Treasury: Is the Social Security Trust Fund Real?

I don't get this. Why is Treasury doing this now? This is the second of three briefs sent to me by Bruce Bartlett on "Social Security Reform: A Framework for Analysis."

Here's the best I can come up with. It seems that this may be part of a concerted effort to put Social Security reform back on the table (we’ve been seeing this lately) and to try, yet again, to sell some sort of private account system. It’s played as a straightforward analysis, but I suspect there’s more behind it than that.

The brief makes the case, or at least considers it a strong possibility, that the Trust Fund cannot be protected from congress. The claim is that congress spends more when the surplus is present, so we need to look to ways to protect the Trust Fund assets (it's based upon an intergenerational equity argument premised on all congresses acting like the recent Republican congress). It mentions private accounts as a way to lock up the Trust Fund, and it promises another brief on how to protect trust fund assets in the future. Also, notice the suggested solution to the intergenerational inequity problem, i.e. reducing benefits.

Here's part of the second brief from the link above. The part in the box may be familiar - it explains how the Trust Fund operates. The rest of the discussion is about whether Social Security pre-funding is "real", and what happens if it isn't. Again, though, the question is why Treasury is spending the time and resources to do this now when there's no realistic chance of reform moving forward in the coming year:

Fourth Key Question: Is Attempted Pre-Funding Real? If Not, How Does That Affect the Answers to the Questions About Fairness and Benefit Size? ...The imminent retirement of the relatively large baby-boomer cohorts and sustained improvements in longevity are expected to cause the ratio of retirees to workers to rise rapidly over the next 30 years. In these circumstances, maintaining Social Security contributions and benefits that are stable relative to peoples’ wages while working implies that the system will collect more revenues than it pays out as benefits in the near term when the ratio of retirees to workers (the old-age dependency rate) is relatively low. It also implies that the system will pay more benefits than it collects in taxes later when the old-age dependency rate is relatively high. This financing strategy is reasonable provided that the near-term surplus revenues are safeguarded in a way that allows them to be used in the future to pay for benefits.

Box 2 Trust Fund Accounting and What It Means As required by law, excess revenues from Social Security taxes are used to purchase special-issue federal securities that are held in the Social Security trust fund and redeemed as needed to pay future benefits. The trust fund is credited with interest at a rate comparable to that paid on federal debt issued to the public. Social Security benefit payments are automatically authorized provided there are sufficient assets in the pertinent trust fund. Because trust fund securities are themselves federal securities, they are often dismissed as IOUs that the government has made out to itself that do not increase its ability to pay benefits. This is true in the following sense: if information about trust fund holdings were somehow lost, there would be no impact on the government’s ability to finance its overall operations going forward because government assets and liabilities would be reduced by identical amounts. But it does not necessarily follow that Social Security surpluses cannot increase the government’s ability to pay future Social Security benefits. Social Security surpluses increase the government’s capacity to pay future benefits to the extent that they reduce publicly held federal debt. If they reduce the issuance of publicly held federal debt now when the old-age dependency ratio is relatively low, it would be possible to issue more publicly held debt in the future to help finance benefits when the old-age dependency ratio is relatively high. (These effects arise from the surpluses, not from the trust fund accounting or the issuance of trust fund securities.) The degree to which today’s Social Security surpluses result in additional resources in the future depends on the effect that they have on spending and taxes in the rest of the federal budget. This is an empirical question that involves the political economy of government finance. If Social Security’s finances do not influence the non-Social Security portion of the federal budget, then Social Security surpluses pay down publicly held debt dollar-for-dollar, and the trust fund balance at each point in time is a precise measure of how much the program has reduced publicly held federal debt up to that point. The trust fund balance at the end of 2006 was $2 trillion. Hence, if Social Security does not influence non-Social Security fiscal decisions, then Social Security has increased the government’s capacity to issue publicly held debt for the sake of paying Social Security benefits by $2 trillion as of the end of 2006. To the extent, however, that Social Security surpluses result in higher deficits in the non-Social Security portion of the budget, then government saving is not increased by higher Social Security surpluses. In that case, future Social Security benefits that would have been financed with higher issuance of publicly held debt will instead have to be financed with reductions in non-Social Security spending or increases in non-Social Security taxes.

If Social Security surpluses accumulate in the trust fund, these surpluses will increase the government’s capacity to pay benefits in the future only to the extent that they result in smaller amounts of public debt issuance than would occur if there were no surpluses. ... (see Box 2 for additional discussion of this point). The result would be an accumulation of real resources now (through higher government saving) that can then be drawn upon in the future to finance benefits.

Many analysts believe Social Security surpluses do not increase the government’s capacity to pay future Social Security benefits. Under this view, Social Security surpluses are offset in the rest of the federal budget by some combination of higher non-Social Security spending and/or lower non-Social Security taxes. To the extent that this is true, Social Security’s surpluses do not increase the government’s capacity to pay future Social Security benefits. The future benefit payments that would have been financed with public debt issuance had Social Security surpluses truly been saved must instead be financed with lower non-Social Security spending and/or higher non-Social Security taxes. In this case, the existence of the present Social Security surplus causes the non-Social Security budget to be more profligate, and the future Social Security cash deficit would be expected to cause the non-Social Security budget to become more austere. Under this scenario, an attempt to make Social Security fair to future generations by accumulating near-term surpluses in the trust fund would be undone by a non-Social Security policy that is less fair to future generations. ...

The Implications for Reform of Not Being Able to Effectively Pre-Fund Benefits If Social Security surpluses are not truly saved in the trust fund and if it is not possible to put in place some other mechanism to ensure that future Social Security benefits are pre-funded (such as personal retirement accounts or some other “lockbox” provisions), then it would be reasonable to compromise other reform objectives so as to limit trust fund accumulations. This can be accomplished in two ways: by reducing benefit levels while holding reform burdens constant, and/or by reducing the share of the Social Security reform burden that is imposed on early birth cohorts while keeping benefit levels constant. However, as will be discussed, only the first method of reducing trust fund accumulations would benefit future generations.

Reducing Benefit Levels Holding Reform Burdens Constant An inability to pre-fund Social Security benefits has an important effect on the decision of how large to make benefits. Compared with a reform that would be best overall if pre-funding were real, lowering each person’s taxes paid while working and benefits received in retirement in an actuarially equivalent manner (that is, reducing forced saving) would greatly reduce trust fund accumulations without affecting Social Security’s solvency or changing the distribution of Social Security’s net taxes across birth cohorts or income groups within birth cohorts. This policy change would have little effect on the well-being or retirement incomes of individuals who increase their private saving by the amount of their tax reductions— such people would do less forced saving through Social Security but make it up by saving more on their own. Individuals who do not save their tax reductions, however, might have inadequate income in retirement. That downside must be weighed against the increased fairness of overall fiscal policy toward future generations.

Changing the Distribution of the Reform Burden Holding Benefit Levels Constant Suppose the level of benefits (that is, forced saving) is held constant. Then trust fund accumulations could be reduced by shifting reform burdens only if payroll taxes were reduced for early birth cohorts and increased for later birth cohorts. Clearly, this policy change would not benefit future generations. However, it is worth noting that shifting the payroll tax burden from early to later generations would also not harm later generations if trust fund accumulations are not truly saved. To see this, suppose payroll taxes are reduced in the near term and increased in the longer term so that the present value of payroll tax revenues is unchanged, and that the near-term payroll tax increases are exactly offset by higher non- Social Security revenues in every year. Then the amount of publicly held debt that future generations inherit would not be changed, and nor would their benefit payment obligations. It follows that those generations are made no better or worse off by the policy change.15

How Can Effective Pre-Funding Be Achieved? If true pre-funding is not possible, the prospects for Social Security reform that is fair to future generations and that ensures adequate retirement incomes are greatly hindered. Rather than compromise on these goals, a better option would be to find a mechanism that provides more confidence that surplus revenues are truly saved. A future Treasury brief will explore this topic in detail.

Comments

[save_the_rustbelt]

From an accounting perspective, an entity cannot loan money to itself and considerable the related debt instrument an asset.

The only "security" or "asset" in the "trust fund" is the federal government's ability to tax young generations to fund the benefits of retirees. In that regard the size of current and accumulated federal deficits are certainly relevant.

The real question is not whether or not their is a trust fund but whether or not the feds can generate enough cash flow to pay benefits without shutting down large chunks of the government. Cash flow is everything and the only thing.

That is what we need to be discussing.

[Lee A. Arnold]

With this Administration, the lies never stop! And in news of other swindles, Treasury is approving another private smoke-and-mirrors plan, this time to bail out Citi:

From Yves Smith:
http://www.nakedcapitalism.com/2007/10/smoke-and-mirrors-siv-rescue-plan.html

From Calculated Risk:
http://calculatedrisk.blogspot.com/2007/10/musical-sivs.html

[James Killus]

Ah, now that's an interesting phrase: "tax young generations." Yes, of course, the only alternative is to tax all those innocent young 'uns, because the income that was forgone in the form of things like the Bush tax cuts, and the no-bid sweetheart deals that were cut, why that money is gone forever, and cannot be located, no, no, it can't be found, and besides, increasing taxes on the top 1% would have devastating consequences for the economy, and that top 1% will make sure of it.

Nice little economy you've got here. We wouldn't want anything to happen to it, would we?

I'm thinking of starting a Madam Lafarge fan club; who's with me? It's will be a knitting society, provided I can figure out how to knit a guillotine.

[zinc]

Hank Paulson is the trojan horse sent over by the street to round up the social security withholdings. I am not surprised. They only have 16 months to get'er done.

Now, the imperative is even greater with the weight of the superfund to be financed.

[Lee A. Arnold]

Anyone who wants to understand Where the Trust Fund Went -- and why the simple solution is VOTING -- please look at a little YouTube:

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

[howard]

i note every so often when this discussion comes up that the payroll tax is a special purpose tax, comparable to the highway trust fund tax.

and when, a few years back, a case came to the supreme court as to the fungibility of the highway trust fund money, the court ruled no dice: there is no fungibility. a special purpose tax must be spent on the purpose congress defined for it.

[Brad DeLong]

Well, what else can the Treasury do? Preparing the ground for a circa-2009 Social Security funding debate seems not unreasonable...

[Lee A. Arnold]

Well, Treasury can hardly attack the Medicare drug benefit, though it is an astounding fiscal disaster in comparison.

[Bruce Webb]

Well my task is cut out for me. See my response at about 6AM pacific tomorrow.

First summary 'idjiots'

[F. Frederson]

STR has it - cashflow in the future. This wouldn't be such a problem if the surplus had been used for productive investments - roads, bridges, schools, renewable energy, etc. - but instead a heckuva lot of it has gone up in smoke in Iraq, and on other operational spending. In retrospect it all looks like (part of) a con to shift taxation from capital towards labor. Fortunately taxes will have to be raised by only 1-2 percent of GDP to cover the SSTF shortfall.

Of course, the real kicker looks to be rising healthcare costs, unless we finally get some kind of national healthcare program in place.

[calmo]

Thanks for that UTube link Lee, such a compact little gem!
I don't know the answer to this one:I don't get this. Why is Treasury doing this now? Are they looking for a distraction (or a rescue?) from a possible market correction? Surely it is too late in the game for that?
Of course I didn't get the 'cabinet shuffle' either and like most people could not believe the audacity of this little runt. But there were no media voices suggesting that he be put over an adult's knee and spanked good and hard.
So I need to see how the media handle this resurrection now --given the first flop, and now, with such low approval ratings...will they sit still again like chumps?
Looks like I have my morning reading assigned to me already. Thanks Bruce.

[dissent]

Treasury is doing this now for the same reason Bush will bomb Iran. They have to do they damage while they have the power.

[Anna]

As a boomer nearing retirement I can only offer two comments:
1) The Trust Fund can be diversified without placing individual ownership on any of it's holdings.
2) In 1983 the young un's were the boomers. This argument does not pass the smell test.

[ilsm]

Social security is on no less "shaky ground" than the US.

It is time to rein in the militarists.

[ilsm]

Social security is on no less "shaky ground" than the US.

It is time to rein in the militarists.

[Free the Market]

Retiree out-of-pocket expenditures to cover premiums, deductibles, and co-pays for parts B and D of Medicare will use up 29 percent of the average Social Security benefit check this year. If Social Security benefits are cut, and Medicare premiums continue to rise, there will not be much left of the safety net. I may not agree with Treasury's solution, but there is a problem that needs to be addressed. The current Social Security/Medicare system is not sustainable as a viable safety net. COLA does not address rapidly rising Medicare costs, even without Treasury's proposed cuts.

The net will fail unless major changes are made. Free market reform of health care would be best, with Social Security surplus funds invested in manner similar to the Harvard trust fund. (Invested in social programs that increase future productivity also, but this seems to be politically difficult to achieve under our system.) Second best would be a rationally planned health care system similar the the VA, and trust funds used to pay down the debt so more could be borrowed later.

[juandos]

Lee A. Arnold whines: 'With this Administration, the lies never stop! And in news of other swindles, Treasury is approving another private smoke-and-mirrors plan'...LOL!

Meanwhile in the real world: Today, President Bush's clamor to raid the Social Security fund in the name of privatization is reminiscent of President Johnson and the Democratic Congress' largely forgotten 1968 agreement to add the then secure Social Security Trust Fund to the General Fund in order to float cash for the Vietnam War and a bevy of domestic programs-a decision that helped secure our current trajectory towards Social Security's insolvency

[mark]

The key distinction between a government pension fund and a private sector trust fund is of ownership.

The person paying into their own private fund regards their personal investment as theirs.

Where as, the person paying into social security regards it as a tax.

There is no more a trust fund in the private sector than there is a trust fund in public sector.

Assets will have to be sold in the private sector, taxes will have to be raised in the public sector.

People in the private sector voluntarily sell their assets in a private trust system. Where as, the government must confiscate it unvoluntarily in a public system.

Because there is no such thing as supply side economics or any adverse incentives to raising taxes, the solution to the social security future short fall is simple.

Raise tax rates on young workers.

[anne]

http://krugman.blogs.nytimes.com/2007/10/11/socialsecuritymedicareandmedicaid/

October 11, 2007

Socialsecuritymedicareandmedicaid
By Paul Krugman

This is largely Dean Baker's beat, * but I've also been noticing what he's noticing: sloppy doomsaying on Social Security seems to be making a comeback. During the great 2005 debate over privatization, I thought people like Dean and myself had managed to get across the points that there is no such program as Socialsecuritymedicareandmedicaid; that Social Security is in pretty good shape, so that projections of huge future spending on Socialsecuritymedicareandmedicaid are mainly about the Medicareandmedicaid part of it; and that in general, what we have is a health care crisis, with the costs of an aging population much smaller and more manageable.

But now casual talk about the need to "fix" Social Security is creeping back into the discourse. Folks, Social Security is in pretty good shape; it's not clear that there even is a long-run shortfall, and if there is it's a much less pressing problem than many others. The only reason we hear so much about Social Security is that there are powerful political forces that want to kill it, for ideological reasons.

* http://www.prospect.org/csnc/blogs/beat_the_press

[anne]

Social Security is of course fine and will be fine for decades at least. There is fortunately a Democratic Congress and a national election coming as well and there is no chance of any change that will needlessly weaken Social Security. As for health care, whether Medicare or Medicaid or health care for children through SCHIP, I am not the least interested in conservative rantings about cost.

A mere $7 billion can protect the health of 3.8 million children for the coming year. This $7 billion compares with the insane wasting of $200 billion on Iraq. Leave Iraq and health care becomes absolutely no problem, nor is health care a problem now other than for conservatives who essentially care nothing at all even for the health of children as long as the children are nopt their own.

[anne]

Bruce Bartlett as Andrew Samwick as Henry Paulson as George Bush care only to find ways in which to undermine the New Deal legacy and especially Social Security and health care provision. Simply look to the President's veto of legislation to protect the health of 3.8 million children at minimal cost.

I am not the least impressed by conservative plans to deny health care to children while smashing and slashing Social Security and Medicare and Medicaid.

Smash and slash the $200 billion this year for war in and occupation of Iraq, by leaving immediately and completely. Then, there is no budget problem, no how, no way.

[anne]

Since the initial budget of President Bush in 2002, spending on all social benefit programs has been only in line with economic growth and has in no way strained the budget. The only spending that has been faster than economic growth from 2002 on has been military spending. We will reach the leave of $800 billion spending on the insanity of Iraq by December 2007.

There is no budget problem other than the problem created by needless and tragic military spending, even with the needless tax cuts for the wealthiest. There is no Social Security or Medicare or Medicaid or children health care or Meicare drug benefit problem other than the perverse disdain of conservatives for such programs.

[bob mcmanus]

"the question is why Treasury is spending the time and resources to do this now"

Things can change. Attack on Iran? Oil spike+dollar crash+defense spending spike+recession = trillion dollar deficits = terrified congress

Just my paranoid imaginings. War on Iran could come sooner than expected, before election season, in order to allow Congress to stew in their panic awhile. Probably not.

What is DeLong about up there? Leave my SS alone, Brad.

[The Baron]

anne you and Krugman's lack of understanding on the SS problem continues to astound me. For a couple of people who I think are pretty bright, you are both amazingly myopic on this point.

Box 2 in the article gave a great summary of what the real problem is. As Frederson stated, yes, future SS shortfall will require "only" 1-2% of GDP raise in taxes... but what is missed in that statement is the $2 Trillion in spending that has been done that will be no longer available. So, to maintain spending at current levels (because by God, no one will actually cut Federal spending), we will need to add to those taxes by another massive percentage.

The SS Trust fund consists of slightly more than 22% of our total current National Debt. This is debt that the Fed has sold to itself, funded by SS taxes, but that will have to be floated on the open market and be bought by the private sector over the next 3-4 decades. Look at all of the most wildly optimistic Federal budget reform plans, and none of them even come close to trying to resolve 22% of the National Debt in that short of a time.

[anne]

Brad DeLong:

"Well, what else can the Treasury do? Preparing the ground for a circa-2009 Social Security funding debate seems not unreasonable..."

Any and every attempt by Republicans to undermine Social Security is unreasonable and worse. The need of the coming Administration will be to reverse policy after benighted policy of this Administration which is always after undoing any memory of Franklin Roosevelt and the New Deal legacy.

[The Baron]

To look at it another way, all of the current SS tax income has gone to fund the debt. As SS becomes a net drain, rather than income, not only will taxes have to be raised to cover the amount of the drain, but also to cover the lost income that the Fed has relied so heavily on in the past.

[save_the_rustbelt]

Zinc is succinct.

Howard, the Supreme Court dealt with the SS trust tax issue in the early 60s. The SS trust tax is NOT protected.

This is not to say that SS is in big trouble, or even in any trouble, as it is likely not. Medicare though, is a different story.

[anne]

There is a massive an growing Social Security surplus, a surplus that will grow for at least another decade, and return dividends for decades beyond. I am not the least interested in deficit worries that have nothing to do with Social Security and have everything to do with military spending but military spending is forever ignored by modern conservatives and even many liberals.

Worried about deficits, then limit military spending beginning by limiting the insane war in and occupation of Iraq. Otherwise, I am not willing to slash and bash Social Security or have children or parents or grandparents suffer because of lack of health care. Worried about Social Security, then worry about war and occupation. Me, I am not worried about Social Security.

[johnchx]

Let's put it this way: there's a large, government-controlled fund that has been financing a large and growing share of the U.S. government's operating deficit. Thanks to tax cuts, expensive military adventures, and the rising cost of medical care, the U.S. government deficit has been spiraling out of control, and this has been facilitated by the willingness of this government-controlled fund to provide the financing.

Who has the "problem" -- the creditor fund, or the United States government, which can't seem to get its taxes and spending to line up?

Of course, the "government-controlled fund" that I have in mind isn't the Social Security "trust fund" (yes, I'm pulling a "Krugman"), but the balance sheet of the People's Bank of China. And the Bank of Japan. And the oil-revenue funds of the major petroleum exporters, like Saudi Arabia.

And strangely enough, we never see the United States Treasury issuing white papers about the long-term "crisis" faced by the Bank of Japan or by the Saudi oil fund.

Funny how it turns out that the only people imperiled by the foolish step of accepting the "full faith and credit" of the U.S. government turns out to be American retirees.

(And yes, by the way, under current law, the OASI and DI trust funds must be invested in securities supported by the "full faith and credit" of the U.S. government. The fact that the Treasury issues a distinct, non-marketable series for this purpose shouldn't obscure the fact that it is, indeed, full faith and credit debt under current law.)

I don't see any near or mid-term difficulty paying for Social Security. It's self-funded (and, as Bruce Webb will undoubtedly point out, very possibly OVER-funded). What I do see is difficulty paying for Medicare, Medicaid, food stamps, the National Institutes of Health, the Census Bureau and the FBI. You know, the government.

As rusty points out, the bottom line constraint is ultimately cash-flow. But the reason we don't run our businesses on cash-basis accounting is that today's good cash flow can easily mask deep financial problems. And so it is with today's federal budget.

The press reports the unified, cash-flow deficit, understating the "accrual-based" shortfall by a factor of five (more or less). If a medium-sized dry goods retailer tried that in its 10-K filings, it'd be guilty of securities fraud.

[bakho]

It seems like the treasury is taking the Clinton/Gore position on the "lockbox" but saying that Republicans like George W Bush cannot be counted on to protect SS so another mechanism is needed?

The SSTF plan is all accounting anyway. There really won't be a loss of payroll taxes because whatever happens, the number of workers in the US is unlikely to go down. However, more money will have to be paid out to SS and that money will have to come from borrowing or actually making the wealthy pay their fair share of taxes (boo hoo). It's not like the US overtaxes its wealthy compared to Europe or Canada or other developed countries. It's not like the US cannot afford this.

Crocodile tears!

[Barry]

Bruce Wilder, don't you maintain a website dealing with this?

To Mark, and to Brad: the only scenario under which SS is in trouble is the one where growth slows down to levels not seen (on the long-term) during the 20th century, and stays that way for forty years.

The Bruce who maintains the website has pointed out that the projected time to problems with the SS system keeps moving steadily into the future, remaining one Samuelson Unit away (1 SU = years to SS 'bankruptcy' = ~40 years; it's a physical constant). This is because the economy *outperforms* the 'Intermediate Cost' scenario, except during recession years (if then). The 'Intermediate Cost' scenario could be described as the '40 year recession' scenario.

One might ask why it's used at all, since (a) it's ridiculous and (b) if it ever came to pass, SS would have to fight for space on a long list of problems?

The answer, of course, is because (a) SS has always had a number of enemies who hated it, or simply wanted to steal the money (a la Greenspan), and far too many economists aren't willing to get up on their hind legs, and honestly say, again and again and again, that Social Security is not in trouble, and that those who say so are Mankiwean scum.

[bakho]

Whatever is going on involves a LOT of misinformation. CBS ran a piece yesterday on the first boomer to apply for SS (obviously staged). Everything else in the piece was misinformation from the Bush administration or the CATO institute.

The stoopid was too much. Once the boomers retire, the SSTF will be paying out more money than it takes in. (wring hands, Chicken LIttle!!) Well excuse me, isn't this the reason FOR the SSTF in the first place? to pay out for the boomer retirement? Why are we currently paying 30% more into SSTF than it pays out?

[howard]

save the rustbelt, actually (although it's been a while since i read through the decision), the supreme court, iirc, didn't even address the issue of a special purpose tax the last time it looked at social security; it was another issue. i'll have to go back and refresh my memory more specifically.

[howard]

juandos, there was no prefunding of social security during johnson's tenure: the idea that they shifted to the unified budget to float cash for vietnam is nonsensical.

[anne]

Though I am not the least worried about taxes, we have a tax system in which when researchers began to point out that among the wealthiest of Americans billions of dollars in taxes were being lost because private equity fund managers were taxed largely both at a maximum of 15% and even that able to be deferred in taxes for years by reinvestment, the initial conservative tactic was to deny this was so.

Conservatives attacked even the truth of tax structure, for private equity fund managers, but eventually the evidence convinces so many that conservatives are forced to cease deceiving however reluctantly. So, conservatives simply turned to refusing to change tax law to have tens and hundreds of millions and billions of dollars taxed as income. There has been no tax law change.

The heck with conservatives trying to smash and slash Social Security and Medicare and Medicaid and slash and bash at the very health of children.

[Meh]

Mark: Follow the money. I don't know if Paulson is to blame, but he is the logical culprit. There are a lot of firms on Wall Street salivating at the chance to charge transaction fees on private Social Security accounts.

Those Wall Street firms are the ones pushing it and the guess would have to be that Paulson is the one transmitting their pressure into the Treasury.

[howard]

save the rustbelt, as memory has been working to the surface (and i'll try to look this up further), what you're referencing is a supreme court decision that basically said that there is no basic "right" to social security; if congress chose to end the program, it could.

that's different than what has to be done with the money in the program.

[johnchx]

str writes: From an accounting perspective, an entity cannot loan money to itself and consider[] the related debt instrument an asset.

Actually, in governmental accounting, this sort of thing happens all the time. That's what's so frustrating about all the attempts by politicians to pretend that the debt relationship between the OASDI "trust funds" and the U.S. Treasury is some sort of dizzying metaphysical proposition ("Oh how can we owe money to ourselves?"). It's not uncommon; it's routine!

The key thing to realize is that, under government accounting standards, a fund is defined as a distinct financial entity with its own self-balancing accounts. Put another way, that means that each fund has its own balance sheet, its own assets, and its own liabilities. It also means that movement of assets (including cash) between funds must be explicitly recorded in the books of account, and those transactions must be explicitly designated as expenditures or as loans. If the former, their purpose must be consistent with the legal restrictions that apply to the fund's revenue sources (i.e. you can only expend monies for the authorized purpose of the fund). If the latter, then the loan must be documented as to duration, repayment schedule, interest rate and so on, and duly authorized by the governing body.

An inter-fund loan will show up as an asset on the balance sheet of the lending fund and as a liability on the balance sheet of the borrowing fund.

It is, in a sense, an "accounting fiction." But, like many accounting fictions, it is enforced with handcuffs. Auditors do in fact examine inter-fund transactions with an eye to verifying their compliance with the law.

Even in consolidated presentations, in which the accounts of the government are shown "as a whole," inter-fund loans don't disappear entirely, because they typically involve loans from restricted sources to "unrestricted" funds (such as a government's general fund). A government's net assets are classified as "restricted" and "unrestricted", and a loan from a restricted fund to, say, a general fund, will be reflected accordingly (i.e. net unrestricted assets will be reduced by the loan liability and net restricted assets will be increased by the loan asset).

Again, this stuff happens all the time, and there are decades of professional standards and experience behind it. (Fund accounting goes back to the Progressive era; it was one of the original "good government" reforms, along with civil services and actually having a budget.) Accountants at the state and local level deal with this stuff every day. The pretense that inter-fund lending is mysterious is just that: pretense.

[evagrius]

They're running out of easy money to keep the economic pump primed, hence the focus on sucking Social Security.

Once that money's gone...no more pump.

[Lee A. Arnold]

As the YouTube shows,

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

the Republicans shifted the tax regime and the surplus is now disappearing into the Bush income tax cuts, pretty close to the same dollar amount annually.

In this Administration, Treasury has been used as a political operation by the White House. They may be hoping to give the next Republican candidate a report to refer back upon, as a campaign issue. They don't have a lot of issues to run on. Lower productivity numbers will make next April's Trustee's report look more alarming, although perhaps that will be temporary and unimportant. And they have to protect those damaging tax cuts... Without those tax cuts, the Republican Party hardly has a contributor base!

But it is a two-edged sword: I can't imagine the next Republican nominee will want to go through a huge campaign fight on Social Security, even if the economy and stocks were to have a good year. Politically, it's going to be a bad idea to go near Social Security any time in the near future. They should fix everything else, first. There are lots more serious problems. And breaking an old promise is never advisable.

[Lee A. Arnold]

To be clear, with regard to the Trust Fund, the logic is clearly: (1) increase payroll taxes under Reagan to make a surplus to cover Social Security, (2) start to see the surplus under Clinton, (3) then give away the surplus under Bush, in income taxes proportionately benefitting the absolute wealthiest. Payroll tax hikes disappearing into income tax breaks. Does the next Republican nominee really want to defend this?

Now Treasury is claiming you can't trust Congress, which was Bush's implicit line two years ago. But he and his party led the charge! So their actual message is "You can't trust US." The solution? Vote the bums out. And let the income tax cuts sunset.

Their rhetorical strategy is also to confuse their "Trust Fund" swindle with a funding shortfall which may or may not genunely happen in forty or fifty years. The solution to that, if it happens? Some mild patches, such as the Robert Ball plan. Social Security is not an economic issue, it is a political one.

says...

There is one government with one budget constraint in the end. If you have two programs each with it's respective funding and expenditures; if overall we have a deficit but one has a superavit, it doesn't matter. The problem is the overall deficit and the only solution is to reduce the overall deficit. There are many ways in which this can be achieved, you can increase revenues in one or both funds or you can decrease spending in one or both funds. Which choice we make is up to us as society to make.

[anne]

No problem then for them there deficit mongers, leave Iraq immediately an completely and save $200 a year. There's saving for ya'. Now, is that clear enough? Worried about deficits? Leave Iraq immediately and completely and the worry goes poof. Get it?

[worker]

Anne,

You're starting to sound like Ron Paul (that's a compliment by the way).

Worker

[save_the_rustbelt]

johnchx:

Inter-fund transfers in a balanced state or municipal budget are a world away from the SS trust fund scenario.

We can toss around semantics but the federal government could not meet the audit standards it wants applied to other entities.

[Ken]

The Baron says...
anne you and Krugman's lack of understanding on the SS problem continues to astound me. For a couple of people who I think are pretty bright, you are both amazingly myopic on this point.

Box 2 in the article gave a great summary of what the real problem is. As Frederson stated, yes, future SS shortfall will require "only" 1-2% of GDP raise in taxes... but what is missed in that statement is the $2 Trillion in spending that has been done that will be no longer available. So, to maintain spending at current levels (because by God, no one will actually cut Federal spending), we will need to add to those taxes by another massive percentage.

The SS Trust fund consists of slightly more than 22% of our total current National Debt. This is debt that the Fed has sold to itself, funded by SS taxes, but that will have to be floated on the open market and be bought by the private sector over the next 3-4 decades. Look at all of the most wildly optimistic Federal budget reform plans, and none of them even come close to trying to resolve 22% of the National Debt in that short of a time.

Yes the problem is the budget deficit and not SS. But if defict growth doesnt outpace global growth, Is there any reason we should expect secondary debt market demand to fall and drive prices up? it seems central bank surpluses always seem to find their way to treasurys. I see no current reason to think that demand will fall. Unless of course the falling dollar discourages that demand. and isnt it just as possible that with more retirees wont they turn to good old us treasury debt for retirement income?

Is there a problem. Sure but if we deal with it now it wont be nearly as big.

[anne]

Clarifying; because of fiscal changes since 2002 we have a structural budget deficit. Revenue growth because of the tax cuts will be relatively limited from here no matter how much economic growth there may be. Spending, because of military spending is rising rapidly. There is and will be a structural deficit, but the question for another Administration will be how this is dealth with.

[Callahan]

Some pundit/economist appropriately named "Laffer" ... father of supply side eco or some other twist on the subject say's this is the best damned economy "we" have ever had. So please do not worry about Social Security.

[James Killus]

Scnario 1: A bunch of extra money is collected from Social Security taxes, over and above what is need to fund current obligations. That money is stuffed into the pockets of a small group of taxpayers, who are mostly capital holders. The capital does what it does, which is to say accumulate, via compounding and the net returns that accrue to those who have bought a bit of the house odds in the Big Casino. Then, when a demographic bulge reverses the Social Security arithmetic, taxes are raised on the stuffed pockets group, and the invested capital returns to where it originated: those who have paid into Social Security.

Scenario 2: A bunch of money is diverted from the Social Security Trust Fund and is, instead, invested in various private sector vehicles that (one hopes) have a positive return. These are not quite as risk-free as an investment in the capitalist class as a whole, because that group (investment managers, traders, and perpitrators of "control fraud") gets to siphon off some of the money as it passes by, and this money is no longer considered to be in the system. It's just the cover charge, the toll, the three drink minimum that one must pay in order to have a seat in the Big Casino, and the casino owners have to keep up the payments on the penthouse, don't they?

As nearly as I can tell from the comments here, the argument against Scenario 1 (the current situation) is that there are "taxes" involved, especially taxes on people who have a lot of money, which is a Very Bad Thing. Wouldn't want to let riffraff into the penthouse, would we? Besides, the casino owner earns that money, with every roll of the customers' dice.

The arguments against Scenario 2 are that forced savings look rather a lot like taxes, that it is inefficient, in that there are those agency fees along the line, and that it places additional risks onto those who are least able to bear those risks.

Of course, for many, the arguments against Scenario 2 are actually their hidden reasons for being in favor of Scenario 2. Better still would be the total destruction of the system, as this would remind the masses that they exist at the sufference of the aristocracy.

Hum de hurm, I wonder if one can knit a guillotine out of steel wool...

[kharris]

DeLong probably has the right answer, though he may have the wrong reason. DeLong is a partial privatizer, if memory serves, but his is an academic rather than a political argument. He wants the as-yet unrealized returns represented in an over-large risk premium for stocks to end up in the hands of Social Security beneficiaries. Except that it is his belief that the equity risk premium is too large, rather than a demonstrable fact. Even if DeLong is correct, Dornbush's notion that things can go on longer than you would think applies here. If that risk premium has been too large for a very long time, why would we not expect it to remain large for a longer time still? Why is now, when there are corrupt reasons for privatizing afoot, be a good time to privatize?

We know that some of the privatizers have less lofty motives than DeLong. Privatization represents a way to hold on to a tax structure favorable to themselves or their masters. By handing us "research" that argues for violating the promise to those who have paid an elevated level of payroll taxes since 1983, they attempt to stack the deck for a future policy debate. It is worth noting that, for all the even-toned language, the argument is that future Congresses won't be willing to honor promises made by past Congresses to Social Security beneficiaries. Treasury is making the same argument Congrressional Republicans made prior to the most recent presidential election. Of course, they did not take the blame on themselves. They blamed future tax payers who would balk at paying. This while they voted for policies that ran up Federal debt, making the burden of future tax payers harder at the expense of tax benefits for today's rich and spending for today's campaign contributors. Face it, folks. The GOP was using code to tell those who gained from their tax policies that they'd be taken care of while the GOP tries to seem blameless to the public at large. Treasury is now finding its own way to seem blameless while repeating the coded pledge to the rich and under-taxed. There is an election coming, after all, and the rich are in it for the long haul.

[Bruce Webb]

Barry I always cringe when I post something dumb, because I fear that Wilder will get blamed, but the Social Security website is mine. It is generally speaking static and designed to get links to the real numbers so as to avoid idiocies such as:
As Frederson stated, yes, future SS shortfall will require "only" 1-2% of GDP raise in taxes
Examining the payroll gap at depletion is a worthless exercise. Far more useful is to track the current payroll gap and its past trend and current year economic numbers. The current payroll gap is not 1-2% of GDP it is precisely 1.95% of payroll for that portion of wage income under $97,500. Where do I get this number? Well the same place the Baron should be getting his information. Instead he quotes some guy named "Frederson". Hey Baron its called 'research' and 'primary sources'.
2007 Social Security Report; Conclusion of the Summary section
Over the full 75-year projection period the actuarial deficit estimated for the combined trust funds is 1.95 percent of taxable payroll-somewhat smaller than the 2.02 percent deficit projected in last year's report. This deficit indicates that financial adequacy of the program for the next 75 years could be restored if increases were made equivalent to increasing the Social Security payroll tax immediately and permanently from its current level of 12.4 percent (for employees and employers combined) to 14.35 percent. Alternatively, changes could be made equivalent to reducing all current and future benefits by about 13 percent. Other ways of reducing the deficit include making transfers from general revenues or adopting some combination of approaches.
Which brings up the second point. The payroll gap is not static, it is dynamic, it changes over time based on differences between current economic performance against projections as well as changes in projections over the 75 year window. Now given that apart from some relative certainty on the demographic side (all Boomers that will ever exist already being on the face of the planet) we don't know what the specific economic conditions are going to be in 2050 or 2041 or even 2012. On the other hand we have a real good idea of what happened in 1980, 1990 and 2000 and a reasonably good picture of what is happening now.

Okay the payroll gap changed in the course of one year from 2.02% to 1.95%. If it continued to improve at that rate the system would be self-funding in exactly 27.857142857143 years. Of course only a lunatic would try to predict even tomorrow to 12 decimal points. Yet advocates of privatization assert that we need to be working from 'Infinite Future Horizon' perspectives. Well I suggest another course. Lets look back. First how has the payroll gap been faring over the last ten years? Well our friends at EPI have given us a handy table.
Trustees changes in projections over time to which we could add 1.92% 2005, 2.02% 2006, 1.95% 2007. Why do the numbers change from year to year? Well you would have to either read the Social Security Reports (the optimal choice) or demand link backs from people pulling numbers out of the air (like 2% of GDP). But the answers vary from year to year. The important thing to notice is that despite any change in policy the payroll gap is not increasing and in fact on balance is shrinking. Now you can get down into the grit and argue whether the change in assumed interest in the 2006 Report from 3.0% to 2.9% (which added .06% to the payroll gap) was justified or not. Because without it the current payroll gap would be 1.89% matching recent lows. But that's a fool's game, assuming base motives on the part of the Trustees or the Office of the Chief Actuary just risks getting named a paranoid nutter (trust me on this front). The question really is "Should we have acted on 2006 numbers?" And the clear answer is "No, despite inaction the cost of the fix going forward is actually smaller" Which is to say that doing Nothing in 2006 put the equivalent of 2.02% of payroll in your pocket.

Is Nothing a plan for 2008? Well lets look at the actual numbers from 1960 to present and projected to 2085:
Table V.B1; Principal Economic Assumptions
Table V.B2: Addtional Economic Factors
Does 2.6 Real GDP for 2007 and 3.0% for 2008 and ultimate 2.0% seem like reasonable numbers? (V.B2) or do you think 3.4% for 2007 and 2008 with ultimate 2.8% more likely. Or we could look at productivity. Do you think that 1.7% for 2007, 2.1% for 2008 and ultimate 1.7% is more likely than 2.0%, 2.2% and ultimate 2.0% is more likely based on current year data and historical trend? Or we could repeat the exercise for every one of the number series. Intermediate Cost shows unemployment rising at a steady rate to 5.5% by 2014 and staying at that level. Low Cost would have unemployment remaining steady at 4.5% throughout. So do you want to bet on Low Cost or something approximating it, or stick with Intermediate Cost? Be prepared to show your work.

People who want to use projections about conditions in the year 2041 have implicitly accepted a model about current year and near term economic numbers. Well then let them defend those numbers. Me I track the extraordinarily volatile productivity number. Per the Sept BLS Press Release Final Q2 Productivity we went from a truly horrible .2% in Q1 to 3.5% in Q2, which combined suggests that we made the right bet in 2007, all things considered the payroll gap in the 2008 Report will probably be smaller than projected, or at least not enough larger to act.

Ken at 9:37 said this "Is there a problem. Sure but if we deal with it now it wont be nearly as big." Well people have been saying that every year for a decade. The problem is that in most of those years it wasn't true at all, left unattended the problem actually shrank in 9 of the last 11 years. And you can show mathematically that doing Nothing was an excellent (and paying bet) for all workers in 2005 and a pretty good bet in 2006 (for workers with 20 years of retirement) and that cumulatively doing Nothing since Bush brought all this up gave the average single worker a bigger tax cut than the Bush income tax cut. Moreover 2007 numbers show that Nothing ended up being a winning bet for all workers in 2006.

Nothing is a proven plan since 1997, the cumulative Cost of Inactivity on Social Security over that span is roughly 20% of your single year income still in your pocket. Nothing is shaping up to be an excellent plan for 2007, 2008 and beyond. No one has made a plausible case as to why the economy would be performing in 2013 as the standard Intermediate Alternative asserts it will. Certainly unemployment could be 5.4% and rising and Real GDP down 33% to 2.2% from 3.3%, but asking us to act now on the assumption that that is a median projection is just to ignore the numbers.

I don't know with precision what Q3 numbers will be, and its actually over. But I am willing to bet that the economy will outperform Intermediate Cost in 2007 and 2008 and so support the only numerically sound program out there based on historical performance.

Nothing. The Proven Plan for Social Security since 1997. And I have the numbers to back that up.

[Bruce Webb]

The whole Social Security debate is a shadow play. In a Nov 2005 post called Social Security: Is it about Solvency or about Ayn Rand? I put it like this;
This site is all about the numbers. You get links to every Social Security Report from 1942 to 2005, you get breakouts to particular tables from all Reports from 1997 to 2005, you get some explications of what those tables mean. The numbers are important, if you are going to participate in the debate over the future of Social Security you need to understand them, you need to understand their implications, you need to be able to measure them against the numbers you read in the paper every day. Because oddly enough this debate is not about numbers and in most respects it never has been.
Privatizers care nothing about actual retirement security for workers. Whether you look at Posen or LMS (two plans on the table) you find that they do not deliver better results for a lower cost, they and particularly the latter don't deliver on the promise of an 'Ownership society'. Under both workers end up being required to buy an annuity anyway, which is to say getting a fixed check for the rest of your life and then perhaps your spouse's life. Which looks suspiciously close to what Social Security delivers, with a little extra dollop of exposure to market risks.

Its all ideological. Every single bit of it. Most of the people pushing these plans aren't doing it because the want to please their masters on Wall Street, tenured Professors not being particularly subservient to Big Business to start with. Instead a certain very powerful group is subservient to Capital and Markets, not at all the same thing. They don't want your money, they want to show that 'Big Government is the Problem'.

You can show numerically that the most logical course to take short term is to adopt a policy of 'wait and see'. The Social Security ship started taking on serious water in 1971 when the Trust Fund ratio went under 100. It almost went under altogether in 1983 and 1984, some emergency patches being required before the implemented a more permanent fix. But once the pumps were turned back on the ship slowly but surely began righting itself. The Trust Fund ratio finally got back to 100 in 1993 and has been steadily rising since. By 1998 it was pretty clear there was no serious problem long term, growth at historical trend would fill most to all of the gap, and 'crisis' in context not much of a crisis at all. Under Intermediate Cost assumptions Social Security will only be able to deliver a check 20% better in real terms than the one my Mom gets today instead of 60%. Well cry me a river particularly since most 'fixes' simply phase the cut in over time anyway.

If you are over 40 or make an income at or below the median, which would make up the clear majority, none of this makes any numeric sense, these plans don't survive encounter with the numbers. Privatizers by and large know this, they simply don't care, They care ever so much more about pissing on the grave of FDR and erecting memorials to Milton Friedman.

If this was an honest debate you would have Paulson out there defending the projections underlying Intermediate Cost, because if they don't come about Crisis doesn't come either. But it never happens. Is there a single person out there who can explain how you get historic returns on stocks for worker funded private accounts on 2.0% ultimate GDP? Is there a single person out there willing to stand up and take the No Economist Left Behind challenge using Intermediate Cost numbers? Or contrawise reveal your actual economic assumptions and rescore Social Security under them?

Treasury is acting on this front now because they know the numeric tide is moving against them. And the Social Security ship looks ever more capable of just sailing through the 75 year window. Which is to say privatizers' worst nightmare, a government program that works as designed.

[anne]

Bruce Webb, that was awfully nicely done as usual.

[dissent]

"Raise tax rates on young workers."

More knee jerk right wing resentment masquerading as a policy proposal. I think we should have vomit bags for right wingers and when they start to spew, an attendant hands them a specially marked bag: Vomitus RightWingus Bag.

As any informed person who is not a right wing ideologue knows, young people are graduating with a heavier debt load than ever before. And their starting wages have plunged. Thanks Bush corporatocracy! Thanks enablers of the greedy elites, you right wing ideologues!

But that is not the limit of the problem. Because righties and corporatists have pushed all the risk onto the shoulders of the middle class (witness the latest M-LEC bailout for Citi, when only 1% of default loans are getting new terms), because of this risk transfer, students are not choosing my field, computer science, as a major. It's dropped by half. That weenie Bill Gates has been screeching at college campuses for quite awhile now, trying to drum up interest.

But it's not there. Why? Because the corporatists have engineered a system where people in their prime earning years are pushed out of the field. Students don't want to end up in the street after paying off big student loans and putting their best years to work in a technical field. They know that re-training in your 40's or 50's is a big lie. They don't want to work the counter when they have kids in college. Duh. They're not stupid.

The stupid ones are the corporatists and their right wing enablers. The only good news is that more and more people are finally seeing through the b.s. Your days are numbered.

[calmo]

bravo, Mr Webb...esp for the ideological interpretation.
And so this recent emergence is mere coincidence...not timely as BDL suggests nor driven by inexorable political machinations as per bob mcm?
I do find it distracting that this administration is this deaf to 'the people' who have spoken. When the representation is this bad...this antagonistic, it does feed those paranoid predispositions. (So I'm a little too shaky to even revisit mcmanus's post, now.)
If the economy continues to follow housing (and not those upstart exports...ah, rice to China?), I'm sure we will see more of this fear mongering.
Is that it: the uncertainty expressed by lackluster consumption now and gloomy forecasts, are read as opportunities to implement fear tactics to privatize SS?

[Anna]

rustbelt: Howard, the Supreme Court dealt with the SS trust tax issue in the early 60s. The SS trust tax is NOT protected.

Interesting - what is "trust tax"? Did they explicitly try a case on the "trust fund"? If so, could you tell me more so I can find a reading of their decision. If so, do you recall if the 14th amendment came up. I have always wondered if, in the case of the "trust fund", someone would try to argue the 14th amendment.

[Patricia Shannon]

Dissent

Very true. The middle-aged IT workers I know, including myself, say they enjoy the work, but they wouldn't advise young people to into the field for exactly those reasons.

[johnchx]

And I'll chime in, agreeing with just about everything Bruce Webb said above.

To me, the most revealing fact about the "Social Security Crisis" crowd is this: if you really believed that Social Security faced a financial crisis, the most immediate priority would be to shore up the financial condition of the "rest of government" (for want of a better term) so that it was in a position to deal with the liquidation of a substantial fraction of the "trust funds". The fact that the Crisis Crowd would rather gesture wildly in the direction of a highly speculative crisis two decades or more away than spend an hour talking about how to close the fiscal gap we're experiencing right now, tells me everything I need to know about their seriousness about federal finances.

[2slugbaits]

Just for the sake or argument, let's suppose that the privatizers are right (they're not...but let's play along) and the SSTF will not be able to sustain itself beyond another 30 years or so. And let's also assume away the transition cost problem. And let's assume away all risk. So it's a slam dunk...future retirees are better off with private accounts. So unless there is some magical way in which private accounts will kickstart productivity for tomorrow's workers, wouldn't private accounts actually represent a heavier burden on tomorrow's workers than SS? Seems obvious to me because the real issue is the distibution of claims against tomorrow's income flow (GDP). If tomorrow's senior citizens (that would be me) have more claims against GDP flows, then don't those higher claims have to come at the expense of tomorrow's workers?

[Bernard Yomtov]

The brief makes the case, or at least considers it a strong possibility, that the Trust Fund cannot be protected from congress. The claim is that congress spends more when the surplus is present, so we need to look to ways to protect the Trust Fund assets ... It mentions private accounts as a way to lock up the Trust Fund, and it promises another brief on how to protect trust fund assets in the future.

So we can't trust Congress not to raid the Trust Fund, but we can trust Congress not to raid private accounts, via taxation, say.

Run that by me one more time, please.

[mark]

wouldn't private accounts actually represent a heavier burden on tomorrow's workers than SS? Seems obvious to me because the real issue is the distibution of claims against tomorrow's income flow (GDP). If tomorrow's senior citizens (that would be me) have more claims against GDP flows, then don't those higher claims have to come at the expense of tomorrow's workers?

Actually, the burden of demographics that you are refering to is going to fall on those trying to sell their private assets to pay for current consumption. (retirees)

When the proportion of sellers(retirees) to buyers(workers) goes up, what happens to the price of assets?

This has been talked about very sparingly because it undermines both positions.

Demographics shifts can lead to falling asset prices which undermines the notion of promised great return in investing in private trust funds.

The fence swings the other way as well. Unless you believe in the magic wands and other sorts of sourcery of government promises.

[2slugbaits]

Mark,

I would actually make two distinctions. First, if tomorrow's retirees have more income, then they also have greater claims against national income. This means less is available for tomorrow's workers unless privatization is (somehow) able to increase productivity. But as you say, there would be another effect on asset prices as retirees disinvest. Here both workers and retirees are hurt. Retirees are hurt because of lower asset prices, but workers are also hurt because disinvestment means capital shallowing, which will hurt workers' wages.

[Patricia Shannon]

I noticed a long time ago that the likely effect on stock prices and housing prices when baby boomers started retiring and selling their stock and houses have been, as you say, totally ignored. Maybe this is why the Republicans are trying so hard to shift retirement costs onto private accounts, to shore up the stock market, and preserve their riches.

[James Killus]

Patricia, reread what Bruce Webb wrote. They are not saying and doing the things they say and do because they have some grand plan. It's all purely ideological knee jerk: government bad; corporations good. Hulk smash government and Bambi will be safe.

Except those parts of government that they like, of course, like the military (but only collectively, individual soldiers are "phony soldiers"). And the police. And prisons. Hmm. Why does the phrase "military police state" come to mind? Ah, that must be my own knees jerking. Surely they wouldn't dream of concentration camps and torture, would they?

[Bruce Webb]

Well thanks all for the kind words.

You can numerically calculate the Cost of Inactivity. Depending on how many years you have to retirement you can quantify any increase in payroll gap year over year. Now obviously any year marked by an outright drop in payroll gap suggests that doing nothing was the right plan for the current year, you could have funded an IRA (or bought food for your kids) in clear conscience, they simply didn't need that 2.02% in 2006 if they only need 1.95% going forward.

Just as interesting is to calculate the Cost of Inactivity going forward given the current payroll gap. An 18 year old is 49 years from full retirement under current law. The Trustees tell you the current gap is 1.95% of payroll. How much would the gap have to increase by the 2008 Report to convince you that inaction was the wrong course? .04%. Could that happen? Sure but the incidence of that over the last 11 years was once. Flash forward 20 years. You are now 38. Where is the tipping point now? .065 of payroll. Same incidence of 1 in 11 bit cost outnof pocket much reduced. Flash forward 10 more years. Prime earning time, ideal time to be making your own investment choice. What level of increased current year payroll gap makes it a better idea to give your current year dollar to a government fund manager? .101% For Boomers the probabilities that Nothing is the correct plan for 2008 are overwhelming. There may be a time when we need to move on this, but every year the gap shrinks shoves that back in time.

People who want to insist "We can't afford to wait" need to start using real numbers.

[pgl]

Juandos is so desparate to spread the usual rightwing lie that LBJ endorsed raiding the SSTF reserves (hey back then there weren't much in the bank), he cites some obscure cite called Counterpunch? At least, CoRev infects the Angrybear blog to something LBJ supposedly said - taken completely out of context. Juandos's next comment will blame LBJ for the Iraq War.

[Robinia]

Yes, Bruce Webb has it pretty much precisely, I also agree.

But, I have to think that there is just a little bit of the "lobbyist guarding the henhouse" in Paulson, who I think would indeed like to see his cronies have all that money to play with, without congressional oversight.

Kind of a hoot, the idea that Congress can't be trusted to not raid the kitty, but those folks who brought you the tech boom, the housing bubble and the mortgage-market bust will safeguard your annuity flawlessly.

[Bruce Bartlett]

It is true that LBJ switched from what was called the administrative budget to the unified budget, which included Social Security. Although there was a substantive rationale for doing so--the move more accurately indicated the macroeconomic impact of the deficit--I don't think anyone doubts that LBJ's endorsement of the change came about because it slightly improved the budget.

On the original point of this post, my theory is that Treasury as an institution is making a move to increase its influence on an issue that will undoubtedly lead to some legislative action over the next few years.

To elaborate, I always thought it was incredibly stupid of the White House to cut Treasury out of its earlier Social Security reform proposal. Leaving aside the question of merit, the proposal failed in large part because the White House played its cards too close to the vest and had grossly insufficient staff support.

I believe that if Bush had had the brains to give Treasury lead responsibility for Social Security reform it would have been much more successful. This is just a political observation.

[Bruce Webb]

Well I followed my own advice and went to some early Reports and found that the numbers and tone did not match my preconceptions. I sampled the 1988 and 1992 Reports and while over that period the financial outlook for SS was deteriorating (with depletion moving from 2048 back to 2036 and payroll gap from .58% to 1.46%, there is none of the near hysteria you see coming out of Treasury today. The problem was recognized but there was no push for some drastic restructuring of the system.
1988 Report
1992 Report
It seems that grownups were still in charge at Treasury. Which makes sense given that James Baker was in charge, and just as I expected Bruce Bartlett was in the mix
In 1987, Bartlett became a senior policy analyst in the White House Office of Policy Development, then headed by Gary Bauer. In 1988, Bartlett left to become deputy assistant secretary for economic policy at the Treasury Department, where he served until the end of the administration of George H.W. Bush. h/t to Mr. Bartlett.

The 1994 Report shows some more concern, with the payroll gap now up to 2.13%, and the 1996 report shows 2.19% up from 2.17% with the peak coming in 1997 at 2.23% but still no sense of panic.
We believe there is ample time to discuss and evaluate alternative solutions with deliberation and care. The size of the long-range deficit is such that long-range balance could be restored within the framework of the present program. Nonetheless, the magnitude of any required changes will be smaller the sooner they are enacted.
They didn't turn out to be precisely correct in that last seconds, as events turned out the 1996-2000 boom simply sucked all of the air out of 'Crisis' as the gap settled back to 1.89%. But the overall point is correct, there is ample time to discuss Social Security with deliberation and care. Which point the current set of Social Security Issues briefs sets out to subvert, the last thing they seem to want is a discussion of the underlying numbers and assumptions. The 2008 Report is due in six months and we have battles looming over 12 appropriations bills plus SCHIPS which would be a better use of anyone's time than this last ditch attempt to pick up a Bush win on Social Security.

For what it is worth I don't expect legislative movement on this in the next couple of years. The plans I see on the table that suggest moving to private accounts provide worse results at higher worker cost (as an example the LMS plan throws 5.2% of worker financed fix at a 1.95% problem, and all at the interest of disciplining Congress. Well we have elections to do that). Nor it it clear that the authors of these have clearly passed the No Economist Left Behind challenge. Are all these plans really penciling out with ultimate Real GDP levelling out at 2.0% and staying there through the actuarial window?

[M. Stitzel]

THERE IS NO SOCIAL SECURITY TRUST FUND! I've been told the government has taken the end of the year balance in the Social Security Trust fund for about twenty-five years now, and they continue to do so at the end of every year! If that's true, the government owes the people BILLIONS to replenish what they've taken! WE, THE PEOPLE paid that money along with the company's contribution, and the government owes us every cent! It was never their money in the first place!

[Bruce Webb]

Bartlett says
It is true that LBJ switched from what was called the administrative budget to the unified budget, which included Social Security. Although there was a substantive rationale for doing so--the move more accurately indicated the macroeconomic impact of the deficit--I don't think anyone doubts that LBJ's endorsement of the change came about because it slightly improved the budget.
The numbers and dates don't really support that, it is more a right and indeed left wing talking point. I don't know whether Johnson put the proposal to Congress before or after he dropped out of the race on Mar 31, 1968, but given that it wouldn't go into effect until 1969 it seems unfair to suggest that it was anything other than what it was reported to be, a way of better expressing the total amount of federal spending.

Moreover if it was meant as some sort of coverup for a 'raid' on Social Security it kind of backfired. Social Security did have a fairly substantial surplus in 1969 of $5.5 billion, but that steadily shrunk until it hit negative numbers in 1975 where it effectively stayed until the 1983 reforms. Over this time the Unified Budget actually had a negative effect on perceptions of the General Fund.

The notion that somehow we paid for the Cold War with Social Security needs to be put to rest, perhaps with a stake through its heart. Trust Fund assets shrank in every year from 1975 to 1981 and then clocked in at $200 mil and $100 mil the next two years. Meaning that on balance the cash flow was FROM General Fund TO Trust Fund in these years. You don't buy jets with negative dollars.
http://www.ssa.gov/OACT/TR/TR07/VI_cyoper_history.html#wp96419

[calmo]

Ok, Stitzy, swallow a mittful of Benadryl and calm yourself...with the observation that the "cabinet shuffle" (starring shortie) could only have been produced if there was something to fight over...something in that cabinet after all...something to privatize like they said (for awhile and then retracted)...something that might be counted as A Great Legacy for the Bush Administration.
They wouldn't make such a fuss if the lootin was all done and gone, right?
Alrighty then.
calmo tablets. One a day when you can't find your mitts...such inferior substitutes.
You know it.

[Bruce Webb]

Stitzel the true figure is $2.1 trillion and climbing. But you need to look up the definition of 'government bond'. The government didn't 'take' the surplus, they borrowed it and promised to pay it back with interest. It doesn't matter whether you take 'BAkho' or a 'cHill' pill, either would assist in helping you understand that you are a propaganda victim here.