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December 20, 2004

Crisis? What Social Security Crisis?

Garence Franke-Ruta writes:

TAPPED: December 2004 Archives: I seriously doubt that asserting that there is no Social Security crisis will work as a Democratic strategy at this late date, even though it's largely true. It simply won't sound credible. Not after Paul Tsongas founded the Concord Coalition in 1992 with Warren Rudman and ran for office on a platform of fiscal responsibility and saving Social Security from collapse -- a platform widely hailed as being too courageous and truthful to win. Not after the young Democrats at Lead -- or Leave declared that "America's Social Security system is in trouble. It has become an unfair, unsound program... ." Not after the 2030 Center's Hans Reimer won plaudits for launching a Gen-X think tank to, according to a 1999 NPR report, "save Social Security before America's 75 million baby boomers begin retiring." Not after his right-leaning generational compatriots at Third Millenium launched their Campaign to Reform Social Security project. Not after Ross Perot....

Well, fifteen years ago I would have said that we had a (long-run) Social Security crisis, and ten years ago I said that we had a (long-run) Social Security crisis: we were still in the age of diminished expectations--the age of the productivity slowdown--in which productivity growth was slow and there was no certainty that it would accelerate. But between ten and five years ago there came the new economy boom, and the accompanying acceleration of productivity growth. Five years ago I said that there was a Medicare crisis but no Social Security crisis: the projected surplus in the general fund was enough to more than cover the Social Security (although not the Medicare) deficit. Today I would say that we have a Bush-caused general fund crisis, and a Medicare crisis. But Social Security crisis? That has melted away.

The fact that since Perot and Tsongas we have had wonderful news about the likely shape of future productivity growth is an important fact that Garence ignores. And he she shouldn't ignore it.

Posted by DeLong at December 20, 2004 05:35 PM


Luckily for the forces of good, nobody remembers back that far! Tsongas who? I've a dim memory of Perot's ears, and his madness, but...

Franke-Ruta gives us the general public too much credit.

Posted by: mike at December 20, 2004 05:53 PM

Maybe I am being overly picky, but Garance Franke-Ruta is a woman.
"Garance Franke-Ruta is a senior editor at the Prospect. She was previously a senior writer at The Washington City Paper, D.C.'s alternative weekly newspaper. Her work has also appeared in The Washington Monthly, The New Republic, Salon, Legal Affairs, Washington Business Forward, Utne Reader and National Journal. She graduated magna cum laude from Harvard University in 1997 and has lived in Mexico, New Mexico and New York City."

[Ooops. No. You're not being overly picky. Ooops.]

Posted by: Carol at December 20, 2004 06:07 PM

I think there's a reasonable argument about the solvency of Social Security. If Social Security turns out to be solvent or closer to solvent than some people argue, then that's sort of nice.

But there's a bigger problem. Social Security, even if solvent, has been and is a solid screwing for those born after 1960, because it's a rip-off as an insurance program. I mean, how many insurance programs have average premiums that are 35% higher than average expected payouts? That'd have to be a pretty monopolistic insurance industry, friend.

Let's assume that social old-age insurance was and is a swell idea. It would be a swell idea because some of us live a lot longer than we expect, and we don't want to have to save a ridiculous of money just on the off chance that we live a long time. So, at the beginning of our working lives, we all pay a small fraction of our wage as premiums, and then those of us that actually live longer than expected collect the money. A lot of us get nothing (because we die), but a few of us get a lot, and we're all fine with that because that insures all of us that we won't outlive our savings. Yay. Note that the present value of your expected payout roughly equals the present value of what you pay in, making this system actuarially fair.

Now, you should all notice something here: When you start up this social insurance, you don't need a pay-as-you-go system to accomplish this. You don't need to tax workers to pay retirees. You could start a social security with a generation of young workers, they'd start paying some taxes (premiums), and the benefits would start flowing 40ish-50ish years from the start date.

So how'd we get a pay-as-you go system? Well, FDR decided he wanted to sell the program to some middle-aged and older people who could make a big fat return off a pay-as-you-go system because they'd get benefits like they'd paid in their whole working lives even though they hadn't had to actually pay tax premiums for their whole working lives. This would produce some happy voters who'd get some largesse at the expense of younger workers, and, more importantly, future generations who hadn't been born yet. After all, future generations can't vote (and therefore make an ineffective interest group). Johnson and Nixon continued the party, catering to the group of very active elederly voters and expanding their benefits. This simply exacerbated the problem as a whole new group of workers received far more in benefits than they paid in, which made the future shortfall worse. Note that I use shortfall to mean the difference between actuarially fair insurance and the (premium-benefit gap) that future generations experience, not shortfall in terms of solvency.

The math is simple: If you use a pay-as-you social insurance system to give benefits to people who haven't paid in or to give benefits to people far in excess of the present value of what they pay in, then some future generation(s) of workers will receive far less than they paid in. For my generation, we'll receive 35% less in benefits than we paid in premiums. We could "solve" that problem, of course, by lowering our retirement age and raising our benefits and increasing the taxes on the next generation, but then we'd just make that difference much larger and the Social Security insurance program more actuarially unfair for the next generation. This is true even if Social Security is completely solvent.

The biggest problem of Social Security is not its solvency but its inherent intergenerational inequity. And the Baker/TAPPED/Yglesias/Drum team all ignore that, because it would teach the following painful lesson that they don't want to learn: Even if we can think of a beneficial social insurance system, the political incentives would very likely generate a pathological social insurance program that makes people worse off, especially younger and future generations.

Posted by: Keith Brown at December 20, 2004 07:13 PM

Here's the new frame: We have a better plan to save Social Security - we're going to reduce the deficit by trimming Congressional pork and undoing Bush's tax cuts for the rich, we're going to re-shape private benefits/pensions to encourage twenty-something workers save for retirement, and we're going to grow the economy by reducing unemployment and subsidizing R&D responsibly. If we do this, we'll save Social Security.

Two predictable objections:

Q. What if we don't do this?
A. Well... um... actually, we still save Social Security (as long as we prevent Bush from doing anything else stupid, knock on wood).

Q. Aren't we already doing these things?
A. Well, when you put it that way... WOO-HOO! WE JUST SAVED SOCIAL SECURITY! Take a victory lap!

And if the president wants to tour the country talking about problems affecting people, he could start by asking people to refund their tax cuts to sponsor armor for troops and their vehicles in Iraq. Fuck this "in forty years we might have a little trouble" shit, let's talk about real problems affecting real people right NOW.

Posted by: Chris at December 20, 2004 07:22 PM

I'm not familiar with the arguments for or against a Social Security crisis. But, suppose it turns out to be politically feasible to improve the fortunes of Social Security but not Medicare or the general debt. This would still help the overall picture, even without a Social Security crisis, no? E.g. Zvi Bodie argues that the distinction between these 3 items on the balance sheet is largely irrelevant, all that really matters is the overall deficit or surplus.

Posted by: Alex at December 20, 2004 08:09 PM

So new economy productivity growth rates are here to stay? No regression to the mean for that variable?

Posted by: loyopp at December 20, 2004 09:35 PM

Keith, an awful lot of well-crafted words but not a single link to anything that backs up that 35%. The problem in this debate to date is that people haven't been bringing numbers or have simply inserted numbers (like a 3.5% gap) without giving their context (infinite future projection and an assumed 1.6% economic productivity).

I am sure you have something to back that up, but it is a little shall we say arrogant for you to expect us to simply accept it on your say so particularly in the context of a debate that shows that pretty much everyone who weighed in on it over the last ten years or so "knew" "facts" about Social Security solvency that simply were not true.

Alex, correct in principle but not right on the numbers. A hard look at the numbers shows that reasonable rates of productivity going forward, say 2.0%, results in an overfunded system. That is we may see payroll dollars invested in bonds that will never have to be redeemed. Yes this is good for the overall budget, but you then need to make an argument why the appropriate vehicle for extracting taxes was from the first $87,900 of income. Any system that brings more dollars to the Treasury than the Treasury pays out reduces the Public Debt, but we still have the concept, if perhaps not always the reality, of "fairness" to put into play here.

And loyopp, personally I believe that 2.0% plus productivity is here to stay. But the context here is privatization, regression to the mean on the productivity variable dooms any equity based solution anyway, or at least puts the model creation burden in privatizer's hands. For the purposes of this discussion it is simply being pointed out that the numbers underlying their "solution" equally serve to save the current system with no changes in benefits.

It is the "Crisis" that puts the sizzle in the privatizer's steak, no "Crisis" no sale.

Posted by: Bruce Webb at December 21, 2004 12:33 AM

Thanks Carol...I have corresponded several times with Garence and never been sure of gender. Nickname?

Posted by: wren at December 21, 2004 03:56 AM

I agree with Bruce that I would like to see Kevin's numbers. Kevin does make a good point that SS is more like insurance than an investment. But this insurance covers much more than retirement income -- it insures against disability or the wage earner's dying and leaving dependents. It insures that any future spouse will receive at least half as much SS as oneself. It insures against (at least some) responsibility for elderly parents, parents-in-law, siblings, siblings-in-law, etc.

Does Kevin realize that the average cost of nursing home care in this country is more than $125 PER DAY and Medicare doesn't pay for this? (I assume he has longterm care insurance but do all his relatives?) How does one figure the actuarial value of all this?

Posted by: SusanJ at December 21, 2004 07:14 AM

The point is, Bruce and Susan, that even if social insurance is desirable, pay-as-you go social insurance generally isn't, because it creates a very large net benefit for the first few generations at the expense of future generations. This is true regardless of Social Security's solvency.

Bruce, my discussion isn't dependent on productivity growth rates (at least not constant productivity growth rates), because I don't discuss solvency. All solvency means is that the schedule of benefits can be paid. It doesn't mean the premiums that workers pay to receive those benefits are actuarially fair. That gap between actuarially fair premiums and benefits (the "unfairness" gap) is a function of the actuarially unfairly high benefits that earlier retirees received. And Susan, that's true regardless of what Social Security covers. At some point, some generation has to take the present-valued net loss equivalent to the present-valued net gain that early retirees had.

Susan, let's think about this: Social Security started with payroll taxes of 2% in the late 1930s. As of 1962, Social Security included both disability and early retirement (at 62) and payroll taxes were 6%. A 20 year-old in 1945 paid 2% for 5 years, 3% for 6 years, 4% for 5 years, 6% for 11 years, 9.2% for 5 years, 9.9% for 6 years, 10.8% for 2 years, and 11.4% for 5 years, before retiring in 1990. For all this time, this person received all the the survivor benefits Susan discussed, and for the last 34 of those 45 working years, the person had disability insurance. Based on their expected life years left at age 20 (about 50), the person then received inflation-adjusted retirement income for about 5 years.

Now, let's say today's 20 year-old wanted a deal that would allow them to pay 6% for their first ten years, 8% for the next 11, 10% for the next ten, 12% for the next 11, and 14% for the next 11 years, and retired at 73 (likely dying at 78). Would this be doable? I doubt it.

Posted by: Keith at December 21, 2004 09:27 AM

Kevin, Your Social Security history- not quite right.

The original passage of Social Security was not set up as a pay as you go system. Pay-as-you-go did not arrive until 1939. The government was building a fund- and numerous parties got worried. It was too large, it was counter-Keynesian. It was a tempting source of funds. Additionally, Soc Sec was a liability- collecting receipts without paying out for 5 years (and those initial payouts would have quite tiny). So the switch was made.

This is a minor point on the whole. We started out on a different path and quickly deemed it politically too risky.

Posted by: Brendan at December 21, 2004 09:32 AM

Brandon, if what you say is true, then that buttresses my position. We had a properly designed social insurance system at first, and it rapidly morphed into a pay-as-you go program.

Posted by: Keith at December 21, 2004 09:42 AM

I too would like some proof of this statement from Keith:

"For my generation, we'll receive 35% less in benefits than we paid in premiums. We could 'solve' that problem, of course, by lowering our retirement age and raising our benefits and increasing the taxes on the next generation, but then we'd just make that difference much larger and the Social Security insurance program more actuarially unfair for the next generation. This is true even if Social Security is completely solvent.

Posted by: Kosh at December 21, 2004 09:46 AM

Kevin, you seemed to have missed one of my points. I claim that one of the benefits you get out of SS -- when you are young and healthy and still paying in -- is that your elderly or disabled friends and relatives are at the same time receiving SS benefits which directly ($) and indirectly (peace of mind) benefit you in ways that are hard to quantify.

SS plus Medicaid (I know, that's something else) saved our family something like $400,000 for just one elderly relative with longterm Alzheimer's.

Posted by: SusanJ at December 21, 2004 10:23 AM

Keith said "The biggest problem of Social Security is not its solvency but its inherent intergenerational inequity."

But isn't inequity true of many beneficial social arrangements? The highest non-federal tax I pay is for schools. I have no children (and never will as I’m 64) so I've never directly benefited from paying that tax. Of course I benefit indirectly from having an educated citizenry and workforce. I even take a civic pride in paying the tax (and I would willingly pay more, since in Texas we starve our schools).

I suspect that many social arrangements are "actuarially" inequitable. Do we really want to calculate their value by determining the cost to each individual or generation? That seems to me to be individualism run amok.

Posted by: Bob Gaines at December 21, 2004 10:24 AM

Pay as you go worked fine when population and wages were growing rapidly.

Of course, that, to a large extent, has been true for the same reasons that equity has done extraordinarily well for the past 100 years compared with debt.

Given that the system was unfunded 20 years ago, we've made reasonable progress. By 2020, we'll have saved more than half the amount necessary to keep the SS trust solvent indefinitely, if the trust itself were independent.

A simpler solution than Bush's would be to make the SS an independent agency similar to the Federal Reserve, and let it manage its own assets, similar to the way many other large pension funds manage assets.

Of course, that WOULD demonstrate how out of balance the "on-budget" accounts are pretty quickly.

The alternative seems to be to let the GOP keep sucking up all of the excess FICA tax revenues and spending them for things backed up by general revenues.

Would the middle class really stand for it if people earning $40,000 pay a higher marginal tax rate than people earning $1,000,000?

Posted by: Charlie at December 21, 2004 10:57 AM

Is price indexing instead of wage indexing a good idea?



Posted by: Kosh at December 21, 2004 02:03 PM


The inequity in Social Security is not like the inequity in schooling, because in schooling, the first generation that pays for the system chooses to be the "loser," whereas in a pay-as-you system, the first generations choose to be the winners and burden future generations.

When taxpayers decide to pay for schools, they pay for a benefit that they will not directly receive, and the kids who get the schooling will pay for schooling in the future for the next generation. It's like a reverse pay-as-you-go system, where the first generation actually makes the sacrifice.

When taxpayers decide to choose a pay-as-you-go retirement system, they choose to benefit themselves at the expense of future generations, because you have those first generations that receive benefits without paying in very much, and future generations then must make subpar returns to make up for those excess returns of earlier generations.

Sally, the problem with your "don't you get a kick out of helping your elderly relatives" argument is that I can just as easily make that argument the other way. The elderly should get a big kick out of their lower benefits because they're so happy that my taxes are lower. And for a lot of elderly people, maybe now that damn kid can finally leave the house, imposing less of a cost on them.

Posted by: Keith at December 21, 2004 02:25 PM

One can make a good case that it is foolish to try to "save" social security from a crisis that is 40 years away -- the past 20 years history has shown how unreliable long-term projections are, as Brad demonstrated. But I still don't see why democrats should be against social security privatization, which is basically tax cut for the poor with some strings attached. Given the dominence of the republicans in both the Whitehouse and the Congress, this is probably the best deal the poor can get in the foreseeable future. I say take it while the deal is still available. And remember, every dollar spent on tax cut for the poor is a dollar less likely to be spent on tax cut for the rich.

Posted by: pat at December 21, 2004 02:25 PM

Keith is entirely right. The SS's biggest problem is the one today's Democrats won't even mention.

FDR, Altmeyer and the other founders of SS created a funded, actuarially sound system with making the *explicit promise* of paying a "fair return" to retirees -- defined as the positive return on government bonds, payable to each cohort of retirees (with some within each cohort getting more or less).

Hey, what happened to this promise??

Well, first Congress converted SS to paygo in the 1940s and 1950s to be able to pay *way more* than FDR's promised "fair return" -- $10 trillion more, over the return on bonds, to those retiring through the year 2000.

And anybody who has a smidgen of political sense knows the great historical popularity of SS is rooted RIGHT HERE -- it gave *everybody* a *lot of money*. Far more than they'd get in the market. How is a program like that not going to be popular??

Ah, but next -- due to the big tax hike imposed on young workers and the reduction of their benefits, enacted in the 1980 reform when SS went broke -- we see SS now paying *negative* returns.

Every cohort retiring after 2000 gets negative returns from SS. Workers in their 30s today stand to get as little as 50% of their benefits back. Even poor, lowest income workers will get back from SS less than they put in.

Who says so? The Social Security Administration actuaries say so. Go look it up.

And this has nothing at all to do with the funding gap. This is the legally prescribed benefit formula.

Except the legally prescribed benefit formula is itself 30% underfunded for the young, of course. So if SS stays paygo then by the Iron Laws of Arithmetic return on contrubutions for the young must drop another 30% (either a tax hike or benefit cut to close the gap gives the same result) -- and today's 30-year old get as little as 35% of contributions back from SS. A 65% loss. That will surely be popular!

So what's happened to the *explicit promises* of FDR, Altmeyer, and the other SS founders regarding a fair return and intergenerational equity for all?

They're politically inconvenient for today's Democrats, so overboard they go! Forget 'em.

But worse -- and self-destructively -- what is today's Democratic reaction to the rather *obvious* notion that makes everyone *poorer* on a lifetime basis might become rather unpopular politically? You know, earn the opposite political response of one that made everyone richer.

It's this: "Shhh, don't tell anyone -- maybe as they lose up to 50% or 65% on their contributions nobody will notice".

And the funny thing is, they claim they are doing all this to *save* SS as we've known it!

But the bedrock of SS "as we have known it" has been paying people more than they put into it -- a positive return. And that SS is dead and gone *already*.

Anybody who really and truly wants to save SS "as we have known it" will want to preserve the principle of FDR, Altmeyer, and its founders that it shouldn't make whole generations *poorer*, and thus should provide a fair return rather than a negative one.

If that's not good enough, one should at least recognize the political reality that a program that suddenly turns from paying big positive returns to paying big negative ones is not going to maintain its popularity.

Either way, to preserve SS "as we have known it" one should *want* private accounts in SS, because they are the only thing that can maintain the substance of SS by restoring positive returns to participants.

Those who can't see that as a matter or correct principle should at least see it as necessary politics.

Sweden has put 2.5% private accounts in SS for just this purpose. Swedish social policy -- too right-wing for US Democrats. ;-)

Posted by: Jim Glass at December 21, 2004 02:36 PM

"One can make a good case that it is foolish to try to 'save' social security from a crisis that is 40 years away"

40 years??? I think not! Only in the politics of denial.

Let's skip for now SS's real #1 problem, its shift into big negative returns as per my other post. Let's just see how it will provide *even those* returns for 40 years.

(1) While one can say SS "has the money" in the trust fund to pay benefits for 40 years, more or less, it has it only in the form of a totally nonbinding promise that the money will come from the Treasury somehow.

And, alas, the Treasury does not have the money.

To pay off those SS trust fund bonds, which will total $5 trillion or so, the Treasury is going to have to raise a new $5 trillion in taxes -- more than enough to pay down the entire national debt today -- on top of the **even much larger** amount of taxes it will have to raise to cover Medicare.

If you think SS benefits financed on a paygo method are going to come through that fiscal pressure cooker unchanged for 40 years, I have a bridge to sell you.

(2) A good twenty years or so *before* that 40 years is up, the generation then in their 40s is going to be looking at having their benefits slashed 30% as of the day they retire -- on top of the negative returns they'll already be getting.

So if you don't believe that a good 20 years before that 40 years is up -- or earlier than that -- they won't be insisting on a major re-write of the SS program, I have some magic beans to sell you.

Of course, those people are going to be insisting on a re-write of benefits *upward* just as that $5 trillion is coming due on top of the Medicare crunch, forcing benefits *downward*.

Little problem there? Long before the 40 years is up? Nah ... what problem??? ;-)

Hey, imagine you're 45 years old and you just discovered your private sector pension trustee t ran off with all your pension savings and left you with nothing, zip, nada.

Crisis? What crisis?? You won't be retiring for another 20 years! That's plenty of time, what's to worry??

If you're lucky you might not even live that long!

Posted by: Jim Glass at December 21, 2004 02:49 PM

"Is price indexing instead of wage indexing a good idea?"

Any across-the-board benefit cut is regressive: price indexing, postponing the retirement age, any of 'em.

This is because low-income folk depend on SS for their support much more than high-income folk do, so a benefit cut hurts them more.

If you are a Democratic politician who's always positioned yourself as a defender of SS in its role as "social insurance" against poverty, this is going to make it difficult for you to vote for any kind of general benefit cut. It hurts the poor most.

Posted by: Jim Glass at December 21, 2004 02:58 PM

Keith. Two points. The average SS recipient receives less than $1000 a month so they aren't exactly rolling in dough.

Ignore the "feel good" part of helping your elderly relatives. The reality is -- especially as people are living longer -- that you will have no choice but to help them.

And will someone explain the "get your money back" argument? I've never gotten any money back from the fire insurance on my home and that's great with me!

Posted by: SusanJ at December 21, 2004 03:06 PM

And will someone explain the "get your money back" argument? I've never gotten any money back from the fire insurance on my home and that's great with me!

Sure! Look at it two ways:

1) You're fire insurance is "insurance". That's why you don't collect on it unless you have a fire -- an insurable event.

Now, if Social Security was some kind of insurance against poverty, it would be darn peculiar to have Warren Buffett collecting it, eh? What's his insurable event?

Rather Social Security is a retirement benefit. That's why the Social Security Adminstration calls it a "retirement benefit" and a "defined benefit pension plan".

Warren collect from it on the same terms as everyone else his age who contributes to it -- that's how pension plans work.

Now if you contributed 40 years to a pension plan and got nothing back, like with your fire insurance, you might be annoyed rather than happy.

2) Let's say you buy your fire insurance from the government. You don't have a fire, so you don't get anything back.

But that's only due to a change of rules! Before you, everybody who bought fire insurance *did* get all their premiums back, plus insurance coverage too!

Starting with you, the *new rule* is that your premiums are much larger than before, and your coverage is cut to 50% of any loss.

This is so that the premiums you pay can be used to make sure everybody before you, including Warrren Buffett, makes a gain on their fire insurance policy. So you're stuck with the loss and reduced coverage to make it so.

Are you happy with your Congressman?

Posted by: Jim Glass at December 21, 2004 04:47 PM

Pickiness continues:

Garance. G-A-R-A(!)-N-C-E. Garance. Not Garence.

End of pickiness.

Posted by: James Grimmelmann at December 21, 2004 05:24 PM

Thanks Jim. I guess I got SS and Old-Age and Survivors Insurance (OASDI) mixed up.

Posted by: SusanJ at December 21, 2004 06:06 PM

Old Age Protection.

SusanJ -- exactly how does a program that takes more money than it gives you in benefits PROTECT you in your old age? That is to say, how am I protected by having more taken from me than I will receive? Am I truly that dangerous to myself?

Posted by: Victor at December 21, 2004 08:09 PM

Victor -- why do you say that that SS takes more money that it gives you? How are you calculating that? When I run the numbers, that's not what I get.

And -- I repeat -- you have to count the value of other benefits (disability, family, survivors) in additional to retirement payments.

Posted by: SusanJ at December 21, 2004 08:48 PM

Jim Glass wrote,

"(1) While one can say SS 'has the money' in the trust fund to pay benefits for 40 years, more or less, it has it only in the form of a totally nonbinding promise that the money will come from the Treasury somehow."

Wrong. The promise is binding, unless the government repudiates it by changing statute.

"And, alas, the Treasury does not have the money."

Well, yes, because of too many tax cuts for the rich.

"To pay off those SS trust fund bonds, which will total $5 trillion or so, the Treasury is going to have to raise a new $5 trillion in taxes -- more than enough to pay down the entire national debt today"

Over what time period?

And what makes you think the US can't afford it?

Given that the debt is due to excessive general fund deficits, and given that there's no compelling evidence that that can't be fixed by raising income tax rates at the top of the scale, there's no problem here.

Of course, as you say, there *is* a problem with Medicare. But then again, there's a problem with the entire health care system, not just the publically financed part of it.

Posted by: liberal at December 22, 2004 04:45 AM

SusanJ -- Check out Bill Clinton's SS Advisory Council ... ... the "Money's worth" section.

An average wage (composite) worker gets 80% of what they put in.

You are correct that DI is a small piece that provides value, but it is just a small piece and it can be separated off. For the Old-Age insurance component, workers are paying into the system and getting absolutely nothing in return until they hit 65. At that point, they could have taken the value of all their contributions and invested that in an actuarially-fair annuity that would pay them more than Social Security, even with a significant load for profit and admin costs.

Losing money and not getting anything in return is not "insurance". Anything that is insurable at least gives you the *chance* to win, even if on average you won't get your money back.

Clinton's commission is using older data, but the fundamental problem remains today, perhaps just shifted by a few years. Bush's commission, unfortunately, didn't bother to get into this sort of analysis.

On a related note, here's a somewhat newer study by the SSA that shows basically the same thing in terms of IRR (any IRR significantly below a risk-free real rate will yield this problem): link.

Posted by: Victor at December 22, 2004 06:01 AM

Crap. I thought I could give you links. Here are the two:

1996 Advisory Council:

SSA Study:

Hopefully that will work.

Posted by: Victor at December 22, 2004 06:06 AM

Victor -- thank you for the links. I carefully studied the newer SSA report.

I understand now that your key point is that you equate "not getting back as much as you put in" with the estimated Internal Rate of Return (IRR) being less than you think you could have made by investing the money yourself. Note, however, that the IRR is positive, which some would consider to be getting back as much or more as you put in.

More importantly, all of the estimates in the report are based on an earner's working from ages 21 or 22 to age 65 which is 45 or 46 years. This is the worst case scenario in that the worker would be making contributions for 10 extra years in addition to the 35 used to compute the retirement payment. Here's a tip: you can greatly increase your IRR by starting late or retiring early! This strategy would leverage your presumed skill at investing and allow you to take advantage of the low tax rate on capital gains as opposed to wages.

The following points are important:
(1) The SSA report states that "IRR does not reflect the full value of insurance in reducing the risk for extreme outcomes, like death or disability at very young ages or survival to very old ages."

(2) It also does not reflect the full value of the return's being guaranteed rather than subject to market forces or unanticipated inflation.

(3) Finally, it does not reflect the value of the impact on your quality of life that other people are also getting a guaranteed return.

Posted by: SusanJ at December 22, 2004 07:54 AM

"I understand now that your key point is that you equate "not getting back as much as you put in" with the estimated Internal Rate of Return (IRR) being less than you think you could have made by investing the money yourself."

I apply a positive real discount rate. Therefore, if the IRR is very low, the present value of the taxes paid will be substantially less the present value of the benefits. The 1994-6 Advisory Council had this combination of results (tiny IRR, low PV of benefits v. PV of payments).

To your other points:

(1) Again, if you separate out the relatively tiny disability insurance provision, the OASI piece still is going to be showing this same phenomenon.

(2) I'm suspicious about this comment. My IRR is not guaranteed in a personal sense, as you noted. If I lose my job, my IRR changes. If my wages go up, my IRR changes. If the government changes the CPI calculation, my IRR changes (see 1999). If the government changes the retirement age, my IRR changes (see 2000+). If the government raises the income cap, my IRR changes (well, this will hopefully be an issue for me later in my life-cycle).

(3) Because I won't have to worry about other people getting some sort of minimum benefit, I shouldn't be worried about whether or not that minimum benefit is pitiful or that the design of the program is fundamentally flawed and causes their IRR to be pitiful?

It's precisely *because* I have concern for people throughout the income distribution that this issue is troubling to me. Benefit payments that are "better than nothing" provides me no solace or good humor and their existence cannot justify inaction designed to improve problems in the system.

Posted by: Victor at December 22, 2004 08:43 AM

Victor -- This has been interesting for me to see how differently other people view this situation. I think the time has come for me to stop commenting on this thread.

I have both selfish and unselfish concerns with respect to other people. From a selfish perspective, I want to be protected from their imprudence and bad luck. In other words, I'm better off when I don't have to help others directly and don't have to live in a less stable society. Is there an alternative to SS that provides this protection?

Posted by: SusanJ at December 22, 2004 10:30 AM