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January 10, 2005

I May Have to Subscribe to the Weekly Standard

Irwin Stelzer has some smart things to say about Social Security reform:

Social Security Snares & Delusions: President Bush is right to want individuals to have personal accounts, but these could supplement Social Security, rather than supplant a part of it, thereby avoiding the transition-cost problem. So more power to the administration's efforts to devise tax-advantaged schemes to encourage personal saving, schemes that do not require any diversion of funds now destined to finance Social Security. And with the Social Security safety net intact, individuals could be left free to invest these added savings in any way they choose--safely, in order to add a bit to retirement income, or daringly, in the hope of striking it rich.

The president is right, too, to want to consider a reduction in benefits as part of any reform package. And replacing wage-based indexing with something related to the inflation rate might be the right thing to do. But it is not the only possibility: Surely, extending the retirement age to reflect current longevity expectations should also be on the table. But in any case, we should keep our word, unmodified, to those who have long been part of the current system, and confine reductions in benefits to new or relatively recent entrants into the workforce.

Where the president and his team might benefit most from further reflection is in the financing of Social Security. The current system of levying a 12.4 percent payroll tax gives us the worst of all possible worlds. First, it is a tax on jobs--payroll taxes make it more costly for employers to hire, and less attractive for workers to work. These taxes raise employers' cost of hiring by 6.2 percent, and reduce the employees' incentive to work by cutting their take-home pay.

Worse still, the system is regressive. Only salaries up to $87,900 (in 2004) are taxed, meaning that Wall Street mega-earners pay no more than their secretaries. This regressivity is ameliorated by the fact that most high earners continue working after the date at which they receive retirement benefits, and those benefits are taxed at the high rates that apply to all of the income earned by these older but unretired workers. Still, not the fairest of systems.... [W]hy tax a good thing, like jobs, rather than the many bad things that currently go untaxed? Two leap to mind: pollution and imported oil. Surely a reduction in the payroll tax, funded by a tax on either of those two items, would do more to stimulate economic growth, and to reduce the regressive character of the Social Security finance system, than would any of the reforms now being considered....

[T]his pause that might refresh would leave President Bush free to devote that portion of the time and political capital that he is able to spend on domestic affairs to getting his judicial appointments approved, and to begin focusing his attention on the health care system. According to Goldman Sachs's economic team, "Medicare is the much bigger problem. It accounts for more than four-fifths of the projected increase in entitlement spending in coming decades, and its costs--unlike those of Social Security--are largely immune to an increase in retirement age. Indeed, the recently enacted Medicare prescription drug benefit by itself is projected to cause a bigger spending increase than the entire Social Security system!" Now there's a problem worth tackling in order to bring the deficit under control, while plans for reforming Social Security are, shall we say, refined.

The payroll, pollution, and energy independence tax points are well taken. And Stelzer is correct about wage versus price indexing: shifting to price indexing reduces the ratio of benefits to earnings most in those states of the world in which productivity growth is fastest and we are richest--hardly a feature of any optimal policy design.


UPDATE: And, of course, for his good works Stelzer is bombarded with idiocy from that strange economic mind Ramesh Ponnuru, of National Review. It's not the nadir of National Review economic policy writing only because the competition from Luskin, Kudlow, and company is so stiff. But it is bad enough to be painfully funny:

Ramesh Ponnuru on Social Security on National Review Online: ...many misconceptions about Social Security. Rather than clear them up, Stelzer perpetuates them. In the course of trying to minimize the program's solvency woes, he spreads the idea that growth can solve them [but faster growth would solve Social Security's problems--the fact that forecast growth is faster is what has stretched out the expected trust fund exhaustion date].... minimizers argue that the Social Security Trust Fund will pay for benefits through 2042, so there's nothing to worry about. They're wrong. The trust fund contains IOUs [but all financial assets are IOUs--as the stockholders of Enron discovered]... Stelzer... assumes that the accounts would be tightly regulated and would have to be converted upon retirement to annuities. "So much for freeing citizens from the heavy hand of the state." In truth, none of the plans out there require full annuitization. And while those plans include limits on investment options — which also exist in 401(k)s, and in the government's Thrift Savings Plan — they generally provide workers with real choices too [but "real investment choices" produce large investment losses for some accounts--and then what do you do upon their retirement? How do you keep them in catfood?]... Stelzer's readers would benefit if he did his homework before writing articles...

Posted by DeLong at January 10, 2005 08:03 PM

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Comments

Stocks don't even rise to the level of the lowly IOU; no one has committed to return the original capital invested in a share of stock, and dividends can be rescinded on a whim.

Posted by: djs at January 10, 2005 08:21 PM


"So more power to the administration's efforts to devise tax-advantaged schemes to encourage personal saving, schemes that do not require any diversion of funds now destined to finance Social Security."

My money isn't destined to do anything. Nice rhetorical try though; who can argue against destiny?

Posted by: John T. Kennedy at January 10, 2005 08:45 PM


Now Krugman is pointing out that borrowing costs for privatization will not only be $1 to $2 Trillion this decade, but 3 to 5 Trillion in subsequent decades and the benefits of privatization will not kick in until another 40 years or more.

http://www.nytimes.com/2005/01/11/opinion/11krugman.html?oref=login&n=Top%2fOpinion%2fEditorials%20and%20Op%2dEd%2fOp%2dEd%2fColumnists%2fPaul%20Krugman

Posted by: bakho at January 10, 2005 08:58 PM


It may be that this Social Security thing is just a "Stalking horse" What is really behind it?

Posted by: big al at January 10, 2005 09:10 PM


Well, there it is: Ponnuru tips his hand on the rich/poor distributional issue, concerning who is going to pick up the tab for missing $1.8 trillion "surplus" for which PAYROLL taxes were last INCREASED, upon promises that this would fix the Social Security system, --and then was handed over to the upper classes in Bush's INCOME tax CUTS. It's a big booty snatch, and they all know it.

Posted by: Lee A. Arnold at January 10, 2005 09:19 PM


Does the trust fund really contain IOU's? (I picture something scrawled on a piece of paper torn from a spiral bound notebook.) Shouldn't we have insisted on something a little more formal?

Well, if IOU's are all we have, aren't they at least as good as the intention of the issuer to repay the debt?

Posted by: Michael at January 10, 2005 10:26 PM


Someone should tell the Chinese and Japanese that the US government do not intend to honour all those IOUs they are buying ...

Posted by: weco at January 11, 2005 01:42 AM


If they are going to increase the retirement age to match life expectancy, maybe they can break it down by demographic group. "Consider life expectancy. In 1992, the life expectancy of a person born in the U.S. was 76 years. It was 74 for Black women, 65 for Black men, 80 for white women, and 73 for white men." That way poor, Black, and/or male people will be able to retire ahead of rich, white, and/or female people. Yes, it sounds goofy, but I think it sounds goofy that the SS retirement age is now higher than the average life expectancy for a Black man.

Also, don't you think any scheme that bases its payouts on monetary contributions penalizes stay-at-home parents? You'd think the family values gang would want to fix this -- provide a certain dollar amount that gets credited toward your Social Security contributions based on how many years you work as a stay-at-home parent.

Posted by: setty at January 11, 2005 01:46 AM


On of the problems with a lot of the thinking about the future of SS and private accounts is they’re based on models that understate risk. The path to the future is certainly not smooth, not differentiable, and certainly non-normal. Under most of the standard models, the crashes of 1929, 1987 should never have happened. Portfolio insurance failed. The Russian default in 1998 and the ensuing turmoil (the flight to quality) should not have happened. The near meltdown of LCTM (and rescue by the Fed) should not have happened. A single rogue trader should not have been able to destroy Barings Bank. The equity-premium puzzle really isn’t much of a puzzle when risk is properly evaluated. Smart investors and money managers have a better grasp of risk than economic modelers. Are people really prepared for a long dry spell in the market like we had from 1968 to 1980? Do a little calculation from the Ibbotson data and you will see that the rate of return (adjusting for inflation/deflation) for a broad market average for the period 1970-1978 was less than 1930-1938. And of course we don’t know what nature will throw at us. We need a less brittle and more stress resistant financial system. While we’re in the mood to tinker with things let’s give that a little thought.

Posted by: A. Zarkov at January 11, 2005 01:57 AM


My single criticism of the Stelzer excerpt here is the idea of taxing *imported* oil. Thought we'd long since gotten it through everybody's head that a $X tax on a barrel of imported oil is a $X subsidy to the owner of every barrel of domestic oil - here, free money, guys! Petroleum is fungible; if you tax oil, you have to tax ALL oil.

As far as taxing pollution goes, I'm going to go somewhat off-topic for a dumb question: when we institute these cap-and-trade schemes where polluters can sell their 'rights' to emit a given quantity of pollutant X into the air - why isn't it the citizenry, whose air it is, that owns these rights, rather than the companies doing the polluting? If every citizen owned a per-capita share of these rights, then enviros could say, "hell, hell, we won't sell," conservatives could make a buck selling their shares to the highest bidder (which could include enviro orgs trying to reduce pollution), and everyone would be happy.

I'm personally for funding Stelzer's ideas by reinstating the Federal Estate Tax. Maybe even make its rate graduated - it could go up to 65% over $1 billion, 75% over $10B, 85% over $100B, and (just in case) 95% over $1 trillion.

Michael - don't worry, it's considerably more formal. People have used the term 'IOUs' in order to discredit the system. The Social Security trust fund holds US Treasury instruments which have specific maturity dates and pay interest at a specified rate, while the phrase 'IOU' suggests the absence of both. Which is why its use in the context of Social Security is dishonest.

Posted by: RT at January 11, 2005 02:13 AM


"The president is right, too, to want to consider a reduction in benefits as part of any reform package. And replacing wage-based indexing with something related to the inflation rate might be the right thing to do."

Once we agree that a reduction in Social Security benefits is called for, the struggle to preserve Social Security is lost. Benefit levels are not overly-generous but reasonable, while convincing the young that they will have lower benefits is to lose the support of the young for the system. Social Security is fine, but we are busily convincing friends of Social security that Social Security is in sore trouble. I do wish that friends of Social Security were not self-defeating.

Posted by: anne at January 11, 2005 03:11 AM


The most bizarre argument that the privatizers are making is that Treasury bills are not real money.

Posted by: Unstable Isotope at January 11, 2005 03:35 AM


"President Bush is right to want individuals to have personal accounts, but these could supplement Social Security, rather than supplant a part of it, thereby avoiding the transition-cost problem."

What the hell is with journalists, congresspeople and senators all claiming this. We ALREADY HAVE these things --- they're called IRAs people. Exactly how does a "social security personal account" that "supplements rather than supplants social security" differ from an IRA?

Now the amount you can stash away in an IRA (if you are not eligible for 401k, Keogh and so on) is pretty damn pathetic and I certainly would not complain if it were raised (likewise I would not complain if the raise were structured in such a way that those who ARE eligible for better things like 401k couldn't exploit it), but that's a separate issue.
Heck we'd all be better off ditching the current freaking mess we have in this country and defining one and only type of retirement account, perhaps capped at say $15,000 this year and indexed by wage growth each year, allowing for optional company matching of say up to 50% of employee contribution. Likewise I'm happy to attach corrigenda to this like the default policy is employee opt-out rather than opt-in.
But that doesn't appear to be any of these people are talking about, so what ARE they talking about?

Posted by: Maynard Handley at January 11, 2005 03:41 AM


Possibly I am no longer able to read pooperly, but Irwin Stelzer is essentially talking of the splitting and phasing away of Social Security. Am I supposed to be pleased with this?

Posted by: anne at January 11, 2005 04:16 AM


"The near meltdown of LCTM (and rescue by the Fed) should not have happened."

I'm not sure what you mean by "should", but under most normal meanings, yes it should have. The guys at LTCM were, for example, shorting equity volatility in massive sizes only because of historical data (which said volatility was on average supposed to be lower than they were selling it), when their experience of equity derivatives was 1/10 or less than those with whom they were trading. Never once did they ask the first rule of trading: why should I be so lucky? They were idiots and they were going to go belly up one day or the next.

Posted by: ltcm at January 11, 2005 04:49 AM


minimizers argue that the Social Security Trust Fund will pay for benefits through 2042, so there's nothing to worry about. They're wrong. The trust fund contains IOUs

Again reinforcing the fact that the crisis is in the General Fund, and not in Social Security. Cutting the military instead of say, invading random countries, might produce some savings. The NRO gang are as misguided as they are loathesome.

Posted by: fasteddie at January 11, 2005 06:15 AM


Treasury bonds are IOUs; IOUs that are honored now and will be honored in the future. The Social Security trust fund will be honored as will all of our Treasury debt. A hint that America might default on its debt would cause a profound economic crisis.

Posted by: anne at January 11, 2005 06:23 AM


"Only salaries up to $87,900 (in 2004) are taxed, meaning that Wall Street mega-earners pay no more than their secretaries."

Wow, he knows some highly paid secretaries.

"And replacing wage-based indexing with something related to the inflation rate might be the right thing to do."

Not a chance. Why should retirees not share in improved productivity when newborn babies will without doing a lick of work? The assertion that retirees should not share in subsequent productivity increases is barbaric.

Posted by: Jonathan Goldberg at January 11, 2005 06:24 AM


But who, aside from the well-to-do, has an extra 5-7% to put in one of these supplemental accounts? On the median family income, you cannot spare it. What it turns out to be is just another tax shelter for the well-to-do.

Posted by: Bob H at January 11, 2005 06:27 AM


http://www.nytimes.com/2005/01/11/opinion/11krugman.html?hp

The Iceberg Cometh
By PAUL KRUGMAN

Last week someone leaked a memo written by Peter Wehner, an aide to Karl Rove, about how to sell Social Security privatization. The public, says Mr. Wehner, must be convinced that "the current system is heading for an iceberg."

It's the standard Bush administration tactic: invent a fake crisis to bully people into doing what you want. "For the first time in six decades," the memo says, "the Social Security battle is one we can win." One thing I haven't seen pointed out, however, is the extent to which the White House expects the public and the media to believe two contradictory things.

The administration expects us to believe that drastic change is needed, and needed right away, because of the looming cost of paying for the baby boomers' retirement.

The administration expects us not to notice, however, that the supposed solution would do nothing to reduce that cost. Even with the most favorable assumptions, the benefits of privatization wouldn't kick in until most of the baby boomers were long gone. For the next 45 years, privatization would cost much more money than it saved.

Advocates of privatization almost always pretend that all we have to do is borrow a bit of money up front, and then the system will become self-sustaining. The Wehner memo talks of borrowing $1 trillion to $2 trillion "to cover transition costs." Similar numbers have been widely reported in the news media.

But that's just the borrowing over the next decade. Privatization would cost an additional $3 trillion in its second decade, $5 trillion in the decade after that and another $5 trillion in the decade after that. By the time privatization started to save money, if it ever did, the federal government would have run up around $15 trillion in extra debt....

Posted by: anne at January 11, 2005 06:29 AM


Our host opines:

"And Stelzer is correct about wage versus price indexing: shifting to price indexing reduces the ratio of benefits to earnings most in those states of the world in which productivity growth is fastest and we are richest--hardly a feature of any optimal policy design."

This doesn't seem consistent; "hardly a feature" probably shouldn't follow follow from "is correct." Could he have meant "And Stelzer is INcorrect...?

Posted by: Jonathan Goldberg at January 11, 2005 06:30 AM


The next time someone makes the "t-bills are just IOUs" argument, they should be asked if they're willing to give me (or any reasonable person) all the t-bills in their portfolio for free.

Posted by: P O'Neill at January 11, 2005 06:31 AM


Are the T-bills we're talking about here the TED spread variety or are they special bills/notes that are issued specifically for social security which have noi function other than to exist in the social security fund? Do they have negotiability on the open market? If so, then they can be traded and should move with the markets; if not, then this is just a big shell game with the promissory notes in the trust fund evidence of a huge grand larceny on the part of the government.

Posted by: matt at January 11, 2005 06:38 AM


As long as the subject of raising the retirement age keeps coming up, let's talk about what that would mean for people whose work consists of hard physical labor, often with physical side effects that can be debilitating over a long period of time.

I never hear anyone discussing this, probably because the people debating it and most likely to write or influence the law on it themselves work mostly in offices where the hardest labor they encounter may be hauling a couple reams of paper, and the worst disabling injury may be carpal tunnel syndrome.

Getting to the average retirement age in one piece and still working can be a challenge to people who work in meat-packing plants, construction, domestic service, and similar work.
Many of these people are praying every day that their bodies will hold out. To move the retirement age even farther away from them is not only cruel, it is symptomatic of how alienated the governing and academic classes are from the people who create and support the infrastructures of their cushioned lives.

Posted by: Riggsveda at January 11, 2005 06:39 AM


Though I have read Irwin Selzer's article carefully, I find the article an attack on Social Security and not a defense. Part of the attack is even akin to an attack on health care or minimum wage legislation. Should we just say the heck with workers? Pay them whatever you wish at whatever poor benefits. Allow Social Security to end gradually. And, there we will have a splendid economy. Yuch!

Posted by: anne at January 11, 2005 06:50 AM


"These taxes raise employers' cost of hiring by 6.2 percent, and reduce the employees' incentive to work by cutting their take-home pay."

Most people are missing the unspoken,long range goal of Bush's SS privatization,that is to eventually remove the businesses share of the payroll tax, not to make retirement more secure for workers. This is the "political capital that George Bush owes his business campaign donors.

Posted by: Dennyr at January 11, 2005 06:52 AM


"These taxes raise employers' cost of hiring by 6.2 percent, and reduce the employees' incentive to work by cutting their take-home pay."

Most people are missing the unspoken,long range goal of Bush's SS privatization,that is to eventually remove the businesses share of the payroll tax, not to make retirement more secure for workers. This is the "political capital that George Bush owes his business campaign donors.

Posted by: Dennyr at January 11, 2005 06:52 AM


"Also, don't you think any scheme that bases its payouts on monetary contributions penalizes stay-at-home parents? You'd think the family values gang would want to fix this -- provide a certain dollar amount that gets credited toward your Social Security contributions based on how many years you work as a stay-at-home parent."

Currently the system has two benefits to stay at home parents. The first is that if the breadwinner dies the children receive social security payments (usually collected by the parent who survives). The second is that a person can receive benefits for their spouse.

Imagine a widow who stays at home to raise the kids. She would receive SS benefits as the kids grow up. When she turns 65 she would be able to collect on her husbands behalf.

Social Security as it is currently set up now is very good to a traditional stay at home spouse.

Posted by: Boonton at January 11, 2005 07:22 AM


"It may be that this Social Security thing is just a "Stalking horse" What is really behind it?"

Management fees, and commissions as far as the eye can see for a financial services industry that was one of Bush's biggest sources of campaign funding.

There's already a steady drumbeat of 'these accounts are too small for to profitably manage' that sounds suspiciously like trolling for subsidies...

Posted by: Davis X. Machina at January 11, 2005 07:36 AM


LUSKIN ALERT!

http://www.nationalreview.com/nrof_luskin/luskin200501110842.asp

Posted by: The BatPhone at January 11, 2005 07:47 AM


I agree with most of your analysis. I do not like the idea of taxing imported oil, I would prefer taxing all oil. Taxing imported oil leads to using more domestic oil which is something that should be avoided.

Posted by: steve tafeen at January 11, 2005 08:19 AM


At the risk of blowing my own trumpet, may I invite people to read what I wrote on the area six years ago in an Australian context, well before it became fashionable? It's at http://member.netlink.com.au/~peterl/publicns.html#NWKART4. That article was accepted for publication, though the follow up article wasn't.

Posted by: P.M.Lawrence at January 11, 2005 08:25 AM


Regarding that oil importation tax - wouldn't that contradict WTO rules on trade barriers if we taxed foreign oil more highly than domestic oil?

Posted by: Palindrome at January 11, 2005 08:38 AM


Do they [Soc Sec trust fund bonds] have negotiability on the open market?

No. They are special issue securities which must be redeemed by the Treasury, and have equal status with publicly held debt. However, they can not be dols directly to the public.

The Trust Fund issue is easy to demagogue (see examples in the comments above.) Most critics do not say that the Trust Fund is meaningless - it clearly has legal and political significance. The argument is that it is *economically* meaningless.

Why? Per projections, in 2018 the payroll tax receipts will be less than benefits due. *IF* there were no trust fund, the shortfall would be made up by the Government either (a) reducing other spending; (b) raising taxes; or (c) issuing new debt.

Well, fortunately, we have a "Trust Fund". And because we do, what are the choices? Well, Social Security trustees will present their IOUs to the Treasury. And, in order to meet this obligation, the Government will either (a) reduce other spending; (b) raise taxes; or (c) issue new debt.

Since the existence of a "Trust Fund" does not change the financing choices of the government, it is economically meaningless (at a first approximation).

However, it has *legal* significance - by law, the Soc Sec Admin can make benefit payments on its own initiative, without a separate appropriation from Congress, as long as it has cash (from tax receipts and bond redemptions) on hand. Because it has the Trust Fund bonds, Congress does not need to make a separate Soc Sec appropriation. Consequently, they can operate independently until 2040 or 2050 (depending on projections).

After the trust fund runs out, "we the people" will still owe full Soc Sec benefits to retirees - however, the Soc Sec Admin won't have the resources (payroll tax only, at that point) to make full payments. Either Congress will have to appropriate money (maybe they will!), or we have something like a train wreck.

So, the trust fund is not politically or legally meaningless - it is a useful accounting device that lets Congress delay its day of decision and gives current taxpayers some hope that some day they will collect.

But economically, it is roughly meaningless, since fiscal policy is not affected by its existence or absence (I say roughly - defaulting on the trust fund bonds is not an option, and legislating a benefit reduction in 2018 for then-current retirees might be politically impossible, so the trust fund will drive fiscal decisions in a different path than if it did not exist at all).

My impression is that not much of this is controversial, BTW (I am hazy on exactly how Congress appropriates funds for Soc Sec, but they do have the statutory right to redeem their trust fund bonds).

Posted by: Tom Maguire at January 11, 2005 09:04 AM


Here's the danger to Democrats; in response to the bogus "crisis" raised by the Bushists, the Dems will say "but medicare is much worse!" at which point the Bushists will say "Golly you're right! Thank God the Dems are now on the record for gutting medicare!"

We shouldn't be accentuating the medicare problem at all, we should be accentuating the general budget deficit, tax shifts from the top brackets to the middle class, and an unfunded and expensive war as the real budget issues.

These are all problems of Bush's making, a fact that should be repeated endlessly.

Posted by: djs at January 11, 2005 09:28 AM


"The payroll, pollution, and energy independence tax points are well taken. "

Republican Representative John Anderson of Illinois ran for president on a platform of taxing oil -- in the form of gasoline -- 50 cents per gallon, and applying the funds towards Social Security.

That was in 1980. Jimmy Carter argued that Social Security was NOT in crisis, and that the Republicans were just scare mongering.

Anderson lost his bid for the presidency.

So did Carter.

Shortly thereafter, the Democratic Party, controlling both Houses of Congress, raised FICA taxes and cut Social Security Benefits.

It's deja vu all over again.

Look, if the Demorcratic Party wants to propose a counter-plan -- or two, or seven -- to the Shrub's notion of re-indexing benefits and diverting taxes toward private investments, more power to them. But to continue to insist, as Jimmy Carter did (does?) that changes are NOT necessary and are NOT going to be painful is ... much too familiar. And dishonest.

I'm tired of it.

Posted by: Pouncer at January 11, 2005 09:37 AM


Amazing. Luskin sees the crisis as when the trust fund accumulation begins to decline. Simply amazing.

http://www.nationalreview.com/nrof_luskin/nrof_luskin.asp

Posted by: Dhelg at January 11, 2005 09:39 AM


Re the Krugman column - he gets quite exercised about the rising deficits and debt associated with the diversion of payroll taxes into forced personal savings accounts.

However, he makes no attempt to illuminate the (high probability) that not all deficits are created equal. The real question is, what will the effect on national savings of this privatization plan be?

[To the extent that people regard tomorrow's private account balances as the equivalent of today's future claims on Social Security, it won't have any damaging effects on national savings; to the extent that people regard tomorrow's private account balances as *theirs* in a way that today's future claims on Social Security are not, it will get bad and ugly...]

In that context, the higher deficits are directed into higher savings, not current consumption (although second order effects in either direction are possible).

However, I suspect his column is effective demagoguery.

Posted by: Tom Maguire at January 11, 2005 10:12 AM


Tom, that is wrong. SSA bonds are already debt. in 2018 all that will happen is renewing of debt. The same thing that happens when the government pays off 30 day T-Bills and issues new ones. There is no change in the government's net debt position.

Posted by: Rob at January 11, 2005 10:13 AM


http://www.nytimes.com/2005/01/11/opinion/11krugman.html?hp

No; there is no Social Security crisis or problem other than the attempt to "reform" Social Security. This attempt is really meant to undermine a healthy successful program that has gone far far far to assuring that America would become a wonderfully prosperous middle class society.

Posted by: lise at January 11, 2005 10:17 AM


Tom argues quite clearly that the Trust Fund has "legal" but not economic significance because "in order to meet this obligation, the Government will either (a) reduce other spending; (b) raise taxes; or (c) issue new debt. "

But that is exactly why the real problems are the deficits and resulting growing debt since exactly these same three actions will be required to meet our growing obligation to foreign nations.

I say young people are right to be concerned but are simply misinformed if they think SS is what they should be concerned about.

Posted by: SusanJ at January 11, 2005 10:23 AM


http://www.nytimes.com/2005/01/11/opinion/11krugman.html?hp

The Iceberg Cometh
By PAUL KRUGMAN

...Advocates of privatization almost always pretend that all we have to do is borrow a bit of money up front, and then the system will become self-sustaining. The Wehner memo talks of borrowing $1 trillion to $2 trillion "to cover transition costs." Similar numbers have been widely reported in the news media.

But that's just the borrowing over the next decade. Privatization would cost an additional $3 trillion in its second decade, $5 trillion in the decade after that and another $5 trillion in the decade after that. By the time privatization started to save money, if it ever did, the federal government would have run up around $15 trillion in extra debt....

We already have a large budget deficit, the result of President Bush's insistence on cutting taxes while waging a war. And it will get worse: a rise in spending on entitlements - mainly because of Medicare, but with a smaller contribution from Medicaid and, in a minor supporting role, Social Security - looks set to sharply increase the deficit after 2010.

Add borrowing for privatization to the mix, and the budget deficit might well exceed 8 percent of G.D.P. at some time during the next decade. That's a deficit that would make Carlos Menem's Argentina look like a model of responsibility. It would be sure to cause a collapse of investor confidence, sending the dollar through the floor, interest rates through the roof and the economy into a tailspin.

And when investors started fleeing because they believed that America had turned into a banana republic, they wouldn't be reassured by claims that someday, in the distant future, privatization would do great things for the budget. Just ask the Argentines: their version of Social Security privatization was also supposed to save money in the long run, but all it did was move forward the date of their crisis.

A responsible administration would reverse course on tax cuts and the botched 2003 Medicare drug bill, both of which pose much greater threats to the government's solvency than the modest financial shortfall of the Social Security system. But Mr. Bush has declared his tax cuts inviolable, and he says that his drug bill will actually save money. (The Medicare trustees say it will cost $8 trillion.)

There's an iceberg in front of us, all right. And Mr. Bush wants us to steam right into it, full speed ahead.

Posted by: lise at January 11, 2005 10:30 AM


Wasting more bandwidth on social security. I think I'll go with Luskin on this one.

Posted by: northernLights at January 11, 2005 10:32 AM


> Luskin sees the problem as the year after SS surplus peak.

I suspect he'd be absolutely alarmed to find out that diverting 20% or so of payroll taxes to private accounts will accelerate the days of reconing for Social Security by about 20 years, without the benefit of collecting an extra few $Trillion in the trust fund.

Gosh, if there's anything that tells you the problem is not a Social Security problem but rather a general government problem,
As Krugman points out today, we'd have to issue $15 Trillion of debt to fully cover "transition costs". The system would go out of balance immediately, and payroll tax revenues would not be projecte to come back into balance until after 2050.

After 2050, traditional SS benefits would be cut dramatically, and we'd still have $15 Trillion of debt (plus probably accrued interest) outstanding.

Gosh, if there is anything that tells you it is not a SS problem, but rather a general government problem, it is the fact that "the problem" starts to emerge around 2009. When SS is still bringing in a hefty surplus.

Conservatives are addicted to SS revenue, and it seems they're willing to do practically anything to feed the addiction.

Posted by: Charlie at January 11, 2005 10:46 AM


Per Luskin - even as I was typing over at Angrybear, two folks posted the Luskin alert here! Yes, the Clown Show has hit a new high.

Posted by: pgl at January 11, 2005 11:19 AM


[bt ll fnncl ssts r s--s th stckhldrs f nrn dscvrd]... mtnll chrgd, bt wrng. N sst s n . Dbt s n . t s kntpck bt llstrts n ndrlyng prblm. rd sts lk ths nd rlz tht th bggst nm w hv (cnsrvtv nd lbrl lk) s gnrnc -- r dwnrght dsnfrmtn. Th lck f ndrstndng f th fnctnng f cptl mrkts (wth ntbl xcptns)xhbtd n ths dscssn s stndng. wld rg mn f y t tr t gt yr nfrmtn frm srcs wth lss f n x t grnd thn th lks f Pl Krgmn. H s brllnt mn bt h hs s mch f n gnd s n pltcl hck. Tr rdng sm ntrprttns f th wrks f Fm, Mrkwtz, Mllr, Vshn, hll, vn gv Schls nd Mrtn tr (th wr th rchtcts f LCTM "ff th rn" t-bll rbtrg, Nbl Lrts nd *nt* dts). Ths wll gv sm f y mr bckgrnd n th thrs bhnd wlth crtn nd th ntrpl btwn rsk nd rwrd. Thn y cn hv mr ntllgnt dbt. Flm m f y mst, bt y nl dntf yrslf s ppl wh cn't b tld th mght b wrng. h, nd jst t gt t strght, whr s th ctff btwn rch nd mddl clss? nd shld t b msrd b ccmltd wlth r crrnt ncm? Jst crs...

Posted by: Brian at January 11, 2005 11:54 AM


"I would urge many of you to try to get your information from sources with less of an axe to grind than the likes of Paul Krugman."

Duh.... I'll get my information precisely from Paul Krugman, and I do, and you foolish smug twit couldn't possibly touch my credentials.

Posted by: lise at January 11, 2005 12:25 PM


HELP!!!! Is there anyone who can debate SS? Here are some points sent via email to my coworkers and I'm trying to refute his/her arguments but am unable to do so since i'm not really up on SS other than the basics --
==

Nobody is destroying the concept of Social Security. What the administration is trying to do is destroy the old defined benefit system that was based on actuarial assumptions of life expectancy and government "funded" accounts. Think of it as a change from the old pensions at work to new 401k.

Just because you have read that the government debt will increase by the transition costs is a ridiculous argument, because the SS payments and obligations are not counted in government debt. They are, in financial industry parlance, called "off-balance sheet obligations." But just because you don't see the obligations on the balance sheet, does not absolve a company or government from the legal requirement to pay for them.

It is not true that since the obligation is not part of the government debt figure, the obligation doesn't exist. Hence, any raising of actual debt to pay for the transition costs, no matter whether they will dramatically lower future off balance sheet obligations is a bad thing in your view. If private companies engaged in your rhetoric, they'd have a visit from the SEC in the morning.

The analysis that diverting funds into private accounts would raise the deficit, when the whole goal of private accounts is to remove the government from the equation is incorrect as well.

In looking at SS reform, you cannot separate Medicare from the equation, because the source of revenue for both programs comes from the same payroll taxes. Both programs will need to be reformed, and SS is the logical one to tackle first. You may classify it as lying by the administration, but I view it as prioritizing the reforms.

This administration has put Pentagon reform, tax reform, and SS reform on its plate. Good luck trying to lump Medicare reform on the docket. Please point to the brave Congressmen and Senators willing to stick their neck out to battle AARP.

If Democrats truly understood how macroeconomics work, they would understand that lowering tax rates is not a death knell for revenue generation. At least they would understand it, if you were a true Reagan Republican.

The budget deficit is not at record highs, especially considering that we're in war time. The continuing economic recovery should push the deficit lower and allay fears of runaway debt service. Annual budget deficits of less than 2.5% of GDP are a sign of good steady state fiscal control.

The Democrats response to the debt markets further underscores their naivete in the matter. The markets react to everything, because the price already reflects the countless forecasts, budgets and outcomes. If the administration was proposing a plan that would drastically increase the deficit, you bet your sweetheart that rates would spike. US Bond yields have been ridiculously low for a while, even with Bush administration's large deficit spending, and foreign buyers being the largest purchasers of US govt debt (the bond, not the dollar is the proxy of the allure of US investment).

The low yield on US debt has been a good funding vehicle to break out of the recession, becuse deficit financing doesn't cost that much. This was the reason that the recession was generally mild, and is enough hope that the economy will continue to grow, and lots of jobs will be added in 2005, because you've milked the productivity cow to her fullest.

Greenspan issued a correct warning about run away budget deficits. But you also have to consider the timing and venue. He was in Europe and needed to placate the crowd concerned about the weak US$. The timing was important, because his warning came after economic stats came in that the deficit was starting to shrink, and the administration was set to deliver a budget that finally had the notion of spending controls. In effect, Greenspan was already preaching to the choir

==

I know this is alot to digest but is there anyone out there in kos-land that can counter these arguments? some are obvious but others seem a bit too muddy or complex for me.

Seriously can anyone here take a stab at this?!?!?!??!

Posted by: alexm at January 11, 2005 12:27 PM


Thanks Lise!

Brian, duh for me as well.

Posted by: Ari at January 11, 2005 01:03 PM


Ls r whtvr, W t prv m pnt. s sd n m lst pst, thr r ntbl xcptns. Y r prbbl n f thm. Hwvr, prsn wth nmpchbl crdntls sch s yrslf shld xcrcs mr slf-cntrl. Bt f y chs t drnk Krgmn Kl-d, whch ccpts n ltrntv vw (n cld cll t jhd n nclsscl cnmcs), gss shld xpct nthng mr. nd f yr crdntls r s ntchbl, thn wh wld y gt yr cnmc pnt f vw frm smbd ls? Dh? Hr s mr fd fr thght...brggng bt yr crdntls whl mplyng tht cn't "tch" yrs nd cllng *m* smg n th sm sntnc s...wll... bt y cn fnd bttr wrd fr t thn . lxm, gd lck fndng smn n KS-lnd t cntr th rgmnts y hv prsntd wtht rsrtng t cllng y nms. s y cn s frm Ls's "cntr" t m sggstn f gttng mr dvrs pnt f vw, cvlzd dscrs btwn lbrls nd nybd wh drs t dsgr wth thm s nt lkl. Hp y gys cn n d fnd smthng t b hpp bt.

Posted by: Brian at January 11, 2005 01:05 PM


Poor Dear Brian,

We forgive woo.

Posted by: Jennifer at January 11, 2005 01:35 PM


a) I take all of this newfound attention as a signal ; the right flank is nervous that their latest plot against the citizenry isn't going so swimmingly.

b) I guess we can add "duh?" into the lexicon of genteel discourse.

c) re happiness: isn't there some pithy comment about bliss that applies here?

Posted by: djs at January 11, 2005 01:36 PM


Why do you keep endorsing the lie that CSSS2 introduces "price indexing"? It does nothing of the kind; rather, it exponentially phases out benefits.

Stelzer is also factually wrong about the rate at which benefits are taxed. Or maybe he is half right, as only half the benefit can ever be taxed.

And his explanation of employee-employer tax split is rather naive.

Posted by: enfant terrible at January 11, 2005 02:22 PM


*The markets react to everything, because the price already reflects the countless forecasts, budgets and outcomes.

*If the administration was proposing a plan that would drastically increase the deficit, you bet your sweetheart that rates would spike.

Not if there is a counter-buyer (China, Japan) who will buy the t-bonds at any price. No spikes with two big anchors.

*US Bond yields have been ridiculously low for a while, even with Bush administration's large deficit spending, and foreign buyers being the largest purchasers of US govt debt.

Japan will buy any amount of greenbacks and t-bonds necessary to keep it's yen low. AFAIK 104 Y/$ is the pain limit for their industry. China is pegged to the dollar and has been putting the cash in t-bonds, too.

BTW, China has been buying a lot of (mainly oil producing ) assets recently. In Venezuela, Chile, Iran, Canada,... Looks like they are getting rid of the cash.

The central bank of china is not interested in the solvency of bush's budget. Their goal is to keep the FDI coming in. At some point they will simply write off their dollar position. They already lost 30% of its value. Did anyone there loose his job? Anyone?

Posted by: eu-land at January 11, 2005 02:32 PM


Irwin Stelzer is part of the right wing think, or not think, tank the Hudson Institute. A good old London Tory actually. This is simply another essay meant to prepare the way for ending Social Security. This is another way of pandering to the right wing money that pays the way for such pretend journalists.

Posted by: JJasper at January 11, 2005 02:41 PM


interesting comment :

[Since their whitewash of Karimov, I don't like links to TCS]

the Bush privatization proposal represents a staggering reversal of the "Greenspan switch." It would cut the regressive Social Security tax, shifting the burden of paying current benefits to other taxes that are more likely to fall on the wealthy. Thus, the consequence of privatization would be quite progressive, even though Krugman assumes that the motives of the Bush Administration do not favor the working class.

Posted by: eu-land at January 11, 2005 04:02 PM


the Boy King takes his best shot, but comes up short

http://tinyurl.com/568uo

Posted by: djs at January 11, 2005 04:35 PM


"the Bush privatization proposal represents a staggering reversal of the "Greenspan switch." It would cut the regressive Social Security tax, shifting the burden of paying current benefits to other taxes that are more likely to fall on the wealthy. Thus, the consequence of privatization would be quite progressive...."

Absolute rubbish. From the source you know this is rubbish.

Posted by: Ari at January 11, 2005 04:37 PM


setty wrote, "Also, don't you think any scheme that bases its payouts on monetary contributions penalizes stay-at-home parents?"

But you're overlooking the fact that (a) the implicit income represented by the work done by the stay-at-home parent is not subjected to the income tax, (b) there is a "marriage bonus" in effect for couples with disparate (explicit) incomes.

Posted by: liberal at January 11, 2005 05:14 PM


Dennyr wrote, "Most people are missing the unspoken,long range goal of Bush's SS privatization,that is to eventually remove the businesses share of the payroll tax, not to make retirement more secure for workers."

No. Most economists believe that while the employer nominally remits his portion of the tax to the government, his portion actually falls on the employee. (That is, in terms of "tax incidence," the tax falls completely on the employee, regardless of the nominal 50/50 structure of the payments.)

Posted by: liberal at January 11, 2005 05:21 PM


From Rob, 10:13 AM, on the question of whether the Trust Fund is "real"; my point was that it had legal, but not economic, significance.

"Tom, that is wrong. SSA bonds are already debt. in 2018 all that will happen is renewing of debt. The same thing that happens when the government pays off 30 day T-Bills and issues new ones. There is no change in the government's net debt position."

Rob is partly right (but still wrong). Soc Sec Trust Fund bonds are counted in the Treasury debt ceiling, which was recently raised.

However, the Treasury tends to focus on publicly held debt, i.e., debt not held by another arm of the Federal Government. Soc Sec bonds do *not* count in that category, for reasons that should be obvious. Hence, when they issue new bonds to the public in 2018 (analogous to the Soc Sec Trust Fund selling their bonds directly to the public, which they can't do), net public debt will rise.

From p. 199 of the recent Analytical Perspectives on the Budget (p. 211 of the .pdf file):

The Trust Funds and the Actuarial Deficiency: The
simple fact that a trust fund exists does not mean
that the Government necessarily saved the money recorded there. To have saved the Social Security and HI trust fund surpluses as they accumulated would have required the Government to set aside the surpluses reducing the unified budget deficit dollar for dollar with the change in the trust fund balance (or adding dollar for dollar to a unified budget surplus). It is an open question whether this happened or not. The large unified budget deficits that prevailed during most of the time when the trust funds were increasing suggests
that the Government did not do this, although to know this for sure it would be necessary to know what the unified deficit would have been in the absence of those trust fund surpluses, and that is not really knowable.

The assets in the trust funds are special purpose financial instruments issued by the Treasury Department.

*At the time Social Security or Medicare redeems these instruments to pay future benefits not covered by future income, the Treasury will have to turn to the public capital markets to raise the funds to finance the benefits, just as if the trust funds had never existed.*

**From the standpoint of overall Government finances, the trust funds do not reduce the future burden of financing Social Security or Medicare benefits.**

Emphasis added. Legally significant, yes; economically significant, no.

And none of this is controversial - if you read between the lines with Krugman, for example, he does not impute economic significance to the Trust Fund.

http://www.whitehouse.gov/omb/budget/fy2005/pdf/spec.pdf

Posted by: Tom Maguire at January 11, 2005 05:37 PM


The trust fund has distributional significance, and that used to be a part of economics, which makes it "economically significant." They increased payroll taxes and then decreased income taxes. Money is flowing upwards.

Posted by: Lee A. Arnold at January 11, 2005 06:04 PM


> The consequence would be quite progressive.

It is rubbish, but it's smart to identify why.

Bush has offered to pay the first $1-2 Trillion of transition costs out of unfunded general revenue borrowing. But there would be a lot more financing required - Krugman's estimate is a total of $15 Trillion, with the system remaining out of balance all the way out to around 2050.

The trust fund would go bankrupt in the 2010s, and we'd be left in the 2020s able to pay about 75% of promised benefits - and that's the promised REDUCED benefits.

So, in essence, what has been offered is a progressive Trojan Horse. They'd defund the trust by about 25%, and set the government on a course in which we will have a real crisis of financing soon.

We'd get a more progressive outcome simply by demanding that the government honor its treasury debt and let payroll taxes be used to fund the benefits, like we've done for the past 65 years.

Posted by: Charlie at January 11, 2005 07:42 PM


eu-land cites the Kling article at the conservative site TechCentralStation. I read the whole article. I've followed the issue. What more progressive tax is Kling talking about? How does running up the national debt translate into shifting to more progressive taxation? Where does Kling get the idea that Bush isn't counting on the historical returns of the market? Where has anything been written that proves this? Nothing I've seen. In addition Kling betrays himself in his first sentence that eu-land doesn't mention which is "Recently, left-leaning economists Paul Krugman and Brad DeLong have each tried to write seriously about Social Security.". Notice that he says that they "try" to write about it. How superior of him. Please try to find any instance of Kling criticizing any economic position of the current administration. I doubt you will.

Posted by: Jim S at January 11, 2005 07:43 PM


Treasury could focus on debt held by green-haired aliens. Or perhaps more realistic, debt held by foreign central banks.

What happens if any large holder of treasury debt decides to take interest payments on the debt rather than rolling over interest payments into new bonds?

There is really nothing unique about the treasury debt held by the Social Security trust. Government should be planning NOW to be ready to redeem or roll over the debt when it matures.

But clearly, we're not doing that, given that government is spending $1.50 for every dollar of revenue brought in. That's going to be a problem whenever ANY of the big purchasers of treasury debt decide to stop piling up new hoardes of treasury bonds.

Posted by: Charlie at January 11, 2005 07:55 PM


“There is really nothing unique about the treasury debt held by the Social Security trust. Government should be planning NOW to be ready to redeem or roll over the debt when it matures.”
Actually there is. The OASI trust fund buys only special-issue treasury bonds. These bonds are not marketable, and are not marked to market. While they are backed up by the full faith and credit of the federal government, they are subject to interest rate risk.

[I could be wrong, but I thought that they were short-term securities with a floating interest rate that is the average rate on long-term Treasury debt. You get the security of principal repayment without risk of a short-term security, and the interest rate of a long-term security.]

Posted by: A. Zarkov at January 11, 2005 08:41 PM


Somebody above wrote that 1/2 of social security income is taxable. Not true, about 83% of my and my wife's social security income is taxable according to the turbo tax program I'm currently working on.

Posted by: Brian Boru at January 11, 2005 09:48 PM


Lee A. Arnold wrote, "The trust fund has distributional significance, and that used to be a part of economics, which makes it 'economically significant.' They increased payroll taxes and then decreased income taxes. Money is flowing upwards."

Exactly.

Tom Maquire wrote, " 'The large unified budget deficits that prevailed during most of the time when the trust funds were increasing suggests
that the Government did not do this,...' "

Not really. The best predictor of whether there were cyclically adjusted *large* deficits is whether the budget was submitted by Reagan or Bush 43.

Posted by: liberal at January 12, 2005 04:09 AM


Tom--yes there is focus on the piblic debt by politicians but the gross debt is known by teh market and therefore important when dealing with bond market effects. I agree that there maybe a problem come 2018 when the SSA redeems the bonds and the Treasury issues debt to cover it. The problem will be due to having a large deficit outside SS causing large interest rates effects in the market. But that has to do with the general budget running a deficit and is a fiscal problem and not a Social Security problem.

Posted by: Rob at January 12, 2005 05:42 AM


Brian Boru:

Somebody above wrote that 1/2 of social security income is taxable. Not true, about 83% of my and my wife's social security income is taxable

You are right - depending on your income, up to 85% may be taxable. But the exact fraction is irrelevant for my main point - that Stelzer's statement was factually false.

Posted by: enfant terrible at January 12, 2005 06:18 AM


A. Zarkov:

These bonds are not marketable

However, unlike other T Bonds, they are putable.

Posted by: enfant terrible at January 12, 2005 06:22 AM


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