No Preconditions on Social Security Reform?

Is the administration willing to drop its insistence on private accounts as a condition for Social Security reform? Some people think so:

Social Security Up for Discussion Treasury Chief Says 'No Preconditions', by Lori Montgomery, Washington Post: With ... Democrats poised to take control..., the Bush administration is making a fresh push to persuade them to help rein in the rising costs of Social Security and government health-care programs by offering to open talks with "no preconditions."

Treasury Secretary Henry M. Paulson Jr. ... said in an interview yesterday that he has had "a number of . . . very, very general, very preliminary conversations" with lawmakers from both parties about the issue since Election Day, Nov. 7.

So far, "it's too early in the aftermath of the election to know whether we're going to get traction," Paulson said, adding that he is "going to make a huge effort to persuade people to engage in a bipartisan discussion where we don't precondition our discussion."

"No preconditions," Paulson said, means both sides get a chance to put their ideas on the table. In regard to Social Security, administration officials said that means President Bush will continue to advocate ... private retirement accounts, a proposal Congress roundly rejected last year.

It also means that the White House is willing to listen to other ideas... "We're in a listening mode," said Rob Portman, director of the Office of Management and Budget... "The president wants to listen. He wants to hear what the leaders on Capitol Hill think is the best way to go. He's not wed to any particular approach."

Political analysts said the outreach campaign is a sign that Bush may be willing to compromise to make progress on Social Security... Bush may see Social Security as an issue on which he could score points before leaving office in 2009, analysts said.

Bush's former chief economic adviser, Lawrence B. Lindsey, added to that speculation on Monday, after writing in the Wall Street Journal that Bush "may be willing to raise taxes as part of a 'deal' on entitlement reform." Specifically, Lindsey wrote, the administration might agree to lift the cap that limits Social Security payroll taxes to the first $90,000 of income...

While Paulson and Portman are talking about consensus, some Democrats worry that Bush is still determined to pursue the idea of private accounts. ... That fear was fanned last week when Bush appointed Andrew G. Biggs, a proponent of Social Security privatization, to the agency that runs the program.

"This nomination of Biggs is very troublesome," said Rep. Sander M. Levin (D-Mich.), who is in line to chair a House subcommittee on Social Security. "The president is sending signals that what he's really after is privatization. And that's just a non-starter." ...

Just to be clear about what "no preconditions" means. From a Wall Street Journal article on the same topic:

Will Bush Bargain to Save Social Security?, by Jackie Calmes, WSJ (free): For Mr. Bush, private accounts are ... central to his concept of an "ownership society" in which Americans rely less on government...

Publicly, the White House isn't budging. "Private accounts are part of our proposal and we're interested in having others put things on the table, not taking things off," says administration spokesman Dana Perino.

For those who nonetheless see a Bush concession ahead, perhaps the biggest reason is this: If Mr. Bush doesn't drop private accounts, it is virtually certain that nothing will happen on Social Security, the issue he has called the top domestic priority of his second term. ...

This week, ... Mr. Paulson dodged a question about the Democrats' demand that the administration drop the private-accounts idea. "Only by taking a bipartisan approach, not conditioning the discussion" might an agreement be reached, he said.

Some listeners wondered whether Mr. Paulson was signaling administration willingness to quit prescribing the accounts. Administration officials privately said that wasn't the case. ...

Saying that private accounts have to be part of any deal sounds suspiciously like a precondition. There is this is the same article though:

Chief of Staff Bolten got a similar query about private accounts... According to one attendee, Mr. Bolten "came as close as he could in a quasi-public setting to saying that carve-out accounts could be dropped if that were the price of reform." A second audience member supported that interpretation.

But there's this too:

Messrs. Rangel and Baucus each tried to get Mr. Bush to drop private accounts in the past. Mr. Rangel tried at a White House encounter in April 2005. He said afterwards that Mr. Bush sternly replied, "I'm the president, and private accounts will stay on the table until I leave."

As far as I can tell, there's nothing new here. The administration is hoping that by giving in on other issues, it can get private accounts into place, but private accounts will not be dropped as part of any compromise. So long as that's the case, this is nothing but a waste of time, time that could be spent on much bigger problems such as reforming health care.

Update: Andrew Samwick at Vox Baby follows up on the statement "As far as I can tell, there's nothing new here" and explains what is different this time.

Update: PGL at Angry Bear responds to Andrew, and has additional comments as well.

Update: Brad DeLong continues the discussion.

Comments

[Ken Houghton]

In the normal world, removing the cap wouldn't be a horrible idea, especially given the value of SocSec in general.

In the current world, it just means that we'd be putting a few hundred/thousand more dollars per person per year toward eliminating the estate tax or dropping bombs and shooting bullets at the hearts and minds of the Iraqis. (Even ignoring the horror of putting our volunteer Armed Forces in a no-win situation without the proper tools and equipment and essentially a big target on their bodies.)

I don't

[Bruce Webb]

Ah but Ken in the real world raising the cap means lowering the rate.

People may, have, can and will dismiss me as a ranting nut for insisting that Social Security is currently overfunded going forwards. But even assuming it is not the surest way to make it so is to raise the cap. Opponents of Social Security don't want to fully fund it, that is no part of their agenda. They want to kill it and transform it into a market based system. The very notion that fixing it by means of a 6.2% or 12.4% increase (depending on how structured) on the taxes paid by people making $90,000 and over is even on the table for the Bushites is laughable. To take this notion seriously is to believe that the Economic Right is perfectly willing to more than reverse the entire Bush tax cut in the interest of not cutting retirement checks 35 years out.

Raising the cap would not be a totally terrible idea if there was in fact a serious gap in financing for Social Security. It would be a bad idea, and a worse idea than simply raising the FICA rate for workers, but not ipso facto terrible. But absent some wild rhetoric and some distortions of demographics no one has made a serious case based on actual financials that it is necessary.

Now Medicare is different. There are real, if overstated, challenges to it. On the other hand they already lifted the cap. As far as I know all wage income is subject to Medicare (2006 Medicare Report p.6). So any discussion of the cap in relation to Medicare is a non-sequitor - there is no there there.

Any discussion of Social Security that starts with the assumption that participants are concerned with the gap between cost and income starting in 2041 (or depending how you define 'gap' in 2008, 2011 or 2017) kind of ignores the history of the battle against Social Security over the last 71 years.

It is not about retirement security, it is about creeping, and in the Economic Right's eyes not so creeping, Socialism. It is not and rarely has been about the financials and has always been about the principle.

Ayn Rand hated socialism and everything associated with it. Well now, stop the presses.
Social Security: it it about Solvency or about Ayn Rand? . And that whirring sound you hear? It is Ayn Rand (now joined by Milton F.) whirring in their graves at the notion that the problems of Social Security should best be addressed by a fresh injection of funds from people making more than $90,000 per annum.

[Bruce Webb]

Now throwing a 6.2% increase in marginal rates for those making more than the Social Security cap and putting that money towards paying down the General Fund structural debt, now that is something I would get behind.

But that is of course unthinkable. Yet that people will solemnly put forth the exact structural equivalent (raising the cap on FICA) on the table and expect no one to burst out laughing is astonishing proof that numeracy is not a required element for policy making in Washington.

You can not slide a reality knife between 'raising the cap' and 'raising top marginal rates'. Unless of course you address the difference between taxes on upper income wages and on taxes on returns from capital. (Somehow I don't think that the atheletes and actors who earn huge sums on wages are going to look kindly on a 6.2% hit that team owners and studio owners magically are immune from paying. But we are dancing angels on the heads of pins. Any financing gap in Social Security, fanciful or not, is not going to be filled by taxing the wealthy.)

[JohnDewey]

Bruce Webb,

The government's retiree financial problems start much sooner than 2041 or even 2018, and those problems will require more than simply taxing incomes above $90,000.

Washington has been spending the social security surplus for enough years now that they've come to depend on it. Now that Medicare is siphoning billions from general funds, and social security surpluses are nearly gone, Washington needs additional taxes in order to continue pork barrel spending. So what to do? Just raise FICA taxes now and revert back to their spending ways. The propensity for Congress to spend any temporary surpluses is one reason private accounts are so attractive.

Private accounts are favored for other reasons. The return from private accounts, while not guaranteed, is highly likely to exceed the "return" provided by Social Security.

One major attraction of private accounts is that the funds are inheritable. That means that wealth-building for even low-income families can span generations. As you are probably aware, social security recipients who die young sacrifice huge sums to those fortunate enough to live long lives.

Social Security was a good deal for World War II's Greatest Geneation. It's also a good deal for those who contributed tiny amounts - the very low income earners - and are fortunate enough to live long lives. But for the middle class, social security has become a very poor retirement program.

[ilsm]

"But for the middle class, social security has become a very poor retirement program."

But it is our main old age income, expected to keep us from poverty in old age. It is what we expected from the Reagan Greenspan reforms.

Several things before we "re form" social security:

One, the trust fund surpluses since 1984 have understated the "deficit". The cash was used for current outlays, lessening the need for the treasury to increase supply of T Bills (depressed tresury demand for cash, lowered interest rates, prevented crowding out, etc).

Two, if the cash were not available then a lot of people would have paid higher taxes, interest rates would be higher and NPV of fixed income accounts higher, rather than asset bubbles like the dot com and housing bubbles.

Three, Medicare is not funded by SSTF, nor is medicaid or the other 'entitlements', anymore than defense spending.

Four, we cannot ever put three on the table.

You need to fix medicare; fix it, not on the back of SS.

You need to fix medicaid; go there, not SS.

You need to fix the general fund deficit; go there, not SS

I see no need to discuss SS, until the other issues are resolved.

Re- Forming SS is a scam to fix other things with SS reductions as the money is spent elsewhere.

Reneging ain't on the table.

Although this may have been the reagan reform objective all along.

Their idea is turn the regressive employment tax into a retroactive financing of the general fund.

Wrong!

[Bruce Webb]

JohnDewey "The return from private accounts, while not guaranteed, is highly likely to exceed the "return" provided by Social Security."

Put some numbers on the table.

Assertions are like opinions. Like other unnamed entities. Everyone has one or more.

This is an economics site. If you can't say it with numbers you can't say it at all. And adopting the names of philosophers way greater than you could ever be doesn't make you John Dewey. It barely makes you Huey, Dewey or Louie. Who are you to lecture me in that supercilious way?

Ken and Mark know where I am coming from. They didn't need to click on the supplied link necessarily to understand that it was in turn linked by other links directly back into the financials of Social Security. They didn't need to see the link to Social Security is not broke: by the numbers which in turn would have given links back to every Social Security report back to 1942.
http://www.ssa.gov/history/reports/trust/trustreports.html

If you can back up your "highly likely" with anything other than a name stolen from a better man, then bring it. Guess what? I ain't Demosthenes. Which in small part explains why I don't call myself "Demosthenes" but do in almost every substantive post link back to primary sources, or to my own posts which in turn link back to primary sources.

I have read Table V.B1 and understand the implications of Figure II.D7. Do you?

Bring it on. With numbers. Because from my best understanding you have been dead since 1952. http://en.wikipedia.org/wiki/John_Dewey Adopted authority ain't authority.

[ilsm]

"Specifically, Lindsey wrote, the administration might agree to lift the cap that limits Social Security payroll taxes to the first $90,000 of income..."

The limit is $97,000 starting Jan 2007.

Huh??

Go to: http://www.ssa.gov/pressoffice/pr/2007cola-pr.htm

"Some other changes that take effect in January of each year are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $97,500 from $94,200. Of the estimated 163 million workers who will pay Social Security taxes in 2007, about 11 million will pay higher taxes as a result of the increase in the taxable maximum in 2007."

Fantastic, does anyone in the administration know what is going on?

[bakho]

Democrats would be stupid to put a SS proposal on the Table and they now control the legislative agenda. They can correctly argue that SS is OK for now. Pelosi is not for SS discussion, the unions are against it. I give 10:1 odds SS discussion won't happen. Medicare and Health care costs will be debated instead.

"If it works, don't fix it."

[bakho]

Private savings accounts for retirement are a great idea. Everyone should be encouraged to have one. Perhaps there should be an add-on to SS. However, private accounts are not guaranteed to return, events happen that totally wipe out private savings and having no baseline support of the elderly is simply unacceptable.

To people that would do away with SS in favor of private accounts, know that there will be losers unable to support themselves in old age. Supporters of private accounts only are offering this curse, "May your mother-in-law' be one of the losers and be forced to move into your house and live off your wages.

[ken melvin]

John Dewey's been in heaven some 54 years! Wonder how he likes it? Ayn Rand? What does she think? And, what does Ayn think of John? Milton Friedman, oh I know he just got there, but, how's he liking it?

[callahan]

http://www.loudobbs4president.com/

[Bruce Webb]

Sorry to be so peevish but I am sick and tired of people who "know" things.

90% of Americans approved of Bush's job performance at one time. 55% of Americans are now looking around and wondering how the remaining 35% managed to get so stupid. Hey that object on the wall? It's a mirror and some people need to learn to use it.

If everything you learned about Social Security was gained from newspapers in most cases you quite literally know less than zero about it. And this is true even if most of what you know about politics or other aspects of economics was gained from newspapers. You can learn a whole lot about a whole lot of things by diligent reading of your major local metropolitan paper backed up by reading the New York Times and the Washington Post. On the other hand you can get a very distorted picture of the political world if all you read is the WSJ editorial page and all you watch is Fox News, On the gripping hand you can learn a whole lot about dead and missing blond girls by diligently following Nancy Grace.

But you need to be able to evaluate the quality of your sources and distinguish between reliable sources and say Howie Kurtz on a bad day. Between populizers and people who actually have studied the data. And then between people who use data to achieve particular policy ends and people who present data in support of particular policies.

On Social Security there are a hell of a lot more users than presenters.

If you use the New York Times to gather your knowledge of Darfur today, and absorb the details you may not go too far wrong. No you won't be any kind of expert, but there is no particular group in positions of power actively working to distort the fundamental realities. If you used the New York Times to gather your knowledge of Iraqi WMD capabilities in the runup to the war you probably grew to "know" things that were not only factually wrong but logically impossible. Because there were people in positions of power actively working to distort the fundamental realities.

People who are now gobsmacking themselves on the head for being fooled on WMDs, or worse claiming those who were not fooled at the time were horribly wrong not to have been fooled are now largely overlapping with those people who are lecturing on Social Security crisis. Because everything they "know" they learned from people with an agenda, or even worse people from people in the media who "know" what they "know" because they too learned it all from people with an agenda.

Well I have an agenda. One in which I am not always nice and sometimes not even particularly fair. But one which I can back up with numbers.

And not to dance on the grave of the JohnDewey who is not yet quite dead. But when you get to the details of the Posen Plan, the only one whose details made it onto the table, the one which Bush in part endorsed, you find out that for poor workers it was not in fact inheritible. Lower income workers whose accounts wouldn't get themselves above certain minimums had to annuitize their retirement and it died with them. This above everything else ended up dooming the Plan. The Ownership Society it promised was purely mythical for most.

How would someone have possibly known that? Well a very close reading of the papers of record would have clued you in. Or you could have been at the econoblogs. Or watched this from Lee A. Arnold.

http://www.ecolanguage.net/ Second animation

[anne]

Complain away, well done, Bruce.

[evagrius]

I don't know why people are intrigued by private acoounts replacing Social Security but I'll make a guess.
It's not economics that's driving it. Not at all.

It is, as Bruce Webb pointed, related somewhat to Ayn Rand's position but not quite, ( she was an atheist).

Its origins are from a distorted Calvinism, the "I got mine so God loves me -God loves me so I got mine" school of theology. It's the school of theology that sneeringly dismisses the view that "salvation" is open to all, including the poor, the losers, the "addicted", etc;etc;. It views salvation as only open to those superior beings who, obviously superior, are wealthy and of superior "character". It views any attempt at "sharing salvation", so to speak, as an affront to their "hard work", ( never mind the paradox of grace shed on the good and bad alike). This attitude goes way back, before Christianity obviously, ( read Karen Armstrong's latest for elucidation). In Christianity, St. Jerome, the famous misogynist, attacked Origen who was an advocate of "universal" salvation.

I have noticed that this school of theology is particularly prevalent among "conservatives", even those who are atheist.

On another thread topic;
Basically, if someone wants to save a little extra in a retirement investment account on top of Social Security, there's no law preventing people from doing it, is there?
So why shove everyone into the market?
Isn't it the same as the Medicare Part D debacle?

[save_the_rustbelt]

My biggest complaint with SS is the death lottery function.

If you die at age 64 you have really been hosed, especially if you are not married or have never been in a long term marriage.

If you die at 94 you have made out like a bandit so to speak.

There are ways to fix this, either with a life insurance function or with private accounts (for future generations, more along the lines of the Clinton ideas rather than the Bush nonsense).

[fiskhus jim]

Requiring "private accounts" is nothing more than a con to generate million$, and even billion$, in commissions and fees that are, as of now, not deducted from the contributions to the fund.

While these commissions and fees are the only goal behind the President's "plan" for "reform" (without considering his great personal desire to destroy the Social Security system altogether), this issue clearly highlights the problem with privatizing any public asset: namely, the higher costs associated with generating profit.

Currently, the SS Administration has no commission costs and incurs administration fees far below what can be expected from any proposal for Wall Street management of the fund.

Anytime there is profit that can be extracted from the administration process, there is a clear cost reduction available. If Wall Street is eager to take on these "private accounts" because of the anticipated income, we can be sure that fund administration that cuts Wall Street out of the picture is cheaper, and leaves more in the fund for benefits.

[run75441]

Bruce:

I kind of agree with you.

1. First eliminate the "Unified Budget" that allows the Social Security Withholding Tax Surplus to be spent on things other than Social Security. This goes for the Federal Employee Retirement funds also. If Bush was really creative, he would find away to invest these funds seeking a greater return and delay the 2018 payout of Treasury Notes till later. However, Bush would have to face a higher deficit number which is hidden by the yearly addition of the Social Security Withholding Tax Surplus.

2. Is the "Clawback" still on the table? This was the basis for the Bush's Committee plans which meant the private accounts would be funded by a loan from the Social Security TF, only to be paid back upon retirement. To many people do not understand the underlying premise of the Bush proposals. The return may be high dependent upon what the gov. allows you to invest in; however, I am sure it will not be Nasdaq stocks and more towards the line of equities.

3. Has anyone read Diamond-Orszag report on fixing Social Security? Brief Summary:

- An increase in the Social Security withholding tax would begin in 2023 at the rate of .26 of 1% of that year's rate (i.e. 12.4% times .0026) per year through 2079. Additionally, a life expectancy longevity factor would be utilized to increase the tax rate dependent upon increases in life expectancy of the populace. Given these two incremental factors, the CBO has estimates the Social Security withholding rate would be 12.7% in 2025, 13.9% in 2050, and 15% in 2075.

- Increase the amount of earnings subject to the Social Security Tax. In 2004, the maximum salary taxable was $87,900 which represents ~83% of all covered earnings. The CBO estimates that to achieve an increased source of revenue and stability to the Trust Fund, the covered earnings should be increased to 87%. To achieve this, the amount of earnings subject to the Social Security tax would have to be increased by 28%. The increase would be accomplished gradually.

-Incorporate a tax on the balance of the salary not subject to the Social Security maximum salary limit (i.e. in 2004 this would have been anything over $87,900). The rate would begin at 3%, increase to 4% by 2022, and could be shared by both employee and company. Those earnings over and above the maximum would not be considered in determining benefit payout. Workers with higher earnings would pay more than those with lower earnings and would also be subject to larger decreases in benefits. Those with life time low earnings would be sheltered from the benefit reduction and would be better off with Diamond – Orzag as compared to today.

There is more and here is the CBO's analysis of Diamond - Orzag's proposal: http://www.cbo.gov/showdoc.cfm?index=6044&sequence=0#pt3
Long-Term Analysis of the Diamond-Orszag Social
Security Plan December 22, 2004

4. In 2000, an offer was made by a president to fully fund the SS TF with projected budget surpluses. It was rejected. In 2001, one of the authors of the Social Security Withholding Tax increase in 1983 vigorously proposed tax breaks to the population as a whole. The tax breaks were skewed toward the less than 1% of the popuation (31% going to less than 600,000 taxpayers). In itself the rescinding of this taxbreak alone would almost fund the Social Security Trust Fund. In later years, Greenspin (the coauthor of the SS Tax Increase with Mohnihan) later commented on Income Inequity and also about spending out pacing revenues [both of which are lower in percentage of GDP when compared to previous years]).

Social Security needs to be fixed and not taken apart. Also remember its very existence is why companies are abandoning the US for Asia.

[mike]

We have government sponsored and subsidized private retirement accounts coming out of our ears -- IRAs of various types, 401Ks, Keough, and so on. What we don't need is another one of these. We need a social insurance program to give a safety net in case things don't work out. That's what the federal government needs to provide. Let people take care of their own retirement savings -- but provide a federal safety net so we don't go back to the county poor farm and putting gramps and granny in the spare bedroom.

[Richard]

STR: "My biggest complaint with SS is the death lottery function."

Which is just the obverse side of describing SS as longevity insurance.

If you actually have to save funds for your elderly years, you are compelled to oversave, i.e., 20-30% oversaving due to the high variance of an individual's time until death. Of course, you can choose to buy a life annuity to fund that variable benefit -- but that's exactly what SS is: a variable life annuity with a disability benefit thrown in. And the payroll tax is simply the fixed proportional premium for funding that benefit.

Yeah, I know that the actuarial inputs have been jerked around a lot -- but fundamentally the model is simple and capable of working.

[Bruce Wilder]

JohnDewey: "Private accounts are favored for other reasons. The return from private accounts, while not guaranteed, is highly likely to exceed the "return" provided by Social Security."

I have longed argued that Bush, the Republican Party and their policy whores don't want what liberals, progressives, moderates and Democrats want. They don't, generally, want the good of the country as a whole, in any sense of "good" as normally understood. The Brad DeLongs of this world, who insist that the Mancows (Mankiw et alia) want the same things, but simply have a different perspective on the technical means of achieving it, are deluding themselves. The clues are there in the systematic deceptions and omissions, which characterize the polemics of the Right. And, no where has the prevarication been more determined and more dangerous than on Social Security and Medicare. Bush wants to steal the Social Security trust fund for the plutocracy, his only constituency.

Since Reagan, we've gone thru one long asset inflation, so that equities have now been bid up to huge, but unsustainable p/e ratios. The returns to investment in dollar-denominated private securities, going forward from 2006 thru the baby boomer retirement, are going to be seriously sub par. The old phrase, historic returns are no guarantee of future performance, is going to be given a whole new meaning over the next 20 years.

Private accounts have always been a means for the plutocracy to rob Social Security. Sell a large part of over-valued securities to the Social Security trust fund, before the baby boomers retire, and the Great Crash in asset values comes on, due to their selling off their assets.

Plan B, if private accounts are never adopted, I think, is simple inflation, wherein the accumulated federal debt in the SS Trust Fund is devalued by inflation, while federal debt in private hands, most of it inflation-protected TIPS, is protected.

Even a fairly modest uptick in inflation is going to wreck havoc with both the SS Trust Fund and the Federal deficit. So far, the impact of Bush's deficits have been fairly modest, because debt service costs have remained modest, due to historically low rates. But, that can change.

Class warfare is alive and well, and the plutocracy is toying with thermonuclear weapons.

[fiskhus jim]

Bravo, Bruce!

You are absolutely right - the plutocrats, kleptocrats and kakistocrats do not want to promote the "general welfare", as contemplated by the Constitution.

In fact, it seems possible to say that these criminally-minded folks only enter so-called "public service", not to do what is right, but to do what is personally profitable and expedient.

[Bruce Webb]

Thanks Richard and run75441.

A little less "death lottery" rhetoric would go a long way.

To take run75441's questions in order.

1. The Unified Budget is not a problem in itself. The problem to the extent there is one is the investment instrument. Special Treasuries made perfect sense when the Trust Fund surplus was thought to be a short term phenomenum going to depletion in 2023. Treasuries were administratively practically free, they were safe and predictable, they were thought to be temporary. There was no point in setting up some mechanism for diversification of the portfolio when it would have to be unwound in such short order. That the government took the money and spent it is simply a reflection of what bonds are. You give money to the government, they spend it and promise to give it back. Whether or not you report it as some sort of Unified Budget only matters to those who don't understand. The Unified Budget is a very useful tool to measure what actual impacts government borrowing is having on the public bond market. Granted some people use it to dishonestly disguise the actual impact of current discretionary spending in relation to GDP. But this "crime" is really just one of bookkeeping and politics and not any kind of real income shift from one part of government to another. Only if you build the "phoney IOUs" narrative in does this begin to play. Nobody stole anything. Every dollar is right where it is supposed to be. Parked in the safest economic instrument on the face of the planet.

Which is not to say that we shouldn't be diversifying those dollars.

(More of this at my website. My boss has this odd idea that if he needs me to do something while I am at work I should do it. I got to jump in my car and pick up some plans.)

[ilsm]

Rust,

Being a military retiree, I and my cohorts did the death lottery for a lot of years and won.

That we get to benefit longer is gravey.

I should have not stuck it out because I might not live long enough to make sense of the risks???? Huhhhh!

As I was told as a young troppie, 'bet your are going to live forever'.

That is the only rational bet.

Except in life insurance when you are going to die to win.

My bet will always be "I will survive".

Even though I kept paying my GI life insurance.

[run75441]

Bruce:

Alot of what I have written is in answer to the questions:

- Is Social Security Bankrupt? If you rememeber, President Bush came right out and so in a recent speech. My wife watching me yel "liar" at the TV was starled.

- I understand the Treasury Note issue and support your thoughts with one caveat. The damn things have to be paid back and an increase in taxes will be necessary to do so or we can rescind some of the tax breaks.

I will read you website. It looked interesting and obviouly you have invested time and effort into it.

Thanks,

Bill

[Arne]

I have looked at Bruce Webb's site and at the SSA reports. I am not convinced that SS is fully funded, but I am convinced we should do nothing for at least 10 years until we really understand the impact of the Boomer's retirement. The SSA's ability to predict is very poor.
My biggest concern in looking at the numbers is that the changes of the last 5 years really have prevented Bruce's dream from coming true. We have gone from a period where COLAs were consistantly lower and Average Wage Indexes consistantly higher than expected, which led to the trust fund increasing faster than expected. With AWIs dropping the trust fund has stopped outperforming.
Hopefully, when we stop pissing away money in Iraq and in financing deficit spending we can get back to the type of economy needed for SS to be fully funded.

[Arne]

"for the middle class, social security has become a very poor retirement program."
Social Secutiry never was a retirement program. It is not an investment vehicle. It is insurance against living longer than your savings last, insurance against having to work until the day you die.

"One major attraction of private accounts is that the funds are inheritable."
This is attractive to the people who want to deny that SS is insurance. One you are dead you do not need retirement insurance.

[Lee A. Arnold]

Bruce, the Social Security video is bigger at YouTube:

http://www.youtube.com/watch?v=Tts2uTWt6e8

See also BUSH'S TAX CUTS:

http://youtube.com/watch?v=SA1f2MefsMM

[run75441]

anne:

Social Security is an Insurance Program. There is no investment in it.

You really can not be advocating any of the Bush Social Security Commission's proposal's for private accounts, the ones with the "clawback?" Again the question, what makes you believe they will allow you to invest in risky ventures? They won't and you will still have to pay back the amount "loaned" to you by Social Security. Bush's privatization proposals are not sound.

Back to Bruce's Website . . . I looked at them also. CBO felt that even with a decreased population, revenues would remain flat due to productivity growth while payouts went up. This I believe was against the intermediary expense plan. I believe Bruce is advocating the lower expense plan, in which case productivity gains would cover the expenses.

A question arises in my mind, would the growth cover the treasury notes also thereby negating a need for a tax increase? Doing nothing with the intermediary plan would more than likely involve a tax increase. Bruce will have to explain each plan and the outcome. I am of the opinion some sort of tax increase is in order.

[Lee A. Arnold]

Run75441, yes you are right, there are two issues: (1) Social Security's long-term solvency, and (2) the missing trust fund. Over the last 25 years payroll taxes have been increased a few times, while only income taxes have been cut. If we do not reduce other spending, where should the money come from?

[dryfly]

There already are voluntary 'add-ons' to supplement SS... they are called IRAs, 401Ks, etc. There is NOTHING stopping people from using them.

And if people don't make enough to fully fund these then how are they going to be able to support additional 'carve outs'?

Note to House Speaker Pelosi - politely remind the privatizers of this, then move on.

[Mr. Econotarian]

Why do we need Social Security, when people can simply purchase life annuities to meet the need to "insure against poverty" in old age?

[dryfly]

Why do we need Social Security, when people can simply purchase life annuities to meet the need to "insure against poverty" in old age?

Or better yet have Daddy's friends take care of us.

[run75441]

lee:

Reduce spending in comparison to what?

"To gain a perspective for the significance of the change in tax revenues and spending over the last 5 years, revenues from tax receipts as a share of GDP are low relative to the average between 1960 and 2000 in addition to spending when compared to a similar average of the same time period. The low revenue and spending comes in light of increased costs from inflation, etc. (anyone not taking salary or material increases?). In 2004, federal revenues were 16.3% of GDP or the lowest since 1959 while income tax revenues were 7 percent of GDP, the lowest since 1951. Spending was 19.8% in 2004 against an average of 20.3% 1960 to 2000. Laments of out of control spending on Social Programs beyond the Prescription Drug Program as the cause for today's deficits are simply erroneous when compared to the historical average and measured against cuts in tax revenues."

http://www.cbpp.org/1-25-05bud.htm CBO DATA SHOW TAX CUTS HAVE PLAYED MUCH LARGER ROLE THAN DOMESTIC SPENDING INCREASES IN FUELING THE DEFICIT January 31, 2005.

The issue is not additional spending, it is the tax cuts. Allow the taxcuts to sunset in 2010 or be selective and retract them for the less than 1% of the taxpayers (~600,000) and gain enough to almost fund the SS TF. Don't pass the Inheritance Tax reduction which is ajoke as it impacts "only" the upper level taxpayers. The small business men and farmer stories are ajoke and meant only to garner support.

To my knowledge, Social Security Withholding Taxes were increased once by the Greenspin/Mohnihan crew.

[Bruce Webb]

"CBO felt that even with a decreased population, revenues would remain flat due to productivity growth while payouts went up."

Well the devil is in the details. Was 2004 the peak year for immigration at 1,109,606 individuals? And long term are we really going to shrink total immigration down to 900,000 per year? (Table V.A1). Do we actually have a firm handle on how many illegal immigrants entered the country in 2004? If so how? The fact that the Trustees report it at a round 400,000 at a minimum suggests some rounding amongst the sampling and to the skeptical that they just pulled this figure out of some nether region. The notion that we are going to seal the borders down when the gravest threat to the Social Security system is lack of covered workers doesn't even make sense. Yet there it is in black and white.

Why exactly did the Trustees allow a 2006 Report to be published that simply assumed that future interest would be 2.9% rather than the 3.0% of the 2005 Report? Why did it make sense to reassess future teen and retiree labor force participation in the 2005 Report? Yet both of those changes allowed the future health or otherwise of the Trust Fund to be downgraded. How do you possibly make a judgement when they continually change not only the goalposts but the standards of measure?

I started downloading and examining the Annual Reports of the Trustees of Social Security in 1997. At that time the lead number was GDP which was not only relatively well understood but also widely reported. The results were easy to see and the trend was obvious. You can see it in this graph from EPI:
Changes in trustees' projections over time
In the face of inaction the payroll gap was shrinking and the date of depletion was being shoved out in time. There is a word for an issue where the cost of correction in the face of inaction keeps shrinking and the date of fruition keeps getting shoved out at the rate of 1 1/3 years per year. It should be needless to say that that word is not "crisis". Then in 2001 everything changed. Rather than use GDP as a lead number (which people understood) all of a sudden we were using 'Productivity'. And in subsequent Reports sudden shifts in methodology and future assumptions were introduced in ways that prevented a straightforward comparison of last year's Report to this one. Were things getting better? Or worse? Was that change in assumed future interest really just a pragmatic judgement? Who exactly decided that teens thirty years out were more or less likely to work?

Well even paranoids have real enemies and mine live at Cato.

Bottom line. Private accounts are dead for the next two years. 12.4% of payroll is going to flow into the Social Security Trust Fund and benefit checks are going to flow out. And at the end of the day, and more specifically at the end of the calender year there will be x numbers of dollars in the Trust Fund. Either x will be greater than projected x under Intermediate Cost or less. Either x will be greater than projected x under fully funded Low Cost or less. And no amount of adjusting projected numbers over the next 75 years or God help us "Infinite Future Horizon" is going to change x.

Arne is right to point out that AWI is lagging what was projected. On the other hand AWI is to some degree an abstraction based on a set of assumptions about the economy, labor force participation, and actual wages. In political terms AWI and Real GDP are polling figures. (Diebold aside) the real number comes in when the actual votes are counted. For Social Security voting day is the day we can compare actual year end balance in the Trust Fund to the projections of Intermediate and Low Cost. People can spin, they can flip, they can gyrate, they can tweak interest rate assumptions 75 years out, but the fact remains that the payroll tax dollars are rolling in and the retirement checks are rolling out and the balance is known to the penny.

I am content to sit back and watch the dollar meter for the next two years. Exactly two years back I was sitting alone in my condo on Thanksgiving and put up the following post on my Social Security blog:

http://bruceweb.blogspot.com/2004/11/social-security-is-not-broke-by.html

Any number of strange things have happened to the numbers within and without the Social Security Reports since then, number series which seemed solid all of a sudden became oddly fluid. But nothing has occured to cause me to doubt my original conclusion. It still isn't broke. And no one will convince me otherwise without bringing numbers.

[Arne (not anne)]

Since anne's only post on this thread says "Complain away, well done, Bruce," I suspect run75441 was responding to my post because we both refer to visiting Bruce's site. However, since I said the SSA should do nothing the questions could not have been to me.

Nonetheless, I can answer "would the growth cover the treasury notes also thereby negating a need for a tax increase?" Under the Low Cost projection receipts exceed costs and the interest on the trust fund is used to make up the balance. The ratio of trust fund balance to costs remains static, so there is none left for paying down the notes.

I do think Bruce has hit the nail on the head with his observation that the numbers for the LC are picked to produce a prediction where the trust fund does not grow. It is not really a prediction. Bruce "advocates" that the economy does better than LC. I "advocate" that the results are more volatile than the difference between LC and HC, so we do not really know.

[Arne (not anne)]

"But nothing has occured to cause me to doubt my original conclusion. It still isn't broke. And no one will convince me otherwise without bringing numbers."
I would not want to convince anyone that SS is broke, but I have been bringing numbers, and the picture is worse than it was two years ago.
I do not want changes to SS; I want changes to pay as you go legislation, to wasting money in Iraq, to better conservation of energy. I would be delighted to return to an economy where the gains in productivity actually go to the people under the payroll cap.
As far as SS rules go I agree we should sit back and see, but we need to make other changes or we are not going to like what we see.

[anne]

Fine thoughtful comments, Arne. I understand the concern and would not in any way object for the approach you suggest is benignly protective, though I am modestly optimistic.

[Lee A. Arnold]

Run75441, That was a rhetorical question, and you (and apparently every other honest economist) are right again, the issue is the Bush tax cuts. See those two YouTube videos linked above.

The Social Security Administration's table of OASDI contribution rates from 1937 to 2003 is available at:

http://www.ssa.gov/history/pdf/t2a3.pdf

[Bruce Webb]

Arne, reexamine the demographic numbers. In your e-mail to me from a couple of weeks back there was the assumption they were kind of data neutral. I don't see it, particularly on immigration. I don't see how we could suppress immigration numbers down to the level assumed even if that policy was actually beneficial to current workers (which would be the only reason I would support hardened borders to start with). Intermediate cost assumes an ultimate and permanent reduction to 900,000 immigrants a year, legal and illegal. In the face of an assumed shortage in covered worker ratios how would this actually work? And why would we want it to?

A lot of the rhetoric on Social Security fails to address the real world conditions that would exist on the ground at the time the bend points occur. Yes you can make a case that the borders are too loose now. And yes you can argue that the biggest threat to America 30 years out is that we will not have enough farmworkers and night nurses. But making both arguments at the same time is a little tough. Do we build an impenetrable wall now and tear it down once the boomers need some extra workers? Or do we let some extra workers in now knowing their kids will be fully fluent in English when we need them?

Social Security "crisis" is a Black Hole sucking out all rational discussion. It requires a combination of economics, demographics, and politics that simply are incompatible. Not only internally but with reference to everything else, especially tax cuts and the foreign account deficit. Remove the thumb of Social Security on the scales, reset the dialogue in terms that recognize that 12.4% of payroll is enough to fund this particular program, and by God lets move on to more interesting discussions.

I am dying to discuss how we would diversify the Social Security Trust Fund in the event we agreed that current FICA was sufficient to fund projected costs. I was throwing up diaries at dKos and MyDD a couple of years ago just begging people to examine this even as a thought experiment. But I have found no takers. Arne is receptive, has examined the economic numbers, but is gloomy. Anne is receptive, hopes I am right, but (forgive me Anne) thinks of me as an overenthusiastic Golden Lab (if there was such a thing - throw me the Ball!!),

I just have not seen any reasoned argument why we will come in south of Low Cost. Yes the data revisions hurt, yes productivity kind of sucks compared to what reasonable people expected, but I have yet to see anyone who has made the case that these cumulative changes really result in something less than Low Cost. Now Arne is arguing for a number between IC and LC which is cool. But also pointing out that that result is an argument for doing nothing in the medium term. Which is way, way cool.

Not only is 'Nothing' a Plan. It is the current Democratic Plan. And will be for the next two years. Works for me.

[run75441]

Bruce, Arne (sorry), and Anne:

It is rare I run across individuals who can discuss SS and its furure implications. If I implied SS was broke, it was not my intent as I understand it still generates a sizeable surplus. If paying back the TF is covered under LC, then we are all in relatively good shape. If LC is not the future; then by 2018 (or later), some type of payback of the Treasury Notes will be in order. For some reason, I had thought the TF run out was more like 2051. It would seem the diversification of the TF could cover contingency beyond LC.

Bruce, before I offer more; I will look at your website somemore. Starting new work and it will be burdensome for a few weeks. I am interested in further discussing it.

[run75441]

Bruce:

I think I know some people who would engage in a discussion. I will put your website out to them. One may have went back to England as he was a prof at Harvard and visiting on a H-1B. Another teaches in Colorado. One I believe is a Fed Director. A smattering of other functions also.

I thought your website was more complex and I sailed though it tonight. Makes sense and your discussion points are irrefutable.

[Bruce Webb]

Thanks run75441. Look forward to future discussions.

In particular it would be interesting to examine some of the internals of Low Cost. Ironically an overfunded Trust Fund is a bigger long range risk to Social Security than an underfunded one. If income from all sources fails to meet cost eventually the system is faced with payroll tax increases or benefit cuts. Right now that date is set at 2041 and would require some cut in promised benefits of up to 26% and/or a payroll tax increase right now of 2.02% points. Painful but doable.

Now every bit of growth above Intermediate Cost tends to shrink that benefit cut and lower that payroll gap. Which is of course good in principle. But there does come a point in time where Social Security is largely or wholy funded but still is a drag on the General Fund. This is due to the compounding effect of interest on interest. Unlike a bank where those compounded funds are available for lending, compounded assets in the Trust Fund are a straight out liability. Now if your ultimate Trust Fund ratio is flat (Low Cost) that liability is also fairly flat. Real transfers are being made from General Fund but remain relatively minor.

The danger comes if the Trust Fund ratio never flattens at all. What if we beat Low Cost and the graph doesn't flatten in 2023? Well compounding then starts to bite bigtime. As annual interest credited to the Trust Fund starts creeping towards total cost workers will start asking why they are still having to contribute. After all the money is already there. All of a sudden the Trust Fund transforms from an asset for workers into a huge liability for the General Fund. Taken to extremes this ends up transforming Social Security into just another government program.

Some people may see this as an amusing 'turnabout is fair play'. I see it as a recipe for class warfare. The long term solution is relatively simple but requires some short term pain for the General Fund. If we took all current surpluses and current interest earned on the roughly $2 trillion Trust Fund and diverted them into non-federal investments then not only would those assets be put to productive work (funding schools, roads whatever) but the payback gets shifted outside the Federal structure altogether. Instead of a growing General Fund liability the accumulated Trust Fund transforms into a true portfolio.

What would this mean in practical terms? Well first it would make the perceived problems of the Unified Budget disappear. Instead of borrowing from excess FICA the Treasury would have to borrow the equivalent of those funds from the public market. Presumedly the market could handle it, after all the funds displaced by investing the surplus in outside investments should be freed up to buy Treasuries. Overall it should be a wash. But you still have that pesky interest problem, if you can't keep the Trust Fund ratio flat you end up with a double whammy: a real portfolio throwing off gains and a Trust Fund once again creeping towards interest covering cost. The only way to avoid THAT is to immediately start puchashing outside investments to the tune of current interest. If we started that process last Jan 1, it would have required an additional $180 billion dollars of public borrowing and so a consequent $177 billion dollar hit to the General Fund deficit: $76 billion in funds no longer available from excess Social Security income and $101 billion to start paying interest owed and keeping the Trust Fund from balooning.

And it just gets more painful every year you delay the process.

The policy discussions we will have once people realize that in all likelyhood Social Security is fully funded going forwards and at least conceivably overfunded are going to be pretty interesting, albeit totally unexpected by 99.99% of current commentators. Please by all means check the numbers:

2006 SSA Report, Table VI.F8.-Operations of the Combined OASI and DI Trust Funds,
in Current Dollars, Calendar Years 2006-80

[JohnDewey]

Bruce Webb: "If you can back up your "highly likely" with anything other than a name stolen from a better man, then bring it."

Sorry, I've been out of town and unable to respond. Today I have several commitments. Later I'll provide some data as you requested.

I am insulted by your accusation that I "stole" my name from a better man. I occasionally hear this silly assertion from "intellectuals" who need to demonstrate to the world their "important" knowledge of philosophy.

FYI, the surname Dewey has been used by my ancestors for at least 300 years. My ancestors and relatives named Dewey have fought in every major U.S. war. I am quite proud of the name my father passed on to me.

My first name, John, as well as my middle name, Robert, were given to me to honor my two uncles. These uncles were both U.S. pilots who died in combat in World War II. Based on everything I've been told about those uncles, I am very proud to share their names. Neither they nor my parents would consider those names to be stolen.

I am quite certain that my relatively uneducated parents did not know anything about your beloved "better man" when they named me.

There are at least 500 and probably 1,000 males in the U.S. named John Dewey. Why would you assume that any of them have any connection to your philosopher, a man that few people care about today?

[anne]

The new old boss....

http://www.nytimes.com/2006/11/19/opinion/19sun2.html?ex=1321592400&en=78f19b5f4f0cde16&ei=5090&partner=rssuserland&emc=rss

November 19, 2006

A Bad Choice for Social Security

A day after the midterm elections, President Bush announced that he had deputized Henry Paulson Jr., the secretary of the Treasury, to work with the new Congress on reforming Social Security. Mr. Paulson would bring formidable deal-making skills to the task, honed over years as a top investment banker. In an interview with The Times after the announcement, he stressed the importance of bipartisanship. "We were going to have to build a consensus, no matter who won the election," he said.

But then Mr. Bush nominated Andrew Biggs, a zealous advocate of privatizing Social Security, to a six-year term as the next deputy commissioner of Social Security. The nomination puts Mr. Paulson in a tough spot, raising questions about whether Mr. Bush really wants to build a consensus for Social Security reform.

To have a serious discussion with Congress, Mr. Paulson must first take the idea of private accounts off the table. As an experienced negotiator, he has to know that. In opinion polls the public largely rejected Mr. Bush's plan for private accounts. Congressional Democrats resisted en bloc. Most Republican lawmakers were lukewarm at best. Mr. Bush has interpreted the defeat as evidence that the public and Congress are too frightened of change to embrace his vision. But private accounts were rejected because they are bad policy and bad politics.

Mr. Paulson — who has a reputation for pragmatism — could indeed be the right person to take the lead on developing a new set of reforms. But with the nomination of Mr. Biggs, Mr. Bush is signaling that he doesn't want new ideas....

[anne]

http://www.nytimes.com/2006/11/25/opinion/l25pension.html

If It's Not Broken ...

To the Editor:

You say that "to have a serious discussion with Congress," Treasury Secretary Henry M. Paulson Jr. "must first take the idea of private accounts off the table."

I would take that a step further. One must acknowledge that the program has no long-term financial problem. There is no need for consideration of privatization. The political trustees, with the complicity of Social Security's actuaries, have manipulated the long-term actuarial projections to generate a 2 percent deficit.

A reality check makes this obvious. My recent 10-year comparisons of projected versus actual assets show a 20 percent understatement of actual assets, enough to produce the deficit. When corrected, a surplus emerges instead.

David Langer
New York, Nov. 19, 2006
The writer is a consulting actuary.

[richard Rainey]

If Congress would take the social security surpluses (200 billion for 2006) and "Block Grant" them to the oldest retirees ($75,000 each) they would get a 26% return on those surpluses causing an additional surplus (40 billion)on the expected surplus in 2007 and 2.8 million retirees would be off the S.S. rolls. If they repeat this strategy each year for the next 20 years the system would save 4 Tillion dollars and some 50 million retirees would be off the S.S. rolls. This would allow the "baby boomers" to get their benefits without any cuts. The retirement age won't have to be raised, the wage cap and the tax rate won't have to be increased. This strategy could possibly allow the system to avoid having to dip into the empty "trust fund".

[tofubo]

biggs was recess appointmented to the position today

http://www.whitehouse.gov/news/releases/2007/04/20070404-4.html