January 06, 2004

Long-Run Economic Consequences of George W. Bush

John Irons links to Robert Rubin, Peter Orszag, and Allen Sinai writing about how bad America's long-run budget situation is:

ArgMax Economics Weblog: Longer-run Economic Performance: Sustained Budget Deficits: Longer-Run U.S. Economic
Performance and the Risk of Financial and Fiscal Disarray

Robert E. Rubin, Peter Orszag, and Allen Sinai

"The U.S. federal budget is on an unsustainable path. In the absence of significant policy changes, federal government deficits are expected to total around $5 trillion over the next decade. Such deficits will cause U.S. government debt, relative to GDP, to rise significantly. Thereafter, as the baby boomers increasingly reach retirement age and claim Social Security and Medicare benefits, government deficits and debt are likely to grow even more sharply.

"The scale of the nation's projected budgetary imbalances is now so large that the risk of severe adverse consequences must be taken very seriously, although it is impossible to predict when such consequences may occur."

Posted by DeLong at January 6, 2004 09:28 PM | TrackBack

Comments

And again: "...it is impossible to know at what point market expectations about the nation’s large projected fiscal imbalance could trigger these types of dynamics..." (PDF page 3).

Let's say the U.S. stumbles into another unilateral policy that makes the rest of the world even angrier: would you care to finance a war you don't even like, and help out the career of an arrogant Yankee politician? With another reserve currency available, can world politics finally kick-off a run on the dollar?

Posted by: Lee A. on January 6, 2004 10:10 PM

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The impact is already starting with the dollar falling because foreigners are unwilling to provide sufficient credit to finance the deficit at current interest rates. At some point, probably this year, the dollar collapse is going to become "unstable" and force rates up sharply.

Posted by: spencer on January 7, 2004 06:04 AM

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A policy of weakening the dollar works in the short term (witness Canada). In the long-term, however, the US dollar would lose its reserve status (unless the US uses its military might to intimidate its allies, OPEC, Russia and China into following its will). Ultimately, China (if not Russia) should be strong enough economically and militarily to resist and they would then allow their foreign policy to be determined by strategic rather than trade considerations (unless the US pre-emptively strikes to prevent them from doing this).

Posted by: Advanced Calculus on January 7, 2004 06:24 AM

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I have a hunch that trend growth will rise to above 5%. If that is the case a lot of this will work itself out. In fact, I think Bush avoided absolutely disastorous economic conditions because he was bolstered by outrageous productivity gains. The shame is how much better we could be doing. If I am correct, Social Ssecurity will still work fairly much the same, although adjustments for cost of living will need to be made. But if I am wrong about trend growth, we are in serious trouble. And not many people seem to think I am right.

Posted by: theCoach on January 7, 2004 06:32 AM

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The thing I worry about is that the probability of a long-term terror threat, combined with the Republican Party's willingness to demagogue and exploit the threat for political purposes, combined with their having thrown fiscal prudence to the winds in favor of vote buying, will ensure us a string of irresponsible presidents in the George W model.

With a Republican demagogue in the presidency, and his party's control of Congress, the system cannot say no in the short term to warfare undertaken for domestic political advantage and reckless fiscal policies. How many presidential terms is it going to take to get another Clinton?

Posted by: BobNJ on January 7, 2004 06:51 AM

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One would think that this was something new. The point of large deficits is to make it so that the social spending that the neocon's detest can not be made. If we have deficits as far as the eye can see then we can not spend on housing for the poor, improved healthcare/healthcare system for all, improved infrastructure, education for the masses, opps for our nations children. This is the same stragety that Reagon used in the 1980's, it only took 8 years or so for spending to become normalized and social spending to begin and that was because the costs of defense started to become less and less as the cold war ended and a peace dividend was received.

The neocon's feel that the only purpose for the federal government is to pay for the national defense and for foreign policy and that by starving the federal government from funds you can reduce the size of the federal government and push all of the cost to down to the states where the states can then make the decision as to what they think their citizens want or need. By the way Norquist was quoted in the WSJ yesterday lauding the Bush tax cuts and asking that they be made permanent and added to he really wants to starve the fed.

This is the failed Reagon revolution all over again, after all it didn't work the first time so let's try it again and hopefully it wil work this time even though the Republican controlled CBO showed that it won't with non-static budgeting and all.

Posted by: KArl on January 7, 2004 07:41 AM

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-Advanced (to what level?) Calculus

The role of the military showed up recently in a surprising piece from a Chinese op-ed. The gist of it was that a clash between Europe(!) and the US was coming and that China should be prepared. 'Could not locate the original so you'll have to suffer Bonner:
http://www.freebuck.com/articles/bbonner/031205bbonner.htm
It's at times like this that I wish I had a stronger interest in Star Wars or Monday night football or ?...anything that might get me back on the bus of common discourse. "Pre-emptive strikes"? Tell me you're just kidding...sarcasm right?

Posted by: calmo on January 7, 2004 07:43 AM

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Robert Samuelson managed to review the current and looming fiscal crisis in WaPo today, without so much as mentioning the Bush tax cuts. Remarkable performance.

Posted by: SqueakyRat on January 7, 2004 10:34 AM

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We have a ton of discussion about the looming deficits and long-running effects and so forth, and what seems to me to be a total absence of the numbers we need to evaluate it.

Like...what are the projections for federal spending over the next five or ten years? What part of that is debt service? What are the projected tax receipts for the federal government? What rate of growth in the economy is necessary to produce tax receipts that will halt the expansion of the deficit?

That last one is really the key figure. The GOP says we can grow our way out of all of our problems. Fine -- maybe we can. What's the sustained growth rate we need to achieve in order to do this? Why can't I find that number?

Posted by: Ross Judson on January 7, 2004 11:12 AM

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"The GOP says we can grow our way out of all of our problems."

The GOP is lying. This problem is not an accident or a mistake, but a tactic, a method. Norquist is up front about it.

I offer a thought-experiment. How would you kill Social Security and Medicare? Don't say it can't be done, assume it must be done against the preferences of the people, and then come up with a strategy.

You are looking at it.

Posted by: bob mcmanus on January 7, 2004 11:32 AM

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Robert Samuelson, that apologist for Repub fat cats, had this to say in the WashPo today about social security:
"Abrupt benefit cuts would be arbitrary and unfair. But given baby boomers' role in sanctioning today's indifference and denial, they would be richly deserved."

I wanted to write him a letter to tell him what I thought of his nonsense, but he doesn't accept email from readers.

No wonder.

Posted by: camille roy on January 7, 2004 12:32 PM

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"Abrupt benefit cuts would be arbitrary and unfair. But given baby boomers' role in sanctioning today's indifference and denial, they would be richly deserved."

Yuch!

Posted by: anne on January 7, 2004 12:43 PM

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Re Robert Samuelson's comment:
And what is the chance of any drastic cuts (at least formally, as opposed to real cuts regardless of what the legislation says) when retired or soon-to-be retired baby boomers dominate the voting population?

Much of the U.S. has always been hostile to any social insurance policy whatsoever. Which may be why it was originally kind-of-sort of disguised as a conventional funded retirement insurance plan when implemented. And that is maybe why a couple of my elderly friends (who love GW Bush) argue with me when I try to explain to them that their social security payments come from a government program.

Or why there are hysterical charges that it is a Ponzi scheme?

Or people insist, against all evidence, that the privitization of public insurance plans in Chile was not accompanied by real benefit cuts?

Or that the aveage performance of the stock market over 50 or 70 years has any relevance to individuals in their 40s 50s who have 20 to 30 year time horizons? (Care to be relay on previous stock market performance if you were 45 years old in the late 1960s and trying to save for retirement with any kind of private account?)

I think that there is so much gut-level and subliminal hostility to any kind of social insurance among people in the US that many cannot discuss the subject rationally. Not even supposedly reasonable, kindly-old-common-sense uncle type columnists like R. Samueslon.

Posted by: jml on January 7, 2004 01:05 PM

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KArl wrote, "The neocon's feel that the only purpose for the federal government is to pay for the national defense and for foreign policy and that by starving the federal government from funds...By the way Norquist was quoted in the WSJ yesterday lauding the Bush tax cuts and asking that they be made permanent and added to he really wants to starve the fed."

Is this really neocon policy, or is it Republican policy? I thought neocons were focussed, first and foremost, on foreign policy. And I doubt Norquist is a neocon (though perhaps you're not claiming he is); given his views, I'd term him an anarchist.

Posted by: Stephen J Fromm on January 7, 2004 02:01 PM

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"Is this really neocon policy, or is it Republican policy?"

Officially, starve-the-beast was not neo-con policy. Of course, many of the original neo-cons were defecting Dems or even lefter. Irving Kristol. I currently don't know of any Democratic neo-cons, though I would welcome enlightenment.

Whether the neo-cons or religious right or Wall Street libertarians are in charge of the WH or Republican party, your guess is as good as mine. I suspect they trade off daily, with the libertarians getting only Sunday.

Posted by: bob mcmanus on January 7, 2004 02:43 PM

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What would happen if we did "adjust" Social Security and Medicare rather than just tax the rich a bit more to pay for them? What would be the effect on the economy and society to reduce the incomes and health care of that many elderly?

I know, the libertarians are going to say the elderly and sick are "unproductive" and it is a waste of resources to feed and keep them alive anyway, but we don't exsist (yet) just to serve the economy.

Posted by: Dave Johnson on January 7, 2004 02:45 PM

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jml asks, "Or why there are hysterical charges that it is a Ponzi scheme?"

Social Security has been called a Ponzi scheme because Social Security *is* a Ponzi scheme.

A Ponzi scheme is a scheme by which word of mouth from initial "investors" causes others to "invest." But since the money is simply transferred from the later "investors" to the earlier "investors," the scheme eventually collapses, when not enough new "investors" can be found. The later generations of "investors" lose money.

That is *exactly* what Social Security is. The fact that there is NO Social Security "Trust Fund" (i.e., that the "Trust Fund" consists of promises to tax, not assets

I have done this before, but I renew my challenge to Dr. DeLong...or Paul Krugman, or Mark Weisbrot, or anyone else in the world:

1) Be honest, and admit that Social Security--at least as it has been operating throughout its entire history--really is a Ponzi scheme. Admit that the Social Security "Trust Fund" is a sham. Admit that the "Trust Fund" does not consist of anything more than promises to tax; it consists of a record of *obligations,* not assets:

http://www.socialsecurity.org/faqs.html#3

http://www.conginst.org/socialsecurity/PROBLEM/myths.html

2) Claim that Social Security has NOT been operating as a Ponzi scheme, and debate me. My place (see my weblog URL above) or yours.

http://www.ourfuture.org/issues_and_campaigns/socialsecurity/resources/op_eds/readarticle110.cfm

Posted by: Mark Bahner on January 7, 2004 02:58 PM

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Oops. Should have previewed before posting, but it's late, and I want to get home for dinner. I wrote:

"The fact that there is NO Social Security "Trust Fund" (i.e., that the "Trust Fund" consists of promises to tax, not assets..."

...but didn't complete the sentence. It should have been completed some way like:

"The fact that there is NO Social Security "Trust Fund" (i.e., that the "Trust Fund" consists of promises to tax, not assets) is critical aspect of why it's a Ponzi scheme."

Posted by: Mark Bahner on January 7, 2004 03:05 PM

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Mark,
Everybody knows that the government provides a benefit to retired workers. Everybody knows that the government taxes current workers. If you were to have a debate, it would be a debate about semantics only.
Joe

Posted by: joe on January 7, 2004 03:53 PM

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Mark:

Correct me if I'm wrong but did not Ponzi make claims that the funds he was accumulating were generating enormous returns when in reality those returns were zero? Social Security, however, does generate the returns from the real interest on government bonds (yea one can try to ingore that the general fund's debt has an obligation through the usual accounting gimmicks) and to my knowledge the SS Administration has never misrepresented those returns. Maybe the pay as you go logic was faulty, but this is a far cry from the fraud committed by Ponzi.

Posted by: Harold McClure on January 7, 2004 04:00 PM

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Is Social Security any different than an ancient king awarding part of the granary to the old folks? Is it still a Ponzi scheme if it is NOT a con, ie. if it is possible for anybody to find out its structure, and how it works? Are there any sentient current recipients who are unaware of this? Did they gladly pay into it in their working years? Is the Social Security account currently in surplus? Could it be used to buy assets? Can it be amended to survive into the future? Is the Social Security surplus now being used to cover general expenditures? Did tax cuts lopsided to the wealthy help create the budget deficit? Was government spending on corporate welfare decreased, or increased?

The real question is not the "Ponzi-like" structure of Social Security but why we're hearing hysterical assertions about it. It's the dreaded bogeyman of socialism--as if free markets ever survived lonestanding! It's needless, ridiculous rhetoric.

Posted by: Lee A. on January 7, 2004 04:07 PM

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Mark -

Doesn't the Social Security trust fund consist of Treasury bills? Are these not hard assets? Isn't defaulting on a Treasury bill owed to Social Security the same as defaulting on a different Treasury bill that is owed to someone else?

Posted by: Dave Johnson on January 7, 2004 05:15 PM

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A Ponzi scheme promises earlier investors returns derived from enrollment fees, or initial investments from later investors. The size of the promised returns are based on unsustainable rates of enrollment. Once the pool of potential enorollees is exhausted, there are no more returns at all, so the later investors get nothing.

Social security is a retirment insurance program that is financed by transfering funds from the currently working generation to the currently retired generation. When the currently retired generation dies, they are not entitled to any more money. When the currently working generation retires, their retirement benefits are paid by the new currently working generation. So the pool of new enrollees does not run out.

Unless the baby-boomers are last generation to do any productive work in the US, I don't see any basis of comparison at all. Do the people who say it is a Ponzi scheme know something about a coming apocalypse that others do not? Or are they concerned about the last generation to do productive work in the US in the distant future, hundreds or thousands years from now?

The kind of cash flow problems experienced by social security are in principal no different from those that occur in privately, and supposedly actuarily sound, retirment insurance programs when unexpected demographic changes occur.

Early private and public attempts at life and retirement insurance where subject to Ponzi like phenomena whenever the contract design allowed people who entered the risk pool early a chance to cash out with high returns. That is why any private retirement or life insurance industry has to be very heavily regulated, otherwise it is liable to go Ponzi on you.

So I think this whole debate is silly. Either you have a public system, or you have a private system that is so extensively regulated that the same kind of issues will arise. By "same kind of issues" I mean controls on the acceptable risk-return trade offs, individual incentives conflicting with risk sharing, flexibility in benefit design versus people who are lucky deciding to cash out (or from another perspective, welsh out on risk pool once they see that they are lucky), certain cohorts of enrollees getting a higher return that others.

The current administration had a panel of experts who attempted to find a way to move social security to a private system that would increase returns, provide individual flexibility, not reduce currently promised benefits, and also finance the cost of transition (which are large, not small). They could not come up with a plan, as I remember.

Posted by: jml on January 7, 2004 05:32 PM

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Sorry, I forgot to add that there is one important difference between social security and private insurance. That difference is that social security benefits are designed to redistributed wealth from the richest to the very poorest. Some people may object to that, but redistribution is not the same as a Ponzi scheme.

It would be helpful if people who are critical of social insurance programs would be more specific and more reasonable in their criticisms. Then we could have a more productive discussion.

Posted by: jml on January 7, 2004 05:57 PM

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"Mark, Everybody knows that the government provides a benefit to retired workers. Everybody knows that the government taxes current workers. If you were to have a debate, it would be a debate about semantics only."

No, a debate would be about fantasy versus reality. The fantasy is that there is a "Trust Fund" that has assets in it. The reality is that the "Trust Fund" consists only a record of promises. And it is clearly settled *law* that Congress does not have to honor those promises.

That's what the debate would be about. The law versus the fantasy of what people would LIKE to be true. That's why I'd win.

Posted by: Mark Bahner on January 7, 2004 08:34 PM

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"Mark, Everybody knows that the government provides a benefit to retired workers. Everybody knows that the government taxes current workers. If you were to have a debate, it would be a debate about semantics only."

No, a debate would be about fantasy versus reality. The fantasy is that there is a "Trust Fund" that has assets in it. The reality is that the "Trust Fund" consists only a record of promises. And it is clearly settled *law* that Congress does not have to honor those promises.

That's what the debate would be about. The law versus the fantasy of what people would LIKE to be true. That's why I'd win.

Posted by: Mark Bahner on January 7, 2004 08:35 PM

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"And what is the chance of any drastic cuts (at least formally, as opposed to real cuts regardless of what the legislation says) when retired or soon-to-be retired baby boomers dominate the voting population?"

What comes to mind in this regard is that a few years ago the forethinkers of some "young conservatives" organization in Germany proposed to restrict the voting rights for older people, precisely to address this kind of "problem". The problem was worded as seniors have the country in thight grip, and hindering "innovation". One of my first thoughts was, do these guys think they can defy their own age?

Posted by: cm on January 7, 2004 08:41 PM

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Dave Johnson: "I know, the libertarians are going to say the elderly and sick are "unproductive" and it is a waste of resources to feed and keep them alive anyway, but we don't exsist (yet) just to serve the economy."

Some people may think otherwise!

In Germany, health insurance generally covers (occasional) wellness retreats ("Kur"), where people are put in an environment where they are educated about healthy lifestyles, and do generally healthy stuff like exercise, rest, and eating healthy food. My mother wanted to apply for one at age I believe short of 60, and was told her chances are slim "because you are almost at the end of your working life". That was quite revealing.

One rather left-leaning German social democrat (Lafontaine), who is from the Saarland, a border region which is heavily influenced by French culture and lifestyle, coined the phrase when talking about economic and social matters, "in the Saarland, we work in order to live, and in Prussia, people live in order to work" -- I heard an alternative attribution with France vs. Germany.

Posted by: cm on January 7, 2004 08:57 PM

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Mark Bahner: re Ponzi scheme

jml has already provided a more detailed explanation why the Ponzi analogy is flawed than I intended to give, but let me add on more thing.

There is indeed no asset in the scheme (other than fluctuation reserves, which are really just a book asset (?)), but the idea is not (primarily) to accumulate assets, but giving current contributors (of a part of economic production to today's retirees) a claim on a portion of the society's future economic production. As has been discussed in a different thread, this claim is not a "property interest" but rather of a "tacit agreement" form, and the form this is implemented in the current system is that you portion in the total future claim is (roughly) the same as your portion in today's contributions (via the point/credit system).

This system is arguably (and as evidenced by reality) susceptible to fraud and (demographic etc.) problems, but not of a Ponzi kind, but by redefining what the "future share" means in its volume and time structure (i.e. how much you get and when). Let's not confuse this with a Ponzi scheme.

The problem is not that it's a Ponzi scheme, but that future retirees can be "stiffed". But then the question becomes by whom (and please don't nebulously say "the government"), how, and why.

Posted by: cm on January 7, 2004 09:17 PM

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Bush is the long term consequence of a decision in political economy made in the early 1980's.

http://www.bopnews.com/archives/000129.html

Summary: in the 1970's consumer inflation, driven by energy imports, created a series of recessions. The solution was to trade consumer inflation for asset inflation. To generate asset inflation, tax policy was changed, and the US used treasuries to float the boom in asset prices. This selling of paper to buy oil created an investment deficit which has been used to finance oil consumption.

With Bush's election in 2000, the investment deficit has exploded, and the long term consequences of creating, in effect, two dollars, is coming to a head.


Posted by: Stirling Newberry on January 8, 2004 09:44 AM

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People posting on this site keep forgetting how desperately European welfare states are dependent for their political survival on exports to the American worker-consumer.

There is no need to worry: the euro will not replace the dollar. European politicians will make sure of that. It's better than having to explain to their voters why their welfare benefits are being cut yet again.

Posted by: Finnpundit on January 8, 2004 03:05 PM

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Hoy! Are the foreigners already buying US assets towards plugging the budget deficit?

I think they do.

Are they aware that they are thus financing occupation of Iraq?

Are the Saudi sheiks buying US assets aware that they are helping to finance occupation of Iraq?

Some of them probably are.

Are the plain folks in Saudi Arabia aware of this state of affairs?

Probably not.

In the long run, though, more and more people around the world are going to become aware that their better off fellow citizens are financing occupation of Iraq by buying US assets -- even by keeping USD in their portfolio.

(Me too has a ten dollar bill in my wallet!)

Posted by: bulent on January 9, 2004 12:40 AM

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Mr. Bahner writes:
"No, a debate would be about fantasy versus reality. The fantasy is that there is a "Trust Fund" that has assets in it. The reality is that the "Trust Fund" consists only a record of promises. And it is clearly settled *law* that Congress does not have to honor those promises."

Well OK, but I still don't think you win. Suppose that we have a funded scheme so that there is a fund of deposits saved before the event that is supposed to fund retirement ,life , old age medical expenditures, or something else. Suppose the insurance contract allows those who find themselves to be "lucky" sometime before the end of all the insurance contracts expire to pull out of the insurance scheme? It can be quite tricky to write a contract that prevents this. Well, then there are no more funds left for the "losers." But smoothing consumption over time and between the winners and losers was the whole point of insurance to begin with. So as far as providing any meaningul insurance, something with a trust fund and formally has your name on part of it can be just as much a fantasy as the US financing sytem for social security, if it is not properly designed and regulated. Whether there is pot of money someplace with you name on it or not, it doesn't make any difference.

You can save the money before hand, and hope that your projections are accurate enough to assure that the insurance scheme is actuarily sound. Or, You can have the money transfered from current workers to current retirees, and hope that your projections are accurate enough to assure that the insurance scheme is actuarily sound.

Either way, you will have problems with contract design, problems with individual incentives evolving over time and conflicting with the group's originial desire for insurance.

I still maintain that any social insurance scheme that has mandatory participation and has to smooth consumption over long time periods between large numbers of people will have to be so heavily regulated that the same kinds of problems will occur, whether funded or transfer deals.

You can have system where everyone has their own stock market pot. But that will not be insurance, and if people are required to have an account there will be problems. Suppose you were a middle aged investor with a stock market index fund in the late 1960s with a 20 year time horizon, what would your return be at retirement? Would that be what you would expect given estimates of historical average returns. OK, so now we force people to diversify as a function of time to retirement? OK, now we have people disagreeing over what pots the fund should go into. Some one will say that the part of the fund invested in things they do not like is wasted and a fantasy and government boondoggle and a fraud and cheating them.

I think people obsessing too much over the method used to finance social insurance are fooling themselves. If they don't like the idea of social insurance at all, they should just say so, and we can have that argument.

Posted by: jml on January 9, 2004 07:45 PM

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jml (and Mark Bahner): "Well OK, but I still don't think you win." -- Please, guys. This is not a competition. We are here to learn something and gain new insights (and help others at the same), not to score points, are we not? This just a gentle (?) side note.

What jml is effectively saying is that you can be stiffed/screwed/cheated/lose out (you choose) under a private scheme as well as in a collective scheme (Social Security) -- I will avoid the "SS" shorthand due to other connotations henceforth. What, most "private" schemes are collective schemes as well (insurances and mutual funds are pooling money -- and risk -- as well), only not explicitly. Social Security pools over the workforce (more or less), insurances over their customers, which certainly constitute a smaller pool. Also insurances make profits (ever seen insurance buildings, and read about agents' commissions?). The SSA arguably not (but then you can argue; I'm sure it's at a lesser scale).

And BTW, and here I repeat myself and others, Social Security contains also a form of disability insurance, and also will pay out to spouses/children under certain scenarios (and I'm sure many private schemes will be constructed along similar lines?).

"I think people obsessing too much over the method used to finance social insurance are fooling themselves."

Effectively it comes down to some of the working (income generating, but Soc.Sec. is restricted to payroll taxes) generation's output being funnelled to retirees (previous contributors), and some form of "fairness" is imposed by pro-rating benefits according to contribution levels. I definitely agree with the "fooling" part. I'm an amateur myself, but hey, do you know what happens in times of economic and social distress (or heavens forbid a social revolution)? All your contracts may be "adjusted" or voided, or your insurance may declare bankruptcy. It has happened before. On the other hand, I'm pretty sure there will be (at least the effort at) some scheme to render an acceptable way of living to the retired generation, lest this society ceases to exist in its current form. Don't you think?

Generally in economic discussions, I find it useful to abstract from money and look at the underlying flows of goods and services. Money is just the means of exchange. It is important, and the monetary system imposes a lot of constraints, and such has an impact on the "real" trading activity, but it also creates a lot of confusion. Try it, it can be instructive.

I can make out the following potential reasons (and they may sound familiar to some) for distrusting Social Security:

(1) I will be stiffed of payouts (as a retiree)
(2) today's contributions are too high
(2a) I will not receive that much in payouts
(2b) money is being misappropriated
(3) I can manage my finances better than those suckers
(4) the money that I could invest privately is stolen from me by FICA (variant of 1 & 2)

(3) and (4) are probably a bit tendencious. Yet I heard it so often, and in combination with (2b). Guys (and gals), there is a risk. For one thing, your investment may go wrong. (But then who knows what form of welfare they will have when you retire. I can vividly envision some pro-privatizers screaming for collective bailouts when they are screwed -- but let's not gloat; it's a serious matter. Maybe Social Security and welfare will be the same? Some people somewhere are already considering this.) And yes, when you retire, the "evil government" can give your share of GDP to somebody else (whom?). Unless you believe that future retirees will be seriously stiffed (by whom?), what exactly are you worrying about?

(2b) is definitely there, but it's a monetary, not "real" effect, and I'm confident that future obligations will be met by some form of taxation or redistribution.

Regarding demographic factors: that's a valid and terrifying concern. My hope (but I hope it's an _educated_ hope) is that advances in science & technology, and thus productivity, will compensate for it. Otherwise we will be screwed, period. But the prospects are not so bad in my judgement.

Finally, my post always are very long, and I may have to work on my rhetorical skills (specifically presenting more concisely), and others have pointed out the same. Suggestions are welcome, anybody.

Posted by: cm on January 9, 2004 11:55 PM

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"Social security is a retirment insurance program that is financed by transfering funds from the currently working generation to the currently retired generation. When the currently retired generation dies, they are not entitled to any more money. When the currently working generation retires, their retirement benefits are paid by the new currently working generation. So the pool of new enrollees does not run out."

There is another reason to consider productivity growth a national security issue and declare anti-productivity policies treason.

Posted by: bulent on January 10, 2004 12:39 AM

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I also regard the Social Security System as a Ponzi scheme, which in its classic operation begins to fail when the number of retirees withdrawing from the fund exceeds the number of employees depositing into the fund. This process of failure is accelerated by maintaining a relatively constant “purchase power” (increasing rate of withdrawal) to retirees, while capping the maximum contributions derived from the employees. The ‘bottom line” equals the total “unfunded” liabilities accruing to the SSA by the numbers of contributors to the system. As of 2001, the accumulated entitlement obligations owed to all people (including all current workers) who have earned Social Security and Medicare benefits is $12.9 trillion for Social Security and $16.9 trillion for Medicare. When these obligations are combined with the debt held by the public, the total burden exceeds $33 trillion, or 10 times the official debt measure (before adding in the 2003 record-breaking Federal deficit).

Over the years, Congress has applied the “surplus” accruing in the SS fund to the General Fund by way of an exchange of SS receipts for non-marketable U.S. Treasury obligations. Congress has done the same accounting of surpluses in the Highway Fund and every other segregated “User Fee” fund. This accumulation of U.S. Treasury obligation, while constituting an asset to the funds, remains an obligation and claim on the (next generation of) American taxpayers, although it is the actuarial hope that this indebtedness, as and when it becomes due, doesn’t have to be discharged against current earnings, but can be forwarded into the global credit markets against future earnings. But given today’s political economics, this may be only wishful thinking. And indeed, when the SS system was last over-hauled during the Reagan Administration, the deal that was struck depended on the premise that the “surplus” would be used to buy down the accumulated Federal debt, so that when the due date on the “Baby Boomers” retirement account arrived, the Treasury would have adequate borrowing capacity.

But that deal has been abrogated by the same party that instituted it. How do you think G.W.’s offset his tax cuts? He has sacrificed the future retirement benefits of the working class to pay for the current benefits of the wealthy class. And he has intentionally (albeit not admittedly) directed the benefits to the wealthy class, because the “consumption” of the wealthy class will not translate into statistics measured to compute the rate of inflation.

There are two other factors that will distort the capacities of the SSA to meet its obligations. The first is the other public pension system: the Federal Pension Benefit Guaranty Corporation. The PBGC insures 32,500 private, defined benefit pension plans covering 44 million employees and pensioners, and it is about to add to its obligations the pension liabilities of the airline industry after recently adding another steel company. The PBGC, like all private retirement funds, took a beating in the stock market collapse – an unrealized capital loss of $7 Trillion that remains obscured in America’s retirement funds. The PBGC went from a $7.7B surplus to a $3.6B deficit in fiscal 2002, and the deficit added another $1.8B lost in the first quarter of 2003. To address (gloss over) these losses, Congress is now considering accounting gimmickry by way of H.R. 3108: The Pension Funding Equity Act of 2003. And the cumulative losses in the nation’s 401(k) accounts will compel American workers to continue working well into their retirement years, especially as employers convert “defined-benefit” plans to “contribution-defined” plans to ameliorate the level of corporate unfunded pension liabilities. Add up all the unfunded pension liabilities, public and private, here and abroad, and the numbers exceed $100 Trillion. A debt that will not be paid.

The other factor at work is the age old economic reality called “scarcity of resources.” In this case, a scarcity of energy resources, and most particularly oil. There is a dynamic paradigm shift taking place in the global oil market, as demand balances shift to China and India; supply balances shift to non-OPEC producers, especially Russia; and overall, demand exceeds supply by some 40 million barrels per day between now and 2015. Put that into the actuarial equation, along with the concurrent impact on the exchange rate of the U.S. Dollar, as oil producers either demand payment for or otherwise implicitly price oil in Euro, and all those non-marketable Treasury bonds held as assets in the SS fund become worth-less.

We are facing a incalculable but inevitable financial calamite. It is going to impact every industrialized and developing nation. And the body politic will remain in denial to the very end. It will be the defining moment establishing the next Age of Empire (and the culmination of certain other agendas).

Posted by: dc on January 12, 2004 10:06 AM

____

I also regard the Social Security System as a Ponzi scheme, which in its classic operation begins to fail when the number of retirees withdrawing from the fund exceeds the number of employees depositing into the fund. This process of failure is accelerated by maintaining a relatively constant “purchase power” (increasing rate of withdrawal) to retirees, while capping the maximum contributions derived from the employees. The ‘bottom line” equals the total “unfunded” liabilities accruing to the SSA by the numbers of contributors to the system. As of 2001, the accumulated entitlement obligations owed to all people (including all current workers) who have earned Social Security and Medicare benefits is $12.9 trillion for Social Security and $16.9 trillion for Medicare. When these obligations are combined with the debt held by the public, the total burden exceeds $33 trillion, or 10 times the official debt measure (before adding in the 2003 record-breaking Federal deficit).

Over the years, Congress has applied the “surplus” accruing in the SS fund to the General Fund by way of an exchange of SS receipts for non-marketable U.S. Treasury obligations. Congress has done the same accounting of surpluses in the Highway Fund and every other segregated “User Fee” fund. This accumulation of U.S. Treasury obligation, while constituting an asset to the funds, remains an obligation and claim on the (next generation of) American taxpayers, although it is the actuarial hope that this indebtedness, as and when it becomes due, doesn’t have to be discharged against current earnings, but can be forwarded into the global credit markets against future earnings. But given today’s political economics, this may be only wishful thinking. And indeed, when the SS system was last over-hauled during the Reagan Administration, the deal that was struck depended on the premise that the “surplus” would be used to buy down the accumulated Federal debt, so that when the due date on the “Baby Boomers” retirement account arrived, the Treasury would have adequate borrowing capacity.

But that deal has been abrogated by the same party that instituted it. How do you think G.W.’s offset his tax cuts? He has sacrificed the future retirement benefits of the working class to pay for the current benefits of the wealthy class. And he has intentionally (albeit not admittedly) directed the benefits to the wealthy class, because the “consumption” of the wealthy class will not translate into statistics measured to compute the rate of inflation.

There are two other factors that will distort the capacities of the SSA to meet its obligations. The first is the other public pension system: the Federal Pension Benefit Guaranty Corporation. The PBGC insures 32,500 private, defined benefit pension plans covering 44 million employees and pensioners, and it is about to add to its obligations the pension liabilities of the airline industry after recently adding another steel company. The PBGC, like all private retirement funds, took a beating in the stock market collapse – an unrealized capital loss of $7 Trillion that remains obscured in America’s retirement funds. The PBGC went from a $7.7B surplus to a $3.6B deficit in fiscal 2002, and the deficit added another $1.8B lost in the first quarter of 2003. To address (gloss over) these losses, Congress is now considering accounting gimmickry by way of H.R. 3108: The Pension Funding Equity Act of 2003. And the cumulative losses in the nation’s 401(k) accounts will compel American workers to continue working well into their retirement years, especially as employers convert “defined-benefit” plans to “contribution-defined” plans to ameliorate the level of corporate unfunded pension liabilities. Add up all the unfunded pension liabilities, public and private, here and abroad, and the numbers exceed $100 Trillion. A debt that will not be paid.

The other factor at work is the age old economic reality called “scarcity of resources.” In this case, a scarcity of energy resources, and most particularly oil. There is a dynamic paradigm shift taking place in the global oil market, as demand balances shift to China and India; supply balances shift to non-OPEC producers, especially Russia; and overall, demand exceeds supply by some 40 million barrels per day between now and 2015. Put that into the actuarial equation, along with the concurrent impact on the exchange rate of the U.S. Dollar, as oil producers either demand payment for or otherwise implicitly price oil in Euro, and all those non-marketable Treasury bonds held as assets in the SS fund become worth-less.

We are facing a incalculable but inevitable financial calamite. It is going to impact every industrialized and developing nation. And the body politic will remain in denial to the very end. It will be the defining moment establishing the next Age of Empire (and the culmination of certain other agendas).

Posted by: dc on January 12, 2004 10:08 AM

____

I also regard the Social Security System as a Ponzi scheme, which in its classic operation begins to fail when the number of retirees withdrawing from the fund exceeds the number of employees depositing into the fund. This process of failure is accelerated by maintaining a relatively constant “purchase power” (increasing rate of withdrawal) to retirees, while capping the maximum contributions derived from the employees. The ‘bottom line” equals the total “unfunded” liabilities accruing to the SSA by the numbers of contributors to the system. As of 2001, the accumulated entitlement obligations owed to all people (including all current workers) who have earned Social Security and Medicare benefits is $12.9 trillion for Social Security and $16.9 trillion for Medicare. When these obligations are combined with the debt held by the public, the total burden exceeds $33 trillion, or 10 times the official debt measure (before adding in the 2003 record-breaking Federal deficit).

Over the years, Congress has applied the “surplus” accruing in the SS fund to the General Fund by way of an exchange of SS receipts for non-marketable U.S. Treasury obligations. Congress has done the same accounting of surpluses in the Highway Fund and every other segregated “User Fee” fund. This accumulation of U.S. Treasury obligation, while constituting an asset to the funds, remains an obligation and claim on the (next generation of) American taxpayers, although it is the actuarial hope that this indebtedness, as and when it becomes due, doesn’t have to be discharged against current earnings, but can be forwarded into the global credit markets against future earnings. But given today’s political economics, this may be only wishful thinking. And indeed, when the SS system was last over-hauled during the Reagan Administration, the deal that was struck depended on the premise that the “surplus” would be used to buy down the accumulated Federal debt, so that when the due date on the “Baby Boomers” retirement account arrived, the Treasury would have adequate borrowing capacity.

But that deal has been abrogated by the same party that instituted it. How do you think G.W.’s offset his tax cuts? He has sacrificed the future retirement benefits of the working class to pay for the current benefits of the wealthy class. And he has intentionally (albeit not admittedly) directed the benefits to the wealthy class, because the “consumption” of the wealthy class will not translate into statistics measured to compute the rate of inflation.

There are two other factors that will distort the capacities of the SSA to meet its obligations. The first is the other public pension system: the Federal Pension Benefit Guaranty Corporation. The PBGC insures 32,500 private, defined benefit pension plans covering 44 million employees and pensioners, and it is about to add to its obligations the pension liabilities of the airline industry after recently adding another steel company. The PBGC, like all private retirement funds, took a beating in the stock market collapse – an unrealized capital loss of $7 Trillion that remains obscured in America’s retirement funds. The PBGC went from a $7.7B surplus to a $3.6B deficit in fiscal 2002, and the deficit added another $1.8B lost in the first quarter of 2003. To address (gloss over) these losses, Congress is now considering accounting gimmickry by way of H.R. 3108: The Pension Funding Equity Act of 2003. And the cumulative losses in the nation’s 401(k) accounts will compel American workers to continue working well into their retirement years, especially as employers convert “defined-benefit” plans to “contribution-defined” plans to ameliorate the level of corporate unfunded pension liabilities. Add up all the unfunded pension liabilities, public and private, here and abroad, and the numbers exceed $100 Trillion. A debt that will not be paid.

The other factor at work is the age old economic reality called “scarcity of resources.” In this case, a scarcity of energy resources, and most particularly oil. There is a dynamic paradigm shift taking place in the global oil market, as demand balances shift to China and India; supply balances shift to non-OPEC producers, especially Russia; and overall, demand exceeds supply by some 40 million barrels per day between now and 2015. Put that into the actuarial equation, along with the concurrent impact on the exchange rate of the U.S. Dollar, as oil producers either demand payment for or otherwise implicitly price oil in Euro, and all those non-marketable Treasury bonds held as assets in the SS fund become worth-less.

We are facing a incalculable but inevitable financial calamite. It is going to impact every industrialized and developing nation. And the body politic will remain in denial to the very end. It will be the defining moment establishing the next Age of Empire (and the culmination of certain other agendas).

Posted by: dc on January 12, 2004 10:08 AM

____

I also regard the Social Security System as a Ponzi scheme, which in its classic operation begins to fail when the number of retirees withdrawing from the fund exceeds the number of employees depositing into the fund. This process of failure is accelerated by maintaining a relatively constant “purchase power” (increasing rate of withdrawal) to retirees, while capping the maximum contributions derived from the employees. The ‘bottom line” equals the total “unfunded” liabilities accruing to the SSA by the numbers of contributors to the system. As of 2001, the accumulated entitlement obligations owed to all people (including all current workers) who have earned Social Security and Medicare benefits is $12.9 trillion for Social Security and $16.9 trillion for Medicare. When these obligations are combined with the debt held by the public, the total burden exceeds $33 trillion, or 10 times the official debt measure (before adding in the 2003 record-breaking Federal deficit).

Over the years, Congress has applied the “surplus” accruing in the SS fund to the General Fund by way of an exchange of SS receipts for non-marketable U.S. Treasury obligations. Congress has done the same accounting of surpluses in the Highway Fund and every other segregated “User Fee” fund. This accumulation of U.S. Treasury obligation, while constituting an asset to the funds, remains an obligation and claim on the (next generation of) American taxpayers, although it is the actuarial hope that this indebtedness, as and when it becomes due, doesn’t have to be discharged against current earnings, but can be forwarded into the global credit markets against future earnings. But given today’s political economics, this may be only wishful thinking. And indeed, when the SS system was last over-hauled during the Reagan Administration, the deal that was struck depended on the premise that the “surplus” would be used to buy down the accumulated Federal debt, so that when the due date on the “Baby Boomers” retirement account arrived, the Treasury would have adequate borrowing capacity.

But that deal has been abrogated by the same party that instituted it. How do you think G.W.’s offset his tax cuts? He has sacrificed the future retirement benefits of the working class to pay for the current benefits of the wealthy class. And he has intentionally (albeit not admittedly) directed the benefits to the wealthy class, because the “consumption” of the wealthy class will not translate into statistics measured to compute the rate of inflation.

There are two other factors that will distort the capacities of the SSA to meet its obligations. The first is the other public pension system: the Federal Pension Benefit Guaranty Corporation. The PBGC insures 32,500 private, defined benefit pension plans covering 44 million employees and pensioners, and it is about to add to its obligations the pension liabilities of the airline industry after recently adding another steel company. The PBGC, like all private retirement funds, took a beating in the stock market collapse – an unrealized capital loss of $7 Trillion that remains obscured in America’s retirement funds. The PBGC went from a $7.7B surplus to a $3.6B deficit in fiscal 2002, and the deficit added another $1.8B lost in the first quarter of 2003. To address (gloss over) these losses, Congress is now considering accounting gimmickry by way of H.R. 3108: The Pension Funding Equity Act of 2003. And the cumulative losses in the nation’s 401(k) accounts will compel American workers to continue working well into their retirement years, especially as employers convert “defined-benefit” plans to “contribution-defined” plans to ameliorate the level of corporate unfunded pension liabilities. Add up all the unfunded pension liabilities, public and private, here and abroad, and the numbers exceed $100 Trillion. A debt that will not be paid.

The other factor at work is the age old economic reality called “scarcity of resources.” In this case, a scarcity of energy resources, and most particularly oil. There is a dynamic paradigm shift taking place in the global oil market, as demand balances shift to China and India; supply balances shift to non-OPEC producers, especially Russia; and overall, demand exceeds supply by some 40 million barrels per day between now and 2015. Put that into the actuarial equation, along with the concurrent impact on the exchange rate of the U.S. Dollar, as oil producers either demand payment for or otherwise implicitly price oil in Euro, and all those non-marketable Treasury bonds held as assets in the SS fund become worth-less.

We are facing a incalculable but inevitable financial calamite. It is going to impact every industrialized and developing nation. And the body politic will remain in denial to the very end. It will be the defining moment establishing the next Age of Empire (and the culmination of certain other agendas).

Posted by: dc on January 12, 2004 10:11 AM

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