September 17, 2004

"But There Will Be Nothing Left in the Social Security Trust Fund!"

Teresa Nielsen Hayden is shrll. She writes:

Making Light: Wedge: I’ve been ruminating about a one-liner that’s been floating around the meme pool since lord knows when. You’ve probably heard it a thousand times:

By the time you retire, there’ll be nothing left in the Social Security retirement fund.

It’s untrue, of course; but for those who aren’t aware that it’s untrue, it’s profoundly frightening. We’re set up to be a cooperative society. We believe that by working together, we can as a people be richer, safer, smarter, and happier. However, this cooperation requires a certain basic level of trust. The belief that you could be left penniless in your old age, after a lifetime of contributing your regular fraction to the public good, creates a huge breach in your sense of trust.

It’s not the kind of idea that turns you into a monster overnight. I’m inclined to believe that the commonest reaction to it is dull, low-level grief: you thought life in America would be better than this. Still, if that’s what you have to look forward to, you’d better get while the getting’s good. You’re going to need that money. Meanwhile, you find yourself resenting calls on your generosity. True, you’re probably a lot better off than the people you’re being asked to help; but you’re not comparing them to your present self. Lodged in your heart there’s an elderly, needy, cast-off version of you, whispering that when the time comes, nobody’s going to pay to help you. Children stop looking like our hope for tomorrow. Instead, they’re the heartless little bastards who’re going to let you live on dogfood in your SRO until a heat wave finally does you in.

The other thing about believing there’ll be nothing left when you retire is that it makes you far less likely to scream in outrage over the long-term looting of the national treasury. After all, you already know you’re not going to get any of that. It’s not inevitable. I think we need to say so, early and often.

The first stage of the con is that those who say "there’ll be nothing left in the Social Security retirement fund" want you to think that that means that no further Social Security checks can be written. But what actually happens upon trust fund exhaustion is either (a) benefits are cut across the board by about 1/4 so that Social Security payments thereafter equal revenues, (b) Social Security taxes are raised to avoid benefit cuts, (c) the Managing Trustee of the Social Security System (i.e., the Treasury Secretary) borrows money from the government's fiscal manager (i.e., the Treasury Secretary), or (d) some combination of the above. This does not mean that the long-term imbalance in Social Security funding is not a serious problem. But those who say "there’ll be nothing left in the Social Security retirement fund Posted by DeLong at September 17, 2004 09:59 AM | TrackBack

Comments

A most important article! Yes, there will continue to be Social Security and Medicare if we as a people choose to keep the pledge we made to each other beginning in the 1930s. Not long ago there was a snooty ad run by Microsoft, in which a young boy explains to a Senator that there will soon be no Social Security. The boy evidently knows there will be no Social Security because Encarta explains just this. Snooty rubbish. Microsoft should be ashamed to have run such an ad.

The question we need to ask is do we care to keep the community commitments we began in the 1930s, that produced the wonderful middle class strength we found and maintained from the recovery on? I for one do.

Posted by: anne at September 17, 2004 10:23 AM

Remembering the Ball Commission results, of course Soc Sec scare is just that...a scare. Ridiculous. And Greenspan knows better. How he can shill for these people is beyond me.

But I also remember how it used to be. I'm enjoying my soc sec money as we speak. How? Because neither my parents nor my in-laws have ever had to ask us for money to help support them, nor move in with us because they couldn't afford to live on their own. Rather they are able to live a happy and healthy (given all the medicare coverage) AND financially independent retirement.

Works for me!

Posted by: xyzzy at September 17, 2004 10:44 AM

Brad, I think you got cut off in midsentence...

Posted by: David Moles at September 17, 2004 10:45 AM

"I'm enjoying my soc sec money as we speak. How? Because neither my parents nor my in-laws have ever had to ask us for money to help support them, nor move in with us because they couldn't afford to live on their own. Rather they are able to live a happy and healthy (given all the medicare coverage) AND financially independent retirement."

Surely. Happy are my mom and dad.

Posted by: anne at September 17, 2004 10:57 AM

The answer anne, is a freightening NO. Take IBM for an exanple. As late as the 1980s they were passing out literature when you were hired saying that part of your pay was lifetime paid medical for retirees, and a pension. Sadly, today, there is no paid medical for retirees at IBM. Secondly, they have reduced the pension and then did away with the pension in favor a a cash balance plan. No one ever tells people that these portable plans that are supposedly so desirable, only pay half the benefits if a worker worked the same 30 years under both plans.

So when you ask "do we care to keep the community commitments: the answer is a resounding NO. IBM is not the only company doing this. This same mentality runs the government at this time so what is different?

IBM retirees as a group saw their health-care premiums rise nearly 29% in 2003, on the heels of a 67%-plus increase in 2002. For IBM, with its caps in place, spending on retiree health care declined nearly 5%, after a drop of 18% the year before. (http://www.pensions-r-us.org/Financial_Surgery.htm)

So there you have it, the "best" companies America has to offer and they bitch about healthcare costs, while spending less each year.

The future is not rosy.


Posted by: me at September 17, 2004 11:00 AM

I thnk this is one of the most important reasons for the success of the modern Republican party. I know several twenty-somethings who believe Social Security & Medicare simply cannot survive. Thus, they see the system now as screwing them for others' benefit. The idea that tax-cuts for them now might screw others -- that's just leveling the playing field. They'll take what they can get. And when Democrats promise to keep the system going, that's taken as promising 2+2=7.

Posted by: Brendan McManus at September 17, 2004 11:06 AM

Sometime back in the mid 70's ir 80's there was a blue ribbon committee chaired I think by Alan Greenspan regarding just this problem.

At that time the FICA tax was equal to the benefit payout and because the baby boomers vastly outnumbered thier retiring grandparents there was no problem meeting the obligation. But the future looked bleak indeed if nothing was done. Everyone knows the demographics: huge baby boom population reaching retirement with fewer yourg workers to suppoer them with FICA taxes. What to do? .... What to do?

Solution proposed by Greenspan's blue ribbon panel and implemented by our government? Easy. Raise the FICA withholding and create a social security trust fund. This trust fund excess money would be loaned to the federal government now to be payed back when the boomers retire.

This seemed to make good sense and was implemented without a lot fuss and bother. Taxes were raised, a trust fund was created, money was loaned to the federal government, and assets were created for our retirement. And the federal government would improve its balance sheet by a proportionate reduction in public borrowing. Or so we thought. But conservatives were in charge.

Given that this huge increase in a regressive payroll tax was now available to fund the federal government these conservatives saw an opportunity to reduce the taxation on the rich by cutting progressive income taxes. And so they did. Over and over and over again. They cut income taxes far more than the increase in FICA taxes could offset the difference. This increased deficit was instead was make up for by an increase in public borrowing. This is not what was supposed to happen.

Now we have a problem. Worse than before.

Greenspans recommended solution: cut benefits to those who agreed to a hefty tax increase to fund their own future benefits from the balance sheet of a solvent federal goverment.

Is there any bigger cad alive than Alan Greenspan?

Posted by: ken at September 17, 2004 11:09 AM

Sometime back in the mid 70's or 80's there was a blue ribbon committee chaired I think by Alan Greenspan regarding just this problem.

At that time the FICA tax was equal to the benefit payouts and because the baby boomers vastly outnumbered their retiring grandparents there was no problem meeting the obligation. But the future looked bleak indeed if nothing was done. Everyone knows the demographics: huge baby boom population reaching retirement with fewer yourg workers to suppoer them with FICA taxes. What to do? .... What to do?

Solution proposed by Greenspan's blue ribbon panel and implemented by our government? Easy. Raise the FICA withholding and create a social security trust fund. This trust fund excess money would be loaned to the federal government now to be payed back later when the boomers retire.

This seemed to make good sense and was implemented without a lot fuss and bother. Taxes were raised, a trust fund was created, money was loaned to the federal government, and assets were created for our retirement. And the federal government would improve its balance sheet by a proportionate reduction in public borrowing. Or so we thought. But conservatives were in charge.

Given that this huge increase in a regressive payroll tax was now available to fund the federal government these conservatives saw an opportunity to reduce the taxation on the rich by cutting progressive income taxes. And so they did. Over and over and over again. They cut income taxes far more than the increase in FICA taxes could offset the difference. This increased deficit was instead make up for by an increase in public borrowing. This is not what was supposed to happen.

Now we have a problem. Worse than before.

Greenspans recommended solution: cut benefits to those who agreed to a hefty tax increase to fund their own future benefits from the balance sheet of a solvent federal goverment.

Is there any bigger cad alive than Alan Greenspan?

Posted by: ken at September 17, 2004 11:16 AM

Again, all a matter of perspective.

It is considered a fundamental betrayal of trust of the elderly to modify the promise of a benefit that is considerably higher than the amount they put into the system. Okay, but what about the trust of the 30 something who has to pay at much higher rates to maintain that level of benefits, or who has to reduce his own benefits, pay for new prescription benefits that were never a part of the promise, and, oh yeah, pay the interest on the treasuries that the trust fund is 'invested' in? Why is it not a breach of trust to ask current workers, already faced with the humongous demographic problem of every 2 workers supporting themselves and one retired person, to save for their own retirement and pay for new programs for the elderly? It just seems to me that the sword of fairness cuts both ways.

Posted by: Jason Ligon at September 17, 2004 11:21 AM

http://www.nytimes.com/2004/09/17/politics/17medicare.html

Private Plans Costing More for Medicare
By ROBERT PEAR

WASHINGTON - Members of Congress expressed concern on Thursday about new data indicating that Medicare pays private health plans more than it would cost to care for the same patients in the traditional Medicare program.

Lawmakers of both parties raised questions about the payments, which were increased under the new Medicare law to entice more private plans to participate in Medicare.

About 4.7 million of the 41 million Medicare beneficiaries, or 11.5 percent, are in health maintenance organizations and other private plans, now known as Medicare Advantage plans.

"The majority of seniors in traditional fee-for-service Medicare should not subsidize the minority of seniors in private plans," said Senator Olympia J. Snowe, Republican of Maine.

Senator Jeff Bingaman, Democrat of New Mexico, said that "large overpayments to H.M.O.'s were built into the bill" that Congress passed last year, and he asked why people in traditional Medicare should bear the cost of such "subsidies."

Congress once assumed that private health plans could get by on payments equal to 95 percent of the cost of treating patients in traditional Medicare, but experience showed that was not enough to keep plans in the program.

The Medicare Payment Advisory Commission, an independent federal panel, says in a report to Congress that Medicare is paying private plans an average of 107 percent of what it would cost to cover their patients under the traditional fee-for-service program. Payments were as high as 116 percent of the traditional Medicare cost in some cities and 123 percent in rural counties.

The office of the chief Medicare actuary told Congress that Medicare would spend $50 billion less in the next 10 years if it paid private plans only 100 percent of what traditional Medicare pays. Copies of the estimates were obtained by The New York Times.

Posted by: anne at September 17, 2004 11:36 AM

"...are either chuckleheads, charlatans or thieves."

Did I guess the ending right?

Posted by: melior at September 17, 2004 11:54 AM

Take a trip over to Making Light and read the excelent sermon by one of her responders. I don't mean to make fun of the responder by useing "sermon" as it is a great discourse on "fear".

Posted by: dilbert dogbert at September 17, 2004 12:04 PM

I think this is a generational issue. I'm 30. Everyone I know around the same age has already discounted ever receiving Social Security benefits.

The impression I get is that we let our grandparents generation retire nicely, and save the generational warfare for the baby boomers whom we despise as selfish narcissists who cared nothing about subjecting us to parental divorces, absent parents, latch-key kids, sexually transmitted diseases, and the drug problem among a long list. This is not a right vs left issue. Everyone I know seems to agree on the baby boomer pathology.

If you talk to a Gen Xer about the "commitment" of the generations and the "trust" between them, we will roll our eyes. We have seen very little, generationally speaking, of either from the baby boomers to us. We have been left no patrimony. Expect the knives to come out.

This is in broad generational terms. I don't comment on the many families and individuals who obviously sacrificed much for their kids. But its a common perception of the generation as a whole.

Gen Xer's have a choice - besides preparing for our own retirement, we will either need to sacrifice for our children, or for the Baby Boomers. We know which commitment we will make, and intend the honor the trust put in us by future generations.

Posted by: Chris Durnell at September 17, 2004 12:12 PM

Like I said anne, apparently not.

Posted by: me at September 17, 2004 12:23 PM

Hey Chis,

Along with the long litany of complaint us boomers have subjected you to (my favorite is 'sexually transmitted diseases', as if, even being disease free, anyone under 30 would even give me a second look) how about the one where we borrow money for you to pay back with interest in order to finance a big tax cut?

If that one is ok with the genX's then perhaps Bush is right. Being a boomer and beneficiary of said tax cuts, why should I worry about your paying for them if your not.

Posted by: ken at September 17, 2004 12:36 PM

Social Security Trust Fund

I see no reason why Gen-X'ers should have to redeem the Trust Fund bonds in order that Boomers can get their Social Security checks.

For 20 plus years Boomers have used the Fund to lower their income taxes. If they didn't save their tax windfalls, that's just too damn bad!

Posted by: Ellen1910 at September 17, 2004 12:39 PM

"The impression I get is that we let our grandparents generation retire nicely, and save the generational warfare for the baby boomers whom we despise as selfish narcissists who cared nothing about subjecting us to parental divorces, absent parents, latch-key kids, sexually transmitted diseases, and the drug problem among a long list. This is not a right vs left issue. Everyone I know seems to agree on the baby boomer pathology."

So then the idea is to screw my parents? Say what?

Posted by: Ari at September 17, 2004 12:44 PM

Ari--

Nobody's talking about screwing your parents. If you can't help them out and they're on welfare, we're here to take care of them.

But if they used their tax rebates to buy ocean front property that you and your siblings expect to inherit, then, they've already screwed Gen-X.

Posted by: Ellen1910 at September 17, 2004 12:50 PM

From 1983 on, workers have paid more in payroll taxes than necessary to support Social Security. We are still paying more than is necessary to support the system. There is a surplus of taxes that has been paid to provide for the coming generation of retirees. To break the pledge of support or these retirees would be to cause us to wonder what community means in America.

Posted by: anne at September 17, 2004 12:51 PM

Pledge? Please.

The 1983 revision was designed for one straightforward result -- to transfer as much of the tax obligation as then possible from investors and owners to workers. It took President Bush and Mr. Delay to almost finish the job.

Posted by: Ellen1910 at September 17, 2004 01:10 PM

Government pension benefits are senior to treasury bills in the opinions of (elderly) judges and generals.
Government real estate taxes are senior to bank mortgages in the opinion of (elderly) judges and generals.
Government income and social security taxes are senior to tax free retirement accounts in the opinion of (elderly) judges and generals.
Is anyone else likely to disagree?

Posted by: wkwillis at September 17, 2004 01:12 PM

I hate to seem like I'm sucking up to Anne (again), but the point about 1983 needs to be made loudly, when those who haven't seen their 21 years of excess payroll tax payments squandered start moaning about me wanting to claim my SS benefit. I've already paid for my folks, and some for me. It was not me who spent it on beach-front property - we had an on-budget surplus till the tax cuts came along.

The reason it is not a breach of trust that a 30-ish worker has to pay higher taxes than would otherwise be the case is because words mean something, singly and in groups. It is among the surest signs of political speech that words are forced into meanings they don't naturally carry. There is no standing pledge to tax workers at a particular (low) rate rather than another (higher) rate, and that is why there is no breach of trust to 30-ish workers. Workers adjust their behavior (we are told) to the prevailing tax rate. That is the argument for the 30-ish worker, and why comparing workers in the early part of their earning years with those who have few years to make up for lower than promised benefits is not really valid. Older workers have less opportunity to adjust.

But back to the subject at hand. Oddly enough, we were talking around the office yesterday about Hayden's point – pensions obligations and trust in the broader society. Giving current and future Social Security beneficiaries the impression they have been snookered is, we decided, part of a larger problem across a broad range of pensions (don't bother explaining to me that SS is not a pension plan – you know what I mean). Crumbling corporations stuck their workers pension contributions into their own worthless stock. Airlines are trying to dump pension obligations on the Federal government, which would automatically lower pension payouts to 2/3 of what was promised. Rules for funding pensions were already nonsense, even before Congress gave underfunded firms a pass. GM has pretty obviously been campaigning for pension relief of some kind, trumpeting the $63 billion pension millstone that has to be added to its costs. Bastards.

We need to understand that this is all linked to trust in large institutions. Big corporations and several faces of the federal government (Congress, the SS mechanism, the Fed Chairman) have had a hand in breaching trust. Tack on lies of various sorts about trivial issues like why we went to war, how much the new Medicare benefit will cost, who ratted out Plame, where our elected leaders were when they had pledged to defend the skies of Texas, and we're on track for a Vietnam era sort of distrust of big institutions.

This notion that trust makes the world go better is, as I understand it, pretty venerable. Francis Fukuyama churned out "Trust: The Social Virtues and the Creation of Prosperity" back in the mid-1990s, but even then, I was pretty sure I had heard it from sociologists and wise old heads of other types long time before. Makes a ton of sense.

Posted by: kharris at September 17, 2004 01:13 PM

Trust Fund? What Trust Fund? Step 1 in the recovery program is to be clear and honest: there never was a Trust Fund and there never will be.

If Social Security tax money had been used to build wheelchairs and retirement homes to be mothballed for future use, or invested in corporations located in countries with a lower average age than the US (say, India), or even used to pile up gold in Fort Knox, then you might call that a Trust Fund.

But it wasn't. That tax money is spent. It is gone. When the cookie jar is opened in 2020, the only thing in there will be a piece of paper saying U.O.U. (rather than I.O.U).

That is the way it is now, it is the way it was after the Greenspan FICA tax increase, and it is the way the system was designed. Let's own up to that.

Cranky

Posted by: Cranky Observer at September 17, 2004 01:17 PM

Cranky --

It's worse than that. When X'ers and Echo Boomers are groaning under the "tax those wage earners" programs of the Boomers, Anne and kharris are going to be whining "What about all the money we put into the Trust Fund?"

And don't ask them on whose backs they managed to reduce their income tax rates from 70% to 25%.

Posted by: Ellen1910 at September 17, 2004 01:39 PM

Danger of no tax liability

Walter Williams explains how poor people not paying taxes is bad for America

YOU KNOW, I NEVER THOUGHT OF IT THAT WAY. I AGREE THAT IT'S NOW TIME FOR THE SO-CALLED POOR TO PAY THEIR FAIR SHARE OF TAXES.

HOW'S THAT FOR A MORE HIGHLY EVOLVED OPINION OF TAXATION?

September 15, 2004

In last week's column, I reported on the Washington, D.C.-based Tax Foundation's study that estimated that 44 percent of income earners will legally have no 2004 federal income tax liability. The study concluded, "When all of the dependents of these income-producing households are counted, there are roughly 122 million Americans -- 44 percent of the U.S. population -- outside of the federal income tax system."

The Bush administration sees removing the income tax burden on Americans at the lower end of the earnings spectrum -- families earning less than $50,000 a year -- as desirable. When President Reagan successfully got Congress to remove 6 million Americans from the tax rolls, he described his tax reform initiative as one of the proudest achievements of his administration. At the time, I argued that doing so was nothing to be proud about, and I extend that same criticism to President Bush.

You might ask, "Why?"

CONTINUED ON -

http://pep.typepad.com/public_enquiry_project/2004/09/walter_williams.html


Posted by: Arrogant Adrian at September 17, 2004 01:45 PM

Cranky,

If the money were invested privately, the government would be borrowing as much money on the capital markets as it does from Social Security. The total debt wouldn't be any different. Those bonds would have to be repaid just as surely as those held by the trust fund.

Jason,

Government bonds are not 'investments,' as you put it. They are investments. Just to prove it I'll buy your treasuries for ten cents cash per dollar of face value. Since they are worthless, you'll be way ahead, right?

Chris,

I'm really sorry you have both some sort of STD and a drug problem. But it really isn't my fault. It's yours.

Posted by: Bernard Yomtov at September 17, 2004 02:07 PM

Bernard Yomtov

What a nice sense of humor :)

Posted by: lise at September 17, 2004 02:14 PM

Chris Durnell wrote, "If you talk to a Gen Xer about the 'commitment' of the generations and the 'trust' between them, we will roll our eyes. We have seen very little, generationally speaking, of either from the baby boomers to us. We have been left no patrimony. Expect the knives to come out."

You've seen little because your vision is blinkered.

If past is prologue, the US will be a far wealthier country a few decades from now. That patrimony was mostly generated by people that preceded us, from our parents' generation to those who invented writing, agriculture, etc thousands of years ago.

So quit your whining.

The thing that really could screw everything up would be a major war.

Posted by: liberal at September 17, 2004 02:22 PM

> Cranky,
> If the money were invested privately, the
> government would be borrowing as much money
> on the capital markets as it does from Social
> Security

Except I nowhere suggested that the funds could have been invested in bonds. Equities yes, which one could rationally (although not necessarily correctly) assume to have a decent compounded growth rate. As long as those equities were for corporations in another country with a lower average population age.

But I am NOT suggesting that this should have been done or could be done. I am pointing out that to have a real trust fund one of these actions would have had to be taken. We don't, never did, and never will have a "trust fund": we just wrote ourselves a big check, put the checkbook in our left pocket, and put an IOU to ourselves in our right pocket. Guess what happens when the IOU comes due?

Cranky

Posted by: Cranky Observer at September 17, 2004 02:34 PM

This is all very Rovian.

Set Greenspan out there to ponder the demise of SS soto voce, ignoring the fact that projected immigration and job growth more than matches the retirement decline of the baby boomers.

Except during the Bush era, of course.

Therefore, unless Greenspan also foresees that future worker's taxable wages will continue to decline as a percentage of GDP (now lowest level since 1929), while vampiroyals investor class continue to gorge on tax-free capital gains out of declining corporate benefits and pensions, there is no problem with SS on the face of it.

Which makes Greenspan either a shill for Wall Street, for which he should be damned to hell, or he's afraid the pol's would dump his corpse in a dark alleyway if he mentioned the decline of worker wages and benefits, and theft of SS.

From what I see of BushCo, I'm inclined to the latter. They will tell you what a sunny day it is, while pissing down your back. I just wish Greenspan had the balls to tell it like it is, and pour the American people into the streets.

How is it that a secret Right-Wing oil cabal of Raving Lunatics and Croesusian Chimps, can hold hostage 250,000,000 American citizens, most of whom carry small arms and know how to use them?

So much for the NRA's Democracy theory. Speaking of guns, roses and candy, an associate of mine sent me this link on 9/11:

http://www.freedomunderground.org/memoryhole/pentagon.php#Main

which if you haven't seen it, you certainly must.

Still, with that one single stroke of the voting lever, we can send them jibbering back to their corporate boardrooms.

Get out the Democrat vote, or die!

Current Projected Tally: (9/17)/04)

Electoral Votes: Bush 285 Kerry 253
Popular Vote: Bush 51.1% Kerry 47.0%

http://www.electionprojection.com/

Posted by: Tante Aime at September 17, 2004 02:54 PM

Cranky,

I was not talking about investing in bonds. I was talking about the fact that, if it weren't borrowing from SS, the government would be borrowing elsewhere, by issuing bonds. Those bonds, the ones they would issue, would have to be repaid, and the taxpayers would be coming up with the money, just as the taxpayers will come up with the money to pay off the bonds held by SS. The only difference would be who the money is owed to.

Posted by: Bernard Yomtov at September 17, 2004 03:01 PM

So, Cranky, you're predicting that sometime in the lifetime of people now living, the government of the United States of America will default on its debt obligations?

Posted by: John Casey at September 17, 2004 03:12 PM

There's virtually no chance that I will vote for Bush-Cheney, but I'd really like to hear some serious talk about Social Security and Medicare reform from Kerry-Edwards.

Brad, have you heard any rumblings in academic circles about certain plans?

Posted by: Brian at September 17, 2004 03:39 PM

"Government bonds are not 'investments,' as you put it. They are investments."
~~~

Government bonds in the SS trust fund are investments to whom, exactly?

To the issuer? No, obviously, as they represent exactly $0 amount of investments owned by the the government that it can liquidate to finance SS in lieu of using taxes. Bonds are an obligation of the government, a liability.

To SS recipients? No, obviously, as the bonds are not payable to SS recipients -- who have no legal right to their proceeds whatsoever -- but are payable to the Treasury, the issuer of the bonds.

As to the attempt to prove their value by kindly offering to buy them for 10 cents on the dollar, they are not marketable.

Now... If in order to meet your own future obligations you issue a non-marketable note for $X dollars to yourself, which you promise to pay off to yourself from your future income, exactly *to whom* does this note represent not an 'investment' but an investment?

Posted by: Jim Glass at September 17, 2004 03:42 PM

I poop too much and it makes me tired.

Posted by: Arrogant Adrian at September 17, 2004 03:59 PM

Why is it that every time the comments on this blog discuss SS we get bogged down into this silly game of semantics about the "SS Trust Fund"? I think we all understand that payroll taxes are presently being used for current spending, that the government is sending IOU's to the "SS Trust Fund", and that future taxes will be required to redeem those IOU's.

Posted by: joe at September 17, 2004 04:21 PM

"If past is prologue, the US will be a far wealthier country a few decades from now...."

Well, that's certainly valid grounds for approving a class of rent seekers' extraction of a huge transfer from others, who will never obtain any kind of compensation in return. In the amount of an ever-rising portion of GDP -- 10 more points by 2040.

"So quit your whining."

Considering how the over-60 group is now the richest demographic class, and growing ever more rich than the rest all the time -- and certainly will be, as you say, far wealthier in the future than they even are now -- I'd have thought that the ever growing poorer-to-richer transfers through all these entitlements would trouble a "liberal".

You know, maybe rich folk like Warren and Bill -- and even their poor cousins who only have paid-off homes (up to $500k tax free gain there) plus maybe $750k in retirement funds -- could pay for their own medical insurance premiums and retirement incomes, instead of collecting them from Warren's Dairy Queen employees?

But I guess to be liberal no longer means to think the rich should pay their own way. Now it means they receive subidies instead. Just take a *look* at the income spread of those *receiving* entitlements ... and what it will be in the future.

Personally I'd think that if letting the rich keep more of their own money though tax cuts justifies so much liberal whining, then making massive transfers *to* the rich *from* the poorer would certainly justify a little carping. But go figure. ;-(

"The thing that really could screw everything up would be a major war."

Or perhaps just a future majority of voters not wanting to incur huge tax increases to pay transfers to a prior generation of beneficiaries -- no matter how rich they are -- when *no* such subsequent intergenerational transfer will be coming to them.

~~~~
An array of government and private analysts put the actual U.S. "fiscal gap," which means all future receipts minus all future obligations, at $40 trillion (Government Accountability Office) to $72 trillion (Social Security Board of Trustees). These are not sums, but present-value figures...

"To give you idea how big the problem is," said Laurence Kotlikoff, economics chairman at Boston University, who has written extensively on the subject, to close a $51 trillion fiscal gap, "you'd have to have an immediate and permanent 78 percent hike in the federal income tax."...

"It's a number that's so large that people find it implausible, and so they don't think about it," said Alan Auerbach, a UC Berkeley economist who studies the issue and consults for the Kerry campaign. "But it's based simply on the projections we have for Social Security and Medicare. People aren't making these numbers up."

[Hey, real bi-partisan sourcing!]

...a few painful options on how to meet the liabilities:

-- More than double the payroll tax, immediately and forever, from 15.3 percent of wages to nearly 32 percent;

-- Raise income taxes by two-thirds, immediately and forever;

-- Cut Social Security and Medicare benefits by 45 percent, immediately and forever...

http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2004/09/12/MNG2S8NOI21.DTL

Posted by: Jim Glass at September 17, 2004 04:21 PM

Never forget that Greenspan is a Skull and Bonesman.

And we are in deep duck soup here. Our media has dumbed down so far, dying shrimp on a shrimp boat have, collectively, a higher conscienceness IQ.

Posted by: Elaine Supkis at September 17, 2004 04:22 PM

Jim,

Don't be tiresome. They are an investment of the trust fund, just as treasuries held by, say, a private pension fund, are an investment of that fund.

If you think the US is going to default on its debt obligations, (which Gingrich&Co. wanted to do a few years ago, and which Bush&Co. are making more likely all the time) then yes, it's all nonsense. But short of that it isn't.

Look, suppose the money was in private investments. Why would the government's obligation to use the proceeds to meet SS obligations be any greater than it is now? Why couldn't they just cash in and use it to reduce the debt, for example, which would lead to a situation identical to a default on the SS bonds.

Posted by: Bernard Yomtov at September 17, 2004 04:47 PM

Bernard,

It's your argument that's tiresome -- and more so since Jim's correct and you're not.

Anne, at least, argues from the position that the issue is one of intergenerational promises (and fairness?). Shouting "full faith and credit" is unhelpful.

Posted by: Ellen1910 at September 17, 2004 04:59 PM

Brad DeLong ::: (view all by) ::: September 16, 2004,
10:15 PM:

Well, the way I look at it (and this *is* what I do at my day job), we think that the promises and
commitments the U.S. government has made and its
standard operating procedures for setting spending amounts commit us to an average federal spending level of 26% of total production over the next two or so generations. We know that number will be off--it might be 24%, it might be 28%. But 26% is the number we should have in our minds when we plan.

Now taxes are currently set so that, if standard
operating procedures for tax break extension, et
cetera, are followed, the federal government will
collect some 18% of total production in taxes. 18% is a lot less than 26%.

We as a society have two choices. We can either ignore the gap between 18 and 26 until the foreigners we borrow from lose confidence that we will ever solve it, and our economy and currency go smash in the way that Argentina's seems to every generation, that Mexico's did in 1994, that Germany's did in 1923, and so forth. Or we can take steps to close the gap between 18 and 26. And the sooner we start to take those steps, the easier things will be.

Let's assume that we decide not to let the economy and currency go smash, and that we take option 2. First, we wonder "Where did this gap come from?" Well, if we did not have the Bush tax cuts--or if we let the Bush tax cuts expire--we will be at 21 instead of 18 on the tax side, and face a long-run fiscal gap of not 8% but
5% of total production, a smaller problem.

In fact, if we hadn't done the Bush tax cuts, we would be (as we were in 2000; remember?) in surplus, with taxes at about 21 and current spending levels at about 20 percent of total production. But even though we would be in current surplus, we would not be in long-run surplus. The aging of the population and greater life expectancy is going to push Social Security spending up by about 2% of total production.
Better and more costly medical technology coupled with the aging of the population and greater life expectancy is going to push Medicare and Medicaid spending up by about 4% of total production.

Taking care of the 2% of production rise in the
long-term funding gap coming from Social Security is straightforward. Either cut benefits (by raising the retirement age by 3 years, by cutting everyone's benefits by about a quarter, by shifting some of the risk that the stock market will tank from the government to Social Security beneficiaries by turning some of their benefits into private investment accounts, or some combination) or raise Social Security taxes (by either removing the current lid on Social Security taxes, by increasing the tax rate by a
couple of percentage points, or some combination).

The increase in the gap coming from the rise in Social Security spending is thus a serious, but a fixable problem. The system only goes smash if we take no steps over the next two generation to either cut benefits or raise taxes.

The increase in the fiscal gap coming from Medicare and Medicaid is a bigger--and harder--problem. All trends suggest that the next two generations will see extraordinary improvements in medical technology coupled with large increases in medical costs. We believe that people who are sick should be treated: we don't think that the poor should die in the street
because they cannot pay their hospital bills. But
somebody has to pay. So either we grit our teeth and accept very large tax increases to preserve an income-independent right to medical care, we keep our taxes where they are and begin to ration life-saving and life-extending medical care bigtime depending on the thickness of your wallet, or we think up some clever scheme to make the medical system work much much better so we can get better medical care at much lower cost. I vote for the "clever scheme" option
myself, and there are bunches of people working for John Kerry who are trying to think of what the clever scheme should be (in contrast to the people working on health care for George Bush, who seem more interested in boosting the prices of drug companies and then jumping to drug-company jobs). But I'm not optimistic. I think we have a very hard social choice before us over the next couple of generations.

Although the choices are hard, we can make them. We do have options. Decide what to do about health care, decide how much in the way of benefit cuts and how much in the way of tax increases we want for Social Security, let the Bush tax cuts expire--and we have a functioning, solvent government with in all probability a healthy, rapidly-growing economy.

But if over the next generation or so we fail to make our social decisions about health care, fail to accept either benefit cuts or tax increases in Social Security, fail to let the Bush tax increases expire, continue to elect this modern bunch of Republicans.... Well, there is no Qeng Ho coming in from outsystem to
assemble at Brisgo Gap and save us from the
consequences of our own follies of governance.

Brad DeLong ::: (view all by) ::: September 17, 2004,
12:49 PM:

Well, we're only screwed if we fail to make three
social decisions:

(1) Are we going to tax ourselves a lot more to pay for Medicare over the next two generations, or are we going to start rationing doctor visits and drugs? (And there is the "clever scheme" option, if we can figure it out.)

(2) Are we going to raise Social Security taxes, cut Social Security benefits, or do a little of both?

(3) Are we going to let the Bush tax cuts expire? If not, what $300 billion a year of other federal spending are we going to cut?

If we as a nation answer these three questions over the next generation--if we answer them any way--we are fine.

Our big problem, of course, is that George W. Bush and the modern Republican party are trying to keep us from answering these questions out of the fear that even posing them will be to their political disadvantage.

This is, I believe, only one of the many reasons that working to keep George W. Bush from being elected this November is an issue not of partisanship but of patriotism.

Posted by: anne at September 17, 2004 05:00 PM

The above posts by Brad DeLong were comments to
Teresa Nielsen Hayden.

Posted by: anne at September 17, 2004 05:03 PM

I will repeat my theory, based on a few data points: people are getting this line from financial planners. Of course financial planners don't want you to believe that you'll get Social Security checks.

Posted by: Matt McIrvin at September 17, 2004 07:35 PM

> Don't be tiresome. They are an investment of the
> trust fund, just as treasuries held by, say, a
> private pension fund, are an investment of that
> fund.

Uh, yeah. So I can just issue bonds to myself and become rich? Would you like to buy some stock in my perpetual motion machine company?

Rather than calling people "tiresome", it might be better to provide some solid arguments. Not there are any defensible arguement to this point, but you could at least try.

Cranky

Posted by: Cranky Observer at September 17, 2004 08:07 PM

the elephant in the room isn't social security, Iraq, or the economy--it's the environment. We are making a huge assumption that the planet will even sustain life as we know it in 30-50 years. Mass extinctions, air and water pollution, lack of freshwater, greenhouse gasses, dead zones in the ocean, food shortages, overpopulation--not to mention the threat of rogue WMDs....for 30 year olds these kind of issues are in our imminent future I'm afraid.

Posted by: delecti at September 17, 2004 08:16 PM

Dear Cranky, yes, you can issue bonds. Of course, there is no guarantee anyone will buy them, especially if you cannot print money or tax.

Posted by: Eli Rabett at September 17, 2004 08:45 PM

I'd be willing to bet all the SS checks coming to me in 2030 that the state of the conventional environment will be a non-issue in my retirement years. Maybe a few "save a beetle" campaigns, but the march of technology within this time frame should easily handle all environmental problems including clean water, clean air and nuclear waste. One major concern would be a large scale nuclear-type war, although even this could be overcome unless truly massive - then we would be toast for a while (decades) as we ants regroup, yet with 2040 technology.

Not just the US, but most parts of the world will be far richer by 2040 and cleaner. Yet my guess is that people will have a sense of fairness then as well with respect to a future program that looks something like SS.

Posted by: yamishogun at September 17, 2004 09:11 PM

Straightforward Brad DeLong -

"Taking care of the 2% of production rise in the
long-term funding gap coming from Social Security is straightforward. Either cut benefits (by raising the retirement age by 3 years, by cutting everyone's benefits by about a quarter, by shifting some of the risk that the stock market will tank from the government to Social Security beneficiaries by turning some of their benefits into private investment accounts, or some combination) or raise Social Security taxes (by either removing the current lid on Social Security taxes, by increasing the tax rate by a
couple of percentage points, or some combination).

"The increase in the gap coming from the rise in Social Security spending is thus a serious, but a fixable problem. The system only goes smash if we take no steps over the next two generations to either cut benefits or raise taxes."

Then, I too opt for the small tax increase necessary to keep our social pledge. Thanks to you Mother, thanks to you Father.

Posted by: lise at September 18, 2004 04:04 AM

Should SS and Medicare benefits be means tested? Would a resulting "progressive benefits" scheme be enough to restore the trust of GenX'ers in the Fund?

Posted by: BabyBoomerJackNYC at September 18, 2004 04:05 AM

Be careful about your assumed returns from stocks. Since mid-1997 when the PE went over 20
cash has outperformed the S&P 500.

Stocks did not surpass their 1929 peak until the early 1950s.

The advocates of stocks are ignoring the risk and the very fact that politicians now think stocks are a great idea is a sure sign that all the suckers have bought into the idea.

Posted by: spencer at September 18, 2004 05:00 AM

"Be careful about your assumed returns from stocks. Since mid-1997 when the PE went over 20
cash has outperformed the S&P 500."

Spencer, why do you think the price earning ratio has stayed so high this long after the bear market and through a tepid recovery?

Posted by: anne at September 18, 2004 05:07 AM

"Should SS and Medicare benefits be means tested? Would a resulting 'progressive benefits' scheme be enough to restore the trust of GenX'ers in the Fund?"

My sense is that means testing would seriously undermine the sense of Social Security and Medicare as community unifying programs. Why should the programs be made less compelling for a significant number of people and made needlessly more complex. These social benefit programs are for us all, a promise for our contributions through life to the community.

Posted by: anne at September 18, 2004 05:14 AM

What is puzzling is that corporate earnings have been fine, yet valuations have remained quite quite high. Was it that valuations were even higher than we understood by 2000? Paul Krugman speculated several years ago that this might well have been so.

Posted by: anne at September 18, 2004 05:48 AM

Jim Glass wrote, "Well, that's certainly valid grounds for approving a class of rent seekers' extraction of a huge transfer from others, who will never obtain any kind of compensation in return. In the amount of an ever-rising portion of GDP -- 10 more points by 2040."

Ah...that must be why you're so supportive of efforts to recoup land rents from the landowning class. Not.

And what fraction of those 10 points of GDP are Medicare rather than Social Security? The issue of how to slow the Medicare system's growth in expenditures is really the issue of slowing the increasing size of the medical sector, as a fraction of GDP.

--------------------------------------
For those interested in a nice example of Jim Glass' style of argument, see: http://tinyurl.com/7yweu

Posted by: liberal at September 18, 2004 06:01 AM

spencer wrote, "Be careful about your assumed returns from stocks. Since mid-1997 when the PE went over 20 cash has outperformed the S&P 500."

No kidding.

Also, don't forget that those favoring privatization who make arguments about the superior return of the stock market are intellectually inconsistent. The 75-year SS projections assume an abysmal rate of GDP growth, whereas the oft-quoted rate of real return on stocks (7%, IIRC) implicitly incorporates a much healthier rate of GDP growth, as it's an average over the past.

Posted by: liberal at September 18, 2004 06:07 AM

Jim Glass wrote, " 'To give you idea how big the problem is,' said Laurence Kotlikoff, economics chairman at Boston University, who has written extensively on the subject, to close a $51 trillion fiscal gap, 'you'd have to have an immediate and permanent 78 percent hike in the federal income tax.'..."

And why should we believe anything Kotlikoff says? What were his assumptions about growth in GDP? In Medicare?

Here's a quote from a manuscript from Austen Goolsbee at University of Chicago
(http://gsbwww.uchicago.edu/fac/austan.goolsbee/research/dwl.pdf):
"Gravelle and Kotlikoff (1988, 1989, 1993) merge the analysis of organizational form with the study of the dead weight loss (DWL) of corporate taxation. Their simulations differ from standard work, like Harberger (1966), Shoven (1976) or Ballard et al. (1985), by allowing both corporate and noncorporate production within sector. In conventional models, one sector is corporate and the other not and the implied dead weight losses amount to 10-20% of tax revenue. Gravelle and Kotlikoff, by assuming a large elasticity of substitution within sector, find DWL greater than 100% of tax revenue. The critical issue in both strands of the literature is, empirically, the organizational form response to tax changes." Later, he claims that "Shifting this magnitude implies a DWL from corporate income taxation on the order of 5-10% of tax revenue."

I also saw a footnote in an out-of-print book on taxation by Joseph Pechman in which he was skeptical of some assumptions used by Kotlikoff.

And speaking of trusting the numbers of other, I don't trust numbers coming from you:
http://tinyurl.com/3v5qj


Posted by: liberal at September 18, 2004 06:32 AM

Jim Glass wrote, "You know, maybe rich folk like Warren and Bill -- and even their poor cousins who only have paid-off homes (up to $500k tax free gain there) plus maybe $750k in retirement funds -- could pay for their own medical insurance premiums and retirement incomes, instead of collecting them from Warren's Dairy Queen employees?"

Sure. Problem is that once the system is non-universal, political support for it will collapse.

"But I guess to be liberal no longer means to think the rich should pay their own way. Now it means they receive subidies instead."

So the rich didn't pay into the system?

"Personally I'd think that if letting the rich keep more of their own money though tax cuts justifies so much liberal whining, then making massive transfers *to* the rich *from* the poorer would certainly justify a little carping. But go figure. ;-("

How much are the rich getting back via Bush's tax cut program, versus how much are they getting back from Social Security/Medicare?

And what does it mean, "their own money"? You mean like all the Ricardian land rent the rich collect, which was income from value created by society? Or rent coming from government-granted monopoly privileges on patents and copyrights?

Posted by: liberal at September 18, 2004 06:41 AM

Jim Glass wrote,
" 'So quit your whining.' Considering how the over-60 group is now the richest demographic class, and growing ever more rich than the rest all the time -- and certainly will be, as you say, far wealthier in the future than they even are now -- I'd have thought that the ever growing poorer-to-richer transfers through all these entitlements would trouble a 'liberal'."

No, he-who-quotes-out-of-context, I was referring to the previous poster's comment that "We have been left no patrimony." Which is clearly laughable, as I made clear.

Posted by: liberal at September 18, 2004 06:49 AM

spencer wrote, "Be careful about your assumed returns from stocks. Since mid-1997 when the PE went over 20 cash has outperformed the S&P 500."

The other thing is the quality of earnings. Gretchen Morgenson had a column a few months ago arguing that the quality of corporate earnings still isn't all that great despite all those scandals.

Posted by: liberal at September 18, 2004 06:55 AM

As Brad and Anne have pointed out a rise in the payroll tax by a couple of percentage points is by itself enough to preserve Social Security. I do not find a problem here provided we can indeed act.

"Taking care of the 2% of production rise in the long-term funding gap coming from Social Security is straightforward. Either cut benefits (by raising the retirement age by 3 years, by cutting everyone's benefits by about a quarter, by shifting some of the risk that the stock market will tank from the government to Social Security beneficiaries by turning some of their benefits into private investment accounts, or some combination) or raise Social Security taxes (by either removing the current lid on Social Security taxes, by increasing the tax rate by a
couple of percentage points, or some combination).

Posted by: lise at September 18, 2004 06:56 AM

"...a few painful options on how to meet the liabilities:

-- More than double the payroll tax, immediately and forever, from 15.3 percent of wages to nearly 32 percent;

-- Raise income taxes by two-thirds, immediately and forever;

-- Cut Social Security and Medicare benefits by 45 percent, immediately and forever..."

Is this satire, parody, or proof that FRB-Cleveland is populated by stupid, moronic economists?

Posted by: Ellen1910 at September 18, 2004 06:57 AM

Destroying SS wil destroy the full faith and credit of the US government, so you kids have good luck trying to get foreigners to buy your debt.

Give me back the 15% cash I have paid in NOW, not 10 years from now when I cannot change my wasy and we will call it even.

Oh, and yes, quit taxing my property for schools for YOUR children, build you own. And on and on.

Posted by: me at September 18, 2004 07:09 AM

The most common part of this recurrent thread is that everyone ignores two real problems.

One, we spend too much on the military.

Two, global warming and the end of cheap oil.

The endless discussions about the 'trust fund' are about as entertaining- and enlightening- as a complicated mechanical model of the solar system- with the earth at the center.

As for the under-thirties and their whining about how the Boomers done them wrong- o pulleeze! In reality the Boomers made it possible for you to do a number of things that used to get us thrown in jail, and you have (not) repaid us by failing to vote in record numbers. Get a clue.

Posted by: serial catowner at September 18, 2004 07:53 AM

Never mind all the dollar figures and statistics.

The operative word is "trust". Can one generation trust another?

The creation of SS in the thirties was an affirmation of generational trust. It created the foundation for the middle-class prosperity of the fifties and sixties.

Problems arose as that prosperity dissolved the generational trust beginning in the seventies. Carter warned the American public of the looming crisis resulting from that lack of trust but Reagan's "sunny optimism" assured Americans that they only needed to trust themselves; there was no need of intergenerational obligation.

Government policy has extended this trend. Creating a tax policy that essentially forces people into home ownership resulted in the proliferation of urban sprawl.

I just finished a round trip from the S.F. Bay area to Modesto. It's essentially a series of urban blobs spread throughout farm country. There's a series of new housing complexes being built along the freeway, all pressboard and stucco, guaranteed to rot in twenty years and costing $500-600k apiece. The same "old" businesses are there as everywhere, chain stores galore. The commute is long, painful and boring...and wasteful. All to give everyone the illusion of independence and no need to trust each other.

Privatization of government activities is just another expression of the lack of trust. It removes those services from being communal obligations to mere business transactions. "Clients" are now "customers", ( look up the dictionary definition of both).

All in all, the right-wing "conservatives", ( who are reactionaries and not true conservatives), have destroyed the ancient, archetypal understanding that society is based on trust and mutual obligation and changed it into a market where goods and services are bought and sold. The only trust there is in the money. That's why social problems, from education to health care, have not been adequately addressed.

Finances aside, what's needed is a philosophical sea-change, away from self-interested individualism to a more communal sense of mutual obligation.

Posted by: evagrius at September 18, 2004 08:48 AM

http://www.guardian.co.uk/comment/story/0,3604,1307401,00.html

This article, by a London School of Economics fellow, backs my argument.

Posted by: evagrius at September 18, 2004 09:05 AM

The point liberal made above about SS opponents assuming dismal GDP growth completely inconsistent with their rosy stock-market projections is extremely important. And so is spencer's about cash beating the S&P since 1997, and the high current S&P P/E. If that P/E drops back to its historical average levels the market will fall hard, and cash will have beaten the S&P since before 1995 (if you're buying the way people really buy, putting in $500 or $1000 a month, and so losing on the buys at the peaks). And since today's corporate earnings are exaggerated by pension funding assumptions that rely on the P/E not reverting to its historic trend, the underlying "E" will fall along when the P/E.

The economic community needs to get on the stick and edcuate the public about how fraudlent the whole "ownership" concept is. Real owners have some control over how their businesses are run. Modern stockholders don't.

If common stocks are such a great deal, why are corporate insiders selling them hand over fist?

Posted by: jm at September 18, 2004 10:19 AM

Answer to BabyBoomerJackNYC

Means testing will *not* restore trust, because of the ant/grasshopper problem: take two people with very similar income histories, but one is frugal and one is profligate. The frugal one is punished for their frugality. (Note this is different from progressive benefits, which SS already does--If person A pays twice the SS taxes of Person B, Person A gets less than twice the benefits of Person B, but that's ok. Progressivity is "Your secretary gets a smaller but still decent pension," the ant/grasshopper problem is "your 'irresponsible' coworker lives off your savings" and generates a lot more resentment.)

The trust issue, BTW, is less institutional ("Do GenX'ers trust the SS Fund") than generational ("Do GenX'ers trust Baby Boomers?"). To repair that kind of trust would require some change wherein the Baby Boomers volunteer to take a hit for the benefit of everyone else. E.g., phase in a raise of the SS retirement age to 68 on an accelerated schedule, so it reaches 68 years in 2015. This improves SS solvency, benefiting prior retirees and the system. It hurts GenX'ers (not that GenX'ers will be surprised), but it hurts Baby Boomers more (which would surprise GenX'ers) by giving them even less time to prepare for their delay in benefits.


Matt McIrvin, that's an insightful observation.


Liberal says "The issue of how to slow the Medicare system's growth in expenditures is really the issue of slowing the increasing size of the medical sector, as a fraction of GDP."

Not necessarily. For example, just change the law to so that Medicare will only cover what was medically available in 2005 (or less expensive replacements), and fully enable medigap. Note that no one's medical care gets worse than today's, although Medicare won't get better as fast (at least in the early years). Now you may not like this policy for other reasons, but it will [drastically] slow the Medicare system's growth, while not mandating an equal slow down in the growth of the medical sector, as a fraction of GDP. So, in principle, the two are separable.

Posted by: Tom at September 18, 2004 01:47 PM

re:ant/grasshopper

May I suggest a different means test? Could benefits be based inversely on adjusted lifetime income?
Pick the national median income. Peg that to 100% benefits. Above that your benefit sees a progressive reduction to 0%.

Wouldn't this constitute " the Baby Boomers volunteer to take a hit "

Two other points.
1)Increases in SS are tied to both inflation and wage increases. Eliminating the increases tied to wages would improve the long-term outlook (“go ahead hit me again”)
2) COLA increases could be adjusted according to individual circumstances (i.e.: homeowner vs. renter)

Posted by: BabyBoomerJackNYC at September 19, 2004 06:38 AM

Tom wrote, "Note that no one's medical care gets worse than today's, although Medicare won't get better as fast (at least in the early years)."

Not necessarily true. Depends on how economically efficient the sector is, how much of the costs are really economic rents, etc. For example, suppose the number of doctors were fixed (in an attempt to continue physicians receiving rent). Then it's *logically* possible that if you cap Medicare costs in in the way you state, costs will continue to escalate.

If you don't believe rents are a problem, look at recent changes in regulations that made it harder for foreign MDs to practice in the US.

I would argue that while part of the problem is insurance (my ilk is found of national health insurance), a large (or even larger) problem is the way health care is delivered by providers. The lack of information in the medical sector as compared to other sectors of the economy is just staggering, as is the apparent lack of economies of scale. (E.g., so many MDs owning their own businesses.) These problems won't be addressed by capping Medicare in the manner you proposed, which was the point I was making.

Posted by: liberal at September 19, 2004 07:12 AM

Anne, kharris, Yomtov, ken are correct on social security. People, listen to them.

The trust fund is not an investment account, and you cannot compare the return on investment in the trust fund to a private investment account. As pointed out above, the trust fund is essentially a savings account to supplement the pay as you go system that is in place. In a pay as you go system, the growth in potential social security payments is linked to growth in GNP per capita over time. It is a temporary patch for a temporary problem of the baby boom retirement period, which is, due to the fact of human morality, a temporary problem. Population cohorts are born, and then after awhile, they die. That trust fund issue is bogus.

It is not a bogus issue that the government has been borrowing from the trust funds with no plans at all (that make any sense) for paying the money back.

The evil baby-boomer generation mooching off of Gen-Xers is also a bogus issue. Because of the demographic transition that has taken place over the last 50 years, the social security system will be long run imbalance, and given current benefits and payments, the Gen-Xers will in turn be mooching off their kids. So I admit the baby boomers are evil, but they are not the source of all evil here.

But the problems with pay-as-you-go go social security are not major, and can be easily fixed in most-likely minor to possibly moderate adjustments in payroll taxes and benefits. This can either be done by fixing up pay-as-you-go, or by a well-planned, and gradual phase in a partial privatization, with the option of government run investment pools, and keeping mandatory -as shown in Sweden, Canada and other countries. Note that the Bush admin has not proposed a well-planned gradual plan for partial privatization along the lines of other countries.

Medicare is a big problem, pension and retirement medical benefits in some "old" industries are a problem, and the government insurance programs that back them up might be a big problem. Social security is not a big unsolvable problem.

For those who think that investing in a stock market fund is a magic bullet, and quote the average long run return on the stock market, remember that the variation in annual returns on the stock market is very large. If you want to guarantee you will actually get anything close to that average annual return after 45 or 50 years of investing, then you are very mistaken. It takes more like 70 or 80 years. Sure, the average annual return in higher, but after only 45-50 years there is a tiny chance you will be rich a Croesus, a small chance that you will be very well off, there is also a much bigger chance you will end up about the same as you would investing in overall GNP growth, and also a good chance you won't have much of anything at all to retire on. That is assuming the Pos-WWII pattern of annual returns and their annual variation continues.

Posted by: jml at September 19, 2004 02:40 PM

Reply to BabyBoomerJackNYC

"Could benefits be based inversely on adjusted lifetime income?"
SS already reduces marginal return per life-time contribution as that contribution rises; this just makes that relationship more extreme.

"Wouldn't this constitute 'the Baby Boomers volunteer to take a hit?'"
Somewhat. It is Baby Boomers voluneering to take a hit, but Gen'Xers get hit as hard under this change. Nonetheless, it is not "defer the bill until Gen'X has to pick it up" so yeah, I think this would increase trust some.


"Pick the national median income. Peg that to 100% benefits. Above that your benefit sees a progressive reduction to 0%." Note that this is effectively an additional tax, captured over the lifetime. The phase out has to be very slow to avoid an excessive tax, and with a very slow phase out you don't save a lot. Certainly "Frank saved nothing, he gets full SS, Joe earned the same but saved 5% of his income his whole life, so due to his income from savings he gets no SS" is exactly the ant/grasshoper problem.


"1)Increases in SS are tied to both inflation and wage increases. Eliminating the increases tied to wages would improve the long-term outlook (“go ahead hit me again”)"
Agree that this improves the long term actuarial outlook. Note, however, that this compounds over time, and thus hits Gen'X more than Baby Boomers.

"2) COLA increases could be adjusted according to individual circumstances (i.e.: homeowner vs. renter)"
This exactly does open up the potential for an ant/grasshoper problem, depending on what the actual adjustments are. If you treat a person who earned less over their lifetime better [relative to their contributions] that is not a problem. If you treat a person who earned the same but saved less better, that is the problem.


Separately, Liberal asked about rents as a problem in health care. That's an issue. The cap I mention wouldn't directly deal with it. I don't think I've worked through all the impliciations, but so far I have not been able to build a model where physician rents prevent per retiree medicare costs from falling in relative terms under the cap, *unless* those rents grow in the future at least as fast as overall economic growth, and perhaps a lot faster. Certainly had the described cap been in place since the mid 70's, current Medicare costs would be a lot lower, Medicare would not cover heart transplants (IIRC when they were declared no longer "experimental"), Medicare would cover the new statin drugs, and Medicare would provide better care than in 70's, but probably not as good of care as it really does today. (I say "probably" because of second order effects in efficiency and progress that only dominate in very long time periods, and the last 30 years likely would not have been a sufficient time period.)

Posted by: Tom at September 19, 2004 05:35 PM

"The creation of SS in the thirties was an affirmation of generational trust. It created the foundation for the middle-class prosperity of the fifties and sixties."

No, it didn't. Obliterating and/or eviscerating the capacity of every industrial power outside of North America in the early 1940s did that. Social Security was one part of FDR's plan to make sure he and his cronies weren't strung from lampposts by their heels.

Posted by: David Thompson at September 19, 2004 07:46 PM

Tom wrote, "Separately, Liberal asked about rents as a problem in health care. That's an issue. The cap I mention wouldn't directly deal with it. I don't think I've worked through all the impliciations, but so far I have not been able to build a model where physician rents prevent per retiree medicare costs from falling in relative terms under the cap, *unless* those rents grow in the future at least as fast as overall economic growth, and perhaps a lot faster."

But physician rents are not the only problem. The US system *in aggregate* suffers from inefficiencies.

According to OECD stats compiled in a special _Money Magazine_ issue (Fall 2003), the US spent more than 13% of GDP on health care, far more than other countries, with no demonstrable increase in average life expectancy.

This was the point of my original claim: the amount spent on Medicare would be reduced if the health care system in the US paralled that in other countries, as would non-Medicare health care spending.

Of course, you're right, Medicare and non-Medicare spending are not *logically* connected. By the same token, though, one could just eliminate the Medicare system entirely.

Aside: it's noteworthy that the countries with the next highest percent of GDP spent on health care are Switzerland, Germany, and Canada. I don't know about Switzerland, but IIRC in Germany and Canada, doctors have a large degree of autonomy, just as in the United States.

Posted by: liberal at September 20, 2004 03:47 AM

Hey Jimbo
DOW 36 000!
Braw Haw ha ha ha ha ha ha ha ha

Posted by: Nemesis at September 20, 2004 08:44 AM

DOW 36,000!

I give up! I want my payroll tax back right now, in freshly made penny stocks, if you please.

Posted by: jml at September 20, 2004 08:22 PM

"But those who say "there’ll be nothing left in the Social Security retirement fund"

...really really should complete sentences.

Posted by: Gary Farber at September 21, 2004 10:56 AM