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January 02, 2005

Why Oh Why Can't We Have a Better Press Corps? (Brad Setser Has Had It with Social Security Doom Mongering Department)

Brad Setser has also been pushed over the edge by Jonathan Weisman's claim that Social Security faces a "day of reckoning" in 2018:

Brad Setser's Web Log: Social Security Crisis in 2018? Ridiculous: Take a look at this Washington Post article by Jonathan Weisman.... The initial framing of Weisman's article is just way, way off. Social security in no way faces a day of reckoning in 14 years, as Weisman implies. Rather than taking the Administration's talking points seriously, the press should simply highlight how ridiculous they are.... Suppose I bought a... treasury bond that matures in 2020.... Do I face a day or reckoning in 2020? Of course not. I have a financial asset....

Social security expenditures will exceed its payroll tax revenues in 2018. So what? Social security has built up assets over time.... Social security can sell some of its assets to cover the gap between its expenditures and its revenues. That is the point of saving -- it lets you spend in excess of your income in the future. The Trustees forecast those assets will last til 2042, using VERY conservative assumptions. The CBO forecasts those assets will last until 2055.... Unless the US treasury cannot make good on its promises -- something that truly would change international financial system -- social security does not face a day of reckoning in 2018. When a bond you own comes due, you have the right to redeem it....

Don't forget that the government -- the non social security part -- has expenditures well in excess of revenues RIGHT NOW. Dick Cheney apparently thinks cash flow deficits that have to be financed by issuing tons of debt don't matter, but cash flow deficits than can be financed by drawing on the interest from your stock of existing assets are a real problem ... interesting financial logic. In 2018, social security won't be able to lend its surplus to the rest of the government, and the rest of the government will have to adjust.... Right now the payroll tax takes in more than is needed to pay for current benefits -- revenues are around 5% of GDP and expenditures are around 4.4% of GDP -- and the surplus is lent to the rest of the government. It is a loan, not a grant. The government has to pay it back.

Rather than debating the "problem" created when social security starts to redeem its bonds, we should be debating how to fix our real problem -- the fiscal deficit. Social security now takes in more than it spends. The rest of the government now spends way more than it takes in taxes.... Ongoing fiscal deficits are the real financial problem facing the US – not the projected gap after 2042 (or 2055) of 1.5% of GDP or so between payroll taxes and trust fund assets and social security benefits that underlies concern about social security's long-term solvency. I’ll put it differently: unless something changes, the rest of the government will go broke long before social security has any problem paying all its projected benefits.

These is an honest case for getting rid of social security, though not a honest case that social security faces a day of reckoning in 2018. People like Pete Peterson think we should not be promisng to transfer 6% of GDP to the baby boom, and want to cut benefits -- even if though we can pay for them. Cutting social security benefits would make it easier to pay the rising costs of Medicare; payroll taxes now going to social security benefits could go for health benefits. Fair point.

But there is also an honest case for keeping social security as it is -- perhaps with a few tweaks -- as a way to protect against income volatility in retirement....


UPDATE: Matthew Yglesias climbs the wall as well:

Matthew Yglesias: Still No Crisis: Well, I haven't written about this in a while, but without naming any (*cough* Jonathan *cough* Weissman) names I think it's fair to say that some members of the DC press corps need a refresher lesson on the lack of Social Security crisis. I get paid on a biweekly basis a sum of money that I won't name. Suffice it to say that 10 days into the current pay cycle, I'd already spent 14 days worth of money. I resolved this Day of Reckoning by going to the ATM and getting some cash out of the account I established when I moved to town at the Riggs Bank. You see, during some earlier cycles I'd only spent 9 or 10 days worth of money during a 14 day period. These savings were created so that I could afford to spend more money at some point in the future.

Social Security, similarly, has been saving money for the past 20 years and will continue to do so for the next 14. At that point, it will slowly begin paying down its savings. This is not a Day of Reckoning for Social Security. At best, it's a Day of Reckoning for the General Fund that owes Social Security the money....

If the Riggs Bank proposed to just not pay me back, they'd be in trouble. Today, the agents of America's rich in the Republican Party are proposing that the wealthy default on their debt to the middle class. That this proposal exists is the only thing that Social Security must "reckon" with for the next several decades....

Posted by DeLong at January 2, 2005 04:38 PM

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» THAT DAY OF
RECKONING
from MaxSpeak, You Listen!
Jonathan Weisman of the Washington Post: "In just 14 years, the nation's Social Security system is projected to reach a day of reckoning: Retiree benefits will exceed payroll tax receipts, and to pay its bills the system will have to... [Read More]

Tracked on January 3, 2005 08:17 AM

» Social Security Word Games from Silent E
How does the GOP meme survive? SS privatizers define SS narrowly ... The most important question about the crisis is: Does the Trust Fund exist? [Read More]

Tracked on January 3, 2005 09:26 AM

» MSM, Not everybody gets it!!!! from Middle Earth Journal
After giving the main stream media credit for telling the truth about Social Security based on a New York Times editorial I have to step back. Brad DeLong reminds us that not everyone gets it. [Read More]

Tracked on January 3, 2005 10:12 AM

Comments

Does anyone believe that the Bush administration believes there is a looming SS crisis? Does anyone believe that the press believes the Bush administration when they say there is a looming SS crisis? But, does anyone believe the press when they say there is a looming SS crisis?

Posted by: Dubblblind at January 2, 2005 04:57 PM


Waitaminute. Your saying the administration might not be telling us the truth, fabricating a crisis to satisfy ulterior motives?

Wow. I can't believe it.

Posted by: Matt Davis at January 2, 2005 05:02 PM


In the doom-mongering department, I think it is fascinating that we have also heard this past week about the increasing longevity of our oldsters, putting a crimp in the Social Security system. Of course this is nonsense, since with increasing longevity comes sprightliness and health, and so tweaking the system to "up" the retirement age will probably be unobjectionable to many... Indeed, given the advances into senescence research, it seems likely that if you can survive another 25 years, you are likely to live to 250, and if you can make it to 250, (with the increasing scientific advances) you will mostly likely be immortal. Lest you frown upon an eternity of decrepitude, may I assure you that you will have the body of a twenty-year-old, and will even come to enjoy hip-hop. I wish to be the first to say that I think the Social Security retirement age should be upped to 99-years-old by the year 2075 (I threw a dart at the wall to choose it), --to help prevent the impending fiscal implosion.

Posted by: Lee A. Arnold at January 2, 2005 05:13 PM


So starting in 2018, the Republicans won't be able to steal people's pensions in order to pay for their tax cuts?

Now I understand why they're in crisis mode.

Posted by: djs at January 2, 2005 05:17 PM


there should be no surprise that what Matt Davis ironicizes about is true. What's so disheartening is the incompetence of journalists like Weisman who blithely mislead the public that " the Bush administration believes there is a looming SS crisis."

Posted by: David at January 2, 2005 07:35 PM


Krugman has a relevant and excellent article on Social Security in this month's Economist's Voice:
Confusions about Social Security
http://www.bepress.com/ev/vol2/iss1/art1

[Indeed he does...]


Of course, Boskin also has a new article that is complete garbage:
Economic Illiteracy on the Campaign Trail
http://www.bepress.com/ev/vol1/iss2/art8

[As editor of the Boskin article, I disagree... :-)]


Boskin starts with a strawman 'Kerry campaign claims that we are living in “worst economy
since Hoover.”' and then goes downhill. Its too bad the Economist's Voice is trying to be fair and ends up allowing this type of nonsense.

And Mankiw's piece, The Economic Agenda, is laughable.
http://www.bepress.com/cgi/viewcontent.cgi?article=1047&context=ev
Minkiw starts with a conclusory statement that is arguably false: "The U.S. economy is now on a sound footing for sustained expansion." In fact, the US economy has serious problems particularly with the General Fund budget deficit (primarily caused by the Bush tax cuts), the current account deficit, high personal debt and more. In fact, I would argue that the "current recovery" is built on a marshland of debt.

Maybe the Economist's Voice needs a better editorial board. Happy New Year to All.

Posted by: CalculatedRisk at January 2, 2005 07:40 PM


Brad, If you were the editor of the Boskin article, you should have challenged him for the source of the quote from the Kerry campaign that 'we are living in the "worst economy since Hoover"'. To my knowledge, no one EVER made that comment, or anything remotely close. Boskin creates a strawman and then takes a cheap shot. The Kerry campaign did point out, correctly, that America had the worst job creation under Bush since Hoover.

Boskin then writes that the Kerry campaign "claims the Bush tax cuts did a lot of
economic harm." I believe (as Stiglitz wrote in your first issue: "The Parties' Flip-Flops on Deficit Spending: Economics or Politics?"), that the tax cuts have harmed the economy. Stiglitz wrote: "The kind of deficit spending associated with Bush’s tax cuts does not increase the country’s long term economic strength. Rather, it saps it."

But Boskin doesn't argue a difference of opinion; he claims Stiglitz (and those that believe like him) are "economically illiterate". I beg to differ.

Best Regards.

Posted by: CalculatedRisk at January 2, 2005 08:28 PM


Back on topic (sorry for detour):

NYTimes Editorial (Jan 3, 2005) is decent:
The Social Security Fear Factor
http://www.nytimes.com/2005/01/03/opinion/03mon1.html

EXCERPTS:
If you've lent even one ear to the administration's recent comments on Social Security, you have no doubt heard President Bush and his aides asserting that a $10 trillion shortfall threatens the retirement system - and the economy itself. That $10 trillion hole is the basis of the president's claim last month that "the [Social Security] crisis is now." It's also the basis of the administration's claim that the cost of doing nothing to reform the system would be far greater than the cost of acting now.

Well, the $10 trillion figure is the closest you can get to pulling a number out of the air. Make that the ether.

MORE EXCERPTS:
"The zeal over privatization is fueled by the belief of Mr. Bush and his supporters that free-market fixes are appropriate for virtually every problem. That faith is misguided. For a society to be functional and humane, it's not enough that some people have a chance to be rich in old age. Rather, all old people must have the dignity of financial security, and that requires universal coverage."

MORE:
"If Mr. Bush were not so serious about privatizing Social Security, his urgency would be silly. Compared with other challenges looming for the government, it's a non-problem. The shortfall in the Medicare hospital insurance fund is two to three times the size of the Social Security shortfall, and that fund is projected to be insolvent some two to three decades before Social Security. Taken together, the costs of the Medicare prescription benefit and of making the tax cuts permanent - Mr. Bush's two main domestic initiatives - are 5 to 8.5 times larger. And his hair is on fire over Social Security?"

Posted by: CalculatedRisk at January 2, 2005 10:02 PM


Being an economic illiterate, I have a question that I don't believe has been addressed:

If social security is privatized, are we then excusing our debt?

Posted by: Rich at January 3, 2005 04:17 AM


Rich,

We should all be so illiterate.

The argument being tacitly offered is that Congress will default at some future date on some part of its debt oblibation. (Those insisting that the Trust Fund is a Ponsi concoction have made this argument for some time.) Because the Social Security Trust Fund is a governmental institution, it can be forced to buy Treasury notes when it should be selling them to fund checks to retirees, if we can just jigger the benefit and retirement schedule around. That form of default is less obvious, so more likely, than outright refusal to pay off maturing Treasury notes held outside of government institutions.

Who thinks Congress will default some day? Well, some current members of Congress seem to think so, making this logic all the more interesting.

Posted by: kharris at January 3, 2005 04:35 AM


"Social Security, similarly, has been saving money for the past 20 years and will continue to do so for the next 14."

And another branch of the federal govt. has been spending that 'saving'. The asset that is the SS trust fund is exactly offset by a liability of the federal govt. Which means it nets to $0.

Some fine day in about 12 years that will become painfully apparent (actually it might become apparent earlier when the same little problem hits for the Medicare trust fund). It is economic (and accounting) illiteracy to look only at one side of your balance sheet when determining your future.

Ask yourself if you would face a day of reckoning if you'd been borrowing $5,000 every year from your parents for 40 years. Issuing them 'bonds' that could be redeemed 40 years from date of issue.

If you'd been truly investing the borrowed funds in true economic assets, you'd have funded your promises. But if you spent it on consumption goods, but wrote yourself an I O Me for every dollar you spent, how exactly would those pieces of paper help you meet your promises to your parents?

Posted by: Patrick R. Sullivan at January 3, 2005 06:03 AM


I should have mentioned, in my little scenario above, that the 'bonds' you issued to your parents, had the caveat that they couldn't be sold, ever, to any outside entity.

Posted by: Patrick R. Sullivan at January 3, 2005 06:20 AM


I posted at length at MY. So I will limit myself to my implicit question. When do we move the goalposts and plug real 2004 growth into a model whose optimistic assumption was 2.8%? Because I look at the numbers and am ready to victory, at least on the numeracy front, if not yet on the political. You hand me 2.2% long term growth and I hand you back an much overfunded Trust Fund. It really is as simple as that.

The economic gods have spoken, at least initially, and they said "4.0%". That 1.2 point gap between prediction and reality at a minimum is going to move the shortfall and exhaustion dates back. And considering that the "optimistic" projection calls for a sharp slowdown to 2.1%, which nobody is likely to accept, they are faced with finding a replacement number for that as well, which will only add push to the shoveback.

Time to move this game to a field called "Reality"
http://www.ssa.gov/OACT/TR/TR04/II_project.html#wp106217 (economic assumptions 2004)

Because as it is shaping up, we may never have to redeem those bonds, or at least only minimally over a 20 year period (drawdown from 560 to 500 trust fund ratio over the 20 years from 2020 to 2040). Basically Congress just has to come up with the interest, and even that presupposes 1.9% growth in the out years.
http://www.ssa.gov/OACT/TR/TR04/II_project.html#wp106217 (trust fund ratios 2004)

If economic trends continue like just about everyone predicts (everyone who is pushing stocks that is) we are staring right at working class tax cuts here. Back at you Mr. President.

Posted by: Bruce Webb at January 3, 2005 06:24 AM


But if you spent it on consumption goods, but wrote yourself an I O Me for every dollar you spent, how exactly would those pieces of paper help you meet your promises to your parents?

Because, if this is to be remotely analagous to the position of the US government, I would be able to meet those obligations by taxing US citizens.

Posted by: dsquared at January 3, 2005 06:41 AM


dsquared. but the government thinks taxes are bad and wants to reduce them.

Posted by: Big Al at January 3, 2005 06:53 AM


I'm no economist, but this whole argument that there is a Social Security "crisis" is really dumb. Do journalists have no brains? The argument is that in 38 yrs. (or longer) the government won't have enough revenue to pay full benefits means SS is going "broke." Correct me if I'm wrong, but don't we now have to borrow money to run our own government? Does this mean the U.S. is "broke" and that there is a crisis? Why don't journalists ever try to put things in perspective?

Posted by: Unstable Isotope at January 3, 2005 07:47 AM


Hey Patrick, those are called consumer loans, look into it. You may have used one to buy your car!

Posted by: Rob at January 3, 2005 07:52 AM


Also, I am more than tired of hearing Social Security described as a limit to household saving. As though the more insecure we are the more we will save, so finish with all social benefits programs. Sweden, Norway, France, Japan, have no saving problem. The conservative plan is to finish the New Deal legacy. There is absolutely no Social Security crisis, but the plans to finish with the program. Phooey.

Posted by: anne at January 3, 2005 08:29 AM


The really ominous thing in Weisman's article is this quote:

"In the past, Social Security has been subject to a lot of temporary fixes, and if you make a fix that you know is temporary, by definition you are leaving a gap that some future generation is going to have to step forward to fill," he said. "We have to hold ourselves to a higher standard than a temporary fix this time."

When you think about it, this is a clear statement that policy should be guided by religion and not by science.

Posted by: enfant terrible at January 3, 2005 08:46 AM


Actually, contrary to Matt Y, Trust Fund assets don't peak until 2023. After that point the program's cash needs from general revenue begin to exceed its interest income. (Table VI.F8, Trustees 2004 report)

Posted by: Max at January 3, 2005 08:47 AM


Big Al "but the government thinks taxes are bad.."
No Al, just the current administration. And even with them it's only taxation of the political donor class that is "bad".

Jack

Posted by: JackNYC at January 3, 2005 08:56 AM


it is nice to see patrick cite the official phony argument talking points so earnestly. In addition to dsquared's response, we have the other little matter of how patrick puts it: the rest of the government has been "spending" the trust fund money.

the actual correct phrasing would be "borrowing and spending" the trust fund money, and that extra verb makes all the difference in the universe....

Posted by: howard at January 3, 2005 09:18 AM


Take a bit of D-Squared, a touch of Unstable Isotopes, sprinkle on Patrick and he disappears. Patrick, just because a bunch of paid TV goons say these things doesn't mean we need to believe them...or repeat them. The point you make about the other (big) branch of the government running a (big) deficit is, of course, far more important than what may someday happen with Social Security. Jumping around making noise about a leak that will someday appear right near the waterline of our boat, maybe, depending on how things go, while ignoring the gushing gash down there by the skeg is just crazy. The general fund is the problem. If there weren't an ugly, persistent, and largely unjustified deficit in the general fund, there would be no argument for denying boomers the benefits they paid extra for. Let's fix the big deficit now, rather than jump through a bunch of dishonest intellectual hoops to justify running the big deficit up even high to defund a successful social program.

The same guy who is banging the drum for "reforming" Social Security (W, not Patrick) led the charge for the tax policy changes, and did nothing to stop the spending rise, that created the persistent general fund deficits. Instead of letting Bush use his earlier screw-ups as an excuse for making more bad policy, why not just insist he fix his earlier mistakes? You know, accountability, responsibility, "the buck stops here" – all that sort of stuff.

Posted by: kharris at January 3, 2005 09:40 AM


The comment by L.A. Arnold near the top brought a bit of weirdness to mind for me. Do you think that the retirement scheme in 'Logan's Run' (at age 35 (?) you were 'retired' from life, willing or not) was the result of someone's SS fix?
Seriously though, I am wondering when another 'Modest Proposal' will be written from this perspective.

Posted by: linnen at January 3, 2005 10:02 AM


There's a new thing honest people need to begin saying about the "2% cut" in contributions to the Trust Fund to finance private accounts. It's really a 32.2% cut. Don't look at me. Go read the latest "Who's Counting" at ABC News. If you reduce a 6.2% tax to a 4.2% tax, that's 32.2% reduction in financing. The 2% figure is deceptively small.

http://abcnews.go.com/Technology/WhosCounting/story?id=300038&page=1

Posted by: kharris at January 3, 2005 11:28 AM


There is NO CRISIS. So how does the GOP meme survive? Fundamentally distinct definitions of "Social Security".

SS privatizers sometimes define SS narrowly, referring only to the pension-entitlement-disability program.

SS privatizers also use a second definition of SS which includes the annual revenue generated by the dedicated payroll taxes.

IN each case, they do not consider the Trust Fund as part of SS.

SS supporters define SS as the entitlement/pension program, the Trust Fund established by the government, and the dedicated payroll taxes that fund both.

Whether or not there is a "Crisis" in SS then follows naturally from the definition of SS chosen. (See my blog for my extended discussion)

The most important question about the crisis is: Does the Trust Fund exist? It was established in 1983, and has been treated as a real Fund for government accounting purposes for 20 years. The Social Security Administration administers both the program and the Fund, and the Social Security Actuaries report on the status of both the Fund and the Program. Both parties have agreed that it exists for 20 years, and it was the basis of the whole "Saving Social Security" debate in the 2000 presidential election. The Fund is a promise - a promise made to middle and lower income baby-boom Americans that their retirement benefits would be covered because the Government was planning ahead and setting aside enough money.

Will the promise be kept? Will the General Fund repay it's obligation - or will it default on the Trust Fund? That's the essential question, wholly obscured when reporters use definitions that deny the very existence of the Fund.

Posted by: Silent E at January 3, 2005 12:03 PM


Very nice, Silent. (May I call you "Silent"?) The notion you raise, about whether financial commitments made in legislation passed by the Congress of the Unites States and signed into law by the president, has been pretty much settled since Hamilton first suggested we might want to go into debt to build our credit rating. (The US was fresh out of college at the time.) Only twice to my knowledge has there been serious suggestion by national leaders that the full faith and credit of the US might not be worth the paper it's issued with. Once was when Gingrich said a "technical default" might actually be good for the US, because it would instill the sort of discipline that only Republicans could offer. The other time is now, when arguments to rejigger the Social Security retirement program seem predicated on a stealth default on obligations to the SS Trust Fund.

Posted by: kharris at January 3, 2005 01:14 PM


"Because, if this is to be remotely analagous to the position of the US government, I would be able to meet those obligations by taxing US citizens."

Ah, I see. So in our hypothetical, the fact that I could take on an additional job for 30 more hours a week makes it a non-crisis. Here is the hypothetical in full.

I know that someday my house will need to have its roof and deck repaired. I have PROMISED my wife that I will fix them when they need repairing. (You know it is a hypothetical if I have a wife). So I set aside $100 dollars per month in the 'Roof and Deck Trust Fund'. I decide I want a new car so I take all the money from the 'Roof and Deck Trust Fund' and make a downpayment on an SUV. I put an "I owe Me" slip in a bank vault and chart that under the Roof and Deck Trust Fund. Every month I take out $100 for an insurance payment for the SUV. But I faithfully put "I owe Me" slips for $100 in the bank vault to reflect the amount I am borrowing from the Roof and Deck Trust Fund. Are those assets? I'm not a full-time economist, but the answer is clearly no. The fact that ten years from now I could take an additional job to make money to fix the roof and deck (to fulfill your higher taxes concept) does absolutely nothing to change the fact that the 'I owe Me" slips are NOT ASSESTS TO ME.

Posted by: Sebastian Holsclaw at January 3, 2005 02:22 PM


Sebastian, i suggest that you read (or reread) kharris' post immediately preceding yours. Then please explain to us your point. You've written variations on this posting a number of times, and each time you come down to the same bottom line: in your mind, the full faith and credit of the United States means absolutely nothing more than "i owe me."

200 years of precedent and experience (and Sebastian, honest, i thought you were a conservative who believed in things like precedent) suggest that "i owe me" and "full faith and credit of the United States" are not equivalent terms....

Posted by: howard at January 3, 2005 02:29 PM


For the last time (this is a rhetorical device meant to express exasperation, rather than a promise to stop asking the question), would the Sebastians and Patricks of this list please describe what they feel would be the likely scenario in which the US government would default on its obligations to America's retirees, and why, in such a scenario, you think Social Security would still be a major concern?

I know you'll scream that the Supreme Court has ruled that the government owes these obligations only to itself, and when the time comes you can explain to the base of the most powerful lobbying force in America that, you see, we never *really* promised you that money in the first place...

But, back on Earth for a moment, your ability to credibly describe such a scenario really is key to anyone here taking your point seriously. In other words, you can ramble on about assets minus liabilities equalling zero, but nobody here believes in your "day of reckoning," perhaps only because every time someone responds to your robotic postings about it by asking you to describe it, you refuse to do so.

Posted by: Julian Apostate at January 3, 2005 03:12 PM


Ah, I see. So in our hypothetical, the fact that I could take on an additional job for 30 more hours a week makes it a non-crisis.

No; to preserve the analogy, you would need to find something analogous to a movement in the tax/GDP ratio of the order 5%. So it would be more like doing two hour's extra overtime at time and a half.

Also note that while an individual can make the choice to save $100 in a bank account, this choice is not an option for the economy as a whole; the bank is there because there are some people who want to borrow and some who want to lend. For the solution of the USA's retirement problem (unless one is going to assume frankly improbable things about the USA's net acquisition of foreign assets over the next twenty years), the only possible way in which the government could be promising retirement insurance is by making commitments about its future power to tax the productive capacity of the USA. Which is the equivalent of writing an "I O Me", but this just shows how empty the original analogy was; all it really proves is that if the US government decides not to honour its Social Security commitments, then they won't be honoured.

Posted by: dsquared at January 3, 2005 04:13 PM


Note, btw, that Federal Reserve notes are pure fiat instruments, so even if the Social Security "lockbox" was a real lockbox the size of Nebraska, filled with $100 notes, Sebastian and Patrick would still be able to claim that those Benjamins would only be redeemable for goods and services if the US government didn't decide to do a Boris Yeltsin and suddenly "unrealise" all high-denomination banknotes - they are also "I Owe Mes".

Posted by: dsquared at January 3, 2005 04:19 PM


D-squared, now you are just being an ass. The government could also just print money flat out and pay the treasuries with the printed money. It would be awful for the economy but whatever.

The point is that the notes are not assets. They aren't. You know they aren't. And no amount of gaming makes them so. I'm all for doing all sorts of things, raising taxes to help people's retirement, cutting benefits to the rich who don't need them, changing the retirement age etc. I am not for pretending that the tradeoffs needed in the system are taken care of by non-existant assets. You are an excellent spin-meister, but it doesn't change the underlying fact that in order for the non-assets to be worth anything, you have to pour 100% of their 'value' into them.

Julian, this is worthy of Enron: "In other words, you can ramble on about assets minus liabilities equalling zero...".

Howard, appealing to the full faith and credit of the United States doesn't get the money now does it? Where is the money coming from to pay those treasury bills? Where? We know the answer don't we? You just don't like saying it.

Posted by: Sebastian Holsclaw at January 3, 2005 04:47 PM


Sebastian, to put it into the simplest form, and not to intrude on Julian and D-squared's turf, what you are describing is a true situation: we have a (as our host has pointed out many times) general fund crisis of immense proportions. I'm happy to call that what it is.

I'm not happy to pretend instead that the crisis is situated in social security and that the problem is that social security recipients have no claim upon the general fund for the assets which were lent it.

While in practical terms it is true that a general fund crisis may not lead to a renouncing by the US of legitimate obligations - i'm not a fortune-teller - describing that as a problem of the "i owe me" nature of the specific borrowing that the general fund has done to stave off the worst affects of bush's fiscal follies is simply not on.

Posted by: howard at January 3, 2005 04:55 PM


er, "while in practical terms it is true that a general fund crisis may NOW lead to a renouncing...."

gotta proofread....

Posted by: howard at January 3, 2005 04:59 PM


Sebastian's 'Roof and Deck Trust Fund' concept actually does have some utility.

For example, we may note that by getting his SUV downpayment from the fund he has reduced the size of his loan and, hopefully, has reduced his other borrowing $100 per month paying his insurance from the fund. So when it comes time to fix the roof and deck, his credit will be good enough that the bank will give him a home improvement loan he might not otherwise have been able to get.

Even better, if instead of blowing the dough on an SUV he were to use it to build up an excellent woodworking shop and power tool collection, he would have in hand much of what he'd need to fix the roof and deck himself, would need only a much smaller home improvement loan (just enough for materials), and would be able to use the tools in semi-retirement to bring in some supplementary income.

But Sebastian needs to keep in mind that, even if he puts the trust fund money in the bank and doesn't touch it, the bankers aren't just going to leave it in the vault. They're going to loan it out to other people -- yep, turn it into IOUs. And whether he gets his money back will depend on whether those people repay those IOUs, and what that money will buy when he gets it back will depend on how productive the world's workforce is and what the exchange rates are at that time.

Posted by: jm at January 3, 2005 10:13 PM


The point is that the notes are not assets. They aren't

And the point is that, nor could they be. The economy as a whole can't be a net acquirer of financial claims unless it acquires them from foreigners. The world economy, as a whole (since one might note that other countries need to provide retirement as well as the USA) can't be a net saver or lender at all.

The point is that, rather than playing around with rinkydink analogies to personal finance (the purpose of nearly all of which is to smuggle a fallacy of composition in and try to hide it), one needs to face up to the following set of facts.

1. The only way that one can retire (consume without producing) is if one has some means of establishing a claim on the production of the currently productive generation.

2. As the world economy is set up currently, that means domestic workers.

3. As the US retirement system is currently set up, this is achieved through the transfer program called Social Security

4. This transfer program uses accruals accounting to keep track of its finances.

5. That's it. Anyone who makes the conceptual issues more complicated than this is probably doing so to push an agenda.

Then there are the following two factual issues:

6. This transfer program is going to become more burdensome on the productive generation over the next fifty years because of demographics.

7. But only to the tune of about 5% of GDP.

Posted by: dsquared at January 3, 2005 11:59 PM


"But only to the tune of about 5% of GDP."

Which is an increase of how much? 80%? Nice use of the word 'only'.

"The only way that one can retire (consume without producing) is if one has some means of establishing a claim on the production of the currently productive generation."

Or save a portion of what you produce while you are working.

And why does a system defended on old-age-poverty grounds pay the rich again?

Posted by: Sebastian Holsclaw at January 4, 2005 07:15 AM


dsquared:

I agree almost completely with you, and would have added some similar comments to my posting had I had time. But although the accounting aspects of this issue may be irrelevant in theory, in practice they will determine how the tax burden on the future productive generation will be distributed, and how we allocate resources to prepare for the future. Also, from a practical viewpoint, because the accounting has in fact been structured as a trust fund, and Sebastian et. al. think of it in those terms, it it is important to deal with the trust fund analogy -- otherwise one plays into the hands of those who portray the trust fund as nothing but a scam, which it is not.


Posted by: jm at January 4, 2005 07:18 AM


I see Sebastian has beaten me to it, but dsquared's:

"Because, if this is to be remotely analagous to the position of the US government, I would be able to meet those obligations by taxing US citizens."

Is in fact, an admission that the SS 'trust fund' is worthless. As the government would have exactly the same option without the 'trust fund'.

And, I also see it finally dawned on dsquared that we can fund retirement systems by going outside the country. But, not that that option is only available if we move to a system of private investment. We can't reach that resource by taxation, can we?

Posted by: Patrick R. Sullivan at January 4, 2005 08:00 AM


D-squared, while showering I realized I didn't deal with what really bothered me about this whole exchange. The hypothetical that you initially objected to (by Patrick) was to correct the mistaken impression held by many (including many on this very thread see kharris' "full faith and credit" rhetoric, howard's endorsement of the same, unstable isotope's comment about 38 years of revenue, Julian Apostate's comment about the Supreme Court and 'owing', Max's comment about interest 'income', and kharris' later comment about credit rating) that the treasury bonds are assets or that interest from them represents revenue.

As shown by your last comment, you know that to be false.

Instead of correcting the misimpression of those on your side, or even allowing patrick or myself to correct that misimpression, you chose to argue with the analogy. If you wanted to, you could have posted your last post, stated they weren't assets and helped the whole conversation along. That would have been fine. Instead you went on the attack, apparently perfectly happy to use the misimpression of those on your side to sow confusion.

That bugs me.

Posted by: Sebastian Holsclaw at January 4, 2005 08:27 AM


Sebastian, typing the name 'Enron' next to an extract from my posting was a strategic coup. Well done.

You still have to describe a credible scenario in which the Gov't would default on its promises to America's retirees. Without that, there's simply no there there, particularly since we know that:

1. the most pessimistic scenario still has current contributions paying around 70% of obligations in the mid-21st Century and beyond, and

2. the most pessimistic scenario is almost certainly wrong, and the goal posts on your day of reckoning continue to be moved further and further out every time they are proved to be wrong.

But what exactly is your point, again? If it's a simple plea for fiscal responsibility, then I agree with you, and we should of course start with the general fund. But I think it's more likely an ideological opposition to a government program of the size, scope and success of the Social Security program. Social insurance exists to ensure that masses of senior citizens don't slide into poverty at the end of their working lives.

You may be able to day trade your way to better returns on your 13% contribution than what SS will give you, but you may be able to do the same with the premiums the state forces you to pay on you car insurance, too. However, living in a modern industrial society, it’s sometimes better to spread risk around for the common good than to provide one more opportunity for speculative gain to the minority of people who are educated and savvy enough to come out on top of the markets.

If yours is an ideological objection, then let’s stop beating around the bush by firing salvos over epiphenomena like Social Security, and discuss foundational issues like the injustice of progressive taxation, or Rawlsian vs. Nozickian concepts of justice. If we do that, we may also get to the heart of why you think savings and assets are anything other than what d-squared describes them as, which is other people’s I.O.U.s. I do sense a faint whiff of goldbuggery in some of your posts…

Posted by: Julian Apostate at January 4, 2005 08:47 AM


Sebastian, you'll note that i could care less about the analogy, for the reasons that dsquared already cited. What i do care about is your mistaken notion that the social security trust fund is a meaningless entity and that, by loaning its money to the general fund, it lost any claim to that money.

Yes, we get that there is a transfer going on, but what of it? you have yet to explain (as opposed to assert) - without resort to misleading analogy - why there is no claim. You have yet to address what it would mean if the general fund chose to say "i don't owe you anything." You simply keep asserting that it's an "i owe me" and therefore meaningless.

As for the rich and old age, have you done your homework yet? If you have, you surely know that households headed by those over 65 have the same wealth distribution characteristics as all the rest of american households, which is to say that 95% of those households have no meaningful wealth at all. If, after all other actions - productivity growth, adjustment in the level to which the payroll tax is applied, increased age of eligibility for social security, etc. - we still need to do "something," then fine, i'm ready at that point to means test out 5% (in an extreme scenario, 10%) of potentially eligible households. But i'm not prepared - as you've suggested along the way - to means test out 35% of households, because they simply don't have the resources to survive....

but that's a separate matter. the primary matter is your lack of a demonstrated proof that the full faith and credit of the United States is a meaningless concept. Please do elucidate at your convenience....

Posted by: howard at January 4, 2005 09:04 AM


Patrick, i don't think Dsquared made any such concession (that the social security trust fund is "worthless"). He discussed how the general fund is going to pay its obligations to the trust fund.

and yes, you are right: as a practical matter, it doesn't much matter whether there is or is not a social security trust fund. What matters is there is an obligation of the general fund (as there is in so many other ways, including to bondholders around the world) which cannot be walked away from without enormously destructive consequences to the entire global economy (because it would mean that "full faith and credit" no longer has any meaning)....

Posted by: howard at January 4, 2005 09:08 AM


Absurd. Totally Absurd.

Does the Trust Fund Exist? Of course it does - it's right there, where the government says it is. Everybody in both parties has agreed about the existence of the Trust Fund for 20 years.

At a minimum, for Congress and Bush to default on the obligations currently held by the Trust Fund, they would require a legislative act effectively abolishing the Trust Fund. Because the Trust Fund has not been abolished, it must necessarily exist NOW.

Assume your way out of the problem by starting with an argument that the Trust Fund does not really exist, is just like economist in the old joke who begins, "assume a can opener..."

So let's talk about the real question, the normative one: Should the Trust Fund be abolished?

And let's rephrase that in concrete political terms: who is going to pay to bail-out the General Fund (or the Trust Fund, if the General Fund defaults on its obligations thereto)? Will it be:
1. Current retirees? (benefit cuts)
2. Prospective retirees over age 50? (future benefit reductions)
3. Younger workers? (future benefit reductions, "indexing" changes, raised retirement ages)
4. Lower and Middle-income taxpayers? (payroll tax hikes)
5. Wealthy taxpayers? (repeal of the Bush tax cuts, means testing of benefits, extension of payroll taxes to all income)

Perhaps the answer is found if we ask, "how did we end up with the General Fund crisis in the first place?" And the answer to that, my friends, is #5. See Reagan 1981, Greenspan 1983, and Bush 2001-2003.

Posted by: Silent E at January 4, 2005 09:10 AM


Sebastion: One more thing to add about means testing. People like me (basically a social democrat) who believe government can provide useful services oppose, in general, means testing because it's politically counterproductive for us. We want the broadest possible swaths of population to support our nanny state, road to serfdom social programs, and any sociologist who studies the issue will tell you that programs that benefit larger perecentages of the population will get larger margins of support

Posted by: Julian Apostate at January 4, 2005 09:11 AM


"Yes, we get that there is a transfer going on, but what of it? you have yet to explain (as opposed to assert) - without resort to misleading analogy - why there is no claim. You have yet to address what it would mean if the general fund chose to say "i don't owe you anything." You simply keep asserting that it's an "i owe me" and therefore meaningless."

I haven't said that even once, much less repeatedly. What is this talk of 'claims'? I am talking about money. I am talking about assets. I am talking about the assumption that 'interest' on T-Bills counts as income. I am talking about the idea that T-Bills count as 'investments' when held by their issuer. I am asking where the money is coming from.

"As for the rich and old age, have you done your homework yet? If you have, you surely know that households headed by those over 65 have the same wealth distribution characteristics as all the rest of american households, which is to say that 95% of those households have no meaningful wealth at all." What? I have done my homework, and you are totally wrong.

A) Older households are typically more wealthy.

B) They are typically smaller households and thus the per capita wealth is much higher than younger households.

"but that's a separate matter. the primary matter is your lack of a demonstrated proof that the full faith and credit of the United States is a meaningless concept. Please do elucidate at your convenience...."

Are t-bills assets when held by the US government? If not (see d-squared) the full-faith and credit question does not apply.


Julian, you write: "One more thing to add about means testing. People like me (basically a social democrat) who believe government can provide useful services oppose, in general, means testing because it's politically counterproductive for us."

Yes, the bribe response. Which it makes it truly amazing that social democrats also whine about corporate money in politics. Nothing corporate donations influence approaches the $20 billion bribe per year you talk about for social security given to the rich and upper class on this one program alone.

Posted by: Sebastian Holsclaw at January 4, 2005 09:30 AM


I don't quite see the analogy with "corporate money in politics." It's quite consistent to be opposed to corporate money in politics while supporting universality. The former has a tendency to destroy social programs, government regulations and support, etc, while the latter has the tendency to build them. It's not a bribe, it's building social solidarity and a common interest. That you don't see the difference is what probably makes you a conservative.

There are other reasons to oppose means testing too.

Posted by: Mandos at January 4, 2005 09:52 AM


"'The point is that the notes are not assets. They aren't'

"And the point is that, nor could they be."

Which is a concession of the entire argument, as phrased by Brad Setzer:

"Do I face a day or reckoning in 2020? Of course not. I have a financial asset...."

Btw, those of you claiming that the government recognizes the 'trust fund' as a real asset, are simply wrong. The Treasury in its annual "Annalytical Perspectives" has consistently admitted they are nothing more than some sort of reminder of where the government's funds have come from in the past, and are useless as a vehicle for funding future SS benefits. See, the Larry Summers version:

"They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, have any impact on the Government's ability to pay benefits."

Posted by: Patrick R. Sullivan at January 4, 2005 10:00 AM


"Yes, the bribe response. Which it makes it truly amazing that social democrats also whine about corporate money in politics."

This is the problem with using proxy issues like Social Security to fight over fundamentals. Few people here are going to agree with you that the Trust Fund doesn't exist. We may agree that an asset minus an equally valued liability equals zero, but we respond that that fact is not relevant to the discussion at hand. You may as well argue with the Bush administration that the tanks they're purchasing and sending to Iraq can only be imaginary tanks, since their balance sheet proves they have no money. It's beside the point. Go participate in an accounting list serv if this is the kind of argument you're going to continue making.

Alternatively, argue that the state providing a wide social safety net for seniors on the brink of poverty is a violation of some basic principle of justice as you define it. Isn't this the real issue?

Posted by: Julian Apostate at January 4, 2005 10:07 AM


"The point is that the notes are not assets. They aren't

"And the point is that, nor could they be."
~~~~~~~~~

Of course they could have been.

Robert Ball, the former head of the Social Security Adminstration and modern godfather of Social Security, specifically proposed to the '94 SS Advisory Commission that the trust fund invest in real third-party, non-Treasury securities that would have been **assets** for it.

Then come 2020 and after, should voting taxpayers not want to increase their income taxes by enough to pay off $5 trillion of SS trust fund bonds on top of the much larger amount they'll have to shell out for Medicare, *they wouldn't have to* because the trust fund would hold *assets* that could be used in lieu of taxes to pay SS benefits.

I mean, geeze, just go the the Treasury's Financial Statements for the US and look at how they explain the trust fund bonds are *not* assets to the U.S.

What does it say about you status quoers that you can't even agree with the Treasury about what an asset is?

Posted by: Jim Glass at January 4, 2005 10:19 AM


"It's quite consistent to be opposed to corporate money in politics while supporting universality. The former has a tendency to destroy social programs, government regulations and support, etc, while the latter has the tendency to build them. It's not a bribe, it's building social solidarity and a common interest."

Yes, money for 'good causes' isn't a bribe. Their money is. Quite so. The regulations and support they want, bad. The regulations and support you want, good. Gotcha.

Posted by: Sebastian Holsclaw at January 4, 2005 10:26 AM


"Alternatively, argue that the state providing a wide social safety net for seniors on the brink of poverty is a violation of some basic principle of justice as you define it. Isn't this the real issue?"

Interesting that we always come back to this mischarachterization. Anti-poverty measures that are tailored to the needs of retired seniors--great, good, excellent.
Anti-poverty measures that pay rich people--not good, wasteful, spending tens of billions of dollars not related to the basic principle of justice as I define it.

Posted by: Sebastian Holsclaw at January 4, 2005 10:32 AM


Sebastian, apparently we are talking past each other: you think the issue is "assets," i think the issue is "claims." I don't really care whether the assets are there or not: it is the obligation of the general fund to find those assets, and i agree, the general fund has a huge problem, created by george bush and tom delay.

But so what? if the general fund fails to honor those claims, i suppose there's a very small likelihood that there will be no further reprecussions anywhere else, but that's a very small likelihood. The much greater likelihood is that the negative ramifications of the general fund refusing to repay the trust fund - telling the trust fund, as you would have it, that sorry, "i owe me" appiles so nuts to you, we don't feel like paying - would be so expensive that no rational fiduciary (meaning, in this context, no president or secretary of treasury) would entertain such a thought.

Part of what keeps US interest rates low is the marketplace's confidence in the full faith and credit of the US. Should there be a reason to doubt that - and a refusal to pay social security claims would be a very strong reason to doubt it - then the marketplace loses its confidence and we deal with the result. After all, what guarantees to any current holder of US bonds that they will be paid? In today's fiscal climate, absolutely zero other than the expectation that the government won't willfully blow that superb credit rating. That piece of government paper is only an asset to the extent that the holder of the paper believes in full faith and credit, not because we have some "lockbox" of cash set aside to pay bondholders.

As for households headed by 65+, i have no idea what this means:

"What? I have done my homework, and you are totally wrong.

A) Older households are typically more wealthy.

B) They are typically smaller households and thus the per capita wealth is much higher than younger households."

A, in particular, means nothing. The wealthiest cohort in America is households headed by those 55-64, but that's an artifact of the extreme wealth of the top 5%, not a function of overall wealth. The cohort head by those 65-74 is the next wealthiest (since, by and large, they still have such wealth as they had, but no longer a working income); the cohort headed by those 75 and up drops down to either third or fourth (can't remember now). But again, both of those elderly cohorts are driven up because of the top 5% (when you did your homework, did you look at the distribution of wealth? or did you only look at the aggregate? because it's the distribution that matters here: we're in a median/mean type of scenario).

So saying households headed by those 65+ are "typically wealthier" truly means nothing (i'm surprised at you, Sebastian; it's rare that you say something that means nothing).

The question of per capita wealth at least has some meaning, but not enough, for the same reason that i just identified. When Bill and Melinda Gates' children are grown, and Bill is 65, Bill and Melinda will, indeed, be a wealthier household per capita than when they had 3 other children around. When my wife's and my child is grown, we, with any luck, will still hover at around the 93% of household wealth, and so our per cap wealth will still be pretty high when our son is out on his own (although, frankly, not enough by itself to survive our anticipated lifespans, which calls into question just how wealthy the 93rd percentile is!). When people with less wealth than us are older (whether they had children or not), they aren't suddenly going to be wealthy no matter what way you slice the numbers.

Wealth is deeply unequally distributed in America; claiming that the elderly are "typically wealthier" avoids recognizing this fact. I suggest your revisit your homework and look carefully at the distribution tables.

Posted by: howard at January 4, 2005 10:54 AM


Try the census information , I draw your attention to Table F. It shows that in terms of household wealth (both including and excluding home equity) those in the 4th quintile of those over 65 (which by definition CANNOT be skewed by the "extreme wealth of the top 5%") have greater wealth than all lower quintiles (with the minor and statistically very small 3rd quintile 75+ category) and greater wealth than all younger categories in their own quintile other than the 55-64 category. They also have greater wealth than those in the 5th quintile who are younger than 55.

I also remind that older households are smaller, so the per capita wealth among older people is understated by these figures.

In short, your contention about the distribution of wealth by age is not bourne out.

Posted by: Sebastian Holsclaw at January 4, 2005 12:32 PM


I apologize, the link to the census data doesn't appear to have gone through.

It is http://www.census.gov/prod/2003pubs/p70-88.pdf

Posted by: Sebastian holsclaw at January 4, 2005 12:39 PM


"Yes, money for 'good causes' isn't a bribe. Their money is. Quite so. The regulations and support they want, bad. The regulations and support you want, good. Gotcha."

Plainly, I oppose government policy that does not achieve the outcomes I wish it to achieve, and I support government policy that achieves the outcomes that I do wish for. Corporate bribes tend to have the effect of undermining many things I believe a government should do. Government policy giving everyone a stake in the system, on the other hand, has beneficial outcomes. I therefore support what causes beneficial outcomes in terms of my sense of overall social justice. Shouldn't this be obvious?

Equating the two only makes sense if you believe that they have an equal moral right to the policy they wish. Since I do not concede this, what I support is not a bribe for me in the sense that you mean it.

Posted by: Mandos at January 4, 2005 12:57 PM


"Part of what keeps US interest rates low is the marketplace's confidence in the full faith and credit of the US."

Defaulting on the special SS bonds, that by law can't be traded in financial markets, would likely improve the govt's credit rating in the non-pretend bond market.

Posted by: Patrick R. Sullivan at January 4, 2005 02:32 PM


Despite being a rootless transnational progressivist, I maintain enough affection for the good old US of A to believe that the promise of the US government to its own grandmothers cannot be entirely worthless - I just refuse to believe that the nation of Steinbeck and FDR could have gone that bad that quickly.

This is why Patrick and Sebastian disagree with me on the subject of whether "asset" is a reasonable enough term to use. If I had a promise to bail me out, from a very rich Uncle called Sam, then that would be an asset that ought to appear on my balance sheet and a liability on his (company accounts don't do things this way, but the regulatory balance sheets of financial institutions often treat non-binding "faith and credit" commitments like this).

Patrick sets a lot of store by the possibility of US citizens financing their retirement with claims on foreigners. I find this implausible, as it would mean that, for the next thirty years, the USA would have to export more than it imports, and I don't see any way in which this goal could be achieved. If I were a US citizen relying on this, I think a better chance for a comfortable retirement would be to start a war in the Middle East and take possession of an overseas asset in the form of an oil-rich country ...

Posted by: dsquared at January 4, 2005 03:12 PM


"If I had a promise to bail me out, from a very rich Uncle called Sam, then that would be an asset that ought to appear on my balance sheet and a liability on his..."

But that isn't what the SS 'trust fund' is. As I have pointed, over and over and over, it is not a promise to anyone (nor, pace the US Supreme Court, enforceable), it is entirely a historic description of where the federal govt has gotten some of the money it has spent.

There is a FORMULA for determining SS benefits to be paid in the future, based on payroll taxes paid. But there's no method for paying those formulaic benefits (at least not all of them). The economics of this is rather straightforward.

Who's rich, who's not. What's nice, what's naughty. That's not economics.

Posted by: Patrick R. Sullivan at January 5, 2005 08:10 AM


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