Arnold Kling  

Measuring Shortfalls in Entitlement Programs

PRINT
Does the Academy need a Reform... Beyond Reform?...

How big? So-o-o-o-o big. Ask the Concord Coalition.


If added to the rates needed for Social Security, the implied payroll tax rate necessary to cover the future costs of both Social Security and Medicare would be 32 percent in 2040 and 44 percent in 2075.

Read the whole thing. Thanks to Bruce Bartlett for the pointer. Bruce seems to be the Washington Post's favorite "conservative economist." For example, see this article.


Comments and Sharing


CATEGORIES: Social Security



TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/221
The author at aWpTiMuS.com in a related article titled Again With The Cap writes:
    Democrat Pans Bush's Soc. Sec. Overhaul, By Ken Thomas, Associated Press Levin, the senior Democrat on the House Ways and Means Social Security subcommittee, said his constituents have raised concerns about the changes. Those nearing retiremen... [Tracked on March 26, 2005 8:25 PM]
COMMENTS (24 to date)
Randy writes:

It occurs to me that what Social Security accomplished was to spread the pain of the Depression over several generations. Not bad. And it seems to me that what we should do now is get over the notion that it can work indefinately. Let it end, so that it can be brought back out when it is needed again - in the next depression.

Jim Glass writes:
It occurs to me that what Social Security accomplished was to spread the pain of the Depression over several generations.

A myth believed by many. But Social Security didn't pay its first benefit until 1940 -- after the Depression was over. And benefits then were tiny. The original program as designed and enacted by FDR was funded and not intended to pay full benefits until people had worked and contributed to it for 40 years -- the late 1970s!

Of course Congress started changing that right away. The really big dollar payouts over contributions came in the 1970s -- the ones when Paul Samuelson praised the Ponzi nature of Social Security and lauded it for paying everyone "benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times (or five times counting employer payments)!"

It is those big benefits that drove Social Security broke in the early 1980s, when FDR's original plan was scheduled to have a $500 billion reserve (1980 dollars).

And it is Congress's unwillingness to cut those big benefits to the non-poor and outright rich retirees (and soon-to-be retirees) of the 1980s that is going to cause all the pain shared by future generations.

Because to preserve those benefits untouched, Cognress upped the starting tax rate on younger workers to 12.4% (from the much lower rates, starting at 3%, paid by the 1980 retirees though their whole careers) while also slashing benefits to be paid to the younger workers. So the younger workers, instead of getting back five or ten times what they put in, as per Samuelson, now are going to get back less than they put in.

And on top of it Congress in 1983 also left the long-term financing gap unclosed, so today's 35-year old workers face a 25% benefit cut even from today's negative benefit level.

All of which 20 years from now is sure to radically change SS if not kill it outright when these now 55-and-younger worker-voters see their benefits being slashed even further into negative territory even as they are hit with a 35% income tax increase to cover the operations of the trust funds, which they had always been been told were already funded with the payroll taxes they'd paid their whole lives...

None of which coming pain helped anyone during the Depression. It's the retirees of the late 1960s to early 1990s who should be saying the big "thank you!"

Randy writes:

Jim,

Thanks for the update. I'm still for ending it. It just seems to me that efforts to "fix" it, while probably beneficial to me, would greatly increase the risk of disaster for my daughters. For me, accepting Social Security checks would be simply unethical.

Boonton writes:

Old habits die hard. Social Security liars continue to lump Medicare into SS projections despite the facts that:

1. Nothing in any of the SS reform proposals touches Medicare.

2. Medicare's projected problems dwarfs Social Security's.

3. Projections for Medicare are more uncertain than Social Security since they require us to project not only demographics, inflation and economic growth but also the the costs of medical procedures not yet invented.

4. The other typical tool of the Social Security liars is to assume SS Trust Fund Bonds will be paid off by an immediate tax increase once they are needed. In reality most bonds are rolled over when they become due so they will increase Federal borrowing when they are cashed in...which is only fair since today they are reducing Federal borrowing. I can accomplish a similar scare by putting forth some artifical requirement like all of Bush's deficits must be paid off in ten years and then projecting the size of an income tax increased needed to accomplish that.

Randy writes:

Boonton,

Re; In reality most bonds are rolled over when they become due so they will increase Federal borrowing when they are cashed in...which is only fair since today they are reducing Federal borrowing.

I do see some value in the idea that the bonds would be rolled over. Assuming that the Trust Fund bonds would be rolled over into some form of real government debt, this would replace a dishonest liability with an honest liability, and make way for ultimately resolving the issue by defaulting on Treasury Bills.

Honest debt refinancing of the Social Security liability would allow the government to continue to pass risk to the future, but the risk would be assumed by willing individuals who could demand a return proportional to the risk.

Both Jim Glass and I have, over the years, explained just about everything that is in the Concord Coalition paper, right here and elsewhere (Semi-Daily Journal, Maxspeak, etc). So now maybe there's even hope GT will finally get it?

mcwop writes:

Boonton I agree on points 1-3. What makes things worse, is that nobody wants to touch Medicare after adding that expensive new drug benefit. The problem was made worse, when it needed to be made better.

This is one of the main reasons I am against making any changes to SS. Leave it as it is. There is too high of a probability that it will be badly damaged.

Randy writes:

Mcwop,

Re; This is one of the main reasons I am against making any changes to SS. Leave it as it is. There is too high of a probability that it will be badly damaged.

Agreed. True, the system will gradually lose value over time. So let it.

Lawrance George Lux writes:

http://research.stlouisfed.org/publications/review/05/03/part1/GarrettRhine.pdf

Another good read, though I think both error on the side of advocation of Private Accounts. lgl

Boonton writes:
Honest debt refinancing of the Social Security liability would allow the government to continue to pass risk to the future, but the risk would be assumed by willing individuals who could demand a return proportional to the risk.

I'm not sure what you mean by pass risk into the future. Social Security basically consolidates risk. Unlike any private business it draws its revenues from the underlying economy.

If $500B needs to be borrowed in 2040 or 2050 it makes sense to borrow it in 2050. To the degree that borrowing today is cut by $100B or whatever then that's all the better. Nevertheless borrowing $500B today isn't being 'honest', it is being stupid.

Lawrance George Lux writes:

The Social Security Fund imbalance cannot be solved by either a viable Tax increase, or by Private Accounts. The Later will actually worsen the actual imbalance, as well as creating a massive new Debt load.

I find it interesting most Statisticians at SS and advocating Private Accounts have to assume rising Life Expectancy(Arnold, I understand your position), in order to get the necessary Beneficaries for the Shortfall.

The real correction should be curtailment of Benefits. Price-indexing simply insists all Seniors accept a destitute existence(never happen, even if the current Congress passes it). The only Solution is a Unit(One-Rate)monthly benefit. It will more costly in the Shortrun, cheaper in the Longrun as Wages rise; grandfathering by restricting COLAs until current Above-limit Beneficaries are in line with the established monthly Benefit.

I estimate 17% of the Liability could be saved over the total run of 75 years, if this standard Benefit is introduced before the Boomers start to retire. Remember I am not a qualified Statistician. lgl

Randy writes:

Boonton,

I'm talking specifically about the special series bonds in the trust fund which start to be redeemed in 2008(?). The choices will be to redeem them from general revenue (probably through tax increases), or through real government debt borrowed from real investors.

Okay, why not simply roll over the special series bonds? It is true that most government bonds are redeemed and immediately reissued. But they are reissued to another buyer. The original buyers of the special series bonds were unwilling purchasers and will almost certainly not be paid in full. So who is going to purchase a new issue of such bonds? The special series bonds can only be reissued by increasing payroll taxes or decreasing Social Security benefits. Such funding would only allow the reissue of the bonds. It would do nothing to resolve the deficit that already exists.

All forms of debt finance current spending by passing risk to the future - this is simply the nature of debt.

I use the term "honest debt" to describe treasury bills because the investors have a choice, and can demand a rate of return proportional to the risk. I view the special series bonds in the Trust Fund as dishonest debt, because the investors (workers) had no choice, and because they cannot demand a rate of return proportional to the risk.

Boonton writes:

I'm talking specifically about the special series bonds in the trust fund which start to be redeemed in 2008(?). The choices will be to redeem them from general revenue (probably through tax increases), or through real government debt borrowed from real investors.

Okay, why not simply roll over the special series bonds?

Why not indeed. We are talking about rolling over something like 2% of GDP per year into regular gov't debt. At the moment we are doing that with 4% of GDP in the form of Bush's deficits. Yet SS critics like to pretend there's some type of law requiring all financing to come from income tax revenue.

So who is going to purchase a new issue of such

The people who purchase Treasury bonds. This would be various gov't agencies, foreign gov'ts, central banks, mutual funds, pension funds, private investors, businesses and so on.


I use the term "honest debt" to describe treasury bills because the investors have a choice, and can demand a rate of return proportional to the risk. I view the special series bonds in the Trust Fund as dishonest debt, because the investors (workers) had no choice, and because they cannot demand a rate of return proportional to the risk.

The investors in these 'special bonds' are simply the Federal Gov't. The benefits workers receive are set by the parameters of the program. If bonds suddenly experience fantastic returns there's no 'bonus' for Social Security retirees...likewise there's no penalty if the investments have a lower rate of return.

Look at a traditional pension. You are promised a certain amount each year once you reach a certain age. The company funds this pension by putting money into an investment fund. If those investments do fantastic the pensioners don't reap the bonus, the company does since they have to contribute a smaller amount to meet their obligations. LIkewise if the investments fail the company is still liable for the payments.

401K's and such simply take the risk from the company to the individual. Social Security keeps the risk to the gov't. It seems sensible to have both since they offset each other.

Randy writes:

Boonton,

As I said in my original response, I do see value in rolling over the trust fund bonds into some form of legitimate government debt. What matters is that the purchasers of the new series have a choice.

I disagree that the purchaser of the original special series bonds was the government. The government collected money from workers, bought the bonds (IOUs really) in their name, spent the money collected on other programs, and is now faced with additional borrowing or tax increases in order to pay back the bonds. Further, the government shows every intention of partially defaulting - e.g., changing the terms of the agreement without consent in order to avoid paying back the entire debt.

I am in favor of additional borrowing, rolling over the special series bonds, as long as the new borrowing is not a repeat of the original dishonest process. That is, as long as the money is borrowed from willing investors. I do think the new bonds will carry a high interest rate. But the investors will have chosen to accept the risk in return for that high rate. As I said in my original post, the ultimate end, probably several years in the future, will be a default on government bonds. That's okay. The investors willingly accepted the risk. Unlike the original investors (workers) who were told repeatedly, and are still being told, that their was no risk.

Bob writes:

Boonton,

It is silly and misleading to say "Social Security keeps the risk to the gov't." I'm reminded of a radio talk show during the S&L crisis when a caller said something like "well, the gov screwed up, let them pay for it." Let's be honest - SS passes the risk on to the next generation of taxpayers. Actually, even using the term "risk" is silly - there isn't a *risk* that the next generation will get screwed.

Boonton writes:

Randy, when the social security trust fund takes in less tax dollars than goes out in benefits it will have to cash in its accumulated bonds. In order to cash them in the Treasury will have to give the fund cash. In order for the Treasury to do this, they will have two options:

1. After paying off non-SS expenses have enough tax dollars left over to cash in the bonds (in other words, be running a surplus in the primary budget).

2. Borrow from the general market the difference.

When the Treasury borrows from the general market it simply issues regular Treasury bonds and sells them at auction to whoever and whatever wants to buy them. So you don't have to worry about the purchasers not having a choice.

Randy writes:

Boonton,

Sounds right.

Now, how about this for a solution. If there is a shortfall, borrow. If a surplus, pay back the loan. The assumption here is that the baby boom retirees are an anomoly, so permanent fixes are not required.

Boonton writes:

Indeed, the key to remember here is that if nothing is done AND the projections are meet to the dollar tax revenue never falls below 80% of promised benefits.

Logically the story Jim Glass & others want to tell us make no sense at all. If SS tax revenue from current rates are always sufficient to pay no less than 80% of promised benefits then how could the remaining 20% require 90% tax brackets?

Randy writes:

Boonton,

My thought is this. It would be a good thing if the risk of the Social Security system were transferred from the program participants to willing investors via reissue of the trust fund bonds as real bonds. And if shortfalls above what is in the trust fund were also financed by debt to willing investors.

Buyers of treasuries are investing in the government's ability to tax. In essence, betting that the economy will continue to grow, allowing the government to raise the taxes necessary to pay its debts.

The reason we are being told that "Social Security" is in trouble, is because the government, facing the limits of its ability to tax, is trying to protect investors in treasuries at the expense of investors in Social Security.

While it may not be necessary for the government to default on any form of debt (the economy may grow substantially and allow us to keep the full faith and trust), should a default be necessary, it seems to me that the government should default on willing investors before unwilling investors. It would be simply the lesser of two evils.

Boonton writes:

Randy,

1. We are hardly at our limits to tax, if you look at tax revenues as a % of GDP you'll see we are currently at an all time low.

2. I think the administration is trying to find a way to make its tax cuts permament without looking like they are blowing up the budget deficit anymore than they have already. The de-indexing of starting benefits from wage growth would be a way to do this on the sly...cutting benefits by a massive amount in the distant future while trying to convince people their winnings in the market will more than make up for it.

3. In general I think we have a very incoherent view of risk that needs to be made more rigerous. By running a surplus in the SS account gov't is decreasing borrowing today. The risk is that borrowing today will be very cheap for the gov't. If borrowing is very cheap then the benefit gov't gets by reducing borrowing today is much lower. Of course, if interest rates zoom up (say because the market finally starts to distrust Bush's handling of the rest of the budget), then the return on SS's 'surplus' will be much larger.

Randy writes:

Boonton,

My total tax rate is 35% (including federal, state, sales, property, gas, fees, licenses, etc). I only make $40K, and I don't consider 35% low. Maybe tax rates were higher at some point in the past. If so, there's a reason they are lower now. Could I pay more? Probably. But I won't. I'll vote Republican.

And speaking of Republicans, I really don't see a problem with deficit spending. Bond investors have calculated the risk and return and decided to buy - let them. It's win-win. Worst case, the economy goes south and we have to close down some programs or default on some bonds. But the programs would never have existed if deficit spending had not been available, and I can't really muster any sympathy for an investor who miscalulates the risk of an investment.

P.S., As I've said before, if the Democrats want to become the party of lower taxes and smaller government, I'll change my vote.

dsquared writes:

Why on earth would anyone think that it makes sense to load the entire costs on the payroll tax? Particularly given that there are a number of Bush tax cuts which are actually scheduled to expire between now and 2020? Are we making the assumption that dividend tax relief is a more unassailable policy than Social Security? Why?

Boonton writes:

Randy,

Last time I looked the Fed. gov't took in about 16% of GDP as tax revenue. The historical average has been closer to 20%. This is not the same thing as your tax rate since various types of GDP is not taxed by the standard income tax rates you experience in your working life. Nonetheless, you are almost certainly paying less federal taxes than you were under the Clinton administration (whether you're better off now or not is another topic).

Randy writes:

Boonton,

You are correct, I am paying less federal taxes now thanks to the Bush tax cuts. That is a good thing and I want to pay even less. The thing is, I don't see how I could possibly be recieving benefits from the government equal to the 35% of my income they take from me. Remember that my original point is that we have reached, or are very close to reaching, the limit of the government's ability to tax. Perception is the thing. Democrats percieve that I can pay more. I disagree. So I vote Republican. Apparently a great many people perceive as I do.

Comments for this entry have been closed
Return to top