Arnold Kling  

IRA's to the Rescue?

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Asymmetrical Information points to a paper by Michael Boskin.


Roughly $400 billion a year is contributed to various tax-deferred saving vehicles, and the amount is likely to grow with nominal income growth and the increased limits on tax-deferred contributions recently passed into law. Immense additional future deferred taxes, larger than the long-run actuarial deficits in Social Security and Medicare, will accrue on these new contributions and their nominal returns plus the future returns on already accumulated balances.

Boskin is describing future tax payments from IRA's and other tax-deferred savings accounts. As people reach retirement age and make withdrawals from these accounts, they have to start paying taxes. Boskin suggests that these future tax payments are not being counted in revenue forecasts, leading to large under-estimates of future government revenue.

For Discussion. Boskin is saying that government tax receipts will rise relative to GDP because of the effects of future withdrawals from IRA's and similar accounts. Given that Social Security and Medicare will require larger tax receipts as a share of GDP in the future, does Boskin's discovery "solve" the Social Security and Medicare crisis?


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CATEGORIES: Social Security



COMMENTS (23 to date)
Art Woolf writes:

There are about $2.5 trillion in IRA assets today. Assume a 7% rate of return for 40 years and there will be $37 trillion in 2043. People will be adding to the $2.5 trillion in the near term, but baby boomers will be withdrawing from IRAs shortly, so the $37 trillion is probably a good ballpark number. If people withdraw 5% of their assets annually, that's $7.5 trillion in additional income. If the federal government taxes it at 25%, it gets $1.5 trillion in additional tax revenues annually. I don't know what that represents in terms of GDP in 2043 or in terms of the annual expenditures of the social security system by then.

Eric Krieg writes:

So future revenue from 401(k) withdrawals are not being projected? On the other hand, you have Roth IRAs, which are supposed to have tax free withdrawals (yeah right, like that is going to happen!). Again, no projection is being made on Roth IRAs, which to some extent will offset the extra money from 401(k) withdrawals.

One answer to the Social Security "crisis" is to simply treat Social Secutiy checks as regular, taxable income. Then, all of us suckers who saved in our 401(k) and IRAs will be pushed into even higher tax brackets. This would give "means testing" a new meaning.

Taxing Social Security benefits at their full value will happen minutes before Roth IRA withdrawals are made taxable, both of which will pretty much solve the Social Security crisis.

When SS benefits are taxable, what is that, like triple taxation? You pay SS taxes on income (one), that money is still exposed to income taxation (two), you get that moeny back as benefits which are taxable (three). Jesus, we're getting screwed.

Rob writes:

I know it seems unlikely that the revenues are not being projected, but it wouldn't surprise me. I am not an economist (lawyer, sorry), but it was explained to me by a CBO economist when I worked for the House Budget Committee that the reason that CBO under-projected the surplus a few years back and under-projected the deficit more recently was that their models underweighted the effect of capital gains on federal revenue.

Data about the sources of Federal revenue is always several years old. I had the impression that forecasts of federal revenue beyond the next ten years is not much more sophisiticated than a static percentage of estimated future GDP.

Jim Glass writes:

"...does Boskin's discovery "solve" the Social Security and Medicare crisis? "

When one combines the tax effect with the idea that people with a million dollars in an IRA plus a paid off home (mortgages get paid before IRAs) probably can afford to pay their own health insurance premiums and really don't need their pensions "topped off" with transfers from the poorer general public, it may well go some good way towards doing so.

And one can bet this idea will occur to voters and thus politicians around 2018 or whatever date it turns out to be when income taxes have to be raised to cover all our current Medicare
and SS promises.

Patrick R. Sullivan writes:

Elsewhere dsquared is praising Boskin's paper (something about clearing up all the bollocks, iirc). Which is surprising given that if Boskin is correct (and I doubt he is), these tax revenues can be used to solve the "transition cost" of moving to a privatized SS. In effect by cutting the benefits paid out to high income retirees.

David Thomson writes:

I feel it is necessary to redirect the main topic of this thread to a most important article in Tuesday’s Wall Street Journal, June 17, 2003, entitled “Skyrocketing Health Costs Start to Pit Worker vs. Worker.” This piece by Jonathan Eig cites the shaming of a forklift driver who at 58 years of age is six feet tall and weighs 340 pounds. The man’s coworkers are upset that his foolish life style is hurting their overall health coverage. Finally, it seems that many employees are realizing that the self inflicted health problems of their fellow workers impact directly on their bottom line. For far too long, the hoi polloi have believed that health care is essentially free if one has employer funded health care. I’m against manipulative guilt tripping---but whole heartedly support its legitimate usage. This evolving cultural phenomenon may have have far more positive financial consequences than just about anything else we could discuss.

dsquared writes:

Revenues of this sort are typically not projected because of the fundamental "principle of annuality" which lies at the heart of government accounting. A private company which had future expected revenues of this sort would capitalise them, because a private company takes the current state of laws as given. But the government has to recognise that when these people retire, they will do so under the 2038 tax code, not the present one. Therefore, it is not regarded as prudent to capitalise them today for the purpose of government accounts. I'm not saying that they should be ignored or that Boskin's work isn't valuable (it is), just explaining how they came to be ignored.

I'm not sure Patrick has understood the point I was trying to make at the other site, perhaps becuase he thinks I'm a political hack like himself when I'm not. The point about "the transition problem" has always been that it's actually the *entire* problem. Any revenue-raising measure which "solves the transition problem" to privatised accounts can also be used to make Social Security solvent, since the two problems are the same. And therefore, as Patrick correctly points out, vice versa.

My position has always been that Social Security isn't insolvent and doesn't need fixing, hence my priase for Boskin demonstrating this fact. If you have an ideological reason why you want to move to a privatised system, then go ahead and make that case; I promise not to bring up the transition problem so long as you don't base your argument on Social Security "being bust" or "providing a negative rate of return".

JT writes:

Art: 5% of $37.5tt is around $2tr. Tax it at a 35% rate and that will generate about $700bb in extra tax revenues.

Jim Glass writes:

"...does Boskin's discovery "solve" the Social Security and Medicare crisis? "

On second thought, flat "No".

Boskin himself estimates the stream of future tax collections, discounted to current value, to be worth $3 trillion (as quoted in the current Barrons).

Compared to that, the unfunded liabilities of Social Security and Medicare, discounted to current value, were $16.4 trillion at in 2002 -- and had risen $4.4 trillion in just the two years since 2000 (according to the "2003 Analytical Perspectives on the Budget")

So while finding an extra $3 trillion is a lot better than the proverbial poke in the eye with a sharp stick, a cure for the Social Security and Medicare funding problem it isn't.

Jim Glass writes:

On third thought, hmmm ...

While Barrons says:

"Boskin figures the present value of the taxes on deferred retirement and savings accounts is close to $3 trillion."

Boskin says in his paper ...

"Using conservative base-case assumptions, the expected present value of future net deferred taxes amounts to fourteen trillion dollars..."

I'm having a hard day getting facts straight.

In any event, I'm looking forward to seeing Krugman report this good news in his column. With the great concern he has expressed both for the budget and the solvency of SS and Medicare, surely he will report on this very happily and quickly.

"My position has always been that Social Security isn't insolvent"

Hey, if that was true before this new money was found and is true for Medicare too, then this is *really* great -- Bush can afford another $14 trillion in tax cuts!

Paul Zrimsek writes:

Does the case for moving to a privatized system necessarily have to be ideological? Assuming that Boskin's analysis holds up, I'd expect a lot of non-ideologues to be impressed by the fact that it was private retirement accounts (aka RISKY SCHEME!!! ENRON!!! BUBBLE!!!) that rode to the rescue of the safe-and-sound governmental plan just when everything seemed blackest.

David Thomson writes:

“In any event, I'm looking forward to seeing Krugman report this good news in his column. With the great concern he has expressed both for the budget and the solvency of SS and Medicare, surely he will report on this very happily and quickly. “

I can indeed see Paul Krugman writing a piece in the New York Times that might help the Bush administration. Yep, and I can even imagine Shaq O’Neal begging me for mercy on the basketball court!

dsquared writes:

>>Hey, if that was true before this new money was found and is true for Medicare too, then this is *really* great -- Bush can afford another $14 trillion in tax cuts!

You really are on a double-counting binge these days, aren't you Jim?

Jim Glass writes:

>Hey, if that was true before ... -- Bush can afford another $14 trillion in tax cuts!

Patrick R. Sullivan writes:

" Any revenue-raising measure which "solves the transition problem" to privatised accounts can also be used to make Social Security solvent, since the two problems are the same. And therefore, as Patrick correctly points out, vice versa.

" My position has always been that Social Security isn't insolvent...."

Putting aside the error in reasoning that the "transition problem" is the same problem as the unfunded promises of benefits, would d squared care to clear up his confused logic about "make...solvent....isn't insolvent"?

dsquared writes:

If I did, Patrick, what makes you think you'd understand my explanation any better than you understand the articles that you cut and paste?

dsquared writes:

Oh what the hell, I have a spare minute.

a) the claim that "the "transition problem" is the same problem as the unfunded promises of benefits" isn't an error in reasoning; the "transition problem" is precisely the problem of how to make up for the unfunded promises of benefits before one can make the transition to a funded system.

b) "make solvent" and "isn't insolvent" occupy different tenses, as anyone who was reading for understanding rather than nitpicking would realise. In the "make solvent" sentence, I am accepting (for the sake of argument) the contention of privatisers that there is both a "problem of social security insolvency" and a "transition problem for funded accounts", and pointing out, rather stylishly, that they are the same problem, so any solution to one is a solution to the other. I then go on to state my own view, that there is neither a "problem of social security insolvency" nor a "transition problem". I'd explain my reasons for believing that these are non-problems, if someone asked me nicely.

dsquared writes:

>>It's only been a week and already a lobby is forming to cut the Boskin Boon taxes. As indeed Boskin predicted in his paper. And them retirees are a strong lobby getting stronger. I'd be worried about it -- but if these programs were already funded adequately, then it's cool.

Jim, this is now the third major economy for which you are predicting fiscal meltdown (Euroland and Japan being the previous two).

I grant you that it is possible that future voters might in principle decide to vote for government bankruptcy and to allow the old and impecunious to starve. However, I think that it is unlikely. I am not aware of a polity that has committed seppuku in this manner ever before, so I maintain the view that amazingly foreseeable problems with obvious solutions, will be solved.

Nobody disputes the fact that the tax base of the USA in forty years' time will be large enough to pay for retirement benefits. So there is no problem, more or less end of story.

Jim Glass writes:

"Jim, this is now the third major economy for which you are predicting fiscal meltdown (Euroland and Japan being the previous two)."

D^2: Hello??

I have never predicted "fiscal meltdown" for anybody, and I've never even mentioned the US or Euroland in anything like that context -- unless you'd care to point to it.

(In threads here with "Bubble" in title I have mentioned that the likes of Rudy Dornbusch and various professional investors have said Japan has a heck of a bond bubble brewing, but that would seem to be on topic -- and it is an observation, not a prediction).

OTOH we know of all the critiques you made of Coase's lighthouse paper and the things he never said in it before bothering to read it, so I guess if you critique me the same way for things I never said I should be happy to be in such good company. ;-)

"Nobody disputes the fact that the tax base of the USA in forty years' time will be large enough to pay for retirement benefits"

Right. And since nobody disputes that, it wouldn't seem to relate to the argument that *anyone* is making re SS, so what makes you think it does?

"My position has always been that Social Security isn't insolvent...."

In which case -- paying careful attention to tenses here -- it doesn't have to be made solvent in the future with the Boskin Boon taxes, and they can happily be cut or spent on other things, with no fiscal meltdown of the United States resulting.

Alas, the Social Security Trustees disagree with you in reporting that SS is 35% permanently underfunded and growing more so every year (read that: "insolvent") so we may have to try and save those Boon taxes for it after all.

dsquared writes:

Jim, your comments on the pensions systems of Euroland and Japan amount to predictions of fiscal meltdown; I'm not sure you understand that they do, but they do. If you're saying that the liabilities of a government are too big to be serviced without having catastrophic effects on the economy, then that's a prediction of fiscal meltdown. For example, if you think that future retirees will successfully lobby to US government to have the taxes on their savings reduced (and you apparently do), then you are assuming either that the USA will be so stuck for tax revenue that it will have to default on its Social Security obligations, or that it will fund these obligations by borrowing on an explosive debt path. Both of these outcomes count as "fiscal meltdown" by any circumstances.

>>In which case -- paying careful attention to tenses here -- it doesn't have to be made solvent in the future with the Boskin Boon taxes, and they can happily be cut or spent on other things

No. Social Security is not insolvent because the benefits can be paid to future retirees by a modest increase in the level of taxation. The Boskin Boon, as you call it, just shows that this future increase in the ratio of current taxes to current GDP can be achieved in a relatively painless manner, through something akin to "bracket creep" as the deferred tax accounts mature and become part of the tax base. If you want to "cut these taxes", or "spend the money on something else", then you have to raise some other taxes at some point in the future in order to pay the future benefits. Or face fiscal meltdown. In other words, you're still double counting, and while you're paying careful attention to tenses in your sentence, you aren't in the underlying analysis.

>>Alas, the Social Security Trustees disagree with you in reporting that SS is 35% permanently underfunded

They do so because a) they project too low a growth rate out of misguided "prudence" and b) they are assessing the solvency of a specific entity called "the Social Security Fund" rather than the Social Security program itself and c) they are making unrealistically low assumptions about the availability of tax revenue to provide external support for the solvency of that fund, not least because they are ignoring the deferred accounts, but mainly because they are pretending that perfectly feasible tax increases in the future would not be feasible.

In an unrelated note, I have now read the original Coase paper and think I conceded too much at an earlier date. When combined with the Reason inteview (particularly the housing analogy which you have never managed to explain away), it is clear to me that Coase is committed to more or less exactly the position I attributed to him in my article. Rather in the same way that you are committed to predictions of fiscal doom if you don't give up some of the claims you're making about pension liabilities. The mere fact that you want to walk away from a ridiculous claim doesn't always give you logical licence to do so.

On a substantial point of history, I now firmly believe that Coase utterly misrepresented what happened in the seventeenth century when Trinity House contracted out lighthouse building rather than carrying it out itself.

I've taken the opportunity of this little crack to have one of my own, over at Brad Delong's comments section, by the way.

dd

Eric Krieg writes:

http://www.nationalreview.com/nrof_bartlett/bartlett063003.asp

dsquared writes:

That link's not very impressive. The economic guts of Bartlett's argument are the sentence:

>>Moreover, the tax laws undoubtedly will change in future years to prevent the overall burden of taxation from rising, as Boskin assumes.

So his only real argument is one which depends on our taking an assertion without question because it includes the word "undoubtedly". I don't see why we shouldn't assume that the opposite will happen.

Eric Krieg writes:

Not that I've looked through the paper, but what is the tax burden that they forcast?

If you assume no changes from today (what are we at, a burder of 19% of GDP or so), where are we going? 20%? 21%?

That would be a modest change, within the realm of what it has been historically. Bartlett would probably be wrong if the burden only increase modestly.

But if we're talking about 30% of GDP, or something much above the historic average, then, yes, I think Bartlett is correct. Tax rates will adjust downward.

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