November 09, 2004

Max Sawicky on the Social Security Debate

He writes:

MaxSpeak, You Listen!: KEEP YER COTTON-PICKIN'
HANDS OFF MY
SOCIAL SECURITY
: There is absolutely no reason at present to make changes in Social Security, except out of political fear of the Right. In this post I confine myself to the merits.... I leave questions of concessions, political communication, and other chicanery for another day.... Does Social Security need reform?

Workers have paid and will pay enough into the Social Security Trust Fund to finance full benefits until 2042. The Federal government is obligated to redeem its debt to the Trust Fund with its own separate revenues, chiefly the income tax. The fact that G. Bush has gutted the income tax is his own damn fault, and somebody will have to reverse that decision if the debt to beneficiaries is to be honored.

Do you want to make provision now for shortfalls in the program in 2042? Are you an idiot? Nobody knows what kind of economy we will have in 2042. Your geniuses in the Bush Administration forecast a deficit of $525 billion for this past fiscal year in January. It turned out to be $413b....

The eminent professor Brad DeLong suggests that a certain variety of privatization might be helpful, but the Bushies will probably screw it up. The latter goes without saying, but what about the merits of DeLong's argument?

He suggests that workers could enjoy an equity premium by investing in the stock market, relative to Social Security's implied rate of return. He says the Gov can do things to minimize administrative costs. He says the accounts can be regulated to be properly balanced and diversified, and 'owners' of the accounts can be blocked from draining them before retirement. In this context, there is no reason to have individual accounts in the first place. The Gov could just scoop up all the diverted payroll taxes and set up some huge asset funds, minimizing individual risk, preventing imprudent withdrawals, diversifying better than any individual could. That was a Clinton Administration option.

Once you start down the road of individual accounts, owners of such accounts will rightly ask, if this is mine, why don't I have the right to abuse it?...

The fundamental problem, such as it is, is that payroll taxes devoted to the old age benefit component of Social Security are insufficient to cover future legislated benefits at present. This is true whether you maintain the status quo, or switch some of the contributions to a separate account.

The simple answer is that the U.S. Government, by virtue of its power to tax, can easily finance Social Security, indefinitely. There are fair and unfair ways to do it, but the ability to do so is not in doubt. Suppose there was no Social Security? Could the nation's economy provide the retirement consumption of the elderly for the foreseeable future? That's what it has to do anyway, public program or no program, since someone who isn't working is consuming goods and services produced by someone who is.

What would I do, supposing 2042 approached and circumstances were as they are currently projected? I would do a combination of payroll tax increases, increases in the retirement age (ideally voluntary, and with adequate advance notice), a slowdown in benefit indexing, and some general revenue infusions. There is no need to do any of this for some time. (There will be a need for tax increases over the next ten years to redeem debts to the Trust Fund.).

A note on terminology. Not too many months ago, Republicans began backing away from the word "privatization" in reference to Social Security. Apparently it polled badly, so there is no reason for us to avoid the term to describe Bush's proposals. The favored usage for the R's is "individual accounts." "Modernization" is another favorite that is used for Medicare deform.

I doubt calling this "forced saving" is going to be effective, since it will be perceived as a free add-on. Forced savings with your own little account is better than payroll taxes that disappear entirely. I expect the R's to finance the transition cost of their scheme by borrowing, along with some domestic spending cuts for spite. At this point the only higher power that will stir them is adverse reaction in global capital markets, leading to interest rate spikes and sell-offs of dollar-denominated assets and dollars themselves.

One conservative or libertarian argument against the individual accounts came from Herbert Stein. If you're going to set aside some of my money, why not just cut my payroll tax? "It's my money!" Do you, the Gov, know better how to set my investment portfolio better than I? If you don't know how to spend better than, why would you know better how I should save?

The wrinkle for Bush in this argument is that a forthright tax cut would relinquish any pretense of providing retirement insurance. It would say explicitly, people, you're on your own. Forget the 50s. Welcome to the 20s.

Max is right in his statement that the case for Social Security privatization is by and large simply a case for having the government invest the Social Security trust fund in the stock market.

There are two reasons I can think of that might tend to lead one to prefer individual accounts to government investments in equities. First, one might be uneasy with the thought of the government voting shares in corporate elections. Second, one might prefer to have beneficiaries with property rights protected by courts rather than beneficiaries whose benefits were at the grace of Congress. Both of these seem to me to be relatively weak.

Posted by DeLong at November 9, 2004 01:57 PM | TrackBack
Comments

Nobody I know with any sense supports the government doing the investing.

There may be restrictions. Perhaps a certain level of minimal risk factor on an investment measured by normal standards of such things. Certainly there should be no "list of approved funds" (I can hear the lobbyists' ears perking up already.) I understand the main principle to be that basically, I get to decide where the money goes.

The author's solution, basically "Hey, we're not in trouble for a while yet, and then we'll think of something" doesn't sooth me much.

There are a lot of advantages to allowing private investment that are glossed over. First, the money will, by and large, go to something a little more productive for the economy than T-bills. Second, if I die, my kids get the cash, not Uncle Sam. Third, it will begin moving away from the social welfare model back to the private retirement model.

Personally, I think the politicians dislike the idea of reducing the hold of Social Security on our elderly because it's such a useful political weapon. Nothing like holding up a Social Security check in front of a frightened elderly person and telling them your opponent will set it on fire.

Posted by: tbrosz at November 9, 2004 02:30 PM

tbrosz wrote, "There are a lot of advantages to allowing private investment that are glossed over. First, the money will, by and large, go to something a little more productive for the economy than T-bills."

Nonsense.

As William Bernstein wrote in his excellent online journal, Efficient Frontier (click the link in my name to get to the article in question):
"In short, the aggregate national investment return will be approximately the same no matter what the overall stock/bond mix of the capital markets. To the extent that debt tends to decrease agency conflicts, a small nod may go to an increase in the overall debt/equity ratio. If everybody issues/invests in stocks, then stock returns must fall to the aggregate return rate. Which may actually already have happened. If all of the nationís pension funds and newly-privatized social security accounts shifted to stocks, they most decidedly would not obtain the historical 7%-8% real return."

Posted by: liberal at November 9, 2004 02:39 PM

Wonderful post!

Posted by: anne at November 9, 2004 02:41 PM

When I said productive, I meant productive, not lucrative. Investment in equity, for example, feeds capital into productive industries. Investment in T-bills feeds capital mostly into wealth redistribution. One can create new wealth. The other can't.

Posted by: tbrosz at November 9, 2004 02:46 PM

Brad DeLong writes:
>
> Second, one might prefer to have beneficiaries with property
> rights protected by courts rather than beneficiaries whose
> benefits were at the grace of Congress. Both of these seem to
> me to be relatively weak.

Speaking as somebody who lost some non-trivial benefits due to Acts of Congress in the early 80s, I find the argument Brad finds weak to be rather stronger. :-) I agree that the plan the administration is likely to propose is not the one I would choose, but the grace of Congress could end up being a lot less graceful down the line, especially if there is a full-blown fiscal crisis.

Posted by: Jonathan King at November 9, 2004 02:57 PM

tbrosz, why not just have the government put the money into index funds, or better yet, form an optimal portfolio?

Posted by: jerry at November 9, 2004 03:07 PM

Key part of liberal's excerpt is "all of the nationís pension funds..." Noone's talking about the "Bondworld" discussed in the article, just part, repeat part, shifting of social security from T-bills to something else. You could still beat T-bills' rate of return.

The other point is that much/most of a worker's Social Security funding would remain in ultra-safe T-bills, so that would make it appropriate to allow some risk-taking with the privatized portion.

Comments about Bushies being guaranteed to mess this up are true, unfortunately.

Posted by: Brian at November 9, 2004 03:23 PM

First, why is it a "weak" argument to say that it might be a bad idea for the government to have voting rights in corporations? This seems to be one of many ways cronies could screw with the system.

Second, a recent TNR piece about how Democrats can package their proposals, the author of the article mentioned that in 2002, President Clinton proposed a diversion of some amount into three different mutual funds that federal employees used. That does seem to make more sense than only using one fund for privatization. Any thoughts?

Since I don't think I have anything new to add besides what I just said, I will say something that I have wanted to say for a while but never found a good opportunity to do so. If we can propose the same things with different names, why don't we do it with trade? I remember thinking about this while reading that people are much more open to school vouchers when they are called something else. So instead of free trade, why not call it trade integration? Unless there is some sort of difference in technical terms that I am not aware of, it could go a long way into making it easier to go about discussing free trade.

Posted by: Brian at November 9, 2004 03:48 PM

It seems to me that all the arguements in favor of individual accounts gloss over the risk factor. Part of the point of Social SECURITY is to divorce an individual's pension from the outcome of a stock market crap shoot.

Posted by: Jonathan Goldberg at November 9, 2004 04:07 PM

You may not want the government to vote these shares, but who votes them then? Effectively, no one, so all this extra investment money does is give the other shareholders a price boost and fuels speculation with the SS money.

Posted by: Jim Lund at November 9, 2004 04:08 PM

The wonderful thing about direct government investment in equities is that it presents us with many of the problems of government ownership of the economy (from conflicts of interest on upward) with none of the benefits of actually managing the assets. If the last 20 years have taught investors anything, it is that corporate management, whether of mutual funds or publicly traded companies, ought never be trusted too much. And yet that is exactly what the governemnt would be doing by investing in equities.

Of course, the alternative that Max and Brad discuss might well be worse, because the government might have a better chance of detecting that it is being fleeced than an ordinary $800-per-year investor would.

Posted by: Tim Francis-Wright at November 9, 2004 07:15 PM

"When I said productive, I meant productive, not lucrative. Investment in equity, for example, feeds capital into productive industries. Investment in T-bills feeds capital mostly into wealth redistribution. One can create new wealth. The other can't."

Huh? The main source of wealth production is redistribution of income. Nations that pump money from the top down to the bottom are richer, top to bottom, than nations that only allow the natural flow of money upward. RICH PEOPLE ARE NOT STUPID. Why invest if no one has enough buying power to buy?

Remember, the United States got rich on land distribution. The government took land from the natives and gave it away for free. A European serf would have to work for several million years to acquire the same land an American settler would acquire simply by showing up and farming it for a year or two.

In the 1920s and 1930s when the nation industrialized and urbanized, land became less important. The government had to redistribute industrial profits to keep the economy going. The strategy worked quite well. My father started investing in the market in the 1930s, and he made out quite well. Despite all the whining, the New Deal helped the stock market and the economy, as did the outrageous 90% marginal tax rates that lasted into the 1970s.

As for Social Security, we still have the same old choices. You can let old people beg or die, or you can come up with an excuse for feeding them. Money savings are one excuse. Ask any anthropologist and they'll tell you that money is just the way our society allocates goods and services. Money transfer payments are another excuse.

Some societies require young people to provide goods and services to older people with high genetic homology. This was even proposed as a law in the United States back in the 1920s.

As far as I'm concerned, I'll stick with our hybrid system of money savings and transfer payments. If nothing else, it provides us with an excuse for providing goods and services to the younger people who provide the goods and services for the elderly.

Posted by: Kaleberg at November 9, 2004 07:25 PM

why are why sitting on our hands and debating the hypothetical scenarios where partial privatization is not a total disaster. listen to the preface to every republican discussion: "everybody agrees socal security is broken irreparably." no one challenges this. they just nod as if yes, everyone agrees.

it is a lie and we know it. soc sec is fine till '42, except it has been borrowed from by bush to pay rich people money, and he doesn't want to pay it back. the right wing goal is for everyone to be on their own - they have to do it incrementally and under cover of lies. just like the ultimate goal of no child left behind being the destruction of public education.

when clinton tried to reform health care his opposition decided it would be dead on arrival. privatization can be dead on arrival too. these repubs will run like hell and deny they ever intended to privatize if a PR campaign is waged and leadership is vocal, to say: take your money grubbing hands off our social security. THEY ARE TRYING TO DESTROY SOCIAL SECURITY. partial privatization leads inevitably to greater privatization and loosening of restrictions on individuals so they can invest in fucking lottery tickets! is there any more 527 money lying around - we need to start producing the commercials NOW.

Posted by: little old lady at November 9, 2004 07:27 PM

Whether you call it 'privatization' or 'modernization' it still makes no sense. We are looking to reform a system that may become insolvent 40 years out by taking money out of that system. This is absurd. I understand that the point is to increase the rate of return of the Trust Fund, thus extending the actuarial viability of the system further into the future. But the implementation of the 'fix' is worse than the disease; it becomes an excuse and prelude to cutting benefits and nothing more. There will effectively no longer be a guaranteed income in old age with an individual account type reform, as the growing cost of private accounts will become a perennial excuse for cutting guaranteed benefits.

Make no mistake, the Bush Administration will be looking to free employers from the need to match contributions to the system for that 'private account' portion. Here's how I predict the issue will be framed: The SSI on the first X$ one makes per anum will go to the private account, let's say 15K. Thereafter, SSI goes to the Trust up to the ceiling. The central argument will revolve around whether employers should be made to match SSI contributions for those first 15K in earnings, since they are in essence a private savings, not a socialized cost. This is the political magic bullet. Low wage employers and part-time employers will be able to escape SSI costs for the majority of the workforces; a cost of labor bonanza. This savings to employers, as much as the much vaunted fees to Wall Street brokerages is the real political muscle behind the GOP's determination to 'modernize' Social Security. The result is that low income people will be completely hostage to the vagarities of the market, and shut out of the Social Security system - thus eroding political support of the program.

Posted by: mike at November 9, 2004 07:30 PM

"When I said productive, I meant productive, not lucrative. Investment in equity, for example, feeds capital into productive industries. Investment in T-bills feeds capital mostly into wealth redistribution. One can create new wealth. The other can't."

Huh? The main source of wealth production is redistribution of income. Nations that pump money from the top down to the bottom are richer, top to bottom, than nations that only allow the natural flow of money upward. RICH PEOPLE ARE NOT STUPID. Why invest if no one has enough buying power to buy?

Remember, the United States got rich on land distribution. The government took land from the natives and gave it away for free. A European serf would have to work for several million years to acquire the same land an American settler would acquire simply by showing up and farming it for a year or two.

In the 1920s and 1930s when the nation industrialized and urbanized, land became less important. The government had to redistribute industrial profits to keep the economy going. The strategy worked quite well. My father started investing in the market in the 1930s, and he made out quite well. Despite all the whining, the New Deal helped the stock market and the economy, as did the outrageous 90% marginal tax rates that lasted into the 1970s.

As for Social Security, we still have the same old choices. You can let old people beg or die, or you can come up with an excuse for feeding them. Money savings are one excuse. Ask any anthropologist and they'll tell you that money is just the way our society allocates goods and services. Money transfer payments are another excuse.

Some societies require young people to provide goods and services to older people with high genetic homology. This was even proposed as a law in the United States back in the 1920s.

As far as I'm concerned, I'll stick with our hybrid system of money savings and transfer payments. If nothing else, it provides us with an excuse for providing goods and services to the younger people who provide the goods and services for the elderly.

Posted by: Kaleberg at November 9, 2004 07:38 PM

I heard Glenn Hubbard on Market Watch on NPR, explaining that most people would want to buy TIPS with their money, or something very safe. Why is that an improvement on the current system where the excess social security contributions are evidenced by bonds? No discussion.

Then he explained that privatization would not be a windfall for Wall Street, because it only amounts to 1/6th of the current payroll tax payments.

Democrats could not explain to 59+ million people that we have big problems in Iraq, or that the estate tax is a good idea. How the heck are we going to explain any of this to the great non-hearing class?

Posted by: masaccio at November 9, 2004 07:49 PM

"When I said productive, I meant productive, not lucrative. Investment in equity, for example, feeds capital into productive industries. Investment in T-bills feeds capital mostly into wealth redistribution. One can create new wealth. The other can't."

Actually, wealth redistribution into education, health, and social stability, improves human capital, which creates more total wealth in the future than we might have had otherwise.

Posted by: Lee A. at November 9, 2004 09:13 PM

Gloom and doomers predict Productivity Growth

2004 2.7% 2005 1.8% 2006 1.9% 2007 1.9% 2008 1.8% 2009 1.8% 2010 1.7% 2011 1.7% 2012 and years forward 1.6%.

These people must hate America. No wait! They are the Trustees of Social Security, including three Cabinet Secretaries!!

Professors DeLong and Sawicky are you really willing to sign off on these numbers? The 2004 numbers are particularly sticky. But these are the numbers underlying the Intermediate Cost alternative (the only one that is ever cited.) And the one underlying the projected 2042 Trust Fund exhaustion.

http://www.ssa.gov/OACT/pubs.html
2004 Report of the Trustees of Social Security p.88

Or do you believe as the Trustees do that these numbers are the best America can do?

2004 2.8% 2005 2.1% 2006 2.2% 2007 2.2% 2008 2.1% 2009 2.0% 2010 2.0% 2011 1.9% 2012 and years forward 1.9%
Same report, same page.

I don't, and no other economic projection I have seen does either. But per the Trustees that is all we need to fully fund Social Security with no changes whatsoever (Low Cost Alternative).

I have posted (more like cut and pasted from the Annual Reports) these figures a number of times on both your sites, and got occasional pats on the head. But what I am still waiting for is a forthright agreement that Social Security is indeed a phony crisis or some explanation of why a plain reading of the Reports has led me so far astray.

"2 points or 2%" Per the Trustees either a 1.89 percent immediate increase in payroll tax (2004 report p.16) or 2% growth in productivity in the out years (p.88) fixes Social Security entirely with no changes in benefits or retirement age, and in the later case no additional out of pocket costs whatsover.

Prof. K gets it. Perhaps you could weigh in on why any projection of future productivity growth that puts 1.6% at the median needs to be taken seriously.

Posted by: Bruce Webb at November 10, 2004 02:19 AM

I heard Hubbard on NPR. It was great for a few chuckles. Part of the idea of privatization (at least support from Wall Street) is that a little commission on a lot of money can produce BIG profits. Does anyone doubt that the biggest beneficiaries of the 401K programs have been the stock brokers? A lot of people are barely even or have lost money.

The only reason I see to privatize SS is to change the government accounting. We could "privatize" the current surplus, say that it is now all in government bonds and be done, or allow a manager to diversify and take slight risks.

The idea that millions of barely educated Americans are going to become active portfolio managers that have the slightest idea of WTF they are doing is ludicrous. Millions of Americans got bad investment advice from their 401K holders during the push to get people to sign on and then were abandoned by advisors once they were signed on. These people who know all about investing think that everyone else does also or if they don't, that they should. They overestimate the level of knowledge. They make the same mistake as the rookie professor that lectures as if all his students already understood the basics. They don't.

Posted by: bakho at November 10, 2004 05:10 AM

Currently half of what one pays in SS taxes is double-taxed in that one also pays income tax on the same income. Could changing that ratio help fix SS?

Posted by: SusanJ at November 10, 2004 07:00 AM

Quoting from the Economist from the post above re "productivity"

"America's favourite measure is output per man-hour in the non-farm business sector. Since 1996, this has increased at an annual average rate of 3%, double the pace of the first half of the 1990s."

Citing numbers from the Trustees Report (p.88) 1.9% productivity growth in the out years makes Social Security whole.

Susan, Social Security doesn't need a fix. If productivity comes anywhere close to the figures since 1996 the Trust Fund is currently overfunded. And productivity can slump by 33% and we still are funded. And exactly no one is predicting the near 50% dip in productivity we would need to get to 1.6%, which is the current long term projection of the Intermediate Cost alternative, which is what produces every single figure and year of depletion cited in the major media.

And BTW addressing the double taxation issue doesn't affect anything. The only issue is whether dollars flowing to the Treasury in payroll tax meet or exceed those flowing out in retirement and disability checks. With even modest productivity growth the numbers say they will.

Posted by: Bruce Webb at November 10, 2004 07:24 AM

"There are two reasons I can think of that might tend to lead one to prefer individual accounts to government investments in equities. First, one might be uneasy with the thought of the government voting shares in corporate elections."

You leave out the third and by far the best management option: a CALPERS type body.

Anybody tracking CALPERS closely on Google News has to be AWED by this the world's largest corporate investor in knocking sense into (1) goofy corporations and (2) goofy stockmarket mechanisms like the NYSE - which it seems to be taking to regularly suing.

Posted by: Fast Pete at November 10, 2004 07:29 AM

>I heard Hubbard on NPR. It was great for a few chuckles.

Stop laughing, that idiot has hold of the ear of the people and the short hairs of the government.

Susan - please stop saying SS needs to be "fixed".

But please continue coming up with great ideas like making it deductible from income!! That is a completely, utterly fantastic idea for the Dems. I'd like to see somebody argue against it - the same people that can be convinced that the inheritance tax is "unfair" will be pretty easy to convince that double-taxing everybody who makes <90K is unfair, too.

It's time for the left to cut off the funding to DC.

Posted by: a different chris at November 10, 2004 09:22 AM

Social Security Trust Fund, Myth Or Reality?

Perhaps someone can explain the following to me.

What happens in a few years when the costs of Social Security payments start to exceed the revenues from Social Security taxes. The conventional answer seems to be that the government will redeem the bonds in the Social Security Trust Fund to cover the difference. However, these bonds are non-marketable and of no direct value to Social Security recipients, so the government will need to raise cash with which to redeem the bonds and pay the recipients. As far as I can tell, the government will have four alternatives to pursue in redeeming the bonds: a) issue marketable securities in the same amount, b) increase tax revenues, c) reduce spending, or d) create more currency. To redeem $1,000 in bonds in the Social Security Trust Fund will require some combination of a, b, c, and d totaling $1,000.

Let us suppose that the Social Security Trust Fund did not exist. What then would the government do when Social Security payments started to exceed Social Security revenues by $1,000? Once again, some combination of a, b, c, and d totaling $1,000.
So, if the existence or non-existence of the Social Security Trust Fund makes absolutely no difference in governmental actions when Social Security payments start to exceed Social Security revenues, in what sense is the Social Security Trust Fund anything other than an accounting fiction?

Posted by: Neil Swanson at November 10, 2004 09:57 AM

I do not think "privatization", or allowing investment in the stock market, is optimal - at least not yet. Simply converting social security from a defined benefit plan into a defined contribution plan, in my opinion, is the first step at correcting the problems. Workers' contributions (including the "employer" portion) would go into their account, with their account earning t-bill interest.

It would be a process to get there, taking some time. Establish a cut-off age where people older stay under the current plan. People younger would have a portion of their contributions (maybe take a portion of the "employer" portion to make it more palatable - the reason for having the "employer" contribution in the first place) go into paying participants under the old plan.

After 10 or 20 years, you have a system that should have been set up that way to begin with: people with their own "accounts" invested in near-zero risk securities (t-bills) as a bare-bones amount for retirement, urging citizens to save outside of this as well.

You eliminate congress using it for political gain. People can understand that they get what they paid in plus interest. Government maintains this source of borrowed funds - effectively no change from that standpoint. People can then better plan retirement, having more confidence in what will be there, & making the decisions of "consume now" vs. "save for later".

Another note: I think multiple copies of posts occur because of impatience combined with slow servers. If you hit the "Post" button, but nothing seems to be happening, hitting it again simply causes more copies (let's see if I can follow my advice).

Posted by: Ron at November 10, 2004 11:11 AM

Social Security Trust Fund is a political deal:

(a) we allow for a number of years the regressive payroll tax to be higher than it is necessary to fund Social Security;

(b) in exchange, for a number of years we will do the reverse, i.e. collect taxes from some other sources to cover the gap between payroll taxes and what is necessary to fund SS>

Congress can undo the deal. Congress can make it a capital crime to be older than 67. Neither is worth advocating. Political deals are not fiction, they are as real as the consensus behind the deal. GOP tries to undermine the consensus on Social Security deal, which perhaps would shift it to the realm of fiction.

As long as the majority does not treat the Trust Fund as a fiction, it is not.

Posted by: piotr at November 10, 2004 11:25 AM

piotr,
The idea that an accounting fiction is reality as long as we just believe reminds one of Peter Pan.

To state that the SSTF is a political deal is a fair characterization, but irrelevant. This is not the manner in which the SSTF was and continues to be sold to the public, i.e. that the SSTF contains some sort of tangible asset which will cover the future shortfalls of the SS program. The underlying truth, which you seem to recognize, is that the "assets" in the SSTF are a myth. We could have the same political deal without a mythical SSTF and we might be better able to engage in meaningful conversations were we to do so.

Regards,
Neil

Posted by: Neil Swanson at November 10, 2004 11:45 AM

The idea of making SS contributions has the virtue of making it less regressive. The biggest beneficiaries (as a share of their income) would be those who pay all year. The idea has the disadvantage of reducing general revenues, which are needed in order for the Treasury to pay the SS trust what is owed. Certainly, there are plenty of other potential sources of revenue to the Treasury, but right now and for the foreseable future, they are inadequate to fund government operations, much less pay back loans from the SS Trust.

Posted by: kharris at November 10, 2004 02:19 PM

"...making SS contributions DEDUCTIBLE..." Sheesh.

Posted by: kharris at November 10, 2004 02:42 PM

One key thing about the stock market is that it only outperforms bonds on average (cf Irrational Exuberance). There's no guarantee that the stock return will definitely outperform the market by the time the baby boomers start retiring, which is a relative short period of time (the first wave will be in by 2010-2020.) Add individual stupidity, undiversified portfolio (the key problem I have with individual accounts -- I don't think people'll go for passive funds, especially the way Bush is selling it as 'ownership society'), Bushies incredible ability to screw things up, and you have a recipe for disaster.

Of course, I already have a job lined up with a fund management firm. So from personal PoV, more 401k accounts are just brilliant.

Posted by: Weco at November 10, 2004 05:14 PM

Kudos to Bruce Webb again. He seems to actually have read the reports and understand the basis on which Social Security is funded.

Now if one wants to argue that the United States will repudiate its debts, of course all bets are off. However, I suspect if this happened, the problems with Social Security would pale in comparison.

In an uncertain world, short term US debt is defined as "risk free". Does anyone want to change this?

Posted by: Sam Taylor at November 10, 2004 05:26 PM

Neil Swanson wrote, "The underlying truth, which you seem to recognize, is that the 'assets' in the SSTF are a myth."

Yes and no.

The assets in the trust fund are backed by the sovereign power of the USG to collect taxes to pay off its debt, just like general Treasury fund debt is. In an *economic* sense, the bonds in the trust fund are no less assets than Treasury bonds in general.

On the other hand, owners of general Treasury bonds can sell them on the open market. And furthermore they *own* the bonds. While the USG could default on general Treasury bonds, it couldn't pick a particular bondholder and not pay her back, as the bonds are her property and hence are protected by the "property interest" defined in the Constitution. (AFAICT.)

Not so the SS Trust Fund. We who contribute(d) to the fund do *not* have a Constitutionally-protected property interest in the fund being used only for SS and not raided for general operation purposes. (Which is what will happen if the government doesn't honor the debt to the trust fund.) It's only a statute, AFAIK, and could be changed tomorrow.

Again, that doesn't mean the assets are fictitious, any more than any bond is fictitious.

Posted by: liberal at November 11, 2004 08:15 AM

Liberal, thanks for the clear reasoning.

A $100 bill has no more intrinsic value than a $1 bill. We accept either with the belief that they will still be worth roughly the same amount of goods next month as they do today. This has certainly not been the case in all places at all periods in history. Which is large part explains the gold market.

But in any event whether you are investing in bonds or dollar bills you assume there is some meaning behind "Full Faith and Credit". The oddest part about the 'just an IOU' argument is the apparent belief that some future US government can just jab a stick in the eye of voting seniors and default on the bonds in the SS Trust Fund. That government would be lucky to survive until the next mid-terms. The notion that some Russian Kleptocrat can sleep easily at night knowing his money is tucked away in Treasuries, but Grandma should be panicking because "it is only a promise" is ridiculous as long as Grandma still has her voter card.

And unless Neil knows something I don't, this boomer plans to be registered and voting right up to the day they put me in the urn.

Posted by: Bruce Webb at November 11, 2004 09:48 AM

If I recall, in ancient history there were cases when all debts, or a large class of debts, were anulled by enacting a law.

Any notion of financial asset depends on law, and changes in law can at the very least dramatically alter the value of a financial asset. In this sense all financial assets are ficticious -- hence the notion of "real estate".

Therefore if the "ficticious nature" of the Trust Fund is our chief worry, it should be invested solely in real estate and commodities (actual, not futures).

Perhaps not such a bad idea. Suppose we use the SS surpluss to purchase oil to be stored until SS gets deficit. First, we drive up the price of energy now which gives a spur to investments in energy saving. Second, as the oil fields become depleted and Asian economies quickly increase their consumption, the rate of return can be quite decent.

Posted by: piotr at November 11, 2004 07:00 PM

"Workers have paid and will pay enough into the Social Security Trust Fund to finance full benefits until 2042."

This is complete nonsense. The Social Security Trust Fund is completely worthless, by any MEANINGFUL definition of "worthless." Any meaningful definition of "worthless" would be something like, "one's net worth is the same, whether or not one has the item in question."

When government payouts to Social Security recipients exceed payments into the system--which will occur circa 2018, not 2042--the U.S. government will have to do one or more of the following:

-- borrow money to pay for the shortfall

-- raise Social Security or other taxes to pay for the shortfall, and/or

-- reduce benefits.

That is EXACTLY what would happen if there was no "Trust Fund."

The money paid into the "Trust Fund" has already been spent on other things. Anyone who does not acknowledge that fact is either ignorant or dishonest.


Posted by: Mark Bahner at November 15, 2004 08:59 AM

"liberal" writes, "Again, that doesn't mean the assets are fictitious, any more than any bond is fictitious."

You yourself explained by "Special Issue" Social Security bonds are not like *real* U.S. Treasury Bonds.

So you yourself explained exactly why "Special Issue" Social Security bonds are NOT real assets.

You know that "Special Issue" Social Security bonds are worthless, for the exact reason that Neil Swanson described: the same things will happen whether the bonds exist, or didn't exist.

You're just not honest enough to admit it.

Mark Bahner (classical--i.e., real--liberal)

Posted by: Mark Bahner at November 15, 2004 09:11 AM