Brad DeLong's Semi-Daily Journal: A Weblog

For the record, I did not say that Ms. Fierst was stupid. I merely find it frustrating when people claim that the SS system is just fine until 2042 when we're going to have to start addressing its problems in some way in 2017.

> Anyone who invests in the bonds of a government that defaults on them is in big trouble.

Expect murmurs from the Gamma Quadrant along the lines of 'why *shouldn't* we default on all those bonds held by those Chinese banks? What greater expression of global hyperpuissance could there be than to simply declare the US economy debt-free?'

" the U.S. Treasury defaults on its obligations to the Social Security Trust Fund starting in 2017, then the Social Security system is indeed in big trouble."

It's in big trouble all right, but not for the reason that the Treasury is "defaulting". Those obligations are I Owe Mes, not IOUs. If anything, cutting benefits on a means tested basis would probably enhance the U.S. govt's credit rating.

Further source information for this topic:

Page two of the Social Security Trustees 2004 report states that, "[T]he combined OASI and DI [old age and disability] Trust Funds are projected to become exhausted in 2042. ... Annual cost will exceed tax income starting in 2018 at which time the annual gap will be covered with cash from redeeming special obligations of the Treasury, until these assets are exhausted in 2042. Separately, the DI fund is projected to be exhausted in 2029 and the OASI fund in 2044."

The report further estimates that "Social Security’s cost as a percentage of GDP will grow from 4.3 percent in 2004 to 6.3 percent in 2030, and then gradually increase to 6.6 percent in 2078. Over the same period, the cost of Social Security expressed as a percentage of taxable payroll will grow from 11.07 percent to 19.29 percent. ... [F]inancial adequacy of the program for the next 75 years could be restored if the Social Security payroll tax were immediately and permanently increased from its current level of 12.4 percent (for employees and employers combined) to 14.29 percent. Alternatively, all current and future benefits could be immediately reduced by about 13 percent."

"[F]inancial adequacy of the program for the next 75 years could be restored if the Social Security payroll tax were immediately and permanently increased from its current level of 12.4 percent (for employees and employers combined) to 14.29 percent."

This assumes maintaining the current cap at 87K, I would guess. I would think raising the cap makes more sense than a regressive tax hike. But, since it *is* regressive, I'm sure the GOP won't hesitate to turn to such a tactic should they decide to bump up FICA revenue.

Some of the rest of us find it frustrating when one of a range of estimates of likely results for the Social Security Trust Fund, based on conservative growth assumptions, is treated as fact and used to imply that other views are naive, misinformed, or stupid. Insisting that the central estimate is right, when the assumptions underlying the central estimate mostly err on the conservative side, is simply not supportable.

The 2017 date for the Trust Fund taking in less than it pays out requires a peculiar sort of assumption of its own, unless I misunderstand the accounting. Doesn't the "cash in" side of that accounting only count money collected through payroll taxes, ignoring interest owed on investments in Treasuries? The 2017 deadline assumes to be true what some critics of the SS system offer as a dire warning - that Congress and the president are such rascals that they don't intend to make good on the interest obligation on borrowing from the Trust Fund.

Claiming that advocating keeping the SS system much as it is tantamount to saying things are "just fine" looks a bit like building a straw man (woman in this case). Responsible action on the part of our government is needed to see that the Trust Fund remains self-financing, but nothing economy-wrecking. We have increased taxes in the past without riots in the streets. We have raised the retirement age. We might contemplate means testing, as we do in other programs. Even if it does not remain self-financing, there is no reason that a Fund borrowed from over the years cannot be lent to at some point. No reason unless one's political position is that, though every other function of government has been financed at various time through deficit spending, SS cannot be.

If one wants to argue that a country with marginal and average tax rates that are below average in the developed world, with a distribution of income that is far less even than is normal in the rest of the developed world and has more concentrated wealth than most of the developed world must maintain tax cuts that favor the wealthy, at the cost of undermining a major part of the country's social safety net, then it makes sense to say Social Security may be facing a funding crisis over the coming decades. Not must, but may, depending on economic performance in the interim years.

If one does not think further enrichment of the upper ranks of the income and wealth distribution through tax policy is necessary, then there is no reason to talk about a funding crisis. There is a funding pinch. Think of the 10-year cost of any one of the Bush-era tax cuts to get a sense of appropriate magnitudes.

We are thinking what should not be thinkable, what must not be thinkable. How could it be possible that America would not honor the integrity of it obligations, of it promises to ten of millions who have through their lives honored America? Social Security obligations must be honored. Treasury obligations must not be inflated or defaulted away.

There are those who are busily at work trying to convince us that Social Security is destructive of the young and daying with the old. We are being told that Treasury bonds are worthless.

Microsoft runs ads for Encarata, joking the Social Security will soon be no more; that Social Security obligations are a comically absurd fancy. What are we about?

I've never quite understood why it should be considered a positive feature of a "reform" proposal that it makes it more difficult to share the burden of demographic pressures between the old and young generations. It strikes me that some form of "default" on these non-bond bonds would be a good idea if it came in the form of a modest benefit reduction or raising of the retirement age, offset by a reduced requirement for contributions from the young.

Well, moving to a private accounts system sure helped Argentina avoid a default.

KHarris

Some of the rest of us find it frustrating when one of a range of estimates of likely results for the Social Security Trust Fund, based on conservative growth assumptions, is treated as fact and used to imply that other views are naive, misinformed, or stupid. Insisting that the central estimate is right, when the assumptions underlying the central estimate mostly err on the conservative side, is simply not supportable.

Thank you so much :)

Anyone know what the effect of raising the ceiling on taxable income, say to $100,000, would have on the funding problem? Or can you direct me to a resource that examines this?

There's an element of irony-- or hypocrisy-- in the Social Security debate.

The general fund (that is, war toys, congressional pork, and all the other vital functions of government) has been borrowing from Social Security for decades. Now Social Security will have a period in which outflows will not match inflows and no consideration is given to the possibility that Social Security might borrow from the general fund

In fact, one can make an excellent case that Social Security is owed by the general fund and the general public a great deal more than the face value of the IOUs. Social Security surpluses reduced interest rates appreciably. If America had had to pay the extra tenths of a percentage point interest on all the cars, houses, and $600 toilet seats that it purchased over the years, I suspect it would have paid out a lot more than than it will have to pay to cover Social Security.

But Washington is so steeped in hypocrisy that no one can see the irony.

KHarris

If one wants to argue that a country with marginal and average tax rates that are below average in the developed world, with a distribution of income that is far less even than is normal in the rest of the developed world and has more concentrated wealth than most of the developed world must maintain tax cuts that favor the wealthy, at the cost of undermining a major part of the country's social safety net, then it makes sense to say Social Security may be facing a funding crisis over the coming decades. Not must, but may, depending on economic performance in the interim years.

Precisely!

" shifting money to private accounts shouldn't be counted as an increase in the budget deficit"

How do you say it? We talking about a bunch of different kinds of entitlements and government obligations and it's easy (for me, at least) to get confused. IF we reduce the probability of future claims ... what do you call the impact on the ledgerbook?

Suppose we take a trivially simple case. I work a year at age 20, I pay 10 bucks into Social Security. The money is transfered in the ledger to the general fund, and the SSA holds a Treasury note - compensating ledger entry --against my eventual retirement

At age 70, I finally put in for my benefit. The note is redeemed, with interest, to Social Security, not to me, and is worth about 40 bucks. They dole out my pension at the rate of 4 bucks a year, expecting me to live to age 80.

If I die before 80, the government pockets the excess.

If I die at age 80, the government's ledgers are clean and in the black.

If I live past age 80 -- the government generously continues to pay me 4 bucks a year, going deeper and deeper into debt.

Okay, so if the probabilities are such that more people outlive the entitlements which have been secured by the bonds, then the deficit will probably increase, right?

So, let's say that at age 20 I'm awarded the $10 bond itself, but denied any claim or entitlement to pension beyond that. So if I die before age 80, I cheat the government out of the old-system profit, but if I live beyond 80, I have relieved the system of debt.

If you assume, in the words of our host, that we are "slouching toward utopia" and in general the population will continue to live longer, then it seems to me that any action taken now to reduce obligations in the future can be loosely referred to as "reducing a deficit".

If not, why not?

The point is values. Do we have an obligation to provide complete Social Security benefits for those who have been paying more than a generational share for decades? Do we care for those who will need Social Security? Do we care to honor those who work in faith for grandparents and parents?

Drop the damn earnings cap, and we're fine.

it alos eliminates a subsidy given to businesses for higher salaries.

Right now it cost business about 6.2% less to pay someone more than 87,900 than it does to pay someone less than that.

'Nuff said.

KHarris

If one does not think further enrichment of the upper ranks of the income and wealth distribution through tax policy is necessary, then there is no reason to talk about a funding crisis. There is a funding pinch. Think of the 10-year cost of any one of the Bush-era tax cuts to get a sense of appropriate magnitudes.

Think of the obligation I have to my parents and yours.

anne: tax rates

US income tax rates (and let's not forget payroll taxes which are effectively also income taxes) may be nominally lower than in most "comparable" countries, but look at what the population is getting in benefits in exchange.

Sure I can sell you a car without upholstery and windows cheaper, while accurately claiming it's a car.

Comparing US taxes with Germany, yes, German nominal tax rates are higher, but so are personal exemption amounts, leading to lower than it seems effective tax rates (marginal rates of course are what they are). German social security taxes are not 12+% but 19+% with slightly larger relative caps (in my judgement), but then social security payouts are disproportionately higher as well.

But the German system is facing the same troubles, as it is also constructed around labor taxation with nominal employer payroll tax matching.

http://query.nytimes.com/gst/fullpage.html?res=9B03E5DB1530F93AA2575AC0A9629C8B63

September 19, 2004

Unfinished Business
By DAVID M. KENNEDY

THE SECOND BILL OF RIGHTS
FDR's Unfinished Revolution and
Why We Need It More Than Ever.
By Cass R. Sunstein.

WRITING in defense of Britain's emerging welfare state in the aftermath of World War II, the sociologist T. H. Marshall divided the claims of citizenship, like Gaul, into three parts: civil, political and social. The first was composed of personal rights, including freedom of speech and religion. The second consisted in ''the right to participate in the exercise of political power.'' The first set of rights enabled the second; democracy depended on the personal liberty of individual citizens.

Those concepts and their relationship to one another would have been easily comprehensible to the American founders. But the third, or social, citizenship Marshall rightly identified as an artifact of modernity, European modernity in particular. It included ''the whole range from the right to a modicum of economic welfare and security to the right to share to the full in the social heritage and to live the life of a civilized being according to the standards prevailing in the society.''+The celebrated intellectual historian Isaiah Berlin concurred: ''To offer political rights, or safeguards against intervention by the state, to men who are half-naked, illiterate, underfed and diseased is to mock their condition. . . . What is freedom to those who cannot make use of it? Without adequate conditions for the use of freedom, what is the value of freedom?''

The crucial importance of the links between social rights and effective citizenship is the theme of Cass R. Sunstein's provocative new book. He boldly addresses the central question vexing democracies for the last century or more: what is the legitimate role of the state in providing for social and economic welfare? Writers like Friedrich Hayek and Milton Friedman have loudly denounced the exercise of state power for those ends. ''The Second Bill of Rights'' is meant as a rebuttal to their libertarian ideas....

Sunstein worries that since the 1980's ''a confused and pernicious form of individualism'' has displaced a social ethos whose origins he traces to Franklin D. Roosevelt and the New Deal era. Like Isaiah Berlin, whose thinking on this issue he may well have inspired, Roosevelt bundled economic and political rights into an indivisible package: ''Freedom is no half-and-half affair,'' he declared in 1936. And later: '' 'Necessitous men are not free men.' People who are hungry and out of a job are the stuff of which dictatorships are made.'' Sunstein considers the second Bill of Rights that Roosevelt called for in 1944 ''a leading American export,'' the model for the Universal Declaration of Human Rights, the European Social Charter and several recent constitutions.

"If one does not think further enrichment of the upper ranks of the income and wealth distribution through tax policy is necessary..."

Then one should favor switching to a system of 100% private accounts immediately. Replacing current benefits with a negative income tax paid out of general tax revenues. I.e. "Tax the rich".

Have the courage of your convictions, people.

Forgive the aside:

http://www.nytimes.com/2004/11/21/business/yourtaxes/21insure.html?pagewanted=all&position=

How distortive of our understanding corporate earnings is the 50 billions dollars of policies issued each year for "finite insurance?" I thought this a most important matter, but we did discuss it.

So 2017, not 2042, is the number to have in mind?

Nice job of putting this back-to-back with the comment on the WaPo article. And VERY nice analogy to the Confederate Treasury! And give my thanks to Kent Smetters for a very interesting paper, which in part motivated my Angrybear post. Memo to self - move Kent's papers to the top of my read pile.

Nice job of putting this back-to-back with the comment on the WaPo article. And VERY nice analogy to the Confederate Treasury! And give my thanks to Kent Smetters for a very interesting paper, which in part motivated my Angrybear post. Memo to self - move Kent's papers to the top of my read pile.

Shorter KHarris: The problem with SS is immorality, not insolvency.

Shorter PSullivan: Hey, I'm immoral! That means I'll win, right? Right?

Relabel that SS bonds US Treasuries and allow the SSA to handel its own resale. Problem solved. The bonds are money spent before. Worrying about 2017 is like worrying about the governemnt paying money on bonds from 1987.

"Shifting money to private accounts shouldn't be
counted as an increase in the budget deficit"

That's just awesome, dude! If they'll buy that,
then we can all quit work and let the feds
borrow trillions from China and Japan and put it
straight into our bank accounts and none of it
would count. I'm so down with that.

Oh boy, it's like yelling down a well.

Money flows to the Treasury in the form of payroll tax, it flows out in the form of retirement and disability checks. Any balance is invested in very real bonds with real interest rates, which list is to be found on pages 135-136 of the 2004 Social Security Report.
http://www.ssa.gov/OACT/TR/TR04/VI_cyoper_history.html#wp125301
http://www.ssa.gov/OACT/TR/TR04/VI_cyoper_history.html#wp125952
The General Fund borrowed that money, the General Fund will pay back that money if need be, because the whole damn reason there is a problem, to the extent there is one, is become there are too many Boomers compared to the rest of you all.

Old people vote. Old people punish elected officials that screw around with Social Security. And there is no reason to believe that cranky elderly Boomers are just going to roll over and let you default on these bonds. That won't last to the next mid-terms. It's like you are waving a magic wand and making human nature just vanish. We are not going away (if we did you wouldn't have this problem) we will show up at the polls and you will redeem those bonds. If you think we will take a back seat to some Chinese bank you have another thought coming.

And Mr. Babbler, Watchful or not by quoting those passages in the Summary you have implicity embraced the economic assumptions that lie behind it. Those numbers will not eventuate unless the economy performs down to the numbers predicted in the Intermediate Cost Alternative. If you are not willing to embrace 1.8% productivity growth in 2005 and 1.6% productivity growth in the out years after 2011 you have no business putting up those numbers. Do you or don't you agree the economy is going into the crapper next year?
http://www.ssa.gov/OACT/TR/TR04/V_economic.html#wp159107

People who assert that Social Security has a problem need to put up their own numbers for inspection. What is YOUR prediction for growth in 2005?. What is YOUR prediction for growth in the out years after 2011? What effect does YOUR economic model have on the long-term health of Social Security?

I said it last weekend on this site: Privatizers like to work from two sets of economic books: one to predict the crisis and another to solve it.

I fully believe we will beat the productivity numbers in the Low Cost alternative from the table linked above. 2.8% for 2004 is in the bag, 2.1% for 2005 suggests a strong downturn that I am not seeing, and a model that peaks at 2.2% and then slumps to 1.9% seems oddly pessimistic for the most optimistic forecast the Trustees can lead themselves to present. And that's all it takes on the economic side.

Andrew & Patrick & Watchful the question is simple. Do you agree that the economy is going to go into the tank as the Intermediate Cost Alternative assumes (since 1.6% productivity longterm barely exceeds the natural 1.5% population growth)? Or are you willing to put up your economic assumptions and measure them against the Low Cost Assumption that shows no crisis at all?

The world is waiting. And tired rhetoric that has been recycled since 1982 when the crisis was real is just not cutting it here.

This is an economics forum. People need to bring numbers to the table or shut the hell up.

(And two BTW's. If the economy behaves in any manner consistent with history, the General fund will not have to pay off the principal, though it will have to kick in the interest, but you borrowed the money after all. And Kharris, the Trust Fund does indeed count the interest on the bonds as income, some $89 billion this year: http://www.ssa.gov/OACT/TR/TR04/VI_OASDHI_dollars.html#wp93785)

I'm wondering -- I also buy T-bills. But I think I'm going to stop buying them next year because I need the money.

Am I going to get a letter from the government ordering ME to "reduce my expenses" - sell my house and move somewhere cheaper -- so the government doesn't have to give ME what it owes me? So how is this different from what they're saying about Social Security in 2017?

It's not a "Social Security crisis," when SS stops running a surplus. That surplus comes from a tax that ONLY the middle class and poor pay! That surplus was used to finance tax cuts for the rich! Why should WE have to face cuts in OUR benefits because the money was used to buy private jets, yachts, etc.?

KHarris

Please do comment on "finite insurance," though the powerful cogent Social Security posts are more important.

http://www.nytimes.com/2004/11/21/business/yourtaxes/21insure.html?pagewanted=all&position=

http://www.nytimes.com/2004/11/23/politics/23spend.html?pagewanted=all&position=

Big Spending Bill Makes a Winner of Mars Program but Many Losers Elsewhere
By KATHARINE Q. SEELYE and DAVID E. ROSENBAUM

Low-Income Assistance

Advocates of more federal aid for the poor had hoped Congress would reallocate to the state children's health insurance program $1 billion that for one reason or another went unspent in the last fiscal year.

But the bill did not provide for the reallocation. As a consequence, enrollment in the program, for low-income children, may drop by as many as 200,000 children nationwide, according to calculations by the Center on Budget and Policy Priorities, a research institute that advocates more spending on antipoverty programs.

Nutrition aid for poor families and rental assistance for the poor received modest increases in allotments, but some other programs for the poor were cut.

The nutrition program for women, infants and children, called WIC, received its largest budget ever, $5.2 billion, up from $4.6 billion in the last fiscal year. Experts said this should be sufficient to serve the eight million families that are expected to apply for aid.

Congress approved $20 billion, about $1.5 billion more than Mr. Bush requested and almost $1 billion more than last year, for the Section 8 housing program, which helps poor people meet their rent payments and is the government's largest housing program.

The lawmakers did not accept the administration's proposal to convert the program into a block grant to states with a $1 billion cut in financing.

Several smaller housing programs for the poor were cut somewhat, including those for public housing, housing for people with disabilities, housing for the elderly and homeless assistance grants.

The Low-Income Housing Energy Assistance Program was allocated an increase of more than 15 percent, to $2.2 billion this year from $1.9 billion last year. But the increase in the program, which helps poor people meet their winter home-heating costs, lags far behind increases in fuel prices. Heating oil is expected to be 38 percent more expensive this winter than last, and overall fuel costs for heating are expected to be 24 percent more.

Head Start, which provides a wide range of services to preschool children, will receive $6.8 billion, about 1 percent more than last year.

In fact the baby boom generation has both supported grandparents and parents, and is paying for its own support these last 20 years just because it is so large.

Bruce Webb is my hero of the day

Bruce Webb

Excellent.

The glaring problem with Ross J.'s assertion that boomers somehow haven't paid their share is that since 1983 boomers have been paying an whopping excess of payroll taxes that have been used to help fund the federal government instead of for Social Security benefits.

The Social Security debate seems to always be associated with much confusion, and much of this is due to the co-mingling of the general fund and the trust fund. As many have noted, it is very possible to argue that the Trust fund is in reasonable shape when viewed on its own, but the fact that all of the money is in IOU's from the general fund is troubling.

I think this whole mess goes away if we just separate the trust fund and the general fund. Allow the trust fund to invest as it sees fit (within boundaries). This has the following benefits as opposed to privitization:
1. The Trust fund would be allowed to maximize its returns by purchasing the securities that it feels appropriate rather than being forced to lend to the general fund.
2. Social Security would retain its "insurance net" aspect, and no one would be destitute in old age due to poor investment choices.
3. This would eliminate the inefficiencies of having millions of small private accounts.

$52 Billion? We shove more than that down the rat hole in Iraq every year.

$52 Billion? Revenues under Bush have dropped many times that.

$52 Billion? That is only about a quarter of the increase in defense spending under Bush.

$52 Billion? Scrap Farm subsidies ($17 Billion and Missile defense $11 Billion and we are over halfway there.

$52 Billion? Clinton collected about 20% of GDP and the economy was fine. We are now collecting under 16%. Why is 0.5% of GDP a problem?

$52 Billion? 0.5% of GDP? Many European countries and Canada collect over 30% of their GDP.

What is the problem?

David's completely right -- since the 83 "save social security" payroll tax hike, boomers have been paying heavily. So have people my age (38), who've never known anything other than double-digit payroll taxes.

Guess I'd have to do the exact math on it. What the federal government did in essence was enact a special tax increase, in 1983, that was paid only by the poor and middle class.

Not too many people bother to actually do the math and figure out how much they've overpaid social security over their taxpaying years. You need the income/outlay figures for social security for each year so you can calculate your overpayment percentage. Then it's your taxable income (clipped at the limit) for each of those years, and you give yourself a stable 5% rate on it. It works out to quite a bit of money, or at least it's sure money I wish I had tucked away somewhere.

A friend with a considerable portfolio, showed me the portfolio a few days ago. An adviser at Bank America had picked out 15 stock funds for her. The average costs of the funds was above 2% a year, and in addition there were 5% sales charges for all funds. The amounts in the accounts were kept just under the amounts that would have cut the sales costs a bit. Setting Social Security accounts for individual investment, besides the astonishing transition costs, will be a tricky business indeed.

So, Mark Bahner, your general objections to Social Security aside, I then take it that you would have no problems with SS being funded from general revenue rather than FICA taxes, since the government's all one big institution? I actually like this solution myself, but it isn't conducive to the idea that there's a social security crisis, or at least no more than there's a crisis in government finances generally speaking. You have the knowledge and honesty, I take it, to apply a consistent standard, claiming that either SS must be funded with payroll taxes OR all government agencies are paid out of one big bundle of general revenue.

>that was paid only by the poor and middle class.

Or even more accurately, the middle-income and lower *working* stiffs.

Notice, that if the word special ist is sent to this comment thread, as it was in the article on African medical training, the word is blocked for questionalbe content. Good grief. Why is this questionable, dare I ask?

Anne,

Someone's trying to reform the NYSE, is my guess.

Dear Brad

I was just stunned to learn that anyone has the gall to propose that shifting money to private accounts not be counted as an increase in the deficit.

Heeeey I have a plan to cut the deficit. The social security trust fund shifts 100 billion to my private bank account (no changein deficit) then I donate 50 billion to the US government (there is an actual program enabling me to do this).

How bout ?

Also brad note the byline at http://www.washingtonpost.com/wp-dyn/articles/A5525-2004Nov22.html. It seems your scolding has had an effect.

Dear Brad

I was just stunned to learn that anyone has the gall to propose that shifting money to private accounts not be counted as an increase in the deficit.

Heeeey I have a plan to cut the deficit. The social security trust fund shifts 100 billion to my private bank account (no changein deficit) then I donate 50 billion to the US government (there is an actual program enabling me to do this).

How bout ?

Also brad note the byline at http://www.washingtonpost.com/wp-dyn/articles/A5525-2004Nov22.html. It seems your scolding has had an effect.

Mark Bahner: Special issue or not, you are not telling us that when you observe a company with, well, "interesting" internal accounting practices, where divisions are cross-charging each other and select ("special") entries are struck from the books when some VP decides the books don't look good, this will raise your confidence in lending those guys your money?

The question is whether we are to abandon a generation of retiring Americans and not have forever coarsened and made shameful our culture. We will care for and honor our parents as they have tended us. That is what an American ethic dictates. There reside our values.

We all imagine the status quo of today will reign tomorrow.

This is false. We have a serious problem coming up: the world will run out of cheap energy soon. Even with today's inflation, it is still cheap. The USA is already embroiled in increasingly bitter and violent wars for oil and this is going to increase, not decrease, thanks to the religious elements here.

War is bankrupting America. Meanwhile, we think we can retire and be fat and happy magically. We continue to build America as if oil will be cheap forever. The need to retrofit our country to work in a post cheap oil world frame isn't happening, quite the contrary.

The baby boom won't be able to retire. The stress of supporting this retirement package will sink our economy since we off shored most of the money making parts of our economy.

"The reason the economy is going to grow more slowly is that there are going to be fewer workers. Even if productivity increases the economy's growth will slow down. It's the demographics."

First this turns the notion of productivity on its head. Second the demographics are already built into the model. All of this has already been taken into account.

People are ducking and weaving here. The question remains. Are you willing to buy into the whole economic and demographic package that underlies the Intermediate Cost Alternative? If not you have no business using its predictions to justify your own policy proposals. The Trust Fund runs out in 2041 if and only if long term productivity dives to 1.6%. If your own model shows better numbers than that the shortfall date will be pushed out.

In fact the Social Security Trustees have presented a set of assumptions under which the Trust Fund never goes to zero, they have done so in every year since at least 1996. It is called the Low Cost Alternative. And the economic numbers required get lower each and every year. For 2004 it calls for 2.1% growth in 2005 and 1.9% in the out years.

http://www.ssa.gov/OACT/TR/TR04/V_economic.html#wp159107

Confront these numbers head on. Make a case why the US economy cannot beat the numbers which would show no crisis at all.

Or as an alternative case study present a set of numbers which allows stocks to produce historic returns on equities which don't exceed those called for in the Low Cost Alternative.

In the 1997 report the numbers required under the Low Cost Alternative could be considered slightly optimistic. We could have had a serious discussion about whether growth along would save Social Security or whether a moderate hike in payroll tax might also be needed. But the economy grew beyond the expectations of that report while the number of Boomers remained static. And now the growth numbers required for this larger economy to pay off the fixed demands of this demographic bulge have diminished almost to the vanishing point: 1.6% productivity in the out years and a 1.89% immediate hike in payroll under the Intermediate Cost alternative, 1.9% productivity and no increase in tax under the Low Cost.

Privatizers missed the boat. It will take serious distortions of the numbers in the 2005 Report (due March 30) to preserve any sense of crisis at all. Productivity growth above 2.7% in 2004 and projected growth above 2.1% in 2005 moves the numbers out. We beat the former and nobody suggests we won't hit the latter (nobody pushing the case for moving money to stocks anyway).

If Privatization is Necessary it Won't be Possible, If Privatization is Possible it Won't be Necessary. So saith the numbers.

http://www.nytimes.com/2004/11/24/business/24finite.html

Experts Say A.I.G. Case Is Tip of the Iceberg
By LYNNLEY BROWNING

A preliminary settlement between the American International Group and regulators will not be the last word on the use of finite risk insurance.

Details about other questionable transactions may soon emerge, industry special ists say.

"The current regulatory and investigative environment, coupled with the speed of the settlement, indicate that greater transparency is on the horizon," said Michael Walsh, a tax attorney in New York with the law firm of Boundas, Skarzynski, Walsh & Black.

The transactions arranged by A.I.G. that came under scrutiny by the Securities and Exchange Commission and the Justice Department fall broadly under the umbrella of finite risk insurance and finite risk reinsurance. Such products have been a big source of growth in recent years for the many insurers and reinsurers who sell them. (Reinsurance is when an insurer seeks to lessen its own exposure to loss by transferring some of its risk to another insurer, known as a reinsurer.)

Finite risk transactions are legitimate when they transfer an acceptable level of risk and are accounted for as insurance. But other finite risk transactions involve minimal or no transfer of risk by the insured to the insurer or reinsurer. Such transactions, which are typically spread out over several years, are intended to dress up near-term balance sheets and profit and loss statements, all by spreading out losses over time.

Regulators said that was the case in the arrangement between A.I.G. and Brightpoint, a distributor of cellphones, in 1998. The Brightpoint transaction attempted to disguise a deposit as an insurance premium. Insurance premiums are tax deductible, but deposits or loans are taxable. Brightpoint took tax deductions for the deposits held by A.I.G., regulators contend.

The Brightpoint case may be unusual. More typical, industry executives and analysts say, are the type of finite risk transaction sold by A.I.G. to the PNC Financial Services Group, Pennsylvania's largest bank.

The PNC transaction, done in 2001, allowed the bank to shift $762 million in bad loans from its books to off-balance sheet entities designed by A.I.G., and thus to inflate its profits.

While many companies that use finite risk transactions appear to account for them properly, the transactions themselves can make their users appear financially stronger to shareholders, regulators and analysts than they really are.

That issue is of particular concern when it is insurers that purchase finite risk contracts, because unlike telecommunications firms or even banks, the core business of insurers is risk.

"The opportunity for insurance companies to use these transactions for earnings mismanagement is significant," said Christopher Culp, an adjunct professor at the University of Chicago's Graduate School of Business, and an authority on finite risk transactions. "It is alarming."

David Schiff, editor of Schiff's Insurance Observer, said yesterday that he had no idea how many companies had used finite risk transactions in recent years, but that they "were very common."

Finite risk policies take many forms and are highly customized for their users. Unlike abusive tax shelters, they are not "off-the-shelf" products that can easily be mass-marketed - or detected by regulators.

A.I.G. has sought to present both the Brightpoint and the PNC cases as one-time transactions, not undertaken for other companies.

Others in the industry are skeptical.

"They do repeatable-type products," said a senior insurance industry executive who has been involved in finite risk transactions. "There are more PNC's and Brightpoints out there."

Bruce Webb wrote, "Or as an alternative case study present a set of numbers which allows stocks to produce historic returns on equities which don't exceed those called for in the Low Cost Alternative."

This is an important point which none of the privatization advocates can counter.

Bruce Webb wrote, "Or as an alternative case study present a set of numbers which allows stocks to produce historic returns on equities which don't exceed those called for in the Low Cost Alternative."

This is an important point which none of the privatization advocates can counter.

Mark,

Are the SSA bonds really sterilised from Treasuries? Aren't they linked in that the SSA bonds represent the promise to pay from General Revenues?

"'Even if productivity increases the economy's growth will slow down. It's the demographics.'

"First this turns the notion of productivity on its head."

Someone who doesn't understand the difference between productivity and GDP growth, ought to be reading about economics, not writing about it.

"Second the demographics are already built into the model."

And the model says SS is not actuarially sound. Whether we switch to a system of private accounts or not. We're on a path to have our current 3 workers to 1 retiree ratio drop to 2 to 1. There is no getting around this.

There is no chance there will be a default on Social Security obligations to baby boomers. The political and economic cost such a default would be intolerable. The cost of Social Security to the baby boomers can and will be readily borne. What is sad is that the obligation should even be questioned. As for creating privbate accounts, and paying for the transition to private accounts, that is another matter.

Bruce Webb, others: Elaine's point stands. Most of modern economies' productivity is based on large-scale and ubiquitous automation and mechanization, which itself is predicated on cheap, reliable, and sufficiently durable energy sources (cheap in the sense that producing and distributing energy uses only so much of the economy's resources that enough resources remain to produce the things we need, and grow).

There is reason to believe that this, and environmental issues (tolerance for global pollution by energy production, manufacturing, and services using chemicals etc.) will be more of potential limiting factors than the population's capacity to innovate and provide raw labor input.

Opinions?

Uh Bruce, what do you think these are: 3 to 1, 2 to 1, if not numbers?

Simple Patrick. They are numbers that are already built into the model. In fact the Social Security Reports are most likely the ultimate sources of those 2 to 1 and 3 to 1 numbers you cite.

I certainly was not unaware of the tables included in the Demographic Assumptions section of the report. Indeed some interesting things appear on inspection.

Let us take Table V.A2.--Social Security Area Population as of July 1 and Dependency Ratios,
Calendar Years 1950-2080  
http://www.ssa.gov/OACT/TR/TR04/V_demographic.html#wp167717

Here we do see the Dependency ratio of workers to Aged rise from .138 (7.5 to 1) in 1950 to an ultimate .420 (close to 2 to 1) in 2080 under the Intermediate alternative. But we also see the Total Dependency ratio move from only from .725 in 1950 to .858 . In 1950 workers typically had significantly more children and a non-working spouse.

The numbers are indeed there, you are just taking them out of context.

And while we are in this section we might examine Table V.A.1 Principal Demographic Assumptions and wonder why, in a world where the population is proposed to increase for decades, and in the face of an impending labor shortage that brought on those lamentable numbers you cite, does the Intermediate Cost model assume total annual immigration, legal and illegal combined, will actually drop from the 962,500 estimated for 2003 in the 2004 Report to 900,000 in the years immediately after 2025? At exactly the time we will need all the home care aides and nurses we can find we are going to clamp down on cheap labor from Mexico and the Phillipines? And not in relative terms but in absolute numbers? How does this make real world sense?

Since at least 1996 the Trustees have presented one of three package of Economic and Demographic assumptions that shows Social Security sailing through the 75 window with a consistent positive Trust Fund ratio. (That is funded with a multi-year reserve). This package is called the Low Cost Alternative. If we meet it or beat it, there is no crisis. I am calling you to confront those numbers directly without the intermediary of whatever secondary source you are pulling from. Because 22 years of Op-Ed commentary about "Crisis" doesn't move the numbers.

All the factors you have ever cited are in the models, indeed these numbers are generally derived from the Reports themselves.

You can hedge and try to ridicule me all you want. But I know these Reports, I know the numbers in them, or how to lay my hands on them in short order. I have been working hard on this since 1996 in preparation for this debate to break out. Remember in the final anaysis these are not my numbers. They have officially been signed off by the Bush Administration in the form of three Cabinet members, these are the official numbers of the privatizers at 1600 Penn Ave. Pretending they don't exist is not an option. Not for them, and not for you.

Two figures that have proven to be moving targets are the tax revenues == payouts date (now 2018) and the trust fund <= 0 date (now 2042).

Both of those dates have moved out considerably during the 22 years of op-eds about the coming Social Security crisis. believe they moved forward by about ten years during the 1990s. Does anybody have historical data for those dates?

Two figures that have proven to be moving targets are the tax revenues == payouts date (now 2018) and the trust fund <= 0 date (now 2042).

Both of those dates have moved out considerably during the 22 years of op-eds about the coming Social Security crisis. believe they moved forward by about ten years during the 1990s. Does anybody have historical data for those dates?

The 2018 date doesn't make much difference, even if you're a screaming social-security-hating conservative.

We won't suddenly screech from a $250 Billion a year surplus to a $250 Billion a year deficit in the Social Security accounts. The transition will be gradual. We'll go from a small surplus to a small deficit sometime around 2018 (assuming productivity, GDP, and immigration slow between now and 2018). There will be a much bigger adjustment to make between around 2010, when the annual surplus hits a peak, and 2017, when the surplus comes near breakeven.

As for repudiating the Social Security trust, recall the last Social Security crisis, at the end of the 1970s. The SS trust was going into the red - that is, it was totally empty, just like it is projected to be totally empty around 2042.

Ronald Reagan came into office considering big cuts in benefits, but then opted to raise FICA taxes instead, so the trust could be partly funded. Social Security has built up a $1.5 Trillion surplus, and that surplus is projected to go much higher between now and 2018.

Any politician who considers defaulting on the SS trust would be repudiating Ronald Reagan's legacy.

cm wrote, "There is reason to believe that this, and environmental issues (tolerance for global pollution by energy production, manufacturing, and services using chemicals etc.) will be more of potential limiting factors than the population's capacity to innovate and provide raw labor input."

I don't buy it. There's plenty of energy out there, including coal and fission.

Now, of course, coal and fission have potentially high environmental costs (and fission has costs in terms of risks of nuclear proliferation, *extremely* high enviro costs if a fission plant were nuked, etc). But the world populace will demand energy over keeping the environment clean. (That's a descriptive statement, not a normative one.)

Besides, it's very possible that technological improvements will allow us to have our cake and eat it too, on the energy-vs-environment tradeoff.

As usual, the problem isn't economics, it's politics---in particular, the transition to a post-oil world.