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January 20, 2005

Newt Gingrich Denies That We Face a Social Security Crisis

From Bloomberg:

Americans are having more babies. The trend, combined with an annual inflow of immigrants that is more than the rest of the developed world combined, may undercut a key argument behind President George W. Bush's plan to allow private Social Security accounts: that the current system faces an emergency because of a sharp decline in the size of the future U.S. workforce.

Even Newt Gingrich, the Republican former speaker of the House of Representatives and a supporter of private accounts, says, ``The combination of higher birth rates and more immigration makes the United States the healthiest of developed nations. This is not a crisis.''

Posted by DeLong at January 20, 2005 07:15 AM


I think Gingrich's comment is mis-interpreted here and by TPM. What he means to say is that the population growth curve and other conditions that are leading to a SOCIAL SECURITY CRISIS are a good thing, even though they create that crisis.

He is saying we can solve the SOCIAL SECUIRTY CRISIS because economic health is not a crisis and can be used to deal with that.

Posted by: Alan at January 20, 2005 07:30 AM


Talk of Changing Pension Math Raises Concern on Benefit Cuts

AT&T, the once-mighty phone giant, has a pension plan with obligations of about $10 billion, according to its annual report for 2003. Yet the company paints a somewhat rosier picture for employees: an extrapolation from workers' individual statements indicates that the plan owes them roughly $10.6 billion, or 6 percent more.

There is nothing improper or unusual in AT&T's approach. Like many other companies, it uses two methods to calculate the value of its pensions: one to tell employees how much they have earned, the other to tell investors how large the company's pension liability is.

But that may soon change. The seeming discrepancy in accounting, which has been an accepted business practice for two decades, has begun to bother accounting rule makers, who say the practice allows companies to understate to investors the extent of their pension liabilities.

The panel that sets accounting standards is now preparing a proposal that would require many big American companies to give a more accurate financial picture of their pension plans. As a result, a number of them will have to increase the pension liabilities on their books, in essence telling investors that they owe their employees more than they have disclosed in the past.

"Depending on the company," said Gerard O'Callaghan, project manager for the pension review by the Financial Accounting Standards Board, "it could be nothing; it could be $10 million; it could be $100 million; it could be a billion; it could be more." The board is a nongovernment body that establishes rules for American companies.

While the amounts paid to retiring workers would not change immediately, some companies would have to increase their reported pension liabilities as much as 30 percent. To bring things back into balance, some may contribute more money to their pension funds - a boon to participants, but a jolt to shareholders, who may have thought that the money would be used for business operations. Other companies may delete attractive features from their plans, to bring the cost back down.

There is precedent for such a cutback. When a change in accounting rules forced companies in 1990 to report the value of the health insurance they had promised to retirees, companies began to reduce the coverage.

Posted by: anne at January 20, 2005 08:32 AM

Nice fudge, Alan. If Gingrich were saying what you purport him to say - then he should have said that. Instead he said social security is not in a crisis. Just as George Will said yesterday that the crisis talk was an "exaggeration". Back to the drawing board with you.

Posted by: Dan at January 20, 2005 08:35 AM

I am known in my office as the liberal and I am going to start collecting social security next month. When I started working in 1954 they said social security wouldn't be there when I retired. I am not retiring but the benefits of social security will make life a lot easier. I realize that the system is not bankrupt and that the benefits can be paid forever at present rates if the economy is as good in the next fifty years as in the last fifty years.
Having said that I think private accounts are a good idea. I know there is not a crisis, but if the accounts can be set up without cutting benefits now or in the future I think they would be a good thing. Taking money out of the payments of benefits is the problem.
For my four young (thirtysomething) children I think that their having a personal property interest in their retirement benefits would be good. It would mean that the benefits represented by the accounts could not be taken away later. Why isn't that desirable?
For those who are worried that personal accounts will dilute benefits I suggest the solution would be to give everyone today paying into social security a certificate creating a legally enforceable personal property right in the social security trust fund and all future payments into the system with the right to sue the government if necessary to collect from the trust fund retirement benefits as currently calculated based upon the total of that person's future contributions over their working life.
If each social security payee has a personal property right in the trust fund, the borrowing of public funds to pay transition costs and the putting the proceeds of that public borrowing into the trust fund would take care of most objections that there would not be enough money to pay benefits.

Posted by: Ed at January 20, 2005 08:50 AM

Ed: Huh?

Gingrich is right to say there is no crisis, but I wonder if he's saying this because he's still convinced of the "third-rail" nature of Social Security? If Democrats can be unified and make certain that Republicans own Bush's SS plan lock, stock, and barrel, the issue (along with terrible military adventurism, staggering deficits, and all the rest of Bush's legacy) will tar Republicans for generations to come. Gingrich may well see this coming, and is trying to build cover to help the few sensible members of the party drag the nutcases back from the precipice.

Posted by: Derelict at January 20, 2005 08:58 AM

We need more white babies and we're getting them; David Brooks said so.

Game of the Day for you, Anne:

(1) Take the Annual Report of a Dow 30/Russell 2K/Wilshire 500 company (the current S&P500 is shooting fish in a barrel, so try to avoid overlapping with those companies for the non-Dow picks)

(2) Examine the pension assets and expected liabilities in the context of either the first or second baseline Social Security assumption.

(3) Identify a company, calculating to infinity, whose pension assets and projected inflows do not cover 73% of their expected liabilities after a date LE 2052--the auto industry is a likely place to start, but HPQ isn't a bad bet.

(4) Communicate with the leaders of the firm (esp. President, CEO, and CFO) and their Board of Directors, noting that George W. Bush and Andrew Samwick have informed you the company is "bankrupt." Ask them how they dare sell stock or issue debt in that condition.

(5)Post on the bulletin boards discussing those companies--Yahoo!, The Motley Fool, thevault.com, etc.--about the company's impending bankruptcy.

(6) Turn that list of companies over to the Social Security BlogPAC so that people who work for those companies can be contacted and informed that, by "common knowledge," they face major cuts in both their Social Security and their company pension.

Posted by: Ken Houghton at January 20, 2005 09:01 AM

"I think private accounts are a good idea. I know there is not a crisis, but if the accounts can be set up without cutting benefits now or in the future I think they would be a good thing. Taking money out of the payments of benefits is the problem."

There is the problem; a problem that will not be solved after the tax cuts we have had without massive borrowing or cuts in Social Security benefits.

Posted by: anne at January 20, 2005 09:03 AM

> Alan. If Gingrich were saying what you
> purport him to say - then he should have
> said that. Instead he said social security
> is not in a crisis.

Of course all these politicians are always direct with their statements, aren't they?

Time will tell. Gingrich is on record favoring private accounts. He knows he doesn't need to add to the crisis -- he gets to paint himself with a veneer of realism and straight-shooterism this way. If you choose to believe that he wouldn't use a phony crisis to help move the idea along that's your business. Me, if I shake his hand I'm counting my fingers afterwords.

Posted by: Alan at January 20, 2005 09:40 AM

> For my four young (thirtysomething) children I think that their having a personal property interest in their retirement benefits would be good.

Well, encourage them to start a 401(k) if at all possible or open a conventional or Roth IRA. It would be better if they had started in their twenties of course. Unless they're literally forced by circumstances to live from paycheck to paycheck, there are plenty of opportunities for them to take charge of the bulk of their retirement benefits. If they cannot save, then they should be more interested in keeping social security intact for their retirement than in cutting its funding source through private accounts.

All of these arguments about private accounts really seem to be predicated on the assumption that most Americans are living from paycheck to paycheck and there is nothing they can do under current levels of taxation (including FICA) to save some money. Sorry, I just do not buy this. I have found money to save at every phase of my income-generating life, including as a grad student on a stipend.

This probably sounds insensitive, but the amount that could be siphoned from FICA into private accounts is chump change (a few thousand?). Most middle class households could create the same amount of additional savings with small lifestyle changes. They could put this into a Roth IRA and never pay a cent of additional federal tax on the gains.

Why do I think lots of people can save who don't? Well, first, it's a fact that you cannot live above your means forever, so we rule that out as an option. Such people eventually go bankrupt. Next, the probability that your salary precisely matches your minimum acceptable living standard is vanishingly small. Hence, it follows that people who are not headed for bankruptcy most likely have an opportunity to find a small surplus.

If Ed's kids are in fact headed for bankruptcy, then I'm sorry to hear it. But if they're just typical middle class Americans, I suspect that there are plenty of savings vehicles already available for their retirement.

Bush's plan does not address an actual gap in opportunities to save privately for retirement (there are plenty). Rather, it's a trojan horse for the eventual phasing out of social security as a defined benefit program. We need a defined benefit program to set a floor on retirement income regardless of one's ability to save. We also need to collect enough tax to keep it solvent. Beyond that, people should have the choice of investing even more for retirement--and in fact they already have that choice though a plethora of tax advantaged retirement programs.

Posted by: Paul Callahan at January 20, 2005 09:43 AM


Introduce your children to IRA's, 401(k)'s, SEP's, pension plans, savings acccounts and other means to save for the future.

Also let them know that depending on the government to create "private savings plans" through borrowing is an oxymoron (although a great way to buy politcal support for a fundamentally flawed plan).

I'm 47 and SS has already helped me - my siblings would have had to financially support my mother and father much more than we have if their SS benefits were lower - and my father was self-employed and paid both the worker & employer portions of SS. They used their excess savings to buy their home outright - another smart retirement strategy to pass on to your kids.

Private accounts already exist - and they are truly private - they are voluntary and have real market risk associated with them. SS creates a benefit floor to minimize (but not eliminate) risk.

Posted by: peBird at January 20, 2005 09:45 AM

I suppose you and the rest of your Al Queda supporting liberal friends want to want until the Social Security crisis comes in the form of a mushroom cloud. Lyin' traitors all of you!

Posted by: Kool Aid drinker at January 20, 2005 10:00 AM

Newt is one smart dude--to bad he is not a Democrat

What Newt is doing is establishing is viability, post Bush. He is doing such my picking some "conservative" propositions over others. One can, after all, be contradictory when one is in the minority, a luxury not allowed a majority. Therefore, Newt still has the recent past from which to pick and choose.

Today's papers had several stories on the strategic choice before the Demos, burnt ground or some other BS.

Newt implicitly points out what Congressional Democrats should do and that is exploit all the Republican contradictions. For example, we should oppose SS reform because of the $1 trillion in new debt--we need to borrow to go to War in Iran, instead, or buy more planes or bombers, or subs, or keep the Navy with 12 or 13 aircraft carriers

Posted by: Moe Levine at January 20, 2005 10:01 AM

Crisis? What Crisis? (Year, and Social Security Tax Rate) 1937 - 2%; 1950 - 3%; 1960 - 6%; 1970 - 8.4%; 1980 - 10.2%; 1990 - 12.4%. What next? Bump it to 15% to fix the minor problems? Seems to me that the system is taking up an ever-increasing portion of payroll. This is just one of the many problems with SS.

Posted by: Mcwop at January 20, 2005 10:03 AM

> Private accounts already exist - and they are truly private - they are voluntary and have real market risk associated with them. SS creates a benefit floor to minimize (but not eliminate) risk.

Yes, exactly. The private account discussion obfuscates the main purpose of social security. It's the segment of your retirement benefits that is not supposed to be subject to market risk--and consequently has a smaller upside as well. It's part of the safety net--a means of eliminating poverty among seniors, including those who couldn't invest their way out of a bag--and that's what Norquist crowd finds so offensive about it. They believe that abject poverty should be the inevitable consequence of poor financial planning.

But let me hang out my own dirty laundry here. Am I saying that I think people with little or no discretionary income should not be risking it in the stock market? Yes, I am. Am I saying that social security is (gasp!) a wealth redistribution program? Yes, I'm saying that too. Sorry. There is no libertarian utopia, unless your idea of utopia is watching a predictable (if small) percentage of people face the catastrophic consequences of their own poor judgment.

I think it's equally clear that there should be upside incentives to good financial planning, but I believe that the downside can be set a notch or two above squalid. Most people want to live better in retirement than social security by itself will allow them. That alone is incentive, and the current system of tax advantaged retirement accounts already provide enough flexibility.

Posted by: Paul Callahan at January 20, 2005 10:06 AM

Ed: you think money in private accounts can't be taken away by the government ? Just try a few years of high inflation (say 10-15%) and sure, you still have the same money, but it will only buy half as much. I grew up in the UK in the 1970s, so I still regard the current 2-3% low inflation as a freakish aberration, and fully expect much higher inflation in future when we have to confront the problems of the trade deficit and budget deficit.

Having locked in my mortgage at a 6% rate, I'm even slightly looking forward to it :-)

Posted by: Richard Cownie at January 20, 2005 11:07 AM

Ed, it sounds like what you're asking for is to give individuals a stronger property right in their existing Social Security benefits. Some progressives would like to do that by establishing an independent governing board for Social Security and allowing that board to put the Social Security trust into assets that cannot easily be raided by Congress.

That's quite different from the privatization proposals currently being debated, which would divert away from the Social Security trust and which would eventually phase out guaranteed Social Security benefits.

Posted by: Charlie at January 20, 2005 12:09 PM

Brad quotes: ...may undercut a key argument...

The right word would be "excuse".

Posted by: a at January 20, 2005 12:50 PM

George Will's solution to the alleged Soc. Sec. shortfall? More babies, that is, faster population growth. William Safire's solution? Have old people die sooner. I absolutely shudder when I hear folks like these who lack any analytical framework.

Posted by: pgl at January 20, 2005 12:59 PM

The meme that the govt can not touch your private account ignores the govts ability to tax. It has no basis in reality.

Moreover, if economic growth is really only one-half the prior record over the next 50 years stocks may not be worth much more in 50 years.

Posted by: spencer at January 20, 2005 01:31 PM

mcwop, you do understand, don't you, that that's only a tax rate up to an income ceiling (what is it currently, high 80s?). As a tax rate on earned income overall, social security, of course, is much lower.

now, i'm no friend of the regressive nature of the payroll tax, and i'm no friend of the anti-employment aspects of the corporate match, and i'd be perfectly happy to have a nice, considered conversation about the pros and cons of moving away from a payroll tax and towards another funding source - as long as it's within an understanding that there is no crisis.

Posted by: howard at January 20, 2005 03:45 PM

If you're following these comments, Brad, I'd greatly appreciate a decent analysis of these suggestions to fix the SS non-crisis. Problem, yes. Crisis, no.

1. Make the first $10,000 of income exempt. (Not part of the fix, but a good thing given what's happing to the working poor.).

2. Either eliminate the cap on income taxed completely or raise it to something along the lines of $250,000.

3. Raise the age for full benefits to 69 over a period of a couple of decades. Raise the age for receiving any benefits to 64 over the same time frame. Make an allowance for health issues on these age limits.

4. Since this is more of a general fund issue than a SS issue in reality reinstate the estate tax for all liquid assets over $10,000,000.

How far do you think those suggestions would go towards fixing things?

Posted by: Jim S at January 20, 2005 05:20 PM

"Gingrich is right to say there is no crisis, but I wonder if he's saying this because he's still convinced of the "third-rail" nature of Social Security?"

Actually Newt is being quite consistent in his statements. When he was Speaker, and my congressman, at a town hall meeting this was discussed and he told several hundred of us back then, do not worry about social security, it has been fixed. He is still saying the same thing today, there is no crisis, very consistent.

Posted by: me at January 20, 2005 07:01 PM

Howard, I am aware of the earnings ceiling. My point is that for people earning up to the ceiling, the SS tax is becoming a problem. It is a drag on labor, it crowds out the ability for states, and the federal general budget to raise taxes.

Basically, Social Security and Medicare are just beginning to crowd out funding for other government programs on a state and federal level. I think it is a crisis that is brewing. This was something Bill Clinton and Pat Moynihan understood very well. Medicare is in crisis right now. Whether Social Security is in crisis depends on what factors you consider. In ten years if the trust fund IOU's cannot be covered, then there may be a financial crisis. Those notes are coming due, and if the bond market cannot absorb them - then we have a problem. The general budget has no extra funds to cover it.
"I don't want us to run right out and spend it before we take care of the crisis in Social Security that is looming when the baby boomers retire,"
-Bill Clinton

Posted by: Mcwop at January 20, 2005 09:32 PM

Crisis? What Crisis? (Year, and Social Security Tax Rate) 1937 - 2%; 1950 - 3%; 1960 - 6%; 1970 - 8.4%; 1980 - 10.2%; 1990 - 12.4%. What next? Bump it to 15% to fix the minor problems? Seems to me that the system is taking up an ever-increasing portion of payroll. This is just one of the many problems with SS.

Posted by: Mcwop at January 20, 2005 10:03 AM
Before the 60's there were plenty of old people dependent on the government. Old people without money went to the county, state, or city old people's home, or got welfare 'on the county'.
The real social security tax rate was higher than 2%.
Welfare for young people is local. Welfare for old people is federal. This causes plenty of other problems I won't go into because it is not relevant to the discussion at hand.

Posted by: walter willis at January 20, 2005 10:24 PM

The hidden strength of Social Security is that in the end it is not their money, i.e. the holders of capital. George Will was rather precious in this regard in his column, admitting that the economic case against Social Security "crisis" was weak to the vanishing point, but arguing that we should still move to private accounts on a quote "philosophic" basis. Hey George, it is not your money and arguing that moving to a private account system that requires 10s of millions of Americans to make choices, and often uninformed choices, about the placement of some fraction of their pay into investment choices, incurring some level of administrative costs, and putting their actual return at risk of the market, all to satisfy your particular philosophic world view is a little narcissistic. We have a system where the average worker needs to do nothing at all. Where the enrollment transparently migrates between employers, where vesting doesn't require five years or ten years with the same employer but simply 40 quarters of employment over your working life.

For the overwhelming majority of participants this is a perfectly fine system. It offers guarantees against early disability or death and gives you the assurance that at the worst you will be able to avoid the pet aisle when buying your weekly groceries. Privatizers can argue their case and make their points with those making salaries approaching the caps, but they just don't have the numbers to show how those making less than $35,000 or so can benefit under any of their schemes. They just don't have numbers, they only have fear.

And as the crafter of Social Security once noted: "The only thing we have to fear is fear itself".

Scrapping a working system to satisfy the philosophical demands of George Will is a no-sale. Bring me numbers to show that this works for Joe Sixpack. "Time's up, pencils down". They just don't have the numbers.

This isn't rich peoples' money, they neither contribute or benefit in any significant way. As far as I am concerned they can just get the hell off of my lawn, because I am not afraid to blaze away at trespassers.

Posted by: Bruce Webb at January 21, 2005 05:02 AM

The supposed reason for the crisis is that the government will not be able to collect enough taxes from the workers of the future to buy back the SS trust fund's Treasury bonds.

I must confess to intense puzzlement that so many can believe the above while also believing that those same workers who can't afford the taxes to buy back the trust fund bonds will be able somehow to buy an even greater amount of stocks and bonds from retirees' "private accounts".

Ed writes, "...I think that [my children] having a personal property interest in their retirement benefits would be good. It would mean that the benefits ... could not be taken away later."

Since securities in a private account have only as much value as what they can be sold for in the open market when you need to sell them, there is no limit to how far their value can drop. There is no limit to how much can be "taken away" by falling market prices.

The question anyone investing in securities needs to consider very seriously is, "to whom am I going to sell?" If retirees greatly outnumber workers, and the workers don't have the physical and intellectual capital base to be highly productive, then they aren't going to be able to pay very much for the securities, regardless of whether the securities are held in public or private accounts.

Posted by: jm at January 21, 2005 06:02 AM


The Free Lunch Bunch

Did they believe they would be welcomed as liberators? Administration plans to privatize Social Security have clearly run into unexpected opposition. Even Republicans are balking; Representative Bill Thomas says that the initial Bush plan will soon be a "dead horse."

That may be overstating it, but for privatizers the worst is yet to come. If people are rightly skeptical about claims that Social Security faces an imminent crisis, just wait until they start looking closely at the supposed solution.

President Bush is like a financial adviser who tells you that at the rate you're going, you won't be able to afford retirement - but that you shouldn't do anything mundane like trying to save more. Instead, you should take out a huge loan, put the money in a mutual fund run by his friends (with management fees to be determined later) and place your faith in capital gains.

That, once you cut through all the fine phrases about an "ownership society," is how the Bush privatization plan works. Payroll taxes would be diverted into private accounts, forcing the government to borrow to replace the lost revenue. The government would make up for this borrowing by reducing future benefits; yet workers would supposedly end up better off, in spite of reduced benefits, through the returns on their accounts.

The whole scheme ignores the most basic principle of economics: there is no free lunch.

There are several ways to explain why this particular lunch isn't free, but the clearest comes from Michael Kinsley, editorial and opinion editor of The Los Angeles Times. He points out that the math of Bush-style privatization works only if you assume both that stocks are a much better investment than government bonds and that somebody out there in the private sector will nonetheless sell those private accounts lots of stocks while buying lots of government bonds.

So privatizers are in effect asserting that politicians are smart - they know that stocks are a much better investment than bonds - while private investors are stupid, and will swap their valuable stocks for much less valuable government bonds. Isn't such an assertion very peculiar coming from people who claim to trust markets?

Posted by: anne at January 21, 2005 07:27 AM


Bush Makes False Claims About Social Security: John M. Berry

Jan. 21 (Bloomberg) -- President George W. Bush's assertions that Social Security faces a crisis and is ``flat bust, bankrupt'' are patently false.

Bush and other administration officials are greatly exaggerating potential problems facing the program to push through changes that would undermine the most successful social insurance program in the nation's history.

The system is so far from crisis or bankruptcy that the truly prudent course at this point most certainly would be to make no changes in Social Security at all. Wait and see if even under conservative assumptions the date at which the system's trust fund would be exhausted keeps receding.

Posted by: anne at January 21, 2005 07:44 AM


"For my four young (thirtysomething) children I think that their having a personal property interest in their retirement benefits would be good. It would mean that the benefits represented by the accounts could not be taken away later. Why isn't that desirable?"

It is desirable for pension savings, and it is how it works now. It is not desirable for a social insurance program, however.

Social Security is not retirement. It is only the floor of protection, the bare foundation of retirement. The money you get out of it is supposed to have only a weak connection to the money you put in.

But even if what you suggest were desirable, it would not be meaningful. If the benefits were risky, dependent on the random walk of financial markets, what exactly would it mean that they "could not be taken away"?

Posted by: enfant terrible at January 21, 2005 10:47 AM

We'll have to roll over practically all of the publicly held debt a couple times before we even start to pay out the interest on the SS trust fund.

The SS trust will accumulate $3.5 Trillion more of assets before the first penny of interest gets paid out.

If we were to adopt "Plan II", we'd accelerated 2018 to today - we'd start paying more out of the SS trust than comes in - and the trust would go bust about 15 years earlier than if we do nothing at all. Then, we are told, general revenues would continue to subsidize Social Security benefit payments for another 20+ years - mind you, at reduced levels from current promises - before the first year when SS finances are projected to be better than doing nothing at all.

Not to worry, though; in the out years (long after 2050), payroll tax revenues are projected to be enough higher than benefit payments that payroll taxes are supposed to pay back all of the transitional debt racked up as general government obligations.

It's hard to believe that the same people that tell us we won't be able to pay SS benefits as early as 2018 also tell us the solution to that problem is for the government to go another $15 Trillion into debt, beginning this year, and continuing all the way out to about 2050.

These are the same folks, too, who tell us it's not a problem that the govt spent more than $1.40 for each buck of revenue the past two years, on budget.

Posted by: Charlie at January 21, 2005 10:51 AM

Ken Houghton:

Companies' pension plans are valued on a "closed group" basis: only those already covered count. This makes sense, as no promise, implicit or explicit, has been made to future workers. The management can eliminate the defined-benefit pension plan for all new employees, and it doesn't even have to worry about political consequences: no one affected gets to vote on that. None of this is true of government plans.

Posted by: enfant terrible at January 21, 2005 10:54 AM

Jim S:

"How far do you think those suggestions would go towards fixing things?"

A negative length.

By exempting the first $10,000, you are losing roughly 30% of the current tax base. By eliminating the cap, you gain 15% at best. This is a huge drop in revenues that far outweighs any gains from estate tax and any savings from your benefit cut.

Posted by: enfant terrible at January 21, 2005 11:09 AM

Bruce Webb:

It seems to me that George Will is a communist. I don't know what else to call someone who calls for the government to force sweeping social and economic reforms on a philosophical basis.

Posted by: enfant terrible at January 21, 2005 11:15 AM

enfant, that is what I was wondering. Of course it's also why I mentioned a restoration of the estate tax. Unless they're really going to take SS out of the deficit calculations we might as well go all the way in terms of integrating it.

Posted by: Jim S at January 21, 2005 04:56 PM

[comment spam]

Posted by: at February 7, 2005 06:20 PM