Our old friend, Dean Baker at Beat the Press, does a good job of taking apart yet another screed by the execrable Robert J. Samuelson, faux economist for WaPo, whining about why nobody is jumping on board with cuts to "entitlements," and particularly his old bugaboo, Social Security. Google "Dean Baker Robert Samuelson is upset" and the first hit gives you the link (Sorry, the link title is too long for me to read it and my trying to put what I saw in just sent one to the general CEPR site, bah! (Anybody out there able to tell me how to overcome this bit when urls are too damned long too read, please?). However, I want to pound the nails in a bit more.
So, RJS provides this line that if there is not an adjustment to SS (and Medicare), then "The young will pay more and get less." Dean quotes this, but does not go far enough in showing how totally ridiculous this is, even though he has pointed out recently that one reason there should be no adjustments for SS now is that the young are massively misinformed about what the not so bad fiscal situation of SS is. Large proportions of them are fully convinced that they will receive no Social Security when they retire because it will be "bankrupt," when in fact that condition will amount to them only getting something like 120% of current retirees' benefits in real terms rather than more like 170% (a bit lower, actually). They are totally out of it, and the main threat to them losing their future benefits is if they support the sort of dreck that RJS is pushing, to cut their future benefits now because otherwise they might have their future benefits cut in the future (eeeeek!).
Let me be more pointed. RJS's statement is simply a lie. The proposals to cut Social Security have generally taken two forms recently: imposing a chain price index and adding another round of retirement age increases in the future beyond those that were imposed by the Greenspan Commission nearly 30 years ago and which are still coming in. The former is estimated to reduce cost of living increases by about 0.3% per year, and this would over the next few years indeed gradually reduce what elders receive in benefits, although it is not at all clear that this will lead to any reduction in what the young will be paying, unless this is accompanied by another round of fica tax cutting, or fica is restructured to have the same revenues come in but have it paid over all income levels, thereby reducing the burden for anybody under the upper cutoff for paying it. However, the effects of this change in the CPI used means that the cuts will get bigger and bigger as time passes, meaning that those who will be most negatively impacted will not the evil baby boomers, but the current young when they finally retire, although since they think they will get nothing, presumably they will be grateful to get even a crust of dry bread.
More egregious for RJS's arguments, and where he really is just outright lying rather than merely stretching the truth is this matter of increasing the retirement age. Nobody is talking about any further rounds of that happening anytime soon. RJS poses as this defender of youth against his awful generation (he trumpets his baby boomerdom to supposedly give credibility to his regularly repeated nonsense), but in fact the baby boomers, or certainly at least the front end ones like me and him, will not be affected at all by these future increases in eligibility ages. It will be the Gen Xers and the Millennials. RJS is just lying through his teeth. We old farts will not pay at all as a result of this change, but today's youth will.
26 comments:
Barkley:
Thanks for posting on the topic.
As a 34-year-old, most of whose friends and family and acquaintances believe that Social Security won't be there when we retire, I wonder: is there any group out there that's fighting to *expand* Social Security? The Samuelsons of the world surely have control of the microphone; it seems like all we do is shoot down some variant on Samuelson's idea. No one seems to be working to strengthen it. Who, for instance, is fighting to implement Richard Thaler's and Pamela Perun's idea of letting people top up their Social Security contributions? http://www.nytimes.com/2011/07/17/business/economy/when-the-wait-for-social-security-checks-is-worth-it.html
I'd love to know. I would donate to and fight for that organization. As it is, all we seem to do is fight rearguard actions.
"Dog bites man"
Make a post when he says something sensible.
You should trademark "the execrable Robert J. Samuelson" -- its a keeper!
Steve:
I am not as expert on the topic as Dale Coberly or Bruce Webb and I believe each has already commented on the Thaler idea. I believe even Barkley recognizes Bruce as an expert on the topic of Social Security.
The battle today is not about whether Social Security is fiscally sound or not, it is sound and the projected deficit (when the TF is depleted) in 2033 can easily be fixed with minor tweaks on the employer and employee side along the way. Both Bruce and Dale have constructed a plan to head off the shortfall. The battle is about paying back the TF the funds that have been borrowed from it which were used in a variety of ways such as 31% of the 2001/2003 tax breaks being skewed to 1% of the household taxpayers, unfunded wars, supplimenting corporate taxes, etc. SS Wihholding surplus revenues have been used in a variety of ways to suppliment the GF revenue requirements allowing Congress to sidestep its fiscal responsibility of raising taxes to support the needs of this country. Now the Keatings, Biggs, Petersons, Bowles, Adelsons, Kochs, Simpsons, etc. of the world are in a panic because taxes may indeed be raised to fill the void left by decreased revenues. Mind you, the void was always there and the TF would have been used eventually to fill it. It happened sooner than expected due to the lack of people working and paying into SS. Getting people back to work would certainly negate all of the void if not again provide a surplus.
The sky-is-falling crisis as brought to you by many Republicans, Democrats, and a president who seems determined to sell us out is simply a false one and meant to confuse the bulk of the people. If Congress defaults on the special treasuries, for sure the US will be in far more serious trouble. Raising taxes to support the GF is inevitable. Raising SS Withholding to support a TF depletion 20 to 30 years out is nonsense also as we do not know what the economy will be like then. Rather than a 20 or 75 year window we would be better served to use a 10 year window of opportunity to tweak SS up or down. Right now, the TF exists, so Mr. Government pay it back, and recoup the ~$1.7 trillion directed to the 1 million or so household taxpayers who were the receipents of Bush's misguided generousity. What Hoover could not or would not do, Bush did in 2001 and 2003.
As we have all seen and experienced, Congress will not raise taxes muchless SS Withholding. Myself, I have a problem raising Withholding because Congress is struggling to pay back the TF now and making it bigger only puts us in greater jeopardy. The mechanism already exists to adjust SS Withholding by law and if used properly, there probably was no need of the Greenspan commission.
In any case SS was meant to cover only a portion of our retirement and it has not kept up with inflation. In which case that portion of our current salary covered by SS has shrunk. I also look at the last 20 years of state pensions which were deliberately over forecasted allowing legislatures to use the funds elsewhere, blame workers, and strike retirement benefits. The same scenario exists for SS today with the TF. So why add to it? In any case, SS was never designed to be expanded in such a manner as suggested by Thaler. As a young 34 year old, there are good investments out there and I (if I could start over again) would look for additional sources of income for when you retire. Investing in SS is too political today and we have our hands full keep it as it is.
Can we change RJS's last name. He certainly is no relation to Paul Samuelson. Let's give him 3 choices: (a) Robert Laffer; (b) Robert Luskin; or (c) Robert Kudlow. That would be more suiting to both his agenda and general level of economic intelligence.
Bill H states in one breath that SS is solvent for 20 years, and in the next breath, admits that the entire trust fund has been spent to pay for current expenses.
How do you reconcile these 2 contradictory statements?
Don Levit
Rosser
thanks for calling a liar a liar.
the idea that the young will pay more and get less is at lest half a lie at the start. there is no proposal for them to pay more, except mine, and mine guarantees that they will get a lot more... a longer retirement at a higher real level of benefit.
but Robert S is a liar. his meme that the young will "get less" is based presumably on the idea that they will not raise their own tax a tiny amount (my proposal) and that their increase in income over the next couple of decades will not be enough to support the normal effective "interest" of pay as you go financing (i am being a little obscure here. as far as i know, i am the only one who describes it this way.) this is a problem of basic economic policy, not a problem due to SS. SS can cope with the problem either by doing nothing, or by raising the payroll tax one tenth of one percent per year between now and then.
but Robert S's lie is based on a Bigger Lie... the calculation that shows the the "present value" (though they don't always remember to say that, and they know no one understands it) of their tax is slightly larger than the present value of their future benefit.
what makes this a lie is that "present value" is the wrong way to look at it, as it assumes an arbitrary interest from a magic bank that NEVER pays less than that magic interest and has no risks, and does not pay the insurance for either death or disability or the most important feature of SS: that the "effective interest" you receive is up to or over 10% real if you end up "less than average" which is exactly what SS was designed to do... prevent poverty in old age, not provide stock market returns to those who are not poor.
the not-poor do okay from SS. they get about 2% real... better than inflation guaranteed, and they get the insurance. up to the cap that is a good deal for them. increasing the cap would tend to make it a bad to very bad deal for them. and the honest rich who are not now enemies of SS would become enemies of it.
Steve Laniel
yes there are people calling for enhancing SS. they, by their choice, are not my friends. this is a bad time for enhancing SS... while the Liars are claiming it is going to cause huge tax increases. put that lie to rest... by paying for it ourselves. and later, as needed, we can try to enhance it. i don't think Thalers plan has much legs for much the same reason. For my part retiring sooner with less money is much much saner. Me and Thoreau and St Francis can't all be wrong.
Bill H, thanks for the kind word.
Don Levit
not for your benefit but for the children who may be listening. SS is "solvent" for the next twenty years if by solvent you mean the Trust Fund has more than the normal one years reserve. It is solvent forever if you mean can it pay benefits that are "enough" if people keep paying the payroll tax because they see it is a good deal for them.
of course the Trust Fund has been "spent." Lending the money out at interest to people who spend it is WHAT YOU DO WITH A TRUST FUND. The people who borrowed it, aka The United States of America, will pay it back when due. Trust me.
coberly:
Thanks for answering Don and you are welcome.
Coberly:
No, a trust fund, in my opinion, should be invested, not lent to anyone, including the Treasury.
These same shenanigans are done for 28 other trust funds, and comprise intragovernmental debt, not intragovernmental equity. Money for future exenses should be invested in special-issue Treasuries, as designed by law, to help ensure the trust fund being intact and paid-up. This is because special-issue Treasuries are for SS beneficiaries only, not for paying current general expenses.
The federal government is unwilling and or unable to set aside funds for future expenses.
While I do not trust Wall Street to do so, I do not trust the federal government, not due to my personal beliefs, but due to their actual utilization of the trust fund as a way to pay for other expenses.
Don Levit
I hate to tell you, Don, but when the SSA "invests" in special Treasury bonds it is still "lending" the money as much as when it simply buys good old garden variety Treasuries. Heck, nearly all financial "investing" is really just a form of "lending," unless one is using one's own money to expand the capital stock of a business that one owns.
I said, "To kill a snake..." Oh, wait. We don't really want to kill this snake, do we? We want to train it to engage in polite conversation with us and acknowledge when it was wrong and we were right. Never mind, then.
Barkley:
I hate to tell you this, but there is a distinct difference between investing surplus FICA taxes in a Treasury security, and taking these same excess taxes, and lending it to the Treasury to pay for current expenses.
And, if I am incorrect, then the trust fund was an inferior way of providing a store of wealth to pay for future expenses.
The very general revenues FDR wanted to avoid then become important, for there is no cash in the trust fund to make up for the cash shortfalls since 2010.
What part of the SS law allowed for the Treasury to use the trust fund proceeds to pay for battleships?
Don Levit
Not much, Don. How do you think Treasury pays for bills that exceed income receipts? They issue securities. How they are labeled makes no difference. Those "special" securities also fund current expenditures.
And, just to be very technically precise and correct: they are not "invesgting," they are "lending." Again, real actual investing involves the production of capital stock, not the creation of this or that financial asset, however labeled.
"The very general revenues FDR wanted to avoid then become important, for there is no cash in the trust fund to make up for the cash shortfalls since 2010."
Don that is a total myth. FDR did not try to avoid that at all. Something that is clearly shown in the very first Social Security Trustees Report:
http://www.ssa.gov/history/reports/trust/tf1941.html
In Social Security's first year of operation, comprising the last six months of FY1937 it ended the year with $267 million in "3-percent special Treasury notes" which had yielded year to date $2.2 million in interest payable FROM THE GENERAL FUND. See Table 1.
Trust me Don, you are NOT chaneling FDR here. He was still President when the 1939 Amendments that established the Trust Funds went into effect prompting the first Report in 1941 and even before this Report he was presumedly aware that all SS funds were being invested in INTEREST EARNING TREASURIES with that interest payable FROM THE GENERAL FUND.
Note the link is to the official SSA site and not some previous post of mine (though I have written on this numerous times).
Don your history is worse than your economics, something I scarcely thought possible.
i am not sure there is not still some room for confusion here.
first i would argue with rosser about the "technical" difference between lending and investing. to my mind at least, if you "lend" money to the government at interest, you are "investing" in that governments projects to make the country more productive, or at least prevent it from become less productive by having to fight, or lose, a war. i don't know that this lack of distinction would cause serious problems for "economic theory," but it seems to me it might be something worth keeping in mind for those who think "government does not create wealth."
second, i don't know enough if the 1937 Trust Fund was money collected from SS taxes, lent to the government, and paid back (interest) from the general fund... or if money from the general fund was used to pay benefits during the time while SS was building up its own Trust Fund from payroll taxes. I don't think it means much either way, but for some people it seems to be a BFD.
Well I do know the answer to Dale's questions, most of them from reading the 1st SS Report linked above. Of which see Table 1.
Summary version: all benefits under Social Security Title 2 (what we know as SS today) were effectively paid out of SS taxes collected in that same year. The absence of a Trust Fund (as opposed to just accounts at Treasury) made this a little conceptually difficult to track as fund transfers between what were then just separate Treasury accounts were not precisely correlated with lump sum pay-outs (all there was before 1940) but the year in cost and income balances tell the tail.
The story is complicated in that there was a separate SS Title 1 program that subsidized existing State old age pension plans out of the General Fund. This was basically the precursor to the similarly GF funded program Supplemental Security Insurance (SSI). To the degree that some of the people who collected money under Title 1 would have collected under Title 2 if they had had similar income histories but retired after 1950 you can say that the phased in worker funded Title 2 was supplemented by general funded Title 1. But the programs were conceived and administered separately with Title 1 payments formally coming from the States and not SS as such.
But properly speaking there was no '1937 Trust Fund', just dedicated Treasury accounts whose daily excess balances from taxation were invested in 3% special issue Treasuries. The Trust Funds came into existence on Jan 1, 1940 pursuant to the 1939 Amendments to the 1935 Act. Details about the first year of the TF and the accounts of the four years prior are all to be found in the Report linked above.
Bruce:
When SS first started, it may have left the excess FICA taxes and interest in the trust fund, without allowing the Treasury to borrow it to pay for current expenses.
As you said, interest is paid out of the general fund, but is not considered an immediate budget expense, as is interest paid on debt held by the public.
Since the surplus began building in 1983, we do know the Treasury has borrowed the trust fund principal and interest. And, we do know that the cash shortfalls since 2010 have been replenished with trust fund interest, which is an immediate budget expense, and increases the deficit. The same will be the result of using trust fund principal until trust exhaustion. If the reserve fund was like an insurer's reserve fund, it would simply be liquidated for cash, without the use of new general revenues. Just imagine if an insurer had to pay claims by utilizing its reserves, for the premiums were not enough to cover claims - and in order to utilize the "reserve," it had to borrow funds. That insurer would have a cease and desist order and would be placed in receivership. Today, the trust fund is merely an accounting mechanism that allows the trust fund to access the Treasury's general fund without an appropriation. It is the same way we pay for battleships. They are merely numbers, which, indirectly provides access to cash, with an immediate budget expense and increase in the deficit. Is that what you call a reserve fund?
Don Levit
Suppostion and conjecture Don:
and not based on reality. Insutrance companies do retain a reserve in a similar way as SS except SS does not invest and insurance companies do. SS buys up special treasuries allowing the seller to do with the funds as they please. After all who would expect the US Treasury to renege on paying back any treasury? If they rnege on any one treasury, we would be living in a different world which you already know. It too can be liquidated.
Insurance companies invest their premiums on Wall Street which is a far riskier venture than buying up treasuries. When a Katrina event occurs, the insurance company draws on its reserves by liquidating its holdings the same as SS and in turn raises premiums on its customers. SS has not yet raised its premiums and it will. Insurance companies "do" draw down its reserves by selling off. SS does the same by selling off.
The treasury pays SS TF back by either casting more treasuries or the aministration raises taxes to fund the GF to pay back the debt owed to the TF which is a separate entity.The appropriation was put into play when the Treasury put into play the special treasuries.
I want my money back Don, pay it or my uncle Bananas will come to se you. There is a reason for the name.
As much as I admire Bruce Webb's analysis and Dale Coberly's and Dean Baker's, as long as you're talking about the policy wonk technocratic details of Social Security finance, Robert Samuelson, et alia, are winning: "Opinions differ as to the solvency of Social Security."
Social Security was a COMPROMISE. The representatives of capital accepted the compromise at that time because the alternative was worse, from their perspective. The representatives of capital are NOT going to accept a compromise today if all they are confronting is an opposition pleading for a compromise.
"Can't we please have a compromise, please, sir?"
"Oh, all right, then, Bunky, how about if we just raise the retirement age to 95 and de-index the benefits from inflation and, oh, make pensions payable in 10% off sale coupons instead of cash. Yes that'll do it. Run along now!"
Don Levit; "When SS first started, it may have left the excess FICA taxes and interest in the trust fund, without allowing the Treasury to borrow it to pay for current expenses."
Don when SS "first started" (in FY1937) there was no trust fund. And all FICA taxes collected were BY LAW invested in 3% special Treasury issues and held in a separate account (but not yet a TF). And so by definition borrowed.
No Trust Fund. All FICA taxes allowed to be borrowed by Treasury. Seems to me that you are starting with two strikes here.
"As you said, interest is paid out of the general fund, but is not considered an immediate budget expense, as is interest paid on debt held by the public."
Well I didn't say that. Maybe because it is not true or rather twisted around. Interest can be credited to the Trust Fund and not be considered an immediate budget expense. But then is not "paid out of the general fund". Because in the sense you mean not "paid" at all. On the other hand interest actually paid out of the general fund in cash IS considered an immediate budget expense. Just like "interest paid on debt held by the public".
Which makes strikes 3 and 4. Or maybe strike 3 1/2.
"Since the surplus began building in 1983, we do know the Treasury has borrowed the trust fund principal and interest."
Principal yes. Interest no. While interest accrued and credited to the TF is counted as a positive for budget surplus calculations it is not 'borrowed' by Treasury but instead 'credited' to the TF by Treasury becoming a pure obligation not offset by any sort of cash extraction.
To be charitable I will only add half a strike here. Which totals 4 strikes out of the 3 needed to be 'out'. Math that even you should be able to grasp.
"And, we do know that the cash shortfalls since 2010 have been replenished with trust fund interest, which is an immediate budget expense, and increases the deficit."
Well we do not know that. Cash shortfalls (which for the DI Trust Fund started in late 2005) are not 'replenished' by anything. They instead are debited against Trust Fund balances. That debit is scored as a negative for overall budget surplus/deficit calculations, but unless they actually surpass the total interest credited to the Trust Fund still are part (albeit a negative part) of a sum that is still counted as a surplus. There is a sense that diminishing a surplus in a component of an overall surplus/deficit calculation is much the same as "increases the deficit". So I can give you a foul tip on that one.
But then it gets worse. For example principal redemption of Special Treasuries by Treasury is not considered a cash transaction. Odd but that is part of what makes them 'Special'.
Don there is help. Google 'Analytical Perspectives on the Budget' and study first the 'Budget Concepts and Budget Processes' section (available as a separate pdf) and then the 'Trust Funds' chapter. I can't promise you Enlightenment, I am not the Buddha, but it might help you fight your way out of your conceptual muddle here.
Bill H said:
"It too can be liquidated."
Yes, the Treasuries in the SS trust fund can be liquidated, but it costs new general revenues, an immediate expense, and an increase in the deficit.
Not the type of prefunded, intact reserve we are used to seeing.
Bruce said:
"Interest can be credited to the Trust Fund and not be considered an immediate expense. But then is not paid out of the general fund."
That is correct. The interest is credited to the SS trust fund and Treasuries are issued in recognition of that. No expense occurs, for the Treasury is an asset to the trust fund and a liability to the Treasury, creating an accounting "wash."
Bruce said "They (the cash shortfalls) are debited against trust fund balances. They are not replenished by anything.
So, you seem to suggest that no negative cash flows occur as a result of the redemption of interest to make up for the cash shortfall.
From a paper entitled "Fiscal Year 2013 Analytical Perspectives Budget of the U.S. Government:"
Page Pages 459-460 "From the perspective of the trust fund these balances represent the value in today's dollars, of taxes, fees, and other income that the trust fund has received in the past for purpose of funding future benefits and services.
From the perspective of the Government as a whole, the trust fund balances do not represent net additions to the Government's balance sheet. When trust fund holdings are redeemed to fund the payment of benefits, the Department of Treasury finances the expenditure in the same way as any other Federal expenditure - by using current receipts if the unified budget is in surplus or by borrowing from the public if it is in deficit. Therefore, the existence of large trust fund balances, while representing a legal claim on the Treasury, does not, by itself, determine the Government's ability to pay benefits."
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/spec.pdf.
Your description of debits against the trust fund shows the accounting side of one part of the transaction. The other part, the cash flow perspective, shows either an increase in debt held by the public if a unified deficit, or the use of general revenues, if a unified surplus. Both these transactuions resulting in an immediate budget expense, and larger budget deficit.
Bruce said "Principal redemption of Special Treasuries by Treasury is not considered a cash transaction."
That was explained above regarding the cash ramifications of redeeming trust fund interest and principal.
Don Levit
Bruce said "They (the cash shortfalls) are debited against trust fund balances. They are not replenished by anything.
So, you seem to suggest that no negative cash flows occur as a result of the redemption of interest to make up for the cash shortfall.
Sigh. Don you used the word "replenished". It made no sense. So you pivot to "you seem to suggest" and insert some notion that I didn't suggest at all.
Payment of that portion of accrued interest needed to make up for the gap between 'income excluding interest' and 'cost' of course results to a negative cash flow from the GF to Social Security. And nothing I have suggested here or anywhere asserts otherwise.
Don you persist in fighting against strawmen of your own imagination and then preen when you are able to set them on fire. It is tiring. On the other hand let me let you into a secret.
People who point out the weaknesses in your arguments have exactly zero interest in actually converting your own opinion. Because you are incorrigible. Instead they fall into two overlapping camps;
Those who enjoy mocking you and making you a creature of fund. And.
Those who are taking this opportunity as a teaching example for third parties. Much as Socrates did to his hapless interlocutors in most of the dialogues, simply using them as a convenient didactic tool.
Emphasis on the tool. Have a nice weekend.
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