Centerfield

I still haven't seen a program that can be analyzed in terms of net benefit, net risk. And maybe that's a good thing. Maybe we are actually going to have a bunch of ideas percolate before a bill is put before Congress.

But, Rick, your analogy of borrowing against your house to save for your retirement is dead wrong. In fact, most independent financial advisors will tell you that it is a poor financial decision to pay off your mortgage instead of saving for your retirement. The issue is returns. If you can borrow against your house at, say, 7% and can use the money to invest for your retirement at, oh, 10%, of course you would do just that.

The parallels here are pretty close. You might not take that arbitrage because you are worried that you might lose your job, then lose your house, and that's a personal risk aversion which is ok for you.

But the government doesn't run out of revenue as long as the economy is ticking along within some band of growth (as it has for the last century or so), so they won't lose the house.

If the program that is ultimately proposed has a continued guarantee of full SS benefits for everyone forever, then you are right. But I expect that SS will be a diminishing percentage of a worker's overall pension income (all SS for me, half-SS and half-private for my son, 90% private for my grandkids, and so on). Then, conceivably, borrowing now to transition does, in fact, make sense. As I say, it depends on the returns; and that depends on the final proposal.

Posted by: Literally Retarded at February 7, 2005 05:06 PM

First off, Rick, you're comparing apples and oranges. "The government" would not be borrowing money to invest in the equity markets. It would be borrowing money now to pay its own existing current and future liabilities. That is NOT "arbitraging" the markets with debt. More like re-financing a mortgage. Individual taxpayers would provide the financing for their own personal accounts, unless there was a government matching contribution program. You're trying to cram several different things into one single analogy, and they don't all fit because the analogy is flawed.

Second, your analogy contains the assumptions that government (taxpayer) financing is riskless and costless. Neither is true. Economic downturns affect government revenues as well. That's kind of a side issue, but it goes to the nature of overall market risk, economic risk, and diversified balanced portfolios. Any economic turndown that could significantly affect a truly diversified equity fund portfolio for any significant length of time would hit government revenues just as hard.

The flip side is that a balanced diversified portfolio contains bonds as well as equities, and bonds work just fine when the equity markets are down. This is why you diversify across classes as well as within them. It may restrict the upside, but it also restricts the downside and greatly smooths the swings, allowing the capture of the market risk premiuim without the market risk. Government revenues on the other hand are by nature totally undiversified. There is no counter-balance. They are totally dependent on the ability to tax and the tax base itself, which is restricted in economic downturns.

Spending money now through deficit financing makes perfect sense IF it results in an overall reduction in government (taxpayer) liabilities. The "home refinancing" analogy is entirely appropriate. The appropriate gauge is the NPV of overall government liabilities, and fit of the payment streams to the revenue streams.

Amusingly, the only scenario I've seen that involves the government actually "borrowing" to invest in equity markets is the minority Democrat/AARP scenario of investing the "borrowed" surpluses from the trust fund, but letting government maintain total ownership and control. A bad idea in many ways, and I suspect not really a serious proposal at all, but just a smokescreen.

Posted by: Tully at February 7, 2005 05:40 PM

But Bush's proposal doesn't remedy the problem: more money going out than coming in. Having the public invest in the market doesn't solve that problem. Having the Government invest in the market does attempt to resolve the problem.

Posted by: EG at February 7, 2005 06:02 PM

The obvious--The Bush proposal (what little there is so far) also reduces money going out, EG, through the reduction of future liabilities. And the NPV equation explicitly addresses that issue--in fact, it's the absolute core of the assessment equation. But we gotta have numbers to plug in, and so far they're not there.

Posted by: Tully at February 7, 2005 06:23 PM

Actually I head a really good alternative on television tonight.
We turn the old people into soylent green. We eliminate the boomer bulge and have a yummy high protein snack that can be sold to pay down the deficit.

Seriously thou:
Cheney: “$754 billion over the next 10 years” and “Trillions more after that”

But he's not going to give you any details so you can check his number against the current system.

Cheney:"The real cost over time is doing nothing,'' he said. ''Because if we do nothing, then the system is going to go belly up. It's going to go broke.''

Nothing but cheap scare tactics. The government can't go broke. It can go into debt or it can cut benefits.

He has a product he want to sell and will say what ever is required to make the sale.

Posted by: Bob J Young at February 7, 2005 07:55 PM

Technically, the government would be borrowing to pay current social security outlays, to make up for the diversion of social security taxes into the private accounts. That's no different than if the goverment kept using the payroll taxes to pay current outlays, and borrowed to fund the private account. The money is fungiable.

If the debt were borrowed from other Americans, and the equity was invested inside the US, the transaction might make no difference at all. But in fact, the rest of the world will participate. After the borrowing, our debt owed abroad will be higher, and the amount of equity owned by Americans will be higher, and some of that equity will likely be in foreign assets. The only thing that really matters is that we're arbitraging debt owed abroad into equity in foreign holdings. Everything else cancels itself out.

I don't see how the re-financing analogy works at all. When you refinance, you pay transaction costs to get a new mortgage at more favorable terms. Are you saying that the multi-trillion borrowing is a "transaction cost" to get more favorable terms? I don't get that at all.

Posted by: rickheller at February 7, 2005 10:17 PM

The government can't go broke. It can go into debt or it can cut benefits.

I can think of many nations who might disagree with that statement.

I'm going to take a risk here in the way of a stupid question. Why do we seem to be struggling with the basic concept of running out of money to pay an ever-expaning obligation? Now we can certainly argue over how to address that problem but it seems a sizeable portion of Americans and folks on this blog need to come to that basic understanding. Or is there some subtle nuance I'm missing?

Posted by: Chris at February 7, 2005 11:26 PM

And they wonder why I chose consulting over a glamorous teaching career, Chris. Are we the only ones who have 100,000,000 Reichmark bills we use as bookmarks?

Why the obsession, Rick? What you're arguing is true only in the sense that every time the government borrows anything at all instead of taxing it directly out of our hides, it's "arbitraging private investment by borrowing" by letting us keep some of our own money. But it's not the government's money. It's ours. Are you afraid we might get to keep some of our own money? Truly, it's a minor side issue at best in terms of any rational financial assessment of a reform plan.

The refinancing analogy is almost exact. What the government would be doing is forgoing some current revenues in exchange for a reduction in future liabilities. The touchstone of whether or not this is a good deal is if the NPV of those lost current revenues is greater or lesser than the reduction in NPV liabilities.

The transition costs of such a move would be in covering the gap between when the revenues were forfeited (loss) and when the reductions were realized (gain). Those transition costs would also be part of the NPV calculations. To be worth doing, the equation must come out as:

{NPV(revenue loss) + NPV(transition cost)} less than {NPV(reduction in liability)}

If you were refinancing a mortgage from 20 years to 10 with a $2000 points&fee cost you'd be making the exact same decision, providing you were doing it rationally. You'd be deciding whether the loss of that $2K (transition cost) and the increase in payment amount (revenue loss) was justified in avoiding the longer payment schedule in the future (future liability). And you'd base the decision on your income now, and your likely income then, and the interest rate, and the possibility that the balloon payments would cripple you, and how much you would save (or lose) in terms of today's dollars. You'd figure out whether the refinancing was worth it in terms of NET PRESENT VALUE, which is the standard.

Posted by: Tully at February 8, 2005 12:41 AM

In response partly to Tully's comments, I offer some numbers.

The unfunded liability of the main Social Security fund is currently $3.7 trillion, according to the 2004 OASDI Trustees report. The assumed rate of return in the fund is 6 percent - based on the fact that the surpluses are invested in US Treasury securities.

Decreasing the revenues flowing into the fund would increase the unfunded liability. Presumably the investment of funds with a more mixed allocation - equities and bonds - would more than offset the effect of the revenue decrease. The unfunded liability would be decreased. The question is how much would the liability be decreased. I suspect that the answer is some, but not entirely - $3 trillion, perhaps, instead of $3.7 trillion. None of this takes into account the new borrowing that Vice President Cheney and others are contemplating - this borrowing would add an unfunded liability - perhaps not to the Social Security system, but perhaps to our general federal indebtedness.

The administration's measures do not address the basic problem. The system will not have enough money to fund its obligations over the long run. To do so, the administration needs to contemplate either benefit cuts or payroll tax increases, or both. In my opinion, the administration needs to address these issues seriously - and to do so in a way that serves the primary mission of Social Security - as a backstop to prevent the elderly and diabled from falling into poverty.

Posted by: DavidEisenthal at February 8, 2005 07:38 AM

That's disabled, of course.

Posted by: DavidEisenthal at February 8, 2005 07:41 AM

I've tried to puzzle my way through this, and I can't get to the point where private accounts make sense. First, they do nothing to address the basic problem of Social Security solvency. Second, the massive transition cost either adds to the problem of Social Security insolvency, or as noted above, it adds to an already unacceptable general deficit. I think we should encourage greater savings, but there are other and better ways to do this. I addressed these points in greater detail in a post, More Detail on Social Security.

One aspect of the debate that really bothers me is the continued purposeful confusion of private accounts with the issue of insolvency. Private accounts would do nothing about insolvency, and it appears that the Administration and others are intentionally blurring that fact in order to gain support for private accounts. In fact, the Administration isn't dealing with the issue of insolvency so far, and that's the problem that needs attention.

Posted by: Tom Carter at February 8, 2005 07:55 AM

Tom,

Private accounts would do nothing about insolvency

Now I'm not as "sharp" on this subject as others and the following argument is not "on the table" but in my simplistic understanding if SS was completely replaced with private accounts (i.e. the Government took the money you paid in SS taxes and put it in PRIVATE investment vehicles) then the program would be solvent. Of course, there would be the VERY LARGE transition costs (since its presently a "pay as you go" program) and there would be the risk of poor investment return but in general it would be a solvent program, a kinda of forced-retirement program.

Oh, on a different note. I've noticed several democratic spokespersons use the phrase "He wants to take the 'social' part out of 'social security'". Where'd that line come from? What's so good about shared insolvency?

Posted by: Chris at February 8, 2005 09:25 AM

Tully,

I think I now see your refinancing analogy. You are referring to the unfunded liability as a debt to be refinanced. That was not clear to me.

My "obsession" about this is because it's the biggest issue on the table right now. Iraq is pretty much over. We all want to get our troops out now, and it's just a question of how to get them out in good order and allow the democratic process to continue.

I consider Gary Becker's views on the "free lunch" to be definitive. Increasing debt and increasing equity do not result in any economic gain in terms of Net Present Value. Private accounts will not address the need to raise taxes or cut benefits in the future.

Sorry to get snippy, but President Bush is once again conflating two separate issues for political advantage. He used the anxiety over 9/11 to create a climate when people (including myself) were persuaded we needed to invade Iraq. He's using anxiety over the long-term viability of Social Security to push his pet issue of private accounts, something dear to his heart since 1978. Private accounts may have merits, but they will not solve the "crisis " in Social Security.

With a nod to The Who, he fooled me once, but I won't get fooled again.

Posted by: rickheller at February 8, 2005 09:32 AM

I realize I've brought the following issue up before, but for those of you who are centrist Democrats, private accounts offer flexibility to those Americans who have lower life expectancies--minorities, especially Hispanic and African-American, and those who do physical labor to make a living. These are overwhelmingly traditional Democratic constituencies.

I am not positing that private accounts solve the SS mess, but they do offer tremendous flexbiiity to the above groups.

Posted by: Scott at February 8, 2005 10:36 AM

Scott,

As I understand it, private accounts wouldn't actually benefit those would lower life expectancies, but might benefit their heirs. That is, when a person retires, there will not be demographic adjustments for the annuity payout based on their gender or ethnicity. The payout would be based on the life expectancy of the entire cohort of retirees retiring that year. So a retiree who dies young would be personally short-changed, but conceivably, the excess amount saved above the cost of the annuity could be passed on to their heirs.

The Democratic response to this argument is to suggest that it would be better to spend more money on health care so these constituencies do not die young, rather than focus on helping their heirs accumulate wealth. Of course, the Democratic view is redistributionist, whereas the Republican view is individualistic.

Posted by: rickheller at February 8, 2005 10:54 AM

But if these are true private accounts, with a typical tax penalty of roughly between 25-40% for early withdrawal of funds before a certain age (59 1/2?), then the funds would most definitely benefit that individual. Rick, this aspects of the program is big and important enough to get a complete answer rather than each of us gleaning its specifics.

Posted by: Scott at February 8, 2005 11:01 AM

Thinking about this further, I understand that there is a requirement to use the private account balance to purchase an annuity sufficient that, together with the base amount of social security, the retiree would be above the poverty line. The amount used to purchase the annuity is non-refundable, and would not be passed on to heirs.

Above that, there would be a "nest egg" that could be used by the retiree as a lump sum. The retiree could use that nest egg in their own lifetime, or pass it on to heirs.

Practically speaking, though, most people don't know when they will die, and I doubt that many would blow their nest egg because they calculate they have a lower life expectancy than people of other ethnicities. That's why I see the main benefit accumulating to their heirs.

Posted by: rickheller at February 8, 2005 11:10 AM

Dave, just to state the obvious (as it appears continuously necessary to do so) the trust fund balances are meaningless in terms of the overall effect of SS on the federal budget. The program can not be considered in isolation from the federal government--it is part of the federal government. The trust fund balances are a real measure of the NPV of the overall federal SS revenue gap between NOW and 2042 at current tax rates. Thus, unfunded liabilities of the system to the taxpayer are not just current projections of the NPV past 2042, they are the total NPV sum of the balances of the trust funds at time of break-even, plus the NPV of the "gap" past 2042. And that post-2042 gap grows larger every year as we move farther down the slope towards break-even. It grew $200 billion in 2004, despite improved economic conditions. At the 75-year horizon the system is still not in balance, and every additional year balloons up that unfunded liability. For a perspective example, shifting from a 75-yr horizon to a 100-yr horizon boost the unfunded liabilities to $12.7 trillion.

The current "balance" of the funds is $1.6 trillion, the NPV of future surpluses will be about another $800 billion. So add on $2.4T to the $3.7T for a true unfunded liability to the taxpayer of $6.1T, and that figure grows every year. Note that this figures is growing, not shrinking or staying steady. If we do nothing, it will continue to grow. To stop it from growing, we must reform the program in some fashion. Sticking our fingers in our ears and singing LALALALA! really loud does not change that. Boosting the trust fund "balances" with higher taxes does not change that. Cutting benefits or boosting tax receipts when required to maintain break-even or increasing real returns (not internal government IOUs) does that. Changing demographics does that (required child-bearing, higher immigration, or Soylent Green!). Nothing else does.

I consider Gary Becker's views on the "free lunch" to be definitive.

Rick, Becker is definitely a bright guy (they don't hand out Nobels in economics for giggles) and very worthy of paying attention to. So why don't you go consider his latest on the subject? You may find much of what he's saying quite familiar. :-) It can be found at:

Why I Support a Privatized Individual Account Social Security System

I think that you're taking his "no free lunch" statements on net societal gains of privatization somewhat out of context, for the simple reason that the current system does not constitute "savings" in any meaningful economic sense. It's pay-go plus federal deficit financing, set to turn into pay-go plus additional federal deficit spending after break-even. He doesn't address the concept of societal return on government spending versus societal return on private investment spending at all. That's another argument anyway, and the capitalists own it already.

Posted by: Tully at February 8, 2005 12:15 PM

Coming in late, I have to admit I find this thread extremely discouraging, due to the number of people insisting on things like private accounts being a separate issue from solving the problem of insolvency.

Have we even reached to point of agreeing that insolvency is a coming and a growing problem? I think for the most part we at least have done this. If that's so, then let's take the next step and acknowledge that the number of things that are possible and practical solutions are on a short list: SS tax increases, SS benefit reductions, increased SS retirement age, constraining SS eligibility based on personal finances, and integrating an investment component into SS financing. That covers just about all the possible ways to begin addressing the coming and growing imbalance.

Now, can integrating investment (called private accounts right now) into SS help? IMO, the best way the get any sort of a decent answer would be to run some simulations based on the following: choose 3 or 4 income levels for beginning workers:maybe poverty level, bottom half's average, median income, top half's average. Run simulations for someone entering the work force at these income levels, using start dates at 5 year increments, beginning at the time at which stock market data is available. For each simulation, run two threads. One thread calculates each hypothetical worker's SS contribution(plus employer match), and finds the resulting monthly SS payment. The other strand takes the amount this person would have paid in SS taxes(plus employer match), and invests it in an S&P 500 index fund, and calulates results based on know past returns. At retirement age, dollars accrued in this thread are converted to an annuity to come up with a comparable "dollars per month" figure.

The question you want the answer to is this: how often does SS end up being a better deal than investment?

I've head it claimed (but not seen direct evidence) that SS always comes out behind when such a comparison is done. Can anyone fill me in on this? I've tended to believe it simply because i know enough to understand the power of compound interest, growth, and average annual market returns over time.

If it is true, it's pretty powerful evidence that despite the risks of stock investment, we could institute SOME TYPE of investment program that leaves more dough available for retirees than the current one is generating, which would allow the government to avoid doing things like continually raising taxes, raising the retirement age, cutting benefits, and limiting eligibility.

I don't care about the few existing details of Bush's plan. What I care about is the issue of whether or not it makes sense to use market growth to help deal with insolvency. I have a strong suspicion that it does, if we do it right. And that if we do it right, we can keep minimum guarantees and pool risk in such a way as to ensure that absent a doomsday scenario, everyone can get something like they do now (a guaranteed minimum payment near subsistence level) or better, without needing to lean too hard on the other, more painful solution options.

If we can get some consensus that integrating investment at least MIGHT help address insolvency over the long term, we can dismiss some sticking points. If integrating investment can lead to a program with more revenue available, then we can probably fret less about transition costs, becuase over the long term the higher revenue program MUST become the better solution as time passes, not matter how high the transtion costs.

If by some miracle we could get to this point of acknowledging that solid evidence suggests integrating investment into SS could lead to more program revenues, then we could talk about the different WAYS in which investment could be integrated, and which ways make sense given human nature and past experience. I might start this latter as a thread, and those who disagree that investment can help can just be invited to sit it out.

Also disinvited would be anyone who thinks that the SS "trust fund" exists in such a way that it impacts either the situation we are in or the possible ways to fix it.

Posted by: bk at February 8, 2005 12:28 PM

Tully: On the link to Becker. He may favor private accounts, but at least he's honest:

It is true, as the critics correctly observe, that there is no magical gain in privatizing since all systems have to provide incomes for retired persons.

and

I do not believe that the main advantage of a private account system is that individuals can get a higher return on their old age savings by investing in stocks. There are no free lunches from such investments since the higher return on stocks is related to their greater risk and other trade offs between stocks and different assets.

Posted by: Bob J Young at February 8, 2005 02:12 PM

Bob touches on something that I've found quite interesting, from a partisan standpoint, about the SS debate. I read a 9 page treatise by Paul Krugman about the ills of SS privatization in which not once did he make any concession to its advantages. Keep in mind that Krugman, like Posner and Becker, is an economist with full knowledge of both sides of the SS argument. Becker, on the other hand, writes what amounts to a 2-3 page blog entry and makes concessions, cited by Bob, which he fairly sees in the SS debate.

It's pretty clear there are good arguments on both sides of the debate, but Krugman couldn't mention a single one in 9 pages of writing. I used to have a lot of respect for him even as his NYT opinion tended toward the vitriolic, but not anymore. If he can't make one concession to the other side's argument, it's clear he's nothing but a partisan at this stage, and I find that unacceptable.

So Bob, tattle on about what Becker says to make your case against SS privatization. Just don't expect Krugman to have any of the perspective and evenhandedness that Becker displays.

Posted by: Scott at February 8, 2005 02:32 PM

Scott: I was going to say something similar. The arguments for and against seem to have been reduced to "trust bush?" and "personal preference".

Posted by: Bob J Young at February 8, 2005 03:33 PM

Perhaps but they're both myopic, unfortunately.

Posted by: Scott at February 8, 2005 03:53 PM

There probably is a decent compromise out there, but it has become an ideological struggle.

So what can the centrist compromise be?

1) Revenue neutral: Don't spend more than the approaching SS revenue shortfall?

2) The yuppies can have their private accounts, but tax increases will have to fund them and the poor will retain their original SS benefits and retirement age?

3) Private accounts based on the TSP system, not the IRA model?

4) The left will allow the third rail to be touched, but the right has to quit yelling, "the sky is falling".

We are not a bunch of dim bulbs here. If centrist can't make a compromise solution, what chance does the congress have.

Posted by: Bob J Young at February 8, 2005 04:53 PM

The way I've looked at this issue, from the beginning, is that the Republicans (speaking in the aggregate) acknowledge there is a problem and are attempting to put forward solutions for it, solutions that I've found incomplete and in many ways wanting. Democrats, on the other hand, have been totally unserious on the issue. Every time a politician, left or right, proposes possible changes to SS so that it might be closer to insolvency, some Democrat charges that politician as being against seniors etc. (Kerry in fact made such a charge against Dean during the primaries).

So aside from the fact that I believe privatization, if done correctly, can be a net positive for the program, my bias admittedly is with the Republicans at this point because they want to address the issue now with little political advantage to be gained from it. I simply don't understand why the Democrats aren't voicing their strategies for solvency more strongly rather than simply "opposing the President's plans" (heard this one before?) I'd like to see Democrats add something to the debate here.

Posted by: Scott at February 8, 2005 05:50 PM

closer to insolvency=closer to solvency

Posted by: Scott at February 8, 2005 05:51 PM

Frankly, Bob, the two quotes you pick are the weakest part of Becker's article, and highly disputable in both social and empirical terms.
While Becker is an extremely bright guy who earned his Nobel, he didn't earn it for macroeconomic or financial theory. He earned it for extending the application of microeconomics theory to non-market aspects of human
interaction and behavior.

In short, he's wrong on both counts. To the taxpayer, it's demonstrable that the gains from investing and owning beat the gains from giving to the government and waiting for the handout. It's been demonstrated so thoroughly that I won't bother. But I'll note that if the government actually made gains off the money received, the SS beneficiaries aren't the ones who would reap the reward. Check the efficiency figures for privatized versus nationalized industries and you'll catch the drift. As I said above, the capitalists won that argument.

But even leaving those items out, you see which side he comes down on--and why. Sound familiar?

Posted by: Tully at February 8, 2005 06:00 PM

Here's a link to one of my favorite blog entries ever from a site called Coyote Blog, entitled "Progressives are too conservative to like capitalism". It touches on what I think is the broader problem with Democratic acceptance of privatization, that individual decision-making is considered "not acceptable" for those assumedly not intelligent enough or unwilling to inform themselves about investing. SS privatization is mentioned toward the end.

http://www.coyoteblog.com/coyote_blog/2004/12/progressives_di.html

While I'm at this, I highly recommend the blog as a daily read. The writer is highly educated, fair, and pretty funny to boot.

Posted by: Scott at February 8, 2005 06:24 PM

Hey! You posted the link. I just picked out the best parts :-}

As for why he supports private accounts, that part is easy. Economists like market based solutions. After all 4 (or 8) years studying the invisible hand has to color your world view.

Posted by: Bob J Young at February 8, 2005 06:28 PM

Tell me that's not your be all-end all interpretation of economist bias, Bob. Give me a break.

Posted by: Scott at February 8, 2005 06:34 PM

Scott: What? I have to serious all the time. Tully IS an economist. I'm just tugging on his leg for some fun.

Posted by: Bob J Young at February 8, 2005 06:47 PM

Aye, my irony radar must need a little repair.

Posted by: Scott at February 8, 2005 06:53 PM

:-} Means mischievous smile

while

: ) is just a Smile

http://www.computeruser.com/resources/dictionary/emoticons.html

Posted by: Bob J Young at February 8, 2005 06:58 PM

I have been edumacated. Thank you. : )

Posted by: Scott at February 8, 2005 07:03 PM

The way I've looked at this issue, from the beginning, is that the Republicans (speaking in the aggregate) acknowledge there is a problem and are attempting to put forward solutions for it, solutions that I've found incomplete and in many ways wanting. Democrats, on the other hand, have been totally unserious on the issue.

Scott, I have in my lifetime voted for a grand total of 3 republicans, as opposed to countless democrats. But I find your summary to almost entirely encompass my perceptions.

The only thing I'd add is that, due to the nature of what I've heard from the GOP on SS, I am very mistrustful that any solution they'd propose would involve giveaways to major donors and make things harder for future retirees from the middle and lower classes. I think that on this count it is a mistrust than many in the middle share with just about everyone on the left. And it's this mistrust that makes the current Democratic position a sound electoral strategy. At the same time, it feels like an infuriating abdication of responsibility to the people to refyse to acknowledge the problem.

But it may be the case that their strategy, as the minority, is to take this position for the time being, to show that they have the middle at least partly on their side. This would allow them to try to force Bush and the GOP to put back on the table the main thing they have taken off (raising the income ceiling on payroll taxes) and also take off one thing that Bush seems determined to do: change the program to one that provides more benefits to wealthy contributors and risk the possibility of a somewhat lower minimum guarantee to those at lower income levels.

I'd like to see those changes to what's on the tbale for consideration. DO consider raising the ceiling on SS taxable income, and periodically keep raising along inflationary lines or something similar. And DO go slowly with integrating investment, along the way making sure that the minimum guarantee component for lower income people doesn't leave people eating dog food and choosing between paying heat and paying rent, etc. Most important, don't do anything to the program that leaves a lot of people worrying that if they live too long, all they'll have is a dimished minimum guarantee. Inheritability of accrued assets is nice, but IMO not at the expense of a diminished minimum guarantee. I really like the component of SS that says "you get x dollars monthly regardless of how long you live."

Granted, this is at the heart of a basic philosophical divide. People who are careful and pessimistic by nature value downside protection much more highly than some vaguely defined chance at a possible increased upside.

Posted by: bk at February 9, 2005 09:56 AM

And it's this mistrust that makes the current Democratic position a sound electoral strategy. At the same time, it feels like an infuriating abdication of responsibility to the people to refyse to acknowledge the problem.

I've thought for a while now that Congressional Democrats are concerned almost entirely with "electoral strategy." So yes I do see their silence and reflexive opposition as a tremendous, and repulsive, abdication of responsibility.

People who are careful and pessimistic by nature value downside protection much more highly than some vaguely defined chance at a possible increased upside.

Aside from the "possible increased upside" of returns (which I actually find less important to the pro-privatization argument than do many), let's not forget the more critical flexibility Americans with lower life expectancies could have with their SS funds.

As it relates to those who are "more careful and pessimistic by nature", I encourage you read to the link I posted above entitled "Progressives are too conservative to like capitalism".

Posted by: Scott at February 9, 2005 10:14 AM

Robert Samuelson has an op/ed in the WashPost today that has some decent insights and makes some good points.

Cut My Benefits

Posted by: Tully at February 9, 2005 10:48 AM

I endorse the Samuelson piece. My only caution is that, if we are going to get people to work longer, we have to make available opportunities for lifelong learning, so that 55 year olds who have been laid off can retrain for the last 15 years of their working life, rather than limp along to retirement age.

I also agree that Democrats are tempted to indulge in demogoguery on this issue, and Josh Marshall in particular, who is normally an acute though partisan writer, is deliberately distorting the debate.

But Tully, back to that refinancing analogy. I think I see what you are saying, but it seems to me that normally when one restructures debt, one refinances short-term debt into long-term debt. What Cheney proposes to do is to refinance a portion of our long-term debt--the unfunded liabilities in Social Security that start either in 2018 or 2042 and go out to infinity, and turn them into short-term debt of the US Treasury.

Now, one may think that's safe, because the Treasury could never default, but other countries have had debt crises, and I don't think we can conclude that it could not happen to the United States. That is a hard-to-measure risk, but I believe it's the kind of risk that Gary Becker has in mind when he says there is no free lunch in doing this restructuring.

Posted by: rickheller at February 9, 2005 11:03 AM

Of course Samuelson is correct. That's why I agree with the posters who say the whole private accounts argument is essentially a moot point as a solution to SS. It does nothing significant to solve the funding problem.

In addition, notice Samuelson combines the SS and Medicare issues. Nobody in government leadership is talking seriously about fixing Medicare. What prominent GOP person just last week said something to the effect that they didn't have the courage to bring up the subject?

The big problem is political. Not everyone is as sensible as Samuelson (or many of the posters on this board). If you start means testing benefits you create a welfare program which will eventually be politically attacked by the right, just like they attacked ADC. While it makes fiscal sense to means test, it will sow the seeds of very serious political discord as it pits one class against another. That's why I think any solution should be a compromise of increasing the cap in exchange for expanded tax-advantaged personal accounts. Try to link the two concepts to make them more politically stable.

Posted by: tim at February 9, 2005 11:15 AM

In the spirit of full disclosure, I think the best idea at this point is to raise the retirement age and couple it with private accounts. Raising the income threshhold should be considered only if raising the retirement age to a level of solvency is too high to be politically unviable.

Posted by: Scott at February 9, 2005 11:25 AM

unviable=viable

Posted by: Scott at February 9, 2005 11:26 AM

That's why I agree with the posters who say the whole private accounts argument is essentially a moot point as a solution to SS. It does nothing significant to solve the funding problem.

Even if we have to cut benefits too, it doesn't make integrating investment a bad idea. If integrating investment into social security results in a program that has a larger pool of available resources for retirees by harnessing investment growth to create a larger pool of resources, then it's worth changing from a system that simply taxes and/or borrows as necessary to collect the needed amount of revenue, which is what the current system does.

If we do not start integrating investment, what we have is a program where, over time, as the population grays. we have to either tax more, borrow more, or make social security a crappier deal, wihch Samuelson acknowledges.

If we do integrate investment, we absolutely WILL have to borrow or tax heavily to finance a transition. So? If investment helps mitigate insolvency through growth, over the long term it still makes sense. Initially and for some time, it requires a big increased financing burden, but the end state is a reformed program that uses economic growth to help pay for retirement.

I have yet to see a single explantion of why integrating investment doesn't result in an eventual state of a larger pool of available resources. People seem to be suggesting the answer is "because we have to borrow to finance the transition." But this is only true during some portion of the transition.

So, Tim, my direct question to you is this:

if you think private accounts are a moot point because they don't solve the funding problem, please explain to me why you think it doesn't make sense to borrow now to transition to a reformed system that could result in a larger pool of resources to pay for retirement.

And if you don't think a reformed SS program that integrates investment can do this, please explain why you think, OVER THE LONG TERM, integrating investment can't be a helpful part of reform.

I agree that the "reverse robin hood" problem needs to be addressed. But if we gradually transition to what would amount to a mandatory retirement investment program, while protecting low income workers who are most vulnerable, isn't that the right direction to head.

I mean, we want to make sure everyone sets aside sufficient money for subsistence retirement, so that the government doesn't have to provide for the short -sighted at taxpayer expense.

And most people dont want to put a giant drag on their current available income by setting aside amounts large enough to cover the contingency that they happen to live much longer than they expect. Remember, not everyone has a family and wants to pass on a big nest egg to the next generation.

Posted by: bk at February 9, 2005 12:22 PM

Rick, you can refinance for many reasons. To lower your payments by lengthening the term, or to take advantage of lower rates, etc. But the rational reason for refinancing is to lower your overall NPV liabilities (or increase your overall NPV assets--same thing, different sides of the balance sheet). That applies whatever the length of term. Will the cost of the refinancing (using that $2000 example) result in a greater than $2000 NPV reduction in liabilities or increase in assets? If yes, refinance.

It's more complicated than that with SS, of course, because there are questions of societal welfare involved--the "safety net." But barring massive economic growth on a scale not predicted, one way or another there WILL be either massive tax increases and/or benefit cuts and/or massive borrowing. Period. We have promised more than we can actually pay for under the current conditions. The current system would result in massively increasing general taxation or federal borrowing from 2018 until 2042 (to pay down the trusts) and then we walk off the cliff and (by law!) have to either radically cut benefits, or become that Euro-socialist nanny state.

Doing nothing is voting for those massive future tax increases and borrowings and those post-2042 over-the-cliff benefit cuts. It's voting for either the nanny state by future emergency fix, or for drastic future rollback of the safety net.

The "fix" of boosting the payroll tax to boost trust fund surpluses actively aggravates the problem, as I have copiously and repeatedly noted here for months. The "lockbox" approach simply doesn't work. Government has proved it cannot be trusted. It's like giving money to a thirsty drunk on Friday night and telling him to give it back with a little extra on Monday morning. The only way he'll be able to pay you is by mugging some folk over the weekend. There are also economic structural reasons that such large chunks of "savings" should not be lock-boxed in the first place. Capital in the markets creates new capital. Capital held in the "lockbox" just sits there at best. At worst it gets spent and we get taxed all over again to repay it.

So no matter whether we act or don't we WILL still do some combination of the Big Three--Benefits cuts, tax increases, borrowing. We can do nothing or we can restructure the system, including re-thinking what the program should be and how it should be paid for, what ends we are trying to achieve and how best to achieve them. Going on as we are has a certain result, and it's not a pretty one.

Samuelson's thoughts on what the program is right now are sound ones, and I'm with him there. We can not--should not--as a people abandon the safety net aspect of SS. But there is little reason to maintain the retirement subsidy aspect if it can be done better by other means. It's an intergenerational wealth transfer of money from the young to the old, and the way it's structured right now the poor young pay out for the wealthy old. My self-employment taxes of 15.3% OFF THE TOP of my income, before I even pay my income taxes or property taxes, help pay to wax Warren Buffet's limo while I clip coupons and shoot critters in season so that my family can eat meat and drink milk and not live in a van down by the river.

At the same time, we have other related structural economic problems. Namely, the non-existent savings rate among lower income strata. This both hurts our economy and overloads the safety net. If we can facilitate even a partial elecgant solution to both problems at a lower cost than the current setup, shouldn't we do so? For strictly rational and societal reasons?

Posted by: Tully at February 9, 2005 12:24 PM

Tully your point about increasing the payroll tax ceiling is a really good one. As the government currently operates, it's not helpful until the point when SS tax dollars collected

Which point out to me one thing that it seems to me EVERYONE should be able to agree upon as a good idea, as part of a crucial immediate step to take to mitigate future pain:

Congress: Stop spending surplus SS dollars collected, and don't increase deficit spending to make up for this lost pool of spending dough.

Even if we did nothing else, if we balanced the budget and put surplus SS dough in a mattress, we'd be better off.

Posted by: bk at February 9, 2005 02:28 PM

BK:

"...please explain to me why you think it doesn't make sense to borrow now to transition to a reformed system that could result in a larger pool of resources to pay for retirement."

I never said that. Or at least I didn't intend to leave that impression. I just don't think private accounts are the answer to fixing SS.

Read this article in today's Wash Post: http://www.washingtonpost.com/wp-dyn/articles/A9090-2005Feb8_2.html

The chief investment gurus for TIAA/CREF and Prudential both doubt the equity markets will provide the bounce SS will need if economic growth is as slow as those who predict the SS shortfall say growth will be. They predict growth after inflation in the equity markets at about 3.5% if the economy slows to 2% growth. And it's this slowing economy brought on by aging demographics that has everyone in a dither about SS to begin with. And that's a 100% equity portfolio. A balanced portfolio would do worse.

Of course this article says historical return on equity is 6.5%, not the 9% that has been stated by others on this board. I don't know who's right on that, but I have to believe these guys know something about investing.

Tully makes a very good point that raising the tax (either the rate or the cap) will not mean the money goes into a lock box and Congress will just spend the money. Unless a lock box can be created I would suggest raising the cap beginning around the time of the break even point so the money HAS to go to SS. That's a pretty crummy solution too. But looking at Bush's latest budget fiction and the new info on Medicare after Bush's medicare fiction (if not outright lies) of 2003, I think a person would have to be pretty gullible to trust the Bush people's numbers on anything, most importantly SS.

Posted by: tim at February 9, 2005 02:30 PM

Just to be clear, I'm not saying integrating investment can be the sole solution, only that it is a sensible part of it.

Posted by: bk at February 9, 2005 04:27 PM

Bk:

I'll try to be clear too. I'm all for private accounts. I think the govt. should use the tax code to encourage them. If the money can be found I would support subsidizing them for lower income workers (similar to a 401k match). But everything I've repeatedly read on the SS debate leads me to conclude private accounts and SS reform, repair etc. are two separate issues.

Posted by: tim at February 10, 2005 10:18 AM

I just don't see how they can be a good idea for a better way to finance returement, but somehow are not part of the SS solution. That dumbfounds me.

Posted by: bk at February 10, 2005 01:09 PM

For reasons stated. Personal accounts don't address the funding problem or transitional costs in any meaningful way. If we want to solve SS problems, it takes money. You suggest we borrow now to pay those costs. How can we borrow money now to pay for transition costs when we have a large deficit, a congress and president that won't raise taxes to close the gap, and a budget that is widely discredited?

Posted by: tim at February 10, 2005 02:02 PM

If borrowing more now results in a more solvent program 100 years from now, it makes sense.

Either we transition to a system where everybody is taxed to build their own minimally sufficient retirement nest egg, or we stick with the system where one generation pays for the last, even though the trend in the ratio of payers to payees is very bad.

Posted by: bk at February 10, 2005 05:10 PM

If we want to solve SS problems, it takes money

More money, or cutting benefits, or rethinking the entire system. And as I keep pointing out, we face that choice regardless of whether we alter the program or not. Doing nothing does not solve the problem or change the basics. Doing nothing is voting to keep running headlong at that cliff.

Richard Pryor used to tell a great story about his last days as a crackhead (before he set himself on fire). Rosie Greer came over one day and followed him around his house nagging him relentlessly about his addiction, not letting up. Everywhere he went, Rosie followed, asking him over and over and over again, "Whatcha gonna do?"

Well, whatcha gonna do?

Posted by: Tully at February 11, 2005 01:04 AM

It depends. Are you as big as Rosie Greer and are you coming over?

I don't buy the falling off the cliff analogy.

If we vote now to cut future benefits, the system will still run a surplus for another 13-15 years and the government will still spend the money until then like kids in a candy store.

If we raise the tax now without figuring out a way to keep the revenues separate, the system will just run a bigger surplus for another 13-15 years and the government will still spend the money until then like kids in a candy store.

If we borrow money now to fund a transition and keep tax rates and cap the same the system will still run a surplus for another 13-15 years and the government will still spend the money until like kids in a candy store. And our deficit will increase at the same time we are paying an extra 750 billion to 1.2 trillion for the 2003 medicare reform.

None of those ideas sound any better to me.

Posted by: tim at February 11, 2005 09:44 AM

And if we divert the current surplus revenues to outside investment they will still exist as real assets 13-15 years from now, as the government will not have been allowed to spend them. Nor would they have to re-tax them from us. And as they would actually offset future benefits due, they would also result in a lowering of future government liabilities.

This would be called a "transition cost" as it would result in lower overall revenue to the federal government, even though it would result in lower future liabilites. If you're against it, it's a cost. If you're for it, it's a benefit. If you're rational and non-partisan, you want to see what the cost/benefit figures are.

So, whatcha gonna do?

(Rosie Greer is twice the man I'll ever be. And I mean that literally...)

Posted by: Tully at February 11, 2005 10:43 AM

And if spending stays the same or increases, what happens to interest rates as the government continues to issue increasing numbers of bonds to fund itself? I too think I would like to see those numbers.

But I'll tell you what I'm gonna do. After work I'm going to pick up a 6-pack of Rattlesnake Ale. The label says it's made in Kansas.

Posted by: tim at February 11, 2005 02:45 PM

And if spending stays the same or increases, what happens to interest rates as the government continues to issue increasing numbers of bonds to fund itself? I too think I would like to see those numbers.

As always, the devil will be in the details. Which is why we gotta have the details.

Try the Boulevard Pale Ale out of KC. It's better.

Posted by: Tully at February 11, 2005 07:15 PM

Would someone be kind enough to provide me with the value of the SS trust fund? It would appear
that if we could plug that into a FV calculation
then divide by the actuarial assumptions providing
the number of retirees that would be receiving benifits,we could begin a reasonable debate.
What about allowing those who are fortunate enough
to have saved prudently over the years to forgo
taking distributions and giving them continued
tax deferral on the income tax equal to the amount
of their contributions to SS over the years.

Posted by: Richard at March 4, 2005 07:45 PM