Arnold Kling  

Bartlett and Krugman

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National Review's Bruce Bartlett and New York Times columnist Paul Krugman appear to be singing from the same song sheet on Social Security. Bartlett writes,


It is not clear what is driving the urgency of Social Security reform. It is desirable, to be sure, but nothing will happen to anyone’s benefit for some time to come. By contrast, the Medicare system is on the verge of collapse...

Meanwhile, writing for Economist's Voice, Krugman says,

I’m not a Pollyanna; I think that we may well be facing a fiscal crisis. But it’s deeply misleading, and in fact an evasion of the real issues, to call it a Social Security crisis

...last year’s prescription drug law, if it really goes into effect as promised, worsens the long-run federal budget by much more than the entire accounting deficit of Social Security.


Bartlett argues for addressing Social Security by switching to price indexing from wage indexing [note--I mistakenly reversed this when I first posted this]. Krugman is less concerned with policy prescriptions than with scoring points against those who favor privatization.

I think that on the Internet, much of the discussion of Social Security is reasonable. As I read posts on other blogs, such as Dead Parrots, I see very little of the sorts of phony arguments that Krugman associates with the pro-privatization side. By the same token, Krugman quietly concedes that there is a case for trying to reduce the disincentives to work and thrift inherent in the current system.

I think that among those who understand the economics of Social Security, there is generally a consensus that:

1. The key driver of Social Security sustainability is the ratio of workers to retirees, which is falling. Some gradual reduction in benefits or increase in taxes is required. This is largely a separate issue from privatization, and is probably more important.

2. Privatization, to have any positive effects, must increase the incentives for work and thrift.

3. The impact of the "transition cost" depends on how in the financial markets the short-run increase in debt is perceived relative to the long-term reduction in liabilities.

It seems to me that when someone takes a strong stand on privatization one way or the other, their views are driven mostly by their feelings about President Bush. People who are more detached politically tend to be more ambivalent about privatization. Overall, I get the sense that the Bush backers have much less passion than the Bush opponents, at least when it comes to this issue.

UPDATE: Another idea into the mix--adding a government savings program on top of Social Security--from Gene Sperling

For Discussion. Are there any important issues related to privatization that have not been raised in discussions at EconLog?


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CATEGORIES: Social Security



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COMMENTS (32 to date)
Dave Schuler writes:

Any private accounts plan of the sort that I've seen brooted about will result in an influx of money into mutual funds. Most mutual funds are heavily invested in Fortune 500 stocks. Since equities are commodities more money chasing the same amount of stock will result in stock prices rising in the near term. The compensation plans of Fortune 500 CEO's usually include substantial stock options. The private accounts-fueled rise in stock prices will result in substantial profits for CEO's that can't be considered performance based in any meaningful sense.

I don't have any problem with Fortune 500 CEO's earning big salaries or receiving big compensation. But I do have a problem with unearned profits of the sort. And what's worse although there's only a likelihood (over the long term) of advantages to us little guys in private accounts the windfall profits to Fortune 500 CEO's (and financial managers) of such a plan is a certainty.

Dave Schuler writes:

Oh, and by the way, what would the effect on Social Security revenues be if income growth was in the middle quintiles rather than in the top quintile? Or, said another way, if the greatest income growth is in the top quintile, FICA max has to be raised substantially in order to make more income subject to it.

JT writes:

"Bartlett argues for addressing Social Security by switching from price indexing to wage indexing."

Is this a mistake? I think he argues for the opposite.

spencer writes:

Since the share of the population working has been growing on a long term trend basis and is massively higher than it was prior to the creation of the SS system how can you reconcile this "fact" with you belief that SS discourages work?

Otherwise, your comments are good. SS needs minor revisons and I would support a rational approach to these minor adjustments.

As an anyone but Bush type I agree with your final point that I oppose privatization lagely because of my distrust of Bush.

One point you have not discussed. If real gdp growth is only going to be 1.7%, or about half the historic average of 3.3%, how do you reconcile this with the SS commission assumption that we will have "average" real returns to stocks. If growth is only going to be about half the historic norms, why should stocks continue to earn historic norm?

Lawrance George Lux writes:

Private Accounts promise no greater protection for Labor or higher Benefits, and the payment structure is still not sustainable. Indexing to Prices, instead of Wages, simply insures greater reduction of Benefits--still without adequate Funding of the SS system.

My idea as expressed on my Blog: Simply increase the Business contribution to 1.8:1 of Labor contribution. This will save the SS system, but not Medicare or Medicaid. It will not have regustered impact on Employment after Six years.

Medicare and Medicaid must be separated from Pension rights and Funds. I am currently thinking on a Plan for Universal Health care which is minimal-invasive and Cost-suppresive. lgl

Deb Frisch writes:

"It seems to me that when someone takes a strong stand on privatization one way or the other, their views are driven mostly by their feelings about President Bush."

I am strongly opposed to privatization and I don't think it has anything to do with Bush. The difference between Bush and Clinton is not that Bush's economists are more right-wing. It's that Bush has much more faith in standard economics and econ is right-wing.

This point was made in an article by Pearlstein, I think, in the Washington Post a few weeks ago.

People are against privatization between the Federal government and corporate America are already too enmeshed. This would lead to further enmeshment. This would be a bad thing.

People are against it for the reasons Jon explained clearly in another thread (I guess you forgot those rational reasons).

Dewey Munson writes:

Folowing was directed to WSJ:
>>>>>>>
All the discussion paradigm's are centered on your comment -

"......with two workers supporting each retiree in 2030,,,,,,,"

This ratio has been on the march since the 30's with many changes along the way .

There are many implications in this march of which SS change is only one.

More serious among problems is the problem which will then exist of 2 workers Producing the needs of each retiree as well as the needs of
themselves .

As a responsible media you should project the overall situation which will exist in 2030 in combination with the SS problem not the SS situation in isolation as agenda-driven groups are doing.
>>>>>
Anxious to hear y'all on an economy with 2 workers per retiree.

barrygoldwater writes:

Ms. Frisch,

I am not sure that I understand your position. If economic analysis tends to drift towards "right-wing" thinking wouldn't that tend to give more credence to "right-wing" thinking? Economics at the outset is a very logical science, and does not declare what is right or what is wrong, it merely offers what have been called "pattern predictions."

Economics may not be perfect, but what do you propose we use in its stead to analyize policy decisions?

Please don't misunderstand, I am not trying to attack you personally, I just don't fully understand your position.

Edge writes:

Two workers to each retiree. This is often repeated, but does this number include survivor and disability beneficiaries?

Looking at it from an individuals lifecycle. Goes to work around 20. Works 45 years, with a few years out of work. Retires around 69. Average life expectancy from there, perhaps 13 years. Spouse also works, perhaps 30 years. Retires with life expectancy of 17 years (I'm not looking at the actuary tables - these are just tossed out numbers).

What's the actual breakdown of old age benefits in terms of years worked, years receiving benefits, years of old-age survivor benefits?

Also, what's the breakdown of benefits relative to the bend points? It's been reported that higher earners tend to live longer. Also, that the bend points make the distribution of benefits somewhat progressive. These tend to go in the opposite direction. What's the overall progressiveness picture look like, and what's the distribution look like?

Then there are also the political hacks that try to make points about black males, like this one . What's the actual breakdown on black males, and black families? Not just the anecdotal version. Would black males really be better off if they get to keep their SS contributions after they die, or are they better off with government insurance limited to old age, disability, and survivors?

Personal note to Arnold - the british bloke who made the disarming comment about the blunder, would that be Imre Leader?

Arnold Kling writes:

"Personal note to Arnold - the british bloke who made the disarming comment about the blunder, would that be Imre Leader?"

It was Pete Bhagat. Imre didn't compete for the UK that year.

Mcwop writes:

Agian people seem to ignore the range of different problems with Social Security.

1) It is is as much a general budget problem as it is a SS problem. In just over 10 years the general budget can no longer tap the surplus.

2) The surplus is a problem. In a paygo system why are (or have) workers (been) paying in more than is needed by those receiveing payments. This is simply government greed.

3) Control and ownership. Many workers want to own their payroll contributions, and control things such as when they can access those assets. Workers do not trust politicians with their contributions, and do not like the fact that politicians can change the rules on a whim. Privatization of at least some portion of payroll contributions makes it more difficult to tinker with the rules. Heck, only a small portion of the 12.4% contributed is even up for discussion by Bush.

4) Many workers want an opportunity to take their wages (the 12.4% or some portion) and have a chance at getting ahead.

5) Many workers may not want to wait to retire at age 72. This occurs for health reasons, or is a decision on how long the person expects to live. Example, if all the men in my family expire early, then that may be the same experience for me. With each hike in the age there is a bigger cut when taking benefits early.

6) You have to throw a political bone to the substantial vitong population that will bear a higher retirement age, and a cut in benefits. A way to do this is to let these people divert part of their payroll taxes to a personal account.

7)One bigger item that is not discussed is a fear by some that taxpayers may like having those personal accounts. Workers may like wacthing the money accumulate. That could mean an erosion of government control/power over those payroll taxes. Remember, the government is the greediest corporation out there.

Dewey Munson writes:

to Edge

I'm 83 retired 19 years ago @ lifetime max SS.
Out of curiousity I ran the following numbers.

mo. yrly
Today's Max Benefit 1939 22330
Today Benefit @ 25000 yr final 1526 17374
Today Benefit @ max in 1986 1222 13726

I was surprised at the above.

First my benefit has been getting annual COLA increases and I was under the impression that was true for the structure.

Surprise! COLA Lag rate has been 2.5% per year. (No complaint}

Therefore older Retiree benefit is 61% of today Max. Contrary to belief, benefits have been getting reduced.

Interestingly the $25000 wage is 77.8% of today Max. The spread based on income is less than I had thought therefore a little more favored toward the "poor".

I'm surprised that Older(19 yr) Retiree benefit is 79.0% of Today's $25000 yr retiree.

I didn't run the absolute min benefit which probably is germaine in this subject.

Misc.
I came across the the implicatins of Cost of Living differences which have to be a net factor. Maybe this balances with Income. Of course many of my peer group figured this out by working in High Cost areas and retiring to low cost areas.

I essentially own my home. Over the years rent equivalents were always higher than mortgage payments. All the complicated analysis not withstanding, Had I not bought a home I would have nothing except need to pay rent from the SS.

Ending with a question. How does a lower income invest when the investing community can't function on accounts less than $100,000? The @25000 income above probably never had enough extra income to invest - and so lotteries and casinos where a few bucks might get something worthwhile.

Deb Frisch writes:

RightwingArizonan: If economic analysis tends to drift towards "right-wing" thinking wouldn't that tend to give more credence to "right-wing" thinking? Economics at the outset is a very logical science, and does not declare what is right or what is wrong, it merely offers what have been called "pattern predictions."

DF: There are two hypotheses for why the Bush Administration's economic policy is so crazy.

H1: Bush's economists, like Bush, are crazy.

H2: Bush trusts economists more than previous presidents.

I believe H2. Most people assume H1. It's like the difference between two explanations for why a soup is salty.

H1: Cook added a lot of salt.

H2: Cook added a lot of soy sauce, which contains salt.
----
Economics may not be perfect, but what do you propose we use in its stead to analyize policy decisions?

Excellent question - enlightened economics that acknowledges the biases in "cost-benefit analysis" especially as practiced by the US government, would be a start. Admit that people like John Graham are part rational analyst and part corporate cheerleader. Admit that the European Union's preference for the precautionary principle is sensible. Have economists speak out about stupid things the government does that are good for big business, not just the stupid things it does that hurt corporate america, etc.

Edge writes:

How could any plan beat the problem of small accounts and ruinous account management fees?

The Federal Thrift Savings plan.

Federal thrift plan has incredibly low overhead, because, as I understand it, government manages all of the individual account details, and contracts out management of five large aggregated accounts into broad category funds - one matching S&P index, one a long term bond account, new ones for small stocks and international, and I think a short term money fund. These are currently managed under contract, I believe, with Barclays.

There are zero marketing and sales costs, and the account administration costs for personal accounts are small because it's all run by the government and personal account options are limited to a few simple types of transaction.

Overhead for even very small accounts is about one-tenth the rate for a typical brokerage mutual fund account.

Conservatives (including National Review and the President) have extolled the virtues of the Federal Thrift Savings plan as a model proving small accounts can be managed with low overhead and relatively little risk, but I suspect this is a passing fancy. These accounts would have little to offer to Wall Street, and would offer limited choice.

Bush's intention, I believe, is to use something like the thrift program as a starter account until a certain level of assets is reached, but I think Bush's threshold is about $7500 - still much too small for low overhead management by private firms attracting accounts in the traditional way. Getting the personal accounts large enough to get reasonable costs using the traditional Wall Street mutual fund would take something like 25 years of work for each individual's account.

If something like the Federal Thrift Savings model is implemented, I can see the National Review, ten years from now, denouncing the plan as "government control of the means of production". Probably this would coincide with a market downturn or some other challenge to the economy. The solution they'd offer? Privatize!

Jim Glass writes:
Are there any important issues related to privatization that have not been raised in discussions at EconLog?

Yes, I think so -- but I'll let Paul Samuelson speak for me, describing the most important thing about the history and nature of Social Security as it's been...

~~ quote ~~

The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times (or five times counting employer payments)!

How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population ... the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired...

A growing nation makes possible the greatest Ponzi game ever contrived.

Newsweek, 1967
~~ end quote ~~

Near all the talk here and on the other blogs has been about the solvency of Social Security -- but that is at most a secondary issue, a mere complication of its real problem.

As Samuelson makes perfectly clear, the real key to both the political popularity and the economic merit of Social Security throughout its first 70 years was that it gave everyone huge amounts of free money.

The cohort of workers who retired in 1967, when Samuelson wrote that, received a return of 10% real on their tax payments, far, far more than could be received anywhere else.

Yet today this reality seems totally forgotten. I'm amazed.

Today, in turn, SS assures negative returns for all young workers that will only become more negative -- up to 65% negative -- if it remains paygo. Even poor, low-wage workers will get back less than they put in.

Would Samuelson approve? FDR? Altmeyer?

As a matter of principle, should a mandatory retirement program make even the poor poorer on a lifetime basis?

As a matter of political reality can a program that makes everyone poorer survive the next generation politically? Or will the losses it it imposes on millions have the exact reverse political effect of the "free money" that Samuelson praised in 1967?

This dramatic shift into negative returns for SS participants that is happening right now is far more important to both the merits of SS and its future political preservation than the mere solvency issue.

That the solvency issue will be solved is a truism, it must happen by arithmetic. It's only significance is that if it occurs on a paygo basis -- by cutting benefits or increasing taxes -- young workers will be driven even *further down* into negative returns, compounding the problems of economic justice and politics.

Even low-wage workers then will get back 30% less than they contribute to SS -- will workers really stand for that?

But who is considering this?

Now its obvious why today's liberal apologists for the status quo -- Krugman, Delong, CBPP, bloggers like Drum and Yglesias, etc. -- all have developed complete amnesia about what the liberals of the earlier generation -- like Samuelson -- said was the KEY, the ESSENTIAL, that made SS both economically beneficial and politically viable: positive returns on contributions. They have no answer. So they can't even mention the issue.

But why are those who are open to reform and private accounts so amnesiac? Why do they keep going on about "solvency, solvecny, solvency"?

I'm befuddled by this -- unless it is all a plot to actually *kill* SS over the next generation by drriving returns down so low for the younge.

But if it is a plot, why hasn't anyone asked me to join?

Look, except for the effect a solvency fix has on returns on contributions, the solvency issue is no more important to Social Security than it is to the Department of Agriculture.

Boonton writes:
Workers do not trust politicians with their contributions, and do not like the fact that politicians can change the rules on a whim. Privatization of at least some portion of payroll contributions makes it more difficult to tinker with the rules.

Really? Let's imagine a headline from the world of the future:


Dateline 2025 - Lawmakers today proposed placing a tax of 3% on 401K plans with combined balances over $1 million. The funds will be used to cover losses sustained by those within 5 years of retirement who lost 30% or more of their 401K in the recent stock market 'correction'. Sen. Ted Kennedy IV said 401K's were created in the previous century to provide for 'regular people' to save for retirement, he stated there was no reason lucky "401K lottery winners" should not give back some of the tax priviliages that allowed them to amass such a large nest egg.

2) The surplus is a problem. In a paygo system why are (or have) workers (been) paying in more than is needed by those receiveing payments. This is simply government greed.

'Gov't greed', like 'corporate greed' is one of those phrases that plays well with the ideological bases but clouds up more than it enlightens. Notice how generating a surplus gets depicted as taking money out of the economy and giving it to the 'greedy gov't'. In reality a surplus puts money back into the economy by decreasing the debt held by the public & expanding the private capital markets. Using this distorted logic a gov't running a surplus is being greedy while a gov't that expands spending to eliminate a surplus is not. Now you see Bush's first campaign for office and his first term in all its glory!

1) It is is as much a general budget problem as it is a SS problem. In just over 10 years the general budget can no longer tap the surplus.

It is entirely a general budget problem. Over on Asymetrical Info Jane Galt figured that it would take a tax increase of $1,000 per household in 2042 to solve the SS imbalance in 2042! The horror. In the meantime we are borrowing $3,500 per household in 2004 when SS is in surplus!


5) Many workers may not want to wait to retire at age 72. This occurs for health reasons, or is a decision on how long the person expects to live. Example, if all the men in my family expire early, then that may be the same experience for me. With each hike in the age there is a bigger cut when taking benefits early.

I agree here, however the same problem exists with private accounts. Ever try to tap your 401K before you are of age???? I've proposed on many blogs (Arnold, why can't you give me some credit!) of implementing the 2% private account plan on top of SS & also converting unemployment insurance into a private account that can be tapped whenever you are not working (Arnold gets the credit or that idea).

7)One bigger item that is not discussed is a fear by some that taxpayers may like having those personal accounts. Workers may like wacthing the money accumulate. That could mean an erosion of government control/power over those payroll taxes. Remember, the government is the greediest corporation out there.

Playing to the base again I see. We already have thse personal accounts, they are called 401Ks/IRAs.

Mcwop writes:
Workers do not trust politicians with their contributions, and do not like the fact that politicians can change the rules on a whim. Privatization of at least some portion of payroll contributions makes it more difficult to tinker with the rules.
Really? Let's imagine a headline from the world of the future:

Dateline 2025 - Lawmakers today proposed placing a tax of 3% on 401K plans with combined balances over $1 million. The funds will be used to cover losses sustained by those within 5 years of retirement who lost 30% or more of their 401K in the recent stock market 'correction'. Sen. Ted Kennedy IV said 401K's were created in the previous century to provide for 'regular people' to save for retirement, he stated there was no reason lucky "401K lottery winners" should not give back some of the tax priviliages that allowed them to amass such a large nest egg.

Mcwop’s Reply:
Yes really. Your statement above does not change the fact that people do not trust politicians with the system as it stands. Sure, politicians can take workers money away, but it will be harder when that money is directly associated to the worker rather than being dumped into the ether. Dateline now: politicians want to cut your SS benefits, and raise the retirement age because one-size fits all. They will make these changes even if it guarantees 40+% of people will realize a negative return on their contributions.

2) The surplus is a problem. In a paygo system why are (or have) workers (been) paying in more than is needed by those receiveing payments. This is simply government greed.
'Gov't greed', like 'corporate greed' is one of those phrases that plays well with the ideological bases but clouds up more than it enlightens. Notice how generating a surplus gets depicted as taking money out of the economy and giving it to the 'greedy gov't'. In reality a surplus puts money back into the economy by decreasing the debt held by the public & expanding the private capital markets. Using this distorted logic a gov't running a surplus is being greedy while a gov't that expands spending to eliminate a surplus is not. Now you see Bush's first campaign for office and his first term in all its glory!

Mcwop’s Reply
It does not take money out of the economy (I never said that); it takes more than is needed from workers to accomplish the SS system’s goal. It is not ok for the government to take the extra SS taxes so long as it helps politicians with their general budget spending problem. The solution is to give back the surplus payroll taxes AND balance the budget. Not to add expensive safety net programs such as a Medicare drug benefit. Bush is guilty as charged on the general budget and so are the Democrats, as they support these expensive programs too.

1) It is as much a general budget problem as it is a SS problem. In just over 10 years the general budget can no longer tap the surplus.

It is entirely a general budget problem. Over on Asymetrical Info Jane Galt figured that it would take a tax increase of $1,000 per household in 2042 to solve the SS imbalance in 2042! The horror. In the meantime we are borrowing $3,500 per household in 2004 when SS is in surplus!

Mcwop’s Reply
Cut general budget spending growth. Eliminate things like the drug benefit, and do not add any new programs. I am all for that.

5) Many workers may not want to wait to retire at age 72. This occurs for health reasons, or is a decision on how long the person expects to live. Example, if all the men in my family expire early, then that may be the same experience for me. With each hike in the age there is a bigger cut when taking benefits early.

I agree here, however the same problem exists with private accounts. Ever try to tap your 401K before you are of age???? I've proposed on many blogs (Arnold, why can't you give me some credit!) of implementing the 2% private account plan on top of SS & also converting unemployment insurance into a private account that can be tapped whenever you are not working (Arnold gets the credit or that idea).

Mcwop’s Reply
The same problem does NOT exist for private accounts. One can tap their 401k at any age. If you stop work, you may roll it over to an IRA. You may begin taking IRA distributions at any age and without penalty under the 72(t) exception. One must withdraw money at least once a year, and you must keep taking withdrawals for five years or until you reach age 59½, whichever is longer. So, a 35-year-old must take withdrawals for twenty-five years, while a 51-year-old must take them for eight-and-a-half years. The amount of your withdrawal is calculated based on the balance of your retirement account on December 31 of the preceding year or any date in the current year prior to the first distribution using your age on December 31st of the year in which you make the withdrawal. You can also begin distributions as early as age 55 from your 401k without penalty if you leave your company in the year you attain age 55 or older. Secondarily, people may have IRA’s and 401k’s, but they want to take some of their payroll taxes and divert those monies to a private account. You may not like that people have this desire, but significant numbers want to do this with their money.

7)One bigger item that is not discussed is a fear by some that taxpayers may like having those personal accounts. Workers may like watching the money accumulate. That could mean an erosion of government control/power over those payroll taxes. Remember, the government is the greediest corporation out there.
Playing to the base again I see. We already have the personal accounts, they are called 401Ks/IRAs.

Mcwop’s Reply:
What does playing to the base mean? Does it mean that the comment reflects the desires/opinions of significant numbers of people forking out payroll taxes? Many want to get their hands on a portion of the payroll tax and divert that money to a personal account. Not just save on top of it. In fact, many that save in addition to the payroll tax are tapped out. That 12.4% represents a significant opportunity to those folks.

Boonton writes:
Yes really. Your statement above does not change the fact that people do not trust politicians with the system as it stands. Sure, politicians can take workers money away, but it will be harder when that money is directly associated to the worker rather than being dumped into the ether.

Really? Cutting SS benefits has been called the 'third rail' because many retirees see even a small cut on a small fraction of them as the 'camel nose in the tent'. Yet tax deductions come and go like the wind even though they involve money that is even more 'associated' with the worker than a gov't mandate private account that you can't touch until you're 65.

Dateline now: politicians want to cut your SS benefits, and raise the retirement age because one-size fits all.

Ditto for private accounts. Ditto for 401K's. The 'one size fits all' objection is only satisfied in a libertarian system with neither SS nor mandated private accounts.

It does not take money out of the economy (I never said that); it takes more than is needed from workers to accomplish the SS system’s goal. It is not ok for the government to take the extra SS taxes so long as it helps politicians with their general budget spending problem. The solution is to give back the surplus payroll taxes AND balance the budget.

But gov't doesn't 'keep' the surplus. There you go again, treating a surplus as money that gov't is somehow locking up in a safe. Every dollar that the SS surplus reduces the debt held by the public is a dollar put into the capital/investment markets of the private sector. It is also a dollar less of tax liability plus interest for the taxpayer who is for all practical purposes the same person paying the payroll taxes.

Let us pretend that the general budget was balanced. What would the SS surplus be doing? Decreasing the debt held by the public. Who is the public? The same people paying the payroll taxes. If you make the assumption that the gov't's debts are really the taxpayers debts (which is pretty reasonable IMO) then the surplus is automatically returned.

401K's & IRA distributions

I wasn't aware it was possible to tap a 401K without penalty when you are young. Nevertheless you have to admit that more flexibility doesn't eliminate the 'one size fits all' problem and unlimited flexibility runs into the problem that these accounts were created as a vehicle to facilitate savings.

What does playing to the base mean? Does it mean that the comment reflects the desires/opinions of significant numbers of people forking out payroll taxes? Many want to get their hands on a portion of the payroll tax and divert that money to a personal account. Not just save on top of it. In fact, many that save in addition to the payroll tax are tapped out. That 12.4% represents a significant opportunity to those folks.

Playing to the base means the ideological bumper sticker lines 'greedy politicians 'controlling' the money'. I'd be just as annoyed with a discussion with a leftist whose every other line was 'greedy corporations trying to make a profit'. What you're arguing, in effect, is having the gov't borrow money on one hand and putting it into private accounts on the other is somehow less 'control'.

In reality it is nothing more than shifting control from one account to another. Putting the 2% private plan on top of the existing system has the virtue of actually increasing savings which has the potential of actually boosting the economy in the future (the only real way to improve the situtation). The argument that many people are 'tapped out' doesn't really float all that well. It's very hard to say the US consumer has cut their consumption spending to the bone to finance additional saving for retirement.

A discussion for another day is why the gov't needs to address a 'low savings rate' at all if the market is supposedly the most efficient way to allocate the rewards for consumption vs saving.

Secondarily, people may have IRA’s and 401k’s, but they want to take some of their payroll taxes and divert those monies to a private account.

Errr ok, so why is this desire somehow more important because they want to do this with their payroll taxes? How about people who want to take some of their income taxes and put into private accounts? Didn't we just do a big tax cut in the last few years. Why are people unable to put that money into private accounts????

Boonton writes:

http://russabbott.blogspot.com/2005/01/social-security.html has a fascinating graphic that he got from http://www.cbo.gov/showdoc.cfm?index=5666&sequence=0.

As a % of GDP, SS's outflows grow to about 6% while its inflows will only be in the high 4%. What's fascinating is how this gap vanishes after the 2040's leaving both SS's in and outflow at just under 5% of GDP.

As I showed in my example of the simple SS model (http://www.janegalt.net/blog/archives/005106.htm), if you are transferring a constant % of GDP you will have a social security system that is stable for an indefinate period of time & will generate a return equal to economic growth (which IMO is about as 'fair' a return as you can ask.

Perhaps the optimal solution is to simply prepare to asorb the upcoming deficit by increasing savings today as much as possible (by taming the general budget deficit)...adding the 2% 'private account' as an optional for extra credit...but just leave SS alone as long as it remains roughly an even portion of GDP taxed and given out.

This isn't as easy as doing nothing because the tax and benefit formulas are complicated and will have to be constantly tweaked to keep the line steady but it looks like it isn't so off as it is.

Mcwop writes:
Mcwop writes: It does not take money out of the economy (I never said that); it takes more than is needed from workers to accomplish the SS system’s goal. It is not ok for the government to take the extra SS taxes so long as it helps politicians with their general budget spending problem. The solution is to give back the surplus payroll taxes AND balance the budget.
Boonton Writes But gov't doesn't 'keep' the surplus. There you go again, treating a surplus as money that gov't is somehow locking up in a safe. Every dollar that the SS surplus reduces the debt held by the public is a dollar put into the capital/investment markets of the private sector. It is also a dollar less of tax liability plus interest for the taxpayer who is for all practical purposes the same person paying the payroll taxes. Let us pretend that the general budget was balanced. What would the SS surplus be doing? Decreasing the debt held by the public. Who is the public? The same people paying the payroll taxes. If you make the assumption that the gov't's debts are really the taxpayers debts (which is pretty reasonable IMO) then the surplus is automatically returned.

Mcwop Replies:
The government does keep the surplus. It goes into the “trust” fund, and the general budget borrows from it. This increases the national debt, while reducing the current account deficit. That is why the national debt increased every year during the late 90's, despite running current account surpluses -
http://www.publicdebt.treas.gov/opd/opdhisto4.htm

So the governmnet has their own personal account, from which they borrow. Of course, in just over ten years those account obligations start coming due, and the governmnet will have to issue public bonds to come up with the money.

Boonton writes:

The purpose of the Trust Fund is to keep track of what SS contributes to reducing the national debt held by the public. Imagine two funds, the SS fund and a highway fund that receives gasoline dollars and spends money on roads. In a year both run surpluses of $100 while the general fund is in deficit $500. It is quite proper to track that the funds generated net savings by the gov't of $200 while the general fund generated dissavings of $700. Likewise a private corporation that owns several businesses will track each business and its contribution to the overall businesses bottom line. If Pepsi owns Taco Bell, Pepsi Cola, and KFC and Pepsi Cola has net income of $500M and the other two losses of $300M the problem is NOT with Pepsi Cola.

The fund 'keeps' the surplus as an accounting balance but the actual cash flow goes to reducing the national debt held by the public. Nearly all of accounting are just entries. If you look at a balance sheet of a corporation the 'retained earnings account' shows retained earnings and it is a meaningful number but there's no bank account with that figure sitting in it. It's simply a scorekeeping device meant to show who owns what share of the assets.

So the governmnet has their own personal account, from which they borrow. Of course, in just over ten years those account obligations start coming due, and the governmnet will have to issue public bonds to come up with the money.

True but irrelevant. Let's imagine the general fund was in balance. What would a SS surplus mean? It would purchase debt from the open market thereby reducing the debt held by the public (in reality it would be more roundabout, SS would purchase special bonds from Treasury & Treasury would then have a surplus it would use to either buy back bonds on the open market or simply pay them off when they expire).

But wait?! When SS 'turns negative' won't SS have to sell those bonds back to the open market again? Of course, that's savings. If I know I'll have a $1000 bill in a ten months you're telling me it isn't sensible to pay down my credit card $100 each month? Even though I'll just charge the card up again in ten months?

Ktrue writes:

I am against the privatization of social security for two very basic reasons:

1) I work in the financial services and am way too aware of too many examples of how people are manipulated, mislead and fleeced by financial agents.

2) I doubt that a significant segment of the population has the skills to make sound decisions regarding their investment choices. The concepts of risk/reward, diversification and time are not slam dunks.

When you come down to it, there are winners and losers in the marketplace. Are we going to allow the losers to really lose (a retired couple never made anything and lost a lot in their (insert fund family here)funds and have very little to live off)? Are we going to punish the winners to help these losers (smart investor guy made off really well so he gets taxed for taking on risk sucessfully to cover those who could not manage risk)?

Are we going to foul up the free markets with government sponsored safe "private" options? Will we allow someone to invest all their retirement in an international growth fund?

Very dangerous.

Boonton writes:

Let me try to explain my reasoning;

The gov't budget has two parts, A & B. Together the balance of those two parts tells us how much money the gov't has to borrow from the public. Borrowing from the public has several negative side effects, future interest expenses increase and overall economic growth in the future is hurt because borrowing from the public 'crowds out' private capital. Economically A + B is relevant because that determines how much economic growth will be hurt or helped in the future.

If one part is in surplus, therefore, it is helping future economic growth and reducing future interest expenses to the taxpayer. If you insist on trying to compute a return on this then you need to give credit for that positive effect.

What mcwop is coming close to arguing is the old 'feeding the beast argument'. Because one part is in surplus the other part is in deficit because there's 'more money' to go on a spending spree with. This is the logic that lead some right wingers to argue that deep tax cuts will cut gov't spending by 'starving the beast'. The fact is, though, the beast has been starved quite a bit but he is getting bigger.

mcwop writes:

Using the trust fund assets for current spending saves money now, but that money must be paid back in the future. Same as if a corporation raids its pension assets instead of borrowing money. The pension obligations will come due. This scenario has ruined many corporations.

I am not talking about starving the beast at all, that is your spin. I am specifically talking about making the very expensive Social Security system more fair for younger workers, while acknowledging the general budget problems affects on reform.

"Any effort to keep Social Security will have to acknowledge the people who want to get rid of it, the people who are saying that government is taking your money and cheating you." -Patrick Moynihan

There are significant numbers of voters in the group of people that Patrick mentions.

Boonton writes:
Using the trust fund assets for current spending saves money now, but that money must be paid back in the future. Same as if a corporation raids its pension assets instead of borrowing money. The pension obligations will come due. This scenario has ruined many corporations.

Again, the budget is divided into two parts A&B. A is in surplus and B is in deficit. Explain how the deficit problem is being caused by A?

Jim Glass writes:
Let me try to explain my reasoning;

The gov't budget has two parts, A & B. Together the balance of those two parts tells us how much money the gov't has to borrow from the public. Borrowing from the public has several negative side effects... Economically A + B is relevant because that determines how much economic growth will be hurt or helped in the future.

If one part is in surplus, therefore, it is helping future economic growth and reducing future interest expenses to the taxpayer...


~~~~~~

And as you know full well, this is only true if the surplus is saved, and not at all if it is consumed ... and certainly not if it more than consumed...

And you also know full well how the experts who have known the budget (from Vandenberg in 1937 to Moynihan and CBO head Penner, etc., in our day) have lined up to say it was consumed, and how the empirical analysis says it was more than consumed...

~~~ quote ~~~

We find that there is no empirical evidence supporting the claim that trust fund assets have reduced the level of debt held by the public. In fact, the evidence suggests just the opposite: trust fund assets have probably increased the level of debt held by the public....

... each dollar of Social Security surplus appears to have actually increased the debt held by the public in the past by $1.76.

At first glance, this dramatic overspending of Social Security surpluses seems entirely implausible. However, the next section presents a simple game theory model that is consistent with this result...

Is the Social Security Trust Fund Worth Anything? (.pdf), by Kent Smetters, PhD., Wharton School and National Bureau of Economic Research.

[And background on all this]
~~~~~

So this relentless insistance of yours that this surplus was somehow saved in a way to reduce borrowing costs, rather than increase them -- contrary to all testimony and empricial evidence (not to mention plain logic and the evidence of our eyes) -- retains all the perusasiveness of religious belief. The sort of religious belief behind creationism.

Until you can present some credible empirical analysis contradicting the above in support of your claim. Which you have been asked for on several occassions, but which I have not seen yet.

Empirical evidence produced by someone other than yourself that is, no offense.

You know, even Creationism seems credible at first glance, at least.

But who seriously believes politicians don't have an incentive to benefit themselves by buying votes by increasing spending to consume money that comes into their hands??

Who are the economists and political analysts who claim government spending is inelastic to revenue? Name them!!

Until you do I'll suspect the pews of your church have a lot of empty seats.

Jim Glass writes:
I am against the privatization of social security ... I doubt that a significant segment of the population has the skills to make sound decisions regarding their investment choices. The concepts of risk/reward, diversification and time are not slam dunks.

When you come down to it, there are winners and losers in the marketplace.

Whereas with Social Security from now on there are only losers.

The Social Security Actuaries say that every annual cohort that retires from now on will get back from SS less than it put in, with losses increasing as time passes.

For today's 30-year olds-the loss is 15% for the average-wage individual worker, rising to 50% for high-wage workers.

Ah, but even these returns are 30% underfunded -- so if SS stays paygo they become a 40% loss for the average worker and a 65% loss for the high-wage worker.

Are we going to allow the losers to really lose... ?

If SS stays paygo then even the low-wage individual workers loses more than 30%.

If you think market returns are risky, have you compared them to these returns promised by Social Security?

As an investment professional, can you think of a diversified portfolio that is guaranteed to produce a net 35% to 65% loss on investment over a 40-year period??

I can't think of a diversified portfolio that can guarantee that.

It seems to require a government.

Boonton writes:
So this relentless insistance of yours that this surplus was somehow saved in a way to reduce borrowing costs, rather than increase them -- contrary to all testimony and empricial evidence (not to mention plain logic and the evidence of our eyes) -- retains all the perusasiveness of religious belief. The sort of religious belief behind creationism.

Until you can present some credible empirical analysis contradicting the above in support of your claim. Which you have been asked for on several occassions, but which I have not seen yet.

As a % of GDP increases in tax revenue have been associated with decreases in spending. If your theory was correct then the reverse should also hold, decreases in revenue that serve the purpose of eliminating or decreasing surpluses should result in decreased spending. If the 'A' part of the budget is SS and other trust funds and the B part is everything else, we should see spending in B go up and down most dramatically when the general revenue that makes up B goes up and down. The fact is we don't and quoting a few politicians or a study I've already addressed doesn't make it so.

But who seriously believes politicians don't have an incentive to benefit themselves by buying votes by increasing spending to consume money that comes into their hands??

But money just doesn't come into their hands. They can spend as much money as they please. The bond market will loan a huge amount to the gov't and there's no indication it is anywhere near tapped out. Printing money, of course, permits infinite spending. Your incentive is real but incomplete. There have to be incentives in the opposite direction otherwise the US budget...all gov't budgets of democracies...would have collapsed long ago in high interest rates and hyper inflation.

Who are the economists and political analysts who claim government spending is inelastic to revenue? Name them!!

YOu mean critics of the 'starve the beast' approach? They are legion. After all, if spending is elastic to revenue then a decrease in revenue will result in a decrease in spending.

Boonton writes:
The Social Security Actuaries say that every annual cohort that retires from now on will get back from SS less than it put in, with losses increasing as time passes.

For today's 30-year olds-the loss is 15% for the average-wage individual worker, rising to 50% for high-wage workers.

There is no reason why SS cannot return to a stable system that generates a return equal to the rate of economic growth.

Boonton writes:

I wrote up this summary of points on Jane Galt's site. I think it hits many of the ideas I've been trying to communicate:


1. If you are taxing and giving out a constant % of GDP then you automatically will generate a return equal to the growth rate of GDP. How this return is distributed is another issue.

2. When the gov't buys its own bonds, it automatically generates two returns. The first return is equal to the rate it would have paid to the private market if it had sold those bonds to the public, the second is the increased economic growth due to a smaller public debt.

3. A gov't is tied to the underlying economy while a corporation is tied to its assets. IBM or GM can only generate revenue to pay its liabilities thru its assets, hence the importance of their balance sheets. The gov't generates revenue thru taxing the economy. Hence a gov't balance sheet is nearly meaningless.

4. Imagine a fisherman who catches more fish than he needs. What should he do with his surplus? One option is to put them in a tank and try to breed more fish for the future. Another option is to throw them back in the lake and assume they will take care of themselves better than he could.

What should a gov't do if it raises more money than it needs? the gov't is more like a fisherman than a company. The fisherman trusts the lake to create fish and the gov't should trust the economy to create wealth. Hence the most logical thing to do with a surplus is not try to 'invest it' in stocks and bonds like a private company would do with its pension fund.

The best policy is to 'toss it back'. This means buy back its debt (if it has any). If it doesn't then the best solution is to decrease the underlying tax so as to eliminate the surplus.

Mcwop writes:
Again, the budget is divided into two parts A&B. A is in surplus and B is in deficit. Explain how the deficit problem is being caused by A?

The current deficit is not being caused by A. By B using the surplus from A, the DEBT (different than deficit) increases with interest accruing. When A needs to tap the “trust fund” assets, then B has to come up with the dough, and it will do it by borrowing or increasing taxes. Either way, when the the IOU’s come due, the deficit (budget B) will be exacerbated by higher interest costs. B has the benefit of deferring those interets costs currently. You help cash flow now, but not in 10 years.

Mcwop writes:

Another way to explain the budget issue:

Person A (Budget A) Rack up $1,000 credit card debt. Person A borrows $1,000 from person B (budget B) who is in surplus to pay off the credit card. You will pay it back ten years from now plus interest. You eliminated the interest payments on that $1,000 now, but Person A's balance sheet still has $1,000 in debt on it. In ten years you have to come up with the money plus the interest. If you are still cash flow negative in 10 years, then there is a problem.

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