Centerfield

I would be interested in reading that also. It will probably be hard to find.

It is my understanding we agreed to raise the fica tax rate in 1983 in order to pay down the national debt to a level in the future that would make it easy for the government to borrow to pay for the large numbers of retirees beginning around 2010. Clearly it didn't work, at least when viewing what's happened to the debt. That's why I'm skeptical of another tax increase but am also unwilling to just accept permanent tax cuts for upper income earners, investors and wealthy estates at the expense of SS recipients.

"I propose a challenge. Who can be the first person to find a proposal by any elected representative that accomplishes what Kevin suggests? "

Who can find an alternative congressional proposal that addresses the crisis in *any* of the four possible ways you outlined?

This is the beauty of the Democrat position. They win when Bush's reform loses, even if they never even try to offer any alternative solution to the crisis at all. They only need to be a critic, they don't need to have a better plan. Pretend there is no problem, while making those who attempt to fix it pay a heavy political price.

Unforunately political victory without an alternative solution means seriously hurting the country, as the problem is left to grow and fester for future generations. But from a short term political perspective, it's great!

Who can find an alternative congressional proposal that addresses the crisis in *any* of the four possible ways you outlined?

That's the thing, though. Option #2 is really the only one that involves an actual paydown of the Trust Fund.

If we use option #1 and #3 instead (or a combination of the two), there will be no Trust Fund paydown. It will simply sit there and grow as it accumulates interest year after year.

If we use option #4, we're just borrowing the money again and transferring the cost to the next generation.

If Kevin, or Josh Marshall, or anyone else, offers the typical reform combination of #1 and #3, they're more-or-less conceding the Trust Fund will not be paid. They're stuck with option #2 if they want any sort of plan that involves the Trust Fund as a meaningful element of the system.

I'd also like you to think about the class-based bargain that Kevin suggests occurred with the 1983 Social Security reform. He says that lower income people agreed to a higher payroll tax in 1983 (a type of tax that costs them more) in exchange for a payback from the general fund several decades later when the baby boom retirement begins...Basically, by his theory, lower income people agreed to pay more for a roughly 35 year period beginning in 1983, in exchange for the wealthy paying higher income taxes beginning around 2018 or so...Why, exactly, would lower income folks make that bargain?

Answer: They didn't! The 98th Congress composed of Democrats and Republicans did, by a vote of 243 (80-R, 163-D) to 102 (48-R, 54-D) in the House, and by a vote of 58 (32-R, 26-D) to 14 (8-R, 6-D) in the Senate. Of note are the 100 House members and 28 Senate members who ducked the vote rather than go on record. The reforms were required as SS was going to be totally out of money by mid-1983. The bill passed in late March and was signed into law on by Reagan on April 20, 1983. He didn't have much of a choice. None of them did. They had a genuine right-freaking-now crisis.

Drum's claims of some "class compact" are unadulterated gibberish, meant to justify his own notions of how the SS shortfall should be handled. There was no "class compact" in 1983. There was emergency action to make sure the checks kept going out. At the time, the projected "break-even" date after the reforms was in 2025. Now it's in 2018. (Congress does love to spend, and it really loves to boost benefits.)

Options #1 and #2 are much the same at the receiving end (government) but much different at the paying end (taxpayer) as far as regressivity goes. That's where we go straight for the class warfare/eat-the-rich proposals.

It just occurred to me that there is an option #5.
Fiscal restrain could produce a general fund surplus, putting the government in a position to actually pay the IOU's in the trust fund. (This is unlike but it is a valid option.)

Just a technical point: There actually isn't a crisis right this moment. There are projections that indicate a high probability of a shortfall at some point in the future. (Yea, I know I'm nit picking)

Things can happen that could make those projections invalid: peace could break out, Avian flu could wipe out all the old folks, ........

Yep, "crisis" is rhetoric at the moment. "Crisis planning" or "crisis avoidance" are appropriate, though.

Option #5 that Bob suggests pretty much depends on high economic growth, as fiscal restraint has never been a noted Congressional virtue. The best we can hope for is that they let federal spending grow slower than tax receipts do. Higher taxes don't usually stimulate economic growth.

There's also Option #6, which I certainly don't endorse. Steal the money from other nations through conquest. But that pretty much wraps up the options list.

Actually, ALL options fall under the lines of "get more money" or "pay less money" or some combnation thereof. All else is "detail." (smirk)

You're right, Bob. There is a fifth option.

It's kind of similar to one of the valid points made on the left -- the possibility that the projections are overly pessimistic and that the system won't go into deficit as soon as 2018.

I'm not sure how to evaluate those likelihoods. It seems the projections use a low figure for economic growth. But they seem to have other assumptions that are overly optimistic. And then there's the combined overall entitlement picture -- the fact that Medicaid, for example, runs a much deeper deficit during this same timeframe.

Here's an overall analysis of it all from the Concord Coalition.

I never though of option #6.
Let's invade Canada! If nothing else prescription drugs would be cheaper.

Hey, option #6, Tully! That's thinking outside the box!

As a f/u to Tully's remarks it does seem to come down to more money in versus less money out. So much of the present proposal (from both sides) seem to be a "name" game (i.e. what do we call it because NO ONE wants lower benefits or higher taxes.)

Like I've said before, I feel we need to declare once and for all that its a welfare program (for destitute elders) and not a retirement benefits program. I say that because, as a retirement benefit program its rate of return really sucks.

Finally , the absurd question but I'll ask anyway, could we get a groundswell of interest in younger boomers and X'ers to disavow their future benefits and move toward an elder welfare program? (That would require many folks to refuse a handout). And would such a conversion make a difference? And what would the poverty level be folks over 65?

#6 is a time-honored classic, used by all empires throughout history. But we're really not imperialistic as a nation, even if many of our corporations are. Of course, by the time they're THAT big, they're "multi-nationals" that can tell us to take a flying one.

Yeah, Bob, it does sound like a new South Park movie plot, doesn't it? Blame Canada! (Will the GOP use Terrance and Phillip as a a counterweight to Harry and Louise? Stay tuned!)

Canada also has oil reserves and gold fields. And technically it is pre-emptive war; we are preempting a fiscal crisis.

How about this for a slogan "Canada, today's solution for tomorrows crisis."

Heck Bob, we can come up with a more flagrant justification for pre-emption. All we have to do is rebroadcast Orson Wells "War of the Worlds" radio broadcast and I bet we can get the Canadian Army to mobilize on our border....again!

It's my understanding that the trust fund can't be trusted, so to speak. And waiting for the GDP to rise to pay off all our debts to include SS seems like a pretty big gamble to me.

I still don't see any reason to privatize the system, I'm not seeing how it will fix the problem of SS. It will cost up to $2 trillion in transitional costs over the next decade (who pays for that?), it will cut benefits (unless the stock market gives some hyper-payouts...and I'm hearing that just won't happen anymore), and other countries with similar programs aren't fairing too well (Britian, for instance). Sniping at a reform proposal, or an outright deconconstruction of a program that many believe to be highly successful is not taking the easy road, it's taking the right road, in their eyes.

Why should Democrats come up with a new program before they defend one they believe could be fixed through other, less-costly means. I mean, who's being more careful with taxpayer's money here? I thought Republicans were the frugal beasts of the legislature.

"less-costly means"

LOL. Even today, making the erroneous assumption that the trust fund represents "money in the bank," SS has net present value (NPV) unfunded obligations of $3.7 trillion. If we could eliminate that for $2 trillion net present value, we'd be irresponsible not to.

Counting the current trust fund balance as an obligation of the federal government, and considering that SS is a part of the federal government, SS today constitutes an unfunded $5.1 trillion net present value obligation of the federal government. Now, that's the amount of money we'd have to come up with today to "fund up" the unfunded portion of the obligations to ensure full benefits through 2078 under current rules, assuming we could actually buy an interest-paying annuity of $5.1T. If we could eliminate that obligation for $2 trillion in net present value funding, why wouldn't we? Why shouldn't we?

I'm not saying that it could be eliminated for $2 trillion, I'm waiting on something solid to start plugging numbers, but those are accurate figures of the unfunded obligations in net present value terms. The equation's pretty simple. Risk-adjusted NPV of reform proposal versus known NPV liability of problem. Go with the lesser of.

If we fail to do anything, we pay the "greater of." At least.

Ok, assumming we go with the lower gambit of $2 trillion, what actually happens to the money still owed to the fund? Are we expecting private accounts to make up the difference? Maybe I'm not understanding the way it works.

Hey, I have another option. Listened to NPR about the Gen X'ers viewpoint on SS. Since a majority assume they won't get a dime lets capitalize on that. Lets continue to take their money and promise them nothing. Wouldn't that solve the problem?

Ok, assumming we go with the lower gambit of $2 trillion, what actually happens to the money still owed to the fund?

What money? The debt exists. The money doesn't. That's the problem. OK, I'm being a bit snarky there, if accurate. But if you're asking me to guess what Congress will decide to do, the best I can say is "Got me. I dunno."

Now--string of assumptions, some big ones. IF Congress passed a sensible private-account proposal (or even a stupid one), my best guess is that it would be accompanied by a "small" payroll tax increase dedicated to buying down the TF. This in itself would move the breakeven date farther out. I would also expect a change from using wage indexing to determine future benefit increases to using CPI indexing, as already allowed by law, and as signed into law by Bill Clinton in 1996. This would also reduce the NPV liability. IOW, they would try to juggle all the various elements so as to provide the guaranteed benefit amount while minimizing required tax increases.

This can't be done strictly inside the government without raising taxes enormously. That's where the market investment side comes in. Accounts would be strictly limited as to asset allocation or withdrawals, but would be owned by the individual. Live too long and run out, you'd still get the guaranteed benefit. Don't live long enough and your kids would have a head start on their accumulation--still reducing future payouts. This in itself would to some extent remove some of the racial and gender inequities in the current system.

Thus, they would keep the current payroll tax, with any surplus revenues going to fund private accounts. As the system went into pay-go deficit, they'd boost general taxes by inches to cover the deficit need to keep the system solvent, writing the extra tax against trust fund redemption. In theory, diverting 1/4 or 1/3 of the SS money to private accounts would boost economic growth, which would also help offset the loss of the taxes diverted to fund it by expanding the tax base. Also in theory, a properly run private accounts system would cost less than the current system no matter what, as even in a down market it would contain real assets and not government IOU's to itself that would have to be re-funded through tax increases. So while shortages would still be made up from general revenues and/or more borrowing, the shortages would likely be much smaller. At the same time, the loss of the "free money" from the funds would force some general fiscal discipline on Congress over the next decade--which would also help improve the economy. Not a great deal of discipline, because that free money will run out soon enough anyway, but some.

That's my best guess at what they're going to try for. In theory, it's as good an option as we're ever likely to have, and could preserve the system with no additional major hits down the road. Even in lesser-case scenarios it's an improvement over the current ticking timebomb. That doesn't mean they won't manage to blow it in practice by letting it be legislated into meaninglessness and passing a stupid plan rather than a smart one, or by passing no plan at all. Congress is not known for its collective brilliance.

I think my problem is, all this relies on the market giving out big payouts, right? What if that doesn't happen, the debt may be gone, but now the program would be in worse shape and still cruising toward insolvency.

Ok, assumming we go with the lower gambit of $2 trillion, what actually happens to the money still owed to the fund? Are we expecting private accounts to make up the difference? Maybe I'm not understanding the way it works.

Interesting question. I wasn't sure about the answer, and I think, as with the analysis above of the current program, there are at least a few possibilities.

The very likely answer, however, is that nothing happens to the money owed to the Trust Fund -- it doesn't get paid back. Take a look at Figure 5 in this analysis of Social Security proposals by Centrists.org. It shows that the deficit accumulated under the current program emerges around 2018, and grows to around 2% of GDP over the subsequent decades. The Kolbe-Stenholm reform plan, by comparison, runs a smaller deficit that ultimately stabilizes at around .5 percent of GDP.

Both options run a deficit, it's just that Kolbe-Stenholm's is one-fourth the size of the current program.

The question then becomes whether those smaller Social Security deficits would be covered by revenues in the general fund of the treasury -- a scenario that would involve paying off the Trust Fund debt. Such a step only happens if we run a surplus in the overall federal budget, which is relatively unlikely. It's more likely that we would cover the shortfall with new debt, which doesn't amount to "paying" the Trust fund in any meaningful sense.

A reform that uses personal accounts probably doesn't result in paying the Social Security Trust Fund debt. It does involve running smaller deficits and borrowing substantially less money.

I think my problem is, all this relies on the market giving out big payouts, right? What if that doesn't happen, the debt may be gone, but now the program would be in worse shape and still cruising toward insolvency.

The CBO analysis of the Kolbe-Stenholm plan uses an expected real annual return of 4.9% for the private accounts. Kolbe-Stenholm uses the Thrift Savings Plan as a model for the accounts, which has five investment options. You can see the returns for the last 10 years for each of those funds here. Even the ultra-conservative bond fund had an average return of 6%.

Of course, these last 10 years have been pretty good for investments, taken as a whole. The future may not be as good. I'm not sure the fiscal advisability of these plans relies on high returns, though. This is essentially a method of pre-funding retirement. Even if the accounts are flat, there is overall more money available for retirement than there would be in the current pay-as-you-go plan.

That last point, however, only applies if we don't borrow the money to create the accounts. That's why putting everything on the table, funding wise, will probably be crucial in this debate.

I think my problem is, all this relies on the market giving out big payouts, right?

Wrong! It relies on the entire market not going bankrupt all at once. Which if it happened would mean the end of the system anyway, as there would be no taxes collected to pay for the system in any case. Or for government.

Surplus SS revenues collected now are spent by the government. They're gone, replaced with nothing more than promises to tax us in the future. If they were instead diverted into external investment, the money would still be there, in whole, part, or enlarged, instead of a "trust fund" holding nothing more than promises of more future taxation. Something, versus nothing. Assets, instead of liabilities.

The entire fiction of the trust fund is that it holds "assets," those promises from the government. But what you owe yourself is not an asset, and SS is part of the federal government. What is an "asset" to the SS system is an overall liability to the citizens, because it's money the government owes to itself, money that must come from the taxpayers. (See previous posts on double taxation downstream--you pay, they spend, then you pay again with interest to pay back their spending.)

SS is a "pay-go" system. It has no assets other than the revenue stream from the payroll tax. If surplus revenues are "invested" internally in the government, no real assets are created for the SS system. If surplus revenues are invested externally, real assets are present. As long as those assets have a value greater than zero, SS beneficiaries as taxpayers are better off.

The real behind-the-scenes argument right now isn't over whether or not external investment is a good idea. It's over how those surpluses can best be invested externally, and who would own them. Even AARP is in support of investing surpluses externally, they just want the government to hold title, while the Bush admin wants those paying the taxes to hold title. AARP and the Democrats don't want us to have ownership of our own accounts. They want the government owning them.

Those arguing for "do nothing" are essentially arguing for guaranteed higher general taxes to "pay down" the "trust fund" balances, and then a gradual 50% to 60% increase in the payroll tax to keep the system as is on top of that. Part of it is philosophical. The Do Nothings want government to own those funds. The Privatizers want us to own those funds. Regulated and controlled to prevent individuals screwing up the accounts enough to require them going back on the dole, but individually owned and inheritable. Staying totally public means major tax increases. Going totally private would as well--in the form of "forced savings"--but would result in individuals owning their retirements, rather than the government owning them. But there's a "trough" in the middle of those extremes that allows for partial ownership and lower overall taxation. And that's where we should be aiming.

One major point, William. Every dollar of surplus SS revenue spent by the government is creating new debt.

I would expect the SS trust fund to be paid down in one fashion or another (simply through the process of covering SS deficits) but even if it were through new borrowing, if that borrowing were external to SS then technicaly it would still have been paid down.

There's only one proven way to "restrain" government spending, and that's for the government to not grow as fast as the tax base. That's what happened in the dot.com boom--economic growth outstripped increases in government spending. Then the bubble burst, and we got the downside. Now the economy is coming back.

Fiscal discipline is required. That doesn't require "cuts" in government spending, it means not growing the damn thing so fast. (Only in government-speak are increases smaller than desired called "cuts.")

So I guess the question essentially comes down to trusting the government to be disciplined and whether accounts are better off in private hands rather than public.

Nope, we can't trust the government to exercise fiscal discipline. But we can make it harder for them not to, by removing the temptation of those surpluses.

It's not a matter of whether the accounts are in public hands or private (who holds the keys to the vault, so to speak) as much as it is whose property those accounts are. Right now, you and I do not have asset accounts with the SS system. Instead, we have the promise of Congress that we will be able to collect certain benefits at a certain age. This promise is not backed with assets, but with the power to tax. This is supposed to keep us happy with paying our payroll taxes. But we have no legal right to anything more than what Congress agrees to provide at any given time. The money is not ours. It's theirs.

Under a private account scenario, we would actually own the assets, and have legal rights in them. This would apply regardless of who the manager was. And if we died before using up our accounts, the balances would be inheritable instead of being swallowed back up into the government maw. So your spouse or children would have that much more to work with. This would help offset to some extent the racial/gender inequity of the current system.

In any case, we're not looking at total privatization of the system, but only of a portion. Assumedly, that would be the portion there isn't any funding for right now, that $5.1 trillion.

Seven years ago it was Democrats arguing in favor of all these things.