5/25/10 11:35 AMThe Future of Social Security - Grasping Reality with Both Hands

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Grasping Reality with Both HandsThe Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and Even-HandedDepartment of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.

Economics 210aWeblog ArchivesDeLong Hot on GoogleDeLong Hot on Google BlogsearchMay 04, 2010

The Future of Social Security

If the Social Security program remains as specified in current law, then sometime between 2032 and 2070--call it a 50% chanceof happening by 2042--the Social Security Administration's trust fund balance at the U.S. Treasury hits zero.

At that point, one of three things happen:

1. The Social Security Administration continues to write Social Security checks as usual, the Treasury continues to pay them,and the Treasury begins sending the SSA notices that it is overdrawn...

2. The Commissioner of Social Security announces that inasmuch as the Social Security Administration does not have thefunds to pay Congressionally-mandated benefits and cannot spend money it does not have, that he or she is reducing allchecks proportionately so that the amount of money to be paid out matches what is flowing into the trust fund. At first, thisis a benefit cut of 24% relative to what the law envisions, and the size of the relative benefit cut grows over time...

3. The Commisioner of Social Security directs the SSA to continue to write checks as usual, and the Secretary of the Treasurydirects that Social Security checks in excess of what is in the trust fund are to be dishonored and returned for insufficientfunds. One in four Social Security checks than start bouncing...

Which of these scenarios will actually occur in 2042 (or whenever) if no changes are made to current law depends on politicsand personnel in the future. We don't know what will happen. But that is what the threat point appears to be if no agreement isreached on reforming the Social Security system over the next generation.

Now comes Jane Hamsher to write that House Budget Committee Chair is a bad person:

Budget Hawk John Spratt and the “Grand Bargain” on Social Security: John Spratt, Chairman of the House BudgetCommittee, was recently appointed by President Obama to the Debt Commission... “secret meetings” in 1997 authorized byClinton Chief of Staff Erskine Bowles... negotiating a deal between Clinton and Newt Gingrich that included partialprivatization of Social Security.

Last week... Bill Clinton spoke openly about the secret agreement... in 1997... to take money out of Social Security and placeit in private accounts.... Clinton agreed to take the political heat for privatization, and the plan only fell through when the

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it in private accounts.... Clinton agreed to take the political heat for privatization, and the plan only fell through when theMonica Lewinsky affair exploded and Clinton was afraid to take the hit in the polls.... Clinton initially reached out to BillArcher, the Republican head of the Ways & Means Committee, while Bowles contacted Gingrich. “They both believed thatany effort to update Social Security would require government to incorporate some measure of choice, and that meant someform of privately managed account,” writes Gillon.... It’s unknown what position Spratt took in those talks. But around thattime, in April of 2008, the Charlotte Observer covered a speech by Spratt before the Rock Hill Chamber of Commerce(Lexis):

Spratt favors supplementing Social Security with a private savings plan that would either be mandatory “or else soattractive that everyone would sign up for it.” He also advocates investing about 20 percent of the Social Security trustfund in the stock market....

Early in 2009 Robert Kuttner wrote in the Washington Post that Pete Peterson was helping the White House in that effort,as were “leading ‘blue dog’ (anti-deficit) Democrats such as House Budget Committee Chairman John Spratt of SouthCarolina and his counterpart in the Senate, Kent Conrad of North Dakota.” Kuttner said that “the deficit hawks arepromoting a ‘grand bargain’ in which a bipartisan commission enacts spending caps on social insurance as the offset forcurrent deficits.” Put Spratt down as “open to Social Security benefit cuts” and a history of support for some type ofprivatization.

As I understand Spratt's position now and back in 1997 and as I understand Clinton's position back in 1997, it is that:

1. Congress enacts option (1) above: if and when Social Security taxes are not sufficient to pay traditional Social Securitybenefits, traditional benefits will be cut so that they can be paid by taxes.

2. Some of the Social Security trust fund will be invested in the stock market in hope of getting a higher rate of return--but theTreasury will guarantee to make the Social Security trust fund whole if and when its stock market investments ever turn outto be net losses.

3. Congress also raises Social Security taxes--only it calls them "contributions" to "private accounts."4. Social Security taxpayers get some choice as to how to invest their "private account" "contributions"--accepting more risk in

the hope of higher return, or not.5. Any gains or losses from investments in "private accounts" stay with the taxpayer in whose name the investments were

made.

This deal would allow (1) Democrats to say that they have no allowed the diversion of a single dollar of Social Security taxesaway from the current system; (2) Democrats to say that they have strengthened the Social Security system as a whole byreinforcing its finances and raising its financial resources; (3) Republicans to say that they have kept the Democrats fromthrowing more money down the well that is the unsustainable and outmoded twentieth-century Social Security system; (4)Republicans to say that they have created private accounts for every American.

It seems to me that this position would be a fine place to wind up--but that it is not a bargaining position from whichDemocrats should start. This is, in fact, where I envisioned and hoped we were going in 2005: with private accounts as an "addon, not a carve-out" to the Social Security system as it currently exists.

It also seems to me that this position is not well-described by Jane Hamsher's characterization of it as "some type ofprivatization" and "Social Security benefit cuts." It is more complicated than that. If you think that the 2042 outcome if nochange is made in the law is option (2) then it is a benefit cut. If you think that the 2042 outcome if no change is made in thelaw is either option (1) or option (3) it is not. And it is "privatization" only if funding "private accounts" with money notcurrently earmarked to flow to the Social Security system is "privatization"--which seems to me to simply be not the case.

Brad DeLong on May 04, 2010 at 05:11 PM in Economics, Economics: Fiscal Policy, Obama Administration, Political Economy,Political Economy: Social Democracy, Political Economy: Social Security, Politics | Permalink

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DrDick said...How anybody can support private accounts in the face of the recent debacle and a complete lack of evidence that anythingsubstantial is going to be done to prevent it from happening again is beyond me. The "fix" for Social Security, and to someextent Medicare, is verys simple and straight forward. Just eliminate the income cap on payroll taxes. The Social Security deficitdisappears and Medicare becomes much more manageable (universal single payer health care is the ultimate solution there). Italso has the advantage of making the payroll taxes less regressive.

Reply May 04, 2010 at 05:44 PM

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Alan said...Interesting article. However the depressing part is that it will be cited by countless true believers and internet trolls to claim thatSS is nothing but "the biggest ponzi scheme in all history."

Reply May 04, 2010 at 05:47 PMdilbert dogbert said...Please keep your hands off my Medicare! My $123 SS check is nice to have but not necessary. Medicare is really necessary.Wonder when the drum beat of stories about "Privatizing Medicare" will start?

Reply May 04, 2010 at 06:11 PMLisa Hirsch said...Best possible outcome: Congress raises the age at which you can start collecting Social Security and applies the tax to all income.

Reply May 04, 2010 at 06:12 PMDave Johnson said...We already have private accounts. Or are you saying it is illegal to save?

Reply May 04, 2010 at 06:15 PMCranky Observer said...> Best possible outcome: Congress raises the age at which > you can start collecting Social Security

Why exactly would that be a good, much less "best", outcome? The "best" use of our nation's enormous wealth is to force peopleto work until they are 69, 71, 73...? Why? I realize that people of scots temperament think that eternal toil is a wonderful thing,but 99% of the population disagrees.

Cranky

Of course, quite a few billionaire banksters and highly-paid, work-from-the-desk opinion columnists think more toil is alwaysgood too... for everyone else.

Reply May 04, 2010 at 06:31 PMJacob Christensen said...In case anybody wonders, the Swedish solution to the problem is #2: There is a formalised "brake" in the pensions system whichis applied when funds (taxes and other revenues) do not match projected benefits. Add a complicated set of individual accountsand the system should be complicated but viable even if it does not guarantee a specific level of benefits at a later time.

Reply May 04, 2010 at 06:43 PMBloix said..."the Treasury will guarantee to make the Social Security trust fund whole if and when its stock market investments ever turn outto be net losses"

Wouldn't this be the mother of all moral hazards?

"Best possible outcome: Congress raises the age at which you can start collecting Social Security"

We're already moving the age to 67 - higher than that of any other industrialized country. And they all take more annualvacation than we do. But we are poor and they are rich. Or another way to look at it is that we all have to work a few more yearsthan they do so that the banksters can keep on flying their private jets to their Caribbean beach houses where they keep theiryachts.

Reply May 04, 2010 at 06:48 PMdr2chase said...I can't see how this describes a place I'd like to end up. Why wouldn't we just fund SS benefits out of income taxes? The US GDPseems like the ultimate diversified investment, and the IRS has a mighty low overhead.

"Privatized" accounts just create room for investment mistakes, and the inevitable problem of people who cannot affordinvestment mistakes, overestimating their luck and making them. On the other hand, people who CAN afford investmentmistakes (that would be the richer among us) will put their money in these "private" accounts, depriving the safer funds eithertheir financial or political support.

Reply May 04, 2010 at 06:49 PMbakho said...The Greenspan SS prepayment plan has been a BAD bargain for the middle class. Large increases in regressive payroll taxes sothe filthy rich could have a tax lark. Now that the bill is due the filthy rich want to renege. Whatever payments are made as SSbenefits must necessarily come out of the economy at the time the benefits are paid. Everything else is a paper accountingtransfer. A combination of raising taxes on the wealthy and raising taxes on SS benefits paid to people with high income wouldmake SS more of an insurance. Make a large percentage of estates worth more than $10 Million go into the SSTF.

Reply May 04, 2010 at 07:14 PMMia said...I don't even know where to start, because I usually enjoy this blog.

After the bloodbath of exploitation that has evidenced itself so publicly in the last few years, why in the world would we EVERwant to privatize any portion of Social Security? The only ones who think that's a good idea are the ones collecting fees formanaging 401k funds. Anyone else should rightly see such a scheme as just another transfer of wealth (which it would be).

Gradually raise the FICA tax ceiling from 106,800 to say, $150,000. Then gradually lower it again as the number of SSrecipients begins to decline (not to sound morbid, but there is the reality that the numbers of elderly are going to rise, and thenfall again as the boomers pass away).

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Problem solved.

Reply May 04, 2010 at 07:34 PMc said...what dave said. we have private savings, employer 401ks, IRAs... what exactly would social security add on accounts be? whatwould be their purpose?

Reply May 04, 2010 at 07:36 PMRobert Waldmann said...Typo alert "Congress enacts option (1) above:" should be "Congress enacts option (2) above:".

I think Hamsher feels very differently than we do about the SSA investing money in stock. That's public ownership of the meansof production Jane (not that either of us particularly cares one way or the other about that). It means getting a high averagereturn over almost all 10 year periods (except for ones ending about one year ago before Obama and the Democrats savedcapitalism). In exchange the Treasury bears risk, so if there is a recession, there is a big budget deficit. Oh noooo, but, uhm,that's how Obama and the Democrats saved capitalism.

But she is mostly opposed to any openness to even add on private accounts because she doesn't trust the Democrats to hold theline at add on not carve out, because she doesn't trust the Democrats to hold any line, so she doesn't want them to ever give aninch.

I think Hamsher opposes any dealings with the enemy, while they are on the soil of the Republic (has she made a pact withvictory ? No she has made a pact with debt.).

Actually I agree that no compromise is possible with Republicans. They just trick us by pretending to negotiate, which coststhem nothing, since they never get to yes. Heyyyyy, that's clever. Why don't we do that ? Set up a powerless committee and saywe can't do anything until it has filed its report which we will then reject. Why hasn't anyone suggested that to Obama ?

Reply May 04, 2010 at 07:51 PMIrregardless said in reply to Mia...I usually enjoy this blog as I learn a lot but this post is too much. Pretty much each comment here has an issue with Brad andshould be one part of the "Delong smack down". I find it hard to square advocating for private accounts with the recentcatastrophic loss of wealth in the stock market. How about "the Treasury will guarantee to make the Social Security trust fundwhole if and when its stock market investments ever turn out to be net losses" Why would this guarantee be worth anythingsince the explicit assumption of this post is that the current SS IOUs will not be paid? What about moral hazard for the fundmanagers?

Brad owes everyone here a post answering the few questions that I have raised and the better written and reasoned questionsand comments posted.

Reply May 04, 2010 at 08:16 PMNat said...Long ago Max Sawicky pointed out that when the SSTF runs out in 2042 (for the sake of argument) that 2043 will see a verylarge income tax cut. The gist of the deal in '83 was 'give the wealthy a tax break for the next two generations and we will coverany Social Security short fall out of general revenue after that'.

Sawicky suggested that we just continue to make up the difference with income tax instead of payroll tax, just as we will havedone for 25 years or so.

So I propose the Sawicky Plan as #4: Congress should pass a law that affirms that the general fund will handle any and all shortfalls in the Social Security pay as you go system to perpetuity. Problem solved.

Of course 99% of current discussions on this topic reflect the desire of the Republican Party to renege on the whole deal andessentially swipe the multi- trillion dollar trust fund.

And I find it absurd that pointing this out is necessary: paying ahead in any manner is unbelievably stupid. Wimpy never paysyou on Tuesday for the hamburger today. Every dollar paid ahead shrinks the tax burden of the wealthiest of tax payers today,and time shifts the political battle to where the money will have to be pried out the wealthiest and most politically powerful taxpayers of the future.

Reply May 04, 2010 at 09:06 PMkaleberg said...A more conservative approach would be to take an old fashioned approach, one popular in the 50s & 60s of the last century, andargue that the government basically has an equity position in every private business in its ability to tax corporate profits. Ifbusiness does well, the government gets more money to spend, on research, wars, roads or Social Security. Rather than buyingequity shares in corporations, it would make more sense to simply restore corporate taxes to a more old fashioned level. Weknow, from history, that this will have little effect on economic growth, and will realign government, taxpayer and corporateinterests. The government provides a many valuable services to modern corporations, particularly limited liability, which can beconsidered a valuable insurance policy, so it makes sense for it to charge a suitable fee rather than allowing corporations tocontinue as free riders.

Reply May 04, 2010 at 09:07 PMchristofay said...Of course bennies to Fed gov employees should also be looking at deep bennies cuts. The Fed has already been def spending forclose to a decade, so how can we fully pay the bennies to those workers who choose the fed bureaucracy industry as theirprofession of choice? If the fed bureaucracy industry can "create jobs", then let it make a profit, a surplus at the end of aspending year.

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I expect a mean test for starters for the double dippers in Congress. They get to accumulate tax-free slush funds (re-electionfunds), then they get to sell their fed gov access to the best bidders. Typically they either die in office or retire, rarely voted out,well, last election and the upcoming a log of them were and will be voted out. In our specialized service industry economy thereare good areas to save money and to generate funds via taxation here. I propose the marketing motto, Your Turn to Go First.

Reply May 04, 2010 at 09:42 PMbenamery21 said in reply to Nat..."2043 will see a very large income tax cut" This assumes that A)The SSTF is honored, and B)the redemption of the trust fund iscovered thru progressive income tax increases rather than: 1)Some form of regressive taxation (as a VAT), 2)refinancing as debtheld by the public.

There SHOULD be progressive income (and estate, etc) tax increases on the rentier class (starting circa 2016, and varying overtime) to return the money they have borrowed from (underpaid to) the general fund since pay-as-you-go turned into pre-funding by middle class boomer and Gen X payroll taxes.

Reply May 04, 2010 at 09:55 PMbenamery21 said...Long before (back on the old unmoderated Krugman site) the recent co-option of the term Tea Party, I proposed the "TrustEnforcement Act: Progressively Accounting for Regressive Taxation Yields" or the TEA PARTY ACT of 2016.

This would be a significant reform of the estate, payroll, and income taxes which would base tax rates during the SSTFdrawdown on recouping with interest the gains made by the upper class via the "more economically efficient" regressive taxstructure of excess payroll taxes and reduced capital gains taxes which obtained over the past ~30 years.

Reply May 04, 2010 at 10:16 PMbenamery21 said in reply to Bloix...Age 67...Well, except Greece now, apparently. The banksters win again. Obviously the problem in Greece was working peopleretiring not rich people dodging taxes and looting the economy.

Reply May 04, 2010 at 10:21 PMbenamery21 said in reply to c...Forced saving. Call it what it is.

Oh, and a chance for banksters to skim(can you say "fees"). Oh, and a re-apportionment of risk back onto the individual poor(no bend points in forced savings accounts so the vaunted progressivity of benefits goes out the window). Oh, and an artificialinflation pump for market values when boomers start to withdraw from their 401(k)s (further chances for banksters to loot, canyou say "more uninformed herd investers to be fleeced").

Reply May 04, 2010 at 10:27 PMbenamery21 said...Delong says: "It seems to me that this position would be a fine place to wind up"

Delong is advocating reduced progressivity of Social Security benefits and increased individual retirement poverty risk.

Reply May 04, 2010 at 10:32 PMbenamery21 said...Forced saving to fund a benefit add-on I could live with, but you seem to be advocating a "let SS wither to insignificance"approach by taking a starting point which assumes no change in the law and assumes the correctness of assumptions regardinga continuing decline in the ability of scheduled revenues to fund scheduled benefits.

How about the following simple approach (I have additional refinements but this is the gist): Hold constant the ratio betweencovered wages AFTER-FICA (rather than before FICA as now) and scheduled benefits. One could hold the FICA tax rateconstant and close the shortfall solely thru benefit cuts from scheduled benefits. Or one could hold to the current benefitschedule and fund the shortfall solely thru FICA tax hikes. However, the pain would be evenly distributed if the Average WageIndex is simply revised to reflect after-FICA wages.

Reply May 04, 2010 at 10:53 PMbenamery21 said in reply to benamery21...Oops. After revising the Average Wage Index to reflect after-FICA wages, to evenly distribute pain between workers andretirees, it would be necessary to schedule indexed increases in the FICA tax rate to maintain long term fiscal balance.

Reply May 04, 2010 at 10:57 PMvtcodger said..."Grasping Reality ..."???

We have a chart which is I think OK except for a couple of minor flaws like failing to label the vertical axis which is, I think,surplus in the Trust Fund as a percentage of what? obligations? Then we have the assertion that in 2042, benefits must be cutby 24%. There's no explanation of where that claim originates, and it certainly appears to be unrelated to the chart.

My opinion. This is either bullshit or so badly presented as to be worthless as a basis for discussion.

BTW, the Social Security Trust Fund is NOT, REPEAT, NOT the primary source of Social Security benefits. It is much moreanalogous to a checking account -- someplace to hold cash so the checks won't bounce. It is, at the moment, bloated by excesscontributions from baby boomers. That they will eventually want (and get) their money back is a problem only if the countryactually is -- as often appears to be the case -- run by total idiots.

If anyone wants a serious and accurate discussion of Social Security, let me recommend Bruce Webb's bloghttp://bruceweb.blogspot.com/.

Reply May 05, 2010 at 12:08 AM

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Barry said...My plan: Step 1 - terminate the Berkeley econ dept - obviously, we can't afford it. Tough titty, old boy.

Step 2 - hang the motherf*cking economists who have lied to us about SS - Feldstein and Greenspan (who gets 40 from the catbeforehand, for breaking the financial system - if this means we swing his corpse, so be it).

Step 3 - hang every motherf*cking econowh*re who has praised those motherf*ckers. Or they get to swing the cat or pull on therope.

Step 4 - raise taxes on the rich.

Step 5 - burn every br*thels in econowh*redom (Chicago, AEI, UCLA, Heritage, Harvard, CATO, GMU) to the ground, with alleconowh*res locked inside.

Why the f*cking f*ckity f*ck do you listen to the g-dd-mned neo-classical/-libeal econosh*t which got us in to this mess, Brad?

Reply May 05, 2010 at 04:15 AMBarry said...Oh, I forgot - burn Hoover.

Step 6 - impale the regents at Harvard, Chicago, GMU and UCLA for systematically screwing us over for decades. Those regentsat Stanford who support Hoover also get some sharp wood.

Reply May 05, 2010 at 04:22 AMMiracle Max said...Best progressive option has been mentioned -- use income tax to shore up any shortfall in the cash requirements of theprogram. Last time I looked, this was less than 1.5 percent of GDP (way out in 2040-something). Note that this does not mean atax increase all of a sudden, since you need general revenue to repay the fund leading up to 2040-something anyhow, undercurrent law.

The flaky part of Brad's preferred compromise is that a) benefit levels encompassing the add-on are uncertain; and b) themeans by which benefits are chopped down to cash in-go levels are uncertain. To be fair, also uncertain is what happens ifnothing is done. The presence of an add-on program could make it easier to reduce scheduled benefits in the name of program'balance.' In this spirit, I propose we balance the defense budget too.

One can pretty much guarantee that, contra Brad, his preferred back-to-the-wall compromise is where President Barry will openthe bidding.

An add-on program in addition to current scheduled benefits is not a bad idea. See here: http://tinyurl.com/2bcl4s2

I would not have a cow over investing some of the Trust Fund in the stock market, though how would the revenue be replaced?I guess I would have a cow.

I am MaxSpeak and I have approved this message.

Reply May 05, 2010 at 07:10 AMkharris said...OK, let's not treat this as somehow a new idea from a guy who just started looking at it. DeLong was a strong proponent, priorto the latest stock market plop, of the notion that the equity premium was large and more or less guaranteed wonderful returnsto stock investment up to the point that the premium was erased. From that view sprang the policy advice that there should beinvestment account add-ons to Social Security. That advice, if followed at the time it was offered, would have producedshocking losses.

It would have increased the US savings rate, assuming Ricardo remained on vacation, by exploiting a human "irrationality" (opt-outs generate more of the "in" behavior than do opt-ins). It would have generated fees for the financial sector, which hadalready risen to 40% of S&P profits and is headed that way again - it would have furthered the "financialization" of the USeconomy. We have seen where that gets us.

So, we'd have shocked the public into what very likely would have been a new low in trust of public institutions, exploited ahuman frailty to achieve a policy goal, and enriched the richest participants in the US economy, all in service of driving down anequity premium that DeLong finds offensively large.

Now that the policy has dodged the collapse of the stock market - thereby avoiding shocking the sheep into further distrust ofgovernment - let's give it a try!

No. Let's not. Let's face up to our problems without gimmicks, and with a clear understanding that the goal of Social Security isa virtuous one, that it has served that goal well, and that the evolution of the US economy toward less security and fewer legs onthat three-legged retirement stool argues for keeping the Social Security system we have, instead of making it more complicated,costlier and quite possibly riskier.

Seriously, is there evidence that a nation of equity owners would be a better nation? Isn't the share of the public involved inequity investment in the US already high by G7/G20 standards? Have we found a thorough-going betterment of citizens' welfareas a result? We have a more equitable, more secure culture through the preachings of Jim Cramer than do the poor, benightedSwedes and Dutch and French who live lives of quite, non-equity-investing desparation?

It doesn't seem so. It seems that our interlocutor is not trustworthy on this issue, having clouded his own judgment throughexcessive fondness for his own policy inventions.

Reply May 05, 2010 at 08:17 AM

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Barry said...kharris, good summary.

Reply May 05, 2010 at 09:14 AMRobert Ash said...Brad, we beg of you. Please think about this issue more before commenting on it again. You're one of the few economists I lookto for sound judgement and insight. This post is so forgiving of deceitful attempts to repeal SS and enrich the already rich,disguised as SS reform efforts, that it leads me to question your sanity at the time you wrote this piece.

Reply May 05, 2010 at 09:34 AMA said..."...."some type of privatization" and "Social Security benefit cuts." It is more complicated than that. "Of course it is more 'complicated.' Announcing openly that you raised payroll taxes on the under-100k$ income set to fund taxcuts for the upper classes might not go down so well. But one can always rely on economists to help hide what is really going on;just make it 'complicated.' Then the media can apply their fact-free reporting to make it really un-understandable. The tea partymovement and recent health care reform debate shows how easy it is to direct the public's ire on the wrong target. Only inAmerica do poor people defend privileges of the rich so passionately, not because they believe in the American Dream, as isoften claimed, but because they are so badly misinformed.

And there are private accounts already, (401k, IRAs and such). They helped transfer part of our retirement savings to 'WallStreet.' And transferring part of Social Security taxes to such accounts would make Social Security's position worse, not better.

With the Obama administration delivering a Republican health care reform as originally suggested by the Heritage Foundation,and having bailouts for bankers but not for unemployed homeowners, will they next bring us the Social Security privatizationwhich even Bush II couldn't deliver? If so, then the U.S. has become a banana republic, its government captured by the financial 'industry,' and elections aremeaningless kabuki.Don't help it along, please.

Jane Hamsher's conclusion is right (based on the info her FDL post provided),and not even inflammatory; Prof. Delong, you deserve the 'smackdown' provided by most commenters on this post.

Reply May 05, 2010 at 11:04 AMSharon… the profoundly disappointed said...Shame on you.

I'm honestly surprised that you would post this after the last few years.

I read Jane's post yesterday and I'm with her on this one. I simply don't trust Wall Street, and I don't want the one stableportion of my meager retirement funds parked with Lloyd and the boys.

Raise the income limits on FICA. As people have noted up-thread, rich folks have to pay for their party one day.

Reply May 05, 2010 at 12:04 PMGlenCul said...Fact 1: In any given year, one of the several streams of tax income to the federal government are payroll taxes, labeled "FICA".This tax is harshly regressive because 1) it only applies to salary and wage income, and 2) it is capped at ~$100k.

Fact 2: In any given year, among the many expenditures of the federal government are payments to Social Security retirees.These payments are not particularly generous, but their main purpose is to prevent the scenario of grandma, cold and sick in anunheated flat, eating catfood.

Fact 3: The income and expense streams from Facts 1 and 2 are conceptually linked through a special account. The conceptuallinkage creates a so-called 'social security reserve fund', which is an accounting fiction--useful, but not crucial. In this specialreserve fund are special government securities.

Fact 4: In any given year, if the federal government's expenses, including that in Fact 2, exceed its income, including that in Fact1, the difference is borrowed, one way or another. This occurs routinely year after year.

Thought experiment 1: Make Fact 3 disappear. Burn the special government securities. Do a couple of mouse clicks and removethe special account. Question: What has now changed in any fundamental sense?Answer: Nothing. The government will continue to collect taxes, in the same amount, including those in Fact 1. The governmentwill continue to meet its expenses, including those in Fact 2. And the government will continue to borrow to meet the differencebetween taxes and expenses, which have remained unchanged so it's borrowing from China and Japan and ... remain unchangedin amount or type.

Thought experiment 2: Increase the taxes from Fact 1, possibly by increasing or removing the cap.Question: What will now happen in a fundamental cash-flow sense (independent of other macroeconomic changes and knock-on effects)?Answer: The special social security account will begin to grow faster than it currently does by exactly the increased tax amount,the income to the federal government in the year will increase by that amount, and the amount borrowed from China and Japanand ... will be correspondingly less in that amount because the additional amount will be 'borrowed' from the social securityaccount.

Thought experiment 3: Divert 25% of the tax stream from Fact 1 to a fund--let's call it the US Sovereign Hedge Fund, USSHF--to invest in stocks.Question: What will happen in a cash-flow sense (irrespective of the effects of increased demand on the equity markets, etc.)?Answer: The amount diverted to the USSHF will be spent in cash to buy stocks. The difference between buying the stocks in the

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Answer: The amount diverted to the USSHF will be spent in cash to buy stocks. The difference between buying the stocks in theUSSHF vs 'buying' government securities in the existing account will be felt as a need to sell the difference in government bondsto China and Japan and ... because the amount available to be 'borrowed' from the social security account will be smaller.

This therefore amounts to borrowing dollars from China and Japan and ... to invest in American equities (or maybe globalequities, who knows?). Maybe the spread wins and the USSHF makes money. Maybe the spread loses and the USSHF is down.Maybe the idea is good because of the historical spread between equity returns and the risk-free rate represented by those USGovernment bonds we sold to China and Japan and ... to fund the account. That is, after all, how many hedge funds make their money, and the USSHF can borrow really cheaply.But the idea has nothing inherently and necessarily to do with keeping Grandma away from the cat food.

Thought experiment 4: Just like TE3, except keep track of the Fact 1 inputs from each individual that go to the USSHF, and letthat individual make investment decisions herself with them within the overall USSHF structure. Then when it comes time topay that individual a la Fact 2, use the accumulated value for that individual's share to help make the payments.This raises the question of whether the payments out of the USSHF are part of the regular payments to be made from Fact 2, orare they in addition to the payments from Fact 2? If they are just a part of the regular payments, then all of 'individual' record keeping is a waste of time and effort.If they are in addition to the regular payments, then this represents an increase in benefits via Social Security, which might be agood idea in its own right, but one for which the USSHF is not a prerequisite. There is also a problem in determining how to pay out the benefit--possibly by converting the accumulated value in excess ofthe funding costs (remembering the borrowings from China and Japan and ... necessary to create it) into an annuity?Pay out only 75% of the regular Fact 2 benefits from the regular SS fund, and then add in the USSHF converted annuity?

It all sounds pretty complicated.

And you can bet its overhead will be much more expensive than the dirt cheap current Social Security overhead. The USSHF willhave a lot of fees and transaction costs to cover, not to mention the cost of the staff required.

And what is the real benefit to be gained by all the complexity and risk? Why not just go with TE1, break the unnecessaryconnection between the horrible tax (so we can replace it with something less regressive) and the security provisions we feel werequire for Grandma's old age. Deal with each side of the ledger independently and honestly.

Reply May 05, 2010 at 12:25 PMBloix said...A point not yet made in all these very excellent comments: If the idea is that there would be individualized accounts, then wewould be losing the risk-spreading annuity (or "insurance") effect of Social Security.

Under Social Security, I can spend the benefits I receive today secure in the knowledge that I'll continue to get a check even if Imake it to 90. The government can manage the risk that I will live a long time because it knows that for every 65-year-old wholives to be 90, there's one who will die at 70.

But if I have a private account, I can't manage the risk that I won't die. I have a limited fund that will run out if I live too long.So either I restrict consumption now or I run the risk of cat food at 90.

This is terrible problem with 401(k)'s, and there's no reason to increase the problem by imposing it on Social Security as well.

Reply May 05, 2010 at 03:27 PMBill said...What you now realize is that the future social security recipient is a residual claimant, and the person or entity which holds ahigher claim is the Treasury bond holder, since social security can be manipulated as you approach it.

So, why not require persons to buy Treasury Bonds to fund their retirement.

At least you would get more respect as a bondholder than as a potential recipent.

Reply May 05, 2010 at 05:57 PMRobert W. said...We already have private SS accounts - IRA's and 401K programs. Once the recession is over, you can get a long way towardfunding SS forever merely by undoing everything that Bush II did; all the tax cuts, both wars, and the extremely expensive, andunfunded, Medicare prescription drug program. Once you have done that, indexing retirement age to life expectancy, andraising the SS cap should be sufficient.

Reply May 05, 2010 at 08:29 PMNat said...Ahhh, MaxSpeaks. Always pay attention to Miracle Max. And I somehow forgot to recommend Bruce Webb, so I am happy tosee VtCodger did it above.

Money is money. You can fund Social Security out of any revenue stream you want. Long ago we chose to fund it out of a payrolltax on earned income. For the first time in over 30 years the pay as you go FICA/SECA process is falling a bit short since we areat 10% unemployment. Since '83 the payroll tax has subsidized income tax. It will again assuming the economy perks up. Butdemographic inevitability will cause a fairly permanent short fall later this decade.

Future income tax revenue will necessarily make up the difference. That was the deal in '83. Income tax will repay the debt owedthe Trust Fund that will have been accumulated over about 35 years of FICA and SECA surplus.

There are two related issues regarding this repayment. The first is the reluctance of many right wing politicians to considerrepaying the debt at all. This nothing more than the contemplation of theft on a grand scale.

The second is more complicated and is used to camouflage policies promoting the first issue. The yearly Social Security pay asyou go shortfall will grow slowly. The Social Security Administration by law issues a yearly estimate of the health of the TrustFund. It actually is 3 estimates which correspond to the 3 lines in Delong's graph. The Trust Fund was specifically created to

5/25/10 11:35 AMThe Future of Social Security - Grasping Reality with Both Hands

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Fund. It actually is 3 estimates which correspond to the 3 lines in Delong's graph. The Trust Fund was specifically created tocover any shortfalls in pay as you go and it might (yes, might) someday be exhausted. But the Fund is very large, currently over2 trillion dollars, and it earns interest. So maybe it will never be exhausted. Maybe it will be exhausted at some distant point inthe future when we are all dead and buried.

Mr. Delong is worried about the Trust Fund running out in 2042. I think that is completely crazy. I also think that any effort tosolve a problem that might exist 32 years in the future by taking money out of my pocket today borders on fraud. We tried it in'83 and we are still arguing about it today.

Listen to Max: income taxes will by law make up the difference until '42. And the same process will work in '43 and beyond.

Reply May 05, 2010 at 09:11 PMchristofay said...Prof Delong comes from the profession that couldn't see the housing bubble even when all the too big trading firms werebuilding up short positions against it.

Prior to the social security funding crisis, shouldn't we have a civil servant benefit crisis as there is not a dedicated tax stream tocover this increasing expense?

At the federal level what is the equity in providing retirement benefits to agencies, bureaus, departments, that have all the use ofthe appendix? The SEC has been dormant for a decade. There isn't much enforcement against the gaming that goes on regularlyin stock pricing. If things seriously go off the rails, a couple of middleclass scapegoats are found.

Why didn't the CIA stop the conservative religious terrorists that attacked us on 9/11? I haven't seen any remorse from thatagency for a colossal failure.

For two examples. If these agencies and commissions don't perform, what is the rational for rewarding their employees?

Now, let's look at Rahm, Summers, Geithner, who do they work for again? Definitely candidates for self-funding retirement, andit will be much more comfy than mine.

Reply May 06, 2010 at 01:52 AMMichael E Sullivan said...

Verify your CommentPreviewing your CommentMichael E Sullivan

I have to agree with Bruce Webb that trust fund depletion 30 years out does not represent any kind of crisis that needs animmediate solution. Remember that depletion merely means that we would need to have a 24% benefit cut or FICA increase tomaintain scheduled payouts without any changes. It would take an very small change in taxes or benefits today to move thisdate out 20-30 years. Also note that the scheduled benefits in 2041 are about 160% of today's benefits in real terms. So even a24% cut would mean that retirees in 2041 would be 20% better off than retirees today. Merely restraining the growth of benefitsto a smaller amount still above inflation would put the system in actuarial balance indefinitely and never deplete the trust fundcompletely. Essentially this report says that in spite of the giant recession we just experienced and the anemic recovery that hasfollowed it, about all that's happened is that intermediate cost trust fund depletion has failed to be pushed back over the last 2years (the 2007 report also showed intermediate cost depletion in 2041, most reports historically show the date moving forwardeach report, as economic numbers come in better than those of the intermediate cost assumption).

Note also that the low cost scenario does not show trust fund depletion until 2070 (and before the latest very bad recession, thelow cost scenario showed trust fund growth without bound), and Bruce made a convincing case in 2008 that the numbers forintermediate are quite pessimistic, that low cost may be a more realistic median estimate, and intermediate cost a veryconservative one.

All in all this report shows a program that is *very* strong and sound, even after weathering a huge storm in 2008-2009. It doesindicate that if nothing changes something will have to happen down the road, but what's required to bring the program into fullbalance even under the pessimistic scenario is nothing remarkable, merely a slowing of benefit growth to something around theinflation rate. If the economy comes back with any oomph at all within the next 10 years, this report will start looking more likethe 2005-2008 reports showing no problem at all. The right course of action is still to do nothing, with an eye toward possiblyrestraining the benefit growth rate at some point in the next 5-10 years if these depletion dates do not move forward.

Medicare is the entitlement problem, not social security, and that problem has much more to do with health cost inflation thanwith the medicare model.

Reply May 06, 2010 at 07:47 AMChester Schneider said...The premise that the Social Security Trust Fund will hit 0 around 2042 is Republican propaganda, based on very conservativeactuarial assumptions. The history of the date that Social Security will go bust shows a steady advance from the 2030's to the2040's over the last two decades.

There is a good chance that Social Security is adequately funded at present. Given increased longevity, further increases in theNormal Retirement Age may become appropriate. Also, if wage index increases lag price index increases, it may be necessary tolimit the annual benefit increases for recipients of benefits.

Reply May 06, 2010 at 11:04 AMPaul Benedict said...Social Security was a disaster foisted on us by FDR making a deal with banks to fund WWII.

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Me: Economists: Juicebox Mafia: Moral

Philosophers:

Now that we get the joke, let's turn it on the banks. Privatize by investing in first time real property farm and non-farm:http://www.nolanchart.com/author716.html

Reply May 07, 2010 at 08:52 AMsoullite said...Oh ,what a shock. Another Obamaton pavingth way for his attempts to gut social security.

Reply May 07, 2010 at 11:37 AMTom said...Social Security does produce positive results, and at he same time has funded a large part of unrelated government spending.Most of this spending was a transfer of wealth to the defense industry. What SS got was government bonds or as Bush calledthem "worthless IOU's." We now spend a trillion dollars every 15 months on defense, and we are defenseless against box cutterhijackers, shoe bombers, underwear bombers, and now car bombers. If the tea bag constituency wants more defense, they will just have to accept more taxes. Social Security must not be destroyedin the name of fiscal responsibility when the country is being run by Wall Street. Goldman can pay more in taxes, as thecorporation at present pays almost nothing, while making immense profits by marketing shitty products like Timber Wolf to itsclients.

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