Sunday, September 26, 2010

It's A Wonderful Life but Social Security? Not So Much

I have met Jay Bullock a few times. He seems like a nice enough guy and I am sure he is a very good English teacher. Heck, he might even the second best English teacher in MPS. (Sorry, Jay, but top honors go to Karra Esenberg at Hamilton.)

But, Jay, you're thinking about this social security thing all wrong.

He seems to think that his insurance company (and mine), American Family, operates its business like the government has operated social security. If I thought that were true, I'd be looking at the Gekko or the ditzy girl with too much make up.

Jay fundamentally misunderstands the analogy between social security and a ponzi scheme. It is not that the government should have kept excess social security dollars locked in a vault. That would have been better than what it did do, but would have been its own piece of mismanagement. Jay says I would have beaten George Bailey to death for putting the money in Joe's house.

Not hardly.

In fact, had good old George failed to do so, I would have taken my money over to mean old Mr. Potter. Lending to Joe is how George earns the money to pay me interest.

But the social security trust fund is no Bailey Building & Loan. It did not lend its money to Joe. Lending the money to Joe - and to the Kennedys and Mrs. Macklin and a hundred others - gave that broken down old Building & Loan a claim on someone else's assets (it carries a mortgage on Joe's house) and a right to be paid income on that claim. (Joe owes principal and interest). The trust fund could have invested its money (much like American Family invests its money)in a way that gave it a claim on a someone else's assets. But it didn't. Think of Uncle Billy losing or blowing the money and leaving George with nothing but his IOU. Now that would have truly meant bankruptcy, scandal and prison.

Now, to be fair to Jay, you could operate social security (although not an insurance company) on a pay as you go basis. Insurers don't do that because they can't compel policyholders to stay with the company and can't raise the rates to whatever is required to pay current claims (and because, for those and other reasons, regulators wouldn't let them). The government, of course, has a more or less captive customer base. Taxpayers can't take their business "elsewhere."*

But social security long ago abandoned a strict notion of "pay as you go" and for good reason. We have know for a long time that birth rates following 1964 were far lower than those between 1946 and 1964. We have long known that this was going to result in a reduced ratio of workers to retirees when the little darlings born between 1946 and 1964 hang it up.

Not very complicated math demonstrated that this would result in levels of taxation that would be politically - and perhaps even economically - unsustainable. (Taxpayers may be unlikely to go elsewhere but they can prefer leisure to labor.) So we decided to charge our current "customers" "extra" to fund the largely predictable costs that would be incurred when it came time for them, as a class, to submit their "claims."

The government should not have kept the money in a safe. It should have invested it in conservative investments outside the federal government. This is, after all, what both private and public pension funds do.

Indeed, Jay should probably be a bit more concerned with this than he is. MPS has promised over two billion dollars of unfunded benefits to future retirees. If, in the end, taxes are imposed on city residents to pay those benefits, we should just rename ourselves "New Detroit."

Jay argues that, well, if the government had not done this, every dollar invested would have been a dollar in additional deficit spending or taxes. Another possibility, apparently even too hard to imagine, would have been reduced spending. But to suggest that behaving responsibly would have been hard takes nothing away from Johnson's original point that social security has been operated as a Ponzi scheme.

In the end, Jay succumbs in the end to the Ultimate Stupid Blogger Trick of the left. Concern about social security is, in the end, reducible to fear of the "Brown Menace." He cites Charlie Crist's proposition that we could fix the problem by creating a "path to citizenship." Because some critics of social security don't do that, they are, implicitly, racists or cynical exploiters of racism. I hope he doesn't teach his students to be that intellectually lazy.

Crist's comments reflect a misunderstanding of the problem. He thinks the trust fund has assets. Beyond that, current levels of illegal entry won't fix the problem. Most illegal residents already pay social security taxes. There are many issues surrounding immigration about which reasonable people can differ. Playing the race card against conservatives in general (as opposed to some particular position that might be fairly characterized in that way) fouls, rather than advances, the conversation.

* Of course, increased taxation can result in a reduced tax base.

25 comments:

George Mitchell said...

Nice analysis. Folkbum's attempts to explain SS are laughable. It's really not very complicated. Even assuming the IOUs are honored, there is more money going out than is coming in. Not sustainable, in the same way that the unfunded pension and health insurance liabilities of MPS will bring the district to real or de facto bankruptcy. If Folkbum is banking on those benefits down the road he will get quite a wake-up call.

Dad29 said...

Another factor in the 1964 switch was LBJ's "guns AND butter" financial scheme.

Allowing the raids was politically perfect, as LBJ and that Congress would be long gone before the piper showed up at the door.

Anonymous said...

Move to strike as nonresponsive. Bullock's final point, to which you do not reply, is that the Republicans' proposed "solution" to Social Security -- diverting a portion of Social Security receipts into private investment accounts -- would transform the upcoming shortfall in Social Security receipts from a problem that is manageable by modest changes in retirement age, income subject to tax, etc., to a catastrophe. How do you divert say a third of SS receipts into private accounts and still pay current benefits to Grandma with two-thirds of what you have coming in? You can't. Please don't tell me that magically the rate of return will be so much better with private accounts that the fishes and loaves will be multiplied and we will be able to pay anticipated benefits to retirees and those soon to retire and still have more money for future generations than we would otherwise. If you believe that I've got some bridge bonds to sell you for those new private accounts.

George Mitchell said...

Anonymous appears to assume that fixing Social Security can be done without modifying benefit levels. Wrong. For starters, the retirement age probably has to grow and inflation needs to be measured in a more realistic way. Further, citizens under a specific age, say 50, need to have the voluntary option to manage their own account rather than remain in SS. A wide range of changes has to be on the table to address the unsustainable current condition. No single change will be sufficient. Some might want to raise taxes further. I don't, but that's also a possible option. The main point is, contrary to Folkbum general theme, the system is simply not sustainable as now structured.

Anonymous said...

I believe I mentioned "modest changes in retirement age." But George I have to say to you, too, you are not responding to what was said. Why do citizens under the age of 50 need to have the voluntary option to manage their own account? Do you not get it that if contributions to SS are diverted, in part, to private accounts, the underfunding of SS gets worse, not better, and in a rather dramatic way? If you let people who are paying into the system divert one-third of their contributions to private accounts, that means that there will one-third less money available for current retirees and those over 50? And that it is on top of the preexisting underfunding problem? So how does this constitute any part of a "fix"?

Dad29 said...

The options proposed by Ryan (private-accounts, etc.) are not cast in concrete, and Ryan is the first to admit that.

But there's a disingenuous "either/or" being presented by the naysayers, allowing a choice between two bads as the ONLY choice.

Ryan proposes, in general, that the Feds will guarantee a MINIMUM payment to anyone under the age of 50 who goes into the 'partial investment' plan. Reducing the original SS 'promise' to a smaller MINIMUM guarantee--which will be supplemented by the private account's annuity payments--will allow SS to remain viable for all the payees. (That in combo with retirement-age changes and perhaps reduction of bennies for 50+ people.)

But the big prize for the under-50's is this: the private-invested moneys can be passed on in their estates, unlike SS.

Free Lunch said...

There is a problem with the funding of Social Security because the George W Bush Administration cut taxes and increased spending to a huge degree. At the end of the Clinton Administration, the country was on track to pay off all of its external debt, the debt that Reagan and G H W Bush had been irresponsibly piling up, a problem that seemed to trouble Fed Chairman Alan Greenspan -- for a while. When Clinton was president, Greenspan fought on the side of a balanced budget, but when Bush became president, he endorsed Bush's wastrel ways. So much for Greenspan's competence and integrity.

As the economy was run into the ground by irresponsible deregulation, speculation and overly generous tax cuts, the Fed was forced to cut interest rates to absurdly low levels. These extremely low levels have cost Social Security. They have also cost life insurance companies a lot.

We will not assume that the Republicans or Democrats will ever cut spending, so take that fantasy off the table. Republicans believe in spending restraint only when they are not controlling Congress. Republicans have shown repeatedly that they are the more irresponsible because they are so adamant about both increasing spending and cutting taxes at the same time, but Democrats who have a consistent philosophical commitment to helping people with government spending are not going to cut spending just because the Republicans have borrowed too much.

We should have a country with very little external debt right now, but that did not happen. That is not the fault of Social Security. Social Security is not a Ponzi scheme. It's not even a competent analogy to call it such. It is no more a Ponzi scheme that a society is. We always have to rely on future generations as the older generations become too old to be productive. We always owe future generations our commitment to investing in them so they are able to do that. Is that a Ponzi scheme?

Social Security is not an investment program, but it is successful. It is not merely pay as you go, but it is designed to be and remain actuarially sound. If nothing is done it will continue to pay out at levels that are higher than the current level indefinitely, though it will be lower than the initially assumed level.

China will be very concerned to find out that US Treasury obligations are not assets. Feel free to tell us why they are not assets.

Free Lunch said...

Dad29,

Why do I want more nonperforming 401k's?

Ryan is just selling us out to Wall Street. There's no value to his proposal. The returns that are being promised will not be delivered.

Don't forget that Ryan really doesn't have a lot to work with. Not only does Social Security offer support for retirees, but it also pays for disability and survivors. Ryan's promise appears to ignore that or his minimum payments won't even be enough to pay for cat food for retirees.

Ryan's proposal benefits the rich. The other 98% will suffer from it.

jimspice said...

What do we do with the first retiree whose portfolio is wiped out? Or the next ten thousand, or a million? Do we really let them live on the streets, victims of an "unfortunate" market?

Anonymous said...

Mitchell? Mitchell? Dad29? Dad29? Would somebody please explain to me how allowing say one-third of the contributions to SS to be diverted to private accounts doesn't catastrophically impact payments to current SS recipients and those who are likely to retire in the next 25 years? Dad29, you say that Ryan proposes that anybody under age 55 will have a smaller minimum guarantee, plus the private accounts. OK, I'll buy that. Good luck with those private accounts. Hope they do better than the stock market after 2000. But that's not the point. We're chopping off a third of the inflows to SS, by definition. What's happening to the payments to current SS recipients, and what will be happening to those over 50? You say the system is not sustainable as currently structured. Yeah, and you want to throw everybody over the age of 50 under the bus. Talk about not being a sustainable system!

You people and Paul Ryan propose this irresponsible idea as if it were serious. You have no answer to what I have asked, now three times.

Free Lunch said...

Of course, increased taxation can result in a reduced tax base.

But not in the United States. Everyone knows that we are on the left (tax increases mean revenue increases, tax cuts mean revenue cuts) side of the Laffer Curve. Republican tax cutting fever has proven that time and again.

Anonymous said...

I've got an idea. Let's start channeling one-third of all SS contributions into private accounts, effective now. The drawback is, of course, that we'll have to reduce benefits, effective immediately, for retirees like Dad29 by a third; and near-retirement types like George will also be looking at SS payments chopped by a third. But for those like George they could also have those wonderful private accounts -- a third of $15K a year (employer and employee FICA, assuming maximum contribution levels, more or less). So George will be able to set aside $5K a year for five or ten years, until he decides to hang it up. That'll give him another $25K or $50K to augment his significantly reduced Social Security paycheck. Plus interest thereon!

For retirees like Dad, it's too bad, so sad. You've got to break a few eggs to make an omelet, and all that. No pain, no gain. I'm sure that Dad, as a member of the greatest generation, will sacrifice once again.

Dad, George, you game?

Private accounts -- the fix to our broken Social Security system!

george mitchell said...

Anonymous,

Whew. Kind of breathless, aren't we?

First, your comments completely reinforce the accusation that SS resembles a Ponzi scheme.

Second, in case you missed this point: SS as it now exists is unsustainable.

Third, a fix will involve political compromises that hold harmless recipients over a certain arbitrary age.

Fourth, everyone under that age should have the option to stick with a system that yields them no return but is fixed vs. a "private" system that lets them invest on their own.

A transition to a new system is what Ryan and others are suggesting. The alternative is the current system, i.e., not sustainable.

Anonymous said...

You really don't want to answer the question, do you. "A fix will involve political compromises that will hold harmless recipients over a certain arbitrary age." Those political compromises mean coming up with money out of general revenues, on a ginormous scale, to replace -- for decades to come -- the contributions that would be diverted to private accounts. You say the current system is not sustainable. You say that because, in the absence of some changes in the retirement age, income subject to FICA tax, COLA formulas, etc., Social Security payments would need to be made, in relatively small part, from general revenues. That subsidization would be small potatoes compared to the mammoth drain on the Treasury that would be required to replace the contributions diverted to private accounts in any system in which private accounts were more than miniscule investments. And that's going to be "sustainable"? Could you get real, please?

AnotherTosaVoter said...

Don't guaranteed minimus lead to a moral hazard problem?

George Mitchell said...

Anon's actuarial degree apparently enables him/her to reach conclusions with certainty that are above the level of many other observers.

Some of the pertinent quantifiable variables involve: timing of benefits; number and age of beneficiaries; amount of benefits. If age limits for current benefit levels are introduced, along with other changes, benefit payments and levels and liabilities eventually decline (compared to no change).

Anon says any such change would require huge general revenue infusions if accompanied by opt out plans for younger recipients. That is not automatically the case. But let's take h/her claim seriously and do some additional fact-checking. Stay tuned. My focus for the rest of the weekend is on the National League west title.

George Mitchell said...

Anonymous v. Ryan:

Social Security’s Own Actuaries Confirm Ryan’s Roadmap Saves Social Security
Tuesday, April 27, 2010

The non-partisan Office of the Chief Actuary for the Social Security Administration [SSA] released their official score of the Social Security provisions of A Roadmap for America’s Future. Earlier this year, House Budget Committee Ranking Republican Paul Ryan (WI) introduced an updated version of his Roadmap proposal – aimed to fulfill the mission of health and retirement security, pay off our crushing burden of debt, and spur economic growth.

The Actuaries report confirms earlier findings from the Congressional Budget Office [CBO], which found Ryan’s Roadmap would pay off the long-run actuarial deficit in Social Security, while strengthening the safety net for society’s most vulnerable. By providing common-sense reforms, such as modest adjustments in benefit growth for higher-income Americans and gradual increases in the retirement age, the Roadmap makes Social Security permanently solvent.

Specifically:

* Currently, Social Security’s long-run actuarial deficit is 2.00% of payroll – which is $5.3 trillion in present value terms. SSA’s Actuaries certify that the Roadmap erases this deficit, making Social Security permanently solvent. In contrast, the unsustainable status quo would impose 24% across-the-board benefit cuts to keep the program afloat.
* The Roadmap requires no net general revenue transfers over the 75-year period, and strengthens the federal government’s long-term fiscal position.
* The Roadmap meets criteria for “sustainable solvency,” as Social Security’s trust fund assets are expected to remain on the rise at the end of the 75-year period.
* The Roadmap guarantees that every dime placed in a personal savings account is guaranteed – even after inflation; also provides for a benefit enhancement for the lowest earning Americans, providing that those most reliant on Social Security receive benefits well above the poverty level.

The report was released shortly after the first meeting of the President’s Fiscal Commission, where Democrats and Republicans echoed the need to serious reform to avert our looming fiscal crisis. Absent reform, vital government programs like Social Security will be unable to meet their obligations, imposing devastating cuts for our nation’s senior citizens. A Roadmap for America’s Future, as analyzed by the non-partisan government actuaries and the CBO, remains the only viable legislative solution put forth to get our fiscal house in order.

To read the full SSA Actuaries’ report, please visit: http://house.gov/budget_republicans/press/2007/042710ryanbillletterfinal.pdf

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Free Lunch said...

George Mitchell -

Thanks for reminding us of the letter. Let's read the highlights:

1. Total actuarial deficit is about 2.0% of payrolls.

2. Savings and costs identified are:

3. 1.04% savings by decreasing increases in benefits.

4. 0.04% added cost by increasing low income benefits.

5. 0.41% savings by increasing retirement age.

6. 1.13% savings in the deficit by taxing health care benefits.

7. 1.74% deficit increase from PSA diversion.

8. 1.53% savings from smaller benefits for those with PSAs.

9. 0.02% deficit increase from PSA guarantee.

And it requires substantial borrowing from the general fund to pay for the PSAs.

The letter says that PSAs make tax increases and benefit cuts higher. Why do we want them? Who benefits from them?

George Mitchell said...

Is the following post from Anon an inside joke?

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Anonymous said...

I know it's off topic, but what happened to music on Sundays?

Anonymous said...

OK, I've read the Chief Actuary's report. Yes, Paul Ryan's Roadmap saves Social Security, and preserves its solvency! How does it do so? Well, between 2037 and 2056 Social Security would have to borrow $1.2 trillion from the Treasury. I thought that was the problem with the current "unsustainable" system -- that at some point it has to tap into general revenues?

Second step: Raise taxes on working stiffs! The Roadmap proposes to impose FICA taxes -- both employer and employee -- on the value of employer-provided health insurance. An employee making $45,000 a year may very well have family plan health insurance that costs $15,000 a year. So now we've just upped his payroll taxes by 25%. Read my lips -- oh, wait, this isn't someone with capital gains or dividend income or a ten-million dollar estate, just an ordinary working stiff. We can raise taxes on him!

Third step: Raise the retirement age! Yup, first to 67, then tie it to increases in longevity.

Fourth step: Reduce benefits! The language here is particularly murky, about "reducing bend points," and other unintelligible nonsense. Other sources reveal, however, that implementation of the Roadmap would eventually result in a decrease in benefits paid to retirees at the top of the scale of 28%.

Final step: Private accounts. From now until 2021, we'll let people deposit 2% of the first $10,000 earned and 1% of the next dollars earned, up to the Social Security cap (currently about $106,000), into private accounts. Whoop-de-do, that's $1100 a year! By the time people in their mid-50's are eligible to retire, they could have like twelve grand in their retirement accounts! They could buy an annuity that would pay . . . one cab fare every month for the rest of their lives!

Let's be very clear about what the Roadmap does. It raises taxes on people earning below the Social Security cap. (Those earning more than the cap, with employer-provided health insurance, would not see any increase in FICA taxes.) It increases the retirement age. It decreases benefits. It subsidizes Social Security from 2037 to 2056 with general Treasury revenues. And, it phases in, initially at a very small level, private accounts.

Some or all of the steps included in the Roadmap -- benefit decreases, retirement age increases, tax increases, general revenue subsidies -- may be necessary. But the private accounts Ryan proposes aren't going to help support my retirement, in any significant way, and this report, at least, doesn't prove that private accounts, in and of themselves, help to preserve Social Security.

Anonymous said...

Correction: Payroll taxes on a working stiff making $45,000 a year with a $15,000 employer-provided family health insurance plan would go up by 33%, or about $1860, under the Road Map. Not to worry, though, the Road Map eliminates all taxes on dividends, and capital gains, and estates!

George Mitchell said...

"Some or all of the steps included in the Roadmap -- benefit decreases, retirement age increases, tax increases, general revenue subsidies -- may be necessary. But the private accounts Ryan proposes aren't going to help support my retirement, in any significant way, and this report, at least, doesn't prove that private accounts, in and of themselves, help to preserve Social Security."

Earth to Anon: (1) private accounts are not intended to support your retirement unless you choose one; (2) who ever said private accounts, "in and of themselves," would preserve SS?

Anonymous said...

Private accounts wouldn't help to support my retirement even if I chose one. Under Ryan's plan the most you or I could expect to see -- if we are at the top of the earning scale, and contributing as much as he would allow -- in ten or fifteen years would be twelve or fifteen grand. That wouldn't even buy pet food for us to eat for the rest of our lives. And my point with regard to private accounts not helping to preserve Social Security is that the diversion of FICA contributions from payments to current Social Security recipients to private accounts, unlike most of the other changes Ryan proposes, actually makes the Social Security deficit worse rather than better. Increasing the retirement age would help the solvency of SS. Reducing benefits, or slowing their growth, would help the solvency of SS. Increasing the base on which FICA taxes are imposed -- whether by taxing unearned income, or earned income at higher levels, or, as Ryan proposes, by including the value of employer-provided health insurance in the base -- would help the solvency of SS. Revenue inflows from Treasury would help the solvency of SS. Allowing people to divert funds that would otherwise be paid as FICA taxes to private accounts does not help the solvency of SS; it worsens it. The solvency of the Social Security system is a Trojan horse for people who, for ideological reasons, favor private arrangements over anything that, God forbid, might be run by the government. That private accounts would, during a transition period of many decades, increase the SS deficit, matters not to them.