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January 12, 2005

Why Am I Not For Bush's Social Security Reform?

It's strange--I ought to be a member of what Joshua Micah Marshall calls the "faint-hearted faction"--those Democrats excited about doing something for Social Security involving private accounts, and eager to strike a deal with Republicans. I do, after all, think it quite likely that the U.S. government is leaving some money on the sidewalk by not investing part of the Social Security Trust Fund in equities. I do believe that Social Security has long-run financing problems, and that the sooner these are fixed, the better. I do see merit in giving Social Security beneficiaries more secure property rights in the prefunded portion of their Social Security benefits, so that it is theirs by more than the Grace of a future Congress. And the important and dangerous problem that private accounts shift risk off the government (where it belongs) and onto individual beneficiaries can be managed--restrict private acccounts to, say, be invested 60% in long-term Treasuries and 40% in the broad stock market, and the amount of risk shifted off is very small.

So why, then, is my attitude toward the Bush administration's Social Security non-proposal like that of the Dread Pirate Roberts?

Experience. We've seen what Bush administration proposals turn into. We've seen it turn a surplus into a deficit. We've seen its idea of a farm bill. We've seen its steel tariff--bad economics, bad mercantilism, and bad politics. We've seen the recent corporate tax monstrosity. We've seen the Medicare drug benefit. We've heard from Paul O'Neill. We've heard from John DiIulio. The Bush administration is batting as close to a zero on economic policy as an administration can--and economic policy is the bright spot in this administration.

So one's assessment of what the Bush Social Security "reform" plan is going to be must be more-or-less like this: it may look cute and friendly now, but it won't stay cute and friendly for long. Somehow--we're not sure how--it's gonna get mean. It's going to get ugly. And it's going to get stupid. The chances that whatever the Bush administration proposes and the Republican Congressional leadership gets behind will be good for the country are indistinguishable from zero.

Posted by DeLong at January 12, 2005 10:11 AM

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Does that mean that'd you'd support a plan like Bush's to create them within Social Security if it was anybody but the current group of clowns in charge? The other day, in your highly interesting party line post approach about Social Security reform, you said that you were against creating within the system.

I seriously hope that the Democratic leadership is working on a nice reform package to counter the nonsense that's coming from the Republicans. It will be good politics and good policy-making.

Posted by: Brian at January 12, 2005 10:40 AM

I'm curious, Brad, is there another nation's program that you like? The Prospect has an article on British Tories envying our system. So are there any other countries you would copy? Chile? Sweden?

Posted by: Carl at January 12, 2005 10:45 AM

Didja read the latest gem from Luskin? He says the SS crisis is in 2010, not 2018, 2023, or 2042, because that's when the surplus stops getting bigger and starts getting smaller. I think Luskin's reasoning must have been, "well, we've turned a small, long-term problem into a pretty immediate crisis by saying the crisis year isn't when the variable we're supposed to look at hits zero, but when the derivative of that variable hits zero, so why not move the crisis up even further, by taking the second derivative of the actual variable that's meaningful."


Posted by: Julian Elson at January 12, 2005 10:49 AM

This from Froomkin's White House Talk today:

"Fort Collins, Colo.:
Who is actually putting together the Whitehouse Social Security proposal? Treasury Secretary Snow? Karl Rove? the House leadership?

Dan Froomkin: My sense is that this is very much being masterminded by Karl Rove. For better or for worse, he is the guy thinking about the long-term and the Republicans being the permanent ruling party and the fundamental restructuring over time of the government in free-market ways.

Social Security, built along a defined-benefit rather than defined-contribution model, is not fundamentally acceptable in that long-term schema, I'm thinking. So even if they don't win this time, it's still a victory to have made Social Security a topic of debate, rather than the legendary third rail of politics. "

So it seems (if Dan is correct) that the political arm of the administration is in control of the most important economic plan of a generation. Not that economists are omniscient, but doesn't this seem odd.

Posted by: NeilS at January 12, 2005 11:03 AM

Brad: I think I agree with you in principle, but isn't there another problem, namely how to finance the transition to your proposed plan given our current deficits?

Posted by: hilzoy at January 12, 2005 11:15 AM

Brad: I think the point is that you are looking at ways to reform the current system. No matter how one cuts it, the Bush agenda is to terminate the system.

There's a huge difference between private investment accounts and SSA investing in equities. Giving beneficiaries a greater property-rights stake does not mean you want to gut the system. Wanting to ensure the solvency of the program is a far cry from wanting to terminate it.

Posted by: Amos at January 12, 2005 11:38 AM

Someone, somewhere has suggested that the missing WMD's will turn up in Social Security "reform." Exactly. Wish I'd noted the source of that wisdom.

Posted by: PW at January 12, 2005 11:44 AM

Here's a question: if you believe that equities are going to generate better returns than other possible investments, then can't the government take that money off the table in a risk-free way by increasing taxes on gains from equity investments (both dividends and capital gains) ? And isn't that a less disruptive way of doing it than borrowing trillions of dollars to allow SS to play the market ?

This taxation of equity returns wouldn't necessarily need to be based on the same rules as the current system (i.e. no tax until you sell). We could presumably get each person to declare their year-end portfolio value and tax any increase in inflation-adjusted real value (maybe allowing a one-month window to sell if prices stay high, or re-calculate if prices drop drastically).

In theory it seems that investors would still buy equities as long as their expected after-tax return was greater than that of safe investments (Treauries). And as the whole market is much larger (what is it, maybe 6x larger ?), then we would only need to take a tax of roughly 1/6th of the equity premium on the whole market in order to raise the same revenue.

Of course, if the equity premium doesn't exist, then this won't work - but at least we won't have borrowed trillions of dollars and gambled it to find that out.

Posted by: Richard Cownie at January 12, 2005 11:45 AM

Take the Rex Nutting piece you covered today, rub it up against the Dsquared piece, and the reason for opposing the Bush proposal is crystal clear. If the Bush proposal has to be sold with lies, what are the odds it's worth doing? The prospect of having yet another major policy successfully peddled with lies and smug insistence that the people who point out the lies are just troubled individuals is too much.

The longer governance by lie persists, the more it becomes routine. Letting Bush get away with it again further degrades our political future. If you want any hope that the next Republican to run for president will baulk at dishonesty, because it might just carry a political cost, you have to spend your time pointing out the dishonesty of the White House campaign for changing Social Security.

We know the Trust Fund will hold together for a good many years after Bush is out. We can afford to wait. We cannot afford to let Bush touch the Social Security plan, nor can we afford the spectacle of him winning another victory through illegitimate means.

Posted by: kharris at January 12, 2005 11:46 AM

I don't understand a mandatory defined contribution program at all. Why should anyone be forced to put their wages into government-chosen investments? I do understand and support Social Security as a social insurance program-- but I can't get my head around the idea that the government has the right to tell me how to save for my own personal retirement. Don't the Rebublicans like to say, "It's your money"? Well, if it's my money, why do they want to tell me what to do with it?

Posted by: jr at January 12, 2005 12:08 PM

the reason they want to tell you what to do with your money is that "their" good friends are all going to benifit from your selective GOVERNMENT directed "investments."

Posted by: nanute at January 12, 2005 12:38 PM

Expanding on my previous comment, the defining feature of a government is that it can take a cut of any profitable activity.

I develop software, and like many others, find software development to be a very profitable endeavor. Does the US government decide that software development is a profitable business, so it's going to raise revenue by going into that business ? No, it just takes a healthy cut of my pay instead.

So if the government feels a need to raise revenue from the apparently profitable endeavor of equity investment, surely it should do the same thing - tax those who profit from equity investment, not get into that business itself.

The other route is roughly socialism or communism, where government engages directly in profit-making enterprises. Doesn't usually turn out well.

Then we come to the question of private accounts vs shared pools. If the goal is economic security for retirees, then we want to ensure that everyone, or at least some very high percentage, say at least 95%, will have an adequate minimum income X from retirement until death. Suppose in a shared-pool system this requires average investment of $Y/retiree at retirement and
100% of people get exactly the necessary income X.
Now if we allow investment choices, then there will be a distribution of outcomes; then to ensure that 95% of people are above X, we'll have to set the average level of investment considerably higher, maybe at 1.5Y or 2Y. So then a larger
total amount of resources will be subject to the
constraints of the system. Which in fact on the
whole will *reduce* people's freedom to manage their own money.

Of course Bush's proposal will probably skip over this and allow a rather large proportion of retirees to end up destitute. Because his actual goal is to destroy Social Security, not make it more efficient.

Posted by: Richard Cownie at January 12, 2005 12:40 PM

This is one basic thing I never understood: why are there so many people willing to risk the destitution of old people (or the unavailability of health care for poor kids, etc, etc)? What ideology could possibly pervert their sympathies so? Why are they not in treatment for this kind of thing? I mean really, why isn't there a DSM entry for Grover Norquist Syndrome?

Posted by: Mandos at January 12, 2005 12:47 PM


If we start reasoning that a proposal is bad just because it is Shrub's, how will we be able to tell if Shrub's proposals are bad?

The substance of each plan has to be viewed separately from its source. I have not liked any of Bush's proposals on anything (except perhaps immigration), but I would equally dislike identical proposals if they came from Gore, Kerry, or Dean. I hope I misread you when I took it from you
r post that you might conceivably discriminate on this basis.

[First, we don't have a proposal to evaluate. Second, even a good proposal can be implemented in a very lousy fashion...]

Posted by: enfant terrible at January 12, 2005 01:28 PM

Mandos: current Republican ideology seems to be that everything that happens to you is due to your own virtues and faults. So, for example, if you get elected President or get to be CEO of Halliburton, that success in itself proves that you must be worthy of success. Conversely, if you're unemployed and destitute, then that must be the result of some flaw in your character. If you're black and unemployed, it can't be due to racism, because hey, Clarence Thomas is black and
not especially bright and *he* made it to the Supreme Court.

Since the people who think up and promote this ideology are, of course, successful, they are particularly susceptible to this line of thought.

Once you can swallow this, then it becomes simple to think that future SS private accounts, like the children of Lake Wobegon, will all be above average. To think otherwise would to insult the character of America's investors.

It helps to have a paranoid distrust of fancy-pants liberal Massachusetts concepts such as "arithmetic" (especially when it comes to allocating voting machines to precincts, or actually counting votes), and "history", and

I hope I'm exaggerating, but fear I'm not.

Posted by: Richard Cownie at January 12, 2005 01:34 PM

But what happens when they are confronted with the statistic that, for example, kids in poor neighbourhoods are more likely to have undiagnosed appendicitis leading to rupture and complications? Do they want poor kids to go through this agony? I'm talking about the failure of sympathy here. That seems to me highly pathological.


Somebody who can tolerate a chronic level of agony in others, blame their circumstances on them, and not support an "entitlement" for care...seems to me to be seriously ill in some way.

Posted by: Mandos at January 12, 2005 01:43 PM

If you believe that there is a market premium that we can capture through private investment, but to eliminate risk you're going to arbitrarily restrict where folks can invest, and you're worried about transaction costs, why have private accounts at all?

Why not just mandate some percentage of social security is used not to buy T Bills, but to buy into index funds?

Doesn't that do exactly what you want while minimizing risk and management and transaction costs?

Posted by: jerry at January 12, 2005 01:49 PM

Mandos: ah, there you go again. "statistics" can prove anything. That was probably made up by some liberal academic. And if parents don't want their
kids to have undiagnosed appendicitis, they should go live somewhere else, it's a free country.

But yes, the total lack of empathy and failure to acknowledge reality when it's inconvenient does seem to border on the pathological. W seems practically delusional in talking about the economy or Iraq -
and his performance in the debates was pitiful,
stumbling from one irrelevant talking-point to
the next. The next 4 years are going to be interesting.

Of course, the real outcome if SS is dismantled will be that destitute retirees will be supported mostly by their families or their local communities. And from W's point of view, he's been supported by his family his whole life and it never hurt him, so what's the problem ?

Posted by: Richard Cownie at January 12, 2005 02:06 PM

Think that you missed the big picture here. Social Security currently is only portion of people's retirement planning. You have SSN, your own savings, 501Ks etc.

SSN is supposed to be the guarantee that you won't be completely desitute when you retire. And to provide that guarantee it should be invested in government bonds. And the cheapest way to do it is on the grand scale - just as we do now.

So if you want to come up with ways to increase people's savings over and above SSN great.

Second, I think that we are forgetting one other thing with private accounts. If we divert some of the SSN money from buying government bonds, then someone else will need to buy those bonds. And under classic economic theory to get more buyers you need to give those marginal buyers more, in other ways raise the interest rate available. So we lose out again.

Posted by: Samuel Knight at January 12, 2005 02:15 PM

That's W, though. But there are clearly intelligent people who have access to and believe in statistics and all these things who still feel the same way. Think that Grover Norquist is a stupid, ignorant man?

Posted by: Mandos at January 12, 2005 02:17 PM

"For the first time in six decades, the Social Security battle is one we can win -- and in doing so, we can help transform the political and philosophical landscape of the country. We have it within our grasp to move away from dependency on government and toward giving greater power and responsibility to individuals." - Peter Wehner [White House Social Security Memo]

These 60 years, there has been a disdain for Social Security on the part of some conservatives. The problem is not with the finances of Social Security, rather with having social benefits programs. The wish is to set us back to where we were before the New Deal, each entirely responsible for our own well-being. Should there be limitations that we face, well that is not the fault or responsibility of society. That is our fault. But, I find I must to an extent be responsible for others and wish in turn that others be responsible for me. Social Security and Medicare and Medicaid were achievements as wonderful as free public schools, and I do hope we can preserve these programs.

Posted by: anne at January 12, 2005 02:38 PM


My belief is that Norquist is, like so many republicans, a person who really hates poor people. They make him intensely angry just because they exist.

And like torturing "suspected terr'ists" it's okay to do that because they are subhuman.

I think the DSM would call such a person a sociiopath at best and a psychopath at worst.

Cf. Mussolini.

Posted by: Mark at January 12, 2005 02:45 PM

Brad: I do, after all, think it quite likely that the U.S. government is leaving some money on the sidewalk by not investing part of the Social Security Trust Fund in equities.

That assumes the purpose of Social Security is to provide retirement savings and not to be a captive source for the goverment borrowing.

Posted by: a at January 12, 2005 03:28 PM

re: Norquist et al

I think there is a slightly respectable right-wing theory that government is incapable of solving some problems no matter how much money it spends, and that you therefore have to accept those problems as an immutable fact.

For example, the total money spent on government programs to ameliorate poverty is in theory enough to get everyone above the poverty threshold. And yet we still have poverty.

It's a little bit of a stretch to jump from arguing that some problems can't be completely solved, to the conclusion that government shouldn't make any attempt to ameliorate those problems. But clearly, like W, it doesn't have to make perfect sense to appeal to Republicans.

The same logic would seem to apply much more obviously to a program like missile defense, which has consumed something like $90B without producing anything remotely convincing. But for some reason "small-government" fans don't think of the military as part of "government".

It's all a little baffling, it may make more sense if you view these arguments as rationalizations rather than true reasons.

Posted by: Richard Cownie at January 12, 2005 03:33 PM

No, Mandos, I don't think Norquist is a stupid, ignorant man. I think he's (1) a cold-blooded Ayn Randian, and (2) a cheerfully lying demagogue. The evidence for both is extremely strong. For evidence on the latter, just take a look at the 2003 Washington Post column he wrote in which he rhapsodized ecstatically about the fact that "the Founders gerrymandered the Senate for Republican control" even against the wishes of a majority of the people -- or the successful campaign he masterminded in Alabama against Gov. Riley's attempt to make the state's income-tax rates for its poor higher than for the rich, in which he hired a guy with a conspicuously thick black accent to do radio ads announcing that the whole thing was just another clever secret plot by Whitey to rip off the state's blacks. In short, the guy is, as Mark said, a sociopath -- and, like all sociopaths, he's a cheerful and routine liar.

Posted by: Bruce Moomaw at January 12, 2005 03:36 PM

>Someone, somewhere has suggested that the missing WMD's will turn up in Social Security "reform." Exactly. Wish I'd noted the source of that wisdom.

It was Atrios:

Posted by: Felix Deutsch at January 12, 2005 04:24 PM

Could someone explain how using Treasury bonds to fund the Social Security trust fund differs from a case were a company issues bonds to a defined benefit plan that it sponsors?

In other words, General Motors (for example) is prohibited by ERISA from issuing corprate debt to its pension plan in order to fund that plan. The assumption by lawmakers being that you cannot replace an IOU (the pension promise) with another IOU (the bond) from the same party and still have a funded plan. Is the corporate situation analagous to the Social Security Trust where the SS payment promise (made by the Treasury) is being funded by a non-marketable Treasury bond (issued by the Treasury)?

If it is not the same, then what is the difference? Why would the GM plan be considered unfunded by the PBGC when the Social Security system is considered to be funded?

To extend the analogy further, corporate pension plans -- such as that run by GM -- must calculate their liabilities annually. Those liabilities include all promises made to future workers. Once a worker accrues a benefit under an ERISA plan the earned benefit cannot by law be reduced -- a promise once made must be kept (and funded). Considering this, it seems that people are treating the promises now being made under Social Security somewhat cavalierly. Every worker born after 1975 (those up to 30 years old) is now being promised benefits that will be delivered after 2042, yet many commentators seem to be arguing that it does not matter today that a predicted shortfall will be reached in 2042 as that date is too distant to matter. Does this make sense considering that there must be millions of Americans under 30 now in the work force?

Shouldn't we be making sure that we are properly calculating the earned benefits of those in their twenties so they have some idea of what they need to save to supplement their Social Security benefit?

Lastly, those in their twenties are now making a larger contribution than needed to pay current benefits (only about 74 percent of last year's employer and employee payroll tax was used to pay for current benefits). So, that cohort is floating a loan (in effect) to today's retirees. Yet it is this cohorts' benefits that may have to be cut. Those paying extra today to fund the trust will have to pay extra again (in the form of reduced benefits) when they retire.

Is the building of the trust fund a fair treatment of those now in their twenties? Is intergenerational fairness something that should be taken into account.

Posted by: DCPI at January 12, 2005 04:36 PM

Like Mandos, I wonder if these talking head republicans think like normal people. I could not say things that I know are factually untrue, or that would be inconsistent with other ideas I believe in. My head would explode, or more accurately, I would be ashamed.

And I would know if I did that, because running inside my head is a second voice, clearly me, but different. And it gets really irritable if I even think something stupid, let alone say it out loud.

But that kind of thing does not trouble these republicans. So, I wonder if they think like I do, or like most of my friends, republican and democrat alike.

Posted by: masaccio at January 12, 2005 04:46 PM


So, the point is you do not like Social Security. I understand, so why be coy. If the system is preserved as is there will be no problem paying full benefits for far far longer than 2042 or 2052. All that would be needed would be an eventual lifting of the payroll tax cap, and that will not be needed if growth stays about where it is. The question is whether you like a social insurance program, and the answer seems no.

Posted by: lise at January 12, 2005 05:04 PM

I think that there are some systems in place in the world (Singapore and Hong Kong, for example) that are structured in ways that do a better job at boosting the economy and treat workers more fairly (they are a boon to younger workers, not a drain).

There is an obvious need to have a system in place to deal with people who cannot work and have no savings, so I do beleive we need a social insurance system.

BTW. Is ours really a social insurance system? People who do not work at least 40 quarters in their lifetime earn no benefit at all.

Posted by: DCPI at January 12, 2005 05:12 PM

Once again I will offer myself up to the alter of Social Security if you will just please please please not bring up the subject again.

In other words, Mr. DeLong, are you mean, ugly, and stupid? Or are you cute, friendly, and, above all, very long? Discover what you are best at Mr. Delong. Haha.

Posted by: nancy at January 12, 2005 05:30 PM


A nice answer, that clarifies your argument. I would not have thought to look at Singapore or Hong Kong, but I will now. Fairness through the generations is essential to keep support for a social insurance system, and I will consider whether this term is properly used as well. Time to look more closely abroad. So far I have looked to England and Sweden, and find the Swedish system interesting.

Posted by: lise at January 12, 2005 06:10 PM

Why mess with Social Security. It is meant to keep us from being poor, in response to all those people who lost their shirts in the 1929 crash. Democrats should propose an alternative: keep SS as is, lifting the cap on taxed income and support and strengthen IRAs and 401ks. This way you can still get the benefits of playing in stocks, without messing with your Social Security pension.

Posted by: Unstable Isotope at January 12, 2005 06:12 PM


Anne posted an interesting article on Social Security in Sweden that can be easily found in a search of Brad's site.

February 5, 2004

Some lessons from Sweden on the pros and cons of privatizing Social Security.
By Alan B. Krueger - New York Times

YOUNGER workers,' President Bush said in his State of the Union address, 'should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account.'

According to former Treasury Secretary Paul H. O'Neill, the president believes that the reason he was elected was his bold -- some would say risky -- stance on replacing part of Social Security with personal accounts. If the president holds onto office in November and his party continues to hold Congress, the creation of some sort of personal retirement accounts as part of Social Security seems likely.

Although it is impossible to know what form such accounts might take, in 2000 Sweden instituted a system of personal accounts that holds many lessons for any country seeking to reform its retirement system.

Sweden now has a blended system, an approach Mr. Bush apparently favors. Employers and employees contribute a combined 16 percent of payroll toward a 'pay as you go' retirement system like Social Security, and an additional 2.5 percent toward individual retirement accounts. Those born after 1954 are fully in the new system, while older workers are phased in....

Posted by: lise at January 12, 2005 06:15 PM

Richard Cownie's idea of taxing unrealized capital gains is absurd, unless we also refund negative taxes on unrealized losses.The latter is much too difficult to do and will never fly. A reasonably progressive income tax plus an inheritance tax on lifetime bequests received are much more palatable and easier to execute.

Posted by: Thomas T. Schweitzer at January 12, 2005 06:17 PM

" I do, after all, think it quite likely that the U.S. government is leaving some money on the sidewalk by not investing part of the Social Security Trust Fund in equities."

What money Brad? The last time I checked, public debt was about $4.4 Trillion. What would you have the government do? Borrow another $1.6 Trillion to bet the lot in the stock market? You would have to subtract about 4% interest to cover the borrowing needs, not to mention the increase in interest rates.

I think private savings accounts are a great idea. I think so much of the idea, I have several. The best idea is to fund them outside of Social Security. I think stocks have been bad news over the last 5 years. How many of your CREF stock funds have negative growth over the past 5 years? Social Security is meant for the Clan of the Cave Bear rabbit hunters. Social Security is not for the "Me want Mastodon Meat" Clan of the Cave Bull. Ice ages can cometh.

Your instincts in not trusting Mr Bush are correct. Mr Bush made out with his own tax cuts. Mr Bush made his money by getting the citizens of Arlington, TX to fall for the ruse of raising taxes to pay for a stadium Then there were all his sleazy oil businesses that were bailed out by Daddy's rich friends. By all rights anyone signing onto a deal with an oily JR Ewing clone should have his head examined.

Posted by: bakho at January 12, 2005 06:42 PM

The bottom line is the only win here can be no action. Any compromise will set the grounds for future dismantling.

And -- let's be clear about this -- this issue has made it very easy to see the despicability of the GOP leadership and their, forgive my French, lackeys. If there were doubts, before.

If you're not alarmed now, then when?

Maybe this issue will become the critical overreach while there is still sufficient independent instititional strength available.

Posted by: smellslikeboo at January 12, 2005 06:56 PM

Very good point about the lack of insurance for those who don't work long enough, or at all. The same problem exists in a health insurance system tied to employment.

Regarding your comparison of GM's pension system to Social Seucrity, the big difference is that GM lacks coercive force. It cannot compel the public to give it money. The Federal government has coercive force. (It must have such force to be a real government.) As long as the government has the power to tax, it can legitimately make pledges that GM cannot make.

The law allows the Social Security administration reduce payments to beneficiaries to match inflows, I believe. Thus if nothing is changed, beneficiaries alive after 2042 (or 2052, according to the CBO, or even later, under a number of plausible scenarios) will receive something on the order of 68% to 77% of scheduled benefits, funded only by FICA payments in the same period. That is a more generous benefit than the plan floated recently by the White House, to index initial benefits to inflation rather than wages, seems likely to provide. If we take steps to avoid depletion of the Trust Fund, such as eliminating the cap on FICA earnings, raising the retirement age, or doing a better job of forcing shadow economy workers onto tax roles, then the odds are very good that everybody will get their currently scheduled benefit when they retire.

As for intergenerational fairness – we could means-test benefits. We could also consider that, as productivity continues to improve, those now in their 20s will have a far better standard of living in retirement, on average, than current retirees. At least we can hope so.

When the system was created, it was assume that those of working age would care for their elders, if they had the means. Fewer of us these days anticipate caring for our elders, but many still do. Our payments come home to us in the form of a check to mom and dad. Intergenerational transfer in the early days supported something that was already going on, with an element of insurance added in (an incomplete element, as you point out). Those without the good fortune of working offspring still had hope of keeping body and soul together. The problem of keeping body and soul together has been eased greatly over the years, but it still exists for many. Cutting the certain benefit is a very bad idea for the least fortunate workers.

Posted by: kharris at January 12, 2005 07:11 PM


If the difference between GM using its own bonds to fund its pension plan and SS using Treasury bonds is the government's power to tax, why is it that we need a trust fund at all. The government always has the power to tax, even in absence of the fund (as you point out).

If we eliminate the trust fund we could reduce the payroll tax (or adopt private accounts) and maintain the same level of benefits for today's retirees while reducing the burden on those working (not funding the trust fund would mean an increase in taxes, but some of those taxes come from non-wage sources such as capital gains, dividend income, corporate taxes, estate taxes, etc.).

Posted by: DCPI at January 12, 2005 07:29 PM

Re: taxing unrealized capital gains

In the current system, realized capital gains
are taxed, but you get a credit for realized
losses, and you can also carry forward those
losses to future years. As a practical matter
(rather than a political issue), it doesn't
seem any harder to deal with unrealized gains
and losses.

Furthermore, the exercise of stock options
already incurs an AMT tax liability on an
unrealized gain (which is how some people
suffered huge losses by exercising options on
dotcom stocks, and not selling before the crash).
So if that principle is "absurd", then it is at
least an absurdity which is already US law.

But anyway, the details of the tax aren't that
important at this stage - the principle is that
if equity investment is a profitable activity,
then the government can raise revenue by taxing
everyone who gains from it - or taxing it more
heavily than at present. And this seems easier,
less risky, and less damaging, than borrowing
trillions to buy stocks.

Posted by: Richard Cownie at January 12, 2005 07:32 PM

Yes, I hate old people. That's why I save and save and prepare for my own retirement, now knowing that I'll simply get a small chunk of SS because today's boomers won't pay more into the system.

I'm literally shoving old people onto the street because I'm a republican who thinks we should fix SS now rather than wait until all you boomers retire and THEN RAISE TAXES.

Posted by: Aaron at January 12, 2005 09:09 PM

What about returning to the income tax rates of the early fifties? Some would say they are regressive but I think that the infrastructure improvements, quality of life, and general ability to overcome market failures in education, health care, and so on could be firmly addressed.

Posted by: bigfoot at January 12, 2005 09:46 PM

If much of the privatized accounts should be invested in long-term treasuries, well, isn't that what it's already invested in? I view SS as part of my retirement savings along with my 401k. SS isn't there for me to retire rich, rather, it is there to guarantee I don't end up broke if my other investments don't go well or if I live longer than planned and use up my savings. I don't want two 401ks to manage. If SS is risk averse, which it should be, well, I have a private account to supplement that which I can make more agressive (in my case even a small portion of that is invested in bonds, so a partially privatized SS won't actually give me a chance to be any more agressive than I already could be). Bush's plan seems to me like having two 401ks to manage, except one is mandatory. If I were lower income and my only retirement investment were the amount provided by SS, well I probably shouldn't be gambling with it, whereas if you do have a supplementary retirement account, you can be as aggressive as you want with that, but for an (overall) well balanced retirement portfolio you should at least have your SS in safe investments.

Thought experiment I like to propose to those who favor partial privatization: I have a plan to fight the deficit. The government takes out some loans, invests it, and uses the returns on their investment to pay down the deficit. Why is theis a bad idea, and how is your plan to strengthen SS different/better than my plan to strengthen the rest of the budget? Also, keep in mind that your average pension manager gets better returns on their investments than your average 401k holder.

Posted by: Eric L at January 12, 2005 10:26 PM

Richard Cownie,

What you're suggesting makes a lot of sense. We tax income several times (federal income, state income, FICA), it makes sense to shift at least some of that burden to activities that aren't being taxed. Why not take the next stop and just put in a wealth tax?

Since states already tax real property, taxing financial instruments isn't illogical. I don't know if the Courts would allow a federal wealth tax-- there's certainly no way the present Congress would vote for it. The tax base is only getting narrower, when Congress does eventually raises taxes, it will only be on wage earners.

Posted by: beowulf at January 12, 2005 10:47 PM

I still don't understand why a portion of the CURRENT social security trust fund can't be invested by the government in index funds. If equity investment is the answer, why not do it now and directly?

Posted by: Russ Abbott at January 13, 2005 12:14 AM

"I still don't understand why a portion of the CURRENT social security trust fund can't be invested by the government in index funds. If equity investment is the answer, why not do it now and directly?"


[Because the Republican Congress in the late 1990s didn't want to do anything Clinton asked for?]

Posted by: anne at January 13, 2005 03:36 AM


Generally, the Trust Fund helps smooth out financing. It works like inventory, providing a cushion against fluctuations in demand (benefits payments). In the specific case of the baby boom generation, a higher rate of FICA withholding was imposed so that we could fund some of our own retirement, because our age cadre was so large that if we didn't contribute to our own retirement, it would have put an unhealthy strain on the next bunch of workers.

Posted by: kharris at January 13, 2005 04:54 AM

beowulf wrote, "We tax income several times (federal income, state income, FICA), it makes sense to shift at least some of that burden to activities that aren't being taxed. Why not take the next stop and just put in a wealth tax?"

Good idea. The only reason I can think not is that it might not be practical from the point of view of administering such a tax.

But a flax tax on wealth does have two great merits: (1) it follows the "ability to pay" principle, since the truest measure of ability to pay is wealth, not income; (2) it follows the "beneficiary pay" principle, since one of the great benefits of government is to allow the securing of private wealth, which wouldn't be possible in an anarchy.

Moreover, a flat tax on wealth would probably be more progressive than the progressive tax on income (not absolutely sure about that).

"Since states already tax real property..."

Yes, but it's screwy. The *best tax in the world* is the tax on the value of (unimproved) land. It's extremely equitable and efficient. So efficient, in fact, that it's one of the few taxes where the tax regime is *more* efficient than the regime without the tax. Yet the trend in real estate taxes is downward.

(Unlike these authors, I'm not a "geolibertarian"---more of a "geoliberal"---but these pages are very well written.)

Posted by: liberal at January 13, 2005 05:08 AM

Russ and Anne,

If we were to shift funds out of the Trust Fund, Treasury would have to cough up the money it has already borrowed. That would require raising the money from somewhere, all at once. That would draw attention to the size of the addition debt, which in turn could lead to calls for higher taxes. Since privatizing Social Security is a "good idea" but paying for the transition is a "bad idea" we mustn't do anything precipitous. So we'll run up the cost of transition over time, rather than all at once.

Posted by: kharris at January 13, 2005 05:11 AM

K Harris: I guess one of our differences is that I am part of the generation after tbe baby boom and I have been paying into the surplus my entire career ... at least half of my retirement will fall after 2042 (based on the actuarial tables). GenXers will pay for the "smoothing" on both ends.

Yes, investing the surplus into assets not associated with the US government (stock index funds) would be better than what we do now. Those assets need not necessarily be stocks, though, the Singapore Common Provident Fund, for example, invests its assets in real estate.

Posted by: DCPI at January 13, 2005 05:16 AM

SS private accounts are most appealing to the self-employed who (if they are paid on the books) must supply SS with 12.4% of income up to the maximum. SInce many of these self-employed have incomes under $70,000, their ability to divert much more than the 12% into retirement is limited. I can understand the push to allow private accounts for these workers. However, that could be better accomplished by restructuring the way SS taxes are collected than leaving the payroll taxes as is and allowing everyone to divert X% of wages.

Posted by: bakho at January 13, 2005 05:21 AM

I'm much like Brad -- I do not trust Bush, so even if it is a good idea I would have problems.

One point I have seen no one discuss is the basic assumption behind the projections. The projection have real GDP growth of about half the long term historic average but assume that stock returns will equal the long term average returns of about 10%. That seems to me to be a very unrealistic assumption. The only 20 year
period in US econ history that had growth under 2% were the periods that included the early 1930s depression. Stock returns that include that period were also way below the historic norm. I can see a low probablility that long run real gdp growth is only 1.7%, but if so profits growth will not be 7% and stock returns will not be 10%.

Just as an example from 1928 to 1948 real growth was 2.2% and stock returns were only 4.4%.

Discuss anyone?

Posted by: spencer at January 13, 2005 05:48 AM

I have been paying into the surplus my entire career - DCPI

Yes, as have many of the boomers (example-me. born in 1956, graduated in 1980, been paying the increase since 1984)

GenXers will pay for the "smoothing" ....

Not all of it. As boomer accumulated wealth is spent (much in the final years of their life) many GenXers will be there to profit and collect. That should help smooth things too.

Posted by: JackNYC at January 13, 2005 06:07 AM

spencer: You're right, I think even the advocates of private accounts admit (very quietly) that the returns from equity investment won't be enough by themselves to close the (hypothetical) funding gap, and that some kind of long-term benefit cuts will be needed. And if you think P/E ratios have an
upper bound, then total equity returns have to
track GDP growth - with high GDP growth, SS is fully funded, with low GDP growth, stocks don't help. Bush, for various ideological and tactical reasons, wants to have large private accounts and large future benefit cuts. The sleight of hand is in making people think it's the private accounts that fix the funding, and disguising the massive benefit cuts which amount to the destruction of SS in future decades.

Brad: on the question of property rights, it seems to me that any enhancement of property rights over SS funds has the same effect as taking money out of the system. For example, if your private account is bequeathable, then a) you can borrow against it and b) the money leaves the system if you die early. And from my earlier argument, allowing money to leave the system, other than to provide income to retirees, will force us to put more total money under the control of the SS system, and thus reduce overall freedom.

Posted by: Richard Cownie at January 13, 2005 06:18 AM

Have you read Atlas Shrugged by Ayn Rand of late? Greenspan admits to being a disciple of this novelist--whose books, interestingly enough, never include old people or sick people or children. Everyone's (read adults) either whiney and inferior, a member of the master race, or unjustly persecuted by the government (as Norquist would have it). So no, these people don't fancy that they're sick. . .they're merely utopian in their thinking.

Posted by: sylny at January 13, 2005 06:38 AM

"Richard Cownie's idea of taxing unrealized capital gains is absurd, unless we also refund negative taxes on unrealized losses."

It is no more absurd that the current practice of taxing only realized gains, and would avoid some distortions the current system creates.

Richard's ideas in this thread make a lot of sense. All of them.

There is also no problem with tax refunds on losses. It can be done by a minor modification to the current system - extending the period for offsetting gains indefinitely. Or it can be done by immediate refunds.

You may think it would make the budget deficit more volatile. It would, compared to the current system; but it would be economically fully equivalent to government holding equities (or forcing people to hold equities in their so-called personal accounts).

Posted by: enfant terrible at January 13, 2005 06:42 AM

"SS private accounts are most appealing to the self-employed who (if they are paid on the books) must supply SS with 12.4% of income up to the maximum."

It is no different with employees. The split between employer and employee has only accounting significance; the true economic incidence of the tax is independent of who nominally pays it.

Posted by: enfant terrible at January 13, 2005 06:53 AM

KHarris and Spencer

There is a serious structural government deficit, and any plan for Social Security such as direct investment of revenue in a total stock market index should not responsibly involve adding to government debt. As long as there is no chance for increasing payroll tax revenue, there should be no direct stock market investment of funds.

Social Security is in surplus and will be for another 13 years at least. If the economy grows at an historically viable rate there may "never" be a Social Security problem. With reasonable economic growth, the revenue stream will fund full benefits decade after decade. So, my wish is that we turn from Social Security to a more responsible fiscal policy.

The most significant threat to reasonable long term economic growth is a fiscal policy that builds impossible deficits. There is my worry, but we are only responding to policy initiatives rather than defining them.

Posted by: anne at January 13, 2005 07:19 AM

Anne: What investing the Social Security Trust into non-government backed securities would do would be to fund the promises being made to today's workers with properly valued assets (see my GM example above).

The follow-up question is why are we building a surplus at all (taxing GenX) when taxes can be used to fully pay SS benefits in the future (see kharris response at 7:11 PM above)? Were we hoodwinked by Greenspan in 1983?

If we are to treat GenX, GenY and the generation now in the crib fairly we should also recognize that the $2 trillion in transition costs is already "on the books" as a liability, so issueing new debt to cover it does not really change matters.

Posted by: DCPI at January 13, 2005 07:30 AM

Generating a surplus in Social Security for a generation was sensible because of the population ripple that has been caused by parents of the baby boomers. The surplus accumulated will begin to be drawn down in another 13 years, so we must be careful before changing investments. Debt matters when it grows beyond the rate of economic growth, and this is what will happen with government debt in coming years. We should then surely avoid new debt.

Posted by: anne at January 13, 2005 07:55 AM

enfant terrible: thanks!

The other part of the puzzle is the demographic problem of the baby boom. If we think there won't be enough workers 40 or 50 years from now, we can easily fix that by increasing immigration: there is no shortage of motivated well-educated hard-working young foreigners wanting to work in the US. In the 1990s we gained about 15M people by (legal and illegal) immigration. Boosting legal immigration by 0.5M/year could give us an extra 25-30M workers in 2050.

Of course that doesn't help if job growth remains anemic, but at some point surely we'll run out of Bushes ...

Posted by: Richard Cownie at January 13, 2005 08:54 AM

anne wrote, "Generating a surplus in Social Security for a generation was sensible because of the population ripple that has been caused by parents of the baby boomers."

Yes and no.

The move to a partly prefunded system makes sense in terms of program solvency, etc. But there's an equity issue. There's obviously a problem with the system not being prefunded. Question is: why should that problem be addressed/mitigated with payroll taxes and not general taxes?

Posted by: liberal at January 13, 2005 09:03 AM

Enfant terrible- if the employer share of the payroll tax were eliminated would every employee's wage go up 6.2% immediately? Of course not. Wages would go up slowly and raggedly if at all, and employers would fight hard to keep "their money."

Posted by: jr at January 13, 2005 09:45 AM

"So one's assessment of what the Bush Social Security "reform" plan is going to be must be more-or-less like this: it may look cute and friendly now, but it won't stay cute and friendly for long. Somehow--we're not sure how--it's gonna get mean. It's going to get ugly. And it's going to get stupid."

Dear Brad,

Are you by any chance ...

... a Galaxy Quest fan?

[Yes. The best Star Trek movie ever made]

Posted by: Crewman Guy at January 13, 2005 09:50 AM

jr wrote, "Enfant terrible- if the employer share of the payroll tax were eliminated would every employee's wage go up 6.2% immediately? Of course not. Wages would go up slowly and raggedly if at all, and employers would fight hard to keep 'their money.' "

Perhaps. But supposedly most economists agree that the incidence of payroll taxes falls almost entirely on the employee.

Posted by: liberal at January 13, 2005 12:53 PM

In the time it takes for us to fill out this thread to the requisite 200 or so posts, Bush will strong-arm the House, the Dems will squeak mightily and cave, and Soc. Sec. will be no more. Done, done and done.

Rove has built critical mass. Everything Bush does wrong or badly now only helps Republicans that much more. (Example: falling dollar hurting Euro while discouraging U.S. citizens from traveling to Europe and being infected with progressive heresies.)

Indeed, everything that goes badly in the entire world only helps Bushco. (Example: tsunami gives Jeb opportunity to kick off his '08 campaign, cause, you know, tsunamis are just like hurricanes.)

The only hope is a deus ex machina from outside. EU? China? Dunno, but it ain't gonna happen domestically. We are well and truly fucked.

Posted by: Jim J at January 13, 2005 01:57 PM

>In the time it takes for us to fill out this
>thread to the requisite 200 or so posts, Bush will
>strong-arm the House, the Dems will squeak
>mightily and cave, and Soc. Sec. will be no more.

For once this seems to be shaping up quite well for the Dems. Bush didn't give any details of his plan during the election, so his narrow victory gives him no mandate for it, and his current low popularity ratings don't help. The Repubs in the House fear a disaster in the 2006 midterms if they vote to gut SS without Dem support. The Dems for once are unusually united (even the DLC) and the craziness of Bush's plan to borrow trillions isn't going to persuade anyone. And now that Bush isn't running for re-election, the blind party loyalty is breaking up and the various factions of the Repubs are re-emerging - notably fiscal conservatives and NorthEast moderates.

Posted by: Richard Cownie at January 13, 2005 04:01 PM

Richard Cownie-I second that emotion

Posted by: anti-ditto-head at January 13, 2005 10:08 PM

There used to be someting in economics called the veil of money. Everybody forgot about it?

Let's assume that changing the Social Security system doesn't give a huge boost to the real economy. If it would, taking up debt and investing it in the stock market would as well.

Now, the amount of GDP used up by retirees in relation to that used by working citizens will rise in the coming decades. That is independent of whether the money comes from the government (current system) or from personal accounts (reformed system). Therefore, a system change will have no effect on the welfare of citizens in the future ;-]

Posted by: Jonny at January 14, 2005 10:09 AM

Jonny: *if* the effect of the reform was to guarantee that retirees in future decades would have the same (wage-adjusted) standard of living as at present, then your analysis might apply. It seems very likely from what we've heard so far that Bush will propose changes in the indexing of benefits which would amount to substantial cuts in the guaranteed SS payments to future retirees. In short, some of them would end up eating dogfood and dying of hypothermia. Probably the average share of GDP available to each retiree will be decreased; certainly the minimum share available to those whose "private accounts" do poorly will be decreased. And that's why we have to oppose this, both as Democrats and as humane individuals.

There is also an element of self-interest, because the retirees who end up eating dogfood might well be me, or my wife's cousins, or someone else I might feel obliged to support at my own expense.

Posted by: Richard Cownie at January 14, 2005 10:50 AM

The USA is not alone in social security problems; other countries have a worse situation like Germany, Italy or Japan.

My main point was that the stock market can not create wealth out of thin air; only if the new system is somehow more efficient, will it better the situation from now. My aim was not to insult the grounded worries of citizens, but rather "polemicize" against unlimited belief in the stock market.

Posted by: jonny at January 19, 2005 04:37 AM

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