February 13, 2005
Krugman Revisited: The Evidence
In the immediate previous post, I noted an unfortunate tendency on the part of Paul Krugman to write in Type M arguments. This whole brouhaha started when I called Krugman a Hack when a more liberal commenter on Marc Cooper's blog said he was knowledgeable. I should not have said that, I should have written why I thought he was a hack in clear and no uncertain terms without resort to his motivations and only reference to his ideas and the consequences of his ideas.
In the comments section "reg" disagreed with me and stated that I turned the argument from one about Krugman's ability vs his style of argument. That's not what I intended, but, given the law of unintended consequences, that is what I shall have to address so that "reg" can see the light, cease being so angry at anything republican or conservative and join the rest of the USA on it's way to SS solvency if we take charge and make repairs now. (Of course, I won't hold my breath, we are dealing with a bright, intelligent but emphatically liberal fellow.)
"reg" states that Krugman used the Congressional Budget Office's speculations regarding SS and the so called looming SS deficit. And, he further stated that the CBO was "bi-partisan." Now, it seems to me that when ever a liberal talks about "bi-partisan" it means "you can't argue with this because both parties agree on the issue (I know, I know, that is a Type M argument - but in this case, motivation is an integral part of the issue). Nothing of course could be further from the truth. Clinton's impeachment was bi-partisan, passing the Gulf of Tonkin was bi-partisan and so was the decision to vote down the Civil Rights act a number of times prior to the passage of the 1964 Civil Rights Act. You see how all of those "bi-partisan" efforts worked out don't you?
OK, let's examine the so called CBO projections of SS revenue vice SS expenditures. Both, it will be noted include Old Age, Survivors and Disability Insurance (OASDI)figures. According to Krugman, there is no "crisis" the system is not insolvent in 2018 or beyond and that it will continue to be able to pay retiree's and the disabled far into the future. Get that, CBO projects, according to Krugman, no problem. So, let's turn to the actual Graphs put out by CBO.
The Light Blue Line (LBL) is the projected revenue vice expendature made by the Social Security Administration Board of Trustees, the Dark Blue Line (DBL) is the projections of the CBO. If you look closely, in both cases, the lines intersect and then diverge in a negative direction (income vice expendatures) around 2018 the same year that Krugman says that Bush and Company are lying about the system being insolvent.
The American Heritage Dictionary of the English Language defines insolvent as:
in·sol·vent,adj. 1.) Unable to meet debts or discharge liabilities; bankrupt. 2.)Insufficient to meet all debts, as an estate or fund. Of or relating to bankrupt persons or entities. <> n.Well, it would seem that the CBO says that SS will be bankrupt in about 2018. Krugman says no and says he used CBO info to back that statement up.
1.)A bankrupt.
But let us not just dwell there, lets see if we can't find some other information that sheds some light on the issue. Ah, here we are - David C. John is Research Fellow in Social Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies. In an article dated this past September John states:
"As political leaders debate how best to fix Social Security, many policymakers are focusing on the wrong issue. Their sole concern seems to be the date when the Social Security retirement and survivors trust fund will run out of its paper assets. This mistaken emphasis misses the fundamental point about Social Security's problems: There is no cash in the Social Security trust fund, and there never has been any.According to John then, an acknowledge expert economist in SS afairs, there is no "real" money in the SS Trust Fund, merely promises from the federal government to pay future recipients what is owed them. So far, it sure sounds like a ponzi scheme to me:The Social Security trust fund is merely an accounting device filled with IOUs that future taxpayers must repay. Far too soon, payroll taxes will be insufficient to pay all of the promised benefits. Unless Congress promptly takes action, taxpayers will have to pump hundreds of billions of additional tax dollars into Social Security to pay the promised benefits.
How the Trust Fund Operates.Workers pay their Social Security taxes through their employers. Each employer periodically sends a lump sum payment to the U.S. Treasury that includes all of the income taxes and Social Security and Medicare payroll taxes paid by both the employer and its employees.
The Treasury both receives the payroll taxes (and income taxes that higher-income retirees pay on their Social Security benefits) and pays monthly benefits on behalf of the Social Security Administration (SSA). The money stays in the Treasury's hands until it is either paid out as Social Security benefits or otherwise spent by the government. In fact, no money ever goes into the trust fund. Instead, the trust fund balance is the result of two accounting entries by the Treasury.
First, the Treasury estimates how much of the aggregate tax receipts are Social Security taxes and "credits" the Social Security trust fund with that amount. Then the Treasury "subtracts" the total amount paid in monthly Social Security benefits from the trust fund balance. No money actually changes hands; these are strictly accounting entries.
Any "money" remaining in the trust fund is converted into special-issue Treasury bonds, which are really nothing more than IOUs. In addition, the Treasury pays interest on the trust fund's balance by crediting the trust fund with additional IOUs. These are also strictly accounting entries, and again no money changes hands. After crediting the trust fund with the proper amount in IOUs, the government spends the extra Social Security tax collections just like any other tax revenue--to finance anything from aircraft carriers to education research."
"Pon·zi scheme n. An investment swindle in which high profits are promised from fictitious sources and early investors are paid off with funds raised from later ones."Although in this case, it's not "high profits" it's income after retirement.
Is there more? You bet! According to the CBO, the income vice outlay issue will be in the negative when looked at as a percentage of the GDP no later than 2025 it goes negative. Actual difference in 2003 (as a percentage of GDP) was 0.62. In the year 2025 that figure will be -0.57 (Based on a simulation using the Social Security trustees' 2004 intermediate demographic assumptions and CBO's January 2005 economic assumptions.) Again, those are the ACTUAL CBO figures reported in their 2005 analysis.
One last point from David John:
"According to the Office of Management and Budget under the Clinton Administration in 1999:These [trust fund] balances are available to finance future benefit payments and other trust fund expenditures--but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. [Emphasis added.]
In short, the Social Security trust fund is really only an accounting mechanism. The trust fund shows how much the government has borrowed from Social Security, but it does not provide any way to finance future benefits. The money to repay the IOUs will have to come from taxes that are being used today to pay for other government programs. For that reason, the most important date for Social Security is 2018, when taxpayers must begin to repay the IOUs, not 2042, when the trust fund is exhausted.Conclusion. Social Security's financial crisis will begin far sooner than many politicians claim. In less than three years, the first baby boomer will reach retirement age. Once that happens, Social Security (and Medicare) will be on a slippery slope toward insolvency. While Social Security can continue to use its tax receipts to pay full retirement benefits until 2018, Congress cannot wait that long to act. Misleading the public into believing that Social Security is secure until 2042 or beyond will only make the impending crisis more difficult to avoid."
But, I suspect that information (all gleaned from the internet by the way) is going to be insufficient for some. So, here is some more.
Michael Tanner of the Cato Institute notes:
"Currently, the Social Security system is running a surplus, taking in more in taxes than it spends on benefits. That surplus is used to purchase government bonds -- the only purpose to which it can be put. The purchase of those bonds generates general revenue for the federal government and that money is spent on the operations of the federal government. That is a bad system, but it is how the trust fund was designed to work. The fund does not hold cash, never has held cash, and was not designed to hold cash.Starting in 2014, the situation will reverse. Social Security will no longer run a surplus but instead will run a deficit. Social Security will begin spending more on benefits than it is taking in through taxes. To continue to pay those benefits, it will have to start redeeming the bonds in the trust fund. But, as President Clinton's own fiscal year 2000 budget admits, those bonds are not real economic assets. Rather, "they are claims on the Treasury that . . . will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures."
In financing terms, the Social Security trust fund is an irrelevancy. Come 2014, when Social Security's payroll tax income falls below its benefit obligations, the program will need large infusions of tax dollars. The existence of the Trust Fund means only that until 2034 those dollars will come through increased income taxes rather than increased payroll taxes. But the number of extra dollars needed is absolutely unchanged. In the words of humorist P.J. O'Rourke, "Having a government Trust Fund is exactly the same thing as not having a government Trust Fund."
None of the proposed "lockboxes," "safes" or "vaults" currently being debated will change this reality. There is no way to actually leave the Social Security surplus in Social Security. The surplus must be used to purchase bonds, the purchase of the bonds will generate revenue for the government, and that revenue must be spent. What both the president and congressional Republicans are actually proposing, in various forms, is to use the revenue generated by the purchase of the bonds to pay down the national debt rather than to finance new spending or tax cuts. This may or may not be good policy, but it will not change by so much as a single day the date at which Social Security will begin to run a deficit. Nor will it change the amount of new tax money required to continue to pay Social Security benefits."
Still not enough information? How about this then from the Social Security Administration itself:
Did you understand that, in 2018, the trust fund will have a negative cash flow and in 2042 it will have to reduce benefits by some 27% and in 2078 by 32%. Unless of course there is a massive infusion of payroll tax or other tax.
Does that mean that everyone loses their benefits? No, of course not, but it does mean, Krugman's published Type M arguments notwithstanding that there is a "crisis" though it's not tomorrow afternoon. It also means that we need to do some real thinking about how to solve the problem. The Democrats, in 97, 98 and 99 said that it needed urgent repair, that there was a crisis. Vice President Gore said during the electioneering of 2000 that we had to have a "lockbox" so that congress wouldn't keep raiding the "trustfund." Hmm, what do you suppose Gore knew that the rest of us didn't?
I know this has been a long post, but it's important. Here are some links by reputable economists that dispute Krugman's analysis of the SS issue.
http://www.heritage.org/Research/SocialSecurity/CDA98-01.cfm
An analysis from the Wharton School of Business at the University of Pennsylvania. http://irm.wharton.upenn.edu/WP-security-smetters.pdf
And now, a word from the opposite side: DOES SOCIAL SECURITY FACE A CRISIS IN 2018?
by Jason Furman
A recently leaked White House memo indicates that the first phase of the Administration’s strategy to sell individual accounts will be to convince Americans that the Social Security system is “heading for an iceberg.†The President frequently cites 2018 as the beginning of a Social Security crisis that, he says, will leave the system bankrupt. Others claim that Social Security will hit a crisis in 2018 when, to pay benefits, the system will become dependent upon what they describe as “worthless IOUs.â€Â
These statements seriously misrepresent Social Security’s financing and the challenges the program faces. Furthermore, even if one were to grant the President’s arguments, they would make the individual-accounts plan he is considering less attractive. Under the principal plan the President’s Social Security Commission designed, the milestone that the President cites as a major turning point for Social Security  the point at which Social Security benefit costs will start to exceed Social Security tax revenue  would be reached twelve years sooner, in 2006 rather than 2018.
Here are the key facts:
The Social Security actuaries project that in 2018, Social Security’s trust fund will hold $5.3 trillion in assets, in the form of U.S. Treasury bonds. Starting in that year, Social Security payroll tax collections will not be sufficient to cover the cost of all Social Security benefits, so the Social Security system will start to use a portion of the interest the trust fund earns on its bonds to cover the remaining benefit costs. The rest of the interest the trust fund earns will be reinvested in the trust fund. The actuaries project that as a result of these interest earnings, the trust fund’s assets will increase by another $1 trillion in the decade after 2018 and reach $6.6 trillion by 2028." And the only think I can see with this is as P.J. O'Rourke has previously noted:
"Having a government Trust Fund is exactly the same thing as not having a government Trust Fund."
Donald Luskin has a resounding rejoinder to one of Krugman's columns. Krugman issues the "6.5% Challenge" and Luskin not only takes the challenge, but refutes Krugman with a slam dunk.
Full Disclosure: I am not an economist, the material here is gathered from the internet and from my understanding of the issues.
Further Full Disclosure: To my knowledge, Paul Krugman is not a licensed psychotherapist, but I am.
UPDATE: Donald Luskin has a terrific post up now. Here's my favorite part:
"What was Paul Krugman's reaction in his Friday New York Times column? You won't be surprised: according to America's most dangerous liberal pundit, Greenspan "has betrayed the trust placed in Fed chairmen, and deserves to be treated as just another partisan hack." This isn't the first time Krugman has called Greenspan a "hack" -- that's the word he uses when the maestro says something with which Krugman disagrees. It works the other way, too, of course -- less than a year ago Krugman cited Greenspan an "expert" when the maestro said something with which Krugman agreed.If Greenspan is, by turns, an "expert" or a "hack," what does that make Krugman? Based on all the astonishingly brazen distortions and outright lies in his latest column about Greenspan, Krugman is nothing less than an "expert hack."
Go, Read the whole thing. EVERY word
Posted by GM Roper at February 13, 2005 10:38 PM | TrackBack"This whole brouhaha started when I called Krugman a Hack when a more liberal commenter on Marc Cooper's blog said he was knowledgeable."
That's a lie. What you said was that, simply by virtue of considering Krugman to be a knowledgeable economist, the commenter's reasoning was tossed in the wastecan.
But Krugman, even if you disagree with him or disapprove of his rhetoric, is in fact a knowledgeable economist. Or even if he isn't, isn't not absurd to believe he is. It certainly doesn't invalidate one's ability to reason to believe that he is.
So what does that make you? Well, it makes you an intellectually dishonest jackass incapable of and unwilling to have rational debate. And it puts your reasoning in the trashcan. One can predictably expect you to take wrongheaded, foolish, and uninformed positions, and that in fact is what you can be observed to do on a regular basis. The liberal commenter no doubt holds you in contempt, and is right to do so -- not only for attacking his ability to reason on such a false basis, but because of your obscenely partisan and intellectually dishonest assertion that those who don't rubberstamp Bush's partisan judicial appointments aren't "bipartisan". No one honestly believes that, certainly not you, you small-minded jerk.
Posted by ts at February 14, 2005 07:14 AM
My, my, the spleen some visitors have. the above comment states: "That's a lie. What you said was that, simply by virtue of considering Krugman to be a knowledgeable economist, the commenter's reasoning was tossed in the wastecan."
Here then is the actual quote from Reg: "Don't argue that one with me - read independent analysts like the CBO or a knowledgable economist like Krugman on the issue and come up with numbers that prove their analysis wrong before you even bother to regurgitate Bush's bull. There's no "there there" in Bush's plan except a gift to Wall Street - if you don't understand why, you are - to be blunt - simply ignorant."
To which I replied: "Just when I think reg is becoming more "nuanced" and maybe even understandable he posts something like "...knowledgable economist like Krugman..." That alone tosses his reasoning in the wastecan."
A re-reading of reg's comment will indicate that he cannot be argued with, that he calls anyone (in particular me) ignorant after an earlier comment of mine. To toss that type of reasoning in the wastecan is appropriate and good. Fair warning trewth_seeker This is my blog and I pay for it. I'll let you get away with this once, but future posts calling anyone names, any one a liar or any similar behavior will result in that post being deleted and the violator banned. Nuff Said? If you want to disagree, fine, but do so in a clam and respectful manner or face the consequences
Posted by GMRoper at February 14, 2005 07:56 AM
Krugman and other critics of the Prez don't deny a problem...far from it. They deny a CRISIS and they deny BANKRUPTCY and they deny that the trust fund set up by Reagan in which we have been paying extra payroll taxes for nigh on 20 years into Treasury Bills can be considered worthless unless you want to also tell that to our friends in China, Japan...or even to George Bush, who has a large segment of his fortune stashed in the same instruments. Will the trust fund have to be payed back by the general fund, which...thanks to everybody, but most recently George Bush, due to his crackpot fiscal policies...have been borrowed to keep other taxes down and pay for programs people apparently wanted their congressmen to support ? Of course. Or it means that the full faith and credit of the U.S. is meaningless. P.J. O'Rourke can come up with some good one-liners the day that news hits the front page. (Or do we recognize debt accumulated by the general fund if it's to the Chinese, but not debt accumulated by the general fund if it's to our own elders. Mmmmmmmm....) This is a revenue and tax issue, but not a Social Security issue, unless you want to simply give Grandma the finger. Which I wouldn't put past the libertarian Cato types who have an ideological privatization agenda that they've been pushing for years.
The other thing you don't mention is that "private accounts" put the system in far worse shape than it already is (which Bush considers to be a "crisis"), because they rob the ongoing ability to continue to pay benefits of trillions of dollars that get diverted to...well, to Wall Street. (Also, nobody who talks about this ever mentions that there is the possibility of an inflationary effect on the stock market if there is an artificial government program that pushes money into the market that otherwise wouldn't be there. I'm not an economist, but somebody should at least explain why there isn't the liklihood of a "private accounts bubble", since about 85% of money invested in stocks - and undoubtedly a larger percentage of small investor's capital - isn't actually capital investment, i.e. new investment, but sale of existing equities. I know that the money has to go somewhere, so maybe an economics major could answer this one, but as it channels into the stock market, it isn't going to buy new machinery for making widgets...it's mostly going to guarantee a profit to folks who are selling equity at a higher price than they bought it themselves. This isn't a moot point and it's never discussed.)
The projected shortfall that actually has been guesstimated to start in around 50 years is, also, based on very conservative predictions of economic growth. Lower than what we've actually experienced in the past. (Anyone who assumes that there won't be breakthroughs in the next fifty years in renewable energy, among other things, is ignoring what's happened to the economy over the last fifty years.) But the income/outflow differences in any of those charts could be fixed by some fairly simple adjustments of retirement age, means testing benefits at the very top of the elderly population, and increasing not the payroll tax, but the cap on income taxed. You may object to these for various reasons, but they do actually address the problem that exists in the future. BUSH'S PLAN MAKES THE PROBLEM WORSE, MORE QUICKLY. Why no mention of that elephant in the room ?
And frankly, anything from an ideological ivory tower, such as Cato, which believes that the solution to any problem is privatization - literally anything that comes along, because they are as ideological as a goddammed communist in their own way - doesn't pass the smell test. The first thing that you need to recognize about Cato is that behind every one of their arguments (while some may, in fact make sense on their own terms), first and foremost is what you call M - their motivation, which never changes. They are so far out of the American mainstream on economic issues, frankly it's a joke.
I don't understand why you people just regurgitate any crap that Bush comes up with as credible, without analysing it for yourselves. Is there nothing foolish or craven the man could do that you clowns won't swallow? Pathetic....
Posted by reg at February 14, 2005 08:15 AM
Also, you haven't addressed the fact that after Krugman and some others put the facts on the table - about the percentage of shortfall, the fifty year window and the fact that Bush's rhetoric is designed to trash one of the smartest things Reagan did (with Tip O'Neill) and claim that it was simply a fraud - the White House began to pull back on its rhetoric. Also, the GOPers in Congress don't seem to be swallowing this thing whole. Social Security can and should be addressed and made more solvent for the future. The "private accounts" hoax doesn't do this. After you've acknowledged that one, we could debate what might be done to solve real problems. Not one word on what the Prez' program actually does. I'm not surprised, but it makes you look extremely foolish. Get off your horse about Krugman and try dealing with reality and explains what you think should actually be done. P.J. O'Rourke is DEFINITELY not more competent than Paul Krugman to come up with the answer. I guarantee you that. You implied to that other poster that I was an arrogant ass because I said read the numbers put on the table by the critics before you discuss this. You've dealt with some of the numbers, you've spit out a denial about the existence of the Reagan trust fund...but still no explanation of why the Prez' plan fits the problem. That was what I asked for AFTER you looked at the stats. Now that you've looked at the stats, can you tell me what makes senes about increasing the debt and lessening social security's solvency by enacting private accounts as a "solution" that isn't pure ideology as opposed to problem-solving ?
Posted by reg at February 14, 2005 08:28 AM
Reg writes: "Get off your horse about Krugman and try dealing with reality and explains what you think should actually be done."
I'm not an economist, so I can only go by what others have said. That they are of different opinions than you means only that they have different opinions. I have said in the past that I don't know if Bush's plan will work, I don't know if any plan will work, I do know that I don't buy Krugman's analysis and neither do a lot of other knowledgeable folk.
I'll also note to you reg, this is my site and you are welcome to post your thoughts and beliefs anytime you want. But there will be no further name calling or casting aspersions on others. Keep your anger to yourself or express it somewhere else, don't bring it here. The next time, you will have that comment deleted and be banned from this site. Clear? I sure hope so, because desptite our disagreements, you seem to be a bright intelligent fellow with a lot to say. You need to watch how you say it here.
Posted by GMRoper at February 14, 2005 08:58 AM
Here's the best summation of the history and import of the Reagan/Greenspan social security trust fund I've seen to date. Of course as P.J.O'Rourke might say, "For some folks having facts is just the same as not having them."
KEVING DRUM/WASHINGTON MONTHLY: Social Security is funded by payroll taxes. In 1983, Alan Greenspan headed up a commission that recommended saving Social Security from imminent doom by raising those payroll taxes to cover expected increases in Social Security payouts. But there was a twist: Greenspan recommended raising payroll taxes above what was required to actually pay current benefits to retirees, with the resulting surplus used to buy treasury bonds that would be piled up each year in Social Security's trust fund. And since these bonds were sold to the trust fund by the federal government, this means that the federal government got a big chunk of extra money every year for use in the general fund.
Under this scheme, payroll taxes were sufficient to cover payouts plus bond purchases until about 2018. Then, from 2018 to 2042, when payroll taxes would no longer be enough to cover payouts, the difference would be made up by cashing in the bonds in the trust fund. In other words, the feds would tap into the general fund to give back all the money that Social Security had handed over between 1983 and 2018. This money would come from the same place all general fund money comes from: income taxes.
Still with me? Here's what this means:
*
Between 1983-2018, this plan calls for payroll taxes to be higher than they need to be to cover payouts to retirees. However, because the surplus payroll taxes are handed over to the feds, it means income taxes are lower than they would otherwise be.
*
Then, between 2018-2042, payroll taxes will be less than they need to be to pay benefits to retirees. However, the difference will be made up by higher income taxes, which will be used to pay off the trust fund bonds.
Payroll taxes are paid mostly by the middle class and the poor. Income taxes are paid mostly by the well off.
So: for 35 years the middle class and the poor pay excess payroll taxes and the well off get a break on their income taxes. However, for the following 24 years the middle class and the poor get a break on their payroll taxes and the well off finance it by paying higher income taxes.
Now, this may sound like a dumb idea to you, but that was the deal. The bottom 80% take it on the chin for a few decades, followed by a couple of decades in which the well off get socked.
But suppose  as conservatives are laying the groundwork for  that Bush decides the trust fund is a mirage, just a giant IOU from one part of the government to the other. And as part of his "reform" plan he proposes a complex scheme that, when stripped to its essentials, entails doing away with the flim flam of that illusionary trust fund and the higher income taxes it will require when 2018 finally rolls around. What would that mean?
It would mean that the middle class and the poor got suckered into overpaying their taxes for three decades, and then when the bill came due the well off ducked out of their end of the bargain.
Of course, that would be a brazen rip off of the middle class in order to give a break to the well off and the rich. George Bush would never do something like that, would he?
Posted by regr at February 14, 2005 09:03 AM
I'm sorry to belabor this, but I accused you of completely ignoring the elephant in the room, i.e. that Bush's plan makes things worse, not better, regarding the shortfall in payroll taxes, but near the end you did quote a statement that alluded to that.
I started to read Don Luskin's rejoinder, but I was stopped by his comment that Dean Baker's analysis of Social Security was touted by the Communist Party. That is just the same old National Review crapola they've been hustling since Buckley was pimping for McCarthy. I don't pay any attention to people who make those kinds of arguments - I call them "S" arguments. Guess what the "S" stands for.
Posted by reg at February 14, 2005 09:14 AM
reg writes: "I don't pay any attention to people who make those kinds of arguments - I call them "S" arguments. Guess what the "S" stands for."
Why reg, I can see you cut out the cussing for which I'm greatful and that you have a sense of humor. ;-)
Posted by GMRoper at February 14, 2005 09:20 AM
"I have said in the past that I don't know if Bush's plan will work, I don't know if any plan will work, I do know that I don't buy Krugman's analysis and neither do a lot of other knowledgeable folk."
That sounds fair enough, but Krugman's main contribution to date has been to bring the debate back to the reality of what the numbers actually signify...as opposed to the "crisis-mongering" that Bush used to kick off discussioin of SS. Now there are two elephants in the room that no one, regardless of their politics can dispute...#1 is that Bush's plan doesn't address the problem on the terms it actually exists, i.e. a shortfall of payroll taxes some decades from now (at least four, more likely five or six) which Bush's proposal - incredibly for something dressed up as a reform proposal - accelerates. #2 is that the "crisis" argument relies on disputing the very existence of the Reagan-Greenspan Trust fund backed by T-bills (or bonds - not sure of the difference). Declaring this trust fund worthless is a major statement about the credibility of debt incurred by the U.S. government and is an issue more related to general taxation and fiscal policies over three or four presidencies, not whether the trust fund exists. If it doesn't exist, it means T-Bills are deemed worthless, which would send shockwaves through the world economy.
Personally, I don't think agnosticism about Bush's plan, even in the light of the data you cite, is very credible at this point - because on the face of it, his plan makes the situation worse, in terms of data no one disputes as the "official" picture even if they disagree on such things as whether or not it's overly pessimistic regarding economic growth. You may not share Krugman's "analysis" but insofar as it's a refutation of what was passing as conventional wisdom not so long ago, that Bush has put forward a plan to "save" Social Security, it's indisputable. Argue about his prescriptions if you will, but he brought needed sanity and perspective to what was shaping up as a shameless propaganda offensive by Bushco. That was my original point - bring real numbers to the table and look at what it all might mean, rather than simply repeating Rovian talking points about a "crisis" or the magic of private accounts, which many Bush supporters tended to do. If there's a near-term crisis, it's in medical care. (Again, Bush's major contribution on this front was to pass a Big Pharma-friendly bill that actually has made the fiscal situation of healthcare worse. But hey... What else is new?)
Posted by reg at February 14, 2005 10:44 AM
GM, this guy suggests that the US government isn’t going to honor its own treasury bonds because the money just isn’t there. I find that argument either disingenuous or foolish in the extreme. When have you known the US government to default on bonds? Never. And if they start now the damage to the economy would be unbelievable. The effect on the interest rates of treasury bonds would be astronomical because the risk would have gone from near nil to substantial. US government bonds would no longer be the safest investment in the world. Think about that for a second then imagine the political fallout of telling seniors that, sorry, the trust fund is empty and we can’t find the money elsewhere (sure we just passed tax cuts from what we’re now telling you is the same pool of money) so you’ll just have to except poverty. I don’t buy that scare tactic for a second.
In addition, using the current life expectancy of 77.2 yrs and using 1946-1964 as the Baby Boomer birth years, the big crunch in payout ends in 2041. After that date, the retired population should dip dramatically and ease a lot of the strain on the system. This crunch is only for a finite period of time and is eminently solvable without dismantling Social Security.
Posted by Mavis Beacon at February 14, 2005 12:24 PM
Mavis, you are of course correct (as is reg) regarding defaulting on the bonds. However, there is only two ways to "cash" those bonds, increase the deficit or increase taxes, both of which are probably unacceptable.
I don't believe the president's plan WILL dismantle the SS System, a point that gentle folk can disagree on. On the other hand, your comment regarding the "big crunch" in payout ending in 1941 is not supported by reg's and Krugman's CBO projections which show the difference between income and payout continuing for many years beyond '41 indeed, in the post the deficit goes beyond '75. Now, the SSA says that in 41 (see graph above that the cost and layout will equal out, but what happens if congress decides to increase benefits in exchange for votes as they have in numerous times in the past. When are we at least going to be honest and institute the real third rail in this mess by cutting the wealthy out of the system. Notice I didn't say rich. Means test those above a certain wealth level regardless of income, or even those above a certain income.
There are lot's of things that can be done to avoid a crisis. Now is the time to take a look at some of those efforts. Just saying leave it alone, there won't be a problem for years to come isn't sufficient.
Thanks for your comments!
Posted by GMRoper at February 14, 2005 02:40 PM
Your last comment - aside from sort of dodging the Prez' plan's very negative effect on the ability of payroll taxes to pay off as presently projected, therefore making the problem as it actually exists worse than it actually is - is on the track of real resolutions to real issues. But raising some non-payroll taxes to insure that we pay off the Treasury bond trust isn't really a debatable issue - the alternative is either a general default on Treasury instruments or an absolutely indefensible categorization of elderly Americans as not deserving of equal treatment with the Chinese or the Saudis. Now the latter would be a wonderful development for those of us on the angry left who would like to see the GOP crushed into the dust politically for a generation or two, but it would be irresponsible for the rest of you folks to suggest as a proper course.
Posted by reg at February 14, 2005 04:53 PM
Just FYI, here's a link to an actuary who points out that the "low cost" projections of the SS actuaries have historically proven to be the most accurate. He argues that the "low cost" projection should become the "intermediate" projection since it's proven the most trustworthy and a new "low cost" projection should be added to the three-tiered set. If this trend of "low-cost" rather than intermediate or high cost projections holding true continues to be the case, the issue of the fund running out of money becomes moot - it won't, at least not within the 75 year timeline that SS dictates that trustees consider in their deliberations. Interesting...
Posted by reg at February 14, 2005 06:44 PM
Note: when I said "running out of money" I meant payouts becoming larger than the trust fund balance and incoming payroll taxes. I'm falling into the trap...sorry.
Posted by reg at February 14, 2005 06:47 PM
http://www.davidlanger.com/article_c67a.html
That was the link I forgot to include. My last...I'm pretty sure...no kidding.
Posted by reg at February 14, 2005 09:09 PM
Interesting thread folks, many excellent points on both sides of the discussion.
But if we are going to be honest then I suggest we consider what I think is the elephant in the living room:
Social Security is NOT a retirement system nor is it a pension system; Social Security is an income redistribution system much like welfare and many other government programs.
The money you contribute ceases to be yours as soon as it is taken. You have no control over those funds. Your survivors don't get any remaining balance when you pass away. You continue to get benefits even after what you receive in benefits exceeds what you contributed.
And it's not as if you will live well on the benefits they pay you. I'm 47 and have earned a very good living for most of my 25+ years in my profession. Visiting the Social Security web site I can find out that my monthly benefit, in today's dollars and assuming I continue to earn as I have and retire as late as possible, will be roughly $2100/month. I'm not planning on living on that.
So, from my position on the more Libertarian Right - that's my bias/motivation if we have to talk Type M/Type C - I don't like Bush's idea very much either. I accept that there is a problem that needs fixing. I'm inclined to try and fix problems earlier rather than later, so here is my fix:
Means test Social Security benefits. If you have assets and/or income above certain levels then your benefits are reduced, on a sliding scale toward zero for those folks who are least needy. Heck, if we do this correctly we might be able raise the benefits of the most needy seniors, many of whom face huge and increasing property tax bills that eat away very quickly at their meager Social Security benefit.
And I must admit it was very, very difficult to keep my self from putting scare quotes around the word "contribute" when referring to taxes. :)
Posted by too many steves at February 15, 2005 05:42 AM
Reg, thanks for the link. It does make more sense than other economists that have posted on the web and reporters in the MSM. It also set's my mind at ease a trifle regarding the need for reform. I'm not convinced that it doesn't and as you noted earlier it's not maybe a "Crisis" now, but it really could be if we don't do something now. The "something" may be only setting some really good economists (one's without a particular drum to beat) and as this article indicated some actuarists also without a particular drum.
This statement "With regard to the latter, bear in mind that the trustees are high-level political appointees, including many not enamored of Social Security." is no doubtedly true, but it is not the trusties who put the figures together methinks, they just sign off on what the careerists in SSA put together.
Also, this statement "Under low cost, there is also a never-ending annual surplus. One political implication is that the annual surplus can be "borrowed" by the U.S. Treasury for a great many years without the need for repayment, so long as benefits can be paid in full." presumes, low cost will be the final product, not something we can automatically assume.
Further study is needed and I suspect that in the long run, hopefully before a crisis does come to pass that cooler heads will look at the issue and make sure that SS is a workable thing for the future. My daughter is 35 years away from retirement and likely she will have Teachers retirement to fall back on. But, regardless of her long term intended retirment plans, a safety net is a good thing to have. None of us know what exactly tomorrow will bring.
By the bye, I truly hope your last post was not your last post on this site if you take my meaning. We can disagree on issues, but I like what you bring to the table of ideas (well.... most of the time >;-)
Posted by GMRoper at February 15, 2005 09:27 AM
Okay, both of you guys are in the corner of rational reform and a recognition that SS addresses a real need - and has done so fairly well as mega-programs go. That's all anyone can ask. Kudos...
Posted by reg at February 15, 2005 11:58 AM
