January 03, 2005
Why Oh Why Can't We Have a Better Press Corps? (Yet Another Washington Post Edition)
Anyone, anyone at all writing a newspaper story about Social Security by now should have a grasp of the following three issues:
- The issue of private accounts: Are there any pluses to moving money currently earmarked for the social Security system into private accounts? If so, what are the pluses? And what are the minuses?
- The issue of risk: Social Security is a social insurance program, intended to provide a guaranteed floor to post-retirement income which is then supplemented by savings and pensions. How much risk is the Bush administration asking future recipients to run, and what happens to those for whom these risks turn out badly?
- The issue of scale: We anticipate substantial economic growth over the next seventy-five years. How should the social-insurance floor that Social Security provides adjust over time as society grows richer?
But read articles like this from the Washington Post, and you find it impossible to believe that the Post's reporters have taken the time to learn even the basics about the issues at stake in Social Security:
washingtonpost.com: Social Security Formula Weighed: "A person with average wages retiring at age 65 this year gets an annual benefit of about $14,000, but a similar person retiring in 2050 is scheduled to get over $20,000 in today's dollars," Mankiw said in a speech at the American Enterprise Institute.... Under an inflation-linked formula... benefits currently equal 42 percent of the earnings of an average worker retiring at 65... would fall to 20 percent of pre-retirement earnings. Future retirees would, in effect, be consigned to today's standard of living....
"If this was a case of just price indexing and doing nothing else, frankly, some of the [opponents'] charges are pretty valid," [Heritage Foundation analyst David C.] John said. "But if you give the personal accounts as well, you're giving people the opportunity to make up the difference. Not everyone will do that, but a substantial number will."...
Administration officials point out that future retirees face two prospects: the amount of benefits the retirees were promised and the amount that can actually be paid. If workers are allowed to divert four percentage points of their 12.4 percent payroll tax into personal investment accounts, future retirees would probably be able to raise their total benefits above the amount payable from taxes collected at that future time, according to the chief Social Security actuary. But those increased benefits still would not match the benefits currently being promised because future tax levels cannot keep pace with the rapid increase in the number of retirees.
A retiree in 2032 would see a promised monthly benefit of $1,343 drop to $1,231, an 8.3 percent cut from both the payable and promised levels. But by 2052, returns on personal accounts would push total benefits for a middle-income worker to 129.4 percent of the payable benefit, even though the total benefit would still be about 6 percent less than promised because of the rising number of retirees.
Posted by DeLong at January 3, 2005 08:59 PM
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Tracked on January 4, 2005 09:36 AM
Stopping the Bum's Rush
By PAUL KRUGMAN
At least one person is reporting the issues accurately.
Posted by: CalculatedRisk at January 3, 2005 09:57 PM
But really, this country simply can't afford the extravagance of coddling all those retiring baby boomers!
Posted by: jm at January 3, 2005 11:19 PM
If the SS Trust Fund buys Treasury bonds with it’s current excess revenues, can it sell these bonds on the secondary market? Does SS mark to market its portfolio of bonds? Does interest rate risk matter to the Trust Fund? If the answers to these questions are “no,” then it seems to me that the trust fund is an accounting gimmick. If the Trust Fund owns a Treasury bond, then that bond gives it a future claim on tax revenues, but only at maturity. So when FICA taxes no longer provide enough funds to cover payouts to retirees, the Trust Fund will have to redeem mature bonds, and the Treasury will have to raise taxes to pay the redemptions, unless it simply issues new debt. This could be very costly if interest rates are high. So how is this different from simply raising the FICA tax?
Posted by: A. Zarkov at January 4, 2005 01:33 AM
The issue of risk: Social Security is a social insurance program, intended to provide a guaranteed floor to post-retirement income which is then supplemented by savings and pensions.
But is it? Is providing social insurance program a goverment obligation? Does not seem so, since the goverment does not treat the promises of the Social Security in the same way as its other legal obligations. Is it an independent entity? Apparently not if it cannot refuse to put its assets to the disposal of the goverment or to choose how it is going to meet its promises. The closest thing it seems to come to is a shell game - for as long as it brought in more money that it spent the goverment was willing to pretend to play but now that it may become net loss the plug is being pulled. We can complain that the promise to America's retirees was a swindle. Any constructive ideas?
Posted by: a at January 4, 2005 01:52 AM
zarkov states: "So when FICA taxes no longer provide enough funds to cover payouts to retirees, the Trust Fund will have to redeem mature bonds, and the Treasury will have to raise taxes to pay the redemptions, unless it simply issues new debt. This could be very costly if interest rates are high. So how is this different from simply raising the FICA tax?"
Well, the primary difference is that the payoff of the Trust will come from general revenues (i.e., the progressive income tax, etc) rather than the regressive FICA taxes. And because the lower and middle classes can't afford to see significant income tax increases, that means that income tax rates on the top earners will have to be raised.
And that is why the Bush administration is trying to destroy social security.
BTW, your understanding of the nature of the Treasury notes held in the Trust is faulty. First off, the Trust is legally entitled to buy and sell "marketable" Treasury securities at "market" prices. It is also entitled to purchase special notes. Although the Trust cannot sell the special notes it holds on the open market (the same goes for United States Savings Bonds, btw) the Trust is legally entitled to redeem its notes at ANY time (not just upon maturity) to provide benefits. Because these special notes provide the flexibility and security needed by the Trust, in practice the Trustees have relied almost entirely on these "special" notes for Trust fund assets.
Posted by: paul_lukasiak at January 4, 2005 04:33 AM
a states "We can complain that the promise to America's retirees was a swindle. Any constructive ideas?"
yes, stop calling it a swindle, and recognize that as a nation we can afford to meet the obligations to the Social Security Trust fund by pursuing a responsible fiscal policy--i.e. raise sufficient general revenue to eliminate the federal deficit and create surpluses.
The problem is not that Social Security will "go broke" at any point. The problem is that between 2010 and 2030, the percentage of GDP spent on providing SS benefits will rise from about 4.1% to 6.1% of GDP. AFTER 2030, there is only a infintesimal annual increase in percentage of GDP spent on benefits (between 2030 and 2080, the pecentage will rise from 6.1% to 6.3% of GDP.)
Even IF the Trust Fund goes broke in 2042, there will be no problem with providing full benefits to retirees, because we will have been spending about 6.2% of GDP on benefits for over a decade at that point---it will simply be a question of re-arranging the tax code to provide less "general revenue" and more money for social security without any net increase in taxation.
Posted by: paul_lukasiak at January 4, 2005 04:54 AM
Now THIS is a swindle by Bushco...
From the Post article...."By 2042, average monthly benefits for middle- and high-income workers would fall by more than a quarter. A retiree in 2075 would receive 54 percent of the benefit now promised. "
In other words, when (according to Bushco's SS Trustees) when the Social Security Trust goes broke in 2042, there would only be enough money to pay 73% of benefits, and maybe only 65% of benefits later on. In order to avoid this, we are going to start paying you 73% of your benefits BEFORE 2042, and decrease that to 54% of benefits by 2075.
Posted by: paul_lukasiak at January 4, 2005 05:06 AM
Social Security will start redeeming its Trust Fund in 2018. This is not Social Security's problem. The Trust Fund is Social Security's asset. Anyone who says Social Security starts running into trouble in 2018 is trying to lay the groundwork to steal trillions of dollars saved by working people.
And we should call them on it, everytime someone mentions 2018 as a problem for Social Security Reform. 2018 was a problem in 1983, and Greenspan's commission fixed.
By the way. How does the Fed Chairman like being made the patsy for the biggest scam in history?
Posted by: wetzel at January 4, 2005 06:00 AM
It seems that there is no way, that an administration can compel an administration in the future, to honor it's pledges. SS is just one of many. Habeus corpus, torture, imprisonment for life without a trial, there must be others.
Posted by: eric bloodaxe at January 4, 2005 06:30 AM
There is no Social Security crisis, nor will there be in 2018. Workers have have paying more to Social Security than the system pas in turn paid since 1983. The trust fund will continue to grow with just this surplus till 2018. The surplus then can be used to support full Social Security benefts till at least 2042 given the psssimistic growth projections of the system's governors. Better growth for America and the trust fund will be intact till 2052 or far far longer. America's debt to its workers must not and will not be dishonored. There is no Social Security crisis; there may be a minor problem readily solved in future years.
Posted by: anne at January 4, 2005 08:08 AM
The key point of the story is the attempt to tie privatization to the future benefit reductions (note I say reductions rather than cuts because the issue is the size of the increase in future benefits -- inflation rate versus growth in wages). The Administration is trying to make the case that everyone accepts the need for sacrifice and pain (reducing the increase in benefits) but that privatization will eliviate some of that pain. In other words, the tactic seems to be shifting from "privatization is necessary to save Social Security" to "privatization is necessary to help future retirees cope with the actions needed to save Social Security." And how can anyone be against helping future retirees?
Posted by: Ken Jarboe at January 4, 2005 08:20 AM
paul_lukasiak: yes, stop calling it a swindle, and recognize that as a nation we can afford to meet the obligations to the Social Security Trust fund by pursuing a responsible fiscal policy--i.e. raise sufficient general revenue to eliminate the federal deficit and create surpluses.
The problem is not whether I call it a swindle but whether our dear goverment treats it as such. There is no question that US can afford to keep Social Security promises to the retirees. US can also afford to stop world hunger. Will it?
Posted by: a at January 4, 2005 08:28 AM
actually, a, complaining that it's a swindle is a constructive idea: it puts the heat on those who desire to destroy social insurance in america by calling what they are trying to do what it is. Remember how much difference it made when the right started called the estate tax the "death" tax? If we keep saying this isn't social security reform, this is a social security swindle, i suspect it will have the same impact.
The other constructive idea, as others have already indicated, is that we emphasize that the problem to solve isn't social security: it's irresponsible fiscal policy by the bush administration. If and when bush and delay actually start taking fiscal responsibility seriously, then i'm willing to discuss actual reforms in social security, but not until they show some good faith first.
i expect godot to arrive before that happens.
Posted by: howard at January 4, 2005 08:54 AM
The distinction is between whether the system we have now is a swindle (its not, and describing it as such does not contribute to the debate) and whether Bush us trying to make it a swindle (he is...the indexing changes make it clear that more money will come into the Social Security trust each year than is paid out in benefits indefinitely, and that the FICA taxes will simply be a regressive form of income tax.)
Posted by: paul_lukasiak at January 4, 2005 08:58 AM
paul_lukasiak: The distinction is between whether the system we have now is a swindle (its not, and describing it as such does not contribute to the debate) and whether Bush us trying to make it a swindle (he is...
What you seem to be missing is the peculiarities I pointed out in the setup of the system, specifically
1. It is not an independent entity. It cannot change Social Security tax structure, cannot change how much is paid out and to whom, cannot change what assets to hold.
2. The goverment does not treat Social Security promises as the obligations you can enforce (for example, sue if your benefits are cut).
You can argue that Bush's goverment is the first one that is trying to break the rules. That may be so but it is exploiting the holes created earlier. My own constructive suggestion would be to patch the holes (either accept Social Security promises as legally enforceable goverment obligations or make it a really independent entity) rather than keep repeating that there is no problem while the vultures are feasting on your innards, sorry, benefits.
Posted by: a at January 4, 2005 09:24 AM
“BTW, your understanding of the nature of the Treasury notes held in the Trust is faulty. First off, the Trust is legally entitled to buy and sell "marketable" Treasury securities at "market" prices. It is also entitled to purchase special notes.”
I merely posed some questions. But thanks to your link, we can clarify what’s happening. The following quotes are relevant to the question at hand.
1. “The DI Trust Fund holds a very small amount of "public issues" (marketable securities available to the general public).”
2. “The OASI Trust Fund holds no public issues.”
So the Trust Fund essentially owns no marketable securities. Virtually everything they hold is a special-obligation security. They do not mark to market.
3. "Special obligations" of the U.S. government are available to the trust funds for investment.
4. “Special obligations may be redeemed prior to maturity without risk of loss to the trust funds. Unlike other Treasury obligations, special obligations may be redeemed at any time before maturity at their face value (i.e., their original purchase price) plus accrued interest, if needed to cover program expenditures. Therefore, their early redemption cannot result in gains or losses of trust fund capital. On the other hand, if marketable obligations are sold prior to maturity, the prevailing market price is paid.”
5. “Obligations held by the trust fund may be redeemed prior to maturity only when their redemption is required to pay program costs. Obligations will not be prematurely redeemed and reinvested in order to obtain higher (or lower) interest rates, or redeemed for any purpose unrelated to the payment of program costs.”
So while the law seems to allow premature redemption, it’s not the administrative policy. They have special rules governing how the do premature redemption. BTW in 1982 the fund essentially went broke:
6. “The assets of the larger trust fund (OASI), from which retirement benefits are paid, were nearly depleted in 1982. No beneficiary was shortchanged because the Congress enacted temporary emergency legislation that permitted borrowing from other Federal trust funds ...”
So it does appear that the Trust Fund is an accounting gimmick where the government effectively borrows from itself. It operates using rigid formulas, and in no sense is the Trust Fund managed like a state pension fund portfolio, eg University of California Retirement System. One way or another, taxes pay retiree benefits. Since about half of taxpayers pay no income tax at all, but do pay FICA, paying off the Trust Fund obligations from general revenues is shifting the burden of the demographic prolem to higher wage earners. This is what you want, but a lot of other people won’t like it once they understand what is going on.
Posted by: A. Zarkov at January 4, 2005 09:38 AM
America's Republican elite never met an obligation they weren't ready to run away from.
Ever since Roosevelt politely suggested that they should chip in a bit for the education of their servants children it's been bitch, bitch bitch, bitch, bitch.
And thus Ann Coulter was born.
Ba Da Boom - Crash.
Thank you, Thank you very much. Enjoy the Buffet I'm here untill Tuesday.
Posted by: Nemesis at January 4, 2005 10:03 AM
Enough of the pockets game. Just give Bush the $3trillion he needs to offset his tax cuts then let him cut SSI benefits to zero whole continuing to collect SSI. This should allow him to cut the taxes on the wealthy to zero.
Posted by: ken melvin at January 4, 2005 10:07 AM
Zarkov wrote: "I merely posed some questions."
and then answered them under a set of assumptions that were false, as I demonstrated.
Please go troll somewhere else.
Posted by: paul_lukasiak at January 4, 2005 10:55 AM
the difference, as Paul noted, is "who pays"?
Bush doesn't want to raise payroll tax rates, or extend them to cover all income.
His 2001-2003 tax cuts (and the campaign to make them permanent) make it clear that he doesn't want to use income taxes or estate taxes or corporate taxes (or any other General Fund revenue) to honor SS Trust Fund obligations.
He still hasn't addressed the looming General Fund crisis, so we can assume he will continue to rely on large-scale deficit financing.
So who pays?
1. Bush wants to cut retiree benefits: low-income retirees who depend on SS will face the biggest burdens.
2. The accumulated debt will have to be serviced and (probably) repaid by our children and grandchilden.
3. Interest rates will rise, slowing economic growth and thus income growth.
4. The dollar will fall farther, fueling inflation. 3 and 4 will hit the poor hardest.
And who doesn't pay (or pays least)? The rich. The same folks who got tax cut benefits in 1981 and 2001-2003 (and the next few rounds as well) and thus created the mess will bear little if any of the burden for cleaning it up.
Posted by: Silent E at January 4, 2005 10:58 AM
Roosevelt may have 'politely suggested that they should chip in a bit for the education of their servants' children', but it remained a suggestions.
Domestics and agricultural workers were not covered by the original SS. (Surprisingly, these are the same two categories into which most 1935 blacks fell -- coincidence, huh?)
You couldn't pass SS today -- the racial issues alone would sink it. Transfer
Posted by: Davis X. Machina at January 4, 2005 11:13 AM
CalculatedRisk - yes, Krugman is back thankfully. But alas - his stalker as returned to the NRO with those self-styled Truth Squads. Don Luskin has indeed provided us more lies - more of his own. But of course - our host got to fire off another salvo at Luskin on January 1.
Posted by: pgl at January 4, 2005 11:20 AM
There's a big problem with the WaPo article that no one here has yet addressed (not even Brad). They report without qualification the idea that the private account holders will get greater returns than would be available to people whose retirement is funded by FICA receipts plus trust fund redemption. They don't say where those calculations come from, or what assumptions were made.
Several sources have reported that the estimates of future benefits and FICA receipts are based on low growth rates (1.8%) in the SSA Trustees analysis, while the estimated returns from private accounts assume much higher growth rates (3.7%?). If higher growth occurs, the shortfall in FICA receipts will not happen. If the lower growth occurs, would YOU put money in the stock market.
Also, A. Zarkov, thanks for posting the info about the nature of the trust fund obligations. However, your conclusion is the reverse of reality. The trust fund was built up solely from the regressive FICA tax, but the money was then loaned to the general fund, which is normally funded by more progressive taxes. So however you think the general fund should be funded, that is how the trust fund should be redeemed. In the 80's, top rates were cut while FICA was increased. To reverse that now when the bills come due would be the biggest ripoff of the middle class by the wealthy in American history.
Posted by: raygunnot at January 4, 2005 12:12 PM
another thing that they don't mention is that the "return" on the private accounts is based on redeeming both the principal as well as the earnings from that account---and that the payout is calculated based on the life-expectancy of the retiree.
In other words, if that retiree takes the payout indicated by Mankiw, if he lives longer than he is "expected" to, he will be living on less than 36% of the benefits promised to him under the current system, because his "private account" would be empty. (According to Mankiw, "full benefits" under indexing in 2052 would be only 54% of what is promised under today's system---but because this retiree has a "private account", his benefit levels will be cut by at least one third....)
Posted by: paul_lukasiak at January 4, 2005 01:34 PM
lukasiak: Which assumptions are incorrect? What makes me a troll? It seems to me that the nature of the Trust Fund investments is important for understanding the system. Or do you simply want a bunch of commentators practicing groupthink?
raygunnot: Perhaps I expressed myself poorly. Your conclusion is essentially my conclusion. The government is lending money to itself, and it’s a question of how that obligation is paid, through FICA or the income tax. Which is better is the subject for another discussion. We should not pretend the Trust Fund is holding assets in the way a state pension fund holds assets. If the Trust Fund bought dollar-denominated foreign government bonds, then foreign taxpayers would bear the redemption costs instead of Americans. Moreover, while the portfolio of obligations the Trust Funds holds is not subject to default risk, it is subject to interest rate risk. So I agree with DeLong, the press is not informing the public very well on this issue.
Posted by: A. Zarkov at January 4, 2005 01:50 PM
Silent E: A, the difference, as Paul noted, is "who pays"?
The first question I would ask is "Does anyone intend to pay at all?" What I see is that the system was lauded and celebrated while it was racking money in. The urge to reform struck our friends in Washington at the first sign that the current cashflow may turn negative. Notice: current cashflow, not the fund value. That points me to suspect that our dear goverment does not feel its obligations that constitute Social Security trust fund are worth a dime.
Posted by: a at January 4, 2005 02:46 PM
A. Zarkov wrote, "So when FICA taxes no longer provide enough funds to cover payouts to retirees, the Trust Fund will have to redeem mature bonds, and the Treasury will have to raise taxes to pay the redemptions, unless it simply issues new debt. This could be very costly if interest rates are high. So how is this different from simply raising the FICA tax?"
The FICA tax is a regressive tax. "Taxes" are mostly income taxes, which are progressive.
"One way or another, taxes pay retiree benefits. Since about half of taxpayers pay no income tax at all, but do pay FICA, paying off the Trust Fund obligations from general revenues is shifting the burden of the demographic prolem to higher wage earners. This is what you want, but a lot of other people won’t like it once they understand what is going on."
No, because this isn't in fact what's going on.
First, honoring the trust fund's obligations isn't "the demographic problem." Certainly the demographic problem hastens the day when the debt must be paid back, but the debt is there only because current FICA taxes are higher now in an attempt to partly prefund the system.
Second, the general fund has borrowed from the trust fund, and must (by current law,anyway---I won't comment on the "swindle" issue and the lack of formal binding of future governments) pay it back.
Third, the assets in the SS trust fund were built up out of regressive taxes, and the debt of the general fund is due to (progressive) income taxes being set too low for the level of general fund spending. To say that making the general fund honor its obligation to the trust fund represents a shift in tax burdens to higher wage earners has it backwards. Rather, *not* honoring the trust fund debt would be a dramatic shift of wealth *upwards*. (There's an intergenerational issue of those benefitting from lower income taxes now versus those paying for higher ones later, but that's a separate issue, and applies to debt owed to the public, not just Social Security.)
Posted by: liberal at January 4, 2005 02:49 PM
"a" wrote, "The urge to reform struck our friends in Washington at the first sign that the current cashflow may turn negative. Notice: current cashflow, not the fund value."
Not true. That the outflow will exceed inflow has been projected for some time. What's changed is that the government is now run by far right radicals who want to shift as much of the tax burden from the wealthy to the non-wealthy as possible.
Posted by: liberal at January 4, 2005 03:16 PM
liberal: That the outflow will exceed inflow has been projected for some time. What's changed is that the government is now run by far right radicals who want to shift as much of the tax burden from the wealthy to the non-wealthy as possible.
What made you think they did not try it before? Greenspunk's commision was considering defaulting on the Social Security bonds (http://www.cepr.net/Social_Security/defaulting_ss.htm). Now they just found an easier way to do the same - cut the benefits to stabilize the system on the pay-as-you-go level, throw a bone of private accounts and keep pretending trust fund is full of money.
Posted by: a at January 4, 2005 05:32 PM
No, you parsed that document wrong. It clearly states that it's Bush 43's commission that's raised the possibility of defaulting, not Greenspan's.
(Not that Greenspan was honest in 1983, given his recent pronouncements on the issue.)
Posted by: liberal at January 5, 2005 12:58 AM
and someone correct me if I'm wrong, but the disccussion of default by Bushco's SS Dismantling Commission was really not serious -- just a scare tactic employed to make it privatization schemes and draconian benefit cuts more palatable.
Posted by: paul_lukasiak at January 5, 2005 06:50 AM