rc3.org Strong opinions weakly held

It sounds like an obsession with punishment.

Posted by Patrick Berry on 23 March 2011 @ 4pm

Also, this nicely demonstrates a complete misunderstanding of Social Security.

Posted by Snarkout on 25 March 2011 @ 1pm

I think this discussion illustrates perfectly why America is going to crash and burn financially. No one wants to have a serious discussion about the issues.

I don’t know Mr. Sumner and can’t read his mind, but here is my take on his post. He is afraid that by planning for his future and sacrificing now in order to have a decent quality of life in retirement, he will be means tested out of benefits. While someone else in his exact same financial situation (making the same amount of money, some medical issues, etc) will decide to live it up in a fancy house, drive fast cars and take exotic vacations and of course, end up flat broken when retirement rolls around.

So, two individuals with the same lifetime income, one was responsible and will get shafted by means testing, the other was irresponsible and rewarded by means testing.

This is one of the biggest issues with any attempts to means test entitlements such as this. We reward bad behavior and punish good. At what point do individuals need to be held accountable for their life long actions?

BTW – Someone without any marshmallows, earning the minimum wage would be a millionaire when they retire if they invested their 12.4% social security payments their entire working career. NOTE: This is not an endorsement of privatization, only that someone of little means can become wealthy with discipline and more importantl, time.

Posted by Jeff Price on 25 March 2011 @ 3pm

@Snarkout: Which part of Social Security is Mr. Sumner misunderstanding?

Posted by John on 25 March 2011 @ 3pm

John, means-testing Social Security wouldn’t “save” Social Security (which doesn’t need to be “saved” to start with). I recognize that Sumner is arguing on moral grounds that people who don’t have retirement savings are grasshoppers while he is a thrifty ant who deserved to be rewarded, but he accepts the false underlying premise.

Posted by Snarkout on 28 March 2011 @ 9pm

Snarkout, SS is already running in the red and the baby boomers are just starting to retire. It’s facing a demographic tsunami. Are you saying there is nothing to worry about? There is no money in the trust fund, it’s all just IOUs. Promises to either tax, print or borrow money. It’s not cold hard cash.

I’m trying to understand what’s “false” about saying SS needs to be saved. From where I stand, it’s broke (demographically and financially).

Posted by Jeff Price on 29 March 2011 @ 12am

Snarkout: thanks for your clarification. I summarize Sumner slightly differently: he’s not saying that he should be rewarded because he’s a thrifty ant but that the grasshoppers shouldn’t be.

Jeff: If by “red” you mean it’s taking in less than it pays out, then yes. And yes, the SS trust fund buys IOUs. But the alternative there is what? Hold cash? Or gold? If there was no separate accounting of the SS trust fund and everything was handled out of the general budget I think the problems would be worse (because they’d be obscured more).

The real problem is Medicare which at the rate things are going will hit catastrophic problem levels well before the SS trust fund runs out.

Posted by John on 29 March 2011 @ 10am

John, by “red” I mean that SS currently pays out more in benefits than in brings in tax receipts. It has been for the past two years or so. Of course, the problem is even worse this year thanks to the idiotic “tax cut and spend” compromise Obama and the Republicans worked out.

I think the problems with SS is pretty well obscured now thanks to the illusion of the trust fund. At least if we had no trust fund we wouldn’t have a wasted trillions in surplus tax receipts over the past decades that have done nothing but increase spending. SS is nothing but a pay as you go system with a fake trust fund used to launder the surplus to the general fund.

I do agree that Medicare is an even bigger problem and one we’ve shown even less willingness to deal with.

Posted by Jeff Price on 29 March 2011 @ 11am

I don’t think it’s accurate to describe the Social Security trust fund as an illusion. If I put my money in a savings account, the bank loans it to other people. If I go to the bank and withdraw my money and they decide not to give it back to me, then someone is probably going to jail. Obviously in the case of Social Security the federal government has loaned the money to itself, but the Social Security trust fund isn’t fundamentally different than any other government creditor.

The bottom line is that the government is going to have to increase its revenue to meet its obligations.

What I find humorous is that Republicans who claim that taxes are too high on rich people never include Social Security taxes in the calculation, even though they’re in the club that says that the trust fund is fake because tax revenue is tax revenue. You can’t have it both ways.

Posted by Rafe on 29 March 2011 @ 11am

Rafe, don’t confuse me with a Republican. For what it’s worth, historically Social Security taxes have always been too high. Now that SS is running a deficit, they are too low. I don’t pretend to have it both ways. In my ideal world, Social Security taxes would be adjusted each year to keep the program with a balanced budget. No surplus, no deficit, no trust fund.

In my view, the banking analogy falls short. A bank must maintain a fractional reserve of cash on hand for the savings accounts they have. The Trust Fund has no such requirement. A bank uses the money in savings accounts to make (mostly) collateral based loans that produce a profit, the government just spends the surplus SS funds.

I like to compare the Trust Fund to a 401k loan. You are taking money from one account to spend now with a promise to pay it back with future income. That’s exactly what the SS trust fund is. A promise to raise taxes, print money or borrow at some point in the future. I don’t understand how to have a serious discussion on the problems our country faces when folks don’t even acknowledge those problems.

Don’t get so hung up on semantics. Perhaps fake isn’t the best word. It’s very real, but it’s also meaningless because Social Security is a pay as you go system. It always has been and will likely always be. The Trust Fund only serves to tell us how much we have overpaid in Social Security taxes and underpaid in income taxes over the history of the program.

Posted by Jeff Price on 29 March 2011 @ 11am

Jeff, that’s ridiculous. The “IOUs” are U.S. bonds. Are you saying that the government is going to default on Treasury bonds? If so, we have more problems than just Social Security. (And why would we default on bonds owned by Americans rather than, say, bonds owned by the Chinese?) People might enjoy this Hoover Institute report about how Social Security runs out of money in 28 years. Note, however, that it is from 25 years ago. Jeff, while Social Security is currently paying out more than it is taking in, as the economy improves that will probably return back to not being the case for a good while longer, as it historically has been. Last year marked the first time I can remember when the date of trust fund exhaustion actually got closer.

Under the very conservative assumptions the Social Security trustees provide (the one that had the trust fund being exhausted in 2018), Social Security can bump along making full payments for another 25 years while the Baby Boom lump makes its way through the snake. At that point, even if we reach it, either relatively minor changes can be made, or Social Security can switch to cutting payments by about 25%.

That obviously wouldn’t be ideal — although, like Scott Sumner, I have my own retirement savings — but it maintains the character of Social Security as social insurance. The people most worked up about saving Social Security from forthcoming demographic doom are, in general, not people who are ideologically invested in actually saving social insurance (see: the Hoover Institute; the Concord Coalition; etc.). Jeff, I’d really recommend you read some liberal experts like Dean Baker; here he is in 1998 addressing a number of beliefs about Social Security, and here are a bunch of recent papers and op-eds he’s written. Read the Hudson Institute in 1995 and Baker in 1998, and ask yourself which one seems to have had a better grasp of the future of Social Security.

Posted by Snarkout on 29 March 2011 @ 12pm

“At least if we had no trust fund we wouldn’t have a wasted trillions in surplus tax receipts over the past decades that have done nothing but increase spending.”

I don’t see how this would have been any different if the money had been placed in the general fund directly (instead of indirectly via the purchase of bonds by the SS trust fund) – it still would have been spent.

On a more general note, I found this article very interesting (from 1983):

http://www.monthlyreview.org/0283morris.htm

The article covers a lot of interesting details about SS that I didn’t know before, and (for having been written in 1983) is reasonably accurate with it’s predictions on several items (i.e. when the fund would start permanently paying out out more than it takes in – ~2010). Of course, the predictions (and SS planning in general) are driven largely by population demographics.

Posted by John on 29 March 2011 @ 12pm

@John,

There would be no difference. That’s my point. The trust fund is an accounting gimmick. Nothing more. Nothing less. The only asset in it is the power of the federal government to raise taxes, print and borrow money. If there is no difference whether we have the trust fund or not, does it really matter?

Snarkout, links didn’t come through

Please show me where I said the US would default on Treasury bonds? You are putting words in my mouth. While the SS treasuries are not marketable instruments, they are not worthless. As I said in two previous posts, they are promises by the US Government to raise taxes, print or borrow money. The “trust fund” will be repaid, by new money, one way or the other.

As for the day SS become insolvent, that’s just all made up numbers. As John illustrated, the trust fund is just an accounting shell game. The debt the trust fund carries makes no difference. SS is a pay as you go system (as your link illustrates and as I’ve said). The only thing the trust fund does is obfuscate our financial situation.

FWIW – I really don’t like Reagan and I hate his SS tax hike. As your article points out, it wasn’t meant to run that big of a surplus. As we all agree, their is no cash in the trust fund. Only a promise to raise taxes, print or borrow money when those debts become due. Unlike a bank, which has some hard cash and the rest as loans or investments it can sell to cash in an account…the trust fund has nothing out than the power of our government.

I’m apparently not getting through to you guys, for whatever reason. Now I know how Obama feels.

Posted by Jeff Price on 29 March 2011 @ 2pm

I actually think everybody here is right in their own way, and I don’t just mean that as a cop out. The money we owe to the trust fund is real, but at the same time it’s up to us to pay ourselves back. It’s not as though the money comes from different buckets.

Posted by Rafe on 29 March 2011 @ 2pm

Please show me where I said the US would default on Treasury bonds? You are putting words in my mouth.

The Social Security Trust Fund holds non-negotiable Treasury bonds. (They cannot be resold, but are backed by the “full faith and credit” of the U.S. government.) I don’t see how defaulting on these bonds is any more valid than defaulting on a bunch of T-bills held by J.P. Morgan or the Japanese central bank. All government debt is backed by the implicit promise that the government will raise taxes or print new currency to pay it back.

Posted by Snarkout on 29 March 2011 @ 3pm

Jeff, we are closer in thought than you think.

You believe that the SS trust fund is an accounting gimmick and not worth the bother. I believe that accounting for it this way is worth something, just like I believe “earmarking” the money in our family’s savings account for different needs/goals is worthwhile even though it’s all in the same bucket.

But the much more important thing (and I think we agree on this) is regardless of our view on the trust fund itself, the taxpayers will directly (if from the general fund) or indirectly (as a result of repaying bonds) pay for SS benefits and with the fiscal outlook of this country that is going to become a larger and larger issue.

Posted by John on 30 March 2011 @ 10am