Centerfield

I had the unusual experience last night of agreeing with Bush at least twice. First, on SS. I don't have a problem with the proposal to slow the rate of growth in entitlements for people who don't fundamentally need them to begin with. Of course I'd like to see the details.

And, I appreciated Bush's statement on religion. It's a sad day when one has to applaud the fact that an American president is stepping back from accusing his political opponents of witchcraft, but, what the hell, I'll take what I can get. It's always nice to learn that I still get to be an American even though I am a non-believer. (I still get to pay taxes, right?)

Posted by: michael reynolds at April 29, 2005 12:58 PM

I give Bush credit for talking about the sorts of obvious changes we need to make to maintain SS solvency without overburdening future generations. Here I'm talking about slowing down growth rates and other tweaky things.

I give low marks to all the demagoguing naysayers. I heard an especially irresponsible "just say no to SS reform" type commercial on the radio this AM sponsored by the UAW. Makes me feel good about buying a Honda.

I find it an ongoing curiosity that Bush continues to place the private accounts at the forefront of his nascent SS reform plans. In the short term, this has allowed his critics o distract from the real issue of the pending imbalance between collections and payouts. But it may make sense for Bush to go about things this way because he feels that reform like this is so hard that it can happen only once a generation or so. That makes sense to me. Some have suggested that since private accounts won't "solve" the problem, why not leave this contentious issue aside for the sake of focusing on the core issue of imbalance. The argument that if it doesn't happen as part of omnibus reform, it won't happen is one that I find pretty compelling.

Posted by: bk at April 29, 2005 01:13 PM

I think we saw why the President is going to eventually prevail on this issue... The man has no fear, and he is the only one doing the talking about change.

Excellent point to all. I would only point out that I loved how Bush for the first time pointed out that Congress should not only make Social Security solvent, but improve it as well, which I see as the reason for his private accounts proposal.

As far as cutting benefits for the rich, all I have to say is that it is about damn time someone told the truth. You will never be able to explain to me, in a way that I accept it, why Bill Gates has a Social Security account.

Posted by: Mathew at April 29, 2005 02:52 PM

I find it an ongoing curiosity that Bush continues to place the private accounts at the forefront of his nascent SS reform plans. In the short term, this has allowed his critics o distract from the real issue of the pending imbalance between collections and payouts.

Listened to this response at the press conference and I thought he spelled it out pretty well (at least for GW). The present payment mechanisms simply increase the financial obligations of the government AND when they pay out the returns are lousy. IN THE LONG RUN, private accounts have the potential of decreasing federal obligation (there's only so much money you can print) AND providing a better return.

But, when all is said and done I think the Democrats smell blood in the water. To now engage in a dialogue with the President will only decrease the number of political points scored.

Posted by: c3 at April 29, 2005 04:47 PM

I'm not buying. When the Republicans are giving out tax cuts I don't make enough to qualify for anything more than a token. When they're giving out benefit cuts I make way too much to be protected. As far as I can tell from the vagueries spouted last night, I look to see a 15-20% reduction in my expected soc sec payment under the Bush hint (plan does seem too strong). If they do nothing I look to get a 0% reduction. I suspect a lot of voters will have my reaction. I think the solvency problem is real but it needs to be addressed by adults. Which is why I'm willing to wait for a different administration.

Posted by: Pudentilla at April 29, 2005 06:49 PM

Which is why I'm willing to wait for a different administration.

You mean a different administration and congress willing to address the problem. Don't hold your breathe. Posted by: c3 at April 29, 2005 07:20 PM

If they do nothing I look to get a 0% reduction.

If they do nothing you can look to get a 60-70% increase in your payroll taxes, a 40% reduction in your benefits, or some "balanced" combination thereof. The government has, as the accumulated baggage of many Congresses and Presidents, promised more than it can actually deliver. The promised benefits of the current system cannot be delivered without the tax increases. If the tax increases are not made, the benefit cuts will be. By law, beginning in 2041 or thereabouts. Maybe a little sooner, maybe a little later, but around then.

I can't say how much that would affect you personally. But one of those two things, or both, WILL occur if the system is not reformed. An excellent overview of the Social Security problem can be found here at Centrists.org.

What Bush discussed last night is a progressively-implemented variant of the proposal to link increases in the initial benefit calculation to inflation rather than wage indexing. COLA adjustments would continue to be linked to inflation.

Posted by: Tully at April 29, 2005 10:22 PM

Tully:

Interesting post.

It's Friday and I've had a wretchedly busy week...too tired to tackle it at the moment.

I think I may try tomorrow over at PK when I'm refreshed. Look for a trackback. :)

Posted by: carla at April 29, 2005 10:33 PM

Have fun, Carla. Don't forget the homework.

Posted by: Tully at April 30, 2005 12:37 AM

"The government has, as the accumulated baggage of many Congresses and Presidents, promised more than it can actually deliver."

What was the surplus when Bush took office? What is the value of the tax cuts he's instituted since he took office [we'll just leave the calculation of the cost of Iraq to the side for the sake of clarity]? Just because the last ruler of a large government who adopted Bush's notion of fiscal prudence was Nero, doesn't mean I am compelled to have the political or economic argument on his terms. Plenty of Presidents and Congresses in the past have dealt with Soc Sec issues fairly and in a bi-partisan manner. This President and Congress have an ideological goal, hatched in the Cato Institute a generation ago, of undermining and ultimately destroying Soc Sec. I'm not accusing him of insincerity, just insanity. I'll wait.

Posted by: Pudentilla at April 30, 2005 01:05 AM

Gotcha, Pudentilla. The "Hate Bush" forum is there. The "Love Bush" forum is there. This is neither of those places.

This thread topic is Social Security reform. The homework and discussion material for the thread topic can be found here.

Posted by: Tully at April 30, 2005 02:32 AM

I'll have to disagree here on a number of points:

First, the current projections by the Social Security administration actuaries which show the cut in benefits point at 2042 relies on an absurdly low economic growth rate of 2.4%.
Folks, if there's only 2.4% growth the stock market will be in the bottom of the toilet bowl. You could have all the private accounts in there and they'd grow like lichen on a piece of granite.
Righ now there's concern because the recent pace of growth is only 3.1%. So quite franky we can consider the 2042 figure to be too conservative given the historical growth of the stock market.
Does anyone know what growth rate the CBO uses for its projections which show solvency through 2052?

Anyway if we do nothing at all, by 2042 there will only be enough to pay for 73% of proposed benefits so If I retire after 65, in 2042 when I'm, 88 instead of $2100 in today's dollars it will be about $1400 bucks in today's dollars. That's without any SSI tax increase.

Anyway the drastic tax increases that Tully posits are not the only solution. Another one is to change the cap on what income is taxed for SSI. Right now it's about 90K. Remove the cap and there is no solvency problem. A better solution I've hears is referred to as the donut solution. Levy SSI tax on the first 100, leave the second 100K or 200K untaxed except for medicare, resume taxing income above 250K or 300K. That's it. Everyone else pays the same taxes as before, SSI stays solvent and all benefits get paid. Both Al Franken and Lindsey Graham proposed it although the latter wants it used to fund private accounts. Forget private acounts through SSI though. Too expensive. Way too much overhead in comparison to what the government does more efficiently.

Posted by: Marcus at April 30, 2005 04:59 AM

Marcus;
IMHO unfortunately at this point its probably a bad political move to propose and push a SS reform that might actually get passed. The only person who could/would claim a victory (no matter how small) would be GW. I don't think anyone on the other side of the aisle (and probably a fair number on the Repbulican side) want that.

Remember how they'd say if someone is getting electrocuted you couldn't touch them because you would also feel the charge. Well, GW has touched the third rail and now everyone is standing back and watching. Too dangerous to help out.

Posted by: c3 at April 30, 2005 11:09 AM

I don't know Tully. I think it is reasonable to question whether this president and this congress have demonstrated the political and fiscal responsbility to warrant treating them as sincere and trustworthy partners in the quest to address longterm social security sovlency issues. Great defense of Bush's fiscal record though.

Posted by: Pudentilla at April 30, 2005 11:46 AM

If you wait for perfection in politicians, Pudentilla, you'll die waiting. As I pointed out, there are fan clubs and anti-fan clubs available. I don't really care about the personality cults of either side, I care about the situation and what we can do about it.

Marcus, the figures used for projections can be found at both the CBO and in the 2005 SSA Trustee's report. SSA projections are made at three different levels, from pessimistic to optimistic. They use the middle level for ongoing calls, and that level has fallen well within the 90% certainty level for over 30 years. Their methodology is extremely sound. CBO figures tend to wander around a bit, as they play with the assumptions and pick & choose. Future domestic growth rates are a function of domestic demographics--the same age demographic driving the cost bulge in SS--but the markets are international in scope. Given existing world demographics, the assumption that the international markets will grow at a faster rate than the domestic economy is not just sound, it's a conservative one.

The government is obligated to pay full benefits through the extent of positive balances in the "Trust Funds" which is where the 2041 figure comes from. But please note that the balances in the "Trust Funds" are unfunded promises to pay from general funds money that does not exist. That money as well will have to be taxed or borrowed from the public, and that shortfall is currently pegged to begin in 2017. Boosting the "Trust Funds" is not a solution, it's just a license to Congress for more deficit spending. So using the 2041 figure without acknowledging the additional government revenue required in the period 2017-2041 to fund that "Trust Fund" spending is simply bad math that ignores the realities of government financing. Boosting "Trust Fund" balances with new taxes now is simply loaning the government more money, which they will spend and we will then have to pay back in the future. Double taxation. That figure for SS is currently $1.5 trillion in unfunded obligations, money borrowed out of the payroll tax and already spent. Making it the "Trust Funds" larger does not improve the overall tax situation, it worsens it. That's also a "sunk" cost, it's the part of the tab we can't reform away.

Regardless of who's in power, that is the box we're in. Regardless of who proposes what, the current (Net Present Value--NPV) price tag of doing nothing and paying benefits at current schedules through 2080 is roughly $6 trillion (SS shortfall plus Trust Fund obligations). IOW, we'd need $6 trillion in hand today to "pre-fund" the entire SS system revenue shortfall under current conditions and still maintain benefits at currently promised levels. (That's over and above all payroll tax receipts.) For a scale comparison, that's half a year's GDP.

That's the figure that any reform has to reduce. The yardstick for assessing reforms on the fiscal side is that figure. To vote to do nothing is to vote for the $6 trillion NPV "do-nothing" option. The ONLY means of reducing that figure are tax increases or benefit cuts, or a combination thereof. More borrowing doesn't really reduce the revenue requirements, it just reschedules them. (Boosting the "Trust Funds" is in reality more borrowing.) The exception is that some short-term borrowing can reduce the NPV of long-term future obligations by more than the current borrowing cost through rate arbitrage, but that's of limited utility.

Them's the basics.

Posted by: Tully at April 30, 2005 01:12 PM

"But please note that the balances in the "Trust Funds" are unfunded promises to pay from general funds money that does not exist."

Isn't this argument a bit tendentious. After all, when Bush promises us that we do not have to make high risk investments with our proposed private accounts, the example of safe investments he offers is treasury bills. But when he wants to argue that there's a crisis, he says that the same t-bills are meaningless i.o.u.s. (Interestingly enough, most of Mr. Bush's personal wealth appears to be invested in t-bills). It's seems to me, that the economic crisis the President would create by presiding over the United States' default of t-bills would make the Social Security solvency issues seem small indeed. The willingness to resort to such arguments, in fact, are one of the reasons I am willing to wait a few years.

The last time we had a solvency issue in Social Security a bi-partisan solution (under a Republican president and a Congress dominated by Democrats) was found and indeed if you look at the budget surplus available (created under a Democratic President and Congress dominated by Republicans) to President Bush to implement the promises made in that social security compromise, you would have to conclude this administration and Congress are the aberration in the decades long ability of leaders of both parties to deal with social security fairly and thoughtfully.

President Bush, in contrast, as well as the Cato Institute types and Grove Norquist, who advise him, have consistently questioned the legitimacy of Social Security, itself, throughout their entire careers. This is surely their right. Their belief, however, has been rejected by citizens of both parties, overwhelmingly, for decades.

I don't think it's a productive political exercise to negotiate for the solvency of a program with a negotiating partner who wants to kill the program. I personally think that many if not most Republicans subscribe to the proposition that Social Security is a good program that should be preserved and strengthened, and I'd rather wait until they're in a position to speak for their party. But maybe I'm wrong. Maybe most Republicans, these days, want to kill Social Security - what do all the centrists say?

Posted by: Pudentilla at April 30, 2005 02:00 PM

No, Pudentilla, this argument is NOT in the least bit tendentious. In fact, it's utterly essential to understand the basis of it in order to understand the spot we're in as regards SS financing.

The possibilty of default on government bonds is just not the relevant issue. US bonds are considered VERY safe, comparatively speaking, because we've always paid them back, so we have a high level of trust built up in investors.

But the problem with the US bonds in the trust fund is that, in order for the government to pay off on the obligations they represent, the government will have to find the revenue. And as Tully said, that has to happen either via tax increases or via budget or benefit cuts. So the point is that, even though we have something called an "SS trust fund" this trust fund doesn't represent real assets from the point of view of the government as a whole. The SS dept (a subset of the government) considers them assets, and the treasury department (a different subset of the government)considers them liabilities. From the point of view of the US government taken as a whole, they're a wash, they represent $0 in real assets.

Look at it this way. If you wrote yourself a check, would you have more money? No, you wouldn't.

Here's how it works, roughly. The gov't collects extra SS money. Then SS buys US bonds with that money, and then the treasury department takes the money from selling the bonds and gives it to congress to spend. The money is gone. All those bonds represent is a promise that the treasury department will pay the money to the SS dept. But to do so, they will still have to collect the money from somewhere to do so.

So you might be correct if all you are saying is that the Trust Fund is all good because we know the US government is good for the money. That's fair, we probably are. Like I said before, we always have been good for it, which is why other countries keep buying our bonds and financing our deficit.

But even if the government can be entirely trusted to pay back the money, in order to do so (to pay retirees on SS) the government has to GET the money from somewhere. Once again, because from the point of view of the US government, they're a wash, they represent $0 in real assets. It's not so much that we worry that the gov't will default, it's just that we must acknowledge that the trust fund number only represents a promise to pay, not real assets. At the very second when SS collections become insufficient to cover SS payouts, the government as a whole must find the extra money to pay off those bonds that the trust fund holds.

As it relates to retirement accounts, individuals would be able to choose from a variety of investments. Some people would choose bonds, but not everyone. People who took their SS money and invested it in non-fed'l gov't bonds or stocks would be short-circuiting the "spend it now and promise to pay it back later" shell game.

If everyone chose to invest in fed'l treasury bonds, then yes, it would in essence be the same thing as the current system.

Posted by: bk at April 30, 2005 02:55 PM

"Tendentious--marked by a tendency in favor of a particular point of view : BIASED" You seem to assume I'm a Bush-huggin' rightie because I wish to discuss the realities rather than play partisan ping-pong. Because I don't buy the Koolaid, regardless of origin. Because the facts as I have offered them don't mesh with someone's partisan propaganda. Try again. Note that my "homework" link is NOT to the White House or the GOP, but to the moderate Dem-leaning Centrists.org. If you wish to dispute their take on the situation start by noting the credentials of their staff--and start disputing with factual analysis instead of emotive partisan hyperbole.

Facts are not tendentious, they're just facts. The government is obligated to pay those bonds to the SS system, but that does not make the money required to pay them materialize. They are unfunded promises of the government. To pay them the government must tax more and/or borrow more. In terms of overall government revenue requirements, the existence of trust fund balances is entirely meaningless, as they do not change the overall revenue receipt or payout requirements of the government by one dime. Additional X dollars must still be produced on Y dates to pay Z benefits. The government still has to come up with the additional X. It can't do it by writing checks to itself, as Bryan put it. The funds must have an external origin.

By contrast, the government is NOT obligated to pay Social Security benefits at any particular level. It's an entitlement program, and the specifics of entitlement benefits can be changed at the whim of Congress. We have NO ownership rights in our SS accounts. That's settled law. And in 2041 the govrnment is required by law to pay no more in benefits than it collects in payroll taxes.

The 1983 reform set up our current system. They had to do something, as the existing system was going into deficit right then. So they came up with a new system that charged higher taxes than were needed to pay then-current benefits. They also decided to tax half of the Social Security benefits for wealthier recipients, to permanently delay a cost of living increase by 6 months, to increase the reduction in benefits for early retirement from 20 to 30 percent, to slightly increase the payroll tax rate and to raise the normal retirement age from 65 to 67 on a phased in basis beginning in 2003.

And they took the surpluses that resulted from the over-taxation and spent them. This is the origin of the "Trust Funds," (we'll pay it back, really!) and it was not a particularly fine hour for that Congress or any since. The 1983 reform was claimed to make SS self-sufficient in perpetuity. Yet, here we are. And the "decades long ability of leaders of both parties to deal with social security fairly and thoughtfully" is exactly what got us here.

Over the decades since the program was implemented Congress has shown a remarkable appetite for raising benefits and expanding coverages. In 1936 the SSA made the blanket statement that total SS taxes would never exceed 3% of the first $3000 of income. They are now 12.4% on the first $90,000. To maintain the current promised benefit structure with no changes, they will have to rise to near 20% by 2060. This figure does not include the additional governmental taxation that will be required between 2017 and 2041 to pay back the "Trust Fund" balances.

Surpluses external to a purportedly "self-sufficient" system are irrelevant, though I applaud Clinton's (brief) ability to keep them out of the hands of Congress, to convince Congress not to rush right out for more champagne and caviar. I applaud that Congress for some restraint. I also applaud Clinton's feeble attempts to reform SS while the budget was still in surplus--attempts which you will find offered largely the same proposals we see today. But we're still left to deal with what is, and blamestorming doesn't do a damn thing in that regard.

So, once again, if you want to argue hyperbolic political demonology without doing the homework to understand the basics of the SS problem, please do it somewhere else. If you want to catch up on what the actual facts of the situation are and then figure out some alternatives and argue them, I'm all ears. But first ya gotta leave the Egyptian river and start grappling with the realities, which would not change one millimeter if Bush and the GOP vanished tomorrow and John Kerry magically appeared in the White House with a Dem-controlled Congress behind him.

"Do nothing." $6 trillion NPV, and rising. Alternatives?

Posted by: Tully at April 30, 2005 03:57 PM

Oh, Ricky, Ricky, Ricky...
I thought by now most journalists had learned to read the fine print whenever Bush proposes something. Paul Krugman certainly has...
http://www.nytimes.com/2005/05/02/opinion/02krugman.html?hp
When Shrub says he's "helping" the poor, it always means he's "helping" himself to what the poor deserve.

Posted by: Blue Jean at May 2, 2005 03:21 AM

I see you that one millimeter and raise it a cubit.

Several things about the Social Security Insurance assumptions first:

The 2041 cutoff point in the current projection was 2038 in the 2001 projection. Largely due, I think, to a significant underestimation in productivity.
In 2001 SSA report the intermediate productivity projections for 2001 - 2004 productivity were 2.1, 2.1, 1.9 and 1.8. Actual productivity for those 4 yrs 2.0, 3.2, 3.5 and 3.3 respectively. I don't think these folks realize the cost savings generated by new technology. One very notable example would be the IT services in your average large company. Much greater efficiencies realized in data access and storage, and data backup are nowadays accompanied by maintenance or reduction of current employment levels of IT staff. Additional cost savings accrue when more efficient versions of software from VERITAS, Oracle and the like, allow companies to buy different types of hardware from different vendors to suit their needs and thus realize significant capital savings that run into the millions annually. In other words I don't think the guys at SSA get it when their best guess underestimates the productivity gains by up to a third. I think they also miss the impact of Sarbanes-Oxley which essentially mandated a lot of changes, some painful, in corporate IT.

The SSA's GDP assumptions for the past 2 years were pretty low. (look at the above linked tables about 3/4 of the way down the web page) The 2001 intermediate projections for GDP in 2001-2004: 3.1, 3.1, 2.6 and 2.4, because they predicted slower growth in total employment, ended up being .8, 1.9, 3.0 and 4.4. I think it's safe to assume that the 2001 effects felt for '01 and '02 kept GDP low and higher than anticipated productivity gains for 2003 and 2004 were instrumental in the GDP exeeding estimates.
I also wonder if the SSA is underestimating the increase in older workers planning on working past 65. Businesses, predicting a smaller workforce in the future because of the demographic transition from boomers to the smaller pool of neXter's etc. are already seeting up programs to retain older workers as consultants, part-timers and full-timers. I myself plan working past 65 simply because I love my line of work. Maybe not full time but then again I'm not always full-time anyway.

Their assumptions of about roughly a million immigrants per year - legal and illegal, also seem kinda low too don't they?

So our SSI problem, while being a problem, may not be as big of a problem as is being promulgated.There's obviously a lot more uncertainty than what I think is generally assumed.

I want to note a few other things.
According to the centrists.org site, the plan to raise the SSI tax ceiling to 141K of income will produce enough money such that by 2042 the shortfall will be 1.25% of GDP. This is about 1/5th of what the 1983 Reagan deficit was in relation to GDP.

If the GOP stays in power and maintain the high level of deficit spending of 6% GDP (675 billion in REAL deficit including Iraq supplementals and excluding SSI surplus of about 154 billion - divide that by about 11.6 trillion for FY04 GDP) we'll be in such deep doodoo it's not going to matter what goes on in 2042. I'm hoping that the bums will be thrown out and that financial sanity will reign for a time. We could very well find ourselves in surpluses in 10 or 20 years and all this angst will become relatively moot. Remember the prediction in 1992 that there would be no surpluses or anything close to a balanced budget, yet it was done. If not, debt accumulates rapidly and/or SSI benefits get cut. TThen, as Tully rightfully points out..we are soooo fucked.

one last thing, Social Security is an insurance program, not an entitlement program. Republicans insist on calling it an entitlement program because they want to equate SSI with welfare. In the other discussion about dem/GOP messaging you're seeing a prime example of the GOP trying to make one thing look like something more..evil...sinister...unworthy. Of course many in the GOP have always hated SSI. They've decried as socialism, among other epithets, yet it lifted millions of seniors out of abject poverty. As a government program it's one of the most efficiently run with about 1% of the money it handles going to overhead. Quite unlike the Pentagon....

additional reading....
http://www.macroadvisers.com/content/Exec.%20Summary%20of%20Productivity%20Study.pdf#search='productivity%20history%20US%20aND%20GDP'

Posted by: Marcus at May 2, 2005 05:26 AM

Hmm, I don't even think of "entitlement' as an epithet, just accurate, since it describes something Americans think they should be entitled to from the government regardless of the availability of revenue. Is it insurance, sure, but even with insurance, no insurance company plans to collect far less money that they expect to need to pay out. Just like with health insurance and other forms of insurance, if there is a gap, benefits get cut or premiums go up, or both. Right? Whether we call it entitlement or insurance, or both or neither, the fundamental issue of a funding gap remains.

I think the goal of SS is worthy. It makes a ton of sense to ensure that older Americans do not become destitute upon retirement. Such a program can work only when the money collected is commensurate with the expected payouts, and that balance does not currently exist going forward, without reform. I see SS as an entittlement mostly in the sense that many seem to be insisting that they are entitled to get what they have been unrealistically promised, regardless of the availability of funds to pay that money out. Again, I don't think of that word as an epithet.

Marcus, why are you surprised that SS has low overhead? You get a number, SS tracks your income, pay-in, and address, and upon retirement you get a monthly check until you die. Not exactly nuclear physics. I'm guessing they have their system figured out pretty well by now, which is why they have expenses similar to that of an index fund, (which does a pretty similar thing, after all). I'm not seeing why we'd compare SS to the Pentagon, since the complexities are so disparate.

I'm also curious why you keep obsessing over the exact date of technical SS insolvency. What difference does it make whether this occurs in 2038, 2041, or 2044 when the funding burden for the government as a whole comes much sooner, 2017, 2021, 2023? That's when the gov't has to start finding additional revenue to fund the promises the trust fund represents.

It sure would be a happy occurence for SS funding if older Americans worked longer and retired later, but do you have any data suggesting this is a reliable trend that we can plan on? It would also be a happy occurence if a roaring economy provided large sums of unexpected supplementary revenue to make the funding problem (not to mention the budget deficit) go away. That's worth hoping for. But not something to plan on, right?

Posted by: bk at May 2, 2005 09:16 AM

Blue Jean, if you can't do better than regurgitate Krugman's drivel through an unembedded link, go play outside. Adults are talking.

Marcus, variance in a single variable of the model is a pretty minor criticism. Especially as the model will compensate to large degree through other variables that are inversely affected by the same factors--there are corrective feedback effects. For example, as you note, productivity gains were achieved in large part by reductions in employment. What did that do to payroll tax collections, eh? The model itself tracked actual collections within the 90% confidence level for the years mentioned. Despite an ongoing recession, the unpredictable effects of 9-11-2001, and piles of deficit spending.

And there's a reason you can't use the 5% "tails" of the best-case and worst-case trendlines as baselines. It's because they're damned unlikely from year-to-year, almost impossible as long-term trends, and mostly involve unpredictable factors as causative agents. No one in 1922 was predicting the Great Depression, the Second World War, or the productivity gains of war industrialization. Because no one knew they were coming. Same here. We might experience a major spurt in productivity from some new technology--or we might stagnate under the debt burden of current deficit spending. But neither WW2 or the Depression lasted forever--much less for 75 years, which is the SS predictive horizon. Uncertainty levels are actually higher in the short-to-medium term than it is in the long term, but swings moderate out with time. The intermediate-assumption model will be accurate barring unforseen changes in fundamentals, which be definition you can't predict with any certainty at all. We could have a worldwide epidemic with a 50% mortality rate, or suddenly develop cheap table-top fusion--but neither are something to bet on.

According to the centrists.org site, the plan to raise the SSI tax ceiling to 141K of income will produce enough money such that by 2042 the shortfall will be 1.25% of GDP.

Oh, please do go look at that page! First off, look at the diagram (Figure #4) and you'll see that 1.25% is incorrect. Try 1.75%. Note the objections they raise to the idea, and then go back to the detailed issue summary and sub-ref "lockbox" approaches. The assumption you refer to is that the wage ceiling is raised to $141K (today that would be $145K) but that NO extra benefits accrue from the raise. Max benefits would continue to be based on the 87K (now 90K) ceiling. IOW, if you increased the wage ceiling by more than 50% without changing benefits you could lower the solvency problem by about 15%. So note: if you did this without changing the Trust Fund setup, SS actuarial solvency would indeed improve a bit, but overall government solvency would decrease. Write this one in stone, folks: Pre-funding approaches that depend on government (vs. individual) holding of surpluses have failed time and time again, and do not reduce overall government revenue requirements but exactly the opposite, meaning they guarantee future tax increases equal to the amount of the surpluses plus interest. While raising the wage ceiling and locking benefits would reduce the internal SS solvency shortfall to a "mere" 1.75% of GDP (from 2%) it would raise the overall government tax revenue requirements by an amount greater than the SS reduction! See "Trust Funds (so-called), double taxation scheme". I hate paying twice.

Increasing taxes for benefits funding as needed costs much less, and has the advantage of being reasonably honest in our pay-go system. Once again, raise taxes, cut benefits, or some combination. The "$141K" proposal raises taxes, but fails the first rule of being an honest fiscal reform--making the overall cost lower, or providing a greater return at no additional cost. It doesn't do that. Instead it cost-shifts from one part of the government to the other while making the overall price tag higher without improving benefits.

Entitlement vs. insurance. A side point and a bleoved bit of Lakoffian framing for some, but let's hit it. Social Security is labelled as insurance. It's in the program title. But it is not insurance in any legal sense. It is an entitlement. This was settled by the US Supreme Court in the case of Flemming v. Nestor (1960) when the USSC ruled that we have NO contractual ownership rights whatsoever in our SS accounts. None. The government can do whatever it wants with that money. Our "contributions" are not "insurance premiums," they're taxes. Our benefits are not "policy payouts" or "account withdrawals" or "insurance benefits," they're entitlements determined by current legislation. SS may have (does have) an insurance-like purpose, but it's not insurance. You have no legal right to collect payouts at the levels "promised" when you made the payments, and the goverment can dictate that you have no claim to any of your contributions at all. But you do have the legal obligation to pay the taxes. Insurance by definition involves a legal contract transferring risk for a price. We have no contract. Instead, we have politicans. (You wanna argue we need better politicans, it'd be tough to disagree.)

I'll argue long and strenuously in favor of the "safety-net social insurance" aspect as being the single most important part of the system. Both for the elderly and for the disabled. I fully agree that we need to preserve, even enhance, the "safety-net social insurance" aspect of the system, regardless of what label you want to put on it for partisan framing purposes. But I haven't seen those parts challenged in the current proposals--just reductions in promised benefits for those farther up the income/wealth ladder.

So my question still stands--why is it OK to raise taxes on middle and upper income households, but not OK to reduce promised future entitlement benefits (with the new promises still in excess of current levels) to them? The two are functional equivalents in income terms.

I'd go read your other link, Marcus, but I'm not shelling out $250 to peruse a proprietary private report that's six-years-plus out of date. I already have more current and accurate data for free.

Current tab $6 trillion, and rising. Alternatives?

Posted by: Tully at May 2, 2005 11:26 AM

inre to Krugman - for drivel it's quite informative and factual. The other nice thing is that he does it so clearly. Your characterization is drivel in itself as it offers no substantive criticism of his work.

Yes it is okay to raise taxes back to Clinton era levels. Maybe even to Reagan era levels. It should happen for reasons that Republicans should be following but haven't in decades - don't be in more debt than when you started, pay your bills, tighten your belt and even raise taxes if you need to. Classic example of that turned on its head - the borrow and spend era of Reagan, Bush, Bush, the governator et al. It's all borrow and spend.
Is it morally defensible to borrow and spend this country into near oblivion as the GOP has done for the past 5 years?
Is it ok if we leave trillions of dollars more debt for our children?
the irony of your touting pay-go for SSI when the last 5 years have been anything but is...well.... irony.There is no sense of responsibility for the future at all. If there was there wouldn't have been ANY tax cuts in this century until the national debt was paid down and a surplus was established, as originally planned by Clinton, to take care of SSI. I thought my plan was the most sensible: in real surplus years (excluding SSI contributions) any debt paydown for a particular year would mean a one time rebate to taxpayers amounting to 1/10th the debt service savings, with those paying more taxes getting more rebate. Half the remainder of the saving goes to infrastructure - roads, schools whatever and the rest plowed into a rainy day fun. Does anyone listen? no, they're too busy sucking up to wealthy contributors. Don't worry - I equally fault the democrats for going along with the borrow and spend.

I will also refer back to the falling contribution of corporate taxes. That especially needs to be taken care of. I pay a business tax and income tax on the income because some of my work is off payroll. The upshot is that I pay more taxes in proportion to my income than most companies. Every year. Most large companies pay little or no taxes. Much of their income is sheltered offshore and immune from taxation or they are beneficiaries of special tax breaks and subsidies. Recent tax laws in 2002 and 2003 have reduced corporate tax collections by another 50 billion per year. That's about one tenth of the current deficit.
Congressional Research Service notes that in last decade corporations paid 25% of their profits in federal corporate income taxes. historically the rate was more than 49 percent in the 50's and 33 percent in the 70's. We, the average citizen, are picking up the tab.
So yes, it is ok to raise taxes back to former levels in an effort to help maintain SSI payout levels and to reduce the deficit as well. I don't buy your prefunding argument either. Pension funds are similar to what I think there should be with SSI, a different sort of lock box. The 184 billion CalPERS fund is one government program that is pre-funded by future beneficiaries and the state. Plus they do home loans..It's worked well for years. The current fly in the ointment cause by the major Enron/AIG/(name of corrupt corporation that ripped off investors) and a short-sighted shift in payouts that will be hopefully taken care of this year or the next.

Insurance or entitlement....SSI provides the following: Disability insurance; through the survivor's benefits it also provides a kind of life insurance. Since you keep drawing benefits until you die rather than until some lump sum has been exhausted, it's "longevity insurance". My grandmother is alive at 95. (Her husband died at 44.) It's insurance against poor market performance. Yes you have to pay into it.
Guess what? In California we HAVE to pay for liability insurance if we want to register a vehicle. Not only that, we don't own any of the premiums we pay them. I can't withdraw them but when I rear end a porsche at 3 mph and cause 5K in damage (cheapshit construction) I get the bill paid by my insurance. We are, transferring risk as you put it. I don't buy your statement that we are not transferring risk when it comes to SSI. Any financial decision regarding the future, especially 20 or more years down the line, involves risk. IF I am disabled I get benefits. If I die my daughter gets survivor benefits. Furthermore, uncertainty in payout is a constant in the insurance industry except for term and whole life insurance programs. If you've ever followed your health insurance you know that your plan and its payouts change constantly. I don't have any certainty if Blue Cross will double cross me yet again with another benefit reduction despite rising premiums. The mechanism is too similar to dismiss, you're basically arguing over management. Corporations vs Government. Is there REALLY a difference? Finally I point out that if SSI was a true entitlement then general funds would be used, not contributions from future beneficiaries. So no, SSI is not the welfare program the GOP has been trying to paint it as for decades.

Projections. I was talking about 2 variables, GDP and productivity. SSA is way off on GDP the past couple of years. They were way off in 1994 when they predicted 'bankruptcy' in 2029 as opposed to the current figure of 2041. Maybe their underlying assumptions suck. Here's a graphic of their predictions... Come to think of it...90% confidence ....that's 10% error. That's alot of error to accumulate over 10, 20 years. Funny enough, if we take these SSA projections and their history, between 1994 and 2004, a period of 10 years, the expected solvency meltdown is pushed off 12 years. If this SSA prediction trend continues, in 40 years the solvency meltdown will be 48 years away, or 98 years from now. Facetious as this may seem I will point out that while SSI might be having some problems little is being down about more immmediate problems with Medicaid solvency or the pension funds taken over by the US govt.(yet another government subsidy to corporations). Face it Tully. There's a powerful faction in the GOP that just plain hates SSI for no other reason than it's worked well and that just sticks in their craw. They're doing everything they can to destroy it. The latest proposal does turn it into more of a welfare system by increasing benefits for lower income and removing benefits for middle class. The aim I think is to create a disconnect between Americans and the SSI program The fewer people on it the less popular...etc. etc. etc.

BTW I dispute your position that improved productivity results in less employment in the long run. Historically the opposite has happened, and in many industries. With IT (data storage and recovery, disaster recovery etc.) rapidly coming down in price, more businesses are buying into it, creating more jobs in that sector. Not so much employed by those companies but in the software and IT services that are sold or leased to these businesses. You no longer need a team of 10 IT professionals to run something the size of BankAnnapolis. A couple of guys and a broom closet full of servers is all you need. But especially because that's all you need more businesses will buy into that solution to increase their productivity. The businesses that supply that software, like Oracle which has grown from a tiny shop to worldwide organization with about 40,000 employees, will generate more jobs to deal with expanding customer base.

Look at what is now desktop video. You could drop 2 million bucks easily setting up a major edit suite 25 years ago. 25 years ago you could store 30 seconds of video on massive hard drives in a 20x60 dust free climate controlled room run by a CMX 600. I think that rig cost a cool quarter million. 20 years ago a former employer of mine spent more than 100K on a Sony BVH2500, a unique 1-inch video deck that could do single fram editing. That same deck was cleverly leased initially to the "2010" effects crew so that by the time it was installed in the edit suite the machine was half paid for. I spent many hours on that thing..... Today I can do the same operation on a laptop with a couple of firewire drives for under 2K. 20 years ago you'd spend tens of thousands on a paintbox and do primitive animation, unless you were an artist like Ed Emshweller. 17 years ago you could do nonlinear editing with the Montage, running 16 to 26 timecode reading betamax decks. That was mid 5 figures. Around then a DVE (digital video effects device) cost a cool 100K or so. You had few operators and expensive edit suites where you could drop anywhere from 300 to 1500 bucks an hour. Today, thousands of video professionals are employed utilizing desktop video solutions that run as low as 10K for what I would consider a professionally equipped setup. You can get a good Apple or Adobe paint and effects bundle for 1/50th the old costs.
Result? Avid, Adobe, Apple and other companies are facilitating the creation of more jobs through lower costs and higher productivity. The Bay Area has lost a good dozen major video facilities to this productivity revolution but now there are more cameramen, producers, editors and other craft services than ever before because almost every major company can now afford an in house video department or rely on outside contractors for the same services.

Maybe because I've intimately lived tech revolution ever since my father made an electrophoresis machine in our basement in '65 and later on built the first commercially available solid state oscilliscope, one of which is STILL running at UC Berkeley. The lesson I learned that you can write in stone is that jobs acquired by technology gains over time outpace jobs lost to those same tech gains. Greater expansion of business opportunity (lower prices, greater availability of product, greater utilization of product) and employment generated by the same exceeds the initial job loss. In other words, no more buggy whip makers but look at what replaced them and how many.

Posted by: Marcus at May 4, 2005 06:16 AM

Marcus, substantive criticism of Krugman's columns requires that Krugman actually have substance in his columns. And he's quite capable of substance, but it never seems to make his columns. If you see a factual Krugman argument you like, bring it over, state it in your own words and show you understand it, and we can talk about it. And I'll show you where it's wrong, or incomplete, or dishonest. Because those are Krugman's trademarks as a partisan polemicist. But I'm not going to fisk the entire internet because some college troll has found links HE thinks is relevant and learned how to cut & paste.

You can make all the framing arguments you like, but SS isn't insurance. It's an entitlement. By definition, by legislation, and by federal law, as verified by the United States Supreme Court. Feel free to waste your time typing around that, but it remains a settled fact, and you're just exercising your fingers and Lakoffian synapses. The role of SS is another subject (entitlements can play many roles) and I already stated I support the "social safety-net insurance" role, regardless of semantics. I haven't seen any proposal to change that role.

RE: SS statistics. I suggest a basic course in variance and modeling. You're still being selectively irrelevant. The long term trends are matching quite well, and the short-term variances are evening out, which is the point of long-term trend-line modeling. (That's why they're called "variables.") The "pushing out" on solvency is related to the dot.com boom, as is the later pullback. And both are meaningless in isolation in any case, as the correct figures are those for system revenue imbalance, which is currently predicted to hit in 2017. And the Washington Monthly? GMAFB! Do your research at the primary source, please, the SSA itself, not filtered and garbled through popular publications and re-framed in isolation.

You keep desperately trying to divert the subject away from the realities and the mechanics of the SS system in order to pursue your own agenda and play whuppin' boy on Georgie and crew. And frankly, that's a big freakin' yawnin' so effin' what evasion. Changing the subject is not an argument. Changing the subject is not a discussion. Changing the subject sheds no light. Most importantly for the purposes of this thread, changing the subject is NOT addressing the subject. The subject is the current fiscal realities of the Social Security system, and the possible remedies.

Current "do nothing" plan, $6 trillion and rising. Alternatives?

Posted by: Tully at May 4, 2005 11:25 AM

This thread is a wonderful explanation of the financial problems of Social Security.
It is a pay out of current Government revenues system. If there comes a time when the Government does not have enough money to pay out, it either has to change the benefits, collect more money (increase taxes somewhere), or print more money. This revenue shortfall is expected in a few decades. Collecting taxes ahead of time and loaning it to another part of the Government at that time does not solve the problem. A structural change is needed. Putting some money, by voluntary choice, in personal accounts would be such a structural change. Whatever money is put in those personal accounts reduces the future indebtedness of the Government by some amount.

Posted by: tburhoe at May 4, 2005 11:44 AM

tbur,

basically, I am with you, as you are joining the chorus I've been singing lo these last few months on the problems of the SS system, to little avail. A few quibbles, though:

To whatever extent private account funds were invested in government bonds, then government indebtedness wouldn't decrease. (So as someone pointed out, Bush the other night was a bit disingenuous in suggesting that the worried could invest their private account dollars in g-bonds)

Regardless of how SS is reformed, if such reform is not twinned with a stoppage or at least a serious curbing of deficit spending, not much substantive will have been achieved vis-a-vis levels of government indebtedness. The gov't has been spending surplus SS dough by cycling the cash through g-bonds. If the government continues to spend at the same levels via additional borrowing (via bonds sold to whoever) even as the surplus SS dollars dry up, that's a big problem too.

Posted by: bk at May 4, 2005 01:15 PM

You can't address social security without addressing the revenue structure itself, including deficits and surpluses. That includes the drop in tax revenues from corporations and the wealthy, placing the greater burden on wage earners. These are not sidebar issues at all. If you want solvency you have to have solvency throughout the entire budget. If not then you're just moving numbers around columns without changing anything at all. That includes the bogus private accounts. Address the budget problems and you go a long way to addressing the SSI problem or at least putting it off for 4 decades. Years ago Republicans ran on a balanced budget amendment. On their own terms they are utter failures.

btw

you sound too polemic regarding Krugman.
and insurance is insurance - it's a semantic battle that we'll have to agree to disagree.

Posted by: Marcus at May 4, 2005 08:37 PM

oh and those darn SSA predictions...I don't think I heard you address the difference between 1994 and 2004 predictions and why the 12 year increase in sovency is irrelevant to those predictions

and aren't you , and economics teacher, a college troll too?

Posted by: Marcus at May 4, 2005 09:02 PM

I'm not an economics instructor any more, Marcus. Haven't been for quite a long while. Now I deal with real-world government budgets--not with authoring misinformative newspaper columns for partisan propaganda. And somehow, the fine elected Democrats who keep re-appointing me manage to overlook my unwillingness to twist the data and reports to suit them. Silly politicians--they just want the facts so they can deal with the realities.

But hey, if you like what Krugman says, I repeat--bring it on over, state it in your own words, and we'll talk about it. But you don't. Instead, you whine and ad hominem and toss out red herrings and straw men.

"Insurance." You can call the pope a popsicle, but that doesn't make him one. Denial of the realities does not change the realities.

Once again, you're simply changing the subject to avoid addressing the subject. Tiresome. For all those words you've tossed, the only "reform" you've offered adds up to raising taxes to stuff up the Trust Funds. Everything else has been random rants and lousy logic to justify them, denials of the problem by assertions of doubt--using evidence you apparently have no expertise to assess, as you've demonstrated none--and the loading of tangential baggage onto the subject so you can talk about the baggage and not the subject. And the subject is Social Security reform.

My question remains on the table, unanswered. Why it it OK to increase the progressivity of the system by raising taxes on those better off, but somehow not OK to increase the progressivity of the system by reducing future benefit increases to those better off? When the two things are functional equivalents?

"Do-nothing." $6 trillion NPV, and rising. Alternatives?

Posted by: Tully at May 5, 2005 10:02 AM

Progessivity in benefits makes sense ONLY if there's no major impact on the ability to pay one's bills. If you have a middle income earner who expects about 2K/month for benefits who has maybe limited external resources you don't want to cut those benefits. I think under the Bush plan those are cut by at least 25%. If you are in the 2K/month range and you have the ability to access an additional 50K/year then maybe we can start trimming the SSI benefits. As it stands the progressivity of benefits as posed by the Bush administration hurts the middle class more deeply than if nothing is done at all about solvency of SSI. That's a main weakness that will kill his current proposal, which answers the question as to why they took so long to spell it out. Progressivity in money collection makes sense on several levels. Historically, if you want a stable society, you maintain a large middle class and avoid having exponential differences in income. T Roosevelt was aware of this as have been many others. That's why he made his tax proposals. If you have economic and political power concentrated in the hands of too few, well history has the answer to THAT question. On a more philosophical level, it's the middle and lower classes that create the wealth of a lot of higher income earners. An outrageous example would be the 2 man shop my client and I had for several years where we generated about 10 million in revenues for under half million in labor, equipment and licensing costs for the corporation we were working for. Then they were bought and moved to Denver...oh well...if was a good run.
Thirdly, the upper income earners have had major reductions in individual tax rates over the past 25 years, much more significant than us middle income earners. Has we not done so we'd probably be in less of a pickle.

Why you insist on disconnecting the budget mess from SSI I don't know. $675 BILLION this year in REAL deficit, not the fake deficit. Ideology? A tendency towards unsystemic thinking? If the budget was properly tended to there would be no problem with SSI collections for 40 years or more, if we follow the SSA dancing predictions. The GOP have been utter failures in that regard and not acknowledging the damage it does to this country ignores the elepahnt, so to speak, in the room of SSI.

Posted by: Marcus at May 5, 2005 09:58 PM

one more reason why we should do anything we can, including progressive taxation, benefit cuts for those with greater assets, etc.
It's the right thing to do. The social compact that we take care of our neighbors, our fellow citizens.
We do something that makes life better for people.
A nation of me-firsters is a dead nation.
We take care of our children we take care of our elderly. Change the diapers daily on your grandmother for 4 years and you'll know what I mean.
It's a legacy thing.
A nation of me-firsters, like the execs at Wellpoint who basically ripped off insurance customers to the tune of hundreds of millions of dollars, is a dead nation walking.

Posted by: Marcus at May 5, 2005 10:09 PM

I insist on disconnecting the budget mess from SS for the very simple reason that you will NEVER EVER EVER find any practical "top-down" comprehensive solution to our overall budget problems. EVER. Systemic reform has to begin with systematic reform. You don't eat a whole steak in one swallow, you carve off pieces and chew them up. Try it all at once and you choke to death. Yeah, bad analogy, but still applicable. And frankly I don't give a phart about impractical pipe dreams, just things that might actually work. Our political system is not amenable to radical changes, it's built around incrementalism. One step at a time.

Your logic's getting better, but you still don't address the structural problems. BTW, for most of the income levels affected by a change to inflation indexing, the benefit reduction would actually be more severe under the do-nothing scenario, just a few years farther out. And more abrupt as well. And those reductions would be across the entire spectrum of recipients, not just middle- and upper-income. The poor would get whacked hard. Either way, with the time/age cutoff it would still be a 20-year warning minimum with a gradual taper, so it's not like anyone would be suddenly facing a reduction in money they counted on.

So look past the blamestorming, think practical, remember we're talking about a century's worth of future problem and an admin with only three more years, and look at the payroll tax revenue curves. Solution space: Tax increases, benefit cuts, combination. Barrier: Increasing taxation before required for benefits is a false solution--Congress just spends the money. Reality: the Bushie proposal doesn't fix the whole problem, nor even quite half. Assume it's actually implemented--then there's still a $3+ trillion (NPV) federal revenue gap to plug to keep the SS system operational. $2 trillion (NPV) of that is future taxes/borrowing required to pay those Trust Fund IOU's--this portion has to come from outside the payroll tax. And the benefit-cut portion of politically viable solutions will have been used up.

Obvious conclusion: a good chunk of the remaining problem (that $2 trillion NPV) will have to be financed external to the payroll tax from general revenues, and the remaining portion must be addressed either through future payroll tax tweaking or general revenue transfers. And that's where the progressive taxation arguments belong.

Posted by: Tully at May 6, 2005 12:28 AM