Arnold Kling  

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Brad DeLong writes,


I am cranky, and annoyed. And I am not asking for very much. All I want is:

* No more claims that we know that carving-out Social Security revenues to fund private accounts will have no damaging effect on national saving. It might work. It might not.
* No more claims that the U.S. is a small open economy. It isn't.
* No more claims that there is no reason to think that slower economic growth will carry lower asset returns with it. There are good reasons to fear this.
* No more claims that the household employment survey is as good a guide to short-term labor market trends as the establishment survey. It isn't.
* No more claims that an honest forecast of what George W. Bush's policies are sees the deficit cut in half by the end of this decade. It doesn't.

I want attempts to raise the level of the debate, not attempts to lower it still further.


Let me add a few:
  • No more claims that we can be indifferent between funding health care or retirement spending out of taxes and funding those expenditures out of personal saving. As Alex Tabarrok put it, "suppose that we documented exactly how everyone spent their yearly income. Now we tax everyone 100 percent and provide them with exactly what they were buying before. Nothing changes, right? Wrong. At 100 percent tax there is no longer any incentive to work - thus no one works and nothing is provided. Everything changes."
  • No more claims that extravagant promised benefits in Social Security and Medicare in future decades can be financed with small tax increases today (claims which at best could be true only if Congress would not spend the money).

  • No more claims that Social Security is working because poverty is lower among the elderly today than it was during the Great Depression. Most of the reduction in poverty among the elderly over the past century, like the reduction in poverty in general, is due to economic growth.

For Discussion. If personal accounts rather than Social Security had been enacted in the 1930's, what would we see today in terms of poverty among the elderly?

For Discussion.


Comments and Sharing





COMMENTS (96 to date)
Deb McAdams writes:

Well, in that case the first beneficiaries would have had to either have been allowed to remain poorer or their benefits funded from the general fund.

If we switch today to phase-out accounts, we either have to stop paying benefits to those already retired or pay their benefits from the general fund.

Given a growing economy, it isn't clear that private accounts in general work better than modified pay as you go systems for any theoretical reason, after start-up or transition costs are taken into account, if the early beneficiaries still get benefits.

I have not seen numbers that have added up in this debate that indicate the elderly would be better off if we switch after transition costs are considered.

Is taxing at 0% better than taxing at 100%? Is either on the table now? Is either relevant to anything under discussion now?

The 100% argument works just as well against any forced saving program such as phase-out accounts, so the question more accurately would be what would poverty among the elderly look like if there was no government retirement program at all.

My impulse is to say worse than what we have today.

Randy writes:

I think the elderly would be quite wealthy, as they would have benefitted greatly from an average 8% annual return in the equities markets since the end of the depression.

Benefits to the first generation would have been provided through honest government borrowing (that is, from lenders who agreed to lend to the government at a calculable risk/return evaluation), rather than dishonest government borrowing (that is, from workers who would have preferred not to make the loan - many of whom weren't even born when the "contract" was forced on them).

It is unfortunate that the computers that would have made private accounts possible in 1935 were not yet available. And it is fortunate that they are available now.

monkyboy writes:

Poverty among the elderly would be much higher today because sometime in the past...congress would have allowed people to "borrow" from their private account to pay medical bills, send the kids to college, buy a house, etc., etc. and many wouldn't be able to pay back these loans.

One more plea to raise the level of economic debate:

* No more claims that Social Security is a "guaranteed benefit" or that investing money in the stock market is necessarily more risky. Social Security is subject to political risk, as I pointed out in an article over at www.citizen-journal.net. Political risk, as a weakness of the present system, has gotten far less attention than it deserves. (Care to help remedy that, Arnold? I'd love to see you post your take on the issue...)

If personal accounts had been enacted in the 1930s, they would have channeled funds into the stock market just when they were most needed, and the Great Depression would have been stopped in its tracks. The economy would have been stronger in the 1930s and 1940s, and the strong growth of the 1950s and 1960s would have taken place in the context of a more purely capitalist, less mixed economy. We would not have legitimized-by-example the global trend towards statism that took place in the 1960s and 1970s. There would be a wealthier, freer world. But the personal accounts themselves would remain controversial today. Libertarians would be fighting against the legitimacy and the utility of mandatory saving of any kind. Short of complete elimination of the program, they would push for allowing people to, say, borrow against the future returns from their personal accounts; allowing people to extract surpluses from their accounts (above and beyond what is needed to assure a poverty-level retirement) and, that achieved, they would try to reduce the poverty-level requirement. Meanwhile, the process of splintering families that has taken place over the past few decades would not have occurred. It would be a widespread practice to live with one's parents, which would be worth it to children since parents would have large retirement assets which filial children stood to inherit. Strong family ties would encourage the transmission of values. Many fewer young people would have to borrow in order to go to college; instead, their personal-account-owning parents and grandparents would be well-positioned to finance them in what amounted to an informal loan arrangement; children would pay them back later. In short, our country, and the world, would be a richer and freer place.

Randy writes:

Nathan,

Read your article - very well said.

I have recently come to the conclusion that I simply do not have to worry about receiving my Social Security benefits. The reason is that the current system is of greater value to the government than it is to its beneficiaries. The government is well aware that the system can be voted out of existance if it is perceived to be in default, and they are also aware that the loss of that revenue source will be a huge shock to the government's ability to spend. Bottom line; other government programs have much to worry about - Social Security will be kept going at their expense.

Lawrance George Lux writes:
If personal accounts rather than Social Security had been enacted in the 1930's, what would we see today in terms of poverty among the elderly?

Arnold,
I would first say I like your ideology, but worry some about your practicum. It remains the old argument of does Private Sector or Public Sector provide better Services.

The Social Security program in the 1930s was a economic bone to quell Radical dissent among Labor. It had low immediate Cost, and managable longterm Costs. The matrix may have changed seventy years later.

Private Accounts during the 1930s meant relatively little. Labor had a low investment base coupled with a high expenditure profile(support of extended family). Private Accounts would not have gotten off the ground until after the start of WWII if at all. It was Social Security and Welfare programs which curtailed the high expenditure profile provided by extended family support.

We argue Today about the value of Private Accounts, enjoying the limited liability for extended family support established by the original SS program. Advocates of Private Accounts argue that We no longer need the limited liability as provided by SS in its present form. There are Those of Us who argue that the high expenditure profile will again be with Us, if We destroy the limited liability presented by the current SS programs.

We need to be talking about what will be gained or lost, not solely about limitation of taxation. Unlimited liability for extended family can become the most expensive taxation existent. lgl

muckdog writes:

Good comments! It's frustrating to read columns from Delong or Krugman that view everything as a political chess match. I like the honesty of this site. The Social Security debate looks as if the Democrats will be successful in scaring people. The sad news, is that this means that as the surplus social security dollars start to dwindle, deficits will have to increase. Or, taxes go up. And I view that as tragic. The tax rates have gone from 2% to 12.4%, and the cap is now at $90K. Looks like the march to a 100% tax rate is underway! But, like you say, then we can all quit our jobs and stay home.

Randy writes:

Lawrance,

Re; There are Those of Us who argue that the high expenditure profile will again be with Us, if We destroy the limited liability presented by the current SS programs.

Agreed. But,

1. How certain are we that replacing family responsibility with government responsibility is a good thing?

2. Many believe the current system is unsustainable. It they are right, won't we eventually reach a point where we must reintroduce the liability of extended family support? Haven't we reached that point already?

Nate Grover writes:

"If personal accounts rather than Social Security had been enacted in the 1930's, what would we see today in terms of poverty among the elderly?"

Poverty among the elderly would not change. It would be about the same. Our society would provide subsistence to any elderly who are in poverty. The political reality is that no one wants to see old people starve.

There'd be some kind of program for caring for these people. And it could not possibly be as bad and oppressive and irresponsible as our current Social Security program.

nate

Or, if we'd had some sort of 'private accounts' instead of the Greenspan Commission band-aids of 1983, where would we be?

Anyway, for DeLong to be calling for higher level debate, that's got to ring hollow for, say, this guy http://slashdot.org/~pudge/journal/99906

Dewey Munson writes:

Please think! Social Security and Saving.

Social Security is Saving.

Saving is the deferring of Consumption to a future time.

To maintain the economy, Today's Saving must be matched by the Consumption of the Savings of years gone by.

For this to occur it is necessary the measurement of Savings - Store of Value- over time must be constant. The purchasing power of Money in "Year of Consumption" must be equal to the purchasing power of Money in "Year of Savings".

By saving a PERCENT of today's economy (FICA tax) to be consumed as an equivalent PERCENT of tomorrow's economy (Wage based PIA) we have stumbled on a true system which permits the saving of a loaf of bread today to be consumed as a loaf of bread on a future day. (I doubt that Wages alone are the proper measure of the economy)

The FICA saving (Tax) rate should never have been more than necessary to fund the current years' Consumption (Social Security) hence, no fancy "trust fund", (Our current FICA rate would be around 9%)

"Taxation" with all its connotations is a particularly bad word and to use it to describe a system which deposits Money today to be withdrawn at a later time is a serious error.

True, the FICA rate is forced Saving but in the real world we start with nothing and "grow" to something so it is unrealistic to expect Saving to occur naturally in the early stages of life.

The "inter-generational transfer" is an erroneous emotional term - all my SS income will be in my kids inheritance.

In addition, the current generation walks into a system built by the generations before them after 20 years of coddling. Our Military are doing much for which to be applauded and thanked.

Not much coming from the '30s is worthwhile, but don't ignore this fortunate error.

Why do Economists who are happy to click away to produce a "Time Value of Future Money" using fictitious discount rates fail to run a "Lack of Value of Past Money" using known past discount rates?

Then maybe I would have been able to save a loaf of bread in 1939 which I could eat today.

My first job as a longshoreman in 1939 paid $0.96 per hour and now pays prox $ 27.

This is 6% rate of change for the same labor job.

Deb McAdams writes:

What would a one-time charge to transition from modified pay as you go to privatized accounts cost now?

I still have not seen the theory of why when everything is included, especially the first generation, an equal risk investment in private accounts would necessarily result in bigger payments than the current system.

If it is possible to pay a reasonable amount to make a transition, why has that not been put onto the table?

Why this deception about crisis? Why these claims that phase-out accounts are necessary to "save" social security?

Why do people who are philosophically opposed to government retirement programs of any kind claim their agenda is to save Social Security?

Will those who are philosophically opposed to any forced government retirement program admit their motivations?

Norm writes:

"No more claims that Social Security is working because poverty is lower among the elderly today than it was during the Great Depression."

From the Census

Poverty rates by age in 1959
18-64 = 17.0%
65+ = 35.2%

Poverty rates by age in 2003
18-64 = 10.8%
65+ = 10.2%

If only census data would stop making such a strong case for social security reducing elderly poverty.

Norm writes:

Muckdog, taxes as a share of the economy are at their lowest level since the Truman administration. We are on our way to 0% not 100%.

norm writes:

"No more claims that extravagant promised benefits in Social Security and Medicare in future decades can be financed with small tax increases today..."

And Medicare? Who is claiming that? Why even mention Medicare when Brad wrote about Social Security? Oh right, you have to add Medicare, because otherwise, the statement about small tax increases not solving the problem wouldn't be true. This is especially funny because Brad DeLong has been arguing for months that the health care crisis is far more pressing than Social Security. Oh, and didn't this Administration that just added a huge new entitlement to Medicare?

Jim Glass writes:
"No more claims that we know that carving-out Social Security revenues to fund private accounts will have no damaging effect on national saving. It might work. It might not."

Hello? I've certainly heard claims that private accounts might not increase saving by much, at least at the start.

But I've never seen anyone claim they'd reduce savings. Not even Krugman. Who's making that argument? With a cite please so I can go see for myself.

Heck, even DeLong himself has endorsed Smetters' take (.pdf) that the SS Trust fund has reduced government savings rather than added to it, so this is odd even coming from him.

Jim Glass writes:
And Medicare? Who is claiming that? Why even mention Medicare when Brad wrote about Social Security? Oh right, you have to add Medicare, because otherwise, the statement about small tax increases not solving the problem wouldn't be true.

Actually, absent the general revenue funding needed for Medicare, not mentioning that, we need only a small income tax increase of 35% from today's level by 2030 to cover SS and the operation of the FICA-tax funded trust funds, according to SS's actuaries.

Those trust fund bonds aren't going to redeem themselves you know!

You can decide for yourself whether you consider a 35% income tax increase "small".

As to whether this should be mentioned together with the income tax needs for Medicare -- which bring the projected required income tax incease to 62% in 2030 and 98% by the end of the trust fund's life in 2042 and higher afterward -- of course it should.

The tax bills will be arriving on the same day and tax money is fungible -- people who don't want to pay a 62% to 98% to >100% tax increase might decide health care is more important and cut SS instead.

After all, the last time Congress found that it actually had to raise taxes to pay for promised but unfunded SS benefits, it decided to cut benefits by 50% of the unfunded shortfall instead.

That was 1983, and it wasn't facing anything like the shortfall and tax hikes it will be facing relentlessly in the future. You think it won't do it again come 2030 or so?

Jim Glass writes:
Poverty rates by age in 1959 18-64 = 17.0% 65+ = 35.2%

Poverty rates by age in 2003
18-64 = 10.8%
65+ = 10.2%

If only census data would stop making such a strong case for social security reducing elderly poverty.

Now, don't stop there if you are trying to impress.

Be scientific and adjust for how much the poverty rate was reduced in 2003 compared to 1959 by employer-provided retirement plans that had covered workers for a full 40 year working life (not to mention by IRAs etc.) -- of which there were zero in 1959.

After all, SS was already running full steam in 1959 for a generation, why was it so ineffective at reducing poverty in 1959? Why did it get so much more effective only later as all those balances in pension accounts finally built up?

Then, after you scientifically reduce the effect of SS by that, also account for how much more would have been contributed to pension plans by businesses (and saved by individuals) absent SS.

After all, big business was a big supporter of SS right from the start because it let them reduce what they paid for employee pension support, and so added profits to the bottom line.

So adjust to reduce the impact of SS by that effect too, and after adjusting for both items give us a revised estimate for the impact of SS 1959-2003.

And then realize that all that doesn't really matter -- what matters is the future . In the past, yes, SS gave big positive returns on contributions that helped workers.

But the SS actuaries say that going forward all generations born after 1970 are going to be getting back less from SS than they put into it -- they are going to be lifetime losers to SS.

And a program that takes from workers isn't going to be making them any wealthier, eh?

Jim Glass writes:
Deb McAdams writes:

What would a one-time charge to transition from modified pay as you go to privatized accounts cost now?

If by "one time charge" you mean total charge discounted to current value, the answer is $0.

What's the cost of prepaying the mortgage on your house? More cash up front, but totally offset by cash savings later. Net $0. Or you'll actually come out ahead some if you expect rates to be higher and cash needs to be greater later.

Which will certainly be the case with Social Security around 2035, when we'll be facing either income tax hikes approaching 100% from today's level or annual deficits approaching 20% of GDP, as large as the entire federal government today, or some combination thereof.

You think prefunding benefits will be costly now? How costly do you imagine it will be be finance the same benefits if they aren't prefunded then?

I still have not seen the theory of why when everything is included, especially the first generation, an equal risk investment in private accounts would necessarily result in bigger payments than the current system.

Equal risk investment??

The SS actuaries say men born after 1970 will get negative returns, women will get around 1% or 2% -- but even these benefits are 25% underfunded, which means if the system stays as it is women get negative returns too and men get even worse.

And that's guaranteed.

Equal risk??? What diversified private investment portfolio is so "risky" as to guarantee you a loss over 40 years? Name one that bad!

Anyone would be hugely better off just buying government bonds directly.

If it is possible to pay a reasonable amount to make a transition, why has that not been put onto the table?

What's more reasonable than $0 discounted to current value -- while also avoiding the fiscal crush of 30 years from now? That's on the table.

Why this deception about crisis? Why these claims that phase-out accounts are necessary to "save" social security?

You've worked for a company for 20 years, but won't retire for another 20. You're counting to retire on your pension from it, but they've way underfunded the plan by spending a lot of the money you contributed to it on operations. You won't even get back what you put in.

Plus the company faces huge other charges in 10 years or so -- so even your current loss-level benefits may be slashed further.

What "crisis"? You won't be screwed until you retire, that's 20 years away!

Why do people who are philosophically opposed to government retirement programs of any kind claim their agenda is to save Social Security?

Why, that sounds like accusing people of dishonesty! But questions like that can go both ways.

Why do so many people keep saying they want to "save" the status quo system when actually they want to change it dramatically from a system that made workers wealthier in the past to one that will make them poorer in the future? How is that "saving" Social Security??

How do they keep the delusion in their minds that they are preserving this Social Security...

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)!

... when the actually are driving forward a system that will make workers poorer?

And how do they manage to deceive themselves into thinking they actually are helping workers by doing this?

Will those who are philosophically opposed to any forced government retirement program admit their motivations?

Will those who are willfully blind to the faults of any government retirement program -- and willfully resistant to any proposal to change it with the times -- do the same?

David Thomson writes:

Allow me to pretend that Iā€™m a credentialled psychoanalyst. Why would anybody look upon Brad DeLong as an objective observer? The man is an extreme Democratic partisan. Is there any evidence whatsoever to suggest that he cares about the overall good of the country? Brad DeLong seems to be nothing more than a knee jerker for the Democratic Party. Am I being viciously unfair? I think not.

Jay Stirrat writes:

In my case $63,000/yr vs. $24,000/yr from social Security.

I am 62 and just started receiving SS at $16,500/yr. My wife retires in 4 years and will receive $7500/yr for a total of $24,000/yr. Since SS payment increases with inflation this payment is in 2005 dollars.

My wife and my total contribution to SS is $89,080. The company had to pay an equal amount for a total of $178,160. If I had invested this money at the risk free 10 Year Treasury Note. We would have $ 591,547 today. Our life expectancy is age 85 and 88. If we keep this money invested in the long bond at 5.75% and live until 85 and 88; It would pay out $40,000/yr for the rest of our lives.

If invested in the market and corporate bonds at a 60%/40% allocation we would receive $63,000/yr. All payouts in this E-mail are 2005 dollars.

So $63,000/yr vs. $24,000/yr from SS. Which would the voters choose?

So I am eating dog food and enjoying it knowing that the politicians are being well feed.

Lawrance George Lux writes:

Jim Glass,
You highlight the real defects of the SS system, though you do not know it precisely. You claim the Income Tax must be increased 35% to pay the Trust Fund bonds, but Many claim the Taxes were already paid and the Government spent the funds. Neither Beneficiaries or SS system can be blamed for this. The Economy would be repaying those Trust bonds, if they had been farmed out through Investment bankers.

Study of Conditions since 1959 will state that the greatest Cause of Poverty since 1965 has been delinquecies in Pension Plans and Private investment schedules(at least among White Americans as I am). There are many other factors generating poverty among Blacks and Hispanics, which also proclude coverage of themselves under Pension Plans and Private investment schedules.

The leading current cause of Poverty among Americans is adverse Health Care Cost scenarios. You rant against DeLong linking SS and Medicare, but they must be linked to address the issue of Poverty.

Jay expresses a real loss endured by himself and his wife, due to the Government-dictated investment of SS Trust funds. Such would not have occurred if these monies has been issued as freely traded investment bonds earning Interest which accurred to his account. Even if the funds had been invested in bonds drawing Interest from something other than future taxes, and all funds keep collated; Jay and his wife could have drawn better overall benefits. A last note states that FICA taxes are taxes; the entire boondoggle of Private Accounts could have been avoided if Statement had been issued to the point that Taxes are not Interest-bearing Savings, but a One-time payment of Government bills with no longterm gain of capital. lgl

Arnold Kling writes:

Norm wrote,
"Poverty rates by age in 1959
18-64 = 17.0%
65+ = 35.2%

Poverty rates by age in 2003
18-64 = 10.8%
65+ = 10.2%"

But think about this. If you were 65+ in 1959, then you were born in the 1890's and your prime saving years were the 1930's.

If you were 65+ in 2003, you were born in the 1920's or 1930's, and your prime saving years were the 1980's.

So I don't think that one can necessarily jump to the conclusion that it was Social Security that reduced the poverty rate in 2003 among the elderly relative to that among the elderly in 1959.

fred c. dobbs writes:

Very few working people would have put one dime into the stock market in the 1930s. It took decades for the Great Crash to be forgotten. That generation was fooled by their recent experience into thinking stocks were a fool's bet. Perhaps this current generation has the opposite delusion? After 20 years of bull markets, everyone thinks stocks are always a better deal than other investments.
It's as true for generations as it is for individuals: Nobody wants to buy at the bottom and everyone is buying when the market is at a top.

Deb McAdams writes:

The first question is: Should there be any government involvement in retirement at all. I do not think it is controversial that poverty among the elderly would be greater if there was no government program of any sort.

The second question is for those who answer that the government should actively attempt to ameleriorate poverty among the elderly in some way. Those who answer that government should not take an active role really do not have an honest place in this debate.

The second question then is given the expected benefits of people who will not be able to build private accounts, is there free money to be had by switching others to private accounts.

The Social Security trust fund already invests the surplus on the market, with very low transaction costs and so far with good results.

Where is the argument that private individuals would, on aggregate, do a better job? The easy argument that they wouldn't is that they certainly would have higher transaction costs, and those costs are just dead weight losses.

The reason there are not private accounts today is that there was the first generation problem.

It is dishonest to just pretend away that problem and compare what actual private accounts could deliver compared to what a program can net given that the first generation's benefits are not pre-funded.

The United States government currently has 7 trillion of debt.

Assuming it would take 10 trillion to prefund social security, do you want to do that and start everyone on private accounts today?

If you just look at the private accounts, recipients would be better off. I'm all for that. In fact, I'd rather have that 10 trillion plus interest paid from income taxes than payroll taxes since the former are more progressive. If not for the difference between payroll and income taxes, when you look at more than just the accounts and examine the beneficiaries as both recipients and the tax payers who would pay the debt, it comes closer to a wash.

But after we get past the dishonest implication that we could just start fresh and ignore the current generation of recipients we get to the point, which is that opponents of Social Security seem to want to dazzle people with private accounts while decreasing benefits.

If there was free money, why has nobody pointed it out? Where is the huge market failure? The return on debt is irrationally lower than the return to equity? Individual private investors can capture that difference more efficiently than the Social Security trustees? Why?

There is no free money. Just a dishonest attempt to lower benefits without putting that desire to a head up vote.

There is no reason to think private accounts would work better than the current system when the current generation is taken into account.

Those who do not take the current generation into account are being to some degree deliberatly dishonest. In this case they are usually being dishonest to hide their impulse to reduce or even end government retirement benefits.

Jon writes:

Another reason you cannot compare returns on social security with those on private investments is that social security does something much different. First, the benefit schedule is tilted towards low wage workers at the expense of higher wage workers. Secondly, social security includes various death, disability, and survivor benefits. Finally, as others have mentioned there were the startup costs.

Deb McAdams writes:

To the people arguing that Social Security will be too expensive in the future:

If you want to make that argument, make it. That argument has nothing to do with privatizing Social Security.

You think the only solution is to cut benefits? State your case. Don't be dishonest and try to link cutting benefits to private accounts.

The fact that prefunded accounts under certain conditions give better returns than non-prefunded programs, is dishonestly irrelevant to either the point of unaffordable benefits or the point of optimal government retirement policy today.

You want to pay your mortgage in advance, by borrowing money from somewhere else? Tell us the interest rates somewhere else and the rate you're paying on your mortgage. Are you sure its less? Or are you just trying to whip up enough confusion to sneakily cut benefits?

More money is taken for the Social Security program than is currently needed for the express purpose of funding retirement benefits in the future.

You'd rather direct that surplus to make up for lost revenues from permanently abolishing the inheritance tax?

If that's the case, make your argument. Craven dishonesty doesn't look like it will work this time.

John writes:

FYI on basing expectations on historic returns. Investor behavior has a greater bearing on expected returns than market behavior.

Dalbar study on actual investor returns vs. market returns is instructive:

1984-2003

S&P 500: +12.98% per year
Average Investor: +3.51%
Inflation: +3.06%

My observations:

Most of this period stocks were rising at a historically high rate. If the average investor can't outperform a risk free Treasury Bill in a bull market what will they do in a prolonged period of substandard returns?

Those individuals who have not had any ability to save and under this new privatizing plan will now be 'empowered' owners... are unlikely to be better prepared to make financial decisions than those being measured in the above mentioned study.

link to study: http://www.munder.com/munder/cda/includes/ip_vp_investorbehaviorreport.pdf

Full disclosure:

I am a registered Republican supportive of most Bush policies. On SS I am in favor of extending retirement ages to correspond with increasing life expectancies and reduction in benefits to higher income retirees. Strongly opposed to private accounts.

I am also a professional investor (since 1983) and am biased in that I see the average investor as likely to see results substantially below the averages and believe that the averages are vulnerable to unusual long term cyclical (secular) risks over the next decade.

Dan writes:

Deb,

As a long time reader and almost never a poster I feel obligated to respond to your ad hominem and tu quoque attacks against some of the people here who disagree with your views.

Personally, I am undecided on the issue and I read many of these blogs to compare the different viewpoints. However, whenever someone begins questioning other peoples honesty I have to wonder if they themselves have a strong enough arugment to carry the day.

You appear to have some good points but I feel you keep hurting your position by claiming your opponent's postions to be grounded in dishonesty. The motives behind an argument do not matter to the validity of an argument.

Bob writes:

Deb: There is no free lunch. SS as currently structured will be too expensive in the future, although Medicare is worse. These problems will solve themselves because programs that become too large a burden on the taxpayer are cut (but mohair subsidies, which cost nothing in the context of the overall budget will survive forever). There are plenty of ways to disguise the cuts by pushing them off into the future (e.g., adjusting colas). Private accounts are a different issue but important in terms of defining gov's role in retirement.

Which leads to my real reason for posting. Be careful when claiming moral superiority. Clearly SS has reduced poverty among the elderly in the past. How could it not as a program to transfer wealth from younger generations to the elderly? But...

1)How can you start with the assumption that this transfer is moral to the point that questioning it disqualifies one from the debate? I'd be happy to hear your logic but I have to say that I'm skeptical.

2)How can you use past performance (including that first generation you mentioned) to presume that SS will continue to make retirees better off in the future? It certainly appears that there is a cohort that is being screwed. And the opportunity cost of a paygo system can be huge, depending on how people respond (a great unknown since we cannot observe parallel universes).

3)What relevance is the "death" tax (hehe) to the SS debate? Would your position on SS be different if W hadn't pushed through that particular cut?

Deb McAdams writes:

Dan:

1) If you believe it is immoral, then you are precluded from an honest debate on how to save it. What would Ronald Reagan's plan be to save communism? What would Harriet Tubman's plan be to save slavery? It may be immoral - I'm not arguing pro or con here - but if its immoral you should debate ending it, not improving it.

2) The initial question was would the elderly have been better off if personal accounts were enacted instead of the current system. The comparison between personal accounts and the current system is dishonest because personal accounts do not take into account benefits for the contemporary generation of beneficiaries.

We can take the contemporary generation into account and propose, for example, to prepay their benefits by taking on general fund debt - but after thereby-necessary general fund tax increases are taken into account, there is no reason shown so far to think personal accounts would come out ahead of the current system.

So when you compare how the elderly would fare with or without Social Security, it is dishonest to compare a pretend world where we can just forget about contemporary beneficiaries to the real program that direct a large part of its resources to paying the contemporary generation.

3) The FICA withdrawal rate was set in the early 80s to be more than necessary to pay the beneficiaries of the time, so that there would be a reserve to pay the larger generation of retirees in the future.

The political decision to borrow against that surplus to fund the rest of government is not inherently related to Social Security. So it is dishonest to present the general fund crisis which is caused by reducing general fund revenue below general fund expenditures (for example the Bush Tax Cuts that did not accompany Bush Spending Cuts) as a social security crisis.

The death tax (hehe) is just one example of the Bush Tax Cuts that, because there were no Bush Spending Cuts, predictably leads to a general fund crisis. To solve this crisis by directing the social security surplus to the general fund and cutting social security benefits is not a course that could be accepted if presented honestly.

Bob:

"Dishonest" is a mild ad-hominem. It is easily defeated by demonstrating that a reasonable person could believe what is being called dishonest.

Could a reasonable person believe that we should compare the return of treasury bonds or investments in equity to the benefits of the social security program without taking into account the amount of money borrowed in one way or another to pay the contemporary generation?

If a reasonable person would not believe that, then the view can only be advanced by unreasonable people. The specific unreasonableness is, I think, dishonesty.

Randy writes:

The choices are;

1. Default on entitlement debt. This includes all forms of benefit cuts, cost share increases, payroll tax increases, and increases in the retirement age.

2. Default on other forms of government debt, or downsize other parts of the government, in order to temporarily extend the life of entitlements.

3. Apply the brakes to the economy by increasing non-payroll taxes in order to temporarily extend the life of entitlements.

There are no "good" choices.

I favor choice number 1, default on entitlement debt. Entitlements created the problem and should bear the burden. Also, this choice will show clearly that we have learned our lesson. Well what'ya know! There's no such thing as a free lunch!

P.S. Deb. Benefits to the first generation should have been financed with "honest" debt, from people who could demand a rate of interest in proportion to the risk, rather than with a so-called "contract" with/on people who were not yet born.

Personally, I believe the die hard supporters of the current system are simply too embarrassed to admit they have made such an enormous mistake.

Boonton writes:

No more claims that extravagant promised benefits in Social Security and Medicare in future decades can be financed with small tax increases today (claims which at best could be true only if Congress would not spend the money).

I know you don't like seeing those claims, especially since you are unable to mount an honest argument against them. Are you seriously asserting it is impossible for government to save in light of higher expected expenses in the future?

No more claims that Social Security is working because poverty is lower among the elderly today than it was during the Great Depression. Most of the reduction in poverty among the elderly over the past century, like the reduction in poverty in general, is due to economic growth.

So on one hand retirees are receiving extravagant benefits from Social Security and Medicare. On the other hand this has nothing to do with dramatically lower poverty among the retired?

Next week: Winning the lottery has nothing to do with the low level of poverty among lottery winners.


Jim:
But I've never seen anyone claim they'd reduce savings. Not even Krugman. Who's making that argument? With a cite please so I can go see for myself.

Imagine gov't borrows $100 and puts it into your 'private account'. In exchange gov't reduces your SS benefit by $106 (the cost of its borrowing) Savings is exactly $0 since your $100 savings is offset by $100 gov't dissavings. However, the story doesn't end there. If you believe Bush and Jim glass that your private account will have a better return than the SS benefit that it replaced you'll reduce your personal savings. Why?

Well if you expect to see $110 in your account in a year then you're $4 better off. Assuming you were happy in the past when you were only expecting a $106 benefit it would be sensible for you to take some of this windfall today. Say by charging an additional $4 to your credit card or cutting your 401K contribution by $4.

Actually, absent the general revenue funding needed for Medicare, not mentioning that, we need only a small income tax increase of 35% from today's level by 2030 to cover SS and the operation of the FICA-tax funded trust funds, according to SS's actuaries.

Those trust fund bonds aren't going to redeem themselves you know

Well yea but whoever said that the bonds had to be redeemed all at once for hard cash? Nearly every other bond the US gov't has outstanding is rolled over every year. I could just as easly generate a similar super-tax increase if I said we were going to pay off all of Bush's deficits in 5 years.

Remember, people like Jim are complaining about a hypothetical 2% of GDP deficit about a half century away while they ignore a 4% and growing deficit today. It's the lies and deceptions like this that is costing the Bush admin. the debate.

Poverty

Be scientific and adjust for how much the poverty rate was reduced in 2003 compared to 1959 by employer-provided retirement plans that had covered workers for a full 40 year working life (not to mention by IRAs etc.) -- of which there were zero in 1959.

After all, SS was already running full steam in 1959 for a generation, why was it so ineffective at reducing poverty in 1959? Why did it get so much more effective only later as all those balances in pension accounts finally built up?

Our good friend should show us some pre-1959 figures. I suspect poverty rates were even higher in, say, 1935 or 1940 for the over 65 crowd. Regardless IRA's are a relatively new invention and they primarily benefit middle and upper-income earners. While some low income people do benefit greatly from them their primary benefits are not going to reducing poverty. Social Security is noted for its progressivity (which also causes lower expected returns). Jim can't have it both ways, if SS's returns are low due to progressivity then it must be lowering poverty.

Boonton writes:


************************************
Dalbar study on actual investor returns vs. market returns is instructive:

1984-2003

S&P 500: +12.98% per year
Average Investor: +3.51%
Inflation: +3.06%
**************************************

This is very illustrative. The fallacy with the 'if only we had private accounts argument' is that there is a given amount of money available to pay off 'returns'.

Think of the lottery. The payoff for having the right number is $1M. Ohhh if only everyone played the right number all at once! Then we would all be millionaires and poverty will be gone!

Well no, if everyone played the winning number at once the payoff would be the pot divided by the number of players. Probably less than a dollar.

The reason the 'market return' was 12.98% from '84-03 is because so many average investors made stupid calls and left 'money on the table' so their realized returns were only 3.51%.

If we could roll the clock back and mandate everyone open up a $1000 account consisting of the S&P 500 in 1984 they would not be enjoying 12.98% realized returns in 2003. Most likely they would be enjoying a number much closer to 3.51%, which is probably worse than social security once you consider inflation of 3.06%.

Boonton writes:

One final thought, let's see if Jim & the privitizers will call a bluff. Here's two ideas they should agree to:


Alternative A: Implement the 2% 'private account' on top of Social Security. If national savings is increased by 2% today then that should make it easier to borrowing in 2030 or 2040. Regardless, if benefits have to be cut in 2040 the savings accounts will provide a nest egg to make such a cut bearable. If the doomsday sceneros turn out to be false then we have the double benefit of SS plus a nest egg...additionally the economy will make use of the additional savings.

Alternative B: Let people borrow against their tax liabilities. What do I mean? Let's say the 10-yr bond rate is 4% and your taxes for 2004 are $6,000. You have the option of not paying your taxes provided you pay the IRS interest (say 5%). Of course additional provisions will be necessary to counter the risk of default.

If 'private accounts' are better then it would make sense for you to put your Social Security taxes into one where you'll earn 7% or whatever. The gov't will of course run a larger deficit today but over the long term it will net out to zero additional deficit since you will pay off your loan with interest equal to the gov't's cost of borrowing (plus a premium to cover loans that go bad).

In the above example you would reap an Equity Premium of 2% that is essentially free money. Hows that? Well you still get your Social Security & other gov't benefits even though you do not pay the gov't $6K in taxes in 2004, yet you earn a net 2% on that $6K (7% return less 5% interest expense). In essence the gov't is letting you capture the equity premium thru private accounts while neither SS nor the gov't budget is threatened.

Assuming the program is structured to minimize the risk of loss to the Federal Budget by loans that go bad, liberals cannot argue with it. Who cares if Donald Trump avoids paying taxes in 2004 if he pays taxes in 2014 with interest?

Mcwop writes:

I would not put much stock (no pun intended) in the Dalbar study. Many other studies contradict it. Watson Wyatt has done some, Terrence Odean, and internally our experience is that investors earn on avearge double the 3.51% stated in their 401k, but you must consider that not all of these people are invested in stocks.

Regardless, your point still stands, but allow me to restate - one cannot assume that everyone would allocate all their money to stocks. For example, some may choose to put all their assets into money market fund.

Boonton writes:

I agree but the fact remains that the 12.98% return does not represent the average, the average must be lower. I suppose one way we could go about capturing a realized return would be by comparing net inflows and outflows. If net $100M goes into the market in January and $105M net comes out in February the realized returns must be 5%??? What do you think?

Mr. Econotarian writes:

On Social Security recipients being happy with the 8% returns since the Great Depression, keep in mind that only those born after 1915 saw returns for Social Securiy below 8% inflation-adjusted real returns. People born around 1895 saw 15% returns, and people born in 1875 saw 75% returns!

(Source: "Cohort-Specific Measures of Lifetime Net Social Security Transfers," SSA working paper #59, Feb. 1994).

Mcwop writes:

Boonton, I agree the average must be lower, mostly attributed to people investing in other asset classes beside stocks. Given choice this is exactly what will happen.

I would say that the only way you can assume returns is to know what someone might have invested. If personalized accounts were used starting in 1930, then one must ask "Will (did) the government mandate the asset allocation policy?" The next question is "Will the asset allocation policy be one size fits all (everyone gets 60-30-10 stock, bond, cash), or does it change as someone approaches retirement?"

The discussion question is interesting, but impossible to reconstruct as the behavioral assumptions are just too 'wild' (for the lack of a better term).

A good return assumption to use is a 60-30-10 stock-bond-cash return sequence. That is the aggregate 401k allocation today. Since 1939 this allocation has returned around 10% (+/- 50 bps depending on expenses). Again, if people have a choice then you can have large numbers that put it all in cash and end up with much lower returns.

Boonton writes:

Actually mcwop my point is much more specific. The S&P 500 had a return of 13%, let's say. My point is that this is as relevant as knowing the lottery payout. The realized return for those investing in stocks will be different because many stock investors did not buy the S&P 500 and hold it from '84-'04. They brought all different types of portfolios including assorted mutual funds, most of which did not perform as well as the S&P 500

Suppose stock investors had all simply purchased the S&P 500 in 1984. Would the return have looked the same? I don't think so. I think the return would have been closer to the average return (whether that was 3.5% or higher) rather than the 13% or so that did happen. Why? For the same reason the lottery payout would not have been the same if everyone buys the winning number rather than just one person. If a certain sum is allocated to providing returns (through stock buybacks, dividends etc.) then trying to spread that return out between a larger pool of people will result in diminishing those returns. The S&P 500 paid off 13% because a lot of people experienced negative returns or much smaller returns (of course a few lucky people do much better as well).

Jim Glass writes:
"The second question is for those who answer that the government should actively attempt to ameleriorate poverty among the elderly in some way."

Ha! If SS was about "ameliorating poverty" it wouldn't pay so much to Warren Buffett and rich. The overwhelming majority of SS benefits are paid to the non-poor middle class and rich.

And being that those over age 65 are today the richest age group in America by far -- and are pulling away from the rest every year -- SS operates in real time as a transfer system from the poorer to the richer.

So here's a question for those who keep going on about how SS is an "anti poverty" program: How about becoming honest about it and proposing that it actually become such a program by means-testing Warren Buffett and the non-poor out of it?

You know, everybody who sends a kid to college these days has to undergo an asset-and-income means test to determine how much tuition they are going to have to pay.

If everyone has to do this to send kids to school it can't be so outrageous -- so how about doing same thing to prevent the rich from collecting tax transfers from the poor? Which does seem rather outrageous.

If progressive, liberal principles alone aren't enough to support this idea, an added bonus is that it would easily close the funding gap -- just by cutting benefits to millionaires, who now are over 20% of the >65 population.

Then we could stop Buffett from collecting tax transfers from his Dairy Queen employees. Which would seem like a reasonable start for an "anti-poverty" program, eh?

Deb McAdams writes:

Jim:

I agree with means testing, exempting millionaires and making Social Security a more efficient program at reducing poverty.

Your argument is more with George Bush than it is with me.

Of course, private accounts has nothing to do with making Social Security a more efficient program at reducing poverty.

Private accounts is designed to disguise across-the-board benefit cuts - which would only lessen the effectiveness of Social Security as a program that reduces poverty.

Which makes one wonder how someone who wants to make Social Security more effectively reduce poverty has managed to get onto the privatizer's side of the debate.

Jim Glass writes:
Deb writes:

"The United States government currently has 7 trillion of debt."

Ha. Only if one disregards all the explicitly accrued payment liabilities that don't happen to be memorialized by bonds, which bring the total to $46 trillion. (Such disregard being the sort of thing that sends private sector accountants to jail.)

"Assuming it would take 10 trillion to prefund social security, do you want to do that and start everyone on private accounts today?"

Let's try and stay in touch with the real world. The actual number being discussed by the White House and Greenspan is more like $75 billion a year. Which would still keep both the debt and deficit way below the level of most of the 1980s-90s. Daunting eh?

"The Social Security trust fund already invests the surplus on the market, with very low transaction costs and so far with good results."

Um ... if the government had invested the Social Security surplus, it would have savings that it could use to pay benefits after 2018 instead of having to increase income taxes then to pay them.

But the government didn't invest anything -- which is why the SS actuaries say income taxes will have to be increased by 35% by 2030 just to cover the operations of the trust funds. Is this really too hard to comprehend?

Do you really want to disagree with the SS actuaries and the Treasury about this?

"Where is the argument that private individuals would, on aggregate, do a better job? The easy argument that they wouldn't is that they certainly would have higher transaction costs, and those costs are just dead weight losses."

Um, Deb, once again, males born after 1970 will get an outright loss from SS even under the current benefit schedule -- and after accounting for the fact that even those benefits are 25% underfunded, they'll do even worse and everyone will lose on the whole, women too. It will make everyone on average poorer. (So much for you "anti-poverty" program, eh?) You seem to have a hard time accepting this.

I asked you before: "What diversified private investment portfolio is so 'risky' as to guarantee you a loss over 40 years? Name one that bad."

Care to answer this time? Feel free to count in all the transaction costs you want. The tell us how you'd expect investors to not do better than less than 0%.

You know, sometimes proposing to do nothing is proposing to do something big.

Now, Deb, if you aren't willing to admit the obvious, irrefutable fact that by arguing to keep the SS system running as it is, you are arguing to make a big change in SS -- by converting it from a program that formerly made participants richer into one that from now on will make them poorer -- and to deal with the consequences, I will be forced to conclude that you simply are intellectually dishonest.

"You want to pay your mortgage in advance, by borrowing money from somewhere else? Tell us the interest rates somewhere else and the rate you're paying on your mortgage. Are you sure its less? Or are you just trying to whip up enough confusion to sneakily cut benefits?"

The interest rate is 4% today.

Deb, once more, I asked you before: When non-prefunded benefits come due 30 years from now -- as either annual deficits reach 20% of GDP (larger than the size of the entire federal government today!) or income tax increases approach 100% from today's level, or a combination of both -- what will interest rates be then? Eh?

If you keep dodging this question, and refuse to defend your position by saying you believe rates will obviously be lower than 4% then, as both deficits and taxes explode to unprecedented heights, then I must assume your argument is (how did you put it?) ... "cravenly dishonest".

OTOH, you could be an agent for Karl Rove, trying to keep SS on its present course until it goes over the cliff around 2030 and does a crash-and-burn -- you know, when that 35% income tax increase arrives to cover the cost of its "investments" while it is making everyone under age 50 poorer.

Politically, it is going to be real popular then, eh?

Jim Glass writes:

Boonton has the answer to the SS funding shortfall! Medicare's too!!

I wrote: "... we need only a small income tax increase of 35% from today's level by 2030 to cover SS and the operation of the FICA-tax funded trust funds, according to SS's actuaries. Those trust fund bonds aren't going to redeem themselves you know."

Boonton wrote:

Well yea but whoever said that the bonds had to be redeemed all at once for hard cash? Nearly every other bond the US gov't has outstanding is rolled over every year.

Yea! All we have to do to avoid that tax is not redeem the bonds in the trust fund -- and so default on SS benefits in 2018 instead of 2042!

The Treasury won't redeem the trust fund's bonds but will just roll them over -- so the trust fund won't get the cash it needs from the redemptions to pay benefits, so the benefits won't get paid. Bingo, the whole tax cost issue is settled! Why did nobody think of this before?

I could just as easly generate a similar super-tax increase if I said we were going to pay off all of Bush's deficits in 5 years.

Yup -- although it wouldn't be nearly as big as the tax increase needed to pay off the $5 trillion in bonds (compared to $4 trillion in debt owed to the public accrued from George Washington's time to today) that the SS Trustees are counting on redeeming ("whoever said that the bonds had to be redeemed all" ... um... they said) from 2018 to 2042.

Although I like this alternative plan better. And we can drop an extra $100 trillion of bonds in the trust fund tomorrow and use it to fund SS and Medicare too forever!

After all, if the bonds are never to be redeemed to pay benefits but will just be rolled over, and (like the bonds in the trust fund now) they are serviced just by the government crediting interest to itself, what debt could be easier to carry?

Crisis solved!

Remember, people like Jim are complaining about a hypothetical 2% of GDP deficit about a half century away while they ignore a 4% and growing deficit today.

While people like Boonton complain about the general revenue deficit today as if either it or the non-enttilement public debt was anywhere near as large as during most of the 1980s and 1990s -- while they ignore the $11 trillion in unfunded entitlement liabilities incurred by the government just last year.

Boonton writes:

So here's a question for those who keep going on about how SS is an "anti poverty" program: How about becoming honest about it and proposing that it actually become such a program by means-testing Warren Buffett and the non-poor out of it?

There Jim goes again, trying to have it both ways. If Buffet's benefits were cut because he is too rich Jim would be here crying that Social Securities return for him was negative since he paid in and got nothing out. Look at him here!

Um, Deb, once again, males born after 1970 will get an outright loss from SS even under the current benefit schedule -- and after accounting for the fact that even those benefits are 25% underfunded, they'll do even worse and everyone will lose on the whole, women too. It will make everyone on average poorer. (So much for you "anti-poverty" program, eh?) You seem to have a hard time accepting this.

Males tend to have higher incomes than females, hence they would not do very well on average in a program with a progressive structure. Here's a logical question for Jim:

Given that social security benefits are paid by a social security tax. The tax raises funds which are distributed to retirees. The overall return on social security in the long run has to be the increase in funds raised by the tax. Since payrolls tend to grow every year tax revenue must also grow. The return, in the long run, has to equal that growth rate.

If some people experience negative returns it is because of how the returns are distributed. Naturally some people will experience negative returns if, for example, they die before they turn 65. On the other hand others have to experience high returns, for example if they become disabled or if they never worked but are widowed by someone who did.

To use another illustration imagine a casino that pays out 49 cents for every 50 cents that comes in. The return to the owners of the casino owner is 2% (1 divided by 50) and -2% to the casino customers. Of course there will be some customers for whom the casino owner will have very negative returns because they win jackpots. There will also be other customers who lose their shirts and earn the owner returns far more than 2%. At the end of the day though it has to sum out to a 2% return for the owner.

You know, everybody who sends a kid to college these days has to undergo an asset-and-income means test to determine how much tuition they are going to have to pay.

For some types of programs yes. Even rich kids, though, can get Federally subsidized student loans.

Then we could stop Buffett from collecting tax transfers from his Dairy Queen employees. Which would seem like a reasonable start for an "anti-poverty" program, eh?

First sign that a Republican has lost the debate is when they resort to class warfare.

Ha. Only if one disregards all the explicitly accrued payment liabilities that don't happen to be memorialized by bonds, which bring the total to $46 trillion. (Such disregard being the sort of thing that sends private sector accountants to jail.)

Here's an interesting question. Suppose Intel knows their Pentium chips will be obsolete by 2010 and they will need a totally new design to remain competitive. This will require the expenditure of $500M in 2010. What law requires them to add $500M on their 2004 balance sheet's liabilities? Is the economic effect on Intel zilch if they borrow $500M from the bond market today versus in 2010?

Um ... if the government had invested the Social Security surplus, it would have savings that it could use to pay benefits after 2018 instead of having to increase income taxes then to pay them.

Errr, if IBM 'invests' in government bonds payable in 2018 taxes still have to be raised in 2018 to pay off those bonds (or more likely the bonds will just be turned over). That doesn't alter the fact that IBM saved in 2004. Right now the Federal Budget has two parts, A and B. B is in surplus while A is in deficit yet Jim would have us believe the deficit problem is with B. Why?

Boonton writes:

Yea! All we have to do to avoid that tax is not redeem the bonds in the trust fund -- and so default on SS benefits in 2018 instead of 2042!

The Treasury won't redeem the trust fund's bonds but will just roll them over -- so the trust fund won't get the cash it needs from the redemptions to pay benefits, so the benefits won't get paid. Bingo, the whole tax cost issue is settled! Why did nobody think of this before?

Jim, you may be aware that the US gov't has discontinued 30 year bonds. That means, with the exception of some left over 30-yrs that are still outstanding, the entire US debt will come due in less than 20 years! Will this be dealt with by a massive tax increase or a default that will dwarf anything previously seen in human history? No, as the bonds come due the Treasury will issue new bonds to pay the old ones off. This is called rolling it over. Whoever owns the expiring bonds today gets the cash just as if the expiring bonds were being paid off with tax revenue.

Yup -- although it wouldn't be nearly as big as the tax increase needed to pay off the $5 trillion in bonds (compared to $4 trillion in debt owed to the public accrued from George Washington's time to today) that the SS Trustees are counting on redeeming ("whoever said that the bonds had to be redeemed all" ... um... they said) from 2018 to 2042.

$5T over 24 years comes out to $208.3B per year. That's starting with 2018's economy which will presumably be larger than today's economy due to economic growth. In comparison we are currently borrowing $400B per year.

While people like Boonton complain about the general revenue deficit today as if either it or the non-enttilement public debt was anywhere near as large as during most of the 1980s and 1990s -- while they ignore the $11 trillion in unfunded entitlement liabilities incurred by the government just last year.

I'm going to hold off on commenting on this until you comment on the Intel analogy I presented.

Jim Glass writes:
Deb wrote:

I agree with means testing, exempting millionaires and making Social Security a more efficient program at reducing poverty.
Your argument is more with George Bush than it is with me.

Tut, tut -- the White House and many Republicans have proposed means testing. Most recently, a means-tested inflation-adjustment for benefits.

Ted Kennedy personally and emphatically, and the rest of the Democratic leadership following him, have said "Never! Never! Never!"

If you favor means testing, your problem is with Ted Kennedy and the Democrats.

Why don't you know that? It makes me doubt your credibility when you go around name calling about others.

Private accounts is designed to disguise across-the-board benefit cuts - which would only lessen the effectiveness of Social Security as a program that reduces poverty.

Really?? Let's look at the real world:

The SS actuaries say that a low-wage male worker age around 30 today will get 98 cents back for a dollar contributed to today's SS via the formula benefit, discounted at the bond rate. I.e., he will be made poorer by it.

But that benefit itself is near 30% underfunded -- so he'll really get only 70 cents back, they admit, under the current program. Some "poverty fighting" there! ;-)

The actuaries also say they expect private accounts to earn 4.6% real, after expenses, on average. Even after subtracting a very dubiously high 3% bond rate as per the Bush plan, that's a 1.6% return.

So if our low-wage male puts $1 into a private account instead, come retiremement time he'll have $1.75 for it, instead of all of 70 cents, almost 2.5 times as much.

So ... do you want to explain how in your mind increasing the low-wage worker's benefit from his $1 contribution to $1.75 from 70 cents is a "benefit cut" that furthers poverty?

Which makes one wonder how someone who wants to make Social Security more effectively reduce poverty has managed to get onto the privatizer's side of the debate.

Maybe you ought to instead wonder about how someone who wants to "fight poverty" has managed to get on the side of aguing so insistantly that low-wage workers should get back only 70 cents for every $1 they pay into SS, instead of $1.75.

That seems an odd way to "fight poverty" eh? By insisting on making the poor poorer -- when there is an option right there to make them richer.

What explains that? Cognitive dissonance? Willfull blindness?

Then we add the issue of supposedly being for means testing, while being against those who actually propose it, and for those who are dead set against it forever. Sheesh...

Randy writes:

Question for Jim and Boonton,

Why do either of you want to do anything to Social Security at this point in time?

Boonton, you seem to think there is no problem with the current system. Great, no problem, no need to do anything.

Jim, you seem to think there is a problem. But still, there is no need to do anything. Because if there is a problem, its a problem for the Democrats to resolve. It's their program. If they want to let it default, then let it default.

Bottom line; if the system is going to fail, then let it fail. Let's get it over with and then do something that works. And if it doesn't fail, that's fine too.

Boonton writes:

Randy,

At most the system needs tinkering. In the long run if the program is set up to tax and spend an even amount of GDP (in other words, after the baby boomers eliminate the trust fund & return to a pay as you go system) you'll have a system that provides income security with a return equal to the growth of the economy.

Boonton writes:
The SS actuaries say that a low-wage male worker age around 30 today will get 98 cents back for a dollar contributed to today's SS via the formula benefit, discounted at the bond rate. I.e., he will be made poorer by it.

Actually if this is true the person would be richer. All this is saying is that he would be slighly less rich than if he had achieved the bond rate of return. However, like stocks, bond yields are notational only. Your actual return from investing in bonds is variable as well, although probably not as variable as stock returns.

This wouldn't necessarily be a bad deal for the 30-year old since the SS benefits are fixed and not subject to market changes. Logically it fits that the SS yield be slightly less than the bond yield.

Jim Glass writes:
Boonton wrote:

let's see if Jim & the privitizers will call a bluff...

"Alternative B: Let people borrow against their tax liabilities. What do I mean? Let's say the 10-yr bond rate is 4% ... You have the option of not paying your taxes provided you pay the IRS interest (say 5%) ..."If 'private accounts' are better then it would make sense for you to put your Social Security taxes into one where you'll earn 7% or whatever..."

So I get to borrow long at one point over a 40-year nominal low T-bond rate, and about a 1.5% real rate, and invest long in market investments.

Cool! Just show me the finance guru who thinks equities won't return more than a 2.5% real into the future (even Krugman predicts 5.5% real) -- or even that T-bonds won't pay more than a nominal 5% -- and I won't do it.

Otherwise, where do I sign up? How big a tax bill can I run up??

Especially considering the alternative! Consider why Krugman himself said he paid extra up front to get a fixed rate mortgage now rather than be exposed to the interest rates and borrowing conditions of 20 years from now...

"Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen." So says the Treasury under secretary Peter Fisher

How will the train wreck play itself out? ... my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.

Wow!! Who wouldn't prefund obligations at today's rates to avoid having to finance them then, eh?

Assuming the program is structured to minimize the risk of loss to the Federal Budget by loans that go bad, liberals cannot argue with it. Who cares if Donald Trump avoids paying taxes in 2004 if he pays taxes in 2014 with interest?

Well, you're half right. Of course liberals can argue with it, and in fact are doing so right now.

They just can't argue with it with any intellectual coherence -- and without extreme cognitive dissonance driven by their strange ideology.

Take Krugman. He goes on and on about how important it is to protect his own finances against exposure to the coming "train wreck" when "interest rates will soar".

But as to SS protecting itself the same way -- borrowing today so benefits will already be funded and not have to be financed after the train wreck arrives -- that's a no no no in his book.

The SS benefits of under 45-ers have to be fully financed in a train wreck.

Go figure. ;-)

Jim Glass writes:
Question for Jim ...

Jim, you seem to think there is a problem. But still, there is no need to do anything. Because if there is a problem, its a problem for the Democrats to resolve. It's their program. If they want to let it default, then let it default.

Well, yeah, but I still feel there are still two good reasons to do something now:

(1) I don't want to see the Democratic party implode. Some of my best friends are Democrats. Heck, I'm in Manhattan, all of them are!

Look what happens if the Democrats succeed in selling their new mantra that "There is no crisis ... we can run SS for 50 years with no problem even doing nothing thanks to the SS trust fund!... then, when the shortfall finally hits we can resolve the problem just like Ron Reagan and Tip O'Neil did last time in 1983."

Imagine voters now really come to believe this.

Then, after 2020 -- only 15 years, not 50 -- massive income tax increases start arriving to cover the operation of the trust fund. And the politicians then do do what Ron and Tip actually did to cover their shortfall -- they cut benefits by 50% of the shortfall!

So voters are left still facing fat tax hikes to cover the trust fund -- which the Dems had always promised them would pay for SS for 50 years! -- to keep afloat with income taxes a program that with the new benefit cuts will force them into even deeper negative returns, making them even poorer.

Who are they going to blame for this shipwreck? Why, the Dems, who swore it would never happen, of course. And what then?

Face it, the Dems are having a hard enough time trying to win an election as things are. After voters learn to loathe them for this, the Dems will go the way of the Whigs.

America then will become a one-party state. Which is not a good thing. Best to try and avoid it.

(2) I don't want to see workers get screwed the way the status quo has them set up to be screwed going forward. Screwing workers is not a good thing.

Not even if you do it with all the self-righteousness of a Democrat.

mcwop writes:

Boonton, not sure if I follow. Are you saying that returns will diminish as more people invest in the S&P 500? In other words, if too many people invest in Microsoft then the return will diminish, becuase MSFT cannot create enough value to pay those investors a return?

Deb McAdams writes:

Jim:

According to your numbers there are roughly 7 trillion in bonds and 39 trillion in explicit liabilities other than bonds.

Do you want to convert that 39 trillion to bonds and pay interest from the general fund?

After you do that, and taxes are adjusted to service those bonds, I'm all for private accounts. But overall, I'm still not seeing why this scenario, on the whole, including the increased taxes, leaves recipients better off than the current system.

How would it be better even in theory?

But Bush is talking about only paying 75 billion per year. That does not sound like servicing 39 trillion worth of bonds.

Bush wants to cut benefits. Whose and by how much? Why not spell it out so it can be debated? Why these deliberately misleading return comparisons?

But aside from Bush, to debate private accounts in general:

What is the reasoning for why recipients would be better off overall after paying taxes on bond service for the contemporary generation and receiving their benefits from private accounts?

And if there is no reason to think private accounts would work better, everything considered, then why do you advocate private accounts?

Randy writes:

Jim,

I think the Democrat's are in error to assume that taxes can be raised to fix this. Taxpayers have reached their psychological limit. That's why the government has become so dependant on debt, including entitlement debt. When the system does start to fail, the Democrats will want to raise taxes, but they will not be allowed to do so. The voter response will be, why throw good money after bad? The only feasible solution then will be to reduce benefits, starting at the top, which will also gradually reduce political support for the system. Social Security will gradually implode into the welfare program it should have been all along. Personally, I think this is the ideal outcome.

Deb McAdams writes:

Why are we not debating a major default on current social security obligations?

A young worker will be much better off with private accounts _if we also have a major default on current social security obligations_.

A young worker will probably be no better and no worse off with private accounts if we do not have a major default.

What makes the young worker better off isn't the private accounts, its the default on the obligations to older workers.

Why was the initial question for discussion not: What would be the impact on current poverty among the elderly if the first generation had not paid any non-prefunded benefits to older workers?

Is it not deliberate dishonesty?

Seriously there are all these great things we can do if we just partially or fully default on a generation of beneficiaries but instead of advocating default its supporters tying the default to a cosmetic change in how accounts are notated, and advocating that change.

Randy writes:

Deb,

I think you are right on target. Social Security is a form of government debt in which the lenders (workers) cannot refuse to lend, and the borrower (the government) has no obligation to repay. Social Security was designed to allow the government the option of defaulting on the debt in difficult times.

Nearly all of the current proposals to "fix" the system, be they lower benefits or higher contributions, constitute a default on the debt.

Private accounts do nothing to resolve the default situation. It was inevitable given the fact that the system works by passing on 100% of the risk to future generations. What private accounts will do is transform at least part of the system into a true investment system. The individual who gets the return, also assumes the risk.

The current system is dishonest. It was designed to default - and it will.

The reason to transition the retirement portion of the system to private accounts is that they are honest. The rest of the system can remain as a means tested welfare system - which is also honest.

Deb McAdams writes:

Randy:

If there is no debate about privatization qua privitization, then the whole debate is over what benefits to cut and what revenues to increase.

Framing this debate about cutting benefits as a debate over personal accounts was a dishonest deliberate misdirection by proponents of benefit cuts, but now that its in the open we can move past it.

In the early 80's FICA withholders were set higher than necessary for then current benefit payments specifically so that a trust fund could be built to handle the coming large generation of retirees.

Now, nearly 2 trillion dollars later, proponents of benefit cuts are proposing that the surplus Social Security money should be used to finance cuts in other less regressive taxes and then forgotten about.

One way to strengthen Social Security would be to legally move that surplus out of the reach of the rest of the government.

At that point, Social Security is undoubtably solvent for the next 50 years and very minor changes make it solvent indefinitely.

The general fund crisis, exascerbated by recent rounds of income tax cuts without matching spending cuts can and should be dealt with as a separate unrelated problem.

Now that instead of advocating private accounts, you are advocating a major default on Social Security benefits I have a new question:

Why is a major and drastic reduction in social security benefits preferable to a small reduction combined with insulating the social security program from the fiscal condition of the rest of the government?

Randy writes:

Deb,

Re; Now that instead of advocating private accounts, you are advocating a major default on Social Security benefits I have a new question:

Why is a major and drastic reduction in social security benefits preferable to a small reduction combined with insulating the social security program from the fiscal condition of the rest of the government?

I am not "advocating" a default on Social Security benifits, merely stating that a default is inevitable. Again, any decline in promised benefits, or greater cost to achieve the promised benefits, constitutes a default. Even if they are only minor adjustments. If someone borrows money from you and then tells you they can't pay you back what they promised, that's a default.

As for insulating the system from the rest of government; that is interesting, and I think the average American believes such an insulation already exists. They are wrong. And I don't think its politically feasible to write such insulation into law. Why not? Because from the government's perspective, the ability to default on Social Security is a good thing. The alternative would be to default on other forms of government debt, or other government programs. However, this may be exactly what happens when the government realizes that it's ability to default on Social Security is subject to the will of the voters. You see, it isn't really Social Security that is in trouble, its the government as a whole.

Boonton writes:

Cool! Just show me the finance guru who thinks equities won't return more than a 2.5% real into the future (even Krugman predicts 5.5% real) -- or even that T-bonds won't pay more than a nominal 5% -- and I won't do it.

Otherwise, where do I sign up? How big a tax bill can I run up??

The program limits would have to be based on maintaining losses due to people that will borrow and will not pay it back. That's why I put a 1% premium above the US bond rate. It might have to be more or less depending on how the program is set up to limit losses.

But just to illustrate how silly your argument is, why do this roundabout borrowing? Just let the Federal Government borrow, say, $5000 for every US citizen and then give that to each citizen in a special private account. Stipulate that they must pay it back with T-bond interest plus expenses for uncollectibles & administration but they can keep anything they make above it. What do you think?

Look what happens if the Democrats succeed in selling their new mantra that "There is no crisis ... we can run SS for 50 years with no problem even doing nothing thanks to the SS trust fund!... then, when the shortfall finally hits we can resolve the problem just like Ron Reagan and Tip O'Neil did last time in 1983."

The Trust Fund was an invention not of Democrats but of Alan Greenspan.

Since Jim didn't address it I'll repost my main points about his fear mongering:

1. Jim assumes that Trust Fund bonds, when they are needed, must be paid off through income tax revenue. This generates his magical projections of massive tax increases. I could do the same thing if I asserted, out of the blue, that all of Bush's deficits had to be paid off in the next ten years. In reality bonds are usually rolled over so they would be reissued to the general public. Using Jim's numbers this averages out to $200B per year for 24 years. As a point of comparison we are currently doing deficits of $400B.

2. The 'projected liabilities' is nonsense. I'll remind Jim of my Intel question. If Intel knows in 2010 it will have to spend $500M to revamp its aging Pentium chips what law requires Intel to report that on its financial statements today as an 'unfunded liability'. To use Jim's logic, there is no economic difference if Intel funds that $500M expense in 2010 by borrowing $500M today and holding it in a seperate account for 5 years (paying interest along the way) or borrowing $500M in 2010.

mcwop

Boonton, not sure if I follow. Are you saying that returns will diminish as more people invest in the S&P 500? In other words, if too many people invest in Microsoft then the return will diminish, becuase MSFT cannot create enough value to pay those investors a return?

Quite frankly yes. Microsoft is only able to generate so much return on its assets. If we doubled its assets it wouldn't be able to make two O/S's that both have as many sales as Windows currently does, nor would it make two Offices with double the combined sales than the current Office. It would probably produce some new products, maybe expand into some other businesses but it is unlikely it will generate the high returns it sees now....assuming Microsoft is being rationally managed today. If we keep adding assets to Microsoft they will soon find it hard to come up with good ways to use them. In the end they might just end up putting it into something 'safe' like 3-month T-Bills & its return will fall.

So let's say Microsoft's return for the last 10 years was 15% in real terms per year. If we turned back the clock and had everyone in the country put 2% of their payroll in MS stock then they would not enjoy 15% real returns for the next ten years. They would enjoy much less.

Boonton writes:

Sorry about that double post guys!

['s ok, Boonton. I've deleted the duplicates 'cause I'm watching what's happening. I'm not sure why EconLog is so interminably slow at the moment, but it's possibly related to Econlib's outage yesterday. Our apologies for the slow page loads and slow responses.--LFL, Editrix]

Deb McAdams writes:

Randy:

You see, it isn't really Social Security that is in trouble, its the government as a whole.

Me:

Do I see? That's what I've been arguing. Now we just have to gang up on Jim until Jim admits that private accounts without benefit cuts aren't in themselves a better deal for beneficiaries than the current system and that the crisis of long term general fund revenues being less than general fund expenditures does not necessarily have to be solved by looting Social Security.

Randy writes:

Deb,

I don't think that is what Jim is arguing, but I'll let him respond for himself.

The reason that there will be benefit cuts (or tax increases which are just another way of saying benefit cuts) is that the current system is inherently dishonest. It is in the best interests of the government to proceed with benefit cuts in order to maintain the system as a revenue producing enterprise with which to fund other pet programs.

As for Private Accounts; please consider that this is precisely the method by which at least a portion of Social Security funds can be insulated from the machinations of a far from altruistic government.

Deb McAdams writes:
As for Private Accounts; please consider that this is precisely the method by which at least a portion of Social Security funds can be insulated from the machinations of a far from altruistic government.

How did private accounts become _the_ method. Why is this method better than just passing a law?

Do you favor passing a law that insulates Social Security from the rest of the government?

Are you arguing that private accounts are a better way to insulate Social Security than a law insulating Social Security? What is your reasoning for that?

I'll agree with you that any benefit change can be considered a default, and I'm sure you'll agree that a smaller default is preferable to a larger default.

How much of a default are you proposing?

Boonton writes:
The reason that there will be benefit cuts (or tax increases which are just another way of saying benefit cuts) is that the current system is inherently dishonest. It is in the best interests of the government to proceed with benefit cuts in order to maintain the system as a revenue producing enterprise with which to fund other pet programs.

Here's another inconsistency in Jim & the reformers line. On the one hand Social Security is giving people negative returns on their money so they get out less than they put in. On the other hand Social Security is facing total fiscal insolvency.

How exactly can both lines be true at once? Think about it, if Social Security takes more money from you in taxes than it will pay to you when you retire then it cannot be fiscially insolvent. More money has to be coming in than going out.

As for Private Accounts; please consider that this is precisely the method by which at least a portion of Social Security funds can be insulated from the machinations of a far from altruistic government.

Are you serious? Do you think there's some type of magic fairy that keeps Congress from passing laws that might hurt private accounts? Are you aware that one of the most potent of all retirement vehicles is the 401K/IRA which exists because government has passed special laws giving these accounts tax benefits? The same few ounces of ink that can alter your Social Security benefits can be used to pass special taxes on 'private accounts'.

As I've shown elsewhere, political risk exists and is unavoidable whether your using Social Security or 'private accounts' to fund your retirement. Ironically political risk is lower for Social Security than private investing. Why?

1. Social Security & private accounts have 'macro' risks. Congress can lower SS benefits or raise SS taxes or even default on SS entirely. Congress can revoke the tax priviliges of 401K/IRA accounts. They can pass special taxes on 'winners' and make them compensate 'losers'.

Privitization advocates like Arnold and Jim are consistently guilty of glossing over this. It's very implausible to imagine that a market correction that results in millions of people suddenly facing a retirement that is 10% or 20% less than they planned will not result in incredible political pressure to make the '401K winners' compensate the '401K losers'. I can even imagine how such a law would be promoted, "Tax 401K millionaires so your Grandma who worked at Enron (insert 2040 version of Enron here) can retire!". To the degree that such political pressure is able to succeed private accounts will be put on a treadmill of their own financial insolvency. Federal bailouts will encourage individuals to make riskier gambles with their 401K's, which in turn breed more expensive bailouts. You have the S&L crises for everyone!

2. Private accounts, though, also suffer from micro risk. Unlike a change in Social Security or 401K's which typically receive lots of coverage, there's always thousands of laws passed every year that have unpredictable effects on businesses. If your private account happens to be heavy in pharma stock, for example, you may take a huge beating if Congress suddenly changes patent laws in an unfavorable way right before you retire. Such a change would not attract the attention that defaulting on Social Security or abolishing 401K's would because it only affects a subset of account holders. But regardless of what you invest in the risk that the gov't will do something that will have an unfavorable result is unavoidable.

Randy writes:

Deb, Good questions all.

How did private accounts become the method. Why is this method better than just passing a law?

As Boonton says, there is no way to keep the government from passing a law even on private accounts. But it seems to me that it would be harder for them to get away with manipulating one massive account that nobody watches, then to manipulate individual accounts with individuals wanting to know the details of their annual statements.

Do you favor passing a law that insulates Social Security from the rest of the government?

I'm not against it. I just don't think it would be politically feasible. Again, the government has an interest in not passing such a law. They want to have the ability to manipulate the system.

Are you arguing that private accounts are a better way to insulate Social Security than a law insulating Social Security? What is your reasoning for that?

It could be, for the reasons stated on the first question. It depends on how willing the government is to make the private accounts a complicated nightmare which would allow them to manipulate the accounts. The degree of complexity can be seen as the degree to which they wish to manipulate.

I'll agree with you that any benefit change can be considered a default, and I'm sure you'll agree that a smaller default is preferable to a larger default.

A smaller default is better. But in time, if the system is not modified to prevent it, I believe the default will be total.

How much of a default are you proposing?

I am not proposing a default. I am pointing out that a default is nearly inevitable, unless the voters prevent it by forcing the government to cut other programs or default on other forms of government debt.

Boonton writes:
As Boonton says, there is no way to keep the government from passing a law even on private accounts. But it seems to me that it would be harder for them to get away with manipulating one massive account that nobody watches, then to manipulate individual accounts with individuals wanting to know the details of their annual statements.

One massive account that no one watches? Are you talking about the same Social Security which used to be called the 'third rail' of American politics? What makes private accounts especially sensitive to political gimmicks:

1. A huge incentive for losers in the account to demand that winners be taxed to compensate them.

2. The fact that stock and bond portfolios often will have a huge standard deviation in realized returns. This means you will fund some schmuck in 2040 who has $50M in his private account because he did something stupid like put all his money in "Bob's House of Cheese". Suppose the people who followed the 'good advice' and did 60/40 portfolios suffered a loss? You're telling me this state of affairs is just going to be accepted as the rules of the game while Bush & Friends are telling us today that stocks are just like a savings account that pays 7% per year rather than 1%?

3. Since the private accounts will be numerous it is quite easy to divide them against each other. Why not tax private account millionaires? Why let people who give up their citizenship take their private accounts with them? Why let dead-beat fathers who owe child support enjoy their private accounts? On the flip side why not let the poor people who just got laid off in the big plant closing 'borrow' from their private account? What about college for their children? How could you let Mary Sue's home go into foreclosure when she has $1M in her private account but can't touch it because she's only 40?

I'm not against it. I just don't think it would be politically feasible. Again, the government has an interest in not passing such a law. They want to have the ability to manipulate the system.

The ability to manipulate the system is necessary to keep it working. The trust fund surplus was not created by pork hungry politicians but by Alan Greenspan as recognition that the baby boomers do represent a significant demographic bump. Changes in life expectancy, income and so on justify the ability to tinker with the system as needed.

The system works best when it taxes and pays out some set portion of GDP. Then returns simply equal GDP growth. However in the trenches taxes and benefits cannot be based on GDP, which isn't even known until a year after the fact. These rates and benefit schedules have to be nudged back and forth to keep the thing in balance.

No one here has presented any serious case that social security has been mismanaged.

I am not proposing a default. I am pointing out that a default is nearly inevitable, unless the voters prevent it by forcing the government to cut other programs or default on other forms of government debt.

There's no reason to think so. As it has been shown many times Social Securities problems are quite managable with a tiny amount of tinkering, that's assuming the problems are real. Use a slightly better assumption of economic growth and social security is as solvent as ever.

Randy writes:

Boonton,

I agree with you that there are risks in private accounts and risks in the current system. But comparing the risks between the two is not really the point.

In the current system, 100% of the returns accrue to the current generation while 100% of the risks accrue to future generations. Every politician temporarily in charge of the system has had an incentive to maximize the payout to the current generation. Only now are we starting to see the consequences as we can now visualize the generation all that accumulated risk is going to come down on.

It isn't the worker to retiree ratio that is the cause of the current problem. It is the fact that politicians, knowing that the population was aging, did not adjust the system to account for it. Because it was in their best interests to do nothing.

Randy writes:

Boonton,

1.Agreed that Greenspan's goal was to resolve the problem of the baby boomers. So why does the problem still exists? Because politicians spent the money. Why? Because it was in their best interests to spend it.

2.What you call tinkering, I call defaulting. By the way, how does someone not yet born sign a contract?

Mcwop writes:

Ok Boonton - gotcha. The topic you raise is a very complicated investment topic. Example, at some point any individiual company or group could hit a growth ceiling. Determing that ceiling is tough part. GE could grow earnings 15% a year (many feel they are too big) for the next 30-40 years, because there is still a large untapped world market. GE has proven skeptics wrong for some time now. Eventually, GE will hit the ceiling. You also have new industries that come along creating never before seen products too. New markets are created.

Your point is correct in theory, but determing the ceiling is the key. If I knew that answer I'd be rich.

Deb McAdams writes:
Because politicians spent the money. Why? Because it was in their best interests to spend it.

The case is not that politicians spent the money.

The case is that the surplus is held as treasury bonds that the future politicians may choose not to redeem.

Of course, the politicians who choose not to redeem the bonds will answer to the people to whom they are denying benefits.

The existence of a social security surplus was not the motivating factor for failing to cut spending or for the latest rounds of income and general tax cuts.

This is a sudden new idea that repaying the social security surplus is optional. If the general fund imbalance reaches certain levels a lot of bad things may happen, one being the looting of the unrelated social security surplus.

Reallocating the social security surplus to compensate for cuts in the progressive taxes has never been inevitable.

That is one specific decision being attempted by one specific politician and there is no particular reason to believe it is the decision future politicians will make or that it is a decision that will be endorsed by future voters.

What you call tinkering, I call defaulting.

This is approaching abuse of the english language. Most english speakers understand default to mean a situation much worse than, for example raising the cap on social security withholdings or even increasing the retirement age.

Minor adjustments such as that are all that are necessary for Social Security to remain solvent as long as can reasonably be predicted - unless the social security surplus is looted and diverted to replace other more progressive tax sources.

Randy writes:

Deb,

I use the word default because that is the appropriate word for a borrower that doesn't repay the entire loan.

Yes, I understand, the government thinks that the program is a tax, not a loan. Its all there in the fine print. But the voting public thinks differently. They have come to see the system as a guaranteed benefit. A retirement system. If they had not been told that, they never would have voted for it in the first place.

It is interesting that your focus is on "saving the system" - because that is also the primary concern of the government. But shouldn't the concern be with ensuring that people receive what they were promised? We are doing exactly that for the current generation. But shouldn't future generations also recieve what they were promised? What right does the government have to default on a promise? Why should the voters support such a system?

And again, how does one who is not yet born sign a contract?

Randy writes:

Deb,

Re; The existence of a social security surplus was not the motivating factor for failing to cut spending or for the latest rounds of income and general tax cuts.

Consider that the existance of the trust fund, and the fact that the government does have the option to default on the Social Security liability, are factors that limit the risk associated with Treasury Bills, and thus allow the government to continue to borrow at relatively low rates. The more that is borrowed and spent, the more likely that the government will in fact eventually default on the Social Security liability.

You really want to save the Social Security system as it is? Start talking up the possibility of defaulting on treasury bills instead of Social Security. As the rates climb, the government will have less ability to borrow. Demand that they start making choices instead of simply mortgaging our children's future.

Deb McAdams writes:

Randy:

It seems to me that one side is advocating defaulting now, with bigger benefit cuts and the other side is advocating defaulting only if there is no other option, and in that case with smaller benefit cuts.

That's why "a default is a default" just is not true. Proposals to definitely cut benefits by 50% are just not the same as a threat that unless economic growth does not slow down, benefits will be cut by 25% fifty years from now.

I'm also not seeing where you're making the leap from the existence of the Social Security surplus makes it possible to default on the Social Security surplus to the existence of the Social Security surplus makes it inevitable or necessary to default on the surplus.

Five years ago, it was not commonly believed that the surplus must be raided. The current administration is cutting general fund revenues without cutting spending to the degree that even raiding the Social Security trust fund would not restore balance.

No administration has done that before. Five years from now, there is no reason to believe the next administration will behave the same way.

You're trying real hard to blame the irresponsible fiscal behavior we see today on the existence of the Social Security surplus.

What makes you think that in the absence of a social security surplus there would be more responsible fiscal behavior? I've seen no reason to believe that's the case.

Randy writes:

Deb,

First, thanks for the debate. Much of this is new territory for me and I do enjoy exploring new ideas.

I don't trust the government. My belief and experience are that they act in their own best interests, not mine. I'm a provider. I want to provide for my family. The government treats me like a pawn who's purpose is to provide for their constituents, thus making it harder for me to provide for my family.

I'm willing to pay my share for the common good. But I make $40k and the government is taking 30%. How exactly is that "fair"? And now they say they can't pay me what they promised - or that I'll have to pay higher taxes if I want to actually get what they had promised - or work a couple more years than they had originally promised.

Democrats say the problem is caused by the Republicans spending money on things they don't approve of. Republicans say the same about spending by the Democrats. I say the problem is simply trusting in government to provide. The government doesn't provide - I do. And I'm tired of providing for people who not only don't appreciate it, but accuse me of greed for not being willing to provide more.

Bottom line, I will vote for anyone who promises to cut taxes, any kind of cuts, because I don't care if the government crashes and burns. It is mostly a burden to me. In previous posts I have referred to my belief that the voters have reached the psychological limit of their tolerance for taxation. Perhaps my meaning is clearer now. It is the beginning of a tax revolt. Take heed.

Boonton writes:
It isn't the worker to retiree ratio that is the cause of the current problem. It is the fact that politicians, knowing that the population was aging, did not adjust the system to account for it. Because it was in their best interests to do nothing.

But if attempts are made to adjust you will jump on them for 'tinkering'. The above sounds good but it doesn't fit reality. We currently have a large social security surplus, have had one for some time and will continue to have one until 2018. This means the current generation is paying higher taxes than necessary to fund the retired generation and the retired generation is getting less benefits than are being raised by taxes. If your model really explained political behavior then why doesn't someone get elected by cutting the payroll tax and increasing current benefits thereby capturing short sighted young and old voters in one sweep?

1.Agreed that Greenspan's goal was to resolve the problem of the baby boomers. So why does the problem still exists? Because politicians spent the money. Why? Because it was in their best interests to spend it.

Doubtful, very doubtful. I ran the regressions several times and the key factor that changes spending is the economy, not the existence of a surplus or tax revenue.

mcwop

Ok Boonton - gotcha. The topic you raise is a very complicated investment topic. Example, at some point any individiual company or group could hit a growth ceiling. Determing that ceiling is tough part. GE could grow earnings 15% a year (many feel they are too big) for the next 30-40 years, because there is still a large untapped world market. GE has proven skeptics wrong for some time now. Eventually, GE will hit the ceiling. You also have new industries that come along creating never before seen products too. New markets are created.

Well suppose GE never finds a ceiling and grows 15% per year forever. Since the economy is growing somewhere under 4% per year at some point GE is going to represent something like 99.9999% of the economy. At some point GE will basically become the economy. When that happens the whole economy will grow at 15% per year and that will be the ceiling ;). But regardless let's say in 1985 GE saw earnings grow 15%. That's a hard number, let's say $450M. Return is found by putting that profit over investment. If $450M in profit was generated with an investment of $3B that represents a 15% return. If we turned back the clock to 1985 and put $6B into GE that years profit is likely to remain around $450M, the return drops to 7.5% because it has to be divided between more investors.

Long story short, when the S&P500 returns 13% you are smart to hold a low cost index fund. Your 13% returns are coming from people who lost money or made less than 13% returns. If you eliminated those people by forcing them to forgo their pet strategies and simply by the S&P you would lower everyone's returns.

Defaulting and Raiding the Fund

it's quite simple. There's two parts to the federal budget; A & B. B is running a surplus but A is running a deficit. Yet oddly so-called deficit hawks think the problem is B running a surplus and not A running a deficit.

Randy writes:

Boonton,

Your points are well made.

Now, I have a challenge for you. Let's make the system fair to future generations as well as the current generation. Let's keep the promise to them as well.

Without changing the formula, cutting benefits, increasing taxes, or extending the retirement age, how would you allow the next generation to have exactly the same guarantee that their parents and grandparents had? In other words, how can the government truly honor the terms of the contract between generations?

Boonton writes:

Randy,

Lifespan has increased faster than the retirement age. If nothing is done tomorrows generation is actually going to get a longer retirement than todays. But more to the point I reject the false choice that any change to the program means the promise is being broken. Since its beginning social security has been modified numerous times. For example, we are currently in the beginning of a very slow increase in the retirement age from 65 to 67. Benefits are indexed to inflation these days, they weren't originally. Initial benefits were indexed to average wages back in the 70's. Why is it now all in the sudden a 'default' if the program is modified even in the slightest way to ensure its future solvency?

Randy writes:

Boonton,

All the changes were defaults. Which is what I meant when I said that the system was designed to default.

As for the age issue, why should we penalize people who may or may not live longer, because some people are living longer now? Why don't we make the people who are actually living longer pay more? The deal has always been that if you live longer, you get a good deal. Let's just leave it that way, if you truly want to honor the contract.

But both of these are off target. I do think it is possible to do exactly what I said in the question.

Here's how;

1. The government borrowed money from me under the terms and conditions of the contract.

2. The government must repay me under the terms and conditions of the contract.

Notice that I am not saying the Social Security system must pay - I am saying the government must pay. The government never defaults on treasury bills. Why not? Because they pay them first. Likewise, there is no reason for the government to default on the Social Security liability. Just pay it second. What is left after mandatory obligations is what remains to fund the rest of the government.

Will this produce some consternation in other parts of the government? Certainly. But when did we decide that these have a higher priority for funding than Social Security? Why should the American people take the hit when the environment changes? The government should take the hit. Isn't the whole point of Social Security to keep the people from taking a hit due to events outside of their control? Let's get our priorities straight. Stop funding the Endowment for the Arts, Amtrack, Foreign Aid, Medicaid, hell - all of it if necessary. Give Social Security the priority it deserves.

So would this be sustainable? I must answer that question with a couple more questions. Can we consider the current system "sustainable" if the only way to keep it going is to make every generation pay a little more and get a little less? Is the current system "sustainable" if every time there are unforeseen environmental changes, a generation gets burned? If the answer to these questions is yes, than what I have proposed is also "sustainable" - only the government takes the hit instead of the people.

Boonton writes:
As for the age issue, why should we penalize people who may or may not live longer, because some people are living longer now? Why don't we make the people who are actually living longer pay more? The deal has always been that if you live longer, you get a good deal. Let's just leave it that way, if you truly want to honor the contract.

How are people being penalized? When the system was set up it the age was set by looking at life expectancies for those who had reached 65. Why is it ok to index benefits to inflation but not to life expectancy? In comparison a private account actually penalizes you for living longer since living longer only means you have to stretch your lump sum out over a longer period of time.

I'm not sure where you are getting this contract. It seems as if you think the entire nation is living under this contract with conditions and clauses that aren't written anywhere but you periodically are able to divine out of the thin air. The rough contract is simply that todays generation takes care of the previous one and in return tomorrows generation will take care of todays. Considering that we live in a very dynamic world I don't see the advantage to setting more details in stone than that.

So would this be sustainable? I must answer that question with a couple more questions. Can we consider the current system "sustainable" if the only way to keep it going is to make every generation pay a little more and get a little less?

There is no need to make each generation pay more and get less. As long as we are basically taxing and benefitting some roughly even portion of GDP the system will be perfectly sustainable with each generation receiving a return equal to economic growth.

Boonton writes:
than what I have proposed is also "sustainable" - only the government takes the hit instead of the people.

This is quite naive. The government is not a person anymore than a corporation is. It will never 'take a hit' at the end of the day because all hits by definition get passed onto actual people.

Randy writes:

Boonton,

Why is it ok to index benefits to inflation but not to life expectancy?

Because inflation is a known factor. Life expectancy is just a wild a$$ guess. If you want to make a real comparison, compare inflation to actual age achieved, another known factor. Why should a 20 year old pay more because he might live to be 80. Make him receive less if he actually reaches 80.

I'm not sure where you are getting this contract.

The Democrats are constantly referring to Social Security as a "contract between generations". I happen to like that idea. I think that there should in fact be a real contract with clearly defined terms and conditions. This would give workers confidence in the system, which is sorely lacking now. The contract in effect at the time of first employment would remain in effect for that worker's lifetime.

As long as we are basically taxing and benefitting some roughly even portion of GDP the system will be perfectly sustainable with each generation receiving a return equal to economic growth.

Are you saying that in the next depression, that Social Security benefits should be dramatically reduced to keep the system in balance? What is the purpose of Social Security if not to ensure people that they will be taken care of even in hard times?

The government is not a person anymore than a corporation is. It will never 'take a hit' at the end of the day because all hits by definition get passed onto actual people.

But does any single program pertain to as many people as Social Security? Some of these programs benefit very few people. And some of them could easily be replaced by private enterprise. But really, it's simply a matter of priorities. The ability of the economy to support taxation is limited. Priorities have to be set, and choices have to be made. I'm saying make Social Security priority number 1.

Honestly Boonton, I am curious as to why you oppose this. I would think the idea of maintaining the system as is for now and forever into the future is precisely the desired goal. Or are you implying that the system is not really sustainable?

Boonton writes:
Because inflation is a known factor. Life expectancy is just a wild a$$ guess. If you want to make a real comparison, compare inflation to actual age achieved, another known factor. Why should a 20 year old pay more because he might live to be 80. Make him receive less if he actually reaches 80.

Not really, the actuarials in 1934 were able to predict the portion of Americans over age 65 in the late 1990's with an error margin of around a tenth of a percent. Pretty impressive, however no one believes you could predict inflation with such precision even 5 years into the future. There's also a good body of literature arguing that we cannot even accurately measure the true inflation rate with the tools we have today. A few years ago Moniyhan and some others were arguing for SS benefits to be indexed for the CPI minus 0.50% or so because of the belief that the CPI has been consistently overstating inflation.

Are you saying that in the next depression, that Social Security benefits should be dramatically reduced to keep the system in balance? What is the purpose of Social Security if not to ensure people that they will be taken care of even in hard times?

You asked about sustainability, so let's keep it abstract for a moment. Imagine a simple SS program that taxed 5% of GDP from workers and gave that 5% of GDP to retired people. Each year GDP grows so what is the return?

Return = Benefit / Contribution

= R * GDP / GDP = R

R is the growth rate of GDP from the first period until the second.

In real life, of course, people do not work one year and then retire one year. They work many years and retire for a few years. Even generations are not so pre-defined. Some people were 'just before' and others 'just after' the baby boom depending on when you want to start counting. So it makes sense to look at periods of growth.

Yes if we suffered a prolonged period of negative GDP growth retiree benefits would have to be cut. However, if this happened we would be in a lot of trouble. Over on http://eh.net/hmit/gdp/ you can run GDP figures. I looked at Real GDP from 1900 until 2003. There's only been three periods where GDP growth was negative over 5 years (1921-22, 1930-34 and 1947-49). If you look at 10 year periods then GDP was only negative one (1933-34). If you look at 15 year periods then GDP grew by -0.49% in the 15 years between 1918 and 1933. Otherwise it has been positive for every 15 year period from 1915 until 2003.

In other words, periods of prolonged negative GDP growth are quite rare with the Great Depression being the only real example, and a small one at that. Even while though the Great Depression only damaged GDP slightly in the long run it was enough of a diaster to literally reshape the world in ways that no one could have predicted before. However if Social Security had been implemented back in 1900 it would have been stable enough to have survived the Depression without giving a single generation a negative return.

Private accounts, on the other hand, would not have been as stable. A prudent 401K investor who was heavy in stocks but planning to retire 5 years after 1930 or so (many financial advisors today advise investing money you won't need for at least 5 years heavily in stocks) would have lost more than half his lifetime's accumulated retirement in less than half a decade.


But does any single program pertain to as many people as Social Security? Some of these programs benefit very few people. And some of them could easily be replaced by private enterprise. But really, it's simply a matter of priorities. The ability of the economy to support taxation is limited. Priorities have to be set, and choices have to be made. I'm saying make Social Security priority number 1.

You seem to be asserting that there is only room for #1, hence we have to default on the national debt in order to save Social Security. I do not see the need for anything so dramatic. As I pointed out Jim's projections of doubling income tax rates are based on the false premise that the national debt has to be paid off entirely in a short period of time.

Randy writes:

Boonton,

You seem to be asserting that there is only room for #1, hence we have to default on the national debt in order to save Social Security.

What I'm saying is that if the system is completely sustainable, or even if only minor adjustments are required to keep it going, then make the necessary adjustments to the rest of the government instead of to Social Security.

Certainly the rest of the government is capable of handling minor adjustments-a percentage point or two to their annual budgets. And the result would be to give the people a Social Security system that they can trust - a true contract. If the system is sustainable, there is no reason to believe that any other program would have to default. And if times get really hard, Social Security is the last program we want to be adjusting.

The only reason to oppose such a system is if one believes that Social Security is so inherently unstable as to potentially cause a major collapse of other government programs. And you have stated repeatedly that you do not believe the system is unstable. Honestly, I think this could work. And I think the people deserve it. Enough of the scare talk. People have a right to trust Social Security. Make it priority 1.

Boonton writes:

I would go along with you if the system could be set up as a simple '5% of GDP in, 5% out' or whatever percentage people feel comfortable with. Unfortunately that's not possible so the system needs to be tweaked to maintain itself just as you have to apply gas and breaking to drive at an 'even' 50 MPH or the Central Bank has to tweak interest rates to maintain stable inflation.

randy writes:

Boonton,

It is the tweaking that makes people feel they can't trust the system. Ask younger workers if they expect to get anything from Social Security and odds are they will say no. Do they really believe that? Probably not completely. What they are really saying is that they don't trust the government.

To be honest, the idea of making adjustments to the government was more of a debate tactic then a proposed solution. It puts the issue in a different perspective. What happens if the pain is brought to government programs that politicians really care about, rather than just to those nameless plebians. It would be interesting to run the numbers, but my guess is that the pain to the government would be so severe as to make the proposal infeasible.

Privatization has problems, but it directly addresses the problem of people not trusting the current system. Every other solution I have heard will make that problem worse. I ask you, what is the probable future of a government program that the voters don't trust?

Mcwop writes:
Long story short, when the S&P500 returns 13% you are smart to hold a low cost index fund. Your 13% returns are coming from people who lost money or made less than 13% returns. If you eliminated those people by forcing them to forgo their pet strategies and simply by the S&P you would lower everyone's returns.

Investing in stocks is not a zero sum game like investing in options is. Someone does not have to lose for someone else to win. Stocks can create wealth. Motley Fool has a nice explanation:

Boonton writes:

Privatization has problems, but it directly addresses the problem of people not trusting the current system. Every other solution I have heard will make that problem worse. I ask you, what is the probable future of a government program that the voters don't trust?

1. Some surveys have indeed shown that many young people do not trust Social Security will be there. They have also shown that similar percentages will believe statements like "The gov't isn't telling us the whole truth about UFO's".

2. 'Feelings' are not a serious enough problem unless they are based in reality. Social Security is on relatively firm fininacial footing. Bush's budget is not stable over the next 10 years yet for Social Security the bar is 75 years or even an infinite time horizon? The if people indeed perceive social security as one of the more serious problems we are facing then they are suffering from an incorrect perception and the solution is to explain how their perception is wrong. Objectively Medicare and Bush's budget is much worse.

Mcwop

Investing in stocks is not a zero sum game like investing in options is. Someone does not have to lose for someone else to win. Stocks can create wealth. Motley Fool has a nice explanation:

Indeed, over the time period we looked at stockes created wealth of around 3.51% (let's leave aside the issue that you have some qualms with the study that produced this figure). My argument is not that stocks are not an essential tool for allocating capital in a modern economy, only that you have to be careful making macro-like statements along the lines of "the S&P 500 return was 13%, therefore if everyone had a private account which is invested in the S&P 500 they would have earned 13% on their money".

Randy writes:

Boontons,

My Social Security statement says that they can only pay me 73% of what they had originally promised, unless some action is taken.

But what they mean by action is not that someone else is going to take care of the problem. What they mean is that I will have to take care of that 27% myself - through higher taxes, reduced benefits, working longer, personal savings, etc. - or that I will just have to live with it.

It isn't a feeling that they are going to screw me - it is a recorded fact.

The "everything is going to be fine" people really pi## me off. They owe me money, or at least an apology. But all I get is a detailed explanation of why they believe that screwing me is necessary - and a bill. They care about the system, not me.

Boonton writes:

Randy,

One projection says that maybe Social Security will only be able to pay you 73% of your projected benefit A projection which has been noted for being biased toward lower economic growth historically.

The 'perception' is that Social Security is not going to be there by the young. Even if we accept your 73% figure (I recall a figure of 81%) that demonstrates the perception is not reality. There's a huge difference between 0% and 73%. Your statement shows the perception is irrational, therefore the 'solution' should begin by addressing the irrationality. It should not begin by accepting a distortion as reality and pretending to solve a non-existent problem.

But what they mean by action is not that someone else is going to take care of the problem. What they mean is that I will have to take care of that 27% myself - through higher taxes, reduced benefits, working longer, personal savings, etc. - or that I will just have to live with it.

Well you already took care of some of the problem. As we have noted SS is now running a surplus and has been for some time. That means you've been paying higher taxes than was necessary to pay current benefits. You neglect to mention another solution, simply borrow the needed funds. As we saw that comes out to something like $200B a year a half century from now which is pretty manageable considering we are currently doing $400B a year.

Here's another point; Jim has alleged that SS pays out a horrible return. Jim has also alleged that SS's liabilities are huge relative to the payroll tax. Both cannot really be true.

If SS's liabilities are huge then that can only mean you, Randy, are getting a huge amount of benefits relative to what you are being asked to pay in. If that's the case then a benefit cut (whether through a current tax increase, decrease in future benefits or increase in the retirement age) cannot be depicted as some type of horrible violation of your social contract. You're already reaping a huge windfall anyway so it isn't unjust to take a bit away...especially since you'll have decades of notice ahead of time!

If SS doesn't have huge implicit liabilities then that means there's no reason to assume there's a crises, so what are you complaining about?!

Randy writes:

Boonton,

I didn't make up the 73%. That's what it says in my statement.

Yes, the Trust Fund was built up by me and others paying higher taxes - repeat, higher taxes.

If SS's liabilities are huge then that can only mean you, Randy, are getting a huge amount of benefits relative to what you are being asked to pay in.

I assume you are referring to the "unfunded" liability. A liability is what the government knows that they owe. Unfunded means they failed to plan and now can't pay me what they owe. Solution; make me pay more so they can pretend to pay me what they owe.

If SS doesn't have huge implicit liabilities then that means there's no reason to assume there's a crises, so what are you complaining about?!

Again, I didn't make up the 73% figure. Its in my statement.

What am I complaining about? What do you think would happen if the current generation of retirees was told they were only going to recieve 73% of their promised benefits, or pay higher taxes to get them, or have their benefits adjusted for the fact that they are living longer than expected? I'm thinking they would complain mightily - and AARP would be storming the Capital. Funny that AARP doesn't give a crap about me.

Boonton writes:
I assume you are referring to the "unfunded" liability. A liability is what the government knows that they owe. Unfunded means they failed to plan and now can't pay me what they owe. Solution; make me pay more so they can pretend to pay me what they owe.

At this point let me go back to the example of Intel. Intel knows in 2010 they will have spend $100M to design a replacement for their Pentium chip line. Is that a liability? Well it may not be a legal one but it certainly is in every normal sense of the word. Intel's shareowners expect Intel to remain in the chip business past 2010 and would never approve of management letting the Pentium become obsolete without a replacement. Yet GAAP and every other accounting system would not only say Intel has no obligation to report a $100M liability, they would consider it fraud if Intel did!

Anyway, with the Trust Fund and future projected payroll tax revenue Social Security is never shorter than 20% of what is needed to pay benefits. The Trust Fund will not run out until 2052, that's when people who were born in 1985 will be turning 67. The Baby Boomers and even some of the later generations will have already enjoyed the bulk of their SS benefits (if you were born in 1970 you would be 82 then, collecting benefits for over 15 years).

So here is what we have:

1. Planning takes us about a half century into the future and is sufficient to cover everyone older than about 19 or 20 today. If planning is one of our duties (you ascribe that duty to the gov't but we are supposed to be the gov't) then maybe the generation just coming into adulthood today will have to do a bit more planning. Not much, though, since even taking a bad case scenero they are 80% of the way there.

2. More than a few economists have noted with more reasonable economic growth estimates the trust fund survives to 2075 and beyond. In other words, the situtation could not be better planned since even people who are just about to be born are covered!!!

3. Why the opposition to adjusting benefits to compensate for the fact that we are living longer? That makes no sense to me. You don't object to inflation adjusting. The worse that can happen is your expected benefit will be remain steady and not be artifically increased.

Boonton writes:

An additional item, if the tinkering and adjustments that may be necessary will only directly effect people who are in their early 20's and 30's today then how much of a violation of the social contract can it really be? If the retirement age is raised a half century from now by definition that gives everyone who will be effected a half century to prepare for it.

Randy writes:

Boonton,

I'm going to let you have that last word. We can pick it up again the next time the subject comes up.

I found this post from Robert B. Reich, former Secretary of Labor in the Clinton administration, I find the part in bold particulary interesting.

I don't believe Social Security needs fixing anyway.

In the early 1990s, when I was Labor secretary, I was a trustee of the Social Security Trust Fund. So I know how those estimates about the future are made. If you assume that the economy will grow this century at about the same yearly rate that it has grown during the past 100 years ā€” even including the Great Depression of Granddad's generation ā€” the Social Security system will have enough money to pay all retirees what they've been promised for the next 75 years at least.

Yes, we postwar boomers are a big demographic bulge. When all of us retire, the government may have to dip into general revenue for a time, in order to pay us the Social Security that we're due. We're owed. But that's only fair. After all, as we've worked and paid into Social Security, the system has accumulated far more money than it needs to pay out to today's retirees. The government has been using that surplus to reduce the size of the budget deficit. So we're owed.

This hardly means the Social Security system will go broke over the longer term.

We're owed. Make adjustments from general revenue. I can live with that.

Boonton writes:

I suppose we may have come to some type of rough agreement here. It's been a worthwhile debate, I'll check the list to see if Jim wants to come back to address my numerous attacks :)

Randy writes:

Boonton,

Perhaps we have. Enjoyed the debate for sure. Thanks.

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