Tuesday, September 13, 2011

Is Social Security Worse Than A Ponzi Scheme?

Since Rick Perry declared Social Security to be a Ponzi scheme, much debate has erupted, with some pointing out that even such SS supporters as Paul Samuelson (in 1967) and Paul Krugman (in 1996) described it as a "Ponzi scheme that works." See http://marginalrevolution.com/marginalrevolution/2011/09/is-social-security-a-ponzi-scheme.html for more detailed discussion. Samuelson said that "The beauty of social insurance is that it is actuarially unsound," and then argued that it was OK to promise current workers more after they retired than they were paying in due to the high growth rate of the economy and the growing population. As all that slowed down, the system was adjusted in 1983 to have people pay in more and retire later, thus putting off the date of "unsustainability." The argument that SS is a Ponzi scheme is based on the fact that current recipients are past payers and rely on new recruits to pay, which was a part of the original scheme by Charles (Carlo) Ponzi in 1919-20, although varying in an important way from Social Security.

Now, it has come to pass that while I have not actually seen any blogposts on this, some on Facebook who do blog, such as libertarian Steve Horwitz, are declaring that not only is SS like a Ponzi scheme, it is actually worse than one due to being mandatory. Even though participants in Ponzi schemes are being defrauded with phoney information, they participate voluntarily (and in the case of the original scheme got their money back plus 50% if they moved fast enough). That SS is not voluntary thus supposedly makes it worse, given that supposedly people are being deceived about its "true nature," although anyone is free to ignore the rantings of various politicians and read the Social Security Administration Trustee reports, which are not at all fraudulent, even if they are not always all that easy to understand. Is there anything to this?

I think it may be worth revisiting the original Ponzi scheme to understand crucial differences, with some similarities. The main one is indeed that future current people pay in and then they receive benefits paid in by later payers. That it is mandatory is what guarantees that there will be payments in the future, even if some of this must be adjusted from time to time as growth rates and so on may change. Otherwise it is different, and not just because of the lack of fraud, even though people are amazingly ignorant about the nature of SS, including many young people believing that if the system goes "bankrupt," they will get nothing, whereas according to the mainline projection by the SSA, such a bankruptcy would lead to recipients in 2037 receiving on the order of 120% more in real terms than current recipients, a fact known to very few people apparently.

The key to Ponzi's original scheme was that there was no ongoing source of income beyond the upfront contributions of new recruits (who were promised 50% returns within 90 days). Ponzi claimed he was making the money in arbitraging foreign currencies, but he never engaged in a single such transaction (although he did buy two firms with the money). Once people put money in, they put no more in, and could only get money from new recruits joining. In the case of SS, it is not just some upfront payment that people make and then sit back to receive. They keep on paying in through the taxes, even if this is mandatory. But then all taxes are mandatory.

In fact, Social Security really is best described as "social insurance," the term first used by von Bismarck when he first proposed it in Germany in 1881 and used by FDR when he proposed it in 1935. Yes, it has some differences with private insurance, and is at least partly a welfare plan for old people dressed up to make it look like an investment, but it does indeed serve the insurance function of guaranteeing people against falling below a certain income level when they are old.

Indeed, this is worth keeping in mind when people start going on about how its returns are not as good as other investments (maybe), an issue in some sense aggravated by Samuelson's old remarks from a different era, when in fact there were positive returns for one paying in (at least on average, obviously depending on how long one lived). In private insurance one does not expect on average to earn a positive return, which is how private insurers make a profit. Some make a positive return, but most do not. They are paying for peace of mind, and that is what one is getting from Social Security.

In any case, the discourse on this topic has become severely degraded. I hope that this can be overcome in the near future, and that people can be better informed about what really is going on with the system.

31 comments:

Don Levit said...

Barkley:
Ponzi scheme is a very inflammatory way to view Social Security.
A more impoortant question would be "Is there a disconnect between what Social Security was intended to be, and what it has evolved in to?
SS was intended by Roosevelt to be self-financing, with no use of general revenues.
Are we using general revenues to redeem the interest due to the shortfall of income to outgo the last 2 years?
Yes.
Will we use general revenues to redeem SS trust fund principal when the shortfall of interest is unable to cover the gap?
Yes.
If SS was truly self-financing, the princoipal and interest of the trust fund would be liquidated, without the use of new monies, general revenues.
If it was structured like an insurer, the reserve fund would be liquidated from the prefunding that was already set up.
Don Levit

John said...

SS differs from Ponzi in two important ways.

1. Time gap between pay-in and pay-out.

2. Generational stop after beneficiary (or dependents) dies or reaches maturity.

The SS concept is straightforward. A working/earning population is taxed for the purpose of funding a safety net against utter destitution (but not full, comfortable retirement) for a non-working population. The numbers rise and fall so the amount of funds will be either more than or less than what constitutes "utter destitution." Revenue will rise or fall, but it will not vanish. When the day comes that "benefits" cannot be fully satisfied as defined, then the definition of what constitutes "benefits" will can to be changed to a smaller amount. But as long as funds are coming in, benefits may be less but will not vanish as the scare-mongers would suggest.

Insolvency is a misleading word. (Ask any landlord. Some rent is better than none at all.) In the worst case beneficiaries may get a haircut -- or even a shave -- but they will not have to give up everything.

The generational cap and the fact that those in retirement don't live as long as those at work (just as a working life is typically longer than life in retirement) are both mitigating differences between SS and Ponzi. Actuarial arithmetic is the compelling difference.

And all of the above presumes no borrowing, which (a we have learned during the Reagan Revolution) is always a great way to do stuff without actual funding.

ProGrowthLiberal said...

"according to the mainline projection by the SSA, such a bankruptcy would lead to recipients in 2037 receiving on the order of 120% more in real terms than current recipients, a fact known to very few people apparently."

Rick Perry recently claimed this figure to be 75% not 120%. I guess the truth is that under currently law recipients in 2037 are supposed to get 160% and 120/160 = 0.75. But that is all lost on the Tea Party crowd who thinks Perry is telling them the truth.

Bruce Webb said...

Levit you are still a bucket of wrong. The 1939 Social Security Amendments mandated that all surplus revenues be invested in securities fully guaranteed as to principal and interest by the Federal government, continuing a practice of the Treasury Department starting with the original Social Security Act of 1935. You can read all about it in the first Report of the Trustees of Social Security from 1941.
http://www.ssa.gov/history/reports/trust/tf1941.html
Which if you do the simple math ALWAYS meant a consistent flow of cash from the General Fund to Social Security to finance the interest on those securities.
And if you examine actual operations of the Trust Funds from their initiation you will see significant extended periods of Trust Fund redemptions using, yes, General Funds. Because that is how you pay off Treasuries, which have been the mandated vehicle for such investments since 1939 and in actual historical practice since the enactment of the act.

Look I have gotten used to your ideologically driven arguments about the 'Phony IOUs' but for Christ's sake man don't try to deploy FDR in your defense. Because in doing do you are working out of a mythic world existing only in the collective imagination of people who hated FDR to start with. Give it up dude, we got numbers (below). And the direct testimony of FDR's cabinet members as linked above.
http://www.ssa.gov/OACT/TR/2011/VI_A_cyoper_hist.html#190685

Bruce Webb said...

"If SS was truly self-financing, the principal and interest of the trust fund would be liquidated, without the use of new monies, general revenues.
If it was structured like an insurer, the reserve fund would be liquidated from the prefunding that was already set up."

Uh. Not if that principal was invested in Treasury instruments. Do you think that insurers don't draw investment earnings from whatever entities they put that money into? In what world would repayment of principal and interest from the borrower be considered unfunded "new monies"? Isn't repayment kind of built into the basic equation here?

And what is worse for your argument is that simple fixes to Social Security would ensure that NO GENERAL FUND MONEY WOULD EVER GO TO PRINCIPAL REPAYMENT and that INTEREST WOULD BE DISCOUNTED BY 60%. According to numbers supplied by that wild eyed crazy Steve Goss, the Chief Actuary of Social Security.

Levit you need to slow down and do some reading and thinking here because the unfortunate truth is that your knowledge basis on Social Security in actually negative. In that much of what you "know" is not factually grounded. The numbers are out there and publicly available, why are you embarrassing yourself in this way? I am starting to feel like I am kicking puppies down at the shelter: big eyed and defenseless.

Bruce Webb said...

PGL I long ago dubbed that 120/160 thing "Rosser's Equation". Throw your fellow blogger some props here.
Intergenerational Real Benefits in Social Security (Rosser Equation Illustrated)
from a blog you may be familiar with:
http://www.angrybearblog.com/2010/07/intergenerational-real-benefits-in.html

Plus nice graphs from CBO graphically showing how it would work.

coberly said...

Apparently Dean Baker has found a way to describe the result of Rosser's equation in a way that does not raise my hackles.

He says with no fix at all, that 25 year old kid will get a pension of 38,000 per year when he retires.

It's pretty clear that Perry doesn't have any idea what he is talking about, which sadly is pretty much true of everyone who has an opinion about Social Security.

coberly said...

uRosser
I wish you hadn't said this:

"and is at least partly a welfare plan for old people dressed up to make it look like an investment, but it does indeed serve the insurance function of guaranteeing people against falling below a certain income level when they are old."

I think it is serious error to call SS even "partly" a welfare plan. Is your car insurance a welfare plan?

Nor is SS "dressed up to look like an investment."

You pay your premium, and essentially the way the insurance works is that when you are 65 or otherwise eligible to retire, you collect a benefit based on what you paid in... with the feature that those who made less money over a lifetime, and hence paid less in premiums, get a higher RATE of return, but less absolute return, than those who earned, and contributed more.

It's not welfare because you don't know going in whether you will be one of the high earners ... with lower rate of return... or one of the low earners.. with higher rate of return.

I see no dressing up. And words like "welfare" or "invsetment" are words with "many parts" so something can share features with "welfare" or "investment" or even "ponzi scheme" and be none of those.

Because as you point out, the essense of ponzi scheme is fraud... and ultimate loss of your money. the essense of "investment" is "risk" and potential high returns... or loss. While Social Security is the opposite... zero risk (except for politics) and no risk of windfall returns... except in the insurance sense.
And welfare is pretty much a matter of giving something to "thepoor" because he is poor, without his having made any direct contribution to his own "benefit," which again is the opposite of SS.

I think "insurance" describes SS better than loose use of other words that describe things with some similar features.

coberly said...

Levitt

you seem confused in your thinking.

we are using general funds to pay interest on, and ultimately to repay the principle of, money LENT to the government by Social Security.

This is NOT using general funds to pay for Social Security. It is using general funds to pay, finally, for whatever it was the Congress bought with the money it borrowed FROM Social Security.

Even your words "redeem the interest due to the shortfall" don't make any sense. Neither does the rest of your comment.

coberly said...

PGL

Perry actually claimed that young people would only get back 75% of what they paid in.

Showing that he has no idea at all what he is saying.

Essentially EVERYONE will get back EVERY dollar he paid in, plus an effective interest that covers inflation and the average growth in wages over the forty years or so that he has been paying the "tax."

The "shortfall" in "promised benefits" comes from the longer life expectancy of those younger people. Their "everything they paid in" will have to spread over many more months (longer life) and so will have to be at a lower "replacement (month's benefits per average month's wages) rate.

If they want the same replacement rate over the longer life expectancy, they would have to pay a higher tax... on the order of one half of one tenth of one percent per year from now until they retire.

Which is about two percent by the end of the typical forty year career. So their average increase would be about one percent. And most "workers" would only "see" about half of that deducted from their paychecks.

Because as we have seen the "most economists" who said the boss's share was "really" the workers money, now all agree that it's really "a jobs killing tax."

Don Levit said...

Coberly and Bruce:
I understand that the trust fund could invest only in Treasuries.
That part of the law will need to be changed.
I don't know what Roosevelt was thinking when he wanted the program to be self-financing, and investing in Treasuries, unless the excess FICA taxes and so-called interest remained in the trust fund and was not lent to the Treasury.
That process at least appears to be self-financing.
But, the excess FICA taxes and interest were loaned to the Treasury and spent. Now, reason tells me those dollars cannot be in the Treasury (and spent) and in the trust fund at the same time.
This same process has occurred with the defined benefits plan for federal retirees.
Now, this is a different program from Social Security, for the retirees' program is funded voluntarily by contributions.
The current payouts are considered a liability, and is listed on the government's balance sheet.
That number is in the trillions.
Is it okay for federal retirees' to have this kind of exposure, this unfunded liability, albeit on a lesser scale than Social Security?
Don Levit

coberly said...

Don

try to think. what would it mean if "excess FICA AND THE INTEREST remained in the trust fund and was not lent to Treasury"?

where would the interest come from.

it could have been invested in private stocks and bonds, or, i suppose, in "marketable" government bonds, but that would have had risks....mostly that the market would turn down at the exact time the Trust Fund was needed to bridge the gap between current (taxes) and current benefits.

SS is self financing. the interest earned on the Special Treasuries is part of the self financing. Used to be lending money to the government was considered "safe." And thos "marketable" Treasury Bonds only have value because the government is willing to raise the taxes to pay for them. (note, not raise the tax rate, just raise the taxes.. that is collect them and use them to pay its bills. and SS is just another bill, just like the one they owe to Boeing for the airplanes they buy.

Your reason tells your wrong. The nature of money is that you lend it to someon who spends it. It remains in the Trust Fund in the form of accounts receivable. (I am no accountant, so if this is not the correct terminology, someone correct me, but the principle is the same.)

It's not the payouts that are a liability, and the retirees don't have the exposure... they don't owe anyone anything. The liability is the government's, it's exposure is that it owes the money to future retirees. Fair and square.

Your "voluntary" retirement plans also leave the future retirees "exposed" in your sense... the investments could go bad. The whole point of Social Security is to avoid that risk.

The only risk to Social Security is that we will get a goddam Democratic President who will sell out the program because he doesn't understand it and thinks its part of the national debt.

IT aint. And as Rosser points out, with no change whatsoever ALL the people who have put money into the plan will get back everything they put in and more... just not as much as they would need for a minimum basic retirement, given that they are going to live longer in more expensive times.

Note the times will not be more expensive because of inflation, but because the people of those times will not be able to live without cars and refrigerators and indoor toilets... which is where they'd be if the chained CPI had been applied in 1936, or initial benefits price indexed instead of wage indexed... or computers or god know what expensive things people a hundred years from now won't be able to live without even if they are "standard of living" and not "cost of living".

coberly said...

Rosser said it but it bears emphasizing

the thing about a Ponzi scheme is it has no way to fund it's promises, and merely uses the early "investment" to give the appearance of being a great investment to attract more "investors."

Social Security funds its promises with an infinite supply of future taxpayers who will want the same good deal the generation before them got: a way to save their own money for their own retirement safe from inflation and market losses.

and still earning the miracle of compound interest from the growth in the whole economy, and not just the chancy growth of some particular stocks.

if just paying early investors by attracting new investors was all it took to be a Ponzi scheme, then every investment, every bond, every bank account, would be a ponzi scheme.

but what the big liars know is that the average voter is too dumb to realize there is more than one variable, or one "feature" operating at the same time.

Don Levit said...

Coberly wrote:
Social Security is just another bill, just like the one they owe to Boeing for the airplanes they buy.
You are exactly correct, Coberly.
And that is the problem - the trust fund is no more self financed than an appropriation from Congress to pay for airplanes.
Both payments are pay-as-you-go from current revenues, from the Treasury's general fund.
As you know, Medicare Part D is funded 75% by general revenues and 25% by participants.
The general revenues is a current budget expense.
Do you consider Part D fully funded?
Don Levit

coberly said...

Don Levit

when I talk about Social Security I talk only about OASDI. even HI, which is self funded, I leave alone because the issue there is costs and not funding.

And Social Security is NOT just another bill. The money the government owes the Trust Fund is just another bill.

Social Security is NOT "the money the government owes the Trust Fund."

I see that I expressed this clumsily in my original comment. I said "SS is just another bill" I meant that from the point of view of the government, the money they owe SS is just another bill.

The Trust Fund is not "self financed". Social Security is self financed. Social Security is NOT the Trust Fund. The Trust Fund is the money that SS collected over its (then) current needs. That is a legal way to define money that was collected for paying Social Security benefits and cannot be spent for any other purpose. Lending the money at interest is not considered "spent", and the interest becomes part of the Trust Fund.. that is, money that can only be spent for SS benefits.

This is not hard unless you are committed to not understanding it.

Don Levit said...

Coberly:
Are you saying that Medicare Part D is fully paid up, because it is backed by unfunded Treasuries, Treasuries that require new general revenues to redeem?
Don Levit

blissex said...

«They keep on paying in through the taxes, even if this is mandatory. But then all taxes are mandatory.»

This is one of the classic libertarian myths, that hordes of parasitic poor vote for ruthless commissars of the people to put a gun to the head of the rich and shake them down.

Paying taxes is an entirely voluntary act, and there is no compulsion involved.

For example several billion people refuse to pay USA taxes on this planet, because they prefer to buy their state membership from another supplier.

Any USA membership buyer is engaging in a free bargain among willing protagonists. If you don't like the benefits of USA citizenship compared to the costs of USA taxation, you are entirely free to buy any other state's membership that you can afford to buy in the citizenship market, just as if you don't like your Sprint cellphone plan you can terminate that and buy a Verizon one (of course you will have to pay any freely previously agreed termination fees and arrangements).

There are no jackbooted thugs shooting on sight to prevent you from leaving the country and you can freely choose any available state membership as a bargain between consenting agents. Just as nobody forces you to shop at Wholefoods, you are entirely free to drive over to Costco if you think that the extra distance is worth your effort.

This extends to OASDI, and if you think that paying USA payroll taxes for purchasing the USA's OASDI product is not a bargain that suits you you can even more easily go to work in another country that offers you a better bargain.

All you have to do is to realize that you are a free agent and TAKE PERSONAL RESPONSIBILITY for your own choice of state services and state insurance membership fees.

blissex said...

«Coberly:
Are you saying that Medicare Part D is fully paid up, because it is backed by unfunded Treasuries, Treasuries that require new general revenues to redeem?»

He is not saying that. he is saying that for the foreseeable future OASDI is an insurance program administered by the USA government but funded by its willing and consenting participants.Just like the FDI insurance program which is administered by the FDIC but funded by member banks.

Similarly to an hedge fund which is administered by the hedge fund manager but to which the fund manager have no liability.

This discussion is about Social Security/OASDI, an insurance program, not The Republican's Spending Folly of 2006 (Bushcare part D).

blissex said...

«Social Security funds its promises with an infinite supply of future taxpayers who will want the same good deal the generation before them got: a way to save their own money for their own retirement»

That's completely wrong it is indeed purely an insurance vehicle, not a savings vehicle, as you write earlier:

«I think it is serious error to call SS even "partly" a welfare plan. Is your car insurance a welfare plan? Nor is SS "dressed up to look like an investment." [ ... ] It's not welfare because you don't know going in whether you will be one of the high earners»

Also because it is not known in advance how long each contributing insured member will live.
OASDI is in effect old age poverty insurance (as the name says), insuring against both excessive poverty and long old age, and as any insurance scheme the people who don't suffer the adverse event will have paid more in premiums than they get in payout.

But indeed it works to the advantage of the current rich, for example it insures the current rich against the effects of putting all their money in Madoff accounts for a luxurious and safe retirement.

«safe from inflation and market losses»

It is not safe from inflation or deflation, because it is in effect tied to the median wage and/or government revenue, and in any case "inflation" and its index can bem redefined at will, and it they have been ("inflation" has been redefined to be "price inflation", and then "price inflation" has been redefined several times, in all cases to bring down the payout).

It ultimately depends as you write «from the growth in the whole economy», even if formally the payout depends only on your contributions and CPI, because if the program were no longer self-funding presumably Congress would donate money to bail it out.

But then it might not, and as you have written IIRC several times, even in the worst projections the self-funded program woukld still be able to payout 80% of the promised returns.

But overall the story is that it is a voluntary bargain among willing agents, and if one does not like it, they can TAKE PERSONAL RESPONSIBILITY and choose another scheme by working somewhere else.

coberly said...

blissex

and we were doing so well. i agree with you,or you with me, so well that i hate to disagree with you, even if only mildly. here goes:

whether it is an insurance vehicle or a savings vehicle it is no more purely one or the other than Certs is purely a breath mint and not a candy mint (in case you are younger than i am, that's from a TV commercial of a long time ago.)

SS serves both a savings function and an insurance function. it fact it is an insured savings vehicle. but unlike FDIC the savings are insured for more than their nominal value. they are insured against losses due to inflation, and market failures (not exposed), and certain kinds of personal bad luck including the failure to thrive (earn enough to save enough for retirement) and failure to be prudent (the savings are mandatory.

don't waste a lot of time trying to insist it is "purely" one thing or another. it is what it is.

if by adverse event you mean living long enough to collect, you are right. but just for the record even those who earn at the top of the taxable income scale or above get back more in payout than they paid in premiums. their monthlypayout is about 26% of their average lifetime real earnings. not only inflation adjusted but wage adjusted, so they earn an effective interest of about two percent real (this is not quite accurate, but it works out the same when you go through all the complications) and all they have to do is live about half as many months as they paid in. which among people at their income level is about their life expectancy. and this doesn't even count spousal benefits.

SS is "in effect" tied to median wage, which by definition rises with inflation plus "productivity" as defined by the trustees. of course congress can change the law, but supposedly we the people are too smart to let them get away with it.

I wouldn't expect Congress to bail it out. that's why i insist it remain self funding, contrary to the better idea of some liberals who want the rich to pay for it because, well, because they are liberals and the only frame they can think in terms of is welfare, even at the very moment they are saying "SS is self funding."

that 80% of promised benefits is misleading. It's 80% of promised MONTHLY benefits, but since the projected shortfall is caused by living too long, at the end of the day you will get 100% of what you paid for. the answer is to pay a little more so you can keep the same monthly for the extra months you will live.

it does depend on the whole economy... which is exactly what the elderly have depended upon since man became human. a process which seems to have stopped with the invention of capitalism.

and no, that's not me being a socialist communist red hater of capitalism. SS is the way capitialism has come up with "honor your father and your mother" under an economic system where families can't be counted on to do that on their own.

coberly said...
This comment has been removed by the author.
coberly said...

Levit


Medicare Part D is not paid up. it is not backed by treasuries at all.

and if it were, general revenues are what backs up all treasuries, even those Peter Peterson buys and sells.

Medicare Part D was part of the bastardization of Medicare, like they want to do with Social Security proper (OASDI and HI). by getting general taxes to pay for it, they weakened the concept of "worker paid insurance." a damn fool move some of the "defenders of social security" are only too eager to try with OASI.

Don Levit said...

Coberly:
You are correct that the Congress weakened the concept of worker paid insurance.
By diverting the excess principal and interest from the SS trust fund, as they did from the federal retirees' defined benefit plan, they turned a fully paid-up system into a pay-as-you-go scheme, just like, as you said, pay-as-you-go for Boeing airplanes.
It is no more fully funded than is Medicare Part D.
Blissix:
Social Security is not an insurance program, or even a retirement plan, as we know it for individuals - at least according to the FASAB, the accounting advisor for the federal government.
In a paper entitled "Accounting for Social Insurance, Revised, published by the FASAB:
Page 85 "Social insurance is not an employee benefit. The accounting methods for employee retirement benefits reflect the fact that employees voluntarily exchange lower wages during their working years to receive certain future benefits. Such an exchange does NOT occur with social insurance benefits.
Page 87 "A nonexchange transacrion arises when one party receives value without directly giving or promising value in return. In regards to social insurance benefits the federal government gives value to beneficiaries WITHOUT RECEIVING VALUE IN RETURN." (I guess that means the feds are doing us a favor!)
"The fact that benefits paid are not based on the amount of taxes paid confirms the nonexchange nature of social insurance."
www.fasab.gov
Click on Exposure Drafts and Documents for Comment
Don Levit

Don Levit said...

Coberly:
I agree with you, totally!
Can you believe that (at least as Part D is concerned).
There are many adherents, enough of them to have a name, that believe Parts C and D are fully funded.
From a paper entitled "Social Security and Medicare Trust Funds and the Federal Budget," published by the Treasury:
Page 13 "From the Trust Fund Perspective, SMI (Parts C and D) is always 'fully funded.'
From the Budget Perspective, SMI draws huge transfers .
Page 17 "Net results for Budget Perspective - Revenues from public less expenses to public.
Net results for Trust Fund Perspective - Revenues from public less expenses to public PLUS GENERAL FUND TRANSFERS PLUS TRUST FUND ASSETS."
http://www.treas.gov/offices/economic-policy/reports/budget_trust_fund_perspectives_2009.pdf.
You seem to support the Budget Perspective for Part D.
However, for the retirement portion, in which the trust fund is tapped similar to Part D, with the use of general; revenues, you seem to support the Trust Fund Perspective. And, if so, this is because of the implicit promise made by the Treasury when they borrowed from the trust fund, rather than the way the funds are actually provided?
Don Levit

Jack said...

Don
Why are you bringing up any aspect of Medicare when the discussion is about Social Security. The two programs are distinct from one another and only share the fact that they serve an older population and the government administers both. It seems clear from your earlier comments that you either don't understand the funding process for Social Security in other than a very superficial way. Or you are deliberately tryiing to confound the facts of Social Security for others who may be reading on this site for the purpose of their own understanding. In short, you don't seem to know what you are talking about, especially in regards to Social Security funding. You have been told this before, many times. The details have been explained to you many times by Bruce, Coberly and me. Please stop being an instigator of misinformation. The country has enough elected Republicans to carry out that function.

Don Levit said...

Jack:
Let the others provide their comments.
You basically said nothing, proving that talk is cheap for the supply exceeds the demand.
The funding of Medicare Part D is done 75% by general revenues.
The funding to redeem principal and interest in the SS trust fund is done 100% by general revenues.
If you do not see the connection, it is because you do not want to acknowledge it.
Don Levit

coberly said...

Don

that kind of "connection" could land you in a mental hospital.

OASDIHI is (are) funded by the payroll tax... that is workers paying for their own insurance.

the "extra" money collected over the years is kept in a "Trust Fund." that means it can only be spent for the purposes of OASDIHI (actually three trust funds).

the money is lent (yes, it can be both "kept" and "lent", money is funny that way) to "the government" a separate legal entity.

the government no doubt has to "fund" its payment on that loan from general revenues.

this does not establish a meaningful "connection" between the way medicare part D is funded and the way OASDIHI is funded.

Don Levit said...

Coberly:
Talk about confusion!
The extra money is not kept in a trust fund.
Numbers which indicate what the trust fund is owed from the Treasury is kept in a trust fund.
Money cannot be both kept and lent.
Give me a concrete example of how that works in the real world, not the world of government accounting.
The dollars are accounted for in the trust fund, but reside (or resided before spent) in the Treasury.
A five year old could understand that!

Bruce Webb said...

Well at least three words of the following statement by Don are perfectly true. The first three:
"I don't know what Roosevelt was thinking when he wanted the program to be self-financing, and investing in Treasuries, unless the excess FICA taxes and so-called interest remained in the trust fund and was not lent to the Treasury.
That process at least appears to be self-financing."

Don what you don't know is that for the first four years Social Security was in existence all funds were simply held on account by Treasury. And after the Trust Fund was established in 1939 the funds were STILL kept on account at Treasury with the role of the Commissioner of Social Security mostly to oversee administration while the Trustees kept an ey on the accounting and solvency. The distinction you would like to see between Treasury and Social Security never existed, in fact the 1939 Amendments made the Secretary of Treasury ex officio the Managing Trustee of Social Security. Making the Chinese Wall you seem to think existed having a gate guarded on both sides by the same guard wearing too hats, or one that appeared different depending on how you approach to gate.

But the fundamental problem is that you are working from a mythic Roosevelt, the one who said contributions would never go up and that Social Security was temporary. That Roosevelt never existed outside the imagination of the enemies of Social Security who delight in invoking his name to "prove" how the current system is foreign to the one he set up. Well it just isn't true as a simple read of that 1941 First Report would show. And yes Roosevelt was still President then (because some people have an incomplete grasp on history).

The story you are telling is a reasonably coherent one, it is just that 'plausible' doesn't translate to 'true' in a one to one fashion. It just didn't happen the way you need it to have happened.

Bruce Webb said...

Don you have gone past 'thickheaded' into territory Jack pointed out. And this is just swapping your original bucket of wrong for a five gallon one:
"You are correct that the Congress weakened the concept of worker paid insurance.
By diverting the excess principal and interest from the SS trust fund, as they did from the federal retirees' defined benefit plan, they turned a fully paid-up system into a pay-as-you-go scheme, just like, as you said, pay-as-you-go for Boeing airplanes."
THERE WAS NO DIVERSION. Nothing was 'turned' into anything, the Trust Funds operate in the same fashion as the did since they were set up. Not only are you confused by the concept of the Social Security Trust Fund, you seem dreadfully out of contact with the idea of Trust Funds generally. Trust Funds are never physically walled off from the operations of whatever institution is holding the assets, the Trust in question is supplied by the Trustee or Trustees who make sure the bank fulfills its obligation as agent for the principal beneficiaries of the Trust if and when. And often enough, as in our case, the Trustee is also an Officer of the Bank and the ultimate protection for the Trust is external in the form of legal rights enforceable through the court system.

There is a phrase for starting a claim "You are correct" and then inserting wordage never asserted by the ostensible claimant. That phrase is "erecting a straw man". Coberly never assented to anything of the kind, you have twisted a statement he made about Part D into a claim he meant to extend that to Social Security. That is you just validated Jack's accusation.

Plus if we actually fix Social Security in the way Coberly and I suggest, which is just a modified version of how its income stream has been adjusted many times over the years, there is no need to pay back any principal at all. And only a small portion of the Real Interest. You obviously have some grasp of the literature given that you freely quote from the Reports but you have shown zero ability to actually interpret the numbers in the data tables.

In the trade we call this "All Blow and No Go"

Don't bother replying, I am already on medication for high blood pressure and don't need to deal with people who just don't want to listen. See ya.

Don Levit said...

I wrote:
By diverting the excess principal and interest from the Social Security trust fund, they turned a fully paid-up system into a pay-as-you-go scheme.
Bruce replied:
There was no diversion.
Well, let's turn this discussion away from personal biases between Bruce and I, and make this Bruce's opinion versus a reputable government agency.
The FASAB is the accounting advisor for the federal government.
In a paper entitled FASAB Memorandum, dated Feb. 3, 2010:
Page 7 "The U.S. Treasury does not set aside assets to pay future expenditiees associated with earmarked funds. INSTEAD, THE CASH GENERATED FROM EARMARKED FUNDS IS USED BU THE U.S. TREASURY FOR GENERAL GOVERNMENT PURPOSES."
Page 8 "The Federal Government does not set aside assets to pay future benefits or other expendutures associated with earmarked funds. The cash receipts collected from the public for an earmarked fund ARE DEPOSITED IN THE TREASURY, WHICH USES THE CASH FOR GENERAL GOVERNMENT PURPOSES."
http://www.FASAB.gov/pdffiles/febtab_h_adobe.pdf.
And, again from the FASAB in a paper entitled "Accounting for Social Insurance, Revised, Nov. 2008:"
Page 35 "Socual insurance benefits are not guaranteed or contractual, or advance funded, or promised. Social insurance benefits are not part of an exchange but rather ARE A WELFARE PROGRAM AND/OR AN ANNUAL GENERAL FUND PROGRAM LIKE MEDICAID AND DEFENSE - which are as likely as social insurance but for which early acrual is not proposed.
http://www.fasab.gov/pdffiles/socialins_exposurefinal.pdf.
Don Levit