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April 10, 2005

Social Security Basics 2: If the Social Security Trust Fund Isn’t “Real,” What Is?

Neil Buchanan: April 10, 2005

In two recent posts on this weblog, Professor Elizabeth Anderson and I have argued that the Social Security Trust Fund is “real” in the sense that its promises of future benefits are backed by U.S. Treasury securities, which have always been a uniquely potent method of enforcing political commitments across time. While it is true that promises can be broken, crediting the Trust Fund with Treasury bonds (rather than, say, passing non-binding resolutions in the House and Senate) represents one of the best ways available (perhaps the best way available) to commit future politicians to honor these obligations.

When President Bush travels the country saying that, starting in 2017 or 2018, the Social Security system will be “flat broke,” or will have gone “bust,” or similar phrases, he is at least strongly implying that the government cannot be trusted to honor its financial commitments—even those that are backed by legally-enforceable government securities.

For those who questioned whether President Bush really meant to say that government bonds were worthless, however, he was even more blunt last week. Standing near the file cabinet holding the government bonds that represent the Trust Fund's assets (written, as such things often are, on mere pieces of paper), Bush ridiculed those government bonds as nothing more than I.O.U.’s, saying that it is essential that people not rely on these flimsy promises and instead bet their future retirement on “assets that the government cannot take away.” Apparently, therefore, government can take away its promises to back its own I.O.U.’s, making this an unprecedented statement by the American President that the full faith and credit of our government is not to be taken seriously.

The President’s statements have quite rightly been criticized around the country. It would be foolish, however, to ignore the President’s threats merely because they serve his policy agenda. Even if he tries to prove that politicians are untrustworthy by being untrustworthy himself, and even if he stands to gain politically by forcing us to question our assumptions about the impossibility of default on federal debt, we would be wise to set aside our shock at the shamelessness of it all and ask a simple question: Is there something better than Treasury bonds with which to guarantee future retirement benefits?

There is, to be sure, an understandable sense of shock when we first confront the fact that all financial instruments are legal fictions. That revelation shakes our assumptions about things that we have long taken for granted. For those who are dissatisfied with the idea that Treasury bonds represent something meaningful—who insist that the Trust Fund does not contain anything “real”—we need to ask whether there are any alternative financial instruments that are any more real than Treasury bonds. Are there, in Mr. Bush’s words, “assets that the government cannot take away”? In other words, if the promises embodied by Treasury securities are not real, what financial promises are real?

The answer is, perhaps surprisingly, that no method of financing retirement incomes is any more real than the Trust Fund. This is not a statement of extreme philosophical uncertainty but simply recognition that all forms of saving for the future involve a leap of faith. When individuals or institutions give up something today in exchange for a promise of something in return in the future, there is always the chance that the promisor will fail to honor his promises. There are better and worse ways to enforce promises, but none are superior to Treasury bonds. Not only are the alternatives subject to their own vagaries that make them even less reliable as promises of future income, but those who suspect that politicians are always looking for a way to break their promises will discover that non-government assets are also fatally vulnerable to the caprice of politicians.

What is really at stake in the retirement debate, after all, is a person’s ability to buy what she needs when she is no longer working. One way to provide for future needs is to store up physical goods: build a bunker and fill it with cheese, Spam, and other long-lasting items. For the non-survivalists among us, though, that option lacks a certain appeal. Moreover, some things that we will need in our golden years are not durable items that can be easily stored. Medical care leaps to mind. What we really want is a guarantee that we will be able to buy the things that we need when we need them. Guarantees, though, are just promises. Which brings us back to the question: Is there a better way to enforce the promise of future access to goods and services than through the Social Security system?

President Bush wants us to embrace his “ownership society,” in which retirement accounts would belong to you—and, to repeat his formulation of the issue, no politician can take away what’s yours. Not true. If people invested their individual accounts in any kind of asset (public or private), those accounts could be taxed by future Congresses (even if politicians take a “read my lips” pledge—a promise that we know can be broken). Taxes can be levied on either the returns on the accounts (income taxes) or on the principal of the accounts (wealth taxes). It might seem unlikely that a future politician would risk taxing people’s investment accounts, but in 1983 (when we decided to rely on the Social Security Trust Fund to finance future retirements) it seemed unlikely that a politician would ever suggest that Treasury bonds were worthless. Mr. Bush might be saying that future politicians are less likely to tax retirement accounts than they would be to cut Social Security benefits, but that has not been true until now. He is less likely to tax retirement accounts than to cut benefits, but future politicians might not feel the same way. If we are looking for a politician-proof retirement system, we’re likely to be looking for a very long time.

Beyond tax changes, there are other ways in which individual accounts are not safe from future politicians’ choices. The relationship between you and the financial institution that holds your deposit is governed by a contract—yet another word for a promise. That contract is enforceable in a court of law, a government institution. Suppose that, at some point, your financial institution decides to charge a “management fee,” or a “low-activity fee,” or a “high-activity fee,” or a “cost recapture fee,” or a “fee consolidation fee,” or all of the above. In addition, the financial institution might decide that it can no longer afford to pay you the promised rate of return. Can you sue and win? It depends. Did the contract that you clicked through when you signed up have a clause stating that “this agreement can be changed by the issuer without notice”? If it does, can you have that clause voided? If no such clause exists, can one nonetheless be implied? If you win in court, what happens if your account issuer is insolvent? Future legislation can change the answers to any of those questions. What is “yours” is only yours so long as you can obtain an enforceable legal order stating that it is yours.

One could argue, of course, that financial institutions have good reasons not to anger their customers. They also, though, have good reasons to push the boundaries of the law and to lobby Congress and the White House to pass profit-maximizing changes in the law. People with private pensions are learning to their chagrin that pension contracts can be unilaterally re-written with the blessing of the legislatures and the courts. What pensioners thought they owned—what was theirs—turned out not to be theirs after all.

Even if the law is written in a way that would protect private contractual expectations, the government might decide not to enforce the law. Insider trading rules are currently being enforced more stringently than before, but that can easily change. Governments can also cut funding of their policing agencies, which is an indirect way of allowing promisors to breach their contracts.

In other words, it is simply false to say that Treasury bonds are not real—that is, that they are not promises on which people can reasonably rely—while other promises are real. Actions by both politicians and private actors can result in people losing the promised buying power in which they invested during their working lives.

But isn’t it at least true that private accounts are backed by something more substantial than the promises backing Treasury bonds? Quite simply, no. If you put your money in a bank account, the money does not sit in a vault, waiting for you to come get it. The bank (or credit union, or savings and loan) will lend almost all of that money out as quickly as possible. When people asked Jimmy Stewart’s character in “It’s a Wonderful Life” where their money was, he told them—completely accurately—that their money was in their community, having been loaned out to start businesses, to finance additions on houses, etc. This truthful reply did not put cash in the depositors’ pockets, of course. They needed cash to buy things, and there was no money to give them. Their deposits were backed not by something real but by the promise that, when they wanted to withdraw their money, the bank would have enough money to give them. And that promise was broken.

Today, of course, the government provides deposit insurance for such contingencies. That, however, merely brings us back to politicians’ promises. The deposit insurance funds do not have anything real in their vaults, either, merely promises that the government will provide money if needed. Since the concern over Social Security is that the government will not come up with the money to cover the Treasury bonds in the Trust Fund, it is difficult to see why a promise-breaking government would be any more likely to come up with money to cover banks’ promises to honor withdrawal requests—especially since those are promises that the government itself never made.

Would it work better if private accounts held stocks rather than bank deposits? Again, no. A stock is yet another promise, with a corporation telling you that you are entitled to a portion of any dividends that it decides to pay out. If you want to get your money back, or if you hope to make a capital gain, you must find a willing buyer of the stock. Enron’s shareholders learned that a seemingly solid financial investment can turn to dust overnight. If the economy in the next few decades does as poorly as Social Security’s trustees assume, stocks will not be a reliable source of income, either. It will be cold comfort to retirees to know that they have something supposedly real (part ownership in a company) if they cannot buy what they want with that ownership.

What about commodities: gold, silver, platinum, etc.? Most people who invest in these assets never actually possess the commodity. They merely hold pieces of paper that represent someone’s promise that they really do own the commodity. If people do choose to hold the assets physically, they will need to waste huge amounts of resources protecting those assets (wall safes, etc.) and buying yet another set of breakable promises: insurance policies guaranteeing that lost or stolen assets will be replaced. And this, of course, is to say nothing of the possibility that the commodities will lose buying power in the meantime.

I do not mean to denigrate these various assets. Each has value to some degree, backed ultimately by the same kind of promises that back the government’s bonds in the Social Security Trust Fund. The same kind of promises, but not promises with the same likelihood of being honored. Financial markets treat the federal government’s promises as being so reliable that its bonds are risk-free. No other asset is that “real.”

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» Is the trust fund real from Asymmetrical Information
The other week, I had another argument with a liberal defender of social security who argued that the social security trust fund is too real, because it's got government bonds that have the Treasury secretary's signature right on them! Any attempt to s... [Read More]

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» Is the trust fund real from Asymmetrical Information
It's time for another argument with liberal defenders of social security who argue that the social security trust fund is too real, because it's got government bonds that have the Treasury secretary's signature right on them! Any attempt to say that it... [Read More]

Tracked on Apr 18, 2005 11:12:52 AM

Comments

Posted by: John

I really don't see why Buchanan is posting on the Left2 Right site. Even putting aside his obvious predilection for Bush-bashing, it is not clear to me how he makes even the slightest rhetorical overture in the direction of the right.

It's not that I don't respect Buchanan. He would just be far more interesting to read if he presented a proposal to shore up Social Security for the next 50 years. Would he suggest raising the retirement age more rapidly, increasing the bite out of compensation, decreasing benefits, eliminating the cap? Or are these proposals, at least if they are put forward by Republicans, just as dumb as those bandied about by Bush at this time?

Posted by: John | Apr 10, 2005 11:30:34 PM


Posted by: peter

The original post makes no attempt to find a better retirement scheme, so why hold it to that standard?

Hmm, I have very different criticism. If I may summarize, all future income streams are presumptive. Of course, very true. Buchanan goes further that all future income streams are equally presumptive, which it is not a very sound presumption.

So, to stay within the context of the question, the Bush schemes makes at least 2 presumptions, either of which is arguable.

1) An income stream based on the promise of the politicans is more sound than one based on a private contract between saver and savings institute. Most people are going to have issues with that.

2) That any private initiative is enobling to the doer, the citizen/saver, and any form or welfare, even an old-age pension, is degrading to the citizen. I think this is the root presumption of the social security reform being submitted, and you would have to go back to your Hayek references to refight this.

Posted by: peter | Apr 11, 2005 12:52:18 AM


Posted by: Tom

John,

Exactly my questions. What does Mr. Buchanan think? Do we not need to do anything to enhance the financial fundamentals of Social Security? Should we just stand pat?

I think he completely misses the point of what the President has been saying. Mr. Buchanan paints a pretty dismal picture in that he believes we should feel better about the politicians ability and willingness to make good on the promises represented by the paper in West Virginia, than we should feel about owning our choice of assets instead. I'd much prefer to have the "worthless paper" in my account, rather than under the control of Sen. Byrd, Sen. Kennedy and a President Kerry. Based on his comments about the lack of value of the promises most of us hold in our IRA's and 401K's - perhaps I should prepare more carefully for the coming global collapse. Maybe I'll invest in Iraqi Dinars. They should still have some oil left in 2018.

The President is merely asking people to look at the fiction that is represented in those promises sitting in the West Virginia filing cabinet and saying - "WAKE UP. You better decide pretty soon if you trust yourselves better than future Congresses and Presidents to safeguard the value of those assets."

If there is truly no issue with the government defaulting on those bonds in West Virginia (ie: reducing Social Security benefits so they don't have to redeem them all), I think I'd like mine now, please.

Posted by: Tom | Apr 11, 2005 12:57:00 AM


Posted by: Tom

Further, I don't understand why Mr. Buchanan makes this statement:

What is really at stake in the retirement debate, after all, is a person’s ability to buy what she needs when she is no longer working.

Personally, I'm planning for my retirement to be about what my wife and I want, not what we need. I have prepared to purchase the things that I will need - and I don't want the government to tell me that I can't also have the things that I also want if I can afford them. My sacrificing has come in the years prior to retirement - putting kids through college, keeping food on the table, shelter over our heads, etc. have all resulted in the delay of numerous desires.

With that sentence, Mr. Buchanan gives us a clue that he favors redistribution of wealth so that everyone's 'needs' are met by the community - even if it means that some of our wants must be ignored lest someone, somewhere be without.

Posted by: Tom | Apr 11, 2005 1:05:37 AM


Posted by: Perseus

Here's what Milton Friedman has to say about the sacred cow of Professors Anderson and Buchanan, the Social Security Trust Fund:

"Congress has never adopted a policy of fully funding Social Security, but neither has it adopted a strict pay-as-you-go policy. As is Congress’s wont, it has chosen the middle of the road, where cars can hit you from both directions. It has collected more in current taxes than were needed to pay current benefits yet not enough more to equal the future liability that it was incurring. The excess revenue has been spent in the ordinary course of government business.

To preserve the fiction that Social Security is insurance, however, federal government interest-bearing bonds of a corresponding amount have been deposited in a so-called trust fund. That is, one branch of the government, the Treasury, has given an interest-bearing IOU to another branch, the Social Security Administration. Each year thereafter, the Treasury gives the Social Security Administration additional IOUs to cover the interest due. The only way that the Treasury can redeem its debt to the Social Security Administration is to borrow the money from the public, run a surplus in its other activities, or have the Federal Reserve print the money—*the same alternatives that would be open to it to pay Social Security benefits if there were no trust fund.* But the accounting sleight of hand of *a bogus trust fund* is counted on to conceal this fact from a gullible public." (http://www.hooverdigest.org/992/friedman2.html) Gary Becker also concurs.

So instead of harping on the secondary issue of the "special issues" piling up in the SS trust fund, why doesn't Professor Buchanan address the more fundamental arguments of Friedman, Becker, Posner, et al. about Social Security reform?

Posted by: Perseus | Apr 11, 2005 2:40:43 AM


Posted by: Literally Retarded

Unlike Prof. Anderson, Prof. Buchanan seems to have some grounding in economics, even macroeconomics. So why is he unable to grasp a basic understanding of the money flows in and out of Social Security?

It makes one worry about the Ivory Tower.

Posted by: Literally Retarded | Apr 11, 2005 6:36:53 AM


Posted by: D.A. Ridgely

Mr. Buchanan asks a deceptively straightforward question: Is there something better than Treasury bonds with which to guarantee future retirement benefits?

The answer, however, as he must surely know, is “It depends.” It depends first and foremost on who owns those retirement assets, whether they be Treasuries, common stocks, baseball cards, gold coins, real estate or a mattress stuffed with twenty-dollar bills. It matters how old that person is, what that person’s other income and assets are, what that person’s current needs are, etc., etc. Of course, no one-size-fits-all investment or retirement system can possibly accommodate itself to so much human variety, which is yet another problem with the current Social Security system and one of the principle reasons private ownership of retirement assets is preferable to a top-down federal program. (If Mr. Buchanan really believes Treasuries are ideal, he should then confess to us if, perchance, he is irrational enough to own any retirement investment assets other than Treasuries in, say, his 401(k) account. After all, they’re “risk free.”)

As for the rest of Mr. Buchanan’s post, he basically makes two points, whether they were the points he wished to make or not. First, that politicians are not to be trusted … ever. I agree. Oh, I know, liberal politicans can be trusted, except they can't be trusted to get elected, so who knows when another scary George Bush type is elected President and evil, greedy Republicans take over Congress again and take away all our middle class benefits to give to the rich. Right? Better just not to trust government in the first place.

Second, that life is filled with risk and that investment through private markets are no exception. I agree as well. But if life is filled with risk, there are better and worse sorts of risks. Prudent risk usually results in greater rewards over a lifetime of saving and investing than Social Security has ever promised. Ownership involves greater control. Capital accumulation would benefit low income families. And people generally would be less dependent on government. These are good things, though they do carry certain risks. Nothing is risk free. Risks can be mitigated, not eliminated. Not even by liberals.

Posted by: D.A. Ridgely | Apr 11, 2005 9:28:40 AM


Posted by: john t

The senior citizen lobby is far and away the most powerful in the country,the proof of this is in the old statement,"follow the money". It is the most sacred of sacred cows. Oh the government can raise taxes alright but if it is suggested that those increases might adversly affect the senior's outflow as against the benefit trough Mr Buchanan will witness politicians changing direction faster than a headless chicken in a barnyard. The point about nothing being more real than the trust fund is quite real however,there are few things in life more real than coercion coupled with a captive audience.

Posted by: john t | Apr 11, 2005 10:03:19 AM


Posted by: Terrier

It is wonderful to hear all these voices praising like a chorus of angels the 'private' accounts that Bush one day plans for them - tho they know just as the rest of us do that what Bush has proposed will be far from private and will in fact be just another ponzi scheme that exists only on paper. I have spoken before here about the laughable prospect of libertarians hoarding cash when they believe the government that underwrites the cash is illegitimate. How much faith should we put in paper? Hell, plastic bought the coffee I'm drinking now. (I know people, my labor fueled the plastic, but I have no way other than trust to ensure that Costco will recognize my labor by accepting that agreement.)

By the way, people, the point of this post is the expose the lie that Social Security is backed by meaningless paper - not to propose a fix for something that is not broken! What are we going to do about the starving people of the moon colonies?

Posted by: Terrier | Apr 11, 2005 10:33:32 AM


Posted by: Tom

Terrier,

So it is safe to say that you are in the camp that says there is no problem with Social Security? You are confident of the prospect that today's young people will be adequately provided for with the current system in place for the next 40 or 50 years?

I hope and pray that this is the strategy Democrats employ for the next 3 or 4 elections. Pay no attention to the man behind the curtain - everything is fine.

Posted by: Tom | Apr 11, 2005 10:48:15 AM


Posted by: Doug

Neil Buchanan seems to have completely missed the point, from my perspective as a 30-something worker. I have 100% certainty that the treasury bonds in the SS trust fund will be honored on their maturity date (and quite likely rolled over into new debt). But I lack confidence that those bonds will be used to provide me with a meaningful income stream in my retirement. The promise that can be broken is how and when those bonds will be spent - at what retirement age, to what benefit level, indexed to what economic measures, etc.

When a future congress is faced with the choice of dramatically raising taxes to redeem those bonds, or tinkering with my retirement benefits so that fewer bonds must be redeemed, I'm pretty much positive that future politicians will choose the later. So like many of my peers, I've concluded that "social security" is not likely to provide me with any actual security in my retirement, and I would be well-served to aggressively save on my own.

Now if the government wished to deposit some treasury bonds into my 401K account, I would completely agree that is as close to a financial certainty as I am likely to obtain. It would literally provide securities upon which I could rely in the future.

Posted by: Doug | Apr 11, 2005 1:02:50 PM


Posted by: Abad man

I do not see much difference between social security and other ponzi schemes. We owe oursleves the money. Could not the governemt default on the notes in the trust fund but honor the treasury notes to private and foreign holders? How can you really default on something you owe to yourself?
Taxes will be raised to retire the notes, or benefits will be decreased, or some mixture of both. If the gov't decides to default on the notes taxes get raised to cover benefits or benefits get cut to hold taxes down or some mixture of both.
On a personal level no one would fund their retirement by writing IOU's to themselves, I fail to see why it will work on a national level. In the end the money has to come from somewhere. The fiction that there is some pot of money or assets other than our future tax revenues backing the notes is as dangerous as saying they are worthless.
Terrier is right, Social security is not broken it is functioning just like it was designed to. The trust fund gives the illusion money is getting put away for the future, when in reality it is more like credit card debt. We're just paying the interest while the balance owed keeps getting bigger anf bigger.
Of course I do not think the presidents plan really fixes anything either. Eventually we will have to come to grips with the fact the money's already been spent.

Posted by: Abad man | Apr 11, 2005 1:35:13 PM


Posted by: Terrier

The difference between Social Security and a ponzi scheme is that we are not skimming off the top. Sure, the government is stealing the money but when have we had balanced budgets without a Democrat in office? We always pay our ancestors debts. That's why the Chinese want to give us money. Will Bush tell them they're just getting worthless paper back in return? The whole point of 'privatization' is to raid the treasury and ensure that Wall Street will become a hotbed of Radical Republic party donors. Bush is a weasel, who wants to convince you he can guarantee your retirement and spend all the money in the treasury at the same time. You think him or any of his ilk need retirement schemes? They'll roast your grandchildren on a spit before they go hungry.

Posted by: Terrier | Apr 11, 2005 2:11:22 PM


Posted by: David Bennett

The position of the right seems to be:

- government bonds are a great and safe investment which is why all those foreigners are buying them.

- government bonds are a lousy investment when purchased with proceeds from wages under $90,000 per year because we don't have to pay.

Granted diversification of resources is a good idea and it might be a good idea to start putting the trust fund into a variety of vehicles including stocks. This could be done now if we had a surplus, we don't, but it could also be done by selling some more of those bonds that foreigners can't get enough of, it isn't. Individual accounts however are risky.

What happens when one individual sells their stocks for the required annuity in the equivalent of 1929 and another in the equivalent of 1931? It won't be pretty. A pay as you go system has some mechanisms to adjust to inflation or deflation, fixed income annuities don't. Claims that annuities don't distort paybacks is false, the insurer needs to average in expectations which means once again that those who live longer get more, those who die sooner get less.

There are means of adjusting payments, simple ties to inflation rather than prevailing wages would reduce expected deficits.

And once again the government faces 2 esaclating deficits that are in or approaching crisis mode. One is the deficit in general revenues, the second in medicare. This later is already nibbling ss benefits and the drug provision alone is estimated to cause more deficit than the entirity of ss.

I do not see either crisis being seriously confronted by politicians on either side.

Posted by: David Bennett | Apr 11, 2005 2:14:21 PM


Posted by: Sebastian Holsclaw

I'm not for private accounts as currently proposed because it would make the temptation to tinker more with the markets almost irresistable. But this series of posts fundamentally misunderstands the objection to calling Treasuries issued by the US government and also held by the US government a "Trust Fund" or "investment" or "assets".

I hate to repeat myself, but:

The appeal to the full faith and credit of the US government obscures the key reason why people correctly say that US Treasuries when held by the US Government are not assets.

If there is no Social Security Trust Fund, one or more of the following things will happen.

A) The economy grows fast enough that there is no crisis.

B) Benefits to Social Security get cut (either directly or by adjustments to the retirement age).

C) Taxes are raised to cover Social Security benefits.

D) Other government programs are cut to provide money for Social Security benefits.

If there is a Social Security 'Trust Fund', one or more of the following will occur:

A) The economy grows fast enough that there is no crisis.

B) Benefits to Social Security get cut (either directly or by adjustments to the retirement age).

C) Taxes are raised to cover Social Security benefits.

D) Other government programs are cut to provide money for Social Security benefits.

I'm sure you will notice that precisely the same scenarios exist both with and without the Social Security Trust Fund.

The reason Republicans are correct when they say that the trust fund isn't 'real' in any kind of investment sense is because having or not having it doesn't help or hinder attempts to pay for anything.

We already know that retirement ages and benefit levels can be changed, so calling it a 'promise' is a little odd too.

Posted by: Sebastian Holsclaw | Apr 11, 2005 4:24:44 PM


Posted by: miab

Neal Buchanan writes:
"we would be wise to set aside our shock at the shamelessness of it all and ask a simple question: Is there something better than Treasury bonds with which to guarantee future retirement benefits?"

Yes, there is something much better.

We would be much better off if the trust fund had bought UK, Canadian, German, etc., government bonds, or a conservative portfolio of corporate bonds mixed with the above.

The problem isn't that the trust fund isn't real -- it is quite real. The problem is that the government ran an operating deficit for years, which it (partially) covered up by using the money generated by selling bonds to the trust fund to fund operating deficit. When it comes time to cash in the bonds, that operating deficit will (1) be revealed, and (2) be exacerbated by the need to pay off the bonds.

If the cash had been elsewhere -- in the hands of private business, or foreign governments -- the fictions used by Washington to hide the operating deficit in the general budget would have failed, and the urgency to balance the budget would have risen earlier and higher. (Anyone care to ask why the trust fund was invested only in US government securities, rather than to maximize returns and minimize risk as all other pension funds are invested??)

Posted by: miab | Apr 11, 2005 4:56:47 PM


Posted by: miab

The problem with the trust fund only arises because the same people have power over the levying and uses of payroll taxes as over the general budget.

If Social Security had independent taxing and budget authority, the whole "US bonds are worthless" issue would be off the table, and we would simply be talking about how the government will fund its debts -- whether held by Social Security or by anyone else -- while continuing to operate its other functions.

But because the same institution (congress) controls both budgets, and has both the general and social-security-specific taxing authority, the government can quite easily pay the bonds in full while still breaking faith with the American people -- and that is the real threat Bush is making. The promise that is worthless is not the promise to pay bonds; rather, it's the promise to pay off the bonds to fund part of social security *while continuing* to use payroll taxes to fund the rest of social security. All the government has to do is honor its bond commitments while dishonoring its implied commitments regarding future uses of the payroll tax revenue. All money spent on social security would be deemed to be "bond repayment" coming out of the general fund, while ongoing revenue from payroll taxes is diverted into the general fund. Presto! - No default on the bonds, the financial markets are happy, while social security spending is slashed.

That's what Bush is really talking about when he's talking about how the government's promises are worthless. The financial markets know that, which is why they don't go nuts every time he says stuff like this.

The same thing could be done (stop using payroll taxes to fund social security) if the trust fund held other investments, but it would be politically harder because there's less room for a shell game, and it would show up much more clearly as a straight cut/misdirection of social security money.

Posted by: miab | Apr 11, 2005 5:25:51 PM


Posted by: progressivelibertarian

The "worthless I.O.U.s" point is bogus -- which was the point of NB's post. Maybe the politicians should be required to back up all their solemn promises in the same way: get a few filing cabinets, print up some T-bills, plop 'em in. Safe as houses! Thanks, NB, for making this point perfectly clear.

As normal, Bush is doing a particularly crude and either uninformed or over-the-line-into-culpable-dishonesty job of what -- good! -- politicians do: giving people the justifications they want to hear, and sometimes different justifications for different people, for what they take to be the public interest (embodied by their own ideas and policies, of course). Though I do tend to think Bush crosses the line on the matters fairly often, I find that people's ideas of when emphasis and spin shade off into culpable dishonesty depend more on ideology or party-affiliation than anything else. I deplore the general decline in the quality of political debate in this country, and I do think Bush represents a new low point (as did Clinton in some respects). Certainly one thing that needs to be done in order to change this -- and Left2Right is doing this -- is to call politicians on these sorts of things.

However, what irked me a bit about NB's post was that it seemed not to appreciate that Bush's words and actions can and should be interpreted in the context of what is required, in our current intellectual, cultural, and political climate, for political success. It seems to me pretty likely that Bush is appealing to the broad libertarian impulse in American society in order to justify social security reform. This, not primarily the desire to "save" the current system, is his biggest reason for wanting to make the reforms he wants to make (though he does, I think, genuinely believe that everyone will be better off under some system based on private ownership of retirement assets). That this libertarian impulse is not strong enough to go up guaranteed state benefits (and Democratic scare-tactics about Republicans wanting to take those away) requires, for political success, that he resort to scare-tactics and disinformation of his own. To speak to this issue -- to the more basic reasons and the perceived requirements for implementing them in the context of our political system today -- is to speak to the right and to do so with an ear that might listen as well. (Doug addressed the silence on this point well: love them T-bills, transfer ownership of my share of 'em to me, pronto!)

Posted by: progressivelibertarian | Apr 11, 2005 6:11:31 PM


Posted by: tautala

Since both private accounts and taxes the federal government collects (income or SS) are dependant on the same economy, I don't see how one can say that taxes are secure while investment isn't. What tax could produce sufficient revenue from an economy when a broad based investment in that same economy doesn't? How can the two be isolated from each other? The question (it seems to me) is which method produces the strongest economy in the future.

Stock and bonds are explicit IOU's against the future economy. Stock can vary in value while bonds are fixed and so seem more reliable. If there is a downturn in the economy when the time comes to redeem the bonds or the economy simply hasn't grown fast enough, the burden on the economy of paying the bonds might be to great. The effect of paying off those bond might be worse than the effect of reduced stock value.

While bonds insure those who have them against loss in value, stocks insure the future against having to pay unreasonable costs. A broad investment should grow (or shrink) with the economy as a whole. Bond debt is independent and could grow faster than the economy and its ability to pay as wee will see in 2018.

Is is right to say to our children "no matter what happens to the economy, no matter what financial, ecological or political hardships you might face, you owe us a fixed payment, even if your standard of living suffers."

Posted by: tautala | Apr 11, 2005 8:25:29 PM


Posted by: D.A. Ridgely

I can’t help but think that there is an almost desperate quality to these repeated posts arguing the ‘brazen duplicity’ of Bush (as though there wasn’t a fair dose of brazen duplicity on the part of those who pushed the creation and expansion of Social Security in the first place and some who continue to press its case) and what amounts to an attempt at fear-mongering over the “shamelessness” of Bush’s attempt to suggest that the government does not always live up to its promises. (Would anyone care to deny that fact to, say, Native Americans?)

Mr. Buchanan writes: Apparently, therefore, government can take away its promises to back its own I.O.U.’s, making this an unprecedented statement by the American President that the full faith and credit of our government is not to be taken seriously.

His suggestion, and that of Ms Anderson, is that Bush is suggesting that the U.S. might default on its lawful debts insofar as holders of Treasury bonds is concerned. Of course, no such thing has been suggested by Bush, however hard Mr. Buchanan or Ms Anderson try to make that case.

What Bush has said – the only sensible, nonpartisan interpretation of his comments – is that the “Trust Fund” may well someday fail pay out exactly those benefits that prospective recipients might now expect to receive. That is not only a reasonable claim, it is a claim backed by evidence if those prospective recipients’ expectation interests include, for example, full Social Security benefits at age 65.

Note that this is not merely hypothetical. My “fully vesting” age of retirement was once 65, now it is 66. Who knows what it will be five years from now. Now, that is a minor point except insofar as Ms Anderson has always accepted and Mr. Buchanan has not denied that Social Security benefits might be reduced one way or the other in the future. Perhaps when I am retirement age (whatever that really means then), depending on the state of the economy, the political influence of the elderly, the political will or lack thereof of Congress, etc., my Social Security benefits might be greater or smaller than predicted by that silly form the SSA sends me. But the fact remains that no one knows for sure. The government has changed the system in the past; it may change the system in the future.

So while we’re on the subject of being “shock[ed] at the shamelessness of it all,” we should understand that the attempts by the proponents of the status quo are every bit as duplicitous as anything Bush has said. (Social Security is insurance. No, wait! It’s an investment. More filling! Great taste!) We have no vested rights to any Social Security benefits. No one does; neither current nor prospective recipients. It is merely at the whim of the majority as determined by our vaunted representative democracy that any such benefits are paid tomorrow or ever again.

And, of course, this is inherent in the nature of representative democracy. As someone so Keynsianly put it, “We owe it to ourselves.” We’re not talking about defaulting on Treasury bonds held by the Japanese or by private U.S. investors, for that matter. Those really are lawful debts of the United States backed by its full faith and credit. No such debt exists in the case of Social Security.

Why? Because if “we owe it to ourselves,” we always have the legal (and, arguably, moral) right to forgive the debt we ‘owe ourselves.’ The notion of owing oneself anything is inchoate, just as the notion of promising oneself is. (Preemptively, I acknowledge that we can give a special meaning to such aberrant usage just as we can intentionally extend the concept of insurance or investments to include Social Security. But we should at least be honest in admitting that when we do so we are playing with concepts, not applying them straightforwardly.) The nature of an obligation is that it is a duty from which one cannot be relieved simply because one changes one’s mind. “I promise I’ll meet you for lunch if I feel like it” is no promise at all. Neither is “I promise myself I’ll lose 10 pounds unless I decide later it’s too much trouble.” Neither, for that matter, is “We promise ourselves we’ll pay X amount of Social Security benefits to those of us over age Y (unless we decide otherwise later through our representative, democratic processes).” That is what Bush, however ham-handedly, has been saying. And it happens to be true.

Tables are not chairs, no matter how much ‘like’ them they might be argued to be. Neither are apples oranges. Social Security is not insurance and it is not an investment. It is middle-class welfare. Those who suddenly demand honesty in government might be well advised to be equally candid in their own assertions.

Posted by: D.A. Ridgely | Apr 12, 2005 12:51:04 AM


Posted by: CTW

(apologies for any double spacing - neither IE nor Netscape seems to work here.)

DAR: What Bush has said - the only sensible, nonpartisan interpretation of his comments - is that the "Trust Fund" may well someday fail to pay out exactly those benefits that prospective recipients might now expect to receive.

GWB: "a Social Security system that will be flat bust, bankrupt", "Most younger people in America think they'll never see a dime.", et al.

to beat a dead horse (see any of numerous other blogs where this topic has been exhausted, eg, washingtonmonthly.com), "flat broke" and "bankrupt" are inapplicable here and in any case require a good bit more than a "sensible, nonpartisan interpretation" to get to your conclusion, which in any event is meaningless as stated. no matter what you assume about the future, obviously the trust fund won't pay "exactly those benefits" one expects at this point in time to receive; if worse comes to worse, the trust fund won't pay any benefits (since it, though not "the system", would in fact be "broke"); but under current projections (for what they're worth) the "system" will pay benefits which altho lower than "promised" are higher than today's (adjusted for inflation).

Now one can quibble over the literal truth of the second quote - neither he nor I know what "most younger people" think on this issue, but I think it's a safe bet that his intent is to suggest they're right if they do think what he claims. this is, to be extremely generous, misleading.

DAR: Those really are lawful debts of the United States backed by its full faith and credit. No such debt exists in the case of Social Security.

My impression based on an allusion here and there is that the funding of the "trust fund" may not be as straightforward as its simply "buying" treasury bonds like any other investor. is your comment based on some insight into this arcane process or are you simply noting that if the government owes itself and defaults, there's no recourse? if the latter, I think you're overstating the risk since it seems likely the effect on the country's financial standing of default, even if only self-inflicted, would nonetheless be disastrous (assuming that by the time such a drastic measure was necessary, it had any financial standing left).

DAR: Social Security is not insurance and it is not an investment. It is middle-class welfare.

is there a "desperate quality" to this "repeated" assertion? (:>) SS does provide some insurance benefits. it behaves something like an annuity investment (with, admittedly, less than stellar - ok, less than zero - returns for some). I assume your emphasis on the "welfare" aspects stems from its redistributive features. intra-cohort redistribution has been assessed by some as minimal (see thelowestdeep.blogspot.com, fifth post on list). the inter-cohort case is clearly 100% redistributive, but obviously in a trivial sense. so, although your rejected descriptors don't fit perfectly, neither does your choice.

you apparently have encountered more calls for "status quo" than I (and I read mostly leftish sources). what I've encountered are calls for a more honest discussion than can occur when the administration routinely uses inflammatory terms and misleading "facts", and organizations such as cato just parrot them (at least tanner does).

Posted by: CTW | Apr 12, 2005 5:55:09 AM


Posted by: CTW

(apologies for any double spacing - neither IE nor Netscape seems to work here.)

DAR: What Bush has said - the only sensible, nonpartisan interpretation of his comments - is that the "Trust Fund" may well someday fail to pay out exactly those benefits that prospective recipients might now expect to receive.

GWB: "a Social Security system that will be flat bust, bankrupt", "Most younger people in America think they'll never see a dime.", et al.

to beat a dead horse (see any of numerous other blogs where this topic has been exhausted, eg, washingtonmonthly.com), "flat broke" and "bankrupt" are inapplicable here and in any case require a good bit more than a "sensible, nonpartisan interpretation" to get to your conclusion, which in any event is meaningless as stated. no matter what you assume about the future, obviously the trust fund won't pay "exactly those benefits" one expects at this point in time to receive; if worse comes to worse, the trust fund won't pay any benefits (since it, though not "the system", would in fact be "broke"); but under current projections (for what they're worth) the "system" will pay benefits which altho lower than "promised" are higher than today's (adjusted for inflation).

Now one can quibble over the literal truth of the second quote - neither he nor I know what "most younger people" think on this issue, but I think it's a safe bet that his intent is to suggest they're right if they do think what he claims. this is, to be extremely generous, misleading.

DAR: Those really are lawful debts of the United States backed by its full faith and credit. No such debt exists in the case of Social Security.

My impression based on an allusion here and there is that the funding of the "trust fund" may not be as straightforward as its simply "buying" treasury bonds like any other investor. is your comment based on some insight into this arcane process or are you simply noting that if the government owes itself and defaults, there's no recourse? if the latter, I think you're overstating the risk since it seems likely the effect on the country's financial standing of default, even if only self-inflicted, would nonetheless be disastrous (assuming that by the time such a drastic measure was necessary, it had any financial standing left).

DAR: Social Security is not insurance and it is not an investment. It is middle-class welfare.

is there a "desperate quality" to this "repeated" assertion? (:>) SS does provide some insurance benefits. it behaves something like an annuity investment (with, admittedly, less than stellar - ok, less than zero - returns for some). I assume your emphasis on the "welfare" aspects stems from its redistributive features. intra-cohort redistribution has been assessed by some as minimal (see thelowestdeep.blogspot.com, fifth post on list). the inter-cohort case is clearly 100% redistributive, but obviously in a trivial sense. so, although your rejected descriptors don't fit perfectly, neither does your choice.

you apparently have encountered more calls for "status quo" than I (and I read mostly leftish sources). what I've encountered are calls for a more honest discussion than can occur when the administration routinely uses inflammatory terms and misleading "facts", and organizations such as cato just parrot them (at least tanner does).

Posted by: CTW | Apr 12, 2005 5:59:30 AM


Posted by: Nick

"Most younger people in America think they'll never see a dime."

This young person things he'll never see a dime, and I've thought that long before the current push for reform. As D.A. Ridgely pointed out, it's all to easy to move the goalposts and reduce benifits/extend the retirement age. All things being equal, I'd vote in a heartbeat for someone who wanted to systematically dismantle SS so my (hypothetical at this point) kids aren't paying for my meagre/nonexistent SS check.

Posted by: Nick | Apr 12, 2005 7:41:18 AM


Posted by: D.A. Ridgely

Financial Planning

(with apologies to Dorothy Parker)

Bond returns vary;
CDs make you wait;
Stocks are too scary;
Insurance tempts fate;
Land’s hard to sell;
Gold’s too much weight.
Oh, what the hell,
Let’s just trust the state.

Posted by: D.A. Ridgely | Apr 12, 2005 9:42:29 AM


Posted by: duus

D.A. Ridgely wrote:
Mr. Buchanan asks a deceptively straightforward question: Is there something better than Treasury bonds with which to guarantee future retirement benefits?

No. He asks if there is something "more real," as the president is insisting that the SS fund is "not real." And the answer to that is "no." It's a fairly narrow point, it's true, but it's right.

Posted by: duus | Apr 12, 2005 11:33:53 AM


Posted by: Tom

It appears that those who post on this topic come down on two sides:

1. There is no problem inherent in the Social Security Trust Fund as we know it. It is backed by the 'full faith and credit' of the U.S. Government, so when the Special Issue notes come due, the government will find a way to pay them off.

2. There is a serious impending problem with the Social Security Trust Fund as we know it. President Bush is trying (inartfully in many minds) to make this point and prepare us for the future by suggesting that some changes today can ward off a worse problem tomorrow.

If you subscribe to Position #1, politically it is a long term loser. Whatever you think of the Government's ability to pay off those notes you can be pretty much assured that future Congresses (Republican and/or Democrat controlled) won't be able to turn off the spending spigot for other programs. The budgetary problems won't subside; rather with Medicare, Medicaid, Prescription Drugs, Social Security, Defense Spending, Intelligence and Homeland Security spending, and other discretionary spending, the fiscal pressure will mount. Future politicians (most likely Republicans) will be able to make the point over the next 15 years that we have a general problem with the government spending more (much, much, more) than we take in. If Social Security reform fails, voters will be reminded time and again that there was a President who was willing to at least acknowledge and take on one of those problems - yet his efforts were blocked by a minority who said that there was no issue.

Democrats will be long term losers on this issue, even if they win in the short term - and it won't be pretty. For every Neil Buchanan out there in Academia, there will be 10 Allan B. Hubbards living in the real world.

Posted by: Tom | Apr 12, 2005 12:33:31 PM


Posted by: CTW

nick - just out of curiosity, how did you come to your "not a dime" conclusion? even the most pessimistic projections suggest barring unforeseen general financial calamity (which, as I think was part of the point in NB's post, would likely adversely affect any prospective income stream) that there will be substantial benefits paid even if nothing is done (disclaimer: not intended to justify doing nothing).

and your (and mr.ridgely's) assumption that government can easily reduce benefits (directly or indirectly) seems inconsistent with the fact that even with Repub control congress, the administration isn't having an easy time selling even its virtual (no details as yet) reform plan.

which is not to suggest that you young-uns shouldn't prepare for retirement with a basket of prospective income sources, just that I don't see what justifies your fatalistic assumptions about this specific one.

Posted by: CTW | Apr 12, 2005 3:17:33 PM


Posted by: MQ

Let me first just say that it is extremely, well, ironic, to see people arguing that government can never be trusted to keep a promise *in order to justify government breaking a promise*. Maybe if we didn't have so many people arguing government should break its promises then government would be more trustworthy.

Random example of low IQ comments --

"On a personal level no one would fund their retirement by writing IOU's to themselves"

SS isn't the American population writing an IOU to itself. It's our children writing an IOU to us, in exchange for the support we provided to our parents when they retired. The *only* way retirement is ever funded is by the working population writing an IOU to the non-working population. That is what underlies the SS promise, and it is what underlies your bank account.

A "Ponzi scheme" must fail since one eventually runs out of people to pay earlier investors. SS is not a Ponzi scheme since we need never run out of children -- there will always be a next generation to support their elderly parents. (And if not there will be bigger problems than SS).

*All* financial assets, including your 401Ks, are supported ONLY by politicians promises and nothing else. Period. Or to be exact, they are supported only by the promises of law-abiding behavior by those who own the most guns and military force when you choose to try to cash in your assets.

All of these are very simple, clear, and direct points. It is hard to see whether we have an inability or an unwillingness to grasp it on the part of our right-wing friends here. Perhaps they have used up their IQ points in service to their ideology.

Posted by: MQ | Apr 12, 2005 5:09:39 PM


Posted by: MQ

"There is a serious impending problem with the Social Security Trust Fund as we know it. President Bush is trying (inartfully in many minds) to make this point and prepare us for the future by suggesting that some changes today can ward off a worse problem tomorrow."

Bush isn't trying to fix the SS trust fund, he's trying to destroy the system while concealing his tracks, which is why he has to be so dishonest. There are plenty of ways to preserve or safeguard the system (e.g. raising retirement age). Dems have no problem with that. But the truth is any issues with the system are minor compared to a whole host of other fiscal issues that are much more pressing and urgent at the moment. Since Bush is doing nothing about those, draw your own conclusions.

Posted by: MQ | Apr 12, 2005 5:19:38 PM


Posted by: Tom

MQ,

So what are the more pressing and urgent issues that need fixing? How should they be fixed? If SS is in such good shape because of those bonds that are backed by the full faith and credit of the U.S. Government, why should we worry about any government spending? What difference does it make anyway if we're only asking our kids to write IOU's to us?

By the way, my point was that your stance on the SS issue is a long-term loser. Still think that is the case.

Posted by: Tom | Apr 12, 2005 6:08:13 PM


Posted by: D.A. Ridgely

CTW: There can be no default on the T-bills in the ‘Trust Fund’ because they are not owned by anyone. Not legally, anyway, and certainly not by anyone who would have standing to sue.

As far as whether Social Security is welfare, insurance, an investment, etc., you make my point for me: it “does provide some insurance benefits [and] behaves something like an annuity investment.” (Emphasis added.) Of course it does. Tables are something like chairs. A zebra is something like a horse. An inflatable doll is something like a real date. (Or so I’ve heard.)


duus: I quoted Mr. Buchanan verbatim.


MQ: I guess I just don’t have a high enough I.Q. to understand how changing the system (e.g., raising eligibility age) is preserving the system. (Hey, let’s raise the eligibility age to 110 and reduce benefits to, say, $100 a month! We can preserve the system forever!)

Posted by: D.A. Ridgely | Apr 12, 2005 7:38:49 PM


Posted by: Perseus

Um, I don't exactly recall writing an IOU to my parents as a child, and perhaps Mr. Ridgley (as a lawyer) can confirm this, but I don't think that such an IOU would be legally enforceable even if I had given them one (the SS "special issues"--which are not publicly traded bonds--are not likewise enforceable since I don't think that the SSA can sue the Treasury). Some of us also believe that parents have a duty to raise their own children irrespective of the ability of their children to support them later in life. And, of course, SS abstracts from particular parents and children.

Posted by: Perseus | Apr 12, 2005 8:20:52 PM


Posted by: Perseus

And, as Becker points out, it precisely because the solvency of SS is being eroded by the declining number of working adults per retiree that private accounts have an important advantage over SS.

My apologies to Mr. Ridgely for misspelling his name in my previous comment--I hit the post button prematurely. But let's simply make SS benefits $0.00/month (compounded daily!) so we can be certain that SS never runs out of money and that the federal government never defaults on the SS "special issues."

Posted by: Perseus | Apr 12, 2005 8:50:00 PM


Posted by: CTW

I'm really struggling with the logic of this whole debate. on the one hand, clearly if one models government as a black box with money (from taxpayers and lenders) going in, money (to contractors, lenders, and beneficiaries) coming out, and total money out and its allocation among recipients decided transparently and autonomously, the fact that internal to the black box SSA holds debt issued by Treasury has no external significance and the "it's not real" crowd wins the argument.

but clearly that isn't an accurate model of government. the decisions are made neither transparently nor autonomously; they are quite visible (well, at least they mostly should be) and are influenced by external actors, eg, voters and debt holders. which is why I think the "it's not real" crowd loses. perhaps it's true that there's no legal recourse if Treasury declines to honor the debt held by SSA. but there certainly is political recourse available to beneficiaries ("vote the bums out") and there will be broad financial implications as lenders demand higher interest rates or cease buying due to the implied increase in risk.

and that's why I see both the idea of "default" on the SSA debt and the non-payment of benefits (the level of which can, of course, be periodically adjusted, but only within politically acceptable limits) as unrealistic. in theory either could happen, but not in practice. viewed this way, the SSA trust fund debt, just like the benefit stream, isn't essentially a legal lien on government revenues but a political one.


Posted by: CTW | Apr 13, 2005 12:41:45 AM


Posted by: CTW

"As far as whether Social Security is welfare, insurance, an investment, etc., you make my point for me: it “does provide some insurance benefits [and] behaves something like an annuity investment.”

and missing is the third member of the triad: "it has a characteristic of welfare (viz, modest intra-cohort redistribution". ie, it may be a dog (pun intended), but a mongrel not a full-blood. which was my point.

Posted by: CTW | Apr 13, 2005 1:00:42 AM


Posted by: bakho

Social Security boils down to this. SS has a seperate revenue stream from other govt expenses. SS has to date been entirely funded by FICA taxes. However, Congress pools all revenues. Under Reagan, the wealthy got huge tax breaks that led to tripling the deficit. Working folks saw their SS increase by 50%. For years, we have been paying more in SS taxes than SS has been paying out. Workers can accept a minimum wage of $5.15 if the govt supplies our retirement. $5.15 is not enough wage to fund a retirement, dammit. The only reason workers accept this low wage is the govt promise to fund retirement. A lot of billionaire CEOs get rich by underpaying workers. Those CEOs OWE their workers a decent retirement. This is the social contract. Bush wants to screw the workers by slashing SS benefits. This is the main issue. Bush won't talk about screwing workers out of benefits. He only talks about the wonders of private accounts. Bush is running a cruel bait and switch. We know better. We will not be fooled. Bush wants to steal our SS taxes to pay for his tax cuts to the wealthy. This is a class warfare started by Bush. Tax cuts for the wealthy versus Social Security benefits. Soak the rich. They can afford to pay for SS. Exploiting workers and underpaying them for years obligates the wealthy. They owe. Bush wants to let them off the hook. Bush wants to screw working class Americans. This is the issue. Do American workers let the wealthy retire to the Bahamas with our SS benefits? Or do we demand justice and what is owed the fruits of our labor?

Posted by: bakho | Apr 13, 2005 1:43:25 AM


Posted by: Abad man

Still the problem comes when it is time to cash in the trust fund. When the number of workers supporting retirees decreases, and it will I have heard no argument about this, the amount of FICA revenues coming in will be less than expendutures. Assuming nothing changes. This is where I understand the trust fund will come in, to make up the difference. The money from the trust fund will have to come from somewhere or someone. Whether it is through increased taxes or decreased government expenditures to redeem the notes, increased inflation, or increased borrowing from foreign governents, it has to come from somewhere. As long as this is done the trust fund is real. If the extra FICA tax was not collected and put in the trust fund, higher taxes, lower expenditures, inflation or increased borrowing, would still need to happen to provide the same benefits. In this respect the fund is fake. Increased productivity is very appealing, but we have had that for the past century and we still run deficits, so forgive me if I do not hold my breath on that one.

Regardless of how large the trust fund becomes future benefits will be limited by the ability and willingness of future taxpayers to fund them. Whether or not you believe the trust fund is real, taxes will have be raised to provide benefits at the current levels as there is no money in the fund except the taxes of future workers. Cutting benefits does nothing but illustrate the empty promise of the trust fund. If there was really something there it could be tapped to maintain benefits without raising taxes.

As far as ponzi schemes, benefits get paid as long as enough new people come in to pay benetits and continue to skim the money off the top. When not enough new people come in to support the old, the system collapses. Sorry it still sounds like our current social security system. Except if you are the government you can compel people to give more or take less, so social security will probably not colapse. Whose fault is it? Pick your favorite scapegoat and insert name here ( ).
So go ahead and call me low IQ. I am dumb enough to know the money is not there and where it will have to come from.
I try to be frugal and save because I have major concerns about Social Security. It seems prudent and while dumb, I try not to be too stupid. If the government wants to step in and help with IRA's, 401's or diverting FICA taxes fine, I can use the help. If they do not well I think I will still save, even if it is only 25- 50 dollars a month which it has been in the past. So if a means test ever comes about and I fail to qualify for social security because I have had the foresight to plan, and save, has not the government broken its promise to me? Maybe I could read a post on how I do not deserve Social Security because of my good luck and feel better.

Or I guess we could do like SEN Corzine says and just print more money to cover the notes in the trust fund. How disingenuous is that?

Posted by: Abad man | Apr 13, 2005 6:01:42 AM


Posted by: Nick

CTW,

I am financially pessimistic and slightly risk averse, so that effects how I view SS. So, some rough, of the cuff numbers. Assumption: I retire at 62 in 2040 with no disabilities. Nothing changes in SS.

Definitions: Old-Age and Survivors Insurance (OASI). The trust fund used for paying monthly benefits to retired-worker (old-age) beneficiaries and their spouses and children and to survivors of deceased insured workers.

Disability Insurance (DI). The trust fund used for paying monthly benefits to disabled-worker beneficiaries and their spouses and children and for providing rehabilitation services to the disabled. (I won’t be using this)

According to the 2005 SSA Trustees Report, “Annual cost will exceed tax income starting in 2017 at which time the annual gap will be covered with cash from redeeming special obligations of the Treasury, until these assets are exhausted in 2041. Separately, the DI fund is projected to be exhausted in 2027 and the OASI fund in 2043.”

“Even if a trust fund’s assets are exhausted, however, tax income will continue to flow into the fund. Present tax rates would be sufficient to pay 74 percent of scheduled benefits after trust fund exhaustion in 2041 and 68 percent of scheduled benefits in 2079.”

Using the SSA Online calculator (simple version) my monthly benefit will be $1145 in today’s dollars. 74% of that is $847.30. Do you really want to argue that, “…there will be substantial benefits paid even if nothing is done…” if I’m getting $847.30 a month? My wife and I live fairly frugally now, with no kids, and we average about $2000 in living expenses each month (food, mortgage, insurance, utilities, etc.). We MIGHT be able to scratch out an existence with $847, but it would be sparse, and add in any medical expenses (likely) as we get older, and that check just doesn’t cut it. It may be more than a dime, but since I really doubt SS won’t change in some way (decrease benefits or increase age most likely) this is the most optimistic scenario in the bag for me. If inflation jumps above 3% (SSA assumption), then that $847 is worth even less – although I’m not sure how likely this is. My pessimistic side says SS is worth nothing to me and with the large chunk of my paycheck it eats up, may be doing more harm than good in the long run.

Posted by: Nick | Apr 13, 2005 8:34:14 AM


Posted by: D.A. Ridgely

bakho, very stirring rhetoric. But you need an opening sentence with a bit more bite.

Perhaps "Workers of the world, unite!"?

Posted by: D.A. Ridgely | Apr 13, 2005 8:57:57 AM


Posted by: Tom

Bakho,

So are you working for $5.15 per hour for the next 45 years? Is anybody?

Absolutely ridiculous post.

Posted by: Tom | Apr 13, 2005 10:10:28 AM


Posted by: CTW

nick -

as I suggested, the typical person would be quite foolish to rely exclusively on SS - or probably any other single source - for their retirement revenue stream. but however inadequate receiving $845/mo may seem, it's a long way from "not a dime". to personalize a bit, SS provides enough incremental retirement income for me to live in my current home rather than having to move to more modest quarters.

now you obviously have the horsepower to translate "not a dime" into the more meaningful phrase "not nearly enough to live comfortably on". but my guess is that alot of lesser endowed young people assume that when they hear that phrase, they take it literally. which is why I consider it irresponsible for any government representative to propagate it, most of all the leading one.

BTW, to maximize the chance that you will receive the biggest percentage of a dime, support those who at least claim to be committed to preserving SS. you're going to pay for my retirement whether you like it or not, so you may as well continue this ponzi scheme for which, as MQ points out, there is an essentially endless supply of new suckers.

best of luck to you in your future.

Posted by: CTW | Apr 13, 2005 10:53:26 AM


Posted by: bakho

Get this. SS administrators give 3 forecasts of the future. A pessimistic, a moderate and an optimistic forecast. The forecast most everyone uses is the moderate forecast that shows a future funding gap 50 years out that is manageable. Recently SS has been most closely tracking the optimistic forecast. Under the optimistic forecast, there is no SS shortfall. Under the other 2 forecasts, the gap between SS revenue and SS outlays is dwarfed by the revenue required to make Bush tax cuts for the wealthy permanent. SS is affordable. People in the US are taxed at a much lower rate than Canadians or most Western European. If the will exists to pay for SS, the money is available. Bush wants to slash SS to partly protect his tax cuts for the wealthy that are unaffordable. This whole debate is whether or not wealthy Americans will be required to fulfill their part of the social contract with the system that enabled them to become wealthy. Should the wealthy be required to pay their fair share? Or should we allow the wealthy to retreat to gated communities and piss all over the rest of us?

Posted by: bakho | Apr 13, 2005 11:47:23 AM


Posted by: bakho

For anyone interested in what a serious long term SS plan might look like check out the Diamond-Orszag plan.

http://www.brook.edu/views/papers/orszag/200504security.htm

Posted by: bakho | Apr 13, 2005 12:14:40 PM


Posted by: Nick

CTW,

Certainly planning ahead and having other income streams is a good idea. However, I see SS as moderate-risk at this time. Hey, if bakho is right and things go better than expected, then great. Unfortunately, chances are still within the realm of reality that the trust fund WILL be broke on or about 2041. Something will probably change to deal with this and NO ONE KNOWS what that will be. Last change was in the 80s, a new change may happen around 2010 and if history is a guide, another change may occur in 2030 to fix problems stemming from 2010. I honestly don't expect to see any $ from SS when I retire. If I'm wrong...woohoo! But, telling the "lesser endowed young people" they won't see SS is a good way to get them to look for other retirement income sources. They may not have looked before because they thought SS was locked-in and sufficient, so maybe they'll be better off. I haven't watched any of the President's SS speeches, so I'm not 100% sure on this, but when has he ever said no one would get any SS? My impression was he's saying 'trust fund broke in 2041', 'don't rely on SS', 'SS in trouble', etc. I don't see how any of this is false or how it's irresponsible to make the public aware of it.

I'm afraid the attitude of 'screw others like you've been screwed' doesn't sit well with me. If I could, I'd phase out SS so that my kids (theoretical) aren't sucked into the ponzi scheme. I'd take a hit (pay in, but don't get a payout) so they wouldn't have to.

Strangely, "The significance of the new social insurance program was that it sought to address the long-range problem of economic security for the aged through a contributory system in which the workers themselves contributed to their own future retirement benefit by making regular payments into a joint fund. It was thus distinct from the welfare benefits provided under Title I of the Act and from the various state "old-age pensions."
(http://www.ssa.gov/history/briefhistory3.html)

I'm not sure where things went bad and the younger generations started paying for the older, but it seems the original intent was for each to pay for him/herself. Wish we could go back.

Posted by: Nick | Apr 13, 2005 12:33:52 PM


Posted by: Tom

CTW,

Your comment to Nick neglects a larger point. I'd define his point as "not a dime compared to what has been contributed".

Let's assume that Nick and Mrs. Nick make $30,000/year each for the next 35 years (retirement in 2040 at age 62). Combined monthly contributions to SS are $620 for Nick and Mrs. Nick., including the amount contributed by their employers. With zero income growth over their lifetimes, and a rate of return on their pool of money equaling zero, Nick and Mrs. Nick will have contributed $260,400 to Social Security. At $847/month - with no return - Nick and Mrs. Nick will exhaust that $260,400 in 25 years and 7 months - at age 87.

If Nick and Mrs. Nick were able to contribute a total of 4% of their pretax income to an individual account, and the remaining 8.4% to Social Security they would build the following nest egg after 35 years (assuming no growth in income/contributions).

$176,765 (at 4% rate of return per year)
$267,443 (at 6% rate of return per year)
$413,560 (at 8% rate of return per year)

They would still have contributed $176,400 to SS during that time.

Now it's pretty foolish to say that Nick and Mrs. Nick's family income won't grow over time, thus allowing them to contribute more to SS and their own individual account. If Nick and Mrs. Nick never progress from that $30,000 income level each for the rest of their lives then they will likely be considered to be among the working poor.

What is the big objection to allowing all the Nick's and Mrs. Nick's out there to put some of their money away as a hedge against the will of future politicians?


Posted by: Tom | Apr 13, 2005 12:39:56 PM


Posted by: MQ

"As far as ponzi schemes, benefits get paid as long as enough new people come in to pay benetits and continue to skim the money off the top. When not enough new people come in to support the old, the system collapses. Sorry it still sounds like our current social security system."

Wrong, or at least you don't seem to understand why Ponzi schemes are a con game. Ponzi schemes fail because you run out of new people to pay in to the system. In SS, there will always be new payments into the system, since there will always be new young people.

Now in any situation where birthrates are falling and lifespans are lengthening, there will be fewer new young people than old people. For reasons that should be obvious unless you really do have a very low IQ, this will create a problem for funding retirement under ANY system (including private savings). But that does not mean a failure of the system, and it does not make retirement systems "Ponzi schemes". All it means is that you have a choice between must either cutting payouts to the earlier investors or increasing payments by new entrants in some way.

DARidgely:

"MQ: I guess I just don’t have a high enough I.Q. to understand how changing the system (e.g., raising eligibility age) is preserving the system. (Hey, let’s raise the eligibility age to 110 and reduce benefits to, say, $100 a month! We can preserve the system forever!)"

I literally do not understand this comment at all. I suspect it is not so much a matter of low IQ on your part as ideological unwillingness to see obvious things. Say there is an increasing percentage of elderly retired in the population. There are only four ways to handle the increasing retirement costs resulting from this. Raise the retirement age (thus lowering the percentage of "elderly retired" again), cut the retirement benefit, raise taxes on the non-elderly, or increase productivity so that each non-elderly person produces more. This is pure, simple mathematics. Any workable proposal to do any of those things is a legitimate way to preserve the current retirement system. A remarkable thing about private accounts is that they do none of those things (although in my belief it is a backdoor way to cut benefits).

Again, this is quite simple. If you don't get it, think harder.

Posted by: MQ | Apr 13, 2005 12:55:52 PM


Posted by: Perseus

MQ writes: "Now in any situation where birthrates are falling and lifespans are lengthening, there will be fewer new young people than old people. For reasons that should be obvious unless you really do have a very low IQ, this will create a problem for funding retirement under ANY system (including private savings)."

This will create such a problem, but SS is a government program, and as such is sensitive to political pressures that make it far less likely that the program will be managed as well as private accounts. As Milton Friedman notes, the federal government did not raise taxes high enough to pay for all of the promised benefits and uses the SS surpluses to fund current spending (i.e. no "lockbox"), which makes the SS system essentially pay-as-you-go. And even if those rascally Republicans are the sole cause of the solvency problems of SS--though I'd note that unified party control of the legislative and executive branches of the federal government has been the exception (5 years) rather than the rule over the last quarter century--this still supports the political economy case for getting the federal government out of the business of managing a large portion of people's retirement funds.

Posted by: Perseus | Apr 13, 2005 3:25:56 PM


Posted by: Terrier

Perseus, your statements might make sense if the Radical Republic party was advocating taking government out of the management of retirement accounts but they are actually advocating no such thing. They just want to divert a portion of the money you would have paid to Social Security to some Wall Street firms so they can make better friends using your money. (Note that because the money will then not be around to pay current retirees they will have to issue a wheelbarrow full of more paper to cover that shortfall - burying your grandkids under a mountain of pulp on the day of their birth.) Of course, when the whole system they set up gets Enron-ed into oblivion they'll just tell you that that's the way the market is - too bad. If they really want to let you control YOUR money - then ask your local congress-critter to remove all the silly and stifling rules they constructed around retirement accounts and let you have some of that Social Security money back to play with yourself. I won't hold my breath waiting for the weasel's answer!

Posted by: Terrier | Apr 13, 2005 4:22:40 PM


Posted by: Perseus

I'd be more than happy to see the federal government get out of the retirement business altogether, but the proposal is a step in the right direction since under the current system I have very little say in how the money is managed. As for the transition costs, they merely make a portion of the implicit future debt explicit. And my Congressional representatives are indeed all liberal Democratic weasels who oppose private accounts.

Posted by: Perseus | Apr 13, 2005 5:53:21 PM


Posted by: Terrier

Perseus, my congress-critters will be more than happy to promise you relief from government management of your retirement - all the way to their biggest donor's bank! I'm also sure that future generations will no longer worry that they will not see a dime of Social Security payments - they'll be too busy working rice paddies to pay off the Chinese to worry about retirement.

Posted by: Terrier | Apr 13, 2005 6:09:47 PM


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