford expert assistance -- i.e. those who need it most -- can get confused by the complicated forms and can have a lack of the correct paperwork, leading to delays in claiming which, at that level of income, can be life threatening.

So it's a trade-off. You perpetuate an "unfair" system without means testing because that makes sure that those at the bottom are close to guaranteed the money that they'll need, or you increase the complexity in a way that makes it theoretically more "fair" but actually starts decreasing the numbers of those in need getting the money. Presumably there is some way of introducing a level of simple means-testing into the system in such a way that it minimises the losses, but the initial budgetary costs of implementing even simple reform will not be insignificant.

So, while the sentiments expressed by Jonas and Sebastian are recognised and acknowledged, the unfortunate response is that it's just not that simple. Means testing could be done, but what level of complexity, increased bureacracy, administration cost and low-end wastage is acceptable? There is no system without cost.

How is privatising Social Security supposed to get around the problem of means testing, by the way?

I'm a big believer in the fact that the government waste money, but arguing that the administrative cost of excluding 1/3 or so of the social security population will approach the savings costs seems ridiculous. You would be talking an administrative cost of in excess of $20,000 per retiree to get to that.

Wouldn't it be simpler just to remove the cap on payroll taxes? It currently stands at around $80K, I think. Jonas is right in that payroll taxes bear more heavily on the less-well-paid: that does away with a large part of his objection and increases funding for Social Security, without adding in a complex means-testing program that would tend to raise costs and reduce benefits to people in most need.

It's $87k (for 2003), Jesurgislac. This year it's $87,900. Next year it's going to $90k. I think this is just all cost of living adjustment. I've read that removing the cap altogether doesn't have all that much of an effect, but you've got to be able to look at the numbers to be able to judge whether that's an accurate assessment, and it's far too early for me to go out hunting.

Slarti: I'm sure you're more likely to be correct than I am on the cap - and I feel a bit diffident contributing to this thread anyway. ;-)

We're going to take $200 billion that could help the working poor to avoid embarassment at the check cashing place? Count me out... the scope of this sort of liberalism is far too broad for me.

I suspected you'd pick up on that and spin it that way.

For me it's easy though. The country needs as unintrusive a safety net as possible.

As I understand it (Slarti, etc, feel free to jump in here), Social Security works because it's fair. I pay something in now that just so happens to benefit other people, by providing a safety net for us all, AND I still get it back later when I retire. Yes, I would prefer to have control over my own money now, but there's no guarantee if everyone does that that we'll have any sort of saftey net.

It's the security it provides that makes it valuable...this pool of money that the society at large says is worth the momentary "loan" to the government so that we don't have Calcutta type scenes in our streets...but because we're not a socialist society, we get that money back.

The idea that it's only worth doing if those who pay into it, but then don't later need, don't take out what they paid, will radicalize those who hate its socialist aspect even more I suspect, Jonas. If I understand your approach correctly, we all pay in, but only those who need it collect later...that will, IMO, doom it to failure...it's only the notion that we'll all get back out what we put it that makes it even stomachable for many folks.

I personally think it's not so bad. It needs a bit more cash going forward because of the disporportionate numbers of retiring vs. working Americans, but by raising the retirement age and a few other tweaks, there's no reason to change it drastically .

I'm not jumping in because I'm a little torn between thinking of SS as a retirement program with some caveats for the disabled, etc, and thinking of SS as being better suited as a safety net.

So, I think the real question is, what do we want it to be, and what ought it to be? You know, given that the paradigm under which And what are the ramifications if we convert from a blanket program to something more needs-based?

We all pay into thousands of things that we don't get any direct benefit from. It seems to me that if the only defense for hundreds of millions of dollars of payments is as a bribe to avoid talking about the proper level of safety net funding, we aren't doing something properly. Our approach to most tax issues is that we all pay in and very few of us directly benefit.

The problem is that we are not talking about some small payments on the side, or small expenditures. We are talking about something which is projected to grow to 7% of our GDP and almost 1/3 of the total federal budget in 20 years. That is ridiculous for a bribe to avoid defending social programs.

Not sure I understand what you mean by "bribe" here Sebastian?

Slarti writes,

I'm not jumping in because I'm a little torn between thinking of SS as a retirement program with some caveats for the disabled, etc, and thinking of SS as being better suited as a safety net.

Absolutely correct. It is important to decide what you think it should be.

I find myself confused by Jonas' arguments, for example, because it is not clear to me how he feels about this. My previous lengthy comment, (Dec. 7, 7:01PM) dealt mostly with Jonas' question of why the government should limit the risks people take on. In context, it asumed the existence of some sort of mandatory retirement program where the only issue was the funding mechanics.

But in subsequent comments Jonas, along with many others, seems to favor having no mandatory retirement program at all, substituting a welfare scheme for the impoverished elderly. Whatever the merits of this idea, it raises a different set of issues (many of which are being explored here).

Bernard Yomtov,

I find myself confused by Jonas' arguments, for example, because it is not clear to me how he feels about this.

You caught me being a flip-flopper! To be perfectly honest, I'm not quite sure which way I'd like it to go. After means-testing is implemented, either use that money for mandatory private accounts or reduce payroll taxes. Or do a little of both. I could go either way, haven't heard much argument or opinion to pick at this point.

I can't help jumping in to the means testing aspect of this discussion. I can't see how it would not become highly politicized and expensive to administer. It seems to me that such a system would really need to test wealth and not income, and there would have to be regular re-testing for all current recipients. Or, more simply, one would have to apply every year. Oh, and there would be a lot of room for politcal tinkering of the actuarial assumptions made for "wealth testing". Let me explain.

Given that we're talking about means testing retired folks, their annual income will be comprised of any pension income, return on their investments (in the form of interest, dividends and rent), withdrawals from retirement accounts, plus any sales of underlying assets. If a potential recipient is only tested when applying with no subsequent review, widespread fraud would be possible. Other than direct pension benefits, the other sources of income could be arbitrarily manipulated for the qualifying period to understate income. So, means testing would have to look beyond current just income.

Once you move into some sort of "wealth test", you need to make assumptions about several things. Any reasonable test would assume that a retiree should at some point be drawing down the principal in their accounts, rather than living just off of the interest or dividends. However, the rate of drawdown that is reasonable has to be based on actuarial assumptions about the individual's life expectancy, consideration of potential future health care costs, etc. Clearly, this sort of stuff is ripe for political manipulation.

Then, there's the need for ongoing review. To pick one area, look at housing costs vs. asset value. Let's say that the individual owns free and clear a house in a suburb in the Northeast when they initially qualify. Their relatively high property taxes and utility costs actually may help them qualify. At some later time, they sell the house (which initially cost $150,000) for $600,000 and buy a condo on the Gulf coast of Florida for $150,000. Investing the $450,000 profit and drastically reducing tax and utility costs would then put them above the threshold "wealth test" level to continue to qualify. If you say that they shouldn't have qualified in the first place, note that (a) the original house was not generating any income while they lived in it and (b) had they chosen to move into a condo in the Northeast, they would likely have netted a much smaller profit and not reduced their living costs as dramatically, all of which may not have pushed them over the threshold.

thank you JerryN.

there is a HUGE difference between means-testing the EITC, which measures INCOME in the previous YEAR, and means-testing Soc.Sec., which will require measuring WEALTH, and CHANGES in WEALTH from year to year.

I'm quite serious about the questions asked above. Grandma has her savings tied up in diamonds. Uncle Nick is planning on selling his house and moving to a condo, reaping a huge capital gain to live on. Aunt Betsy is the beneficiary of a living trust set up by Uncle George, who is likely to die soon. Great-uncle Philip has a small pension and is disabled, but lives in a small rental paid for by his kids. Georgina (no relation, but everyone calls her Aunty anyway) is 75 but draws a small salary as a part-time librarian. She works because she likes being around the young kids in the early afternoon and reading stories to them.

Philip's pension, Betsy's trust distributions and Georgina's salary would appear on IRS filings. Who among them should receive Soc. Sec.?

Oh, did I mention this is the Gates family, and Bill has a standing offer to help any of them the moment they need it? but they are all doing ok, because he has arranged for health care insurance for all of them and they otherwise have enough?

cheers,

Francis

It's true that we means-test the elderly to some degree now, but I wonder if this can really be done with any accuracy outside of very clear-cut cases. The elderly represent a different set of problems than, say, middle-aged people.

First you have to decide about a work requirement. Should this be age-based? Some people work into their 70's and beyond. Others don't. And of course this creates the problem of very high marginal tax rates on those who work.


Then you have to look at wealth, not just income. And support from children or other family members, including housing, etc.

Gaming this sort of thing is usually not too difficult.

Seems to me that the issue of the practical difficulties of means testing is rather a red herring -- the various means testing schemes for Medicaid or Welfare are far from perfect, but I don't think anyone here would suggest that we therefore should eliminate those tests entirely. Are those who are pointing out the difficulties saying that because of these potential problems, we should not means-test SocSec, and that in an ideal world where those problems didn't exist, they'd be supporting the idea?

The privatization scheme is merely a welfare program for wall street. God forbid folks on wall street should work for a living, or have to deal with the same issues as the rest of America. One can get a ballpark figure of just how much wall street will be wallowing at the public trough when one does a little arithmetic.

Many IRA plans charge $50 annual fees (all 3 of mine do).
Ballpark figure of 100 million workers "participating" in "privatized SS."
$5 billion annual welfare payments to wall street.

Someone working for minimum wage, full time, will have 1/6 of their annual contribution disappear as wall-street-welfare payments.

When wall street decides the fees aren't enough, jack them up. Just do like the credit card companies: "oh, those terms are locked in a cabinet in a basement with the words 'danger, man eating jaguar, keep out' on the door."

kenB, raising the practical difficulties of means testing is not a red herring when it's in response to those who say that such testing should be implemented. Particularly when they are making claims about the costs of implementation and the amount of the reduction in payments. In particular, Sebastian made this statement upthread:

I'm a big believer in the fact that the government waste money, but arguing that the administrative cost of excluding 1/3 or so of the social security population will approach the savings costs seems ridiculous. You would be talking an administrative cost of in excess of $20,000 per retiree to get to that.

If testing is easily gamed or creates a new, large bureaucracy to support it, or both, then we may exclude far fewer than 1/3 of the population at a cost that may well exceed the savings.

JerryM,

The entire budget of the IRS is $10 Billion. Let assume, for the sake of ridiculous argument, that means-testing is so horribly complex and difficult that it will take as much money and staff as the IRS has for determining the wealth and income of all working Americans. If only one third is excluded through means testing, that is still roughly $120 Billion in annual savings, minus the $10 Billion for the massive, unwieldy means-testing infrastructure.

Jonas -

I couldn't find the full breakdown for numbers more recent than 1999, but the benefits paid to retirees, spouses and children average slightly over 3/4 of total benefit payout, so if we're not talking about the other aspects of SSI (survivor benefits, etc.) were talking about a base number of about $275 billion of which the 1/3 savings comes out to around $92 billion.

Then, let's look at that 1/3 number. A quick google found a BLS paper which looks into income distribution for households aged 65 and above for 1997. At that time, according to a chart on page 24 of that paper, roughly 83% of those households had an income under $50,000. Roughly 70% had incomes below $35,000. Note that, as far as I can tell, these income numbers include Social Security benefits. Assuming that nothing much has changed in the overall distribution and even accounting for inflation, I'd say that the 1/3 number is in quesion as well if we're talking about providing a basic level of security.

So, I'll pick a theoretical savings of 1/5. That may be too high a target, but let's go with that. %20 of $275 billion is $55 billion. Not chump change, but not nearly as impressive as the $120 billion strawman. As to the adminstrative costs, I don't have a clue other than that they are non-zero.

Look, instituting means testing is a fundamental change to the existing system. Let's try to be realistic about the benefits and costs associated with the change.

Quick update to previous comment - I found more recent numbers, so the base looks like around $330 billion so at 1/5 the expecting savings would be $66 billion.

Look, instituting means testing is a fundamental change to the existing system. Let's try to be realistic about the benefits and costs associated with the change.

Fundamental change? Of course it is. But the program is going to have to be cut, and means-testing seems to be the only reasonable way to go about that.

In addition, I'm going to have to do some more research before I come to a conclusion of what the scope of poverty amongst the elderly is, because I'm getting wildly variant figures. I just accepted these various numbers being thrown around for the sake of argument.

And for arguments sake, I can't go along with the "$55-65 Billion a year doesn't matter" bandwagon - that's just the most irresponsible policy talk possible.

Jonas: But the program is going to have to be cut

That is itself a hypothesis that hasn't been proved by any calculation, isn't it?

But the program is going to have to be cut, and means-testing seems to be the only reasonable way to go about that.

Sorry, but this simply isn't true. The forecasts of SS's demise are predicated on extremely low rates of economic growth over 40 years and longer.

If you wish to use these never-before-seen low growth rates--fine. But at least have the honesty to apply these same growth rates to your forecasts for private accounts.

"Jonas: But the program is going to have to be cut

That is itself a hypothesis that hasn't been proved by any calculation, isn't it? "

Not really. Though for completeness we could stipulate that raising taxes to 6% of GDP and almost 1/4 of the entire national budget could do it if you don't mind paying off rich people.

Jadegold, while we are talking about the estimates being off, can we talk about the fact that the estimates on expenditures have been far too low for every five year period in the history of the program?

Jadegold, while we are talking about the estimates being off, can we talk about the fact that the estimates on expenditures have been far too low for every five year period in the history of the program?

Absolutely, Sebastian. But I fear it doesn't help your case much; after all, do you really want to argue SS is running a surplus (and always has) but not a surplus as high as forecasted?

It has run a smaller surplus than forecasted. What does that have to with the price of tea in China?

As one of the folks responsible for hijacking this thread, let me back off a bit.

Correct me if I'm, wrong, but Sebastian, Jonas, and probably others that I've frankly had too much beer to mention are arguing from the perspective that Social Security as such, should just go the hell away. Either it was a bad idea to start with or it has outlived its usefulness. Therefore, any discussion about how to fix it us fundamentally misguided. Am I wrong or am I right?

Wrong, in my case. I'm thinking that perhaps the idea that the thinking behind SS is a bit outdated, and maybe it's a good time to examine what's appropriate for SS to be in these times. Maybe, just maybe, it might be smart to modify SS in some way or other. Then again, maybe not.

Probably I'm going to be accused of wanting to abolish some sacred government institution or other, and that's tantamount to bringing back indentured servitude or even slavery. What the hell, have at it.

Slarti -

It wasn't aimed at you :-)

It seems to me that the discussion of whether the nature and design of Social Security is outdated and needs to be altered is separate from fixing the current funding problem. No one, at least here, is arguing about whether there will be a shortfall. I do think it's safe to say that solutions that radically alter the program will take some significant time to push through Congress, if they can succeed at all. In the meantime, the funding problem will continue. Of course fixing that by some combination of modest increases to the tax rates, raising the cap, adjusting the retirement age and limiting the rate of growth in benefits is just boring.

To make a poor analogy, if your problem is that your car needs new brakes, debating about whether to take it to the dealer or the local mechanic is appropriate, pushing this as a great time to buy a motorcycle - not so much.

Probably I'm going to be accused of wanting to abolish some sacred government institution or other, and that's tantamount to bringing back indentured servitude or even slavery. What the hell, have at it.

I didn't realize Alan Keyes read ObWi! :o

Wow, late to the party again I see, but on the off chance someone woulf like to fix the problem with very little affect on anyone and without raising taxes, we might take a look at wage-indexing.

Never heard of it? Neither had I until I read this article in the SFChron.

Under the current system, retiree benefits are indexed to prices. They also are linked to the average wage in America during the years the retiree worked. In the past half century, the average national wage has increased 1 percent a year more than prices.

All this means that a younger brother who follows the same career path as his big sister will get a larger pension than the sister, even after adjusting for inflation. This system, known as wage indexing, constitutes a social pledge to perpetually increase the standard of living for retirees through the generations.

The simple step of ending wage indexing would wipe out nearly all of America's multitrillion-dollar unfunded pension liability. I'll type it again, just because it sounds so unlikely: Ending wage indexing would wipe out most of the liability.

Oh, I'd been meaning to drop something into this thread, but it's been (dare I say) embryonic. Still, no time like the present.

Edward:

If you want everyone to play nice and follow the rules so that the more entreprenueral (sp?) among us can make all the money our ambition allows within the law, then you have to pay a certain fee to ensure your fellow citizens aren't so miserably poor they say "screw the law, to the barricades, off with their heads" circa late 1700's Europe. It's a balancing act.

So, you're saying that the poor are likely to become murderers and thieves unless we grease their palms sufficiently? I'd think the self-respecting among the impoverished would not take to this idea very kindly.

I realize this is probably just you being realistic about human nature and all, but this isn't France in 1789. At least, not yet.

There's a level of hyperbole in what Edward says, but it's essentially true. Widespread poverty is linked to higher crime rates, and "poor crimes" such as muggings, burglaries and petty thefts have a high social cost in terms of social perception of crime rates -- i.e. the Enron-style White Collar crimes like fraud and embezzlement may hurt many more people (although normal fraud that isn't Enron-scale hurts a lot of people a little bit, it doesen't normally destroy their lives), but they don't make people think that the crime rate is higher. Higher perceived crime rates lead to all kinds of other costs downstream, as do higher actual crime rates/

Bah, hit "post " by accident.

Anyway, a rough guide by law and order people is that there are 15% of any population who won't steal anything no matter what, 15% who will steal anything not nailed down, and the other 70% who are open to negotiations and, if they find themselves "unfairly" poverty-stricken, could engage in illegal activity. A big part of reducing crime is to convince that 70% that crime isn't worth it.

While the USA isn't at a France 1789 situation yet, that's not the only way it can go. It could also go Brazil 1985 or India 1970. If you "reform" the system in such a way in which it creates a new demographic of poverty, you can expect to see an increase in crime rates, which is a social cost that everybody has to bear. It doesn't have to reach outright revolution for there to be a significant impact on everyday life.

I'm pretty sure I haven't seen any plans to create a new demographic of poverty. One might make a case for that the result of various proposals might be a new demographic of poverty, but so far one hasn't, other than by allusion.

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