Social Security

Social Security has been a very good deal for the first few generations of participants.

All I need to hear in order to support its continued existence is that neither the contribution nor benefit calculations will change in any way, and that there will be no higher taxes of any other kind to make this happen.

I need a solid contract.

I want to hear that other government programs will be cut, or that other types of government debt will be allowed to default, in order to sustain Social Security.

Without a solid contract, I am absolutely in favor of letting the system gradually devolve into a minimal welfare program.

This is a nuanced version of Barry Goldwater's position on Social Security - make it optional, let those who want to opt out opt out.

You might be right, that under-30 types would chose to opt out as a group. You could probably find groups of over-60 types who'd opt out of paying real estate taxes for public schools, groups of over-$100K earners who'd opt out of paying income taxes favoring instead sales taxes, etc.

It is interesting to see the debate turning somewhat more honestly towards how conservatives might phase Social Security out. Who knows? Republicans have done quite well by pitting groups against each other in the past. But I suspect you'd have to do better than simply find a small group that would like to phase out Social Security to have an electoral winner.

It's intersting that conservatives want to put the cart before the horse. They want to debate how to phase out Social Security rather than why.

At this point let us ignore the libertarian arguments against social security. Yes it does alter the outcome of the free market. Yes it does infringe to a degree on the freedom of the market.

Social Security provides a degree of social stability by serving not only as a guarantee against poverty in old age but also as a basic income for all retireed people. Yes Warren Buffet doesn't need social security but the Buffets of the world are less than 10% of the top 1%.

Let the Right come up with a convincing rational that Social Security could really be phased down. Say we let people 'opt out' as soon as they hit 30. Assume a large portion of the population does.

1. Does Arnold agree that the 'opt out' has to be real? In other words, if your investments go bad you can't 'opt in' again at 60.

2. Does Arnold agree that if the gov't doesn't hold firm to 'opt out' as a rule, if it let's people call 'do over', it will set up a horrible case of moral hazard. In other words, people will seek higher returns by taking excessive risks with their portfolios knowing that the gov't is going to cave in and bail them out.

3. Considering how horrible even a Rightist gov't like ours does in reigning in entitlements, how can Arnold seriously have us trust that a gov't will seriously honor an opt-out provision for th enext 75 years? How can Arnold convince us that all this 'reform' does is keep a forced savings regime but make the savings optional? (In other words, turn it into a deficit machine)

Boonton,

Its a deficit machine now. Its just that the government is borrowing from unwilling workers instead of willing investors.

Social Security is currently running a surplus, not a deficit. If the Trustees are even slightly wrong about economic growth, productivity, or a decline in immigration then it will run a surplus forever (or at least as far as we can reasonably project).

You can call the non-Social Security budget a deficit machine but at least that one is decided on by current voters. Planned benefits for tomorrows retirees are at least partly being meet by forced savings today thru SS.

What happens with an 'opt out' system? People opt out of paying payroll taxes today but there's no reasonably way to guarantee that a Congress 30, 40, 50 years from now won't agree to bail them out (especially during a bad year for the market) rather than let them face poverty or even a slightly less affluent retirement. In fact, there's good reason to think that a future congress would bail out losers in a privitization scheme.

So what are we talking about? Granting a goodie today (no payroll tax for 'opt-outs') without any real guarantee that benefits won't be paid tomorrow (you got hit in the crash of 2030? ok, you can have your check as if you never opted out in 2010). Cut through all the rhetoric about freedom and choice and all you really have is yet another case of the right using the gov't's borrowing power to give people $1.25 of gov't for $0.89 in taxes.

Social Security TODAY is generating a surplus, in the future it goes into massive deficit and the "trust fund" is really an accounting fiction as it's entirely comprised of bonds bought with the surplus: bonds that in the future will have to be paid back, with interest, out of other government intake (READ: Other Taxes). I suppose the SS trust-fund bonds could be sold on the secondary market to cover some costs at some point, but that'll just drive up interest rates and they'll still have to be paid off with other taxes. What was used to buy those bonds? Oh yeah, taxes. Just forwarding the liability along, but demographic shifts and benefit growth keep it from being indefinite. Seems about 2041 we start to have a problem.

Anyway, in answer to Arnold's question, I cannot see why anyone in my demographic (I'm 23) would vote to renew Social Security. The rate of return isn't that great, and I'd much rather have control over the ~$2000 a year I'm throwing away on it, and the ~$2000 my employer is contributing. Toss that into a well-diversified 401(k) and some other investments, and I promise I'll do better than SS would've. Even in a bear market.

I'm also going to be able to reap the benefit of those funds without the pesky loss from administrative overhead. With nobody touching it besides myself and a few fiduciaries there's going to be a lot less run off than with it being handled by hordes of government administrators.

Plus, if some young folks are scared about market returns (either out of ignorance or foolishness), they can always drop the money into Treasury bonds for essentially the same benefit as Social Security.

Social Security TODAY is generating a surplus, in the future it goes into massive deficit and the "trust fund" is really an accounting fiction as it's entirely comprised of bonds bought with the surplus: bonds that in the future will have to be paid back, with interest, out of other government intake (READ: Other Taxes). I suppose the SS trust-fund bonds could be sold on the secondary market to cover some costs at some point, but that'll just drive up interest rates and they'll still have to be paid off with other taxes. What was used to buy those bonds? Oh yeah, taxes. Just forwarding the liability along, but demographic shifts and benefit growth keep it from being indefinite. Seems about 2041 we start to have a problem.

1. If the surplus is an accounting fiction then why will bonds in it have to be sold to the public in the future? Which is it? Are the bonds real, deferring borrowing from the public into the future or are they not real? If they are not real then they should cause no borrowing in the future.

2. Using projections that are probably too pessismistic, SS does indeed generate deficits nearly a half century from now of around 2% of GDP. Why will funding this deficit be some type of nightmare while today we happily run deficits of 4% of GDP with hardly a peep?

3. If SS's projections are to be believed then it is mathematically impossible for stock returns to meet future projections. You can't assume a crappy economy to project SS into deficit and then assume a rosy economy for 401K returns.

4. By definition Social Security's overall return has to be approximately the economic growth rate of the entire economy.

Boonton,

You're missing (ignoring?) the point of the topic - how would you convince a 25-yr old that SS is a worthy program from his perspective? Personally, I am sympathetic to your moral hazard point. But that position - the losers will demand relief and Congress won't be able to resist - can be used to justify pretty much any Fed Gov program/regulation. So I decline to accept it on the grounds that the possibility that Congress will screw up and create a moral hazard problem is far better than writing a blank check for any program Congress can think up.

Further, your point that

"If the Trustees are even slightly wrong about economic growth, productivity, or a decline in immigration then it will run a surplus forever (or at least as far as we can reasonably project)."

only holds if they are wrong in the "right" direction. Again, the thread here is to go beyond the question of SS's (in)solvency, accept that the program's outsized historical returns are history, and to discuss whether support for the program has a solid intellectual foundation or just represents inertia (or in your case, a distrust of the Bushies). Convincing past generations was easy - "We'll pay you a fantastic return." Can you convince future generations that SS, as structured today, is something positive for them beyond SS being

1)a "sacred intergenerational compact" (that they are stuck with, like it or not)
2)"social insurance" (perhaps it was at one time, but it is clearly more of a wealth transfer program today so why not update?)
3)important to keep because it's worked (or at least been around) for 70 years (inertia combined with assuming the future will be like the past when it clearly will not be).

BTW, I'm not a big supporter of SS "reform" because the political pain hasn't gotten big enough yet. Status quo is fine with me, for now.

Bob,

Re; Convincing past generations was easy - "We'll pay you a fantastic return."

Exactly. And if they'll promise me the same I'm totally on board. Put it in writing. Make it a law that the government cannot increase taxes, decrease benefits, or raise the retirement age. Make Social Security as firm a promise as T-Bills are now. If they're willing to do that, I'm sold. If not, then I see no reason to trust them.

Arnold wrote:

My contention is that the overwhelming majority of young workers would not sign up for Social Security if it were voluntary. In fact, I am fairly confident that if they could vote as a cohort either to join or not join Social Security, the majority would vote against.

Extreme libertarians will challenge the assumption that people should be compelled to save for their retirement. They will say that people should be allowed to allocate their income over their life span as they choose; if they choose to allocate nothing to their old age, then let them starve. I do not agree with this position, and for two reasons. First, I believe it is plausible to model the individual as a succession of selves with different preferences. A young person may dislike the idea of growing old and may be inclined therefore to refuse to make provision for his old self. The old self—the self that will not emerge and “take over” the individual for many years—has no control over the decisions of the young self. Compulsory retirement saving gives the old self a “voice” in the decisions of the young self.

Second—and a point actually consistent with libertarian thinking—these improvident oldsters will in fact free ride on their children and grandchildren. This, however, suggests an argument (made in my book Aging and Old Age [1995]) for the existing pay-as-you-go system, as distinct from one in which people finance their own retirement. If by lifting the burden of elder care (or much of it, at least) from the shoulders of one’s children, social security confers a benefit on the children, they should be expected to pay for it. A distinct but related point is made by Becker in his book A Treatise on the Family (enlarged ed. 1991). He points out that parents’ payment of school taxes finances their children’s education (and hence earning power), and social security can be regarded as repayment to the parents in their old age. The larger the family, the greater the aggregate benefits to the children of a “free” public education, but also the greater social security taxes they pay (because there are more of them). The benefit to the children of shifting the elder-care responsibility is probably independent of family size, since parents’ need for such care is independent of the number of children they have.

Personally, I am sympathetic to your moral hazard point. But that position - the losers will demand relief and Congress won't be able to resist - can be used to justify pretty much any Fed Gov program/regulation. So I decline to accept it on the grounds that the possibility that Congress will screw up and create a moral hazard problem is far better than writing a blank check for any program Congress can think up.

Except privitization is being sold by the idea that the stock market is just another type of bank account that gives you 7% returns instead of 1%. We are asked to accept that SS is much riskier than it is because 'some future politician' can vote to cut benefits. Isn't it proper to look at what is likely political behavior under an altnerate scheme?

only holds if they are wrong in the "right" direction. Again, the thread here is to go beyond the question of SS's (in)solvency, accept that the program's outsized historical returns are history, and to discuss whether support for the program has a solid intellectual foundation or just represents inertia (or in your case, a distrust of the Bushies).

Many people have made what I consider valid arguments that the Trustees are wrong in the pessismistic direction. If the Trustees are wrong in the optimistic direction then you have to bring those projections over to stock returns as well. Stock returns will be even worse if the Trustees are overestimating growth but ironically it will probably be easier for the Gov't to borrow. Slow economic growth usually means low interest rates which lowers the cost of financing SS benefits.

Actually when SS was enacted you would only expect to get benefits for a few months, maybe a year or two before your lifespan ran out. Fantastic returns was not the selling point of Social Security, insurance was. If you happened to live a long time (but couldn't work because of your old age) you could have some min. income.

Posner's view is that an individual is really almost 2 (or more) separate individuals throughout their lives, i.e., one might oppose SS as a youth (like I do, and like I am), but as an "oldster" realize they were wrong.

One view is that this is a case where paternalism is justified. Even Arnold indicated such when I asked him once why the market was unable to induce individuals to save a proper amoount. His answer was that the market is a teaching mechanism but unlike wasting a single paycheck a lifetime gives you only one shot to get it right and many will get it wrong.

Posner is also presenting a view similar to my own. Those who don't save will get a 'free ride' , hence the need for a limited type of forced savings. This combines nicely with the moral hazaard problem. If you know you are going to get a free ride when you're old then why not play your 401K extra risky? If you win you'll be rich but even if you lose you'll still be taken care of. Social Security, in contrast, is more like forced savings into a very low risk vehicle.

ES,

Your argument presupposes "security" as the greatest good.

I prefer "arete" - virtue, excellence, quality. What great artist, athlete, warrior, explorer, or entrepreneur ever placed security first?

Your vision of life and mine are incompatible. You want me to die warm in bed. I prefer to die on a mountain top. It would not surprise me if you do not understand - but by what right do you apply your preference to me?

How is getting a Social Security check going to prevent you from dying on a mountaintop? If anything it would make it easier. Climbing gear is pretty expensive after all.

Im sure I should think about this some more before I reply because I will probably reply too quickly and leave myself open to being shot down.

First, I look at SS as a combination of several things that are much more then an alternative investment. SS provides three things: retirement income, disability payments and survivors benefits. Every comparison I have seen from the ones that want to do away with SS seeems to ignore the later two. But somewhere between a quarter to a third of SS payments are for these and I saw one calculation that for an average person this is the equivalent to having both a half a million dollar life insurance policy and a half a million dollar income protection insurance policy. These need to be added to the calculations. It is one reason all the comments about blacks getting a raw deal from SS because they have a shorter life span is incorrect.

Much of the problem with the analysis I see here is it sort of assumes the perfectly competitive model and we know that when it comes to human endownment that the perfectly competitive model does not apply. We do not start life on a level playing field. Some people are born into wealth or other advantages of intelligence, education, health, etc., that give them an advantage in the game of life. It all boils down to the old saying back in the rural hills, "them that has gets".

I see SS as more a policy of protecting those that do not have. All the arguments about returns and the freedom of free market are great for the members of society that have a superior endownment of abilities. The law in its wisdom bans the wealthy as well as the poor from sleeping under bridges. If you are a college educated 30 year old from a prosperous family you can assume that you will be in the highly successful group that does not need SS.

But you can not be sure. My 35 year old son is now experiencing a failing business largely because his partner has a bad stroke last fall that left him unable to work -- guess what, the partner had thrown everything in the business and has no disability or income replacement insurance.

So what it comes down to is that all the right wing argument about poor returns from SS are true for the winners in out society. And of course if you ask any 25-30 year old he will strongly believe he will be a winner. But we know everyone can not be a winner and many who now think they will end up being a winner will fail.

The entire argument is that SS is valid as a social safety net that protects the losers in our market system from the worse costs of their bad luck or poor decisions. Moreover, in the real world many people will be losers even though they have done everything right. Bad things happen to good people. As a humane -- I will not say christian --society we owe it to our fellow citizens to provide this protection and ss, while not perfect, does a very good job of doing this at a relatively low cost.

Essentially every pre-capitalists society saw feeding and taking care of the elderly as part of the social fabric. But in a free market capitalist society that part of our social fabric was destroyed and SS is one of the ways we rebuilt that social fabric.

Boonton,

So does the economic interest of the state outweigh the interest of the individual in directing his or her own fate? I think not, but even if you think it does, why can't we have a system that allows both? I.e., a welfare based program to provide both a minimal safety net and maximum individual choice.

P.S. It is expensive - are you a climber?

The poor return accusation needs to be addressed. By definition returns have to be benefits over contributions. If benefits are increasing then returns have to be positive.

If the doomsayers are correct, if Social Security will run huge deficits a half century from now then returns cannot be negative. How can the system run deficits unless tax receipts are smaller than benefits. If benefits are greater than tax receipts then those getting the benefits have to have paid in more than they got out!

Take the surpluses currently piling up in the Trust account. If those surpluses are depleted in 2041 that means benefits were greater than the surpluses plus the interest earned on the Treasury bonds. Hence a rate of return that has to be greater than the Treasury rate.

Mathematically, here is a simple model. Assume a very simple SS system with two time periods. The tax rate is 5% of GDP and the system simply pays out everything it takes in (a true pay as you go system).

Generation 1 Tax = 0.05 * GDP
Generation 2 Tax = 0.05 * GDP * (1+r)
r= the growth rate

Return for generation 1 = Benefits / Taxes = Generation 2's taxes / Generation 1's taxes = 0.05 GDP * (1+r) / 0.05 GDP

Which reduces to just 1+r. If economic growth is positive then SS's returns are as well.

What may not be positive is an individual's return. As has been pointed out SS's returns are structured so that some people get more than others. An upper middle class earner may see negative returns but that is because the returns are given to others such as the widower and her children or a lower income earner is giving a disproportonate return and so on.

But at least some of the support for the SS systems stems from the fact that it has paid a return far greater than r, on average, in the past. As a poster on a related thread observed, this is an implicit debt that has to be repaid, hence why returns will stink for a large number of future retirees. Your simple model applies either with identical sized generations or on average, not just across a generation, but across generations.

Is the support for SS that I'm reading here really just a case of supporters wanting to keep it "untouchable" because they think if SS is in play, Congress will screw it up? Or do supporters actually believe that the program is close to perfect, that it can't be improved?

So does the economic interest of the state outweigh the interest of the individual in directing his or her own fate? I think not, but even if you think it does, why can't we have a system that allows both? I.e., a welfare based program to provide both a minimal safety net and maximum individual choice.

Randy, you can't have both. To the degree that your libertarian minded any social security system is going to be offensive and vice versa. There's a trade off between providing for welfare and maximizing individual choice.

There is an argument that gets you out of the trade off. Some people have written that humans tend to overestimate 'long shot risks'. In other words, they will worry more about being in a plane crash than a car accident. The implication would be that a free market economy will be a bit less than perfectly efficient. Why? Because people will devote excessive resources to avoiding 'irrational risks'. For example, they might spend more on driving than plane tickets even though taking a plane is much more rational from a safety perspective.

If a gov't policy addresses an 'irrational' risk and provides some security against it then the cost of that intervention in the free market might be smaller than the benefit derived from it. For example, imagine gov't intervenes to regulate airline safety as well as car safety. By coming down harder on car safety they can correct the imbalance caused by people behaving irrationally when it comes to measuring the two risks. If, say, the regulation costs $150B per year but GDP increases by $200B per year due to the improved efficiency then you can argue that no one's liberty has really been infringed. It would be a Pareto improvement for everyone.

Likewise, I think there's a case to be made Social Security gives people a bit of an appetite for healthy risk taking. It's subtle and hard to detect but I believe the economy today is probably stronger than it otherwise would have been because the 'safety net' allowed people to take a few more chances than they otherwise would have.

A rigerous economist will chide me for speculating. If such an effect existed I think it would be easy to overdo it, like adding some salt and pepper to a meal. Let's say for the sake of argument that the effect is real. How much an imposition on liberty is it if the person making $75K a year and paying all these taxes would have made $45K per year in some type of libertarian alternate universe?

Boonton,

I hear you. The key fact is, most people want the system exactly as it is. Aside from this debate, I think the only sane thing to do is nothing. Let it play out. Either the economy will grow or it will not. If it grows, there is nothing to worry about. If it does not, benefits will have to be cut. Social Security will decline in value and older people will be poorer - but then again, so will everyone else.

No reforms. No modifications. Just let it play out.

Boontown:

The surplus is an accounting fiction precisely because it's all bonds. Taxes were collected, those taxes were used to buy bonds, the bonds are held by SS. However, the revenues from the sale of the bonds went into the GENERAL FUND like all of that stuff does and the money was spent.

What's happened, then, is that the "surplus" consists entirely of promises to pay (that's what bonds are, after all). Where do the revenues come from to pay the bonds back? Why, future taxes!

The bonds exist, sure, and could in theory, not in actual practice or under current legality (see massive upward preassure on interest rates), be sold on the secondary market to recoup some of the costs of social security. HOWEVER, those bonds would still have to be paid back eventually by revenues from future taxation. Meaning, of course, that this ponzi scheme has forced everyone to be taxed twice to achieve the same result.

And I never said I particularly liked the current huge budget deficit. I will say that there's a difference between this sort of typical Keynesian manuever done to stimulate GDP during a downturn and the sort of structural problem we see with Social Security, but I don't really think government should be in the habit of trying to manage the business cycle through fiscal policy.

In short: I'm concerned about the current government deficit incurred through wanton spending and the massive unfunded liability with social security hanging over our heads in the future.

Timothy --your being taxed twice analysis is wrong. You know I like an argument as well as anyone, or I would not come here. You have a right to your opinion. But you do not have a right to your made-up facts.

First, let's be honest with these 25-year olds ab out what Bush is proposing. He is not proposing to jointly phase out their government benefits AND their contributions to the system. Rather he wants to keep payroll TAXES at 12.4% but cut benefits as in the backdoor tax increase I've been mentioning. Let's see how many young workers want that? Incidentally, I do suspect most folks would wish to keep at least some of the insurance aspects of the current system. But then the rightwingers who wish to sell privatization have horribly confused the issue so young workers think this is nothing more than a retirement program.

The bonds exist, sure, and could in theory, not in actual practice or under current legality (see massive upward preassure on interest rates), be sold on the secondary market to recoup some of the costs of social security. HOWEVER, those bonds would still have to be paid back eventually by revenues from future taxation. Meaning, of course, that this ponzi scheme has forced everyone to be taxed twice to achieve the same result.

1. You assume that the bonds will be sold to the public all at once. There's no reason for this, just as the surplus will gradually tapper off so will the need to cash in bonds slowly increase.

2. Assuming the SS bonds will not be paid back through taxation or benefit cuts then the effect of the surplus would have been to reduce gov't borrowing for the decades leading up to the surplus. The situation is analogous to knowing you're going to have to charge a $1000 car repair on your credit card at the end of the year so you begin to pay down your card balance now. It would be silly to take a $1000 cash advance on your credit card today and hold it until December when the repair will be needed.

In short: I'm concerned about the current government deficit incurred through wanton spending and the massive unfunded liability with social security hanging over our heads in the future.

You could break the gov't budget into two parts, A & B. If A is in surplus but B is in deep deficit then is the problem with A? You'd think so if you listen to SS reform advocates. A is doing what other gov't programs should, running surpluses today to prepare for higher expenditures tomorrow.

That massive unfunded liability never amounts to more than 20% of benefits according to the Trustees report (in other words, tax revenue never falls less than 80% of promised benefits). Here's a situation I proposed a while ago; Suppose Intel knows in 2008 its Pentium chips will finally be run down and it will have to spend $350M on R&D. Is this a liability? Accounting procedure will say no and it would be improper to report it as such in its balance sheet. Yet Intel's stockholders, directors and everyone else all operate on the understanding that Intel will spend $350M in 2008 to stay in the chip business.

According to the logic presented by privitization advocates, there is no difference between Intel borrowing $350M (discounted of course) today or borrowing $350M in 2008. Yet prudent management tells us it is better to hold off borrowing as long as possible to avoid 3 years of unnecessary interest payments.

The Social Security surplus reduces gov't borrowing today. That adds to the productive stock of the economy while also saving the taxpayer the need to make direct interest payments to public bond holders. Is that a benefit? Certainly. Should that benefit be without cost? The cost is the fact that at some point borrowing will have to be done from the public but so what? It's better to push $100B of borrowing off for 15 years than to do so today.

Randy wrote:

Your argument presupposes "security" as the greatest good.

I prefer "arete" - virtue, excellence, quality. What great artist, athlete, warrior, explorer, or entrepreneur ever placed security first?

Your vision of life and mine are incompatible. You want me to die warm in bed. I prefer to die on a mountain top. It would not surprise me if you do not understand - but by what right do you apply your preference to me?

one might oppose SS as a youth (like I do, and like I am)

1) I oppose SS (or rather, the idea of forced-savings, but SS too, given a better alternative, which I think does exist).

2) unlike Posner, I am a "youth" (under 25 years old)

I was merely presenting another highly-respected author's view regarding Arnold's solution; I did not say I necessarily *agreed* with Posner (not entirely, at least), as you assume. I have to say, however, that yours is the first time in about 2 years that I've been painted (inferentially, not directly) as a socialist; normally I receive the criticism of being a "market fundamentalist", invariably from people the left...

Anyway, you can promote the great athlete, entrepreneur, etc. all you like, and we should (so as to give heroes to which we may all aspire), but the truth is, 99% of people are not great athletes, entrepreneurs, etc., to whom security is easy to achieve because they are extremely-wealthy. Most people are roughly-average types (check out a Bell Curve sometime) to whom security (particularly the security of having enough to live on once out of a job), typically employed by those "greats", and if we are to base our economic policy in reality, we must base our policies around those people. But in order to promote excellence among individuals of the public, we also must tailor the policies such that the promote independence from the state (or more accurately, independence from other, average taxpayers), as much as possible.

Which, I might add, is why I believe Arnold's solution -- making SS voluntary -- is exactly the right way to go (making the default setting, however, an opt-out one), and for the very reasons he stated in his TCS article.

Although I once used to agree with the idea, I am no longer in favor of abolishing all govn't social safety nets (in absence of a better solution that is, e.g. a negative income tax - more on that in a moment), primarily because in my previous 2 years pursuing a pretty standard level of libertarian ideology (which has now moderated to more of a "classical liberal" position, in recognition of the occasional market failure and in recognition that the concentration of power, whether in the hands of government or anybody else, is the greatest threat to freedom), I've seen virtually *no* evidence that private charity will pick up the slack if we eliminate SS or welfare entirely.

And I'm not the only person to observe this problem/ideological inconsistency (particularly as I myself am not very charitable).

I've sought examples from time-to-time, and the only significant one I can think of involves the system of churches, acting as collection points for a variety of charitable causes. But that system doesn't please me, because if we are to rely more on churches, that increases the amount of theocracy which governs our society -- and I see "creeping theocracy" as just as bad, if not a worse problem than creeping socialism (which is without a doubt a serious problem in itself). This is a secular nation by design (1st Amendement, external statements of Washington and Jefferson, etc.), and it damn well ought to remain that way. I don't know about you, but I really don't want the U.S. becoming a theocratic hell-hole like Iran or Saudi Arabia, particularly given how far we've come as a result of the Enlightenment...

Yet, a system of increased religious determination over whether needy individuals receive help is sometimes exactly what libertarians offer as the solution:

It should be noted that there is one sure cure for the welfare problem—a solution that would eliminate the problem in one fell swoop: by the radical but connative measure of having every church and synagogue in the land become responsible for just one family receiving welfare. Just think what such a plan would accomplish!

But in absence of that teaching, of that indoctrination and (often) fear-mongering, what incentive is there to do so? "Why should I care about the starving man in the city sewer pipe - he's not anybody I know, so who cares?"

In that secularized, rational-person model, there must be a real reason for Alice to give to Bob, not one based on 2000 years of religious mysticism and voodoo. Are they friends or relatives? Those relationships would certainly be incentives. But in urban areas, where one finds many of the poorest people (e.g. East St. Louis, which, if you've never been there, really *is* like a 3rd-world country), nobody knows anybody else, hence, there's no incentive to be charitable to those people. Cities tend to be anonymous societies.

Here, I think the private charity works better in rural communities, because IME, those sorts of relationships are stronger than they are in urban areas. Not coincidentally, the libertarian claim of when private charity worked so well (the 18th and 19th centuries) were also the periods in which America was most-agrarian, or, compared to all the time since then, most-rural...

Invoke the Dec. 2004 tsunami tragedy as an example of private charity rising to the occasion if you like; I contend that is an exceptional example, as were the 9/11 attacks. They are exceptions in which people immediately recognize the need for charity - very much unlike the general case of the homeless man on the street with a cardboard sign begging for food/money, which we see (in urban populations, and (for some reason) San Francisco particularly) on a fairly-regular basis. It's the problem of statistical irrationality: we in the U.S. worry more about terrorism, which has killed approx. 3,500 people on our soil in the last 11 years, than we do about car accidents (40,000/year) or smoking (430,000/year), because an act of terrorism is a much-more shocking event. The same problem, in my view, applies to other problems, e.g. poverty.

Moreover, it seems clear to me that if we are to be a risk-taking, entrepreneurial society, then we can encourage greater amounts of risk-taking and entrepreneurship by ensuring that some small, minimalist safety net exists for those who fail... I'm told by a staunchly leftist friend that the majority of the people he's talked-to in food pantries, etc. are actually businesspeople whose businesses failed and which, after investing every penny they had into said businesses, bankrupted them. That is, they are people who took a risk on a business and failed; that sort of risk-taking, quite-obviously, ought to be encouraged if we are to have a market-oriented economic system, so as to bring more competitors into the market, but simultaneously, there must exist some punishment for failure (and therefore, incentive against failure) - e.g., living in a poorhouse with little/no property to one's name and only crappy food to eat.

I'm not advocating massive safety nets, only minimal ones, smaller than those we have today. (I'm still wide-open to the private charity argument, BTW; my point is that I've found no serious evidence of it actually working as a free-man's replacement for welfare, etc.).

Welfare ought to provide a monetary payment capable of subsidizing only little more than a drafty, non-air-conditioned dorm room (or whatever the cheapest housing is that is within, say, a 20 mile radius of their current location (so they can maintain contact in their current social relationships which will help them find another job)) and dorm-quality food (as Bryan Caplan suggested here recently), and only so long as one proves they are making a worthy attempt at finding work. It absolutely must be a system which emphasizes getting back to work, not lounging around on the taxpayer's dole; yet we cannot ignore entirely that poor people inevitably will arise in any economy for any variety of reasons, and dealing with this fact is one of the weakest pillars of libertarian thought.

SS ought to be optional (at least perhaps 50% of one's payments normally allocated to it ought to be), but opt-out by default, and integrate, to some considerable degree, a system of privately-owned accounts into which the owner may invest however they see fit. I also think SS ought to pay out on a graduated scale, based on one's lifetime income (determined from IRS tax returns, seeing as we won't be abolishing that abominable agency anytime soon); lower incomes receive more, higher incomes receive less, but the difference should not be so much that it unduly encourages people to take lower-paying jobs and allow them to live off other, higher-paid people (indeed, that's partly where the voluntary participation and lack of tax hikes comes into play, seeing as SS already is not generous enough to do this). Additionally, the SS recipient age needs to be raised from the current 67.5 to something recognizing our longer lives. When SS was created in 1935, the life expectancy was about 62 years. Today it's 77, and should approach 83-90 years by 2072. Even so, SS's pay-out age was 65 when SS was first created.

Still, like it or not, so long as there are those living in poverty (an ever-decreasing amount since the Reagan-era, I might add, due to his policies which grew the economy), there will need to be some amount of redistribution to keep those people from starving to death, freezing to death, etc.. We should greatly encourage private charity first, but where that fails (and it will never be 100% successful, and nor can any program be), inevitably government must fill in the cracks, unless we want people dying and rotting in the streets (literally). Charity is a first-line safety-net above the floor; govn't *is* the floor.

As a real-world example of why IMO this is necessary, take the example of the high-schooler who gets leukemia. Assuming he/she survives, in the state of IL, at least, there is not a *single* private insurance company who will insure them. None, period. A preexisting condition like that is much too expensive for them to consider insuring.

For such extreme cases, we have a govn't-run, state-level healthcare system to cover them. Your alternative would be, what? Private charity? To cover $500,000 medical bills? Let's be serious... Again, let the market work, whereever possible and as much as possible, and where the market fails to provide critical (not "convenience" or "comfort", but "critical", i.e. health, housing, or retirement) services, let the state handle those remaining outlier cases.

Finally (and this more-directly addresses your concern of forcing SS down peoples' throats), IMO both programs ought to be restructured such that they are implemented at no higher than the state-level; this allows some states to eliminate SS entirely, whereas others may expand it, but regardless, I know of nothing in the Constitution which permits them at the federal level. This restructuring would allow you the freedom to decide which sort of system under which you would like to live. Of course, I don't see such a federalist idea occurring anytime soon, hence I rarely raise it...

I am quite in favor of making such welfare-oriented programs more-voluntary in structure, and at least on paper, I'm a big proponent of replacing them entirely with Milton Friedman's negative income tax idea (although, given some flaws people cite relating to it, the plan may need some tweaking). Whether the NIT could replace SS or welfare in actuality, I don't know, but if it could, I would be all in favor of doing so... And even if the NIT is ultimately unworkable, I think the general thrust of the idea of a NIT is the right one.

In any case, you can count on me as one of those young people who Cato says is more likely to believe in UFOs than in the idea that I'm going to receive SS "benefits" upon retirement... :) I favor *minimal* government, not *no* government.

Thanks Arnold. Now I really feel old. Could you raise the opt-out age to at least 34?

My challenge to the Left is to come up with a convincing rationale for young workers to renew Social Security, either voluntarily as individuals or collectively as a group.

There is no rationale. If you ask a group of 20 year olds if they want to pay money to SS or take a pay raise in the form of keeping their SS payroll taxes - they will take the pay raise.

I do not intend this statement as a SS put down, but common sense tells me that most would take the raise.

Why should 25-year-olds want to recreate Social Security? Easy. Learning to cope with injustice and anxiety are part of the aging process. So being forced to pay large chunks of their earnings into a system that gives them no property right to their contributions and that can be modified or terminated at any time Congress feels like it and that offers a miserable return will be great for their maturization. (And in case they feel cheered by the snake-oil salesmen sending in comments from the basement of AARP headquarters, productivity won't bail out SS: even apart from the payroll-tax cap, higher wages create higher benefits for both existing and future retirees. We can't grow our way past the Baby Boomer bulge.)

ES,

You are correct, I did not read your post carefully. For that I apologize.

I did read your last post. There is too much to comment on all of it, but there is one line I would like to respond to;

...yet we cannot ignore entirely that poor people inevitably will arise in any economy for any variety of reasons..,

Why can't I ignore them? There are 7 billion people in this world and I ignore nearly all of them. The belief behind Social Security is that it connects us all in some sort of greater national good. I think it is more accurate to say that it has unified us as tools of the state. Those who value security over freedom have power, so I must accept their laws - but I do not accept their values.

"Eppur si muove"

Previous comments:

The bonds exist, sure, and could in theory... be sold on the secondary market to recoup some of the costs of social security...

~~~
You assume that the bonds will be sold to the public all at once...

1) Remain in the trust fund, then the gov't will have to raise $1,000 of tax revenue to redeem them to finance the $1,000 of SS benefits through the trust fund. Net cost to gov't: $1,000.

2) Are sold off to investors, then the gov't gets $1,000 from the investors which it uses to pay $1,000 of SS benefits, offsetting -- but then it still must redeem the bonds just as before, so it still has to raise $1,000 of tax revenue just as before. Net cost to gov't: $1,000, no change whatsoever.

3) Are sold off to investors, with the gov't rolling them over forever rather than redeem them, then the gov't gets $1,000 from the investors which it will use to pay $1,000 of SS benefits, offsetting -- but then it still must service the bonds by paying interest on them forever. And the current value cost of an open-ended stream of interest on $1,000 of government bonds is $1,000, obviously. (Otherwise the very act of buying a bond would create a profit or loss.) Net cost to gov't: $1,000.

The bonds have zero ($0) value to the government for financing Social Security, whatever you do with them.

As the government itself says, the bonds are merely an accounting device for keeping a running tally of the amount of Social Security surplus that has been consumed through general expenditures, adjusted for interest, to date.

They have exactly $0 financial value to the government.

"Convincing past generations was easy - "We'll pay you a fantastic return."

But the bill for that is now coming due, which promises all future SS participants the inverse, miserable to negative returns.

And their political effect will be just the opposite of that of the former "great" returns -- how are you going to keep voters happy with that?

(Especially when they realize how negative their returns will be after paying for their benefits twice, first through payroll taxes and then again through income taxes to remimburse themselves for all the payroll taxes the gov't consumed rather than saved)

Of course the negative return is what is going to do SS in, end it as we know it, in another generation.

I can see why liberals would be in denial about that, for purposes of short-term political expediency. But why so many conservatives think the political problem with SS is the 75-year funding gap is beyond me.

~~~~~~~

Except privitization is being sold by the idea that the stock market is just another type of bank account that gives you 7% returns instead of 1%.

Well, look: you can invest your IRA and 401(k) and everything else in short-term T-bills to get near zero return (probably more than you'll get from SS!) with absolute safety until the day you retire and beyond. The Treasury will be happy to roll the T-bills over for you automatically forever.

But if you instead invest your actual IRA, 401(k) etc., in some kind of diversified portfolio of market investments earning returns higher than zero, then your jibes at those who want the very same in SS are not very persuasive.

Which is it?

We are asked to accept that SS is much riskier than it is because 'some future politician' can vote to cut benefits.

Pelosi and Reid are all over the place repeating their mantra: "When the shortfall hits we should just should do like Ronald Reagan and Tip O'Neil did when they faced their shortfall"

Well, Ron and Tip cut benefits by 50% of their shortfall. So we know the Democrats want future returns to be even more negative than they are scheduled to be now.

And when that future arrives, they'll get credit for it!

A while back in this thread, Boonton wrote: "4. By definition Social Security's overall return has to be approximately the economic growth rate of the entire economy." In a later comment he elaborated:

[I]f Social Security will run huge deficits a half century from now then returns cannot be negative. How can the system run deficits unless tax receipts are smaller than benefits. If benefits are greater than tax receipts then those getting the benefits have to have paid in more than they got out!

Mathematically, here is a simple model. Assume a very simple SS system with two time periods. The tax rate is 5% of GDP and the system simply pays out everything it takes in (a true pay as you go system).

Generation 1 Tax = 0.05 * GDP
Generation 2 Tax = 0.05 * GDP * (1+r)
r= the growth rate

Return for generation 1 = Benefits / Taxes = Generation 2's taxes / Generation 1's taxes = 0.05 GDP * (1+r) / 0.05 GDP

Which reduces to just 1+r. If economic growth is positive then SS's returns are as well.

First, in a pay-as-you-go system, Social Security taxes aren't invested; they're merely spent. In the real world, where taxes will exceed benefits through 2017, some of the taxes are spent by retirees and the rest are spent by the government on other programs. Whence the returns on spending by retirees or by government? (And don't try to tell me that government spending, on balance, yields returns, because it doesn't. See here, for instance.)

Second, even if Social Security taxes did yield returns (which they don't), Boonton's little model proves nothing. In a pay-as-you-go system (which is essentially what we have, for now), retirees aren't receiving "returns" from their past "contributions"; they're receiving taxes collected from current workers. Thus, no matter how you slice it, if the number of retirees is growing faster than the number of workers (which it is), the only way to maintain a given level of benefits for retirees is to increase workers' taxes. That's what all the fuss is about.

I wonder if Boonton is in the market for a bridge, say, one that connects Manhattan and Brooklyn?

During the 1990s, much of the SS surplus was not spent, but instead, was used to pay down publicly held debt. Publicly held debt declined from 49% of GDP in FY 1993 to 33% of GDP in FY 2001.

Since then, all of the SS surplus and then some has been spent, with most of that going to tax cuts.

So we've got one of two outcomes. One, the money has been squandered on tax cuts. Or two, the Social Security trust fund surplus is now incorporated into growth of the economy at large.

If it has been squandered, the logical thing to do is to cancel the tax cuts immediately, so the $2 Trillion of surplusses that the trust will generate in the next 15 years will be used to pay down publicly held debt.

Jim, if the bonds have zero value for financing Social Security, you'd better tell that to the Wall Street Journal's editors, who say the $2.2 Trillion of surplusess that will be generated between now and 2014 - of which about $1.4 Trillion will come from interest payments on the bonds held in the SS trust fund - can be diverted to private accounts.

The WSJ editors clearly think the bonds generate real interest income. Presumably, that means they have some real value.

Edge: you said that the surplus was used to lower the publicly held debt during the 1990s from 49% to 33% of GDP.

I certianly don't challenge the validity of your facts. But how much of that was because we paid off the debt, and how much was due to the fact the the economy was growing faster than our debt. Very little of our existing debt was paid off. The problem with the concept of "prepaying", as Greenspan learned, is that additional goverment revenues lead to future expenditure increases that are greater than the increase in revenue! (Ex. a 5% increase in tax revenue leads congress to increase spending by more than 5%) Ken Smetters (sp?) has a paper documenting this phenom.

The bonds have zero ($0) value to the government for financing Social Security, whatever you do with them.

Jim, your analysis fails at point #3. Say the gov't sells off the bonds and simply keeps rolling them over (as it does with nearly all of the national debt). It will pay interest on that debt forever. What's the present value of this cost? It isn't infinite. If the surplus delays issuing that debt to the public for 20 years then it reduces the cost for the next 20 years. You would think this wouldn't make much of a difference if you had to pay interest from year 21 to infinity but it does.

As the government itself says, the bonds are merely an accounting device for keeping a running tally of the amount of Social Security surplus that has been consumed through general expenditures, adjusted for interest, to date.

In other words, they are a running tally of how much Social Security has reduced the deficit.

Tom:

First, in a pay-as-you-go system, Social Security taxes aren't invested; they're merely spent. In the real world, where taxes will exceed benefits through 2017, some of the taxes are spent by retirees and the rest are spent by the government on other programs. Whence the returns on spending by retirees or by government? (And don't try to tell me that government spending, on balance, yields returns, because it doesn't. See here, for instance.)

In my simple model that is what happens. The tax revenue from generation 1 is simply used to pay benefits to generation 0. In the long run a true pay-as-you-go system will spend every dollar it takes in on benefits going out.

Second, even if Social Security taxes did yield returns (which they don't), Boonton's little model proves nothing. In a pay-as-you-go system (which is essentially what we have, for now), retirees aren't receiving "returns" from their past "contributions"; they're receiving taxes collected from current workers. Thus, no matter how you slice it, if the number of retirees is growing faster than the number of workers (which it is), the only way to maintain a given level of benefits for retirees is to increase workers' taxes. That's what all the fuss is about.

Its easier to look at this in terms of the generations in the model. It doesn't matter if generation 1 is larger than generation 2, generation 1 paid in 0.05% of GDP and received benefits equal to 0.05% of GDP*(1+r).

Edge,

1. A tax reduction that results in growth of GDP is not "squandered" because it reduces the debt as a percentage of GDP. Recommend we look for ways to reduce government spending in ways that would allow the tax cuts to be made permanent. If the economy stops growing, Social Security will fail - no matter what course of action we choose.

2. The bonds in the trust fund are not real bonds because they have no owners. You could say that the government owns them, but what kind of an owner has an incentive to not pay itself back?

The problem with the concept of "prepaying", as Greenspan learned, is that additional goverment revenues lead to future expenditure increases that are greater than the increase in revenue! (Ex. a 5% increase in tax revenue leads congress to increase spending by more than 5%) Ken Smetters (sp?) has a paper documenting this phenom.

A statement of faith rather than fact. Tax revenue was growing through the roof in the 90's yet spending was nearly flat (as a % of GDP). In this decade tax revenue has been falling dramatically yet spending has moved in the opposite direction, zooming upwards.

(Especially when they realize how negative their returns will be after paying for their benefits twice, first through payroll taxes and then again through income taxes to remimburse themselves for all the payroll taxes the gov't consumed rather than saved)

Let's think about this paying twice concept.

Take my simple model. Let us suppose that Generation 1, in addition to paying for generation 0's retirement, wishs to ease the burden on Generation 2. So in addition to taxing themselves 5% of GDP they also tax themselves $100B. This $100B is a surplus and assume the interest rates are 10% per generation. Furthermore, let us assume that some foreign bank like China's central bank purchses all gov't debt.

When Generation 2 arrives on the scene they find generation 1 retired and no longer paying taxes. Their 'debt' is 5% of GDP to pay for generation 1's retirement. However, they have a bonus. Since generation 1 reduced their borrowing from China by $100B the interest bill for generation 2 is now $10B less. Generation 2 may indeed choose to borrow $100B instead of paying their full 5% of GDP tax. In that case the cost to generation 3 will be $10 (10% of $100B). If this surplus did not happen then the accumulated costs would be $31B ($10B for generation 2 (10% of $100B) and $121B for generation 3 (10% of $110B)).

Just delaying the borrowing for a generation takes the cost from $31B down to $10B. A dramatic difference.

How did this happen? Simple, anything that reduces gov't borrowing today reduces accumulated interest expenses tomorrow. The Social Security surplus does not in itself increase Social Security benefits. Hence Greenspan was correct to have pushed SS into a surplus in the 80's.

Simple, anything that reduces gov't borrowing today reduces accumulated interest expenses tomorrow.

Not simple at all.

To reduce borrowing the government is borrowing. The borrowing repayments (principal and interest) are deferred into the future.

If the following occurs then the future interest expense may be higher:
- At that future time if the government has to go to market and borrow to repay that previous borrowing
- Interest rates are higher (not sure what the breakpoint is) than when the original borrowing occured.

If you had a choice to borrow today at 4% or borrow in the future at 10%. What do you choose?

Funny part is that the government has been making a potentially big mistake. For the past 10 years they have been borrowing short (e.g. no more 30 year bond), when they should have been locking in low interest rates for long periods (at least with some portion of the debt). Now more than ever the government debt portfolio will be very sensitive to rising rates.

beakburke, the public debt increased by $71 Billion from 1993 through 2001. We increase the public debt by that much every couple of months now.

Public debt actually fell by $450 Billion between FY 1997 and 2001. We're increasing the public debt that much every year now.

Spending during the three Reagan/Bush terms averaged about 22% of GDP. Spending in Clinton's second term was about 18.5% of GDP.

Revenues during the three Reagan/Bush terms averaged about 18% of GDP; during Clinton's second term, revenues averaged 20% of GDP.

I've no doubt that Smetter's econometrics on the Social Security surplus are factually correct, but all it tells you is that Reagan, Bush, and Bush ran up big deficits during the period when the Social Security trust fund was running surplusses.

The fact that most of the surplus was saved during the Clinton years, with a combination of an increase of revenues and constrained spending, was not enough to overcome the sixteen years of profligacy.

Hence the econometrics tell you Social Security surplusses increase overall spending, as if that were some sort of mathematical constant like the speed of light, when in fact, it simply reflects political choices made by specific administrations, with different adminstrations making different choices.

Except Social Security's obligations are fixed. In other words, the system 'owes' based on my contributions today...not on whether the fund is running a surplus. So if you assume the benefits of tomorrow are relatively fixed then the choice today is:

1. Run a surplus.
2. Do not run a surplus (a true pay-as-you-go system)

Running a surplus in the system today decreases interest costs as long as interest rates are positive. You could try to argue that the gov't could do something else with the money that will generate a better return. For example, if the interest costs on ten year bonds are 5% then perhaps the SS Trust Fund would be better off putting $100B somewhere that will earn 6%. To make this argument you have to show how gov't can manage an investment portfolio skillfully. IMO, a better option would be to take a passive approach and simply reduce or defer borrowing today.

I agree with you about the gov't's shift away from long-term, stable rate debt (30 year bonds) to short term debt. Like many of Bush's economic policies, it suffers from a short term focus at the expense of the long run. Short term debt is cheaper than long term debt but carries with it interest rate sensitivity. Also, the 30yr bond was discontinued when it appeared we might have actually paid off a significant portion of the national debt. Bringing it back would be politically embrassing for Bush even if it is the right policy. I would add 50 year bonds to the mix as well.

Several reasons why I don't buy the "more revenue means more spending argument"

1. Much of the gov't budget is on autopilot. Spending like SS benefits, disability, unemployment, welfare and so on tend to go up in bad economies and down during expansions. Many sources of tax revenue go in the opposite direction. When the economy is doing good income taxes, payroll taxes all bring in more revenue while many sources of automatic spending go down.

2. IMO it is an unrealistic model of the spending constraints policymakers face. Suppose you take $40 out at the ATM. You look at the balance and notice it is $200 higher than you expected. You figure what the hell and take out another $60 forgetting that you wrote a check for $200. This holds for individuals but large organizations face different constraints. One side determines what needs to get spent while another side simply figures out how to finance it. There is no 'pot of money' that everyone can dig into and spend as they please.

3. Many explanations have revolved around weak psychological theories. They go something like this: The public will tolerate a $300B deficit but not a $400B one. Therefore politicians produce a $400B deficit but lump SS's $100B surplus into it. Since these numbers are so huge why would the public differentiate between the two? For those beyond casual news watchers, people like bond traders who make a living following the gov't deficit it is hard to believe they would be fooled by such a simple ploy.

Public debt actually fell by $450 Billion between FY 1997 and 2001. We're increasing the public debt that much every year now.

Total government debt during that time increased when you include intra-government holdings.

Total government debt during that time increased when you include intra-government holdings.

OK. But if you adjust for inflation, the total federal debt decreased from FY97 to FY01. If you state as a fraction of GDP, the total debt decreased from about 66% of GDP to 58% of GDP.

Put another way, the fiscal trend of the Clinton years was good to excellent. The recent fiscal trend can only be described as a crisis.

I will try to get back and read the commentaries later, but for now, I will try to answer the question posed:

The elements of the Question need data. How much have Social Security raised the Standard of Living of the Elderly? Forward any good Study on the Issue. How many Taxes have been deferred from Government expenditure of the Social Security Fund surplus over it's lifespan? What type of Tax will be implemented to defray Governmental cost of indigent Elderly care?

Answer to Arnold's Question:

The Social Security system has worked effectively over Sixty years to defray Costs, which would likely cost more to both Government and Taxpayer by alternative forms of Payment. The length of Time utilized makes Projection simply a 'Guessing Game'. Would Anyone in this Country in 1935 have guessed what Standard of Living would be present in 1960? Would Anyone in 1930 have guessed what the Standard of Living is Today--your famous 75 year Projection? What is known is there will be Elderly, who need to be taken care of in 75 years, and the Young will be those Elderly in 40 years! lgl

I agree with you about the gov't's shift away from long-term, stable rate debt (30 year bonds) to short term debt. Like many of Bush's economic policies, it suffers from a short term focus at the expense of the long run. Short term debt is cheaper than long term debt but carries with it interest rate sensitivity. Also, the 30yr bond was discontinued when it appeared we might have actually paid off a significant portion of the national debt. Bringing it back would be politically embrassing for Bush even if it is the right policy. I would add 50 year bonds to the mix as well.

The policy of financing debt with shorter maturities started under Clinton, and Bush has continued those policies.

Put another way, the fiscal trend of the Clinton years was good to excellent. The recent fiscal trend can only be described as a crisis.

I agree 150%.

The policy of financing debt with shorter maturities started under Clinton, and Bush has continued those policies.

Yes, it was the right policy at that time. If you're paying down debt it makes sense to shift it to shorter term since that reduces interest costs & the fact that you're on a trend towards repayment lessens the need to worry about interest rates going up. Now that we are in borrowing phase (massive borrowing to be more specific) we should lock in rates while we can with long term debt.

Yes, it was the right policy at that time. If you're paying down debt it makes sense to shift it to shorter term since that reduces interest costs & the fact that you're on a trend towards repayment lessens the need to worry about interest rates going up. Now that we are in borrowing phase (massive borrowing to be more specific) we should lock in rates while we can with long term debt.

Wasn't it you that said: "Simple, anything that reduces gov't borrowing today reduces accumulated interest expenses tomorrow."

By borrowing short you reduce government borrowing today.

The debt's more or less the same whatever you do. If your debt is $1T and it is all in 3 month bills then every 3 months you are going to have to refinance and pray that interest rates haven't gone up. If it is all in ten year bills your rates are locked in much longer.

There's an interest savings to borrowing short term since short term yields are usually less than short term yields but I don't see how that reduces overall borrowing. Whether you finance your $300K home with a 15 yr mortgage or 30 yr mortgage it is still borrowing $300K.

There's an interest savings to borrowing short term since short term yields are usually less than short term yields but I don't see how that reduces overall borrowing. Whether you finance your $300K home with a 15 yr mortgage or 30 yr mortgage it is still borrowing $300K.

It reduces borrowing by reducing the current interest expense on the debt, which in turn means that you have more tax revenue left over than if your interest expense is higher.

Example:
Current interest cost by borrwing short = $100
Current interest cost borrowing long = $110

That is $10 in interest savings that does not have to be borrowed. In other words, if the gov went long, then current interest expense goes up thus increasing the deficit.

If one doubts the impact of interest expenses on the budget look at the fact that the interest cost to service the debt right now is less than when the budget was in surplus.

http://www.publicdebt.treas.gov/opd/opdint.htm

This brings me back to my original point. Saving money now by going short, or using SS trust fund assets, may not produce future savings under certain conditions.

I agree that reducing interest expenses by borrowing short results in less borrowing...obviously any spending cut including cutting interest expense will lower gov't borrowing. I think we also agree that this is only true in the very short term. In the long term there is a risk that borrowing short will result in increased interest cost when the debt you're rolling over gets caught in a period of rising rates.

I don't see the application to the social security surplus. Since rates are always positive any decrease in the deficit will always decrease interest costs unless that decrease actually causes more increases in spending down the road. That would cover the case of borrowing short to save on interest and getting caught when refinancing.

Not that anyone besides us econ geeks may care but I looked at debt held by the public versus interest expense over on www.publicdebt.treas.gov/opd/opdpdodt.htm.

The debt held by the public was falling dramatically.

98 -$55.8B
99 -$97.7B
00 -$230.8B
01 -$65.99B
02 +$213.87B
03 +$370.9B
04 +$383.2B

Interest Expense fell in 99 and from 2001-2003.

98 +$8.0B
99 -$10.3B
00 +$8.48B
01 -$2.49B
02 -$26.97B
03 -$14.39B
04 +$3.4B

But this suffers from the problem that some interest expense will be due to Social Security and other gov't trust funds. The actual cash that the gov't has to give to others to cover interest costs will be less. To make it worse, since Social Security has been running surpluses interest expenses will go up in an accounting sense even if the whole budget is lowering its interest expense!

"Social Security is currently running a surplus, not a deficit. If the Trustees are even slightly wrong about economic growth, productivity, or a decline in immigration then it will run a surplus forever..."

If they are only slightly wrong in one direction. Of course, if they are slightly wrong in the other direction, then its deficits will be massively larger.

And here's the one place where they are most obviously likely to be wrong