I guess, since nobody jumped all over me, that my basic assumptions from the earlier social security post were more or less accurate. This post will briefly discuss the nature of the "crisis", and the proposed solutions.
As mentioned in the previous post, the crisis is that present payroll taxes will no longer pay for full benefits for social security retirees starting in 2018. At that point, amount workers are paying in will be less than what Social Security is paying out to those damn baby-boomers who are retiring. As many have noted, the overpayments by the baby-boomers throughout the 1980s, 1990s, and 2000s have been "invested" in US government bonds. So, in theory, past 2019 all the government has to do is begin to cash in those bonds and use the money to pay the boomers to sit in their deck chairs and drink Mai-Tais. (If the goverment does this, the amount of money in the bonds will last until 2041 or so.)
The problem with this is that those bonds just mean that one part of the government has to hand money to another part. What really happened to the surplus payroll tax money over the last three decades is that we spent it. Yeah, Congress gave some bonds to the Social Security Administration, but we didn't invest it in IBM, Microsoft, or even CDs. We just spent it, and promised to pay it back later (the bonds).
Look at the first table here (the one labeled: "CBO's September 2004 Baseline Budget Projections"). Notice the column labeled 2004. Towards the bottom, it has a section labeled Deficit or Surplus, and for 2004 it indicates that the total debt is 422 billion dollars. Also notice, however, that we have 574 billion dollars of "on-budget" debt and 153 billion dollars of "off-budget" surplus. That surplus is the extra social security money being collected right now. The rest of the goverment (Pentagon, Agriculture, Justice, etc.) is overspending not by 422 billion dollars, but actually by 574 billion. We're just using the 153 billion from social security that isn't needed to pay today's retirees to make the actual deficit look less than it is.
So, really, what the social security "crisis" refers to is that starting in 2019 that little bit of a surplus will become a deficit. This is why many people just shrug this off: the Government budget is one big spreadsheet, not separate ones for social security and the rest of the government, and this item in the budget will get larger starting in 2019. Big whoop. There is something to this argument, but the what frightens most people is that the cost of paying for Mai-Tais for the boomers will get really, really big (several trillion over some years), and it will be difficult to fund that through normal budget actions (though not necessarily impossible). Hence, there are a set of proposed solutions.
Solution One is the Presidential one: private accounts. The idea here is simply that rather than let the government take all the payroll tax dollars to use today in the budget, workers should be allowed to put some of that money into what they want to invest in (stocks, bonds, CDs, whatever). This is akin to the government forcing people to save money (which Americans basically don't do). When the workers retire, they take the money the goverment forced them to save and get to spend it. The reason why this plan looks good is that if you compare the rate of return for money workers "invest" (they don't really invest it, of course) in social security historically to what they could have done with the money themselves (again: stocks, bonds, CDs, whatever), then social security is the worst "investment" they could have made in terms of having a big pile of money to live on when the hit 65 or so.
The problem with this is that, as was outlined above, social security doesn't "invest" the payroll tax dollars at all. They use todays worker to pay for yesterdays worker/todays retiree. So, if todays worker puts less money into social security (because they are diverting some part of the payroll tax to a private account), that leaves less money to pay for the people who are already getting social security. As noted, starting in 2019 we already won't have enough present worker money to pay the retirees, so if we institute this plan then the long term prospects are good (the workers private accounts pay for part of their benefits, so the government will pay out much less), but short term things really suck. After all, even less money will be coming in via payroll taxes, but payments to retiring baby boomers are just as high as ever. This is what everyone is calling "transition costs": the extra costs to the goverment of switching from the present system to the private account system. Estimates of this cost range from a trillion to four trillion dollars (over many years), presumably in addition to whatever the costs are to fund the retiring baby-boomers. The President has been, umm, unclear, on where this extra money would come from.
Solution Two is to (gasp!) raise taxes or (gasp!) lower benefits, or both. Via Kevin Drum/Washington Monthly, there is a handy Social Security Administration publication (note: pdf file) that discusses all this, and compares (table on page 25) what benefit reductions and increased taxes would be necessary to solve the crisis (i.e., make the income from the payroll taxes equal the outflow of benefits to retirees). It turns out that raising payroll taxes by 2% (not trivial, but not huge either) would remove the crisis. I'm unclear if that solution includes the bond money (which, as I noted, isn't really saved anywhere at this point) or not.
Solution Three is to do nothing. The crisis is at least a decade and a half away, and all sorts of things can pop up between now and then that might make it worse, or better. In any case, any solution that is tried now might not be applicable when the crisis really rolls around, so we might not solve anything. Not many people are proposing this option, but it is worth mentioning.
Here is where I'm really confused: How do private accounts solve the coming crisis? The problem is that in 2019 the payroll taxes alone will no longer pay for the benefits. How does creating private accounts (and diverting even more money out of paying benefits) solve the problem? I guess I can see how it might help many years down the line (when people have invested enough and long enough into private accounts so that there is real money there to retire on, but that will take decades), but how does it help us now? Anyone know the answer?
Posted by baltar at January 15, 2005 01:04 PM | TrackBack | Posted to PoliticsThe big problem with private accounts is the same problem people have with their own retirement investments: dot-bomb, Enron pension, bad swampland instead of fine real estate etc etc=no guarantee. With social security, the point is to guarantee that seniors will not live in poverty by providing a minimal level of support. If we force them to invest, without supplying some "insurance" we may end up with seniors getting less than if they had just pput the money in their mattress (though, the social security calculator hyped by Rush Limbaugh supposedly says that the "investment" return for people in their mid 30s and younger will start to become negative (ie your return will be -.0015% of if you had just held the money). I haven't checked this out personally, so, don't go telling me I sent you to a bad source if it's crap.
I reiterate, the issue is keeping Grandma from eating cat food, not returning profits on investment. It's an anti-poverty program, not a retirement plan.
Posted by: binky at January 15, 2005 06:40 PM | PERMALINKBaltar,
I don't know what evey possessed you to tackly the bear of a social security problem synopsis/discussion, but you seem to have done a pretty good job, I learned a lot from your post. I know few ever look for genius behind the mild exterior of our President, yet I encourage you not to underestimate what he's doing here. He is, I believe, forcing a crisis. What he's doing is bringing social security essentially back on budget, making us pay for transition costs and essentially forcing a budget crisis, before the problem becomes untenable. Let's not forget that Bush's and Kerry's budgets both would have added hundreds of billions of dollars (maybe trillions, depending on the economy) to the national debt over the next four years; I'm not trying to stir up another Presidential debate, just to recognize that political forces in both campaigns agreed the majority of voters' first concern is not the national debt, though I know both campaigns said they were going to cut the deficit and it's only the numbers that lied. Both campaigns recognized that the voters are not being fiscally realistic and responsible, or at least there was another priority. As a matter of a plan, investing is taking a chance, but so is leaving the money in government bonds which may be worthless come 2040.
Binky: No, I agree with you about the original intent of Social Security. That being said, there is nothing that prevents social security from morphing from an anti-poverty program (targeted at retirees) to a retirement plan if that's what people want. Arguably, that's what people believe (more than that SS is just anti-poverty) today.
The other issue is the variablility of private accounts: they can go up and down. Sure, almost all historical trends show an "up", but that can change. The goverment has two choices. It can either let people who invest badly just hang (meaning an increase in poverty, as people who depended on getting the retirement money find they don't have it) or it can guarantee the returns (making sure people get a certain minimum). The problem with this second approach is that if people know they have a guaranteed return, they are more willing to be risky, and hence there will be more losses and more government money put in (negating the point of private accounts in the first place). This logic is precisely what happened to the Savings & Loans that led to their crisis back in the 1980s. So private accounts have issues, clearly.
Morris: Thanks for the kind words. I have no problem with Bush bringing this up for a debate, though I do have a problem with the language he is using. Yes, this is clearly something we (the people) need to talk about, but the President needs to talk truthfully about the costs, benefits and choices we have. Thus far, he isn't doing that well (though I'm not really sure who is - this is fairly complicated economics, and some important part of the debate hinges on what the US economy will do over the next 40 years, which no one knows).
As for "As a matter of a plan, investing is taking a chance, but so is leaving the money in government bonds which may be worthless come 2040." Yes, and no. The bonds are only worthless if the government defaults on them. That's a greater crisis than just social security. It is clear that Social Security will cost a great deal more over the next generation or so. Where and how we pay for that is a huge debate. What do you think about what Binky said: private investments can go up and down. What role does the government have if people make bad decisions about their private investments and have no money when they get to be 65? Are they screwed, or does the government step in? There are details about private accounts that need to be discussed before one can even know if they are a good idea or not.
Posted by: baltar at January 16, 2005 02:48 PM | PERMALINKBaltar,
Certainly, private investments can go up and down, as can the fortunes of governments and their currency. The point I'm trying to make is that there is risk in maintaining the current system, as there is risk in trying to change it. I think Binky makes an accurate assessment of the power of AARP, and their willingness to bring that power against any and all politicians who would consider cutting benefits. Politically it's difficult to take on the AARP, just as once it was difficult to take on Big Tobacco, and millions of people had to die before the political process held that lobby accountable for millions of people dying, so I wonder how much of a state of economic misery would be necessary to curb AARP's influence, considering demographic trends predict they will become much more rather than much less powerful (we could invent a new form of government, the geriarchy). I would agree that Social Security is not what it was intended to be, and essentially it could be restructured to its original intent, though I wonder what Joshua would say about the actual legality of this considering many seasoned citizens have a certain expectation they will receive at least the measure of benefits they paid into.
Personally, I wouldn't have any problem with raising the age to receive benefits to say 68 or 70, because the health of a 70 year old today is much better than that of a 65 year old fifty years ago, but again we would have to give adequate notice for people planning their retirements. The political reality is this won't fly in current conditions because it will cut down on AARP's membership and their clout directly, something they will fight to the death. It seems the Democrats are willing to sit back and let Republicans fall on their face as revenge for their winning the election if Rahm Emanuel's interview with Tim Russert is any indication (although it was nice to see someone in favor of NCLB). When taking out all the options that are abhorent to the AARP (cutting benefits and raising the retirement age) and the option abhorent to most voters (raising taxes), private accounts is about the only option left. This is risky, but so is maintaining a breaking system.
Posted by: Morris at January 16, 2005 05:20 PM | PERMALINKas for expectations, from a legal point of view i'm not sure what basis anyone could assert for demanding a government program be held in stasis: social security may, in some sense, be a sort of social contract, but it's no more enforceable as such than the GOP's contract with america. people don't have a choice whether to enter into this arrangement, so it's not an agreement properly understood.
the thing that annoys me in all of this (and mostly i'm staying away, though i will note that baltar you have done an excellent job of pinning down the basics as i understand them) is how reluctant people on both sides of the aisle are to consider the most practical, and quite possibly most valuable, benefit cut of all: means testing. yes, doing that would mean some people would pay in and never take out, but the same is true of unmarrieds who die young. their estates aren't allowed to sue the government. l the fact is, following binky, this is an anti-poverty plan, not a retirement plan, and if you're rich, you shouldn't be able to collect your $1K/month. if i'm not mistaken, this would make a substantial difference, means testing, and i think it's a compromise everyone should climb aboard. with all the regressivity, relatively speaking, of recent changes to the tax code, this one modest progressive gesture would hurt people very little (set the threshold high and it would still make a difference) and at least extend SS's solvency for a decade or two -- perhaps until the boomers die off.
also, the whole surplus issue is, i think, repugnant: to claim that the system is insolvent but then continue to use moneys taken in in surplus for other expenses is profoundly disingenuous. the much revlied "lock box" of indecision 2000 might have been worth more serious consideration.
Posted by: joshua at January 17, 2005 02:51 PM | PERMALINKThere was a piece in this weekend's NYT: social security
Posted by: binky at January 18, 2005 08:16 AM | PERMALINKthe nyt piece binky cites was excellent. it more or less vindicated baltar's account of things, and if anything painted an even more disturbing picture of the distinction between reality and the bill of goods bush is trying to sell us.
Posted by: joshua at January 18, 2005 11:23 AM | PERMALINKJoshua,
The trouble with means testing is that Baltar's original criticism applies to this as well, that if people know they have a safety net they'll be willing to take great risks with the funds they do have. What I mean is, if someone has a pension that wouldn't pay much more than the baseline social security benefit, they might take a great risk with it because they know if they lose it they'll just get the benefit in its place.
maybe so, but the safety net has been there and i don't know very many elderly people who are daytrading their life savings away. again, i'm talking about people with really substantial investment income, people who never have to touch their principal with or without social security. it just doesn't make any sense to cut them checks, except in the i got mines, you get yours petty ownership-society sense that has never really been a part of the ideological underpinnings of social security as originally conceived.
yes, that variation would be a progressive tax. but it wouldn't be the first. and as i head upper-middle-classward, i'll happily pay my share as long as it's used sensibly.
Posted by: joshua at January 19, 2005 10:56 AM | PERMALINKGood morning! How about some more good news to get your day going? The New York Times reports this morning that the Chilean pension system, so highly praised by those who want to privatize social security, doesn't work the way it was promised (of course, the promiser was Pinochet).
Posted by: binky at January 27, 2005 08:01 AM | PERMALINK