Is Social Security really just all fine, its alleged demise a crazy Republican talking point? Matt's accusation echoes a number of the ones that I've seen on liberal blogs:
The Post even includes bonus inaccuracy:Because Social Security increases are pegged to wages, rather than inflation, economic growth alone won't solve the problem. Fiscal responsibility first is fine; fiscal responsibility only is an irresponsible dodge, as Ms. Clinton well knows.This is just wrong. Social Security benefit increases are, indeed, partially tied to wage rates but it's still true that the faster the economy grows the more affordable promised benefits become. Indeed, that's the basic premise of pay-as-you-go financing of social insurance schemes. The relatively poor present borrows from the relatively rich future. All the Post would need to do is to look back at past SSA Trustees' Reports and they would see that when the economy grows faster, the outlook for Social Security's finances gets bigger. They would also see that if the SSA updated its projections of likely future productivity growth to reflect the post-1995 return to pre-1973 levels of high productivity growth, that the alleged financial problems would substantially diminish.
It may (or may not) turn out that, in fact, the economy does not grow fast enough to close the financing gap. But this isn't a logical fact about the nature of the program, it's a contingent hypothesis that the Post seems to be subscribing to even though its editorial writers don't appear to understand what the hypothesis is or how Social Security works.
But I don't think this is right. Start with the unfortunately common meme that the Social Security administration's claims have historically varied. Yes, they have, but not lately. The SSI trust fund figures did grow for a few years in the late 1990s, due to a combination of changes in assumptions about labor force participation, productivity, birthrates, and average wages. But since 2002, the dates for the trust fund exhaustion have fluctuated around a rough mean of 2040.
And though the long term projections have gotten somewhat better as a result of improving fertility, the short-term projections have gotten slightly worse. Ten years ago we thought that program income would fall below program outlays in 2019; now the projected date is 2017. Meanwhile, the estimated year in which the social security surplus will peak has also moved steadily backwards, to 2010. In 2011, a small hole will appear in the general fund budget as OASDI revenues start to decline, a hole that will become a gaping wound by 2020. From the Social Security Administration's perspective this is fine, but from the taxpayers perspective, this is a huge problem that needs to be, well, fixed--and from which economic growth is unlikely to rescue us.
More broadly, Matt's criticism of the "economic growth won't save us" argument seems to misstate the underlying changes that drove the improved predictions. If you actually look at the difference between the assumptions in the 1997 trustee's report and those in the 2001 report, you'll see that the improvement in assumptions came only in part from real wage growth (a decent proxy for productivity). More of it came from changing assumptions about birthrates, unemployment rates, and the interest rate that the SSA collects on its assets. But unemployment rates can't just keep falling forever, particularly since the Baby Boomers are our largest generation, and older workers tend to stay unemployed longer. Likewise, birthrates could shoot up, but demographics is a slow-motion train wreck; to fix things in 2041, you'd have to be having the babies to fund it right now, so they have time to get out of college and get some work experience. We aren't. Indeed, the latest data from the census bureau show that the birthrate for child-bearing women fell slightly in the early part of this decade. Meanwhile, death rates never seem to reach that much promised plateau, making the problem worse.
If economic growth were going to save us, it should have while we were paying for the unusually small age cohort that preceded the boomers. If productivity growth could save Social Security's finances, we should have seen it push back the date at which the government starts paying out more in OASDI benefits than it takes in in taxes. Instead, the reverse is true.
I personally think that we need some form of private accounts and slowly ween SS from a pay as you go to a funded trust fund.
The objections that you can't trust folks to invest their own money don't ring true--simply establish investment rules similar to the rules that prudent trustees (bankers) use in making investments for their clients. You know, nothing less than AAA, AA, or A grade investments. That eliminates a lot of risk right there. Or even mandate that all investments have to be in US government bonds!
The key is to make SS self-funded rather than government funded. We'll have to do it sooner ot later, and expensive as the transition will be, it'll be cheaper the sooner we do it.
Bingo! When the spending that has been funded by SS surpluses can't be done that way anymore, is when congress will notice it has a problem.
Well, that was depressing. Now you're going to tell me that McGriddles are bad for me.
The trouble with investing the "trust fund" (or personal accounts) in US government bonds is that those bonds will be satisfied from the same resource -- tax receipts -- as will the currently unfunded social security benefits. As a practical matter, the social security program will be bankrupt in less than 10 years. At that point, the trustees will still have plenty of IOUs from the government to cover the expected shortfall in social security taxes. However, from the taxpayers' perspective, it will be as if the "trust fund" had nothing in it. The only way the Treasury will be able to satisfy the IOUs will be to use general tax receipts (or to sell more debt). The social security program will be in the same position it would have been in had the social security surplus been spent as part of the general budget rather than invested in government IOUs -- it will need Treasury to give it the money necessary to cover the shortfall in cash receipts.
Except that my real rate of return will be much higher under a private account, even if invested in US government bonds. And as a bonus, Congress won't be able to spend the surplus!
David Walser wrote: The only way the Treasury will be able to satisfy the IOUs will be to use general tax receipts (or to sell more debt). The social security program will be in the same position it would have been in had the social security surplus been spent as part of the general budget rather than invested in government IOUs -- it will need Treasury to give it the money necessary to cover the shortfall in cash receipts.
Ssshhhh...that's actuary talk. And when we find actuaries, we crucify 'em for pointing out the obvious, because these IOUs are signed by The Government! And The Government is a trustworthy fellow who always pays back his debts!
...or something like that.
Rex,
Yes, your real rate of return would be higher if you were allowed to invest "your share" of the social security tax stream -- even if you invested in T-bills. My point is a different one. You can't improve your current or future solvency by making yourself a loan. Neither can the government. Can you improve your future solvency by investing a portion of your current cash flow? Yes, but not if your "investment" is in the form of a debt to yourself. It doesn't matter whether you promise to pay interest of 5%, 10%, or even 25% on your debt to yourself. Your future financial position will not improve with such an approach.
This is what the federal government has done with the social security surplus. It's spent the surplus and written itself a series of IOUs. When those IOUs come due, the system will be bankrupt.
I think it's worse than people think, given that we are going to have a Social Security shortfall, combined with the negative savings rate and the fact that a lot of people were planning on using their homes as their retirement, and those houses are losing value every day.
MY is correct. Once you start receiving benefits they are indexed to prices not wages. This means if wage rates were to double tommorrow (with constant prices) SS taxes would quickly double also while benefits paid would only double over a period of many years (as existing retirees were replaced with future retirees). This would obviously improve the solvency of the system. With a less drastic increase in wage rates the effect still exists although it is smaller. So faster than anticipated wage growth (relative to price growth) does in fact improve the solvency of the system.
"In 2011, a small hole will appear in the general fund budget as OASDI revenues start to decline, a hole that will become a gaping wound by 2020. From the Social Security Administration's perspective this is fine, but from the taxpayers perspective, this is a huge problem that needs to be, well, fixed--and from which economic growth is unlikely to rescue us."
A huge problem compared to what? How many (stupid and pointless) Iraq Wars does it amount to? Some perspective please.
James B. Shearer writes: "A huge problem compared to what? How many (stupid and pointless) Iraq Wars does it amount to? Some perspective please. "
Precisely. Social Security is supposed to be in huge trouble, and universal health care is impossible, according to every last Repiglican in the country, but the morons have no qualms about throwing away a couple of trillion dollars on a pointless war against a country which was no threat to us.
(And yes, the eventual full price tag for the Iraq fiasco will be at least $2 trillion.)
So when Repiglicans and their so-called "libertarian" compadres make such damned stupid arguments, just point at them, laugh, and pass gas. You're not dealing with rational human beings, you're dealing with demented party-owned fools.
Reminds me of the guy falling off of a building saying "I'm ok so far." as he passes each floor on the way down.
"Except that my real rate of return will be much higher under a private account, even if invested in US government bonds. And as a bonus, Congress won't be able to spend the surplus!"
It doesn't matter whether a U.S. Treasury bond is in your brokerage account or the the Social Security Trust Fund: once the bond is bought from the Treasury, Congress is able to spend the money you (or the SS Trust Fund) used to buy the bond; from the perspective of tax payers and the federal government, U.S. Treasury bonds are liabilities that need to be paid back in the future, not assets that can be drawn on.
"A huge problem compared to what? How many (stupid and pointless) Iraq Wars does it amount to? Some perspective please."
As of this year, about four and a half Iraq/Afghanistan wars. The supplemental for those wars was about $120 billion for 2007, and we are spending about $580 billion on Social Security this year (up 7% from '06, as SS spending has been growing faster than the rate of inflation).
As an aside, it seems there is almost a willful innumeracy on the part of Matt and other lefty bloggers when it comes to entitlement programs. It's hard to support Santa Claus party policies when realize how unsustainable they are.
Private accounts solve nothing.
The problem is too many boomers guaranteed too big a slice of GDP. Taking money from the Social Security Administration and putting into the stock market won't make the GDP any bigger.
What you will end up with is a replay of the South Sea Bubble -- government annuities used to capitalize private enterprise ultimately bringing nothing but tears and recriminations. (The parallels between Social Security privatization and the South Sea Bubble has been mentioned in print by Niall Ferguson, who absolutely stole the idea from me in an in-class discussion at NYU in 2000. He's a nice man though -- I hold no grudge.)
You don't need private accounts to start investing the (temporary) Social Security surplus in stocks; it can be done at the trust fund level in a pooled account, as Clinton had briefly proposed during his presidency. Increased investment in equity markets can grow the economy, by providing capital that companies can use to hire more employees, conduct more R&D, build new factories, etc.
There is another benefit of investing the surplus in stocks though (or any asset other than U.S. Treasury securities): the federal government won't be able to spend the surplus as it comes in (as it does now, since Treasury bonds are loans to the government). This will require Congress to raise taxes or hold down spending in order to make up for the budget shortfall without increasing the deficit.
Fred, my question concerned the portion of SS spending which won't be covered by payroll taxes and may have to come out of general revenues. How many Iraq Wars is that?
". . . a pointless war against a country which was no threat to us."
Read some history. Study some geography. Learn a little geopolitics. Once Bush declared the War on Terror, invading Iraq was obvious (at least to those of us who have a little knowledge of military history and/or served for awhile in the military.) So disagree with the war on terror all you want; just don't think for a moment that going into Iraq was pointless.
We don't have to worry about social security because there is no such concept as supply side economics. Tax rates will have no impact on the behavior of people who work.
Therefore, all you need to do is raise the tax rate on workers.
Answer to James Shearer; At least 2 1/2 to 5 Iraq Wars, probably much more.
I'm assuming your 2 trillion estimate for the Iraq War (past and all predicted future expenses -- including damage to soldiers and economy) is the Bilmes/Stiglitz study; which actually says 1 trillion on the low end to 2 trillion on the high end.
The short term SS problem is that the General Fund will need to repay the SS Trust Fund, starting in 2018. From 2018 to 2042 we will need to come up with 5 trillion extra in General Revenue to pay the trust fund. So 2 1/2 to 5 Iraq Wars.
In 2042 the trust fund is repaid at which point we either pay SS benefits at the grossly reduced level of whatever 2042 SS taxes provide, or we raise funds to continue providing the scheduled benefits. To provide scheduled benefits from 2042-2072 or so; would cost roughly 20 trillion dollars or 10 to 20 Iraq Wars.
Finally, your tu quoque has little force against people who agree that the Iraq War has been a disatorous mistake, but also think we need to determine how to solve SS.
Taking money from the Social Security Administration and putting into the stock market won't make the GDP any bigger.
What *would* make GDP bigger?
What do you believe causes growth?
What about per-capita GDP growth? I'd say that's more important since it's the ratio to SS recipients that matters.
What causes per-capita GDP growth? Greater spending on public works (net of their cost of course)? Unions? Higher tariffs? Higher taxes on the wealthy? Better law enforcement?
And if you believed such a policy would increase per capita GDP growth, would you advocate using SS funds to that end in order to keep SS solvent?
I'm curious.
"Ten years ago we thought that program income would fall below program outlays in 2019; now the projected date is 2017."
Uh, let's think a second here, shall we?
"Ten years ago" it was 1997. So in 1997 we thought we had until 2019. That's a 22-year cushion.
Now it's 2007 and we estimate there's a cushion until 2017. That's 10 years.
22 years to 10 years of breathing space in the span of a decade.
This is not "slightly worse."
By the way, I've seen this error made ALL OVER THE PLACE, so you aren't alone.
JBS and ML&J, thanks for the insight of "Oh yeah, well republicans do stupid things too!" Does it matter what the spending is relative to the war? By the way, ML&J, most libertarians opposed the war. See Ron Paul, et. al.
It seems to me that SS should be judged on the costs and benefits of, um, SS. How many years will we hear lefties defending stupid, defunct policy ideas by saying "Oh yeah, well the Iraq war was stupid and expensive, so why can't we do something stupid and expensive?!?"
I think this administration has been horrible, and the tiny amount of political capital that the dems have managed to hold on to in my opinion will surely be gone if they try to defend one more stupid idea using the "it's less expensive than Iraq" argument.
Surprising that no one suggests the personal responsibility of saving for one's own retirement. Barring calamity (the original reason for SS, I believe, was for widows), there's no reason a person that starts saving in their 20s won't have a very comfortable retirement but for an 'average' wage earner, the person just might have to forego that Lexus in their 30s.
I don't get it. If the social security trust fund is and accounting fiction, then there is no social security crisis. It just another government program that, at this point in time (and throughout its history) has been more than paid for by a dedicated payroll tax. And of at some point the dedicated tax doesn't cover all the costs of the program, who cares? Most government programs are paid for even though they don't bring in money that cover all their expenses. Like, say, defense spending or the office of faith based initiatives.
But if the trust fund (invested in t-bills no less) is separate from the general funds, then they aren't worthless "IOU"s.
I guess I don't see how you can claim that both (a) the trust fund is an accounting fiction and (b) social security will be insolvent. The claims have a logical contradiction in them.
In any case, if you actually go to social security's website and you read the independent actuarial proposals on long term solvency, you'll see that it isn't going to be a huge problem to correct the long term issue. Like, say moving up the retirement age from 65 to 67. And before you start screaming about not being able to enjoy two of your golden years, this would only impact people born the year after such legislation is enacted.
The Greenspan commission (appointed by that well known commie pinko liberal Ronald Reagan) created the trust fund to deal with precisely this issue. I would think Republicans, of all people, would have more faith in the program.
This is what the federal government has done with the social security surplus. It's spent the surplus and written itself a series of IOUs. When those IOUs come due, the system will be bankrupt.
This is only really true if the Social Security Surplus caused spending to be higher than it otherwise would have been. I doubt that. For example, would the Iraq War not have happened if Democratics forced Bush to lower the SSI tax at the beginning of his first term so that the surplus was wiped out? Probably not.
If spending is not impacted by the SSI surplus then what the surplus does is lower borrowing today by the gov't which has two impacts:
1. It lowers interest expense today and tomorrow by taxpayers.
2. It increases private investment today.
While it's pretty hard to say whether or not these benefits will offset all the future expected costs they are there.
You don't need private accounts to start investing the (temporary) Social Security surplus in stocks; it can be done at the trust fund level in a pooled account, as Clinton had briefly proposed during his presidency. Increased investment in equity markets can grow the economy, by providing capital that companies can use to hire more employees, conduct more R&D, build new factories, etc.
Listen carefully, the parts cannot grow faster than the whole. In other words stocks are not some type of magic machine that grows at 10% while the economy grows at 3%. At the end of the day all the returns added together must net out to the overall economic growth rate. Think about it, if they didn't then where are the goods and services going to come from? One of the reasons stocks are at 10% today is that bonds are at 2% BECAUSE the SSI trust fund effectively is investing in bonds. If you did the reverse you would see the return on stocks drop and bonds increase.
Surprising that no one suggests the personal responsibility of saving for one's own retirement. Barring calamity (the original reason for SS, I believe, was for widows), there's no reason a person that starts saving in their 20s won't have a very comfortable retirement but for an 'average' wage earner, the person just might have to forego that Lexus in their 30s.
Last I heard we do have private accounts. Did I miss the news story where savings accounts at banks were abolished? Perhaps I also missed the newstory where they outlawed 401K's, IRAs, Roth IRA's, educational IRA's, medical savings accounts you can roll over and so on. Contribution based plans are great but let's face it, many people will not utilize them correctly and even those that do are unlikely to be so rich at 65 that they can just ditch their social security check. David Gross over on Slate.com does a nice piece looking at the personal financese of politicians. He noted that Britt Hume basically 'forgot' to put anything in his 401K even when he was pulling in big bucks at Fox News and they had a generous matching program. If someone as informed as he supposedly is (and, because of his high tax brackett has every incentive in the world to take every advantage of all opportunities to lower his income tax expense) screws it up why wouldn't millions of other Americans?
You get to design a policy to accomodate human nature. You don't get to design human nature to accomodate your favorite policy. Social Security is a great idea as it is. A baseline form of forced savings that keeps people from being totally impoverished when they are too old to work anymore. It has become even more important as Americans have become financially sophisticated. As many now take on the risk of holding assets like real estate, stocks, bonds etc. SSI balances out the portfolio since it is riskless to the individual (by that I mean you get the check whether or not your stocks have done well, it's the gov't and everyone else that takes the risk of fixing things if tax revenues come up short).
szr wrote: I don't get it. If the social security trust fund is and accounting fiction, then there is no social security crisis. It just another government program that, at this point in time (and throughout its history) has been more than paid for by a dedicated payroll tax. And of at some point the dedicated tax doesn't cover all the costs of the program, who cares? Most government programs are paid for even though they don't bring in money that cover all their expenses. Like, say, defense spending or the office of faith based initiatives.
Except for one small problem: Social Security's dedicated payroll tax IS the source of revenues that pay for things that don't pay for themselves. When Social Security can no longer pay for itself, something big has got to give.
szr wrote: But if the trust fund (invested in t-bills no less) is separate from the general funds, then they aren't worthless "IOU"s.
And where will the funds come from to pay back those borrowed t-bills? It's an accounting fiction of the Enron variety. Hence my sardonic comment earlier about crucifying actuaries.
Look at it this way: suppose you have $50 in your left pocket set aside for groceries, and $20 in your right pocket for a DVD purchase. On the way to the grocery store, you discover three DVDs you want to buy. If your right hand borrows $40 from your left pocket, writes left pocket an IOU for payback of $40 from right pocket, and spends $60 on DVDs...then tell me, what can you buy with $10 and a $40 I-owe-I note at the grocery store?
Patrick Sullivan:
Excellent post! All this debate about whether or not the trust fund is real - is besides the point. Soon (2011?), we're going to have to deal with the fact that there won't be 'excess' payroll taxes to subsidize other spending. The IOUs we've written to ourselves won't help make up the difference. We will have to either increase revenues, decrease spending, or increase the deficit to compensate -- and not just by a little bit. Trust fund exhaustion is a meaningless date. Payroll taxes going from lots of black to no black to lots of red is going to hurt.
TomO, the $2 billion estimate is not mine. I am not asking about totals over all time but the annual budget impact compared to the annual impact from SS drawing down the trust fund instead of building it up (which is what McArdle was claiming would be a "gaping wound" in her post).
As for:
"Finally, your tu quoque has little force against people who agree that the Iraq War has been a disatorous mistake, but also think we need to determine how to solve SS."
I prefer to pick the low hanging fruit first. Withdrawing from Iraq would save $200 billion a year for free.
Rex lectures: "Read some history. Study some geography. Learn a little geopolitics. Once Bush declared the War on Terror, invading Iraq was obvious (at least to those of us who have a little knowledge of military history and/or served for awhile in the military.) So disagree with the war on terror all you want; just don't think for a moment that going into Iraq was pointless."
I don't just think it for a moment, chuckles - I think it continuously. Your Great Leader made a Stupid Move and it continues to be a stupid move. It wasn't his only Stupid Move, just his biggest one. Your stunningly stupid and condescending reply notwithstanding.
I like the "served for awhile in the military" line, though. Yeah, that certainly qualifies you to declare wars necessary.
Sheesh.
"Like, say moving up the retirement age from 65 to 67."
That's already been done. It's being phased-in, but suffice it to say that Megan and Matt and most of their readers will be eligible for full SS retirement at 67, not 65. This was one of the changes instituted by the Greenspan commission in the '80's. Another was to essentially double the Social Security payroll tax. Speaking of which...
To get an understanding of where Social Security is headed, do a little research on how the tax to fund it has evolved. If memory serves, originally FDR set the Social Security tax at 1% from the employer and 1% from the employee on the first $3k in wages.
One argument that I never seem to hear in these debates is that the current payroll taxes were added with the promise of a general level of yield. They were not increases in income tax but are instead targeted deductions paying into what amounts to a government run pension plan.
I think that if the pension plan is in trouble (due to gross mismanagement or unsustainable promises), this has to be put into the same category as any pension plan having these issues. More precisely, if a person has paid social security taxes for 45 years and is planning in this revenue as a part of their retirement plan then we have a obligation as the trustees of the plan to make "Sorry, we screwed up the calculations" a step of last resort.
After all, IRAs are relatively small ($2,000/year or so is a awful small rate to be saving) and it is not like I have the option to invest my FICA taxes in an account instead.
mike, I am not a leftie or a fan of the democrats. The way to improve the budget picture is to cut spending. If you want to cut spending the Iraq War is the obvious place to start. It costs a large amount of money which is being completely wasted and it is politically unpopular. When people claim to be concerned about something and then ignore easy fixes one suspects a hidden agenda.
James Shearer; Fine, I want to withdraw from Iraq too, although mainly for reasons other than the budget. Nonetheless, the withdrawal savings don't come any where near solving our SS problem. So derailing the discussion of this problem to point out that the Republican party is monumentally stupid on a collateral issue is counterproductive; unless its only about scoring partisan points.
I don't disagree with your larger point, James. I just don't want every policy discussion to devolve to an argument about Iraq.
I'm all for pulling out of Iraq but am also concerned about the future of social security and the environment and a few other issues.
Tom O,
Aren't we up to nearly a trillion dollars on the Iraq War by now? Back when Bush was trying to sell trashing SSI we were being told we must do something about SSI NOW NOW NOW NOW! Yet we amazingly came up with a trillion dollars to toss down the drain over the next five years or so.
'Saving SSI' requires nudges and that's about it. In the long run it is probably in better shape than most other large gov't plans. I would be much more concerned about Medicare.
If you want a plan, though, here's one. Keep SSI and establish a 'forced savings' system. You put, say, 3% of your pay into an account and you can't touch it for 5 years. You can put more if you want or you can substitute 401K/IRA contributions instead. This would replace unemployment insurance.
After 5 years you can tap your balance (the portion older than 5 yrs) for any reason you want but every dollar going in has to sit for 5 years. Like a 401K you can direct the funds as you wish within reasonable limits. You increase the savings rate with funds that can be dedicated for medium to long term investment.
Unlike unemployment today, everyone would have a nice fund they could tap should they become unemployed or suffer some other problem. The more you work and hold off tapping the fund, though, the bigger it gets. True some people can zero out the fund long before they turn 65 but most people will use it to build long term savings. Unlike a 401K, though, its not like any money you save is 'lost until you get really old'.
You also get the best of both worlds. You have a defined contribution plan for everyone as well as a defined benefit plan.
MoeLarJ wrote: I don't just think it for a moment, chuckles - I think it continuously.
And again with the bizarre slurs and the spit-talking and impotent invective against exagerated enemies. It's like watching a 1940s Donald Duck cartoon.
Boonton:
"Listen carefully, the parts cannot grow faster than the whole. In other words stocks are not some type of magic machine that grows at 10% while the economy grows at 3%. At the end of the day all the returns added together must net out to the overall economic growth rate."
If you are saying that annual stock market average returns can't exceed the average economic growth rate, this is demonstrably false. Compare average stock market returns over the last 70 years with average U.S. GDP growth rates over that time period. According to Wharton Professor Jeremy Siegel's formulation ("Siegel's Constant") average annual stock market returns correlate with the sum of the average economic growth rate, the average dividend payout of stocks, and the inflation rate. This seems consistent with long-term past returns and is, by definition and historical evidence, significantly higher than the long term economic growth rate.
"One of the reasons stocks are at 10% today..."
Stocks aren't "at 10%" today; the average annual return of broad stock market averages over the last 70+ years is approximately 10% (higher, for smaller stocks). This number includes periods where bonds outperformed stocks. It even includes periods when stocks were so unloved versus bonds that stock dividends were higher, on average, than bond yields.
"... bonds are at 2% BECAUSE the SSI trust fund effectively is investing in bonds. If you did the reverse you would see the return on stocks drop and bonds increase."
This is specious. All things being equal, the returns on stocks don't go down because more money is being invested in them. And certainly the returns on bonds don't go up when fewer investors are buying them. Like all things, securities tend to go up in price when there are more buyers. To the extent that investing the SS surplus in stocks instead of bonds decreases the demand for U.S. Treasury securities (in fact, it would be one variable among several affecting this demand), it could lead to slightly higher Treasury yields to attract new investors. But bond prices move inversely with interest rates, so this would put downward pressure on bond prices. It wouldn't increase returns on bonds, and it wouldn't have a negative effect on stocks unless interest rates rose so high as to slow economic growth.
anony-Mickey writes: "And again with the bizarre slurs and the spit-talking and impotent invective against exagerated enemies. It's like watching a 1940s Donald Duck cartoon."
Who are the "exagerated" (sic) "enemies"? Dumbya?
Cons are the ones exaggerating enemies these days - Hitler this, Hitler that, worse than Hitler. It really is like watching a 1940s cartoon. Save your spit for them, chuckles.
If you are saying that annual stock market average returns can't exceed the average economic growth rate, this is demonstrably false. Compare average stock market returns over the last 70 years with average U.S. GDP growth rates over that time period.
No what I'm saying is that the returns people actually pull out of the stock market cannot exceed the average economic growth rate (unless returns somewhere else are below it). Think about it, suppose stocks gave an automatic 10% return while economic growth is 3%. People put their money in and have 10% more purchasing power next year. But if the economy only grows 3% how can that purchasing power be used? There will not physically be enough goods and services to meet the demand. If someone gets 10% someone else has to be losing 7%.
What is usually meant by 'average return' is something like the return on some market average like the S&P 500. But this isn't the same thing as the average realized return. While the S&P might do well historically it needs to be recognized many actual investors failed to achieve the S&P's returns because they used other styles of investing. If we turned the clock back 50 years and made everyone just buy S&P index funds would the S&P's return have been exactly the same? I doubt it.
someone will win big at a casino but everyone who plays at the casino together cannot win big, they can only win what they gamble minus the house's take. While individuals can gain a return higher than the economic growth rate in the stockmarket everyone at once cannot pull off the same trick...which is what people are saying when they ask why can't the SSI fund just be invested in stocks.
This is specious. All things being equal, the returns on stocks don't go down because more money is being invested in them. And certainly the returns on bonds don't go up when fewer investors are buying them. Like all things, securities tend to go up in price when there are more buyers.
Bond prices go down, bond yields go up. Likewise when stock prices go down their returns will increase over the long run. Hence you make a bigger return if you buy your stocks the day after the 'big crash' than if you buy them the day before.
I don't think we are fundamentally disagreeing here, just talking about the same thing from two different points of view.
Boonton:
Aren't we up to nearly a trillion dollars on the Iraq War by now?
Actually, I think we have spent about 456 billion (a little under 1/2 trillion); yes a huge waste, but not really something that will solve the upcoming 5 trillion we will need to spend to pay back the trust fund or the roughly 2/3 trillion per year we will have to spend once the trust fund is gone.
Back when Bush was trying to sell trashing SSI
I am not Bush, nor am I backing his plan. I do agree with him that there is a problem, and think that it should be addressed seriously despite the fact that Republicans brought it up.
Yet we amazingly came up with a trillion dollars to toss down the drain over the next five years or so.
Yes, Iraq war bad, conceded above. Why does it keep needing to be brought up in a discussion about SS?
'Saving SSI' requires nudges and that's about it. In the long run it is probably in better shape than most other large gov't plans. I would be much more concerned about Medicare.
5 trillion dollars between 2018 and 2042 is a reasonably big problem; with larger amounts beyond that. I am worried about Medicare too, but thats a far more complicated problem involving more the skyrocketting growth of medical spending than demographics. Also the various health plans by candidates are attempting to address this issue whereas SS reform is being ignored. SS is straight demographics and budget problem, but its a real problem. Also both SS and Medicare should put a bit of a reality check into new spending proposals.
Regarding your plan. Uhm, why do you think this addresses the problem? You don't cut retirement benefits or raise new taxes to fund retirement benefits - hence we still have a 5 trillion dollar gap over the next 30 years and a 20 trillion gap for the 30 years after that.
Your forced saving system would be a mechanism that could work if you were tying it to retirement benefit cuts which the new savings would replace. However, that (called private accounts instead of forced savings) was the essense of the old Republican plan you trashed -- so I am not sure if you really agree with this plan.
Unemployment insurance isn't a significant part of the spending problem - its the retirement benefits, so I don't understand why you have that involved.
I don't think the real point was to come up with a plan though, but to point out it is a real problem and not just a right wing talking point.
TomO
Let's address the 5 Trillion gap. I assume you're talking about the bonds in the trust fund, right? Bonds accumulated during the years when the fund was in surplus.
You pay for them like you do all other bonds, you roll them over into the market and essentially borrow them (or pay them off if we ever return to a surplus again like in Clinton's last term).
I don't by the argument that "Congress spent the surplus". As I pointed out with the Iraq War, most of the spending that happened would have happened with or without the surplus. If that's the case the surplus essentially did its job. It held off borrowing for a long time presumably allowing the economy to grow on its own hence borrowing 5T over 24 years starting 11 years from now should not be that dramatic.
Your forced saving system would be a mechanism that could work if you were tying it to retirement benefit cuts which the new savings would replace. However, that (called private accounts instead of forced savings) was the essense of the old Republican plan you trashed -- so I am not sure if you really agree with this plan.
It was actually more of a plan to increase savings. This would indirectly help the gap problem as a higher savings rate facilitates borrowing. Mostly the plan would help those who do not take advantage of the current options like 401Ks or IRAs. Those that do would essentially not be impacted by the plan at all.
The meat and potatos of the solution would be nudging as I pointed out before. Nudge the age up, nudge benefits down, nudge taxes up and SSI is pretty much healthy.
Unemployment insurance isn't a significant part of the spending problem - its the retirement benefits, so I don't understand why you have that involved.
At the moment we seem to have exploding array of '401K' type accounts to facilitate savings. Instead of special accounts for retirement, sending kids to college, medical expenses and so on why not have a generic savings vehicle that can be easily tapped by anyone with a job...even if you work in multiple small companies that don't offer 401Ks? Unemployment insurance is minor but I rolled it into the idea for the same reasons as above. With a generic savings vehicle you can tap in a reasonable (but not immediate) timeframe why not abolish the unemployment tax and get rid of gov't 'agents' who interrogate you over how you got fired or if you looked for work this week. In essense it seems to function like a savings account where you get a 'pool' of money based on how long you worked and how long ago you last collected. Instead of having dedicated reasons to pull money out ("I'm old", "My kid started college","I need an operation") just let people pull it out after it has worked for 5 years or so. For the most part people won't go crazy and even if they did they will at least have 5 years of 3% of income in play at any gien time.
The problem is not that there are no incentives to save. If you're a savings junkie there's a huge array of options to save. The problem is that many people simply don't & would actually like a tad of paternalism to push them. The typical types of solutions offered fail because they target people who do not have a problem. Raising the contribution limits, adding more 'makeup' options etc. are great for savings junkies who are already doing fine. That does nothing for people like, yes, Britt Hume, who quite frankly isn't paying attention enough to even do some brain-dead simple steps.
Why 5 years? Because I figure people will tend to leave the money alone but if they do suffer a diaster or crises they will be able to tap it. Many people today change jobs and treat the 401K distribution as some type of free money (confession, I've done it too). Also it's a lot to make people tie up their money for so long so I would be reluctant to require people to put 3% into a 401K on top of SSI taxes but 5 years doesn't seem like a problem.
Fortunately for us, nobody "decides" that stocks will return 10% and GDP will increase 3% and then force us to live in that world where we don't have anything to spend our money on.
mike TomO I don't really believe we have a SS problem. At some point in the far future taxes may have to be raised to pay the promised benefits. So what?
Of course that does not mean the current program is perfect. I expect there are lots of ways it could be improved. But any changes should be justified on their own merits not with phoney claims of doom if we do nothing. And remember once you start making changes there is no guarantee they will be for the better.
MoeLarJ wrote: Who are the "exagerated" (sic) "enemies"? Dumbya? Cons are the ones exaggerating enemies these days - Hitler this, Hitler that, worse than Hitler. It really is like watching a 1940s cartoon. Save your spit for them, chuckles.
*yawwwwwwwnnnnn*
I was hoping for something good -- you had all day to conjure it. Unfortunately, a parody of a parody, and a bag of flaming dog poop on the side, doesn't qualify.
Let me know when you're up for intelligent debate with people who are not judged as automatically stupid and contemptible for failing to agree with your point of view on the first pass. Your present brand of vituperations are small, petty, and -- as you may have begun to notice -- are increasingly being written off by the other participants.
And it wouldn't make any sense for you to expend all this effort if nobody cares.
anony-mouse replies: " Your present brand of vituperations are small, petty, and -- as you may have begun to notice -- are increasingly being written off by the other participants.
And it wouldn't make any sense for you to expend all this effort if nobody cares."
You seem to care, chuckles. And I'm not in search of lessons in wit from this site's resident "anony-mouse." Almost every site features some generic comic using that same name.
I'll continue to expend "all this effort" effortlessly until I'm not enjoying it any more or until I'm banned - which is almost certain to happen sooner or later. And then I'll move on and find other places in which to annoy anony-Bush voters and Jesoid comedians and Malkinites. It's not like it's hard to find them.
MoeLarryAndJesus said,
"A huge problem compared to what? How many (stupid and pointless)
Iraq Wars does it amount to? Some perspective please."
Fred said,
"As of this year, about four and a half Iraq/Afghanistan wars. The
supplemental for those wars was about $120 billion for 2007, and
we are spending about $580 billion on Social Security this year
(up 7% from '06, as SS spending has been growing faster than the
rate of inflation)."
Amplifying this, we're in an unusual environment right now.
China, Japan, and a number of other countries, are, for their
own selfish reasons, buying enormous amounts of U.S. government
debt. For this year in fact, Brad Setser, estimates its roughly equal
to the entire U.S. current account deficit. Although this isn't
really free money as the U.S. government promises to pay it back,
that lent money, for the politicians in current power, is
something very like free money.
Therefore the american public isn't really paying for the cost
of the Iraq war. If they actually were, if this money were
actually coming out of current taxes, it would be a completely
different world.
So the assertion that the Social Security shortfall is some
four and a half times bigger than the cost of the Iraq war is
although in one sense accurate; at the same time misleading and
inadequate. We don't really know what it means to be taxed at that
level because we aren't being now.
There's every reason to believe that by the time we need to actually
fund the shortfall, these massive flows of money from other goverments
won't be coming in.
And none of us really have any experience of what that means.
Boonton - Re: "This is only really true if the Social Security Surplus caused spending to be higher than it otherwise would have been. I doubt that."
I doubt doubt it. I'm pretty sure that the additional spending is not as much as the total of SS revenue, but I think its also fairly certain that the total spending is higher because of the additional revenue.
RE: "For example, would the Iraq War not have happened if Democratics forced Bush to lower the SSI tax at the beginning of his first term so that the surplus was wiped out?"
The Iraq war is only a small part of total government spending.
RE: "If spending is not impacted by the SSI surplus then what the surplus does is lower borrowing today by the gov't which has two impacts:
1. It lowers interest expense today and tomorrow by taxpayers.
2. It increases private investment today."
Reducing government borrowing leaves more money for the private economy, but a tax pulls it away. You don't get a net benefit. In the specific case of increasing a tax on employee wages (and an equal tax nominally to the employer) you tend to get less employment.
As for more investment, well that's possible, esp. investment focused on replacing labor (which gets hit by this tax) with capital. OTOH if you chart interest rates with US federal deficits you'll see they don't match up very well, so there is room for some skepticism as to how much lower federal borrowing really does allow for more private investment, and room for a LOT of skepticism that its a large enough effect to make up for a tax increase.
Joseph Delaney - Re "One argument that I never seem to hear in these debates is that the current payroll taxes were added with the promise of a general level of yield."
I don't think that's correct. There was no specific promise of any yield for your contribution, nor has there been any steady specific yield over the life of the program to date. The first retirees (who had not contributed to the program for long), made out like bandits. Now people get a lower rate of return. And even two people retiring today will make a different net rate of return depending on when they die. You can easily get a negative real rate of return, depending on how long you live. (And eve if you live a long time your rate of return is not likely to be great).
And as a purely legal matter there is no property right to your projected social security benefits. If congress voted to cancel them tomorrow, than they would be canceled and you would not be owed a cent. You didn't invest your SS taxes, and they where not invested for you. They where spent, just like the income taxes you paid where spent. Even in terms of a "moral obligation" I find it dubious to assert there is more of a moral obligation for the money to be paid if you had paid for previous retirees with a payroll tax, than if the government had taken the same amount of money from you in income taxes. The only moral obligation that I can see is that the government has caused people to depend on the future projected benefits. That would be a stronger argument if the government actually had its own wealth but it isn't very strong justification IMO for an absolute claim on the income or wealth of non-retirees.
RE: "if a person has paid social security taxes for 45 years and is planning in this revenue as a part of their retirement plan then we have a obligation as the trustees of the plan to make "Sorry, we screwed up the calculations" a step of last resort."
I'm not entirely sure what you mean. If the funds aren't there then are they supposed to magically appear, or are you saying that any level of additional taxation to pay the projected benefits is ok?
"No what I'm saying is that the returns people actually pull out of the stock market cannot exceed the average economic growth rate (unless returns somewhere else are below it)."
The returns you get are the same thing as the returns you can "actually pull out" of the stock market. Historically, those returns have averaged 10-12%, depending on the index.
"Think about it, suppose stocks gave an automatic 10% return while economic growth is 3%."
First of all, neither number is "automatic", but let's continue...
"People put their money in and have 10% more purchasing power next year. But if the economy only grows 3% how can that purchasing power be used?"
Simple, you sell as much of your investments as you want and spend the proceeds on products or services of your choice.
"There will not physically be enough goods and services to meet the demand."
Of course there will be. What's confusing you is you are imagining everyone spending all their money at the same time. That's not how the real world works; if it did, there would be no investing and no stocks and bonds to begin with. The existence of stocks, bonds, and other securities in the first place depends on a willingness among investors to defer some of their consumption. In the real world, consumption does not inexorably continue to increase with wealth -- at some point it levels off while wealth continues to accumulate in securities. Consider your average billionaire: he may have a $10 or $20 million house, but he doesn't build a $1 billion house; the bulk of his assets remain in intangible securities. The same is true for most people above a certain level of affluence.
"If someone gets 10% someone else has to be losing 7%."
If you are assuming 10% average returns for stock market investors, then no, someone else does not have to be losing 7%. I'm sure someone is, the average doesn't require this. This is just basic statistics.
"What is usually meant by 'average return' is something like the return on some market average like the S&P 500. But this isn't the same thing as the average realized return. While the S&P might do well historically it needs to be recognized many actual investors failed to achieve the S&P's returns because they used other styles of investing."
Sure, and some investors who used different styles (e.g., value investors) exceeded the returns of the index. But anyone who bought and held the index got that index's return, minus fees.
"If we turned the clock back 50 years and made everyone just buy S&P index funds would the S&P's return have been exactly the same? I doubt it."
This is a red herring: no one is proposing this. And if the only stock market investing allowed were index investing, it would defeat one of the main economic purposes of the stock market, which is to efficiently allocate capital.
"someone will win big at a casino but everyone who plays at the casino together cannot win big, they can only win what they gamble minus the house's take."
Casinos are a bad analogy here. Remember where I said that negative individual returns aren't required for stock market indexes to average 10% returns? With casinos, negative individual returns are required. That's because casino gamblers' average rates of return are negative -- they vary according to local laws, but the returns are usually in the neighborhood of -1.5% to -5%.
"While individuals can gain a return higher than the economic growth rate in the stockmarket everyone at once cannot pull off the same trick..."
This is wrong: individuals can easily get returns higher than the economic growth rate by investing in the stock market; in fact, this happens all the time. Stock investing isn't zero-sum: I don't need you to lose money on, say, XOM, for me to make money on it.
"which is what people are saying when they ask why can't the SSI fund just be invested in stocks."
This clause isn't particularly clear, but your overall argument seems to be that:
1) Investing the Social Security surplus in the stock market is bad...
2) because stock market returns tend to exceed economic growth rates, and...
3) it's economic growth that provides the goods and services retirees (and the rest of us) will need in the future; therefore,
4) we are better off continuing to buy Treasury Bonds with the temporary surplus, and letting the government borrow and spend this money.
You are right about 2) and 3), but 1) and 4) don't follow logically from 2) and 3).
There are two main benefits to investing the temporary Social Security surplus in stocks. The first is that, it will stop the accumulation of debt in the trust fund; by doing this, it will reduce the need for higher taxes and higher deficit spending in the future to pay off debt -- this will reduce a growing burden on our economy in the future. We don't need to invest the Social Security surplus in stocks to get this benefit -- he can get this benefit by investing the surplus in anything other than U.S. Treasury securities, i.e., anything that the government can't borrow and spend. This argues against point 4) above.
The second benefit of investing the surplus in equities is that, by increasing investment in the private sector today, we can increase economic growth in the future. This argues against point 1) above.
"I don't really believe we have a SS problem. At some point in the far future taxes may have to be raised to pay the promised benefits. So what?"
It depends how much the taxes have to be raised. If current trends in the growth of entitlement spending continue (and absent politically difficult reforms, they will), we will end up with a perfect fiscal storm in the next couple of decades: significantly higher taxes needed to pay part of current entitlements and service the debt incurred to pay the rest; slower growth due to the higher taxes and higher interest rates (as our worsening fiscal health makes international investors less eager to lend to us). In short, the "so what" is worsening living standards for you and your children, as they are taxed to the hilt, to pay of the money we borrowed to spend on our wealthiest demographic today.
Fred,
Aboot Boonton's contrast between 10% historical return
on stocks versus 3% historical growth in the economy,
several points.
A. Those aren't the actual figures, but they aren't too
far off.
B. Of course inflation has been pulled out.
C. Seventy-five years ago, stock market investments
were likely disproportionately concentrated in, say,
10% of the population. There returns could therefore
be out of whack with growth in general. They could have
had 10% growth while the economy overall only had 3%, but
today where say the comparable figure might be 60% of the
population (because of pension funds) there's much less
room for average investment returns to diverge from the
overall economy.
They don't have to be exactly in synch, but it can't be
anything like a 10% versus 3% disparity.
Tim Fowler:
I think you're both right and wrong about the promise of future benefits. Politicians have been very careful to leave in the fine print saying that there's no promise of future benefits and that they're subject to change, but that fine print is under a lot of large print saying what your projected benefit will be.
Even in the debate over privatization (such as it was), there were a lot of anti-privatization folks who saying that privatization was bad because a person could lose money, implicitly (and even explicitly in some cases) stating that there was no downside risk to the current system.
A lot of people believe that their SS check is guaranteed and are surprised to find out otherwise. It will be very politically difficult to start cutting benefits; seniors vote.
Mark Amerman,
"Seventy-five years ago, stock market investments
were likely disproportionately concentrated in, say,
10% of the population. There returns could therefore
be out of whack with growth in general. They could have had 10% growth while the economy overall only had 3%, but today where say the comparable figure might be 60% of the population (because of pension funds) there's much less room for average investment returns to diverge from the overall economy."
First, I think it's possible for us to have long term economic growth closer to 4%, with the property economic policies, but leaving that aside, let me address your concern here.
You assume that, A) as the percent of Americans invested in the stock market approaches 100%, B) stock market average returns will approach the average economic growth rate. B) doesn't necessarily follow from A). Here's why.
Stock market index returns are based on the average returns of the index's component stocks; these returns, in turn, are based on changes in expectations on those stocks' future earnings prospects. Those future earnings prospects are influenced by expectations about future U.S. economic growth, to be sure, but stock market aren't limited to those growth rates. Why?
First, the stock market -- even as measured by the broadest indexes -- does not represent the whole U.S. economy. It represents the subset of the U.S. economy that's comprised of publicly-traded, private sector companies. This subset excludes less-productive parts of the economy: struggling little sole proprietorships, non-profit organizations, government agencies, etc. Second, most indexes are market cap-weighted toward larger companies that generate a lot of their profits overseas, including countries with faster-growing economies than ours.
Fred said:
"... If current trends in the growth of entitlement spending continue (and absent politically difficult reforms, they will), ..."
It is true there is an entitlement problem but it is primarily because of Medicare and Medicaid not SS. SS by itself would not cause any great damage. The Medicare and Medicaid problems are connected to the broader problem of ever growing medical spending (much of which is unjusified or pointless) which nobody seems to have a clue about how to fix.
The main driving force behind SS "reform" is the desire of the financial industry for a slice of SS revenues. I don't want politicans dealing with these people because I think it is very likely they would rob the government blind and leave future generations holding the bag when their fancy schemes collapse.
Tim Fowler: "I'm not entirely sure what you mean. If the funds aren't there then are they supposed to magically appear, or are you saying that any level of additional taxation to pay the projected benefits is ok?"
I like to compare this to a corporate pension scheme. It's not an exact analogy, for the reasons that you correctly specify, but the reports that the government send me mimic this fairly closely.
If a pension plan is underfunded, there is a correction in benefits (typically immediately). So if Social Security is grossly underfunded then I would expect it to be rescaled to be sustainable. If the problem is due to mismanagement, this is an unsolved problem for any pension plan (do we hold the members of previous congress' responsible??).
Had I been given the option of investing my Social Security Taxes in a 401(k) this might be different. But I paid a targeted tax and I was given statements with a projected benefit. If this information was incorrect (e.g. benefits need to be reduced) then the sooner that this information is given to tax-payers by the government the better.
In general, so long as the SS tax remains, there will be a specific amount of revenue that can be used to pay benefits. They might be less than expected, but that is better than zero. Shifting to personal accounts kind of leaves open the question of what to do with the current cohort.
But doesn't it make sense to adjust things sooner rather than later? I am always surprised by how modest the cuts to SS need to be (medicare, I believe, is a horse of a different color).
James B. Shearer,
Medicaid and Medicare are even bigger fiscal time bombs than Social Security, that's true. All the more reason to put them on a fiscally sound footing before adding a new national health care entitlement. But they can be addressed in the same fashion, essentially. One major difference: while we currently have a temporary surplus with Social Security, i.e., for the next ten years or so, we will be taking in more in SS taxes than we pay out in benefits, we have no such thing with Medicare. In fact, the portion of the payroll tax that goes to Medicare covers only about half of Medicare costs currently. So the first thing we'd have to do to fix Medicare is to raise this tax high enough that it covers all current expenditures and there's a little surplus left over to invest.
Next, this surplus could be invested in a trust fund comprised of securities other than U.S. Treasury Bonds (again, so the government couldn't immediately borrow and spend the money). Perhaps a portion of the trust fund could be invested in the stocks of health care companies; this could provide a hedge against medical inflation at the same time it provides more capital to the industry to drive innovation. A similar trust fund could be set-up to cover Medicaid.
As far as securities industry firms "robbing the government blind", I wouldn't worry about this. Governments and large institutions are able to get very low pricing from asset management firms, and they have the resources to conduct the necessary due diligence and monitoring. Fees would likely average less than 10 basis points (i.e., less than 1/10th of 1 percent per year). It's true that the asset management firms hired would make some money on this, but there's nothing wrong with that if they do a good job; lots of companies make money providing products or services to the federal government.
anony-mouse, you're missing the point. If the social security trust fund is an accounting fiction then social security is just another government program like defense spending or FDA inspectors. And therefore there is no social security crisis because lots of government programs cost more money than they bring in. We don't talk about the national parks crisis because the visitor passes don't pay for the upkeep of said parks.
So you can't have it either way - either social security funding is not an accounting fiction, in which case we can talk about what happens in 2043 when the trust fund is expected to be exhausted, or they are an accounting fiction in which case there is no crisis.
Fred said:
"As far as securities industry firms "robbing the government blind", I wouldn't worry about this. Governments and large institutions are able to get very low pricing from asset management firms, and they have the resources to conduct the necessary due diligence and monitoring. Fees would likely average less than 10 basis points (i.e., less than 1/10th of 1 percent per year). It's true that the asset management firms hired would make some money on this, but there's nothing wrong with that if they do a good job; lots of companies make money providing products or services to the federal government."
I have no faith in the political process producing a plan designed to minimize fees. That's just not how things work in Washington. If I recall correctly fees in Chile are quite high.
I believe it is quite likely than any SS "reform" which is actually passed will end up making the long term fiscal problems worse instead of better. This happens all the time when Congress tries to fix things like farm subsidies or the PBGC. Investing in stocks (or other risky assets) allows fudging the numbers by assuming an unrealistic rate of return. When the promised returns fail to materialize the government will end up on the hook for the shortfall.
I also don't want the government owning a large pool of stocks. This provides endless opportunities for destructive political meddling.
Fred,
I do see your point, and I do think you make a good argument
in this:
"First, the stock market -- even as measured by the broadest
indexes -- does not represent the whole U.S. economy. It represents
the subset of the U.S. economy that's comprised of publicly-traded,
private sector companies. This subset excludes less-productive
parts of the economy: struggling little sole proprietorships,
non-profit organizations, government agencies, etc. Second,
most indexes are market cap-weighted toward larger companies
that generate a lot of their profits overseas, including countries
with faster-growing economies than ours."
But I think you're doomed to be disappointed in your expectations.
Your first point -- that the stock market only represents part of
the U.S. economy -- actually makes it even less likely that high average
real rates of return, like 10%, can be expected.
Here's how I'm thinking of it. We, the people of this country,
have a certain amount of wealth. By wealth, I don't mean money,
but rather the things and conditions that we desire and we buy with
money.
That big chunk of valuable things can be increased (historically
over the long term it's been increasing at the rate of about 2%
a year in the United States) or decreased (a recent dramatic example
would be Zimbabwe). Let's be optimistic and assume that there's
not going to be a dramatic or even moderate decrease of wealth and
that the U.S. will continue its long-term upward trend of 2% a year.
Since the stock market represents only part of that increase, and
historically I believe most of the past wealth increase has been generated
by small companies that were not even part of the stock markets,
then it seems improbable that the average rate of return
in the future stock markets will or even can be much higher.
It's extremely important to get what I'm saying to realize that I'm
talking real value rather than nominal dollars. Of course nominally
the stock market will have fanastic rates of return, but as far
as the real underlying wealth is concerned, most of that is illusion.
Your second argument, that the stock market also represents ownership
of assets outside the U.S., is more valid. Yes, if americans can
really hold on to their overseas ownership of assets in places like
China, Brazil and India, with recent real growth rates of between 6
and 12% then yes the real returns could be much higher. (Note that
europe hardly counts since the real rate of growth there isn't much
different than the U.S.)
But I doubt that this will actually occur because I'm cynical about
human nature. Other people want that wealth too and I doubt they
are going to play 'fair' over the long run. The only wealth we have
any solid grasp on is what's in this country.
In the note above, when I talk about an average 2% a year increase of wealth, I meant on a per capita
basis.
I have no faith in the political process producing a plan designed to minimize fees. That's just not how things work in Washington. If I recall correctly fees in Chile are quite high.
What do you think the government can do well? Minimize healthcare fees/costs? Establish proper incentives to control carbon emissions or direct agricultural production? Just want to make sure that you're not discounting policy prescriptions in this area due to the incompetence of our leaders (or ineffective incentive structures in place for them) while suggesting that they can effectively regulate other areas of our lives or the economy.
Fred
Casinos are a bad analogy here. Remember where I said that negative individual returns aren't required for stock market indexes to average 10% returns? With casinos, negative individual returns are required. That's because casino gamblers' average rates of return are negative -- they vary according to local laws, but the returns are usually in the neighborhood of -1.5% to -5%.
Not as bad as they might appear at first. Imagine a Casino that has a rich Uncle who is willing to match 5% of every dollar gamblers bet. The casino would be able to have positive payout rates...let's say 3% on average. They would probably like that because it would encourage more gambling which means more matching by the rich uncle.
Is it possible for you to win $110 by betting $100? Sure but someone else has to have lost $7. I agree talking in percentages here may confuse the issue. The person who lost $7 may or may not see a -7% return. At the end of the day, though, everyone together can only pull 3% out of this casino just as the house only pulls 2%.
The stock market doesn't have a rich uncle but something almost as good, the US economy. Stocks have a positive return because the economy grows, corporations have earnings which allows them to pay dividends. Like any other piece of the economy there's a constraint at work, the size of the whole thing. If the economy grows at 3% everyone simply cannot grow their purchasing power at 10% no matter what the S&P returns are.
This is a red herring: no one is proposing this. And if the only stock market investing allowed were index investing, it would defeat one of the main economic purposes of the stock market, which is to efficiently allocate capital.
You're fighting the hypothetical here. The S&P returns existed because there were people who DID NOT invest in the S&P and their losses (or subpar returns) fed those returns. If you turned back the clock, told everyone what the S&P would do over the next 40 years and convinced them to switch over then those losses would have never occurred and never would have fed the S&P returns. You would alter history and cause the S&P returns to fall.
Here's my proposal; if you took a sample of, say, 1000 random brokerage accounts for a 40 year period and computed their realized return I bet you would find it would be far short of the S&P 'market return'. I'm not saying its impossible for the stock market to outperform the US economy...only that as an element of the US economy it logically remains part of the whole. Other elements must therefore have grown slower or contracted.
This is the gist of my point. It's great to encourage people to catch better returns through low cost index investing BUT everyone cannot do it all at once. The solution to SSI is not to just invest the surplus in stocks which will supposedly provide superior returns.
There are two main benefits to investing the temporary Social Security surplus in stocks. The first is that, it will stop the accumulation of debt in the trust fund; by doing this, it will reduce the need for higher taxes and higher deficit spending in the future to pay off debt
Aye but so what? If the surplus was in stocks then we would be looking at a massive sell off in 20 years or so. Just as we ponder today if the economy could handle borrowing to 'pay off' the SSI bonds we would have to ponder if the stock market could asorb such massive selling. How could it? Well workers could buy more stocks today, in effect devoting a larger chunck of their income to 401K's. Companies could pay workers less and increase dividends thereby keeping the value of their stocks high. Or stocks could drop in price and SSI would have to make up the difference through public borrowing, taxes or benefit cuts. In other words, the exact same situtation as we are talking about today. Either tomorrows workers has less consumption, tomorrows retirees have less consumption or some combination of the two.
We don't need to invest the Social Security surplus in stocks to get this benefit -- he can get this benefit by investing the surplus in anything other than U.S. Treasury securities, i.e., anything that the government can't borrow and spend. This argues against point 4) above.
This ties back to what I call the ATM theory of gov't spending. You go to the ATM and notice your balance is $100 higher than you thought so you take out $60 instead of $40. Your presumption is gov't sees a 'surplus' in one area which makes spending go up in other areas. But I'm very skeptical of that. Ideologically many Republicans seem to be of the opinion that deficits don't matter. In that case you wouldn't base your spending decisions on whether or not the deficit was big or small. Also most of the budget is literally on entitlement autopilot. Medicare, Social Security, Medicaid and interest payments go out whether or not the budget is in surplus or deficit. The underlying rules of these expenditures are changed very slowly by the political process. You are left with discretionary spending...of which the Iraq War is no longer minor.
SG
Even in the debate over privatization (such as it was), there were a lot of anti-privatization folks who saying that privatization was bad because a person could lose money, implicitly (and even explicitly in some cases) stating that there was no downside risk to the current system.
A lot of people believe that their SS check is guaranteed and are surprised to find out otherwise. It will be very politically difficult to start cutting benefits; seniors vote.
Guarantee is a relative term. Social Security is pretty much guranteed in the sense that it would take a stunning political upheavel to cause a massive cut in immediate benefits. Not only do seniors vote but so do their kids and people don't want to be told their parents are now suddenly going to be at their door because Congress voted an accross the board 30% benefit cut. Any major change will almost certainly be phased in very, very slowly giving people plenty of time to make themselves ready.
What's interesting is that these risks exist all over. What guarantee do you have that 20 years from now Congress won't pass a special tax on 'windfall' 401K accounts? Think about it, if a crash left a generation of retirees with a huge lifestyle shock wouldn't there be a lot of political pressure to 'fix' the problem by going after some of those '401K millionaires'?
Fred
Next, this surplus could be invested in a trust fund comprised of securities other than U.S. Treasury Bonds (again, so the government couldn't immediately borrow and spend the money).
The problem with this type of idea is that the bond market is much deeper than the stock market. Investing a lot of money in securities raises a lot of questions about their influence. Already there is some concern about the role that large state pension funds can play in the market, using their voting power to force political issues onto companies. The SSI trust fund surplus would dwarf those. I suppose you could set up barriers and such that would limit this problem but then again just identify the spending that is supposedly happening because of the surplus. Either cut that or admit that we are spending it because we want too which means it really isn't being caused by the surplus.
Mark
Your second argument, that the stock market also represents ownership
of assets outside the U.S., is more valid. Yes, if americans can
really hold on to their overseas ownership of assets in places like
China, Brazil and India, with recent real growth rates of between 6
and 12% then yes the real returns could be much higher. (Note that
europe hardly counts since the real rate of growth there isn't much
different than the U.S.)
A fluid market though would produce equal returns adjusted for risk. If China is making 12% returns investment funds will flow there until it is driven down UNLESS that 12% return incorporates a risk premium. Considering that property rights basically have yet to solidify there it probably does.
mike, I don't think the government can be relied on to do much of anything well (which is unfortunate as in many cases there is no reasonable alternative). This does not mean I think government programs are uniformly bad, some are signifcantly better than others. I think it is important to try to improve areas where the government is performing particularly badly. However it is important to be realistic, trying to improve functions that the government is already performing relatively well is likely to be counterproductive (regression to the mean and all that). As government programs go SS seems relatively efficient to me. So it is not something I would mess with (especially in major ways). There is limited capacity for reform in the political system and it should be concentrated on the worst programs where it will buy the most. Currently that means Iraq, by far the most braindead existing major government program.
SG - re: Cutting benefits - The current law sets benefits to be cut automatically if the the "trust fund" runs out and current income from the dedicated taxes isn't high enough. So now new political action needs to be done to cause the cuts. OTOH the cuts would be relatively harsh and unpredictable compared to cuts planned well in advance, and new legislation would be needed to cut benefits in advance. If they aren't cut in advance and tax income doesn't increase faster than expected you can get a real tough situation. There will be a lot of pressure to change the law to avoid the automatic cuts, but to pay the benefits you would need much higher taxes, or deficits that make the worst we've seen look tiny.
A lot of people believe that their SS check is guaranteed and are surprised to find out otherwise.
Any government program requires both ongoing political support, and the cash to pay for it. Even if there was some guarantee in the law (and there isn't, quite the opposite), such a program is never really guaranteed in any strong sense of the word.
Joseph Delaney - OK. I see. I thought you were arguing that the benefits should not be cut, and should be considered some entitlement of the seniors. Since I misunderstood your point, my response wasn't very relevant to your point.
szr - Re: "If the social security trust fund is an accounting fiction then social security is just another government program like defense spending or FDA inspectors. And therefore there is no social security crisis because lots of government programs cost more money than they bring in. "
The crisis is not whether or not social security spending is higher then social security taxes. They get lumped together but they are really separate things. You could have the tax without the spending or the spending without the tax (not that I'd recommend either).
The issue is the spending. The crisis is that the spending will be to high if we are to continued to pay benefits under the planned benefit schedule. Its made worse by the fact that Medicare costs are increasing fast, and will require even more spending than SS when the baby boomers are mostly retired.
The program originally has a bunch of workers for each retiree. Both the mid-range effect of the "buldge" of the baby boomers heading towards retirement, and the longer term effects of 1 - people living much longer while retirement ages (at least ages to receive benefits) aren't increasing much, and 2 - lower population growth, mean that each retiree is supported by fewer and fewer workers.
If you and 30 other workers have to support a retiree, you probably can deal with it. If you have to pay for half the cost of supporting a retiree yourself, or maybe even all of the cost, than you might have a problem.
Tim,
You're right the ratio of workers to retirees is the biggest problem but that problem exists independent of Social Security.
Imagine a '401K world' where everyone retires on their 401Ks only. As the retired sell their stocks off the workers buy them. If there's 30 workers to 1 retired person that's great but if its 1-1 then either that retired person is going to get a lot less for his stock or the worker is going to pay a lot more for it. In other words the retired person takes less retirement benefit or the worker takes home less pay.
The retirement age should therefore be indexed to both lifespan and productivity. If the 'world of tomorrow' lets a single worker produce 30 times the income because of productivity then it's easy to have a 1-1 ratio or even something more dramatic.
You're ignoring something that should never be ignored when looking more than a decade into the future: computer intelligence.
By 2025, the computer hardware-based number of human brain equivalents (HBEs) added to the human population will be on the order of a billion people. And by 2033, it will be on the order of 1 trillion people.
Note that computer software will delay these values by about 7 years...such that the 1 billion HBEs people won't be until closer to 2033.
But in any case, economic growth around the world is going to accelerate dramatically in the next decade or two.
Economic growth in the 21st century
Why economic growth will be spectacular
Boonton,
I'm happy to debate politics, but statistics isn't up for debate. If you still don't understand why a casino requires gamblers to have negative rates of return and a stock market (during a period of positive average returns) doesn't, you don't understand statistics. That's OK: lots of people don't. But I'm not going to waste time debating something with you that's not debatable.
Fred,
I'm not debating that point. That's why I added the 'rich uncle' element to the casino analogy. The stock market is able to have a positive return because economic growth is able to add more to the 'pool' than is taken out by brokerage fees. The stock market has positive returns because the companies that make it up are able to generate income which yields dividends and the growth of retained earnings.
For a casino there is no real life equilivant because even the most efficient house is going to take something off the top and nothing goes into the pool of money that doesn't come from the gamblers themselves. Hence, on average, gamblers have to lose something.
That ability, though, comes from economic growth which is therefore a constraint. The stock market S&P500 can return 10% just like slot machine 34A at 3:14 PM can return 10000% but NOT for everyone at once.
No matter what happens, benefits will decrease. Either taxes go up and pay the same benefits, or taxes stay the same and pay a lower benefit. That's it. What's going on is a shell game as politicians decide who gets stuck with the bill. Republicans want to stick it to Boomers (lower benefits), Democrats want to stick it to Gen X and Y (higher taxes).
Boonton, Indexing to life span might be a good idea, OTOH life span can increase more than productive years.
Indexing to productivity? I'm not so sure. Higher productivity generally should result in the workers, and the companies that employee them being wealthier, not in having that extra wealth taxed away. If a worker produces 30 times as much he might not make 30 times as much in real terms, and even if he doesn't having him support 30 times as many retirees wouldn't be fair to him.
As for stock market growth exceeding economic growth. Growth in corporate profits can exceed economic growth, and a larger percentage of companies can incorporate. There is a limit to those factors but they can drive stock market capitalization to be faster then economic growth for quite awhile.
Also if economic growth starts and accelerating trend than stock prices should anticipate it. The anticipated discounted future value of corporations would go up faster than the economic growth at any particular point of time. I don't count on such accelerating growth (see below) but its possible.
Mark Bahner - I don't think we should count on a technological singularity, or tremendous economic growth because of other causes, to solve all of our problems with entitlements. Tremendous economic growth is something I'd welcome, and its something that may happen, but I don't think its something that you can count on happening, and esp. happening in the specific time scale being addressed. What if your right about the explosion in "brain equivalences" but wrong about the timing. Over the broad sweep of human history 50 years might not mean much but it will mean a lot in terms of paying for Social Security and Medicare.
Indexing to productivity is kind of what has happened already. When SSI started you could expect to collect for maybe -2 to 3 years. Now you can expect to collect for maybe 10-15 years. It seems that we may have overshot the mark a little bit so perhaps it should be 9-11 years or whatnot instead. I don't think, though, either of us would say it should go back to -2 to 3 years thereby making the retirement age something like 75.
Productivity should mean a richer economy which means a richer retirement no matter what system is in place.
Well, we should only not count on tremendous economic growth if it doesn't happen. So the question is, "Will it happen?"
My prediction of tremendous economic growth is dependent on two legs:
1) That computer capabilities will continue to increase as they have in the past, until they equal, then vastly exceed human intelligence, and
2) That human minds are responsible for economic growth. In particular, if hundreds of millions (or even billions) of personal computers are produced every year, and every personal computer is equal or much greater in capability than a human brain, then economic growth must increase tremendously.
So...which of those two legs seems faulty to you?
If I'm right, we should notice world per-capita GDP increasing even in the next 10 years, or certainly in the next 20 years.
I'm aware of two analyses of world GDP growth throughout history: one by Angus Maddison, and another by Brad DeLong. I'm more familiar with Brad DeLong's. Per Brad DeLong's analysis, there has been only one decade in history in which world per capita GDP has increased by more than 3.5 percent per year; that was the 1960s, with an increase of 3.8 percent per year.
World per-capita GDP, as analyzed by Brad DeLong
And per Angus Maddison, only one single year has had a per-capita GDP increase of more than 5 percent. That was 1964, with an increase of 5.1 percent.
I predict that the decade from 2011 to 2020 will have an average world per-capita GDP increase greater than 3.5 percent, and at least one year will be greater than 5.0 percent.
If that happens, and computer hardware continues to increase as Ray Kurzweil has predicted, then I'll be pretty darn sure I'm right. (Unless, of course, computers decide they don't like humans, or we have a global biological or nuclear war. But if that's the case, we'll have a much bigger problem than Social Security.)
Mark - RE: "Well, we should only not count on tremendous economic growth if it doesn't happen. So the question is, "Will it happen?""
No the question that we have to ask if we are going to count on it is "Is it almost certain to happen?" That has to be combined with "How big can we count on it being?", and "When it it going to start".
Asserting that we can't count on such tremendous growth is not asserting either of the "legs" you mention is false. They very well may be true, I'm only saying that we can't count on both being nearly 100% certain of being true within the next several decades.
As for the specific "legs" well -
"That computer capabilities will continue to increase as they have in the past, until they equal, then vastly exceed human intelligence"
Likely. Not certain. Far from certain in terms of something that is going to happen in the next several decades.
"and every personal computer is equal or much greater in capability than a human brain"
Not yet, maybe not for some time.
"then economic growth must increase tremendously."
Depends on what you do with that computational power. It isn't a one for one thing, where every bit of computational power increases economic growth by x% no matter what the private sector does with that power, and no matter what government polices are in effect.
And even when computers exceed the human brain by every measure of power, that doesn't necessarily mean they will have personalities and creativity. They might. We might get "true AI", but I wouldn't count on it in time to deal with the entitlement problem.
Re: "I predict that the decade from 2011 to 2020 will have an average world per-capita GDP increase greater than 3.5 percent, and at least one year will be greater than 5.0 percent."
That quite possible, but it won't make the problems with entitlements go away.
Re: "If that happens, and computer hardware continues to increase as Ray Kurzweil has predicted"
That's highly uncertain. Kurzweil is very optimistic. We might get that increase or even more, but I don't think we can count on it, or really be highly certain of even being close to it.