Mortgaging the Nest Egg

This is not a good sign. A lot of people are borrowing from their retirement accounts to pay off debt:

Borrowing from the Nest Egg, by Lane Kenworthy: This news is discouraging, but hardly unexpected. According to a “Marketplace” report, a survey by the Transamerica Center for Retirement Studies (pdf here) finds that the share of workers borrowing from their 401(k) retirement funds increased from 11% in 2006 to 18% in 2007. Nearly half of those taking out such loans in 2007 cited the need to pay off debt, compared to a quarter in 2006.

Stagnant wages and salaries, most spouses already employed, rising health care and college tuition costs, higher mortgage debt loads, and falling home values mean lots of American households — including many middle-income ones — are pinched financially. The late 1990s economic boom lessened the strain for a while. Then home equity loans helped. More recently, credit card usage has jumped. Borrowing against retirement savings is the logical next step.

See more discussion here, here, and here.

This is why I wonder about the long-term participation rate in "opt out" retirement accounts that are being promoted as a way to deal with the retirement security problem. How many people will opt out of these accounts when economic conditions for the household deteriorate temporarily for some reason? And once they opt out, will they opt back in? People who are motivated enough to borrow against their retirement accounts - almost one fifth in 2007 - would also be motivated enough to opt out of an automatic savings plan. Many of the studies, at least the ones I have seen, do not track people over long periods of time where this type of deterioration would be present, and they do not follow people through a recession when the pressure to opt out would be greatest. I'm not saying we shouldn't have these programs, they do help some people save, and even if some people opt out at least they have a source of funds to use when times get tough. The point, though, is that the people most likely to opt out are the very ones we would like to see participate in savings programs so that they have more than just Social Security available during their retirement years. Because of that, we should be careful not to place too much emphasis on opt-out types of mechanisms for solving the retirement security problem. These accounts may not provide as much of a boost as we hope to key segments of the population.

Update: Megan McArdle follows up with comments on forced saving as a solution to this problem.

Comments

[40lk or SS or What?]

They could just pass a law mandating participation at a certain percentage, and forbid extraction before age 62. Why even go through employers? Just expand Social Security to pay a living wage. Increase the payroll tax by whatever percentage would have forcibly gone into the 401k to fund it.

People tend to discount future purchases. That is, they value a bird in the hand today more than they do a bird in the hand tomorrow. People generally save only if they think they can buy a bit more tomorrow as a reward for forgoing consumption today. Over the 45 years of a career, and 30 years of retirement, the dollar will lose over 80% of its purchasing power. Not very enticing.

Some roll the dice, buy stocks at highly valued prices, and hope for the best. Most people don't bother. Consuming 1/5 of a bird in 50 years is much less enticing than consuming a whole bird today. Thus most people must be forced to save today. In contrast, the savings rate used to be about 10%. Those days are gone. Only forced savings are apparently left.

[ken melvin]

As for talk about access to the middle class, the real problem is those, and they are many, trying to to hold on to middle class status by their toenails or by hook or by crook. The other factor at play is the same as for Social Security, pensions, home equity, ..., the rethugs simply can't stand the idea of anyone other themselves having anything, and they fully understand that money has to be in motion for them to make a killing.

[Callahan]

No problems, just don't retire.

[Robert Bell]

Doesn't the sanity of this depend on the interest rate differential between the credit card rate and the IRA loan rate?

[Organic George]

It seems there is now a direct correlation between the new bankruptcy law and the publics willingness to sacrifice their retirement accounts to say out of debtor predatory

[robertdfeinman]

I've been claiming for some time that there has been a (partially) hidden decline in the wealth of the middle class for the past several decades.

The example I like to cite is that many college students now have to pay for their own education (via loans) whereas in their parent's generation it was expected that the tuition would be paid for by the prior generation.

In other words, there was a pay-it-forward cycle. This has now been broken, the parents now have spent the money they were supposed to set aside for their children. Underfunding one's old age is just the latest in such a series of delayed impoverishments.

People now lease cars rather than buy, they live in houses that they "own" but don't build up any equity in, they buy household items on credit (via credit cards) rather than owning them outright.

This is a modern version of the sharecropper or feudal type of economy, where people have no assets and can never build up any. It could work over the long term if there were enough social services to cover the situations when one can no longer work, but that's not what we are seeing. If you fall off the merry-go-round, too bad,

The hollowing out of the middle class has been disguised by the rise in price of intangible assets owned by the wealthy which has made it appear that the economy as a whole has been doing well. The chickens are coming home to roost as we see more and more firms suddenly taking huge write offs - today it was Sprint's $30 billion.

I hate to keep singing the same song, but a country can't keep throwing huge sums of (borrowed) money into the sink hole of militarism without it affecting the rest of the economy sooner or later.

I guess the fact that there is no way out of this squeeze without an economic downturn, inflation and unemployment is why none of the pols and economists want to talk about it.

[wimpie]

"This is a modern version of the sharecropper or feudal type of economy, where people have no assets and can never build up any. It could work over the long term if there were enough social services to cover the situations when one can no longer work, but that's not what we are seeing. If you fall off the merry-go-round, too bad"

Robert, now you're starting to sound like Buffet. What's wrong with feudalism? It worked fine in the middle ages. After the black death, existing assets were then distributed to a much reduced population, increasing everyone's standard of living by quite a bit.

Something similar will probably happen in the US after the next pandemic.

[reason]

Surely the caption should be "Raiding the piggy bank"?

[chris]

Ah yes, if we killed off a third of the US population, think how rich the remaining ones would be. Maybe the next administration....

BTW, in the mediaeval countryside, which I know quite well from my research, "taxes" or levies usually fell on the poor. Taxes then were regressive, not progressive.

[don]

I wonder at the dramatic drop in personal savings since about 1985. Was it medicaid and medicare (which reduced the need to save), the increase in asset values (first stocks, then houses), an increase in expectations of higher future incomes (based on the rise in productivity), or 'forced borrowing' (as Asian central banks lent money to the U.S. through currency intervention, without asking whether we wanted to borrow it)? If income distribution has become more skewed, this would tend to increase the average rate of saving. My guess is, asset price rises were most important (partly due to lower long-term interest rates caused by the 'forced borrowing' mentioned above), government transfer programs were second, and rational responses to expectations about future productivity are least important. Whatever the causes, the current government responses to the slowdown are designed to keep the savings rate down.

[Bruce Webb]

"After the black death, existing assets were then distributed to a much reduced population, increasing everyone's standard of living by quite a bit."

As if. After the Black Death the shortage of workers initially acted as market theory suggested it should, workers demanded higher wages than the extraordinarily depressed ones they had been receiving before (over the course of the thirteenth century landlords had considerable economic leverage and used it). What was the response of capital? State power to forcibly suppress market wages.
Statute of Labourers, 1351

Whereas late against the malice of servants, which were idle, and not willing to serve after the pestilence, without taking excessive wages, it was ordained by our lord the king, and by the assent of the prelates, nobles, and other of his council, that such manner of servants, as well men as women, should be bound to serve, receiving salary and wages, accustomed in places where they ought to serve in the twentieth year of the reign of the king that now is, or five or six years before; and that the same servants refusing to serve in such manner should be punished by imprisonment of their bodies, as in the said statute is more plainly contained: whereupon commissions were made to divers people in every county to inquire and punish all them which offend against the same: and now forasmuch as it is given the king to understand in this present parliament, by the petition of the commonalty, that the said servants having no regard to the said ordinance, but to their ease and singular covetise, do withdraw themselves to serve great men and other, unless they have livery and wages to the double or treble of that they were wont to take the said twentieth year, and before, to the great damage of the great men, and impoverishing of all the said commonalty, whereof the said commonalty prayeth remedy: wherefore in the said parliament, by the assent of the said prelates, earls, barons, and other great men, and of the same commonalty there assembled, to refrain the malice of the said servants, be ordained and established the things underwritten:

First, that carters, ploughmen, drivers of the plough, shepherds, swineherds, deies [dairy maids], and all other servants, shall take liveries and wages, accustomed the said twentieth year, or four years before; so that in the country where wheat was wont to be given, they shall take for the bushel ten pence, or wheat at the will of the giver, till it be otherwise ordained. And that they be allowed tos erve by a whole year, or by other usual terms, and not by the day; and that none pay in the time of sarcling [hoeing] or hay-making but a penny the day; and a mower of meadows for the acre five pence, or by the day five pence; and reapers of corn in the first week of August two pence, and the second three pence, and so till the end of August, and less in the country where less was wont to be given, without meat or drink, or other courtesy to be demanded, given, or taken; and that such workmen bring openly in their hands to the merchant-towns their instruments, and there shall be hired in a common place and not privy.

Item, that none take for the threshing of a quarter of wheat or rye over 2 d. ob. [2 1/2 d.] and the quarter of barley, beans, pease, and oats, 1 d. ob. if so much were wont to be given; and in the country where it is used to reap tby certain sheaves, and to thresh by certain bushels, they shall take no more nor in other manner than was wont the said twentieth year and before;

The market can't be denied forever, it was easier to enter into land contracts after the Black Death than before, but let us not even in jest think that the benefits of such a disruption flowed evenly to "everyone's standard of living". The rich took active steps to use state power to maintain their self-ordained share of productivity and kept taking them until workers finally demanded and achieved the right to participate in the political process, a right not totally achieved until 1918 in Britain and in many respects until 1964-65 in the United States with passage of the two Civil Rights Acts and the Supreme Court's 'One Man One Vote' decision. And even that did not equalize the power in setting wages between worker and employer. The existence of a free market in wages is largely mythical, and the notion that everyone is magically paid exactly at the level of their marginal productivity is more than laughable.

[Bruce Webb]

"After the black death, existing assets were then distributed to a much reduced population, increasing everyone's standard of living by quite a bit."

As if. After the Black Death the shortage of workers initially acted as market theory suggested it should, workers demanded higher wages than the extraordinarily depressed ones they had been receiving before (over the course of the thirteenth century landlords had considerable economic leverage and used it). What was the response of capital? State power to forcibly suppress market wages.
Statute of Labourers, 1351

Whereas late against the malice of servants, which were idle, and not willing to serve after the pestilence, without taking excessive wages, it was ordained by our lord the king, and by the assent of the prelates, nobles, and other of his council, that such manner of servants, as well men as women, should be bound to serve, receiving salary and wages, accustomed in places where they ought to serve in the twentieth year of the reign of the king that now is, or five or six years before; and that the same servants refusing to serve in such manner should be punished by imprisonment of their bodies, as in the said statute is more plainly contained: whereupon commissions were made to divers people in every county to inquire and punish all them which offend against the same: and now forasmuch as it is given the king to understand in this present parliament, by the petition of the commonalty, that the said servants having no regard to the said ordinance, but to their ease and singular covetise, do withdraw themselves to serve great men and other, unless they have livery and wages to the double or treble of that they were wont to take the said twentieth year, and before, to the great damage of the great men, and impoverishing of all the said commonalty, whereof the said commonalty prayeth remedy: wherefore in the said parliament, by the assent of the said prelates, earls, barons, and other great men, and of the same commonalty there assembled, to refrain the malice of the said servants, be ordained and established the things underwritten:

First, that carters, ploughmen, drivers of the plough, shepherds, swineherds, deies [dairy maids], and all other servants, shall take liveries and wages, accustomed the said twentieth year, or four years before; so that in the country where wheat was wont to be given, they shall take for the bushel ten pence, or wheat at the will of the giver, till it be otherwise ordained. And that they be allowed tos erve by a whole year, or by other usual terms, and not by the day; and that none pay in the time of sarcling [hoeing] or hay-making but a penny the day; and a mower of meadows for the acre five pence, or by the day five pence; and reapers of corn in the first week of August two pence, and the second three pence, and so till the end of August, and less in the country where less was wont to be given, without meat or drink, or other courtesy to be demanded, given, or taken; and that such workmen bring openly in their hands to the merchant-towns their instruments, and there shall be hired in a common place and not privy.

Item, that none take for the threshing of a quarter of wheat or rye over 2 d. ob. [2 1/2 d.] and the quarter of barley, beans, pease, and oats, 1 d. ob. if so much were wont to be given; and in the country where it is used to reap tby certain sheaves, and to thresh by certain bushels, they shall take no more nor in other manner than was wont the said twentieth year and before;

The market can't be denied forever, it was easier to enter into land contracts after the Black Death than before, but let us not even in jest think that the benefits of such a disruption flowed evenly to "everyone's standard of living". The rich took active steps to use state power to maintain their self-ordained share of productivity and kept taking them until workers finally demanded and achieved the right to participate in the political process, a right not totally achieved until 1918 in Britain and in many respects until 1964-65 in the United States with passage of the two Civil Rights Acts and the Supreme Court's 'One Man One Vote' decision. And even that did not equalize the power in setting wages between worker and employer. The existence of a free market in wages is largely mythical, and the notion that everyone is magically paid exactly at the level of their marginal productivity is more than laughable.

[anne]

Good grief; rising asset prices and expectations of rising asset prices are overwhelming reasons to save.

What forced borrowing because of what currency manipulation are we thinking of; say the 60% increase in the relative value of the Yen, along with European currencies from September 1985 as a result of the Plaza Accord?

Ah, Medicare and Medicaid must be the problem. Rotten health care insurance, causing Americans to spend spend spend. Duh.

[piglet]

Off-topic:

Mankiw's 10 principles of economics
http://crookedtimber.org/2008/02/28/mankiws-10-principles-of-economics/

[billy]

This is a modern version of the sharecropper or feudal type of economy, where people have no assets and can never build up any.

This is the grand theft institutionalized by Greenspan. Bubbles generate ephemeral wealth, which disappears in the bust and the resulting price inflation. The only lasting effect of a bubble is the pumping of wealth upwards. Whatever saving the people do, is transferred up by the boom and bust cycle.

In such an system it would be quite irrational to save, or to honor debts. Borrow, spend and default is the trick. And what we see today is in fact the only rational behavior in such a corrupt system.

After what Bruce Webb posted yesterday, I wont be surprised when change comes it will come with the spirit of "first let's kill all the economists". As with lawyers in the 12-1300's and priests in the 16-1700's, economists today are abetting the plunder of the few by the many.

[anne]

What utter nonsense; the investment climate for more than 30 years has been overwhelmingly conducive to saving. I can scarcely imagine a better saving-investment climate than we have had these decades, not just becuase of economic characteristics but because price and technology competition by select financial companies made investing far less costly and simpler than had historically been the case.

[wimpie]

"What was the response of capital? State power to forcibly suppress market wages."

Bruce, are you implying that IF the US experienced a population reduction(pandemic, terrorism, act of war or natural disaster), the STATE would regulate wage increases?

Wouldn't the STATE just raise taxes on the remaining population?

[billy]

What utter nonsense; the investment climate for more than 30 years has been overwhelmingly conducive to saving. I can scarcely imagine a better saving-investment climate than we have had these decades,

http://www2.standardandpoors.com/spf/xls/index/MONTHLY.xls

S&P 500 10yr returns 1988-1998 = 281%

S&P 500 10yr returns 1998-2008 = 41%

The racket under Greenspan started when? Please remind us. When?

[Worker]

Borrowing from 401K could also be a rationale response to high borrowing spreads, a declining stock market, and low money market rates.

Why pay a high rate for an auto loan, or credit card, when you can self-finance borrowing money from yourself. Especially when your savings are tied up earning the 2% Bernanke rate.

[Fred]

Good grief; rising asset prices and expectations of rising asset prices are overwhelming reasons to save.

Households tend to save until their net worth is equal to some multiple of their income. If asset inflation boosts net worth enough, then households will tend to stop saving and even begin dissaving. This is what happened starting around 1995. By contrast, a collapse in asset values will increase savings, which is what we should be seeing real soon now. ("Households" here refers to the aggregate and the multiple is fairly stable, especially over the short-run. When looking at particular households rather than the aggregate, we obviously have the spendthrift households who will spend ever penny they can get their hands on and the miser households who will never stop saving no matter how high their net worth.)

I fail to see any reason for uproar about savings or lack thereof. What we should be worried about is whether the country as a whole is investing wisely or not. In particular, whether we investing in developing skilled workers and productive institutions, so as to have higher national income in the future, because these investments have a very long lead time before payoff.

Personally, I am delighted to see that households are raiding their 401Ks. Every time a 401K is emptied, there is one less potential voter who doesn't have a direct stake in the fluctutations of the stock market.

[cm]

chris: "mediaeval"

I like "mediaevil" better. :-)

[anne]

"Especially when your savings are tied up earning the 2% Bernanke rate."

What complete rubbish; earning a 2% rate of return on an investment is simply a result of wanting to earn 2% and has nothing to do with investing. Continue on though proving why the need is never to invest because investors are, like, always losing (except for all the investors who, like, aren't).

[donna]

Did everyone forget that retirement accounts, pensions, and social security were started so people would retire and younger people could have jobs?

I cringe every time I see older people working fast food and service jobs just to have health care coverage.

So how are we going to get people out of the market so younger people can have jobs if they have no retirement, have borrowed it all, and have no health care coverage?

Come on , the responsible people among us who have savings, 401Ks we don't need to touch, and 20 something kids coming up we would like to get out of our houses are getting very worried here!

[kthomas]

Thank goodness for those new bankruptcy laws. It'd be shame to see so many honest, hard-working Americans in the poo house.

The stock prices have been dropping, it might not be a bad idea to take all the money out your 401k before the traders on Wall Street plunder it.

Ah, the wonders of GW's "Ownership Society".

[typekey pseudonym]

On the weakness of opt-out that MT raised:

Every year, around the end of October, I have to go through my benefits selections and specify what I want for the following year. Usually, there is no change, but I am supposed to return filled out forms back to personnel. The opt-out choice for pensions savings could be set to be good only until the end of the calendar or fiscal year, and then people would have to opt out again.

[Bruce Webb]

"Wouldn't the STATE just raise taxes on the remaining population?"

Only if that state wasn't politically dominated by people who earn their income on returns from capital. Given that I see little prospect of this government or any other entering an age where money DOESN'T talk I can't conclude that tax increases would be the natural outcome.

British and then United States history are replete with cases where state power intervened on the side of capital to restrict wages either directly or through bans on various forms of collective bargaining. We had a period of time from 1932 to 1980 where that dynamic was reversed, where the government by and large intervened in the other direction. To posit that as the natural state of government is to pretend that people like Grover Norquist and Newt Gingrich don't exist. These people are hell bent on returning government to its natural role of cosseting holders of capital from the demands of workers.

I don't know what the US would do in the result of pandemic. I know what England did in the aftermath of the Great Plague. In any event I want to apologize for taking this thread OT.
__________________

The whole issue of forced savings really does break down on lines suggested by 401k or SS. At some point the barrier between a government mandate and a government tax breaks down. As an example people like to cite the Singapore Medical Accounts system as a privatizing alternative to our Social Security and Medicare programs. But on examination the differences fade away. For workers at lower income levels you end up with a result that you get a somewhat higher retirement annuity if you don't get sick much in your lifetime, or avoid medical care if you do. But in the meantime you are required to pay in a fixed percentage of your income in order to earn a government annuity on retirement with government subsidized health care in between, only by squinting can you call this privatizing.

People have been so blinded by hatred of what they think Social Security is to see what it actually delivers. If you were a libertarian tasked with the distasteful task of imposing a mandatory retirement system you would likely come up with something close to Social Security. It is funded with a flat tax, does not call on entrepreneurs to contribute from gains on capital, delivers benefits that scale up based on lifetime earning and so rewards success, and phases out at an income level where individuals could and should be making their own choices. If you HAVE to have a retirement security system this one is practically a libertarian dream. They might quarrel some about the exact point to place the cap but otherwise this is a plan that is minimally invasive on liberty.

You can live on a minimum Social Security check, I know people who do. It is not pleasant, it often requires you to tap into other parts of the private and public safety nets in ways that may be personally embarrassing like using food banks or buying almost everything second hand but generally speaking you won't starve and will be able to secure shelter. Social Security is NOT a progressive government funded pension plan, if it was it would have a much better minimum benefit and more equalized benefits overall. Social Security is not socialism, it is not fundamentally an income transfer system, it is a self-funding insurance plan designed to deliver a minimum amount of dignity after a lifetime of work with an emphasis on 'minimum'.

People should be encouraged to do better retirement planning but I don't think that forced savings is really the answer particularly at lower income levels. The whole discussion is simply a fairly arbitrary privileging of future utility of a dollar to current utility and I can't help but suspect it is more due to a fear that somehow the wealthy will be called to pick up the tab in the future. That is it is kind of an odd system where people profess to be concerned by retirement security for future seniors while accepting current policies that slash heating oil subsidies for the elderly poor today. A little cognitive dissonance thing going there methinks.

[Worker]

My point was only that it is very often rationale to borrow from yourself via a 401K, especially when credit spreads are high and credit availability is limited.

The fact that someone's savings mainly exists in a 401K is attributable to the 401K's favorable taxation and widespread adoption. Why save significant money outside a 401K (other than contr. limits) if you can tap the 401K for personal loans?

I did it in late 2001 to buy a car, which was paid off within 18 months. It was a wise financial decision to internalize the loan. And the ability to tap the 401K encouraged my mid-20's self to maximize my contribution.

The one risk people face (unless it's been changed) is that you must immediately repay the loan if you lose/ change your job. This restriction could and should be changed.

401K loans being said, this current trend may not be so benign given huge debt levels many people already carry.

[James Killus]

What percentage of the 401K and IRA withdrawals are to pay for ongoing medical expenses? And how much of the debt was generated by medical expenses in the first place?

There's often an unspoken assumption that the "debt" that households carry is because they couldn't do without the new toys and such. My observations suggest that households incur large debts due to education and medical expenses, and then find themselves unable to pay them down, so raiding the nest egg begins to look very appropriate. That is especially true for medical expenses, which also tend to be coincident with a loss of ability to generate income.

The ideological attitude is "throw the losers to the wolves," of course. But the wheel does turn and the mill can crush anyone, eventually.

[Swells]

Bruce, I don't get the point you made in another forum about the "investment" in Treasury Notes that happens with the social security "excess". Maybe I'm a simpleton but if the money is spent today doesn't it mean that the unfunded liabilities in social security will have to be paid out of money collected later? If so, how does that differ from a ponzi scheme? After all, the government's income stream isn't enhanced by it loaning money to itself because it has to also pay back the same money it borrows. There isn't any perpetual motion machine in physics and I don't think there is any in economics either.

My main worry with social security is that my nieces and nephews will be made debt slaves by what social security is doing. Where will the trillions required to fund social security benefits come from if not from them? How is it the case that having to pay those trillions won't impoverish them? There is only one source of money for all the social programs and that is taxpayers.

[anne]

Ponzi, blah, blah, Ponzi, blah, blah. Social Security has a massive and growing surplus, and will have a growing surplus for years and a surplus for decades if not indefinitely with reasonable economic growth. But I know Ponzi here and Ponzi there and Ponzi wherever Ponzi can be.

What puzzles me is why we are not all frantic worrying about sweet little nephews and nieces groewn to be chained to tractors paying the only debt that really will make a difference. What debt will that be, Ponzi? Guess.

[Swells]

Anne, I ask a simple questin and you bitch slap me with sarcasm. Now that's an intellectually viable approach. Makes a fellow wonder if the lady doeth protest too much. Maybe everyone who has noticed the remarkable resemblance between ponzi schemes and social security is an imbecile. I'll wear that label if it's approrpriate. But, nobody has explained how the two are different in any substantive sense.

I can see one way. The government can coerce participation in it's scheme whereas Ponzi had to promise outlandish returns. That made the damage from Ponzi's scheme inherently less as it ensured the scheme would unravel relatively quickly.

[Arne (not anne)]

Swells, Anne's response is not particularly useful, but it comes from someone who is tired of explaining.

Anne, No comment would be better.

[Arne (not anne)]

"After all, the government's income stream isn't enhanced by it loaning money to itself because it has to also pay back the same money it borrows."

Not right. Borrowinf from itself allows the government to reduce the amount it borrows elsewhere. Whether it SHOULD be borrowing is a separate question that has nothing to do with SS.

"how does that differ from a ponzi scheme?"

SS is insurance. The incoming stream must achieve a steady state balance with the outgoing stream. The promised outgoing stream must be achievable. A Ponzi scheme promises an outgoing stream that is unachievable and misleads people about how that is managed. Read the SS report and you will see that it can deliver. Bruce Webb will argue that any misleading going on is to make it seem like it will actually deliver less than what is likely.

[anne]

Social Security has been fine for 70 years, and in recent years Social Security has been designed to accumulate a massive surplus to meet the needs of a population ripple whose members reach retirement age. Now the surplus is growing and will grow for years and be available for decades beyond as retirements increase. A reasonably growing economy in addition should actually allow for retirement needs to be met indefinitely.

There is no problem; a retirement program with a massive and growing surplus, a surplus that will last at least decades and with readily attainable growth possibly indefinitely simply is in no danger other than from compassionless conservatives who have wished to do away with the program from the days of Franklin Roosevelt.

[anne]

"There is only one source of money for all the social programs and that is taxpayers."

"There is only one source of money for all the military programs and that is taxpayers."

There is however an interesting difference between Social Security which has a massive and growing surplus, and military spending which amounts to, say, $725 billion dollars in spending and no surplus in view.

Since the initial budget of George Bush in 2002, social spending has declined as a portion of national income while military spending has increased. So sweet little nephews and nieces should have no worry at all about social spending while tractoring away to pay for, say, Iraq.

[ddt]

I would also like an explanation or debunking of the SS "problem". I really don't know much about it, but what I hear is confusing and contradictory, and that goes for people on both sides of the political spectrum, ie "Social Security has been raided by the conservatives to pay for tax cuts and the war" vs. "No, social security is fine, it's a conservative myth that it is running out of money"

1. Has the social security money been "borrowed" by the goverment from itself? Is that a problem?

2. Is the structure of SS sustainable with the boomers retiring?

I know people are tired of explaining this. Pointing me to a good authoritative article would be much appreciated.

[Arne (not anne)]

Social Security was in trouble in 1983. It was fixed. It was modified to handle the surge in Boomers. The data show that the fix was more than adequate.

Whether is can last indefinitely (without minor tweaks) depends on a growing aconomy AND the actual results of the still upcoming surge in retirements. Neither can be known for sure, but it will be at least 10 years before we have enough additional data to determine if (small) changes are required. Note that if both growth and immigration continue, we may need to reduce SS taxes to prevent over-funding.

[anne]

We have then an interesting problem. Why are we the least worried about social spending which has been a decreasing portion of national income since 2002 or Social Security which has a massive and growing surplus, while we never are the least worried about military spending which has been increaing as a portion of national income since 2002?

Social spending has actually dreased both as a portion of national income and decreased in real per capita terms these years. Where is the problem?

Social spending has decreased from 3.7% of national income to 3.6%, while falling 2.6% in per capita terms, and the President is asking further reductions.

Military spending has increased from 3.4% to 4.3% of national income since 2002, and is growing far faster than the economy can grow while taxes have been cut most expressly for the wealthiest households.

Where is the problem?

[anne]

http://www.epi.org/printer.cfm?id=2806&content_type=1&nice_name=webfeatures_snapshots_20071010

October 10, 2007

War Spending Placed Above Domestic Priorities
By Monique Morrissey

Non-defense discretionary spending as percent of GDP

2002 3.7 initial budget under George Bush
2003 3.9
2004 3.8
2005 3.9
2006 3.7
2007 3.6
2008 3.6

Defense discretionary spending as percent of GDP

2002 3.4 initial budget under George Bush
2003 3.7
2004 3.9
2005 4.0
2006 4.0
2007 4.0
2008 4.3

Remember, Social Security has a massive and growing surplus all the while.

Remember too all the defense components to spending included in the "non-defense" budget. So, I am presenting the matter most conservatively.

[anne]

Somehow we never ever worry about military spending, or worry about the insanity of wars and occupations that we are told this very day by courageous economists will cost us 3$ trillion dollars.

Social Security is fine, social spending is decreasing in per capita and share of national income terms, but military spending has been steadily increased while taxes have been repeatedly cut most expressly for the wealthiest.

Where then is the problem?

[Bruce Webb]

ddt, probably the best 'article' on this is the introduction of Dean Baker's and Mark Weisbrot's Social Security: the Phony Crisis

And at the risk of blogwhoring there is a ton of stuff on my Social Security site that some people have found useful. A good entry point is Guide to the BruceWeb which links to seven of the key entries as well as giving access to the Reports themselves.

[TigerPaw]

Worker- it is mathematically correct that borrowing from yourself and then paying it back makes sense. However, you need to keep in mind that the average person (a) doesn't understand the math (b) can't do the math and most importantly of all (c) does not have the self-discipline to pay it back even if they could handle (A) and (B).

So it kind of boils down to a case of "Should we let Johnny play with matches knowing he will almost certainly burn himself?". The right-wing says "yes", the left says "no". Both have a point, the right view is that one should be responsible for onesself, the left view is that with 98% of the population being like "Johnny" they'll take down the country with them and therefore it's best if the matches are taken away. Given the results we see all around us at the moment, I tend to think Johnny can't be trusted. Not fair to you or I perhaps but we're the unusual 2%.

[anne]

"No, Social Security is fine, it's a conservative myth that it is running out of money"

Precisely so.

Since the initial budget of George Bush in 2002, per capita social spending has actually decreased by 2.6% * in real terms; while the President has aske for continued cuts. We refuse to protect the health of 3.8 million needy children for a mere $7 billion when we are paying that for the needless insanity of a few weeks in Iraq.

Where is the problem?

* http://www.cbpp.org/2-20-08bud.htm

[anne]

What is absolutely amazing is the crassness or thoughtlessness of people who are simply incapable of writing without using horrid sexist language. Notice how impressed I am by such horrid language.

[anne]

I was amazingly restrained in using thoughtlessness and not stupidity, by the way.

[anne]

We had a massive budget surplus in 2000. Understand, then, what it means that social spending has been decreasing as a portion of national income and decreasing in per capita terms since 2002, while Social Security has had and continues to have a massive and growing surplus.

The reason we have a budget deficit is wholly because military spending has increased as a portion of national income while taxes have been cut. We are at war, and what budget problems we have and may have are a result of the combination of war and tax cutting especially for the wealthiest.

We are at war to a $3 trillion extent. Needless, physically and psychologically and morally destructive war. There is the problem.

[groucho]

"Not right. Borrowinf from itself allows the government to reduce the amount it borrows elsewhere. Whether it SHOULD be borrowing is a separate question that has nothing to do with SS."

Arne, let me get this straight. SS is NOT a ponzi scheme; just an insurance scheme that happens to be a subset of a much bigger ponzi unsustainable tax scheme?

Is that correct?

I don't view SS as inherently ponzi. But it is still a pyramid scheme that was not able to deliver the goods. The 80's fix proved that it was a "modifiable" ponzi, since it would have been a failed scheme without the tinkering.

BTW, I see most everything through "pyramid glasses"; including the expansion of the universe(planck unit expansion, biological(cell division process), as well as human endeavors.
Further, I distinguish between "organic", sustainable and ponzi. I don't see "bubbles" in financial schemes: I do see pyramid schemes.

I believe the FED, also, wears these glasses. That's why they can't see bubbles.

They are hoping they are sustainable pyramid schemes.

[anne]

"I don't view SS as inherently ponzi. But it is still a pyramid scheme that was not able to deliver the goods."

This is a lie, a mean-spirited lie for the sake of lying, a shameless socially destructive lie.

[Bruce Webb]

As to your questions.

Social Security is designed to be a PayGo program, that is current benefits are paid out of current receipts. By law it is required to keep a 100% reserve, which is to say assets equivalent to one year of projected cost. Those assets are held in the two Social Security Trust funds. In principle those assets could be in any form, but given that they are a backstop in the event that income starts lagging cost, an event that would normally be the result of an economic slowdown marked by higher unemployment and lagging real wages, they ideally are in a form that is stable in the face of a down economy and totally liquid. The asset that was picked was US Treasuries generally considered the safest investment on the planet but also giving a reasonable return on your money.

Now for very sound accounting reasons it is necessary to keep the pool of US Treasuries held by the public (include foreign countries) separate from the pool of Treasuries held in government Trust Funds, which is why these are called Special Treasuries. This has led to all kinds of confusion. People like to claim that the government can't loan to itself but that is just specious nonsense. If I have my money in a trust at Bank of America I may well hold some of that in the form of BofA stock. The Social Security Trust Funds are no different, they are backed by the Full Faith and Credit of the United States. Now certainly some future government could violate that trust, but that is not the same as saying this outcome is likely. Once you strip away the bogus arguments these investments are as real as real can be. Interest earning, fixed term T-Bills. Anyone who tells you different either doesn't understand or has a hidden agenda.

The assets in the Trust Fund are measured by their Trust Fund Ratio, which is reserves expressed as a percentage of projected cost with 100 equalling one year. In 1971 the Trust Fund dipped below 100 placing the system in Short Term Actuarial imbalance. Instead of fixing the problem it was left to drift to dangerously low levels. When Reagan entered office the Trust Funds were coming off six straight negative years and the Trust Fund ratio was down to 25 translating to 90 days and before the fix was installed all of the Trust Funds flirted with zero with only some fancy lending back and forth keeping them above water.

But this is a huge point. What would have happened if the Trust Fund ratio hit zero? Would checks stop? Well no, instead they would have been cut back to whatever could be covered by current income, initially this would just represent a flea bite, but over time it would grow. In 1983 an interim fix was introduced. The Commission established four economic projections, one more optimistic, two middle of the road, and one pessimistic. They calculated that under the middle of the road assumptions that a 2 point increase phased in over a few years would put Social Security back on the path to Short Term Actuarial Balance. And sure enough the economy grew in line with intermediate assumptions with the result that the system was back in Short Term Balance by 1993. Now I read through some of the Commission materials and got no indication that they thought they had a long term fix, if the economy actually performed better than expected and so came in in line with their optimistic alternative then the system would project to be 100% funded, but nobody expected that and in point of fact it didn't happen.

Let me pause. I can Republican bash with the best of them but it is important to point out that Reagan and Bush I are totally blameless. Reagan was handed a grenade, with the help of Moynihan and others he defused it, and when his successor left office the Trust Fund was at 96 and clearly on track for Short Term Balance the next year.

(I'll post and resume)

[James Killus]

It's interesting that, when talking about Social Security, few ever take the time to compare it with other pensions schemes.

What is any pension other than the promise to pay some money to someone in the future? How is that money to be obtained? Well, if the pension fund is prudent, and invests in bonds, then it expects those bonds to be funded in the future, by taxation if they are government bonds, by extracting money from a revenue stream if they are corporate bonds.

Put it in stocks? How does this help? You still expect the money to be extracted from the corporate revenue stream, ahead of dividends, even ahead of other expenses, though not ahead of taxes (although if a company can't pay its bond debt, it isn't paying much tax).

Every pension is a transfer of wealth, goods, and services from productive members of society to members who are no longer productive. The difference between "public" and "private" pensions is that the former are more direct and less risky to the pensioner. The latter allow for much more fraudulent behavior on the part of those who control the funds. They also have higher management fees. It's not surprising that the managerial class (and the criminal elements therein) would prefer to eliminate the more socially prudent competition. What's strange is that people don't see through this more easily.

[Bruce Webb]

Groucho to a hammer everything looks like a nail.

Could any bank or any insurance company on demand pay out all deposits and policies all at once? No they count on a stream of assets coming in the door that allow them to meet obligations going out the door. Sometimes they have to adjust interest rates or premiums to make that happen, this doesn't make them ponzi schemes, not if they are acting with good fiduciary faith.

The 1983 adjustment didn't prove that Social Security was a failed system, it was simply an acknowledgment that previous premium levels (in the form of payroll tax) were not sufficient to pay full claims going forward. So they adjusted the premium. That is what insurance plans do, why it becomes sinister when the government does it is beyond me.

And it is not fair to put words in Arne's mouth, he said nothing of the sort. The President and Congress each year decided on spending levels, if those are in excess of current receipts they borrow the money. In this case a convenient and in fact automatic source of funds was available in the form of Social Security surpluses. If they pumped up spending in amounts equal to that surplus just because it was there it would be a minor foul. If they actually made a good faith effort to set General Fund spending where it should be then the existence of the SS Surplus simply allows them to borrow less from the public than otherwise. That is not a Ponzi scheme, that is called the Budget Process.

[swells]

Arne, thanks for the reply. I don't understand your point about "borrowing from itself reduces its need to borrow from others". I thought money was fungible. 25 dollars is 25 dollars irrespective of where it comes from. Unless maybe you mean it gets to pay lower rates on money that it borrows from itself. I do understand your point about incoming streams balancing outgoing streams. I assume with the number of workers it takes to fund one retiree going constantly down (don't know for sure but I seem to recall hearing it took about 14 workers to fund one retiree originally and that it is down (or will be in the near future) to about 2.6 or so. Where is that balance point? After all, my concern is that social security will impoverish my nephews and nieces. The five of them supporting approximately 2 retirees would seem to be getting pretty close to impoverishing them the way things are going.

Basically I"m of the opinion that investments in old people like myself is a waste of money given the sorry state of schools. I can't help knowing that every dollar sent my way via social security is a dollar that would have been better spent education someone with their life ahead of them. So, when it comes time (not long from now) to belly up to the SS buffet, I plan not to do so.

I don't try to defend military spending at the current absurd rates.

[Bruce Webb]

Short version. In the decade after 1993 the economy performed near or above the top of the Trustees range of projections. By 2004 the Trust Funds were clearly at a point where even moderate growth would allow all benefits to be paid out for decades after the official 2042 date. With the help of a Trust Fund sitting at $1.6 trillion and growing at a rate of more than $150 billion a year you could rationally conclude that Social Security was fully solvent going forward. This of course was unwelcome news to those Republicans who had been working for 69 years to destroy Social Security, but rather than give up they started spinning wildly, with some results visible in this thread.

[Bruce Webb]

swells that 14 to 1 figure is terribly deceptive. On the day the first Social Security retirement check was handed out (Jan 31, 1940 to Ida May Fuller for $22.40) the ratio was probably about 60 million to 1.

The key here is not just covered worker ratio (worker to retiree) but overall dependency ratio (worker to all dependents including children). By 1965 covered worker had settled out at 182 with total dependency at 947, today we are sitting at 205 and 667, under Intermediate Cost assumptions that would rise to 367 and 817 by 2035 but never in fact would be projected to get back to 60s and 70s levels.
http://www.ssa.gov/OACT/TR/TR07/V_demographic.html#wp167717
The important point is that all of this is built into the models. We know pretty precisely what the economic burden will be depending on which economic model actually meets the reality. My best bet is that the current 12.4% rate will actually have to be cut slightly, if the economy nosedives to where Intermediate Cost would have it we would have a choice between modest benefit cuts (that would still be 120% in real terms relative to today's check) or increasing the payroll tax to 16.41%. If it comes to that I would expect them to split the difference, but in any event the numbers exist, your nieces and nephews will be fine.

[swells]

Bruce, I take your point about insurance companies not being able to pay out all liabilities at one point in time, that they depend on an asset stream coming in over time. But, insurance company do own real, tangible producing assets. Pretty much all the government owns is the power to tax. Is it not the case that the special treasuries that you talk about will have to be paid back by taxing people? Won't those taxes have to be ON TOP OF and IN ADDITION TO the social security contributions they will be making? It seems to me that about the only alternative to that is cranking up the printing presses in an orgy of inflation.

Those taxes will come predominantly from younger working people who have children to rear. Every dollar they are taxed to pay off the special treasuries will be dollars they do not have available to spend on education, etc. How can that not be detrimental instead of helpful?

[anne]

"After all, my concern is that social security will impoverish my nephews and nieces."

Abolutely no question definitely for sure, dud wittle kiddles will be poverished, poverished away to poverishdom, by the Social Security monsters. Gooble, Gobble, Ponzi, Ponzi.

[anne]

"Those taxes will come predominantly from younger working people who have children to rear."

That's the whole point, having as many of other peoples' children to take care of me as possible. No more education, just send the widdle kiddles out to the fields as soon as they can toddle and have them toddle up my Social Security.

[anne]

"So, when it comes time (not long from now) to belly up to the SS buffet, I plan not to do so."

Notice the meanness of the language, a social insurance program that is paid for over a life of working, that is critical for millions who have supported children, must suddenly be described in the most demeaning of terms. The point here from the beginning has only been to demean Social Security recipients. Ponzi, Ponzi, duh, duh. Rubbish.

[swells]

I don't know what world Anne lives in but I do know a lot of people who have a very hard time finding the resources with which to rear their children properly. I plan not to insist their children fork over their money to support me in my dotage. Yes I paid into SS over a lifetime. Won't collect a penny of it back. Maybe Anne should get back to me when she's done something a tenth that good for other people's kids.

[anne]

Idiocy; I can assure you I intend to be as greedy as can be and more so with enough practice. Send the kiddles to drive the tractors. Social Security is a right, as much as public schooling, and I ain't ever giving up a right.

What is amusing though is being incapable of understanding that we can easily afford Social Security and public schooling (not to mention no minimal or no tuition in public colleges and universities).

The idea of haveing to choose between education for the kiddles and Social Security is a pernicious deceit.

[swells]

Anne, I don't intend to demean social secutiry recipients. I intend to demean the idea that coercion is a good thing. Coerced social programs raise all kinds of possibilities of moral hazard. Not so much for those forced to participate in them, more so for the ticket taker type bean counters who control them.

If you would like, I can find way more demeaning things to call SS than a buffet.

[anne]

"I plan not to insist their children fork over their money to support me in my dotage."

Notice the language; the intent being to destroy any basis of a right to Social Security. Makes me feel greedier and greedier. We live at a time when protecting the health of 3.8 million needy children for the price of a few packages of cigarettes is too much for compassionless conservatives, but the wish is to destroy Social Security for the sake of the children.

What deceiving rubbish. I must find a proper training program in greed. Gobble, gobble.

[anne]

"Coerced social programs raise all kinds of possibilities of moral hazard."

I actually understand and sympathize with this argument, and have only respect for balances and checks in developing and administering social programs. Also, I understand for all my complaints the concern for children. We are madly wasteful in a number of ways, but where to begin.

[Anon]

Sounds like the general public has decided to follow Congress' example.

[anne]

Should Joseph Stiglitz be nearly right about the costs of Iraq and Afghanistan, we have flown beyond $2 trillion. Stiglitz argues beyond $3 trillion. How can that possibly be? What have we done? I only want to set issues in context, but the context of wars and occupations are simply forgotten so that we battle over schooling or Social Security. We are mad.

[groucho]

Interesting how responders are confusing pyramid schemes with ponzi. My reply( that's self evident) was that SS was apparently ponzi because the original formula did not work over time.

Hence, as Bruce W points out:

"The 1983 adjustment didn't prove that Social Security was a failed system, it was simply an acknowledgment that previous premium levels (in the form of payroll tax) were not sufficient to pay full claims going forward."

which is exactly what I said(system had to be modified). The fact that it WAS modifiable is was makes it non-ponzi.

The original contract was abrogated.(similar situation currently with the Congress thinking about abrogating current homeowner mortgage contracts)

Here's Thomas Sowell's piece from wiki:

" Social Security has been a pyramid scheme from the beginning. Those who paid in first received money from those who paid in second — and so on, generation after generation. This was great so long as the small generation when Social Security began was being supported by larger generations resulting from the baby boom.

But, like all pyramid schemes, the whole thing is in big trouble once the pyramid stops growing. When the baby boomers retire, that will be the moment of truth — or of more artful lies. Just like Enron. "

Again, SS clearly pyramid scheme, but abrogation nulls ponzi structure.

[anne]

"I don't intend to demean social secutiry recipients."

I understand completely, but to be wondering at the need to choose social insurance or fine schooling is a tragedy for such a heritage as ours, and we need not allow for such a choice.

[anne]

Thomas Sowell, a definitive compassionaless conservative, wishes only to destory Social Security. Yuck! Fortunately compassionless conservatives have been self-destructive enough to lose Congress and will continue to lose. Yuck!

Interesting how only war is costless to compassionless conserservatives. War forever and ever.

No Ponzi to a forever war.

[swells]

Anne, I come from a differnt tradition. The term "right", in the tradition I come from, doesn't refer to things like driver's licenses, social security, public education, etc. Those are called priviledges since they are arbitrary arrangements that might be accomplished in any number of ways and are certainly alienable. Rights, in my tradition, are things that are inalienable. Freedom of speech, freedom of (and from) religion, etc.

By the way, I'm not a conservative. For the record, I don't think there is a dime's worth of difference between conservatives and liberals in today's polity. Conservatives are okay with one keeping some of one's property as along as one subscribes to the prevailing idiotic superstitions that fix morality. Liberals are a little more willing for one to determine one's own morality as long as one doesn't mind rendering to Caesar whatever of one's property Caesar thinks would be good for Caesar to have.

[anne]

"When the baby boomers retire, that will be the moment of truth — or of more artful lies. Just like Enron."

The point is lying for the sake of lying; lying as destructively and hatefully and shamelessly as possible. Yuck!

[anne]

Swells:

"The term 'right', in the tradition I come from, doesn't refer to things like driver's licenses, social security, public education, etc. Those are called priviledges since they are arbitrary arrangements that might be accomplished in any number of ways and are certainly alienable. Rights, in my tradition, are things that are inalienable. Freedom of speech, freedom of (and from) religion, etc."

Interesting, I will think through the distinction.

[Patricia Shannon]

Many people are fearful of a co-workers germs, but not at all concerned about filling the air with poisons such as "air fresheners" which have been shown to cause cancer, reduce the immune system, and/or reduce lung function. But TV commercials have trained them to think should use this junk. So why expect people to be rational in other ways?

[dale]

think in terms of rights as relationships- not just as things.

[Andrew]

swells,
The worker to recipient ration for SS is about 4 to 1 presently, and is projected to fall to 2.8 to one by 2030, at which point the system will still be solvent for at least another decade.
The 2.8 figure makes a few demographic assumptions that may not pan out, however. First, it assumes lifespans will continue to increase at recent trend levels, which is far from certain according to studies in the health field (e.g. widespread diabetes).
It also assumes current immigration rates (legal), which may or may not stay constant, but if they change the trend is likely to be upward.

Even if the ratio really does fall to 2.8 to 1, that is a 30% increase. Which means worst case scenario is to raise the SS tax from 6.25% to 8.125% (or x2 for the full tax).

My concern is that the solvency means cashing in the bonds from the trust fund. The annual trust fund surplus is deducted from the federal funds deficit in order to make the deficit appear smaller in the unified budget. When SS stops running surpluses and starts cashing bonds, it is going to be a double whammy on the federal budget, and I imagine a few people are going to freak out when the deficit appears to double. This may just be a subjective political concern, but it could have significant consequences on appropriations decisions in Congress.

[RW]

Thomas Sowell wrote a very good introductory economics text and is now one of the economic hit men at the Heritage Foundation. Citing him in regards to any program designed to benefit anyone other than the wealthy and powerful is, to be blunt, completely profitless as his pattern in that regard is quite consistent: First he mischaracterizes, usually grossly, in order to set up the appropriate strawman and then he sets the strawman on fire.

All the rest of us make a moue of distaste -- like viewing and smelling a spatter of vomit on a bathroom wall -- and move on with at most a spit to clear out the stink of puke lingering on the palate.

Any remunerative element in the entire world could be characterized as a pyramid if one wished given the essential nature of labor and the future tense: We do things now in the hope or expectation of something in the future and when others see us doing that successfully they naturally begin to participate in the growing narrative and social practice.

We could call that social dynamic a pyramid, arguing that the term merely describes a type of structure with a broader bottom than top, where more aid in the support of fewer, but because language and meaning are always about far more than mere structure we typically save the term pyramid in financial context for what it originally described: A planned deceit involving a particular form of enticed herding and fiduciary betrayal.

Any one attempting to characterize Social Security as a pyramid scheme must be prepared to not only accurately describe its structure -- something that Sowell and other right-wing operatives have not done so far AFAIK -- and then effectively elucidate the nature of its planned deceit.

Good luck with that.

[groucho]

"The point is lying for the sake of lying; lying as destructively and hatefully and shamelessly as possible."

anne, There's a lie detection show on TV called "the moment of truth". Have you ever watched it? If you have, could you win the $500k? I would play that game for NOTHING!

[Patricia Shannon]

http://munews.missouri.edu/news-releases/2008/0228-autism-finances-sharpe.php

Financial Struggles Plague Families of Children with Autism
Feb. 28, 2008

Story Contact: Jennifer Faddis
COLUMBIA, Mo. - The information that a child has been diagnosed with autism often throws parents into an emotional tailspin. A new study from a University of Missouri researcher says most people don't immediately consider the major financial struggles that follow. She suggests more outreach is needed to help families plan and cope with the profound financial life changes they may face.

"More outreach". That's what the libertarians would call socialism. Unless it was their child or grandchild.

"As a parent, the diagnosis of autism upends your world," said Deanna Sharpe, associate professor of personal financial planning in the MU College of Human Environmental Sciences and whose own son was diagnosed with the disorder. "It is important for us to hear the voices of families who have financial struggles. There is strong pressure to do everything you can for your child. However, there is a great potential for families to spend a lot of money on therapy or new ideas that may be ineffective. Careful evaluation of therapies is important."
...
Some families quoted in the study reported skipping meals to be able to afford therapy for their children. Others talked about robbing their future by depleting savings, emptying their 401K plans, selling stocks and even filing for bankruptcy. More costs are added to some families who need counseling and medication for themselves in order to cope with the stress of raising a child with autism, further straining the family budget.

[groucho]

"When SS stops running surpluses and starts cashing bonds, it is going to be a double whammy on the federal budget, and I imagine a few people are going to freak out when the deficit appears to double."

andrew,

There's Enron, there's the SIV's. That's the point swells was trying to make.

Trying to run SS as an off-balance sheet entity is as foolish as what we are currently witnessing with money center banks(or prior, Enronitis). ie., SIV's have to come back on board at some point, which will decimate the capital structure.

I'm not a Greenspan fan, but he was telling the truth when he said that the FED can guarantee payments but NOT guarantee purchasing power.

Anybody saying that SS will be fine is missing the point, and that is the future purchasing power of said payout will approach nil.

[Andrew]

groucho-

Yup. I posted without reading the whole thread again. Everything I said was pointed out already in one form or another. C'est la vie.

[groucho]

"we typically save the term pyramid in financial context for what it originally described: A planned deceit involving a particular form of enticed herding and fiduciary betrayal."

RW, I'm not following you with that. What's been in the financial headlines for well over a decade has been "bubbles" and an occasional "ponzi" reference(much more ponzi since the sub-prime collapse)

Pyramids are highly desirable and can be quite stable(think of a mountain or the great pyramids of giza).

There is no reason to put a negative connotation on "pyramid" any more than putting a negative connotation on "scheme".

A scheme is a plan, nothing more and nothing less(US tends to use it in a neg way but the rest of the english world doesn't). A pyramid is a mathematical construct, which can be manipulated in a ponzi scheme.

SS was clearly set up as a pay-go pyramid structure. Strong base of(9?) workers to 1 payee. The base did not continue to grow and the payout age was not increased to maintain the original 9-1 pyramid structure, hence the changes from our fav Greenie.

[Joe]

"We are at war to a $3 trillion extent. Needless, physically and psychologically and morally destructive war. There is the problem."

War? We are not at war. We are conducting military occupations. The most obvious and expensive occupations are in Iraq and Afghanistan, of course. Plus, if you consider maintaining military bases in a foreign country an occupation, then our effort is quite a bit larger. Depending on your source, there are maybe 700 US military bases sited in over 60 countries. Why? Those countries do have their own militaries.

Have you noticed that we can't seem to trust our allies in Japan, Korea, and Germany to take care of themselves for a while such that we could pull troops out of those bases and send them to Iraq? Or is there another reason we can't leave those bases?

[jm]

It is increasingly looking as though Bernanke will create however much inflation is needed to prevent a serious recession -- and that the denizens of the banking business have arranged that to do so we will have to bail out most of the people who have borrowed and spent with abandon, and so support the bankers in the manner to which they have become accustomed.

Since this inflation will need to be such as to achieve a substantial transfer of wealth from savers to debtors, there are great disincentives to save.

[ilsm]

A major object of the Bush43 administration coming in was to raise military investment spending to over levels over $40B per fiscal year (not including R&D appropriations).

Major tactics were to redo the Army with a $200B new approach to mechanizing large infantry formations while our enemies look more like Hezbollah, new aircraft to fight the Battle of Britain again and Air Forces and a Navy bigger than their next ten competitors.

Now, we buy $40 B in expensive air refueling tnkers form Europe.

The success has been phenominal. Paid with America's future.

A key strategic goal of both Rumsfeld and Gates has been the "health" of the national security industry.

The peace dividend threatened that healthy profit machine.

It is healthy again and is taking down the US economy, at 4% of GDP.

All national security spending removes resources from productive uses.

Unless you think the Taliban are going to cause so much damage that you need a $3 T insurance policy.

How about that view?

The issue is: the weight of the national security goal of exceeding $40B a year in profitable production contracts is dragging the economy so that middle class workers have to draw on their future to meet today's expenses.

[Swells]

There are a lot of comments in this thread making a lot of different points. Some people seem to think that I'm a heartless conservative because I oppose forced participation in social schemes or because I worry that my nieces and nephews will become debt slaves when the IOUs the treasury is handing out willy nilly have to be paid back. I'm not an economist so I don't pretend to have the statistical or theoretical background to evaluate every detailed claim made. But, I think common sense can at least get at the principles involved.

To be honest, social security seems like a con game to me(one of many the government is perpetrating). Everything paid into it is spent by the government pretty much as soon as the government gets it (in many remarkably stupid ways in my opinion; ie., corporate welfare, a misbegotten ego war for Bush and Cheney, an often abysmal educational system that cheats many children out of their best hope for a better life, etc.) There's no there there in the trust fund because the special treasuries have no substance, they don't amount to anything more than a promise to tax someone later.

Those taxes will have to be on top of and in addition to the usual, on-going tax burden because demand for government spending isn't going down any time soon. It'll probably keep going up as not only will no one support seeing their own ox gored they will want their own ox's rations increased and politicians will continue to pander to those desires.

The additional taxes required to redeem special treasuries from the trust fund (along with the additional taxes involved in financing medicare liabilities, paying back the Chinese and other holders of our national debt) will be onerous. Once one starts layering on taxes for the repayment of debt on top of taxes for current government spending, the result, in my opinion, runs a very high risk of being extreme, of making debt slaves of our descendents.

I think the generation I belong to is the most perniciously narcissistic on record, offloading huge amounts of debt onto future generations to avoid paying for what we get as we go.

I guess I could be wrong. I certainly hope so.

[ken melvin]

Strange how human minds work. I wonder if has always been so and if 'twill be so in the future?

[anne]

Assuming you are completely warm hearted, the complaints you have are simply too broad to be sensible. There are complaints are participation in social programs, there are complaints about the quality of social programs, intimations that priorities should be changed, and there are complaints about affordability. Too much to make sense of. The focus must be narrowed; a complaint at a time.

I understand you are not complaining about social rights as such, as others complain, but the broadness of complaints allows for no response.

[Arne (not anne)]

Amdrew: "The worker to recipient ration for SS is about 4 to 1 presently, and is projected to fall to 2.8 to one by 2030, ... Even if the ratio really does fall to 2.8 to 1, that is a 30% increase. Which means worst case scenario is to raise the SS tax from 6.25% to 8.125% (or x2 for the full tax)."

The current ratio is actually about 3.3 to 1. The ratio needed to keep SS in balance has dropped from 3.5 in 1983 to 2.9 currently and is projected to drop to 2.6 or 2.7. The current ratio is projected to fall to 2.2 in 2030(intermediate cost projection) and keep dropping thereafter or to 2.3 (low cost) and then start rising.

Your tax raise calculation is flawed because everything over 2.9 (soon 2.8) goes into the trust fund.

The trust fund allows the ratio to get below a sustainable level for a long time before taxes need to be raised. If IC projection is right, it won't be enough and we will need to change. If the LC projection is right, the TF will carry my grandchildren through the period when the ratio is below the sustainable level. Historically, the SSTF has outperformed the LC projections.

[Arne (not anne)]

Swells: Certainly you are right that something will need to change in order to pay back the obligations to the SSTF. The change does not happen overnight, so there is time to decide what to do.

Therefore, the question should be, does SS provide a worthwhile and cost-effective service?

Obviously, I think so. I think so because I have looked at the numbers. Consider a pool of folks retiring at ager 65. Without retirement insurance each of them must have a retirement that will last until they die. With insurance each of them only needs enough to last for the average life expectancy. The latter is far more efficient. I have already put more in than I will get back, but that is because I have been blessed with continued well-compensated employment. I have no more reason to complain about not getting enough back than I do about not getting my homeowners premium back because my house has never burned down.

I am sorry you feel coerced, but that is the cost of living in a society that considers you have a 'right' not to have to work until you drop.

[anne]

What is maddening is that in 2000, we were in a budget surplus so large that Alan Greenspan was worried the national debt would be gone in this decade and leave the Federal Reserve short of Treasury securities to trade in conducting monetary policy. We went from surplus to structural deficit and the reason has been explained over and over, simply and clearly, but conservatives whatever they claim are incapable of understanding the reason.

[anne]

Social spending has decreased as a portion of national income from the initial budget of George Bush, even counting security spending. Social Security has been in massive surplus. But, military spending has grown far faster than the economy could have grown while taxes have been cut expressly to agree with the wishes of the wealthiest. There is the deficit.

What do conservative rant and rave? Social spending, especially Social Security.

anne says...

Billions, and tens and hundreds of billions of dollars, a trillion dollars and two and three trillion are spent for a war and occupation of