An editorial in yesterday's paper included two facts one doesn't often hear from the left-of-center side of the Social Security debate.
1) Social Security was a great deal for some generations, it's terrible for those younger than workers currently nearing retirement age:
A worker today, for example, could "earn" more benefits by investing directly in Treasury bonds than paying that tax. But earlier generations received benefits that exceeded their lifetime contributions by $13.6 trillion.
2) The Social Security "Trust Fund" is not a collection of bonds that can simply be redeemed like standard issue US Treasury Bonds. They're special IOU's from one government account (the general budget) to another (Social Security) that will require additional government expenditures to repay. Thus:
The Treasury report pegs the "official" insolvency date as 2041. But even that's misleading because negative cash flows begin a decade from now and taxes will have to be raised to pay for current trust fund bonds.
This blogger is not likely to agree with the P-I's editorial page on ultimate solutions to Social Security's structural problems, but at least they've got their facts straight.
UPDATE: link added.
Posted by Eric Earling at September 29, 2007 09:54 AM | Email ThisWhen politicians claim they don't want us to have an actual account with our own money in it that stays with us, they are basically saying they don't want to give up the chance to swipe (as they currently do) for other federal spending those SS taxes we are forced to send in. They are ripping us off now and giving us pitiful returns on our own money later.
We deserve better!
My fix for Social Security is really easy and already tested. Just give us the same Social Security plan that Congress has. Which just happens to be what Bush tried to do before the Democrats derailed the plan using every lie and deception at their disposal.
You could make it a sliding scale in pieces that will always benefit both the _current_ SS system _and_ the worker. The tax-free growth benefits obliterate the returns on anything normal, while the 'funding level' of the current SS system is unchanged - or growing if you're able to account for the we're-not-paying-for-this-guy aspect into the calculation somehow.
A combined "Individual Medical/Educational/Retirement Account" as an expansion would rock too.
Posted by: Al on September 29, 2007 04:34 PMAccording to the Treasury:
1) The SSA has sufficient funding to pay full scheduled benefits until 2042 (35 years from now).
2) At that point, the SSA will still be able to pay 75% of scheduled benefits. However, since benefits in 2042 are scheduled to be significantly higher than now (even in constant dollars), that's not as bad as it sounds. In fact, it's still pretty good.
3) If we're not satisified with 75% of the current benefit schedule, we can fix the whole thing by raising the payroll tax 0.9% (plus 0.9% paid by employers). Or, we could raise it less and remove the maximum cap on payroll taxes. Or, we could accept slightly lower benefits, slightly higher taxes, and a slightly higher cap. There's lots of ways to solve the "problem" and none of them are likely to significantly burden the economy.
Given the above, it's hard to see a "crisis" worthy of scrapping or significantly altering what has been one of the most successful social welfare programs in the history of the U.S.
Posted by: scottd on September 29, 2007 04:41 PMStarting in 1982 we paid more Social Security taxes to set up a "trust fund." Those taxes were paid on the first $97,500 in income (in 2007, adjusted annually for inflation). Meanwhile, federal income taxes were cut (especially in the highest income brackets), spending was never reeled in, and we have had huge budget deficits (except in the late 1990's). To pay the entire benefits from 2018 to 2041, the "trust fund" -- basically IOUs -- will have to redeemed by the general fund. Given the aversion to raising taxes, the very people who paid most dearly in higher Social Security taxes are likely to have to reduce their benefits. Meanwhile, the highest income brackets, which do not pay any Social Security tax above the first $97,500 in income and who also have had their income tax rates reduced dramatically, might not pay any higher taxes, especially if a Republican is elected President. Thus, the people most hurt are those who paid a large share of their income in increased Social Security taxes, had minimal income tax reductions, and now will get reduced Social Security benefits.
Social Security was never intended to be a personal investment account. It is a tax we pay to ensure that the elderly and disabled do not fall into penury. It a means that the government uses to help protect the middle class. The middle class is critical to the strength of America. But the middle class is not a natural outgrowth of the "invisible hand" of free enterprise. When we had unfettered capitalism (say, the late 1800's), the nation's GNP grew tremendously, but the rising tide did not lift all boats. We had a small rich class, a small middle class, and a very large poor class, even by the income standards of the day. The large middle class we have today is a fairly new phenomenon, created largely by the GI Bill, unions, a progressive income tax, an estate tax, low cost education, to name a few. And that middle class is protected by Social Security. Unless we want to become a country of a few haves and many have-nots, we have got to protect such middle class institutions as Social Security. And that might very well mean rolling back the tax cuts of the early 2000's. Or at least target the tax cuts to help the middle class.
Posted by: Tom on September 29, 2007 05:59 PMThe 2042 figure is based on accounting analysis that counts the special bonds in the Social Security Trust Fund as assets. They may be assets to the Social Security system, but when the regular annual budget of the federal government has to pay to "redeem" them then it will come out of increased taxes or decreased spending in an already difficult budget.
We're talking about $1.8+ trillion that has to be repaid to Social Security from the general fund. That is a pending crisis, or at the very least a very serious problem, which even the P-I acknowledges.
Posted by: Eric Earling on September 29, 2007 06:28 PMWithout actually taking the time to look closely, I can only say that I think you will find the greatest government growth was in social spending.
This means that the social security money is ALREADY going to help the middle class in the form of government giveaways.
In 2018, we will have a big problem. There will not be enough money coming in to finance social security, there will not be enough to pay for the already established OTHER government giveaways, and there will be no surplus to create even more giveaways that seem to be important to the politicians.
So, I guess that means raising the taxes up to what they "used" to be. The question is, which level should we raise them to. The levels before GWB's tax cuts? RWR's? Or maybe as far back as JFK's? All of these tax cuts were done to spur the economy, and all three did just that. If the tax cuts spurred growth, will the tax-cut roll backs hinder it? If they hinder it, will the result be LESS government revenue? Will less revenue require more tax increases, leading to worse growth, etc?
If you track the federal revenue since 1950 or so (as far back as I have looked recently) you will see that the federal government's growth (not including social security) has out-stripped inflation and population growth by a long shot, and except for the tax cuts has also outstripped the rate of growth of the GNP. Basically without the three tax cuts, the federal government's non-social security income would have grown faster than the economy and a greater and greater portion of our economy would have been consumed by our federal government. I would say that this is NOT what anyone really advocates for.
Posted by: Eyago on September 29, 2007 06:35 PMYes, the SSA Trust Fund does count US Treasury obligations as assets in exactly the same way as millions of other investors and investment funds that hold Treasury bonds. All of those investors (including the Chinese central bank) expect to be repaid. Those payments will come from current tax receipts or new bond issues when the bonds are due. Why should we (beneficiaries of the SSA Trust) expect any different for obligations owed to us?
And yes, $1.8 trillion sounds like a big number, but not when spread over the 24 years when the SSA will be redeeming its bonds -- and it's only a fraction the amount that will be redeemed by other bondholders. Eliminating Bush's tax cuts would easily cover it.
Posted by: scottd on September 29, 2007 06:51 PMThe real crisis is not Social Security. The real crisis is Medicare. THAT is what we should be discussing.
Posted by: Tom on September 29, 2007 07:11 PMYes, of course they'll be "repaid." I never said otherwise. But $1.8 trillion is not chump change. Nor is the fact the Social Security system won't be running a surplus that pads the overall budget so the net effect on the general budget will be even harder to bear. And as Tom notes, this will all be happening concurrently as Medicare is raising an even bigger ruckus with the general budget.
As to your other point, now you're talking about a broader debate about tax policy, and possibly using general fund dollars to pay for Social Security above and beyond payroll tax revenues. I can't say I'm dying to have that much broader debate with you this Saturday evening.
Posted by: Eric Earling on September 29, 2007 08:02 PMI'm not following your argument. @11, you made some issue about the bonds held by the Trust Fund. @15, you say, of course they'll be paid off. So, if the Trust Fund holds bonds, and the bonds are going to be repaid, aren't they an asset?
Now, you seem to be alluding to a broader point of the federal government perhaps straining to pay its debts or fund other programs in the future. Maybe -- but that's not the topic of this thread. Social Security is already fully funded through 2042 and small tweaks can fix it beyond then. It's a popular program that has helped millions, so why should we be willing to give it up?
as to your other point...
I'm not sure what that point is. I never said anything about using general fund dollars to pay for Social Security. So spare yourself the worry, that's not a debate I'm offering.
All I am trying to say, just like the P-I, is that the nature of the "bonds" mean that when the US Government does live up to its obligation to repay the Trust Fund from the general budget there are going to be consequences and they're not going to be fun.
Posted by: Eric Earling on September 29, 2007 09:37 PMHow about stocks and real estate!
If people could have taken the money they put into Social Security over the last 25 years and bought those two financial instruments with the thousands paid to Social "Security" this country would be rife with millionaires.
Posted by: John Bailo on September 29, 2007 10:31 PMGo review our conversation. Better yet, I'll save you the trouble and summarize it here:
1. I pointed out that SS was fully funded through 2042.
2. You said that was only if we treated the Trust Fund bonds as assets. I'm not sure why you would make that rather obvious point unless you were implying that there was some problem with treating the bonds as assets.
I've never said or implied that the bonds won't be repaid -- in fact, I've consistently regarded them in exactly the same way as other Treasury obligations. You're the one who keeps trying to attach some special concern to the repayment of these particular bonds.
Now that you've made it clear that you also expect those bonds to be repaid, I'm not sure what the argument is. I guess we both agree that SS is fully funded through 2042.
BTW, the P-I doesn't say anything about the so-called "special" nature of these bonds. They just point out that taxes will need to be raised to pay off these bonds. We'll see. In any case, it's no different than the actions the Treasury will need to take to pay off any of its other outstanding bonds. So why is this a Social Security crisis? It could just as easily be regarded as a crisis in continuing Bush's tax cuts when we really can't afford them.
Posted by: scottd on September 29, 2007 10:48 PMSo if we (completely made-up numbers here) raise $1 trillion in 2025, but we need $1.1 trillion to pay everyone's Social Security benefits ... we can't just take that money out of the Trust Fund. It has to be paid by the general fund, which is our tax dollars. So that's $100 billion less out of the general fund to pay for everything else, or increased taxes to make up for it.
Yes, those IOUs are an asset to the Social Security Trust Fund. But they represent an unfunded liability to the general fund.
This might not be such a huge problem is the money earned from the sale of bonds/IOUs to the Trust Fund were used to pay off existing obligations. Unforunately, of course, that's not the case.
Posted by: pudge on September 29, 2007 10:54 PMI think our disagreement comes down the perceived impact on the general fund. I think it's substantial, you think we can just raise taxes and everything will be fine. As I alluded to earlier, that's a much bigger debate.
Posted by: Eric Earling on September 29, 2007 11:04 PMBut there is the flaw in this scheme. Where does the Treasury get the money to pay off the bonds/IOUs?
Investing the SSI surpluses in ANYTHING outside the government would retain some value in the fund. But by borrowing the surpluses from itself and spending the money to reduce government deficits, the government basically has a jar of worthless IOUs stashed under a mattress that it will have to repay to itself when needed.
Here's the analogy I use. A person wants to buy a car in 5 years and has a plan to save $100 a week by placing it into a jar under the bed. A couple weeks in the person, seeing how the government does it, decides to borrow the money in the jar and replace it with an IOU.
What does the person have after 5 years? $26,000 in IOUs. And who is obligated to repay those IOUs? Yup, the poor slob who had borrowed it and spent it already.
Democrats rely on the "full faith and credit" argument to suggest that the government will make good on those IOUs no matter what it takes. But what exactly will it take to make good on trillions of dollars in bonds when there is not another surplus anywhere to tap?
Posted by: MJC on September 30, 2007 10:56 AMThe general fund. Same place the money went in the first place, when they were purchased by the Trust Fund. So when that money is spent, it is in effect spending tax money not yet collected. Which may be fine if you use it to pay off debt. But it's not what we do with it.
But by borrowing the surpluses from itself and spending the money to reduce government deficits, the government basically has a jar of worthless IOUs stashed under a mattress that it will have to repay to itself when needed.
Well yes, but let's emphasize they are not worthless to the Trust Fund. What a lot of people don't understand and get scared about is thinking the SS benefits will not be paid off. But they will, as you say in your final clause: they will have to be repaid. Social Security IS NOT HURT AT ALL by this scheme, not directly. It's only hurt in that the economy is hurt, which could decrease contributions to SS over time.
Democrats rely on the "full faith and credit" argument to suggest that the government will make good on those IOUs no matter what it takes.
Not quite. And it's not the Democrats who say it. The Democrats are the ones who like to pretend the money might not be repaid, that the Trust Fund is being "raided," when in fact it is the Trust Fund that is raiding the General Fund. But the part of the Constitution that says the money will be repaid is Section 4 of Amendment XIV: "The validity of the public debt of the United States, authorized by law ... shall not be questioned."
Indeed, anyone who talks about those IOUs being worthless to the Trust Fund is violating the Constitution. :-)
But what exactly will it take to make good on trillions of dollars in bonds when there is not another surplus anywhere to tap?
Simple: increased deficits or taxes.
Note that, however, as bad as SS is, it is not the worst thing in the world (economically speaking). Tom @ 10 is almost correct when he says, The "crisis" in the long term (after 2041) has some pretty simple fixes we can address now: slightly lower benefits and slightly higher taxes. The short-term problem (2018-2041) is more troublesome.
Except, it's actually the reverse: the short term can be fixed through slightly lower benefits and slightly higher taxes. This will keep us from having to pay back those bonds out of the general fund, because it will keep the SS income ahead of the benefits. Long term, we'll continue to pay an ever-increasing portion of our GDP to Social Security, for ever-decreasing benefits, causing the Ponzi scheme to eventually destroy the entire economy.
However, that's a long way off. Ideally, the long-term fix to SS would be to phase it out as it exists, make it ONLY a very bare-bones safety net. You only get if you need it. Duh.
And yes, as Tom and Eric said, the much bigger problem is Medicare, but that doesn't mean we should ignore Social Security. That said, Medicare, too, should be absolutely phased out as we know it. Both Medicare and Social Security clearly violate our civil rights as enumerated in the Constitution (10th Amendment), and are unsustainable. Bad both in theory and in practice.
But many of the Democrats want to expand Medicare to basically everybody. The biggest longterm economic problem we face, and they want to make it bigger. Insanity.
go here to read the full story: http://prince.org/msg/105/59618
It seems that there was a loop hole that allow city government to opt out. Now the people working for Galveston are receiving huge retirements and they may will it to their family.
"The life insurance benefit for those under age 70 is 300 percent of one's annual earnings with the minimum benefit of $50,000 and a maximum of $150,000."
"Those who retire after 20 years will receive three to four times the rate as under Social Security. This Alternate Plan is not just an isolated act of a group of responsible and dedicated Texans."
"Congress canceled the opt-out clause in 1983."
I quoted from the article. It is a great read and quite frankly settles the debate on privatizing social security in real life experiences. Read it and weep.