This article by Paul Starr makes the central error that comes over and over again in liberal analyses of Social Security*: it acts as if the general budget problem arrives at the same time as social security's budget problem.
This is wrong. The budget problem isn't in 2041; the budget problem is now. Sometime after next year, the Social Security surplus will shrink, starting to put pressure on the budget. Democrats trying to implement spending plans will start to find their tax increases eaten, not by national health care, but by seniors. By 2011, the problem will be large. By 2017, money will be flowing from the general fund to social security. By 2025, the hole will be about as big as it's going to get. Around about 2015, social progressive plans will be DOA. Republican tax schemes will be DOA. The only thing we will talk about for the following 15 years is where to find the money to pay for Social Security and Medicare.
Nor can we save money on Medicare as national healthcare advocates have suggested; aside from fairly trivial savings on pharmaceuticals which are likely to cost money in the long run by stifling innovation (drugs save money by replacing expensive procedures), Medicare already has all the advantages we've been promised in a national system. Its costs are still skyrocketing.
The problem that Starr identifies is real, however: raising the payroll tax cap is an enormous tax increase on high earners. You can have that, or you can repeal the Bush tax cuts; if you do both, you're talking about a marginal tax increase of more than 20 percentage points. I know I keep pounding the point that at American levels of taxation, the Laffer curve promise of higher revenue on lower rates doesn't apply. Well, at 55%, it's plausible to believe that it *does* apply. There is a limit to how much you can raise taxes on the rich.
But where he's wrong is to think that Democrats have some choice in the matter. They don't. They, like their political opponents, are going to see most of their dreams crash on the shoals of the Baby Boomer retirement.
* The mirror-image conservative error is thinking it matters whether the Social Security Administration is technically solvent
Eliminating both the cap and the Bush tax cuts would be a big tax increase for the same group of people affected by the AMT. Perhaps if it were bundled with permanent AMT reform it might be more palatable. My back of the envelope calculations suggest that if the AMT were indexed from 1970, it would mean something like a 28% tax with no deductions on incomes above $940,000 (rather than those above $175,000).
Dealing with the 26% rate on incomes below $940,000 is a bit trickier, but you could consider applying that rate only to incomes between $311,000 and $940,000. This would come close to the mimicking the impact of the tax when it was first implemented.
On a lighter note, track down and read Boomsday by Christopher Buckley. It's a hilarious take on a proposed solution to the Social Security Crisis and no side comes out unscathed. And I say that as a baby boomer (1953) myself. ..bruce..
Medicare already has all the advantages we've been promised in a national system. Its costs are still skyrocketing.
True. That's why your friend Ezra, the "healthcare policy expert," avoids mentioning it. He prefers hyping the VA while practicing his Care Bare Stare.
When you're talking about marginal tax rates, don't forget to add in the state rate. They generally range from 5-9%.
raising the payroll tax cap is an enormous tax increase on high earners.
There is a limit to how much you can raise taxes on the rich.
Umm... who's rich? Does a single [earned] income of, say, 130K/yr make a family rich? Dwellers in Silicon Valley will beg to differ. Raising the payroll tax cap is an enormous tax on upper middle class, and, in places, upper is too strong a word.
Gee, maybe we should take a page from Russia, Eastern Europe, and Ireland and actually read about the very real benefits of low/flat taxes...
More toward the SocSec point of the post, it should just go away, the further Financial Insolvency caused by those (current) unrealistic expectations will decimate the, potentially, productive future of 21stC. America.
And, for those that didn't get the Memo, the Western European socio-topias have the same/similiar problem(s) as ourselves--they're not producing enough to ensure that their "social contracts" are worth any more than the paper their Currency is printed on..
The full retirement age is based on maintaining a 50% death rate, so the government does not have to pay any paid for benefits but to half of the investors. The government gets 15% of all wages in America and is so incompetent as an investment manager, if we could we would have fired them, they do not invest our money and grow the funds. The problem with Social Security is totally caused by government. No, matter your political party affiliation, and setting aside your thoughts on issues. We all need to remember what it is to be an American Citizen. We need to make sure our elected representatives obey their Oath of Office and keep their Oath of Allegiance. See http://tinyurl.com/2znnvl Know whom you are voting for.
awoolf, Here in CA, it's even higher 9.25 + a whole bunch of surtaxes that drive it higher.
Even on capital gains.
Medicare already has all the advantages we've been promised in a national system. Its costs are still skyrocketing.
Not quite. A national health system might solve the sorting and adverse selection problems.
Insurance provides a vehicle by which risks are defrayed throughout society, but at a cost. Presumably the desire to avoid the risk of a large, random harm warrants the payment of smaller, regular premiums.
But not everyone is equally risky. Individuals can exploit their knowledge of their individual health risks in deciding whether or not to buy insurance. Healthier people have an incentive to refrain; sicker people have an incentive to buy. Consequently the pool of people buying insurance will tend to above-average medical costs.
Private insurers fight this trend by investing heavily in ways to identify people who are likely to get sick and then refusing to cover them.
Assuming society is going to provide care for people regardless of whether they have insurance, two social harms result. First, people can guess wrong about their need for health insurance, resulting in great personal cost and ultimately throwing the burden of caring for them on the state. Second, the costs that insurance companies incur to sort people is a deadweight social loss. It makes sense for the private firm, but the costs end up being borne by society (including private firms) anyway.
Initially Medicare didn’t face these problems. It offered pay-for-service to qualified people, and there’s little evidence that Medicare administrators strove to keep sick people from receiving Medicare benefits. But in 1997 Congress let Medicare beneficiaries opt into private plans – in essence “voucherizing” the program. Private health plans promptly enrolled the healthiest Medicare recipients and excluded the sickest. The results were predictable.
As the " rel="nofollow">Kaiser Family Foundation reported in 2003:
Quite evidently there are cheaper ways to administer Medicare.
Admittedly this “voucherizing” policy could be made to work if government could better tailor its Medicare funds to the risk of each individual Medicare patient. An effort at this policy is being phased in now. But this remedy would only solve the adverse selection problem so long as government’s ability to make these risk calculations matches or exceeds private industries’ ability, both now and into the future. I trust any libertarian would conclude that that is a bad bet. Consequently I expect Medicare to suffer adverse selection costs indefinitely.
The only thing we will talk about for the following 15 years is where to find the money to pay for Social Security and Medicare.
Well, or which benefits to cut (which can be as simple and relatively painless [yes, I know, "nearly politically impossible"] as upping the eligibility age by 10 years to relatively restore the retirement age to life-expectancy expectations the program started with)...
The problem with Social Security is totally caused by government.
Sort of. The literal solvency of the program is just a matter of income and spending, which is set by the government. But even in a world where there was no Social Security, a big wave of retirees would be a big problem. Somebody has to produce the goods and services that retirees consume; that would strain the ability of the smaller number of workers to keep up with demand regardless of whether SS existed or not.
The real problem is the assumption that people should 1) have 1 or 2 children and then 2) spend 30 years consuming at the same standard of living without producing anything but filled-in golf cards. SS contributes to both of those problems, such that even if it were fully solvent, we'd still have economic worries.
This aspect of the problem is not ever discussed, of course.
Rob, doesn't that assume that everything consumed by retirees is produced domestically? It strikes me that there are plenty of worldwide workers to make enough heart monitors, DVRs, and golf scorecards for our dear parents. I guess the provision of some services (nursing, mainly) is a little bit trickier, but it's nothing that a more liberal immigration policy couldn't solve.
The fact that retirees spend a lot of money is a boon not a burden for the rest of the economy. And to the extent they fund their consumption by drawing down tax-deferred savings, the baby boomers don't even shift the burden for public expenditures disproportionately to younger people. Of course, to the extent they fund consumption with social security payments, they will tend to shift the burden of public expenditures to younger generations which will strain our ability to maintain those expenditures (including social security payments).
Amber, I think Rob's point is not that there aren't enough goods to go around, but that the retirees are not paying for them with money earned from production but rather with their kids' & grandkids' tax dollars.
Interesting to see so many municipalities attempting to lure retirees for just the opposite reason that Rob makes: They consume fewer municipal services (mostly education funded locally) while contributing just as much as most other residents providing a net gain for the community. Of course, their SS income comes from the 'far off' federal government. This makes for an interesting analysis of federal largesse effects at a local level. Adding in SS, the federal transfers to Sun City, AZ for example, look quite handsome even though they have no defense industry.
Thanks Megan:
This is wrong. The budget problem isn't in 2041; the budget problem is now. Sometime after next year, the Social Security surplus will shrink, starting to put pressure on the budget
Thanks awoolf:
When you're talking about marginal tax rates, don't forget to add in the state rate. They generally range from 5-9%.
I might add, that tax can be avoided by moving from a blue state blue area to a red state.
Megan your neglecting to mention what impact demographic shifts with respect to aging is going to have on private assets.
My point is indeed that there aren't enough goods to go around. You can't eat money, not even money stored in tax-deferred savings vehicles (memo to gold bugs: you can't eat gold, either; it's just shinier than bills). Money is just a sort of chit that says you did a certain amount of labor and are entitled to a bit of the labor of someone else. If you cut the number of people actually doing productive work, you have to correspondingly increase the productivity of the remaining workers of there will simply be fewer (and more expensive) goods and services.
When the boomers retire, either productivity will have to go way up fast or somebody's standard of living will have to take a hit (either the retirees or younger workers, or both). The SS system with direct taxes and direct payments makes this very explicit, but it is merely a symptom (and cause) of the problem, not the problem itself.
Consider for a moment what would happen if you were only permitted to live off goods your children physically produced. Suppose also that they are amazingly efficient workers who can claim the benefit of economies of scale without actually building huge factories. Could you really have 1 or 2 kids and also retire at 65? Or do you suppose they'd smother you in your sleep because they resented having to work so hard for you? Yet society-wide, we can only live off the goods our society's children physically produce, whether we save for years or depend on government payments.
It's true that we can shift some production off shore, and pump up our "younger worker" numbers with immigration. Both of these solutions have serious problems, and at most are band-aids which will run up against falling birth rates world wide.
The simple (and only long-term) solution is is to work until we're much older (or, go back to families of 12 kids).
The simple (and only long-term) solution is is to work until we're much older (or, go back to families of 12 kids).
Either that, or do nothing about the 12,000,000 illegal aliens in our midst and allow a few million more to enter the country in order to artificially increase the base (because people are not about to start having 12 children).
Michael_W, Rob_Lyman, TakeFlight, and Amber:
Rob_Lyman was referring to a hypothetical situation where the is no Social Security, and therefore no tax funded entitlement. He claimed that there would "still be a problem" even if this didn't exist, when the fraction of the population that is retired shoots up.
That point, however, is in error.
The increased demand for goods -- even if the country is economically isolated -- is offset by the contracting supply of labor. For people who work, goods cost more, but their labor sells for more.
Also, if retirees fund their consumption from their lifetime investment (which they'd have to be because, again, no tax-funded entitlement), this does not come at the cost of younger workers because that investment has *caused the existence of* the goods they would later consume by virtue of them providing the factors of production (money and time) needed to produce them. Dividend/interest income does not come at the expense of workers; taxes, however, do.
This result holds even for the extreme case where all workers are infertile, save for retirement, and retire at once, leaving zero workers. If that happened, all of their investment would be into automated factories and robotics, which would pay its return to them at retirement.
When retirees consume, they exchange either social security benefits, or they exchange assets they have accumulated over their lifetimes. These exchangeable assets include stocks, land, buildings, bonds of all types, and any other real asset you can think of. In the case of SS benefits, they are, in essence, giving back the money taken from the productive in exchange for the product of the productive. The trade in all other cases is perfectly legitimate use of accumulated savings, but the exchange ratios will depend on good ole supply/demand- in other words, there is limit to the non-productive/productive ratio, and this limit will determine the buying power of these accumulated assets. Essentially, you really don't have a problem to solve that won't solve itself- if your assets are not enough for your consumption, you will have to continue to work- people will live longer and work longer, regardless of what the laws say.
Rob Lyman I have to commend you.
I wish Magan would comment on what impact the things you mentioned will have on private sector trust funds as well.
--This result holds even for the extreme case where all workers are infertile, save for retirement, and retire at once, leaving zero workers. If that happened, all of their investment would be into automated factories and robotics, which would pay its return to them at retirement.
Posted by Person | November 7, 2007 2:11 PM
O Dear...Person, no wonder you post anonymously..
Maybe we should see what 877-RENT-A-CLU has to say about the level of 'savings' of the majority of the BBoomers...
http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Baby+Boomers+net+assets
Person, you're assuming that productivity can essentially go to infinity (robots do all work with zero human labor). If there is a limit to productivity increases--or even just a limit to the rate of productivity increase--then rapid increases in retirees means a worse per-capita GDP, and thus a lower standard of living for somebody, whether we have government transfer payments or not.
Yancy is right that the market can sort of sort this out, left to its own devices; if prices go up, people will work longer. Problem solved. But really, does anyone think that it will be left to its own devices? Will the boomer generation settle for a retirement that is both shorter and less wealthy than their parents' and not raise political hell about it? I suppose such selflessness is exactly what we
My point is, if you're interested in SS reform, the problem isn't solvency (which is actually very easy: raise taxes and cut benefits), it's dealing with the disrupted expectations of boomers.
Barring productivity miracles, those expectations are set to be disrupted regardless of what SS does.
Yancey said:
...if your assets are not enough for your consumption, you will have to continue to work- people will live longer and work longer, regardless of what the laws say.
Amen.
or we just inflate away the boomers' savings, thereby transferring the wealth to those still working/producing.
Rob_Lyman: If technological improvement were insufficient to mechanize all labor, that would simply prevent a fraction of population from retiring by raising the wage rate and reducing the return on capital. The only time my scenario would ever be observed happening would be if the technology were good enough.
I would agree with your broader point that people can't consume beyond production, and less production means someone consumes less. However, you were positing a world of zero Social Security. In that case, the only problem is that "you can't get what you can't afford" -- it has no implications of "reduced consumption per unit of labor" as you were trying to argue.
If Boomers do demand too much, they could kill the metaphorical goose: raise taxes, and a few (wealthier) workers relocate, necessitating higher taxes, which scare off more workers, and on and on until you have nothing left to loot. No fantasy -- this is exactly what already happened at GM, if you replace "taxes" with "wage cuts". Just as no one has to work for GM, no one has to work in the US.
Mark_E_Hoffer: I'm not posting anonymously -- I am, really, a person. (Or a machine capable of passing the Turing test ... who knows! I certainly don't act like a machine!)
I am a genius, aren't I?
Not if you can't figure out how to output name strings that have spaces instead of underscores.
Just for that, no virtual ice cream for you tonight.
Medicare already has all the advantages we've been promised in a national system. Its costs are still skyrocketing.
Repeating this lie often enough doesn't make it true, even with rainbow colors for effect.
Medicare has the most expensive patients today (the elderly, who obviously have both the most need for and the most time to spend on medical care). Covering the less expensive patients would bring both today's costs and cost growth down on a per-capita basis.
I have to say here that I have never considered that boomer demand could actually go unsupplied, as Rob claims here. On it's face, it's the nuttiest thing I have ever heard of.
If goods become scarce, prices rise and consumers turn to substitutes. New products are developed, new efficiencies arise or industries die. Industries dying is the opposite of supply not meeting demand. And then there's imports.
I could see this argument being made about labor, like they can't get enough workers to steam the flounder for the early bird special. We already see how personal service takes a hit in tight labor markets. But consumer goods? Can't see it.
it has no implications of "reduced consumption per unit of labor" as you were trying to argue
I don't think that's what I was trying to argue, except to the extent that upward pressure on prices will mean reduced consumption per unit of past labor. That's just inflation eating away at savings.
My argument was just that less labor means less production unless productivity goes up, and that SS solvency problems were a symptom of this phenomenon, not the phenomenon itself.
Reduced production is not a real problem any more than SS solvency is a real problem. But it is definitely a political problem which fixing SS will not solve.
I'm not saying there will be shortages and bread lines. I'm saying 1) inflation will be an issue, and 2) boomer seniors will be furious that they can't live as well as they used to, or as their parents lived, or as they expected to live, and no amount of jiggering with payroll tax rates will fix that frustration or the attendant political disaster.
Rob_Lyman:it has no implications of "reduced consumption per unit of labor" as you were trying to argue
I don't think that's what I was trying to argue,
Yes, you did. This is what you said above:
Somebody has to produce the goods and services that retirees consume; that would strain the ability of the smaller number of workers to keep up with demand regardless of whether SS existed or not.
That is what I objected to, because SS taxes will hurt worker's consumption, whild dividend paymetns to shareholders will not.
Person, the bolded passage is intended to suggest that reducing the number of workers increases the consumption per unit labor, not reduces it. Consumption stays (or at least, wants to stay) constant, while labor goes down because fewer people are working. Thus, more (attempted) consumption per unit labor.
When I say the workers are "strained," I mean their boss has upped their quota, not that they are struggling to afford what they need.
Put another way, where consumption = production, and production = labor * productivity, when labor drops, consumption drops unless productivity increases enough to compensate.
Rob, I'm also having difficulty with your assertions, but then I've always believed that my retirement is my problem. I also believe that to plan on social security as a significant component of my retirement is a decision to consign myself to a poverty-stricken retirement regardless of inflation.
If even a modest saver put their money in savings bonds (30 yr bond currently paying 5%), how will inflation kill them?
I believe without a doubt that benefits will have to go down (increase the retirement age and/or decrease benefits). Our economy continues to innovate and productivity continues to increase as it likely will ad infinitum, but the rate of growth of medicare and SS will overwhelm increased revenue without the massive tax hike paying such expenditures will require.
Kicking this problem down the road is a massive shirking of collective responsibility executed by our elected representatives. Of course, Republicans are gleeful that our ability to pay for programs other than these two will be increasingly restricted and that's not something I'd be celebrating. It's just as dishonest as saying SS isn't a (significant) problem.
Michael W, I don't disagree with anything you've said.
But what numerous people above have said, and I agree with them as well, is that if goods become more scarce, then prices will rise. That means it will cost more in nominal dollars for someone to buy the same widget after the tightening than before. Maybe not more in real dollars (the producers may well get a raise), but that doesn't matter to the retiree with the 30 year bond, who after all has only nominal dollars to spend.
The ratio of working to non-working consumers is dropping and is expected to continue to drop, leaving fewer of us to produce the goods for everyone. This is the fundamental structural problem which is behind both the SS funding problem and the problem I'm describing. Unless productivity rises quickly enough to keep the level of goods the same, the market will tighten and prices will go up.
What Rob is saying is this- in the future, there will be more and more retirees demanding product from relatively fewer producers. Even if workers of tomorrow are more productive than today (a safe assumption), those workers expectations for their own consumption will also be higher, as will their incomes. Retirees of tomorrow, if they expect to consume on a level par with workers of tomorrow, will have to save a lot of income today (quite a bit more than the average retiree will do), find the political muscle to simply take a larger chunk of hide out of tomorrow's workers, or simply continue to be an active producer to supplement future income (iow, don't retire).
Medicare has the most expensive patients today (the elderly, who obviously have both the most need for and the most time to spend on medical care). Covering the less expensive patients would bring both today's costs and cost growth down on a per-capita basis.
That argument makes no sense.
Yes, Medicare covers the oldest, most expensive patients. But that doesn't explain why Medicare expenses are skyrocketing, because Medicare has ALWAYS covered the oldest, most expensive patients. It isn't like old people used to be healthy back in the 60s, 70s and 80s and then mysteriously all got really expensively sick in the last few years!
What Yancy said, with more pessimistic assumptions (workers and retirees of tomorrow don't expect higher consumption, just the same level as today) and with the expectation that the political and therefore fiscal fallout will be very bad news.
Rob, I'm still not sure I see why this feature of supply/demand is an issue. It is true that those on a 'fixed income' are hurt by inflation, but, SS does rise with inflation (though slightly under) as does the value of your T-bonds (unless you're spending the accumulated interest instead of reinvesting it).
See http://www.washingtonpost.com/wp-dyn/content/article/2007/10/17/AR2007101700215.html
If you have a fixed annuity, or are keeping the money in a mattress, inflation is an issue that could impact you in a way it won't for most of us. Those with negotiated retirements (increasingly fewer in old industries) might want to think about saving to offset the effect of inflation on a fixed retirement sum. Otherwise, it's no more an issue than it is for anyone else. Which is to say, inflation is significant if it becomes excessive but then it hits everyone - producers, consumers, retirees, etc.
It all boils down to taking responsibility for your future...because no one else will do so.
"This is wrong. The budget problem isn't in 2041; the budget problem is now. Sometime after next year, the Social Security surplus will shrink, starting to put pressure on the budget."
This is more of the dishonest drivel we keep hearing from Republicans and their apologists ... point to the impending budget problem and blame it on Social Security. I agree there is an impending budget disaster but the cause is the disasterously irresponsible fiscal policies of the last three Republican Presidents, the worst of which was the "sainted" Ronald Reagan. Their decisions to finance government operations with debt rather than taxes is the real problem, not Social Security.
I have always suspected that the real purpose of the 1983 "reform" of payroll taxes was really a backdoor attempt to implement a flat tax while at the same time discrediting a very successful social program. When I hear people like McArdle, my suspicions are confirmed.
MW, I said that the impending retirement of the boomers was going to create problems which would not be solved by fixing SS, because SS is a mere symptom of a deep structural deficiency: too many retirees, not enough workers.
I never said those problems would be limited to the boomers themselves. We'll all be hurt by inflation, increased taxation to pay those SS benefits and the interest on T-bonds, protracted political fights and grandstanding, etc.
Rob - ergo, wages will rise (if indeed we cut-off immigration) for low-wage service jobs and entice more people into the workforce. I also think you'll see a lot more flexibility with part-time and part-year contract workers who are currently considered of retirement-age.
I don't think what you propose (higher ratio of retirees/workers) is necessarily a deficiency unless we artificially regulate supply (mandatory retirement and other such stupidity). We might even have a sane immigration policy which welcomes those in high-demand professions with the education and training to increase our productivity to help meet those future obligations.
I see a much more dynamic world not dependent upon me having more than my one child to increase our wealth and our overall standard of living (in fact too many of us could lower our standard of living...but that's another discussion).
I see an economically depressed world in which whiny boomers jack taxes up to support their indolence and sense of entitlement, and then yell at overburdened younger workers for being "selfish."
I'm not saying it has to be that way, just that it will be that way.
My point is, if you're interested in SS reform, the problem isn't solvency (which is actually very easy: raise taxes and cut benefits), it's dealing with the disrupted expectations of boomers.
Or, rather, the problem is paying for the realized expectations of boomers with less consumption for everybody else. Does anybody seriously doubt this huge cohort won't get what it wants?
Well, we can always become tax refugees in the UK and "adjust our expectations" to:
Basic State Pension (per week from 9 April 2007)
Based on your own or your late husband’s, wife’s or civil partner’s NI contributions: £87.30
Based on your husband’s NI contributions: £52.30
Non-contributory Over 80 pension: £52.30
Age Addition: £ 0.25
From http://www.thepensionservice.gov.uk/atoz/atozdetailed/retirement.asp#howmuch
Anyone expecting to live on SS is in a seriously delusional state, regardless of where they live.
This chap: "I have to say here that I have never considered that boomer demand could actually go unsupplied, as Rob claims here. On it's face, it's the nuttiest thing I have ever heard of.
If goods become scarce, prices rise and consumers turn to substitutes. New products are developed, new efficiencies arise or industries die. Industries dying is the opposite of supply not meeting demand. And then there's imports.
I could see this argument being made about labor, like they can't get enough workers to steam the flounder for the early bird special. We already see how personal service takes a hit in tight labor markets. But consumer goods? Can't see it.
Posted by spongeworthy | November 7, 2007 3:57 PM
should waltz his Economic theories over to Bangledesh and see how they work out...
Demand creating its own Supply is bazackwards, One must Supply in order to Demand.
Rob Lyman: someone who works for 40 years in an economy average 2% productivity growth has seen productivity increase by 2.2 times. So if Person A was supporting 0.5 retirees when he started working, a new worker should be able to support 1 retiree at a similar level when Person A retires.
Can productivity continue to increase indefinitely? All of our economic ideas are built on the assumption that it can. If it can't, then we have some very radical sustainability and environmental adjustments to make, and Social Security is just a very small part of the problems we will face.
Let's say we have 2000 people in the economy, 1000 of whom work. Their productivity is such that each worker can produce 2 widgets per year. This results in 2000 widgets being produced, or 1 per citizen.
A few years later, half of the workers have retired. We still have 2000 people in the economy, but only 500 of them work. Their productivity has risen to 3 widgets per year, but total widget production has fallen to 1500. This is one 0.75 widgets per citizen.
In short, the baby boomer retirement represents, on its face, a large reduction in the total man hours being worked in the economy. We can expect productivity to rise, but it deeply implausible that it will rise enough. All you have to do is review the size of the reduction in the labor force, and review productivity gains over the last few decades. The productivity gains we would need going forward are simply too large.
People talking about savings are somewhat missing the point: Money is how we allocate resources; it is not a resource in and of itself. It is correct to note that as demand for widgets outstrips supply, prices will rise, and we'll see robotic widget factories and so forth being built. Productivity will rise, and this will help - but it won't rise enough.
We whiny Boomers agreed to a significant payroll tax hike concocted by Ayn Rand acolyte Greenspan and his commission in '83.
The folks on this commission were not idiots. Their actuarial predictions were largely correct. There have been no significant surprises in our demographics. In fact, the trend has been a steady slide into the future for the predicted date of the trust fund exhaustion.
I agree totally with Megan: the problem is 2017. I think Greenspan was essentially a crook because he struck a bargain that allowed large income tax cuts to be masked for nearly two generations by payroll taxes. And that he and his ilk made a bet that political forces would resist paying back the trust fund.
My advice to Rob Lyman and others: blame Greenspan. The guy is a complete and utter political hack, "ARMS" and all. Yeah, I'm going to whine about giving two generations of Paris Hiltons my money for 40 years and then have the next generation's Paris Hilton duck repaying the trust. The 'tax cuts are self funding' crowd has been coasting on the Greenspan tax hike of '83 for a long time now. But that is starting to run out, this year is pretty close to the peak of the SS surplus. If the the SS Trust Fund is reneged it will amount to a multi-trillion dollar heist by the wealthiest of Americans on working class Americans.
And anyone who agrees to kicking more money into the system via an increase in the payroll tax is an idiot. It will just enable more income tax cuts.
So, Nat...what you're saying is that we should raise income taxes to make up for the fact that Social Security surpluses have run out, and will no longer subsidize the budget deficits we've been running. Right?
The good old payroll tax - confiscating the capital of the working classes for generations. Wonder if that's had anything to do with rising inequality?
The good old payroll tax - confiscating the capital of the working classes for generations. Wonder if that's had anything to do with rising inequality?
Social Security is supposed to pay out based on how much you paid in. You could raise the cap on "donations", then you'd have to raise the benefits of the people paying that extra money in, too.
Or, of course, we could all admit that Social Security is just welfare for old people -- welfare they receive even though the elderly are the richest demographic group in the country. THAT might have something to do with rising inequality. :)
Or, Dan, we could all admit that Social Security is an INSURANCE POLICY against being old and poor, which is a lot worse than being young and poor because old people find it hard to work.
That's if all that stuff about how they raised us, built our country, etc., doesn't work for you, and if you just don't care that without a national pension plan, some of them will end up in poverty -- as indeed a third of them were, before Social Security was enacted.
brooksfoe, insurance plans do not charge more to people who are less likely to need the benefit. Just admit that SS is welfare, and let's get a start by means testing benefits. And knock off with the AARP nostalgia. The way you repay those who raised you is to raise your children.
Why is "admit" such a favorite word for Progressives when referring to Libertarians? As if deep down inside we really knew that SS were merely an insurance policy (would that it were!) but couldn't admit it for some nefarious reason or the other.
SS confiscates the capital of the productive, skims the float for 30-50 years, then gives it back when they're not so dangerous. We'd have a lot less elder poverty (and a lot less inequality), if that capital weren't expropriated. Let's all admit that SS is the most un-progressive policy imaginable, shall we?
See, kind of annoying, isn't it?
As for insurance, actual insurance would take a lot less (by orders of magnitude) than the system currently eats, since you only collect actual insurance when you meet the stipulations of the policy (being poor).
Following Rob Lyman and others with interest. One thing not mentioned (I may have missed it) is that Social Security benefits are currently tied to wage increases (how 'bout that source for me?). So the current system has a mechanism for insulating SS recipients from wage-related inflation. No further political action necessary.
Nonetheless, I suggest that everyone between 30-50 do the Roth conversion in 2010. It will be harder for the government to tax that stuff having promised not to.
Brooksfoe - that insurance policy debate goes around and around. As described above, there is some risk insulation in SS, but it wouldn't meet the IRS and accounting definitions of risk transfer.
I would say it is a combination of:
1) financing mechanism (benefits are tied most closely to contributions - and this is what it has been sold as)
2) disability and life insurance (through the respective benefits)
3) wage inflation insurance (through the increase mechanism)
4) wealth transfer (through the progressivity in the benefits themselves and how they are taxed)
I have some faint recollection of someone trying to disaggregate these factors but I can't seem to find it. Better deals (returns - even with US Gov "certainty") should be available on 1 and 2 privately. 3 has value, and would be difficult to proxy and hedge in current financial markets. 4, along with the compulsory nature of the program, is available from governments everywhere.
It is a mixture of these attributes and calling it one of them only, I think, obfuscates rather than clarifies.
Rob_Lyman: I guess I read too much into what you said and we basically agree. I believe the source of my confusion was in how I, intuitively, don't see a worker whose wages shoots up for doing the same work, to be "strained". What matters is how that retirement is paid for. If it's out of taxes, that wage gain is seized. If not, it's kept by the worker. With that in mind, let's go to...
Cody: The subtlety your scenario misses is the impact of how (as I mention above with Rob_Lyman) those retirees are securing access to the widgets. While money is just accounting, financing is not.
If those retirees had funded their retirement with investment, they would have enhanced the productivity of each worker by, in effect, giving them productivity-enhancing tools that allow them to make more widgets for the same labor input. Since the retirees take *less* widgets than the gain in widget-productivity, both workers and retirees are better off, regardless of the dependency ratio.
And as I explained above, that result is robust all the way up to a dependency ratio of infinity (everyone retired).
By 2041 and possibly even by 2025, technology will have advanced enough that the problem of social security will be totally different from whatever we are facing today.
(I was going to use rainbow colors, but apparently you can't use colors in posts... oh well.)
EI
I've brought this up elsewhere only to be given the STFU comments...but...
Along the lines of brooksfoe's comment about productivity. Of course, a lot of our productivity increases has been beneficial to the environment and our overall quality of life. There will be many more inventions unforeseen that will increase our overall wealth and the size of contributions to SS. I don't necessarily agree with the comment that increases in productivity mean a decrease in environmental quality (see, e.g. Moore's Law), but I do agree that we focus too much on economic productivity gains without considering other aspects of our lives that add value to living.
We continue to overlook the need to improve our overall quality of life and we focus too much on the size of our retirement check when that should be just one part of the equation. I think we'll see more and more emphasis on this. Part of it is that our society is wealthier and we have the luxury to think about things, but part of it is also the realization that all this productivity is achieving marginally less amounts of 'happiness'.
When calculating my retirement needs, I see that many financial advisors recommend calculating a requirement for 75-80% of pre-retirement income. Assuming that most of us should be saving 10-20% of our income each year in order to be able to retire and not live in poverty, this means that financial advisors are essentially recommending that you continue to spend in retirement what you spend now. Huh? What about enjoying all those things in life that you didn't have time to do while working that don't cost a dime. What about planning *now* to NOT have a mortgage -- which is what people used to do.
I plan for no social security in my retirement because I believe the rules will have to change and I have no idea how that will impact me. I also believe I should have responsibility for my own future and not pawn it off on my son.
The economy will continue to grow and much of that will be due to productivity increases. The % of old people will grow faster eating up a larger share of our taxes which aren't growing as fast as the need to maintain current benefits. So, either: the % of old people stops growing because we have more kids or people suddenly start dying off younger (neither more likely or desirable); raise taxes without regard to its effect on the economy or the electorate (not likely or desirable); reduce benefits or change the eligibility (not likely though perhaps desirable). Or, we can start focusing more on overall quality of life which might just include finding productive uses for senior's time which they would find desirable -- including part-time or part-year work, re-establishing communities in some of our lifeless suburbs, creating places to live that don't ghettoize seniors..and others that cost little but add a lot. Unfortunately there is little political gain in saying such things. Much easier to say (dishonestly) that "I'll guarantee SS won't change" or other nonsense.
This whole debate makes me proud that President Bush, you know, took the $4 trillion budget surplus and turned it into a $5 trillion budget deficit. But hey, then we wouldn't have had the Iraq war, and imagine how much worse off we'd be then!
Brooksfoe: of course I am of the opinion that the deal struck in '83 should be kept.
The deal in '83 was to raise payroll taxes and cut income taxes and lump it all together in a unified budget for 30-40 years. Payroll taxes have subsidized income taxes since '83. Starting in about 2017 income taxes will subsidize payroll taxes for somewhere between 30 years and the end of time.
And just to point out something that should be obvious: the funding of social security can come from any source. To this point we have chosen payroll taxes as the sole revenue source via a dedicated account that currently runs a surplus. The very nature of the Greenspan agreement was that in the future a significant percentage of the funding for social security will need to come from the general fund, ie. corporate and personal income tax. This is not news, and hasn't been since 1983.
Greenspan's deal in '83 was that our wealthiest citizens would be subsidized for a while and then pay it back waaayy in the future. Early in the Bush presidency Greenspan was on record as saying that the trust fund was safe, and that the very large tax cuts for the wealthy would not jeopardize it. Lately he has been waffling, the pitiful SOB.
Here are two ways at looking at the 1983 deal. The first: it was an honest effort at income redistribution and a sincere belief in supply side BS. All those tax cuts for the wealthy enabled by the payroll subsidy would generate so much wealth that their would be no problem repaying the fund. The other: it was a cynical Wimpy ploy: we will glaaadly repay you in 2017 for a hamburger today. Greenspan's recent behavior indicates to me that he is in the Wimpy camp.
IMO Bruce Webb's blog is the best source of information on Social Security:
http://bruceweb.blogspot.com/
I would say [Social Security] is a combination of:
1) financing mechanism (benefits are tied most closely to contributions - and this is what it has been sold as)
2) disability and life insurance (through the respective benefits)
3) wage inflation insurance (through the increase mechanism)
4) wealth transfer (through the progressivity in the benefits themselves and how they are taxed)
....Better deals (returns - even with US Gov "certainty") should be available on 1 and 2 privately.
Nice analysis. But I'm curious about how to determine whether a person could find better deals "privately" than Social Security. We might model a world in which people took the amount they (and their employer) paid in FICA taxes and instead invested them in the market. But to make this analysis complete, we'd also have to model the consequences of government losing the benefit of all those FICA revenues. So we'd have to model the consequence of government running vastly larger deficits than it did, or model the consequence of government collecting more revenues from some other source (income tax? capital gains tax?). Only after modeling those changes could we attempt to assess the economic returns on people's investments. I haven't seen such a study.
nobody.really,
You forgot one scenario to model.
So we'd have to model the consequence of government running vastly larger deficits than it did, or model the consequence of government collecting more revenues from some other source (income tax? capital gains tax?).
How about the consequence of government SPENDING LESS?
Yancey: you're way too subtle... but you still beat me to it :(
How about the consequence of government SPENDING LESS?
And that's fine, but in policy analysis lingo, this confuses the concepts of revenue requirement and public finance. That is, whatever the merits of spending less, presumably those same merits applied whether or not we financed government through a payroll tax or an income tax or .... So they're a ceteris paribus assumption -- that is, they're held constant for purposes of making a comparison.
To quote you:
I'm curious about how to determine whether a person could find better deals "privately" than Social Security. We might model a world in which people took the amount they (and their employer) paid in FICA taxes and instead invested them in the market.
This appears to exclude quite a bit of government spending: in the amount of SS benefits to be paid out to these people, no less. Being able to pretend otherwise (as in, we are still paying benefits to current retirees so nothing's change) comes only from the practice of keeping future obligations off the books.
nobody.really: Adding to what ...Max... said, a SS obligation *is* government debt, just as surely as a T-Bill. Ideally, the government should buy third-party annuities to cover SS and fund them by issuing bonds so that the governments liabilities can all be seen at once with the debt figure.
If people saved for their own retirements, then the government would lose the money, but it would also lose the obligation to pay. On a sound accounting basis, the balance sheet would be unchanged. (New debt issued for spending would cancel the debt not needed to be issued to buy annuities.)
SS obligation *is* government debt
Not legally, it isn't. In principle, you could sue if the government repudiated your T-bill, but you can't do a thing (other than lobby) if they decide to change your SS benefits.
In response to Michael's point, if retirement income for pensioners with investments is paid for out of dividends, then of course the workers lose out, as there is less money for wages. So the net impact is not so different from taxes for a public pension.
The point Rob makes is known as the 'centrality of output. Nick Barr wrote a good paper on this.
http://www.imf.org/external/pubs/ft/wp/2000/wp00139.pdf
[A] SS obligation *is* government debt, just as surely as a T-Bill.
That's a fascinating assertion. So you're saying that people have the same property interest in Social Security benefits that people have in T-Bill payments? That when Congress changed eligibility requirements for Social Security in 1983, it was the equivalent of Congress changing the terms of bonds the US had already sold?
You may be right, but that's not my understanding. And it's not an entirely hypothetical question. Many banana republics have had to choose between paying their debts and maintaining social programs for the benefit of their citizens. Given the US's taxing and spending habits, we appear to be following suit.
In any event, the fact remains that for decades the US has been financing its current operations out of the Social Security trust fund. I merely observe that no assumptions about eliminating that trust fund are valid unless you also address how the government would cope with the consequences for its (then) current accounts. The suggestion that eliminating Social Security will have benefits for the US's future accounts, while likely true, really doesn't address the question.
James, if not for the investment made by the stockholding retirees in the company, the workers' jobs would not exist. How's that for "losing out"?
I see nothing inherently risky in placing my assets into investment vehicles used by millions of others and are subject to market forces. Market forces are, over time, far more rational than our Congress.
Yes, I'm laying claim to future output but then so is my son's savings account with which he some day hopes to purchase a car.
Unless you spend every dime each month, everyone is, in some way, laying claim to future growth and production. Of course, this same savings is used to finance productivity improvements using capital markets to efficiently put my savings to work and this create wealth which I later tap in my retirement.
How, again, do workers lose in this deal? Would it be better if we saved nothing and the worker continued to use a 30 year-old process to build widgets because the company couldn't pay the 10% interest on the more limited supply of capital? Or is this another example of government dictating the parameters of supply and demand?
If I assume I'll receive SS at its current levels of benefits, I'm betting on an increased level of taxation in order to maintain current (or, heaven forbid, rising, benefits) because we aren't going to slash other government spending (yes, this is an assumption I'm making).
There might be some short-run economic harm if consumer spending declines and savings goes up but in the long-run the lower cost of capital from savings will increase investment and productivity thus benefiting us all.
I think it's safer to put my money away and spend it in retirement. Hopefully I won't need SS, and I can feel good about forwarding that check to my favorite charities.
It is a mixture of these attributes and calling it one of them only, I think, obfuscates rather than clarifies. - Mindles
I think that's exactly right. Which is why I object to Dan saying to have to "just admit it's welfare". Social Security does a bunch of different things. In theory it might be worth thinking about how to disaggregate them, or whether in fact it would be worse to disaggregate; perhaps the whole is greater than the sum of its parts. To the extent that a program is anti-poverty insurance, for example, its ability to lock in political support is an intrinsic merit of the program, because it's part of the guarantee that the program will still be around when you retire. It's analagous to the creditworthiness of the institution. And if that locked-in political support is dependent on people's benefits being calculated in terms of their contributions, meaning it's less income-progressive than it might be, that may be a fair price to pay for greater certainty of getting your money back 40 years from now.
Rob_Lyman and nobody.really:
If the government changes SS benefits, you can in fact sue. The lawsuit will just go nowhere.
Likewise, if the government defaults on its bounds, you can absolutely sue to recover. That lawsuit will also go nowhere.
In both cases, they are unsecured promises to pay. What differs is the practical consequence of not paying.
It's true, as nobody.really points out, that there are different consequences to defaulting on one debt vs. the other. This is an artifact of the methodology creditors use to evaluate creditworthiness. They consider a bond default to be a much stronger signal of lack of creditworthiness than a default on pension promises.
This is exactly why voters should demand proper accounting. To the extent that the government suffers weaker consequences to a pension default than a bond default, it is, in effect, saying to voters, "Our bond IOUs are serious. Social Security isn't." That is why SS should be funded by issuing government debt, so that the government cannot prioritize one over the other.
(It always amazes me how people act appalled that the government would cut SS benefits, yet do not demand that they have equal status to creditors that bonds do.)
Eliminating future SS payment obligations absolutely does impact current accounts because under a proper accounting they are on the balance sheet, reducing its value.
If the government changes SS benefits, you can in fact sue. The lawsuit will just go nowhere.
Likewise, if the government defaults on its bounds, you can absolutely sue to recover. That lawsuit will also go nowhere.
Person, I wish you'd clarify your legal theories a bit here. The two lawsuits go nowhere for different reasons. You lose in the SS case because you have no right to SS benefits; they are, legally speaking, just government largess and alterable at the whim of Congress. Bonds are a legally enforcable promise to pay. That's probably a distinction without a difference if you just want your money, but it's the cause of the different consequences of default.
SS is funded by government debt, BTW. The "trust fund" is literally a bunch of T-bills held by the SSA.
The "trust fund" is literally a bunch of T-bills held by the SSA.
An interesting paradox, right there. You'd think the T-bill, the highest rated bond possible (I am no expert: it might be only VERY NEARLY so, but the point stands), is the safest vehicle for investing the trust fund, if not the highest yielding one. But since the government has plenty of opportunity to effectively refuse collecting on these bonds in the future, the investment becomes much riskier than some relatively conservative mix of stocks and high rated private bonds -- which government would never hesitate collecting on. Of course T-bills are still lower yielding, to boot. Reminds me of the underlying truth that money is only worth something if enough of the right people say so...
Can we get a robot overlord to take charge of all international banking? :-) With powers of collection against all goverments, of course.
Kind of a weird hypothetical we're discussing here, but the SSA's notes are probably a legally enforceable document - but they are held by the SSA, not the retirees.
I couldn't opine on this, but if it came to legal action (which it likely wouldn't, given what would have to happen first) it would depend on retirees getting one branch of government to sue the other or attempting some right of subrogation over the SSA's note holdings in order to sue themselves. A lawyer would have to tell me whether there could be any basis for that, what with a) government immunity, b) terms of the SSA notes c)terms of SSA obligation to retirees, etc.
Here's a bunch of stuff on this, including my own contribution.
Whoops! That's right, of course. When we model the elimination of the Social Security program, we'd want to model related (endogenous) changes in spending, including the elimination of the provision of Social Security benefits, as well as the cost of administering the program. If we believed that government suffers from a "wealth effect" whereby the existence of the trust fund would make government feel richer, and therefore more inclined to spend then it would be otherwise, we'd need to model that as well.
I merely meant that, for purposes of studying the effects of the Social Security program, we wouldn't want to change unrelated (exogenous) spending. I'm not defending government spending here; I'm merely trying to create an apples-to-apples comparison.
By "proper accounting" you mean accrual accounting, not cash accounting. And that's fine. I agree. The OMB, CBO and GAO don't. But in any event, it's beside the point. Let's put aside the balance sheet and look at cash flow.
Let me simplify this. This year, 2007, the US government is running a deficit. But the deficit would be even bigger if the US government didn't have a big flow of FICA taxes to draw on, revenues that exceed Social Security costs. In any scenario in which we talk about eliminating the Social Security program, we'd need to also need to talk about how government would meet its cash flow needs THIS YEAR: Issue more bonds? Print more money? Raise more taxes? There are consequences to any alternative, and we need to consider those consequences.
Even if we had never created Social Security, I think Hope Depot would want to get paid, in cash or credit, when they provide a bucket of paint to touch-up the White House. I don't think it would suffice for government to tell them, "Hey, we can't pay you cuz we're running a big debt right now. But instead of compensation, please take comfort in the fact that our current account is actually better off than if we had created a Social Security program in 1933!"
it would depend on retirees getting one branch of government to sue the other or attempting some right of subrogation over the SSA's note holdings in order to sue themselves
Mindles, I think it's much simpler than that. Instead of directly refusing to collect on old T-bills the SSA can always buy extra new ones, extending the uncollected debt into the future (and covering its own shortfall by increasing payroll taxes, cutting benefits or combination thereof). The end result is the same. My point was that there is a whopping big conflict of interest between the SSA's function as an agent of the retirees and its function as an arm of the government, and this conflict has some interesting consequences.
I'm busy, but...you have no right to SS payments, SSA is not your agent, and there is no possible legal basis for you to sue anyone if you never get a dime of SS.
Flemming V. Nestor 363 U.S. 603 (1960)
I don't have time to research the legal technicalities of the hypothetical Commissioner of SS v. Sec. of Treas. case, but suffice to say that Congress could just order the SSA to stop paying benefits and not to sue.
"Even the Clinton Administration admits that the Trust Fund is fraudulent, stating in its proposed budget for fiscal year 2000 that:
These [Trust Fund] balances are available to finance future benefit payments and other trust fund expenditures--but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, make it easier for the government to pay benefits. [Emphasis added.]
Other government agencies and officials acknowledge that the bonds held by the Social Security Trust Fund are meaningless. The Congressional Research Service (CRS) notes that "Simply put, the trust funds do not reflect an independent store of money for the program or the government...."
What, then, is the purpose of the Trust Fund? According to the Congressional Budget Office, "Trust Funds have no particular economic significance; they function primarily as accounting mechanisms to track receipts and spending for programs that have specific taxes or other revenues earmarked for their use."
The bonds have no independent value because, as the CRS notes, "When the government issues a bond to one of its own accounts, it hasn't purchased anything or established a claim against another entity or person. It is simply creating a form of IOU from one of its accounts to another."
The Comptroller General of the United States recently testified to this effect: "[An] increase in assets to the SSTF [Social Security Trust Fund] is an equal increase in claims on the Treasury. One government fund is lending to another. These net out on the government's books."
http://www.heritage.org/Research/SocialSecurity/BG1256es.cfm
P.S. I don't care about the source of this info, Mitchells summary is spot-on
Sad that, 8 years on, peep are still debating, some with grand ignorance, whether this pig, SSA, can still root. Let's face it, it's been poor policy, it needs to be booted, and we need to re-boot.
Or, Dan, we could all admit that Social Security is an INSURANCE POLICY against being old and poor, which is a lot worse than being young and poor because old people find it hard to work.
Calling it an "insurance policy against being old and poor" is ridiculous.
First of all you get Social Security payments even if (like the overwhelming majority of old people) you aren't poor. It doesn't protect poor people. It transfers money from the young and productive -- even if they're poor -- to the old and unproductive -- even if they're not poor.
Secondly, how the hell does it make sense to have "insurance" against GETTING OLD? Getting old is the best thing that can possibly happen to you. The alternative is dying young! Getting old is 100% predictable. In fact, we know exactly when it'll happen to us. When you set money aside for something that is inevitably going to happen to you a few decades from now that's not "insurance". That's called "savings".
Brooks, if you want to argue that we need to provide for needy old people I'm all for it. Once they've spent all their savings, giving them a monthly stipend and basic medical care is the humane thing to do. But back here in the real world, Social Security mostly just transfers money from people who have less of it to people who have more of it, because the latter are an organized voting bloc and the former are not.
Social Security was established by the Social Security Act of 1935. The majority of the programs in our social support network were created via amendments to this act. For example, Medicare is found in Title XVIII and Medicaid is found in Title XIX.
Social Security was created in the depths of the Depression to alleviate the poverty of the elderly at that time. The initial recipients never contributed to the system. In fact, most if not all those who retired prior to 1980 benefited by not having to contribute to the system for some portion of their working lives.
Social Security could have been funded from income taxes. It could have been funded by sales or estate taxes. It was instead funded as a pay as you go system from special payroll taxes. It requires working and paying in to the system for 10 years to qualify. This funding mechanism created an intergenerational support system based on work. It was intentionally not means tested because Roosevelt realized that the wealthy would kill it if they were excluded. He was a pretty smart guy.
It was also a pretty smart idea not to tie Social Security to the general fund and income taxes. Even in our moderately progressive tax system the wealthy pay a greater share and thus would have an incentive to kill the program.
That is now the problem, because of the demographic bulge of Boomers. To solve this problem the Greenspan Commission involved the general fund, and wealthy interests are now working to renege on the deal. In fact FICA and SECA have enabled significant income tax cuts for the wealthy since 1983. When I hear various Republicans discussing Social Security's problems I do not hear any suggest abolishing FICA and SECA and raising income taxes to cover the missing surplus. On the contrary, they typically suggest raising more revenue via payroll taxes. Anyone who agrees that this is a good idea is either an idiot or a thief.
Obviously, I am for honoring the deal and dealing with the consequences in 2040-whatever. And yeah, it has consequences in the very near future. So what? We can easily deal with it and providing for the well-being of our elderly is a good thing. It has been a good thing for my 37 working years.
And of course, everything in this discussion is dependent on a fair and orderly democratic government. Repaying the SS trust fund or the many other trust funds in our federal accounting system is entirely dependent on our political system. We don't have to repay the Saudis or the Chinese, either. But these actions have political consequences that may or may not be attractive.
Nat, I'm no expert on the Greenspan Commission, but the Trust Fund, and it's requirement to invest only in T-bills or securties guaranteed by the US have been around since the beginning. 42 U.S.C. 401
That is, the general fund has been absorbing the surplus and spending it for a lot longer than you seem to think.
Raising income taxes to cover the missing surplus is obviously more progressive than adding to payroll taxes. Oddly enough, President Bush's solution was much more like the former than the latter, in effect. It made the benefit formula more progressive, and returned some of the payroll tax to investors.
All,
Maybe my comments have been covered, but why isn't it acceptable to raise the early retirement age from 62 to 63 since full retirement has been moved from 65 to 67. Phase this in the same way that the full benefits has been done. Next elminate any reduction in the SS benefit on income earned between early retirement between early and full retirement so that people are have incetives to keep working in some capacity and contiune to contribute to SS. I am 68 and continue to work full time and contribute to SS plus I am fortunate to have a position that has health care and I haven't had to move to Medicare.
Any incoming administration and congress need to deal with the current problems on spending and taxes before proposing another national progam that will raise the tax burden. Why would anyone think that a government organization at any level except small local governments can do something at a high efficiency level. SS needs fixing, Medicare needs fixing, VA needs fixing, FAA needs fixing, Homeland Security needs fixing, IRAQ needs fixing, on and on. Hasn't it been determined that 75% of the Government Programs don't meet their mission??
Ralph Caruso
Rob, yes I am aware that there has been a trust fund for a long time. I have also read that prior to 1983 the fund was exhausted 6 times and the difference made up from the general fund. I vaguely recall the last of these was part of the motivation for the Greenspan Commission formation. Hence the looming 2017 general fund supplement to the pay as you go system has ample precedents.
I am of the opinion that is the deal and I would be a fool to allow it to change. I was asked to sacrifice in '83 and our government made a promise to pay me back. Should our government renege about all I can do about it is exercise my political rights and do everything I can to get those responsible thrown out of office.
My previous point was that running afoul of the wealthy via involving the general fund was a critical mistake for those interested in preserving Social Security. But not for those who oppose it for whatever reason. As is means testing, which President Roosevelt specifically cited. Since I have a very low opinion of Mr. Greenspan, I suspect that this is a feature, not a bug, in his eyes.
And Ralph's ideas above have some merit. I have also wondered about the early retirement age remaining static since that is truly one of the trends missed in the predictions.
Nat,
Unfortunately you were very foolish if you indeed went along with the scheme in '83, with the apparent knowledge, as you claim, that in the future there would be great pressure to change things later on.
That the rest of us, who have made no such agreement should suffer the consequences of your foolish agreement is beyond me.
Overall, the concept of a "deal" between generations makes zero sense. The earlier generation makes such "deals" without consent of the later generations, by definition. Deals between "classes" are no better: wealthy vs. workers, WTF? Before anyone starts using such terms let them disclose their preferred definitions.
Sam: You know, if only in 1983 I had signed on to the net via Road Runner and read my favorite blogs I would have know Greenspan wasn't to be trusted.
Or perhaps if I had read the in depth analysis in the local Austin American Statesman...
Yeah, it has taken 24 years of abuse of the public trust and the rise of the internet for it to be clear this is just another example of Americans who work for their money potentially getting screwed. If Social Security gets scuttled in the near future I am guilty as charged: I should have stopped Greenspan in 1983.
Until I started my own company I couldn't have told you how FICA and SECA actually work. Until I started reading Dean Baker, Max Sawicky, Bruce Webb, Brad Delong and others I had no idea how much of this system worked. Like most Americans I worked, raised a family and my health insurance was free. Things have changed.
If you think a publicly funded pension system is a good thing, the structure of Social Security is actually a very good idea. It is honorable and guaranteed. It is not welfare. It counts on the continued growth of our economy to provide future benefits. In an intelligently run capitalistic system that should be sure thing. It solved an immediate need in 1935 in a manner that provided for future generations. It avoided structural issues that would have made it vulnerable to our wealthiest and most powerful political actors. Despite assertions to the contrary those who created the program did a very good job at predicting demographic trends.
The big screw up in 1935 was they did not predict WWII and the subsequent post war baby boom. Doh!
If you do not think our government should be involved in a pension system then every funding system is a bad idea. Argue away. If you are like Megan and think an old age pension should be a means tested welfare system for the elderly then you probably think funding via the general fund is just peachy. Having worked in the so-called public welfare system since 1976 (both as a public employee and as a small business owner) and a means testing wonk, I think that is a really lousy idea.
And Max (I assume not Sawicky), our entire society is based on deals. They are the very fabric of our society, or any. They can be in contracts, laws like the SS Act of 1935, or societal norms. The intergenerational contract implied in Social Security is that everyone who works will have something guaranteed at the end of their working life. Or that if they pass away their children will have something to cushion the financial loss of a parent. It says that work is a good thing and that doing it for 10 years entitles you something. It's pretty simple and a very popular concept. Part of the hook is that everybody gets it eventually.
And, yeah, this can be changed at any time.
Overall, the concept of a "deal" between generations makes zero sense. The earlier generation makes such "deals" without consent of the later generations, by definition.
It makes even less sense when you consider that the "deal" is entirely one-way. I'm paying for retiree's Social Security benefits, in exchange for which they are giving me nothing at all. How's that a deal? To get MY benefits, I need to take money from the NEXT generation -- who also get nothing out of THAT deal.
"X screws Y out of money, but that's ok because Y can get it back by screwing Z" isn't a "deal". That's just sequential extorition.
Or, Dan, we could all admit that Social Security is an INSURANCE POLICY against being old and poor, which is a lot worse than being young and poor because old people find it hard to work.
We could "admit" that... if we had no clue what insurance actually was. Here's a hint for liberals: virtually everything you call "insurance" isn't. When you say "insurance" here, you mean a hedge -- like taking an umbrella in case it rains. That's not "insurance."
Social Security is welfare. Welfare which isn't means tested, but welfare nonetheless. It's simply transfer payments. That's not what insurance is.
Rob Lyman:
You can't eat money, not even money stored in tax-deferred savings vehicles (memo to gold bugs: you can't eat gold, either; it's just shinier than bills).
Thanks, Rob. Sorry to burst your bubble, but we gold bug know that you can't eat gold. The point of gold as currency is to make the money suply harde to manipulate.
No gold bug thinks that lack of a gold standard is the only problem in the economy or that returning to the gold standard would solve every problem. In fact, we better than anyone else understand the fact that money is not the same thing as wealth or capital (it only represents wealth or capital) and that all consumption must be funded by production.
After re-reading Freakonomics and doing so thinking, I'm wondering if the problem with Baby Boomers and the problem with Social Security and Medicare may ultimately solve itself. Could it be their lax diet habits of their youth, with the high cholesterol clogging the arteries in advanced age, the smoking, the high stress, Type-A career climbing, lead to earlier than expected deaths, even with the advances in medical science?
I've read the occasional news reports that the decline in the housing starts has led to some believing this is leading to a decline in demand for illegal immigrant day labor, meaning one economic problem might end up solving another to a degree. There's also that chapter in Freakonomics about the wave of abortions "credited" with "preventing" the wave of juvenile crime of the late 1990s and early 2000s.
Could it be one problem -- the potential early than expected demise of boomers because of poor health habits earlier in life -- help "solve" the coming expected fiscal crisis?
I'm not saying I wish this to happen, I'm just saying sometimes problems solve themselves in ways we never thought of.
Michael: as a boomer, I have thought about your points a bit. I am not as healthy as my 89 year old father was at a comparable time.
His advantage was a rural upbringing with sufficient food without additives coupled with serious manual labor. Although I was a taller as an adult his hands and forearms are still impressive. Great bone structure is earned.
I have been significantly more active throughout my life in ways that typify modern life, however. I was a varsity athlete and active in relatively serious adult activities, e.g. running 10ks and playing soccer and basketball.
What I now have in my 50s are the overuse injuries that hit my dad in his 60s and 70s. He is also the beneficiary of a completely free medical system since he was a career veteran. I doubt that will happen for me.
So, yeah, I think all of us who are alive today are going to have a more difficult 'golden years' than my dad. But I think that includes pretty much all of us, not just those of us who are boomers.