Social Security reform along the Sound
The news media is awash in talk of Social Security reform, a subject very close to my young heart (and my young pocketbook). Of all the millions of words written about Social Security reform–specifically, the creation of personal retirement accounts–some of the best have come from frequent Sound Politics commenter and onetime guest poster Eric Earling in a Sunday Op-Ed in the Everett Herald:
Partisans have been relying on two disingenuous claims to defend their refusal [to consider Social Security Reform]:1) “Social Security will be fine until 2042.” In reality, Social Security’s trustees have said the program will begin running a cash deficit by 2018, meaning more benefits being paid out than payroll taxes coming in. Opponents claim at that point we’ll simply tap the Social Security Trust Fund, which will be solvent in theory until 2042. One problem: the Trust Fund is functionally empty.
True, it holds special U.S. Treasury Bonds. But turning those bonds into cash for Social Security to make up its deficit would require money from the annual federal budget (national defense, homeland security, Medicare, etc.). At the same time we read stories about current deficit challenges it is ridiculous to think we’ll simply dig deeper into the regular budget to pay for Social Security. 2018 is the date that matters.
2) Opponents describe personal accounts invested in mutual funds of stocks and bonds as “gambling” - a stunning, direct insult to every American who relies on a 401(k) or IRA for their retirement savings.
Such slander is intended to scare older generations, among whom personal investments in stocks and bonds were more rare and pensions in both the public and private sectors were more commonplace. Yet the true beneficiaries of such reform, younger workers, are already employed in a workforce where pensions are commonly unavailable, except for government employees whose unions are ironically opposing reform.
Go read the whole thing, as they say. Eric has laid out one of the clearest arguments for Social Security reform that I have ever seen.
But it may not make much of a difference to the politicians representing Eric and the rest of us in Washington DC. Maria Cantwell and Rick Larsen, two ostensibly moderate Democrats who will be facing tough reelection bids in 2006 have already dismissed the idea of personal accounts out of hand, along with the rest of the Democrat delegation from the area. Their reasons don’t stand up to serious scrutiny, as Eric deftly shows, but that doesn’t really matter.
Democrats aren’t getting their marching orders on Social Security from reason or from their constituents these days. They’re getting them from a bewildered Democrat minority leadership that doesn’t have any plan other than “obstruct, obstruct, obstruct,” and which made up its mind about this a month ago. Of course, some Democrats will continue to pretend they have open minds, and when they cast their votes against reform, they’ll make-believe that it was driven by their interaction with their constituents.
Take, for example, Democrat Rick Larsen of the 2nd District. This Saturday, Larsen is having a town hall meeting on Social Security reform–at the Everett Senior Citizens Center. That’s right, he’s having a discussion of a reform plan that will not affect anyone over the age of 55 at a senior citizens center. There’s only one reason to do this–to scare the elderly into thinking that the mean ole’ Republicans are going to take their Social Security away. But I’m not going to let them get away with it–and I hope you’ll help.
The town hall is at 3025 Lombard Ave., Everett from 10:30 am to 12 pm on Saturday, February 26. I’d love to see a legion of those of us who will actually be affected by reform show up to the discussion–and if any like minded retirees would like to come too, that’d be more than wonderful. If anyone needs help getting there, drop me an email. If you can’t make it, tune into Republican Radio afterwards, where I’ll be giving an after-action report around 12:20 pm.
(Cross-posted at Sound Politics.)
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February 22nd, 2005 at 10:22 pm
There’s only one reason to do this–to scare the elderly into thinking that the mean ole’ Republicans are going to take their Social Security away. But I’m not going to let them get away with it–and I hope you’ll help.
I’m not going to let the Republicans get away with this either. Glad we agree. (or did you mean that the old people were going to get away with something?)
February 22nd, 2005 at 10:40 pm
Oh, grow up, Erik. I was talking about Larsen & his crew and you know it. Unless you’d like to demonstrate how exactly the mean ole’ Republicans are going to take away the Social Security of any senior citizens…
February 22nd, 2005 at 10:59 pm
I’d love to have serious (and grown up) discussion about Social Security — but it’s hard to imagine doing so with anyone who opens with the tired canard of the Social Security Trust Fund being “functionally empty”.
The SSTF holds about 25% of the outstanding Treasury debt. The rest is held by individuals, foreign central banks, pension funds, etc. As I recall, most (if not all) of George W. Bush’s personal wealth is now invested in Treasury debt. Funny thing, I don’t hear any of those party’s being warned that their accounts are functionally empty.
While it’s true that paying those bonds will require funds from the federal budget, that’s exactly the same mechanism that will be used to pay to money owed to other parties. As I recall, simply rolling back Bush’s tax cut would more than cover the SSTF portion. I’m not saying that’s the best way, but it’s certainly possible and seems better than simply defaulting.
So, any time you want a serious discussion — including private accounts — I’m here. But let’s dispense with the phony talking points.
February 23rd, 2005 at 12:14 am
Erik. I was talking about Larsen & his crew and you know it.
Yes I did.
So, any time you want a serious discussion – including private accounts – I’m here
Cool. That’s good because I am trying to get Tim some of his own comments on his posts so he doesn’t have to rely on cross posting for traffic.
I would certainly benefit from not having social security at all. However, I think it is stabilizer to have people be forced to save something. Otherwise there are going to be hoards of elderly homeless people. Americans are just terrible savers.
Paternalistic? Yes. But I would rather have a forced savings system for other people than be personally forced to pay for their maintenance in the future.
Borrowing trillions more and adding it to the debt is the wrong way to go. Bush has already made the old tax and spend liberals look like tightwads compared to his hunger for deficits.
Another problem with the personal savings accounts is that the return is less. Anytime a retirement system gets to keep the contributions when participants die, the remaining members get higher benefits. Thus, being able to inherit the personal acounts will take funds out of the pool.
The poor returns cited on social security are misleading as the disabled, for better or worse, are taking billions out of the fund, people who will never put a dime into the system.
February 23rd, 2005 at 6:49 am
May I add some analytical tools to the SS debate? I am a retired investment software company owner and developer. I have an Excel Spreadsheet which show the size of fund each worker ( in families there would be 2 funds) gets at retirement. It will illustrate just how big the money becomes. By the way, the yearly tax into SS looms at nearly $12,000 per year for big wage or profit owners, and that is in a system where your money goes POOF when you die ( in most cases).
The site is at MSN. http://groups.msn.com/socialsecurityinvestment
There is no advertising, no trick, free, and I am not in any business. Free to download for any investment planning purposes.
February 23rd, 2005 at 7:35 am
I thought it was only 1-2% of the yearly contribution that goes into SS
February 23rd, 2005 at 8:18 am
B Kebbe, a suggestion:
Although you did qualify your statement about one’s money “going POOF”, you can’t simply ignore the cases where it doesn’t. If you die young, with children, Social Security survivor benefits are quite valuable compared to the money you’ve paid into the system. At the other extreme, if you should die single, just after retirement, most of your money does go “POOF”. In all cases, you also need to account for the value of SS disability insurance.
It’s difficult to account for the value of the survivor and disability components of Social Security, but you can’t simply ignore them. Here’s one way to look at it — about 25% of all SS payouts go to those programs. That would imply that 75% of the payroll tax (9.3% tax rate) goes to funding old age retirement.
If you want to estimate how much retirement money you would have if you could invest ALL of your SS payments into your own account, I would suggest using the 9.3% tax rate instead of the full 12.4%.
February 23rd, 2005 at 9:00 am
I don’t understand why this is so hard to figure out. When you give an IOU to someone else, it means something. But I’d like to see you write an IOU and take it down to your bank and attempt to deposit it in your savings account. The USA will obviously not default on its loans. But while that’s nice for people like foreign central banks and George W. Bush, it doesn’t do jack squat for the nation. The money to pay back those bonds has to come from somewhere. So, in 2018, we either a) cut benefits, b) borrow large sums of money, c) raise taxes or d) cut big gaping holes in other government programs, like the military and Medicare. So large sums of money are going to be borrowed anyway.
Anytime a retirement system gets to keep the contributions when participants die, the remaining members get higher benefits.
First, this makes the system remarkably unfair for those related to people who die earlier than average. Does any other retirement system on earth work like that? If not, why do you think that is?
Second, higher benefits than what? Certainly not higher benefits than compound interest will give you. Albert Einstein called compound interest the “most powerful force in the universe,” and the AARP even agrees with him (when they’re not talking about Social Security). The trouble with the current system is that the American people are the ones paying compound interest, rather than collecting it. That’s just foolish.
While they’ll require lots of money initially, personal accounts will eventually stabilize the system. Under Bush’s plan, about half of the payroll tax will go into personal accounts. The other half pays into Social Security as normal. But with even a minimal rate of return of 4%, the invested 6% or so a year will easily bring in more money than Social Security would have, and the retiree will then forgoe recieving any regular Social Security money. That means that fully half of all the money they paid into the system is there to pay for survivor and disability benefits, and for those who don’t want to opt out of the system. That will bring stability to the system and a permanent solution.
Think about it–no private company, state, unionor other organization would ever consider starting up a retirement plan that worked like Social Security. Why in the world should we continue to run it like it is?
February 23rd, 2005 at 9:19 am
Good post, except for one thing. The year that the SS shortfall first starts showing up is not 2018. That year is the first year that SS will run an annual deficit. However, it is important to realize that the system is currently running an annual surplus, which is currently rising and will continue to rise until 2008. The rising surplus is used to fund an expanding federal budget. The year 2009 will be the first year that the annual surplus contracts and the federal budget will need to look elsewhere for capital to expand. Therefore, the real target date for the SS crisis is 2009, not 2018.
For a fuller description see: http://www.nationalreview.com/nrof_luskin/luskin200501110842.asp
February 23rd, 2005 at 10:06 am
Timothy: You are arguing in circles. Let’s look at it another way:
As of 1/31/05, the total U.S. Treasury debt was $7.6T. Social Security held $1.5T of this (20%). That percentage is going to grow a little over the next 13 years (when SS finally stops buying bonds), but not by much.
If your argument is correct, you are saying that the U.S. cannot afford to pay ~20% of its debt. Your suggestion is to just default on the part owed to average Americans while making certain we pay off foreign banks and wealthy investors. Why not just pay 80% of the amount owed to all bondholders? Of course, that’s ridiculous. The United States is not going to default by any amount.
In a related point, $625B of that debt is held by the Civil Service Retirement Fund, $157B by the Military Retirement fund, and $56B by the highly touted Federal Retirement Thrift Savings Plan — more cases of the government “writing IOUs to itself”. Should we be telling all of those people that their kitties are, in fact, empty?
As I said earlier, I long for an honest discussion about the relative merits of various options — and I’m happy to go wherever the data takes us, including private accounts. But, when I hear that the starting point of debate is that the SSTF holds worthless bonds, I know that I am not dealing with a serious or knowledgeable person — and that honest communication is unlikely.
February 23rd, 2005 at 10:38 am
Scott, I don’t know who you’re arguing with, but it’s not me, and I don’t think it’s Eric. No one ever claimed that the US is going to default on any loans. Of course the US will pay back its creditors. Please, though, take a very close look at what Eric and I said:
You’re right that the money will be paid. But where is it going to come from?
Your hang-up on semantics is making your desired “honest discussion” much more difficult.
February 23rd, 2005 at 11:10 am
Timothy: I’m clearly arguing with you and the statement in Eric Earling’s Op-Ed piece. I thought I made that clear by addressing you directly and by directly quoting Eric’s phrase.
The statement was “The [Social Security] Trust Fund is functionally empty.”
I took that to mean that the SSTF doesn’t hold real assets that can be used to pay benefits after 2018. If you meant otherwise, please let us know what other definition of “empty” you (or Eric) intended.
While you are at it, you might address my other point. Since the Civil Service and Military Retirement Plans hold the same kind of assets (Treasury Bonds issued to government agencies), are these funds also “empty”. Do we need to start talking to these folks about benefit cuts?
Your question of how we will pay the ~20% of Treasury debt owed to the SSTF has me scratching my head. We’ll pay it off the same way we pay the other 80% — why is the SSTF different? We’ll pay it off by issuing new debt (we do it all the time), by raising taxes, or by cutting other programs.
Maybe your point is that we are issuing too much debt, so paying it off may prove difficult. Could be. Maybe we shouldn’t be cutting taxes now without first cutting spending. Or maybe the spending is necessary and so are the taxes. There are a lot of ways to look at the total budget deficit problem.
My point is that SS is no different from other bondholders — if you don’t accept that, you’re just living in a separate reality and I’m not sure how we can bridge that gap.
Sorry for wasting your time because I think it really would be useful to have a meaningful discussion concerning government’s role in retirement planning, funding options, etc. I just don’t see how we can do that when we can’t even agree on whether Treasury bonds are real assets that can be redeemed to pay future obligations — or are they just “empty” entries in an accounting ledger? That seems like more than a semantic gap to me.
February 23rd, 2005 at 11:41 am
Scott, I’m talking about the goverment as a whole. The government as a whole will not have the cash on hand to pay retirees their benefits as of 2018, and it will only get worse from there. If that’s not good enough for you, then there’s nothing I can do to help you.
February 23rd, 2005 at 12:02 pm
Timothy, you’ve neatly avoided all of my points by invoking magic-wand phrases like “the government as a whole.” What does that mean?
Will the government as a whole have the cash on hand to repay China’s central bank? Will they be able to repay George W. Bush’s blind trust fund? How about the Military or Civil Service Retirement Plans. Why should I (as a future SS beneficiary) be any more willing to accept default on bonds held in my behalf than these other parties I’ve mentioned.
If you can’t answer that, then there’s nothing I can do for you, either. Carry on.
February 23rd, 2005 at 12:15 pm
You’re not familiar with the Federal government? Big organization? Has offices out east somewhere? Includes the Social Security Administration? Does that ring a bell?
Additionally, near as I can tell, the Chinese Central bank isn’t expecting a Social Security check in 2018, so they really have no bearing on this conversation.
And last, why do you keep using the term “default?” You’re the only one who has brought that word into the conversation. No one is saying the government is going to default on its loans to itself. We are saying that when the SSA stops being a source of government cash, and starts being a recipient, there are going to be problems.
You can wish away those problems by saying that we’ll deal with it the way we deal with all government debt, but the problem is just going to grow until the system itself is changed.
February 23rd, 2005 at 12:30 pm
Scott, David Frum has a very good summary of the Republican argument re: the Trust Fund. He makes a distinction between an obligation that the government has, which the bonds certainly are, and a resource the government can draw upon, which they obviously are not. Does that distinction satisfy?
February 23rd, 2005 at 1:05 pm
Timothy, it’s a sure sign that your argument is lacking when you resort to sarcasm instead of sincere discourse. I’m not sure if this is a problem with other people you converse with, but I can assure you that I have a passing familiarity with the Federal Government, and I understand that Chinese central bankers won’t be drawing on Social Security. I’m just not certain how any of that strengthens your point.
But I am becoming confused on your argument. Do you think the government is going to be able to repay the SSTF? At 12:15 pm you acknowledged that “no one is saying the government is going to default on its loans to itself.” It almost sounds like we’re in agreement. As long as the gov’t makes good on those loans, the SS system is fine until at least 2043 or 2052 (depending on whose projection you believe) — maybe even longer if it turns out the growth component of those projections is too pessimistic.
I’m just not sure how the jibes with the notion that the SSTF is “functionally empty”.
Anyway, I really enjoy your blog and I don’t want to wear out my welcome here. If you’re really interested in hearing other viewpoints on this topic, I’ll do my best to explain why I think David Frum is full of it.
On the other hand, if the price of admission to this debate is an acceptance of the SSTF funds as being less real than other assets, just let me know and I’ll sit this one out.
February 23rd, 2005 at 1:41 pm
scottd - my point is US Treasury bonds are indeed an asset for when bought and sold as such. That’s why of course there is an open market for US Treasuries which are indeed backed in full by the good faith and credit of the US Government (where fed. government pension systems as you noted have some investments). But there is not a market that trades in the special form of US Treasuries held by the Trust Fund, even though they have the same backing by the government. That’s the difference. They’re US Treasury Bonds but they’re not exactly the same.
What the Social Security Trust funds holds is a special reminder to the US Treasury that it owes the Trust Fund the money, with interest. Of course when the Trust Fund comes calling, the Treasury will have to find a way to pay up, which begs the question, where is that money going to come from?
The key is the Trust Fund is not like a big savings account that you can make a withdrawal from without having any other financial consequences in the system. That’s why I described it as “functionally empty” since those bonds require additional government funding to redeem…whether those come through increased taxes, decreasing other spending, and/or selling regular US Treasury bonds to redeem the special ones in the Trust Fund.
That being said, I’m interested to hear why you think Frum’s argument is “full of it,” I generally agree with him as you can guess.
February 23rd, 2005 at 1:54 pm
Eric: Thanks for the kind response. The open market that trades in Treasury debt is, of course, aware of the total issued debt, so I’m not sure why that’s a worthy distinction. I guess we just disagree on the meaning of “money”. (No snark intended — it is, indeed, a complex subject.)
I’m still confused on one point. Timothy seems to be saying that we can, indeed, count on the government to make good on its debt to the SSTF — he’s just concerned about the ramifications of paying that debt. Is that your position?
My offer to get to Frum wasn’t empty, but I seem to have distracted myself from more pressing (remunerative) matters — so that will have to wait ’til evening. See you then?
February 23rd, 2005 at 2:13 pm
Scott, the government could borrow enough money to build a skyscraper to the moon and give everyone in the nation a gold plated backscratcher if it wanted to. Borrowing money is something the government is quite good at. That doesn’t change the situation one iota.
February 23rd, 2005 at 2:20 pm
scottd - yes, the ramifications are the issue. the debt will be honored, i don’t dispute that nor desire that fact to be changed. the question is how, and what are the consequences of those choices.
lastly, while the market is aware of the special debt to the SSTF, it is not direct element of the market itself at the present time since they don’t influence the market by adding to what is being bought and sold.
February 23rd, 2005 at 2:29 pm
Timothy: I honestly don’t know what your point is.
I’ve tried to be respectful and clear in my argument and I’ve tried to ask you questions that would help me understand your argument better. For some reason, you choose to ignore them and resort to pointless snark instead. I’m beginning to think you might be more interested in chanting your side’s mantras instead of probing to see if they really make sense.
I’ve got no time for that, so believe what you like. It’s starting to look like this is becoming a Members Only club.
February 23rd, 2005 at 2:43 pm
Scott, I have no idea what you are talking about. My snark was far from pointless, and I don’t know what mantras you’re referring to– I don’t remember being taught any mantras about “skyscrapers to the moon” in my VRWC classes. If you don’t understand my argument, I don’t know what I’m supposed to do, as I’ve repeated it half a dozen times. Let me do it again:
I haven’t heard you engage that central fact yet.
February 23rd, 2005 at 3:23 pm
Timothy: Okay, let me try to bridge the gulf.
I don’t understand why you think debt owed to the SSA is a special problem. If the government is over indebted, maybe that’s a problem. Maybe all of its creditors (or future taxpayers) should be worried.
Let’s try an alternate phrasing of your crisis statement:
When the Bank of Japan (or China, or Korea, or CalPers,…) stops being a source of government cash, and starts being a recipient, there are going to be problems.
The statement is functionally no different just because I changed the name of a specific creditor. Every dollar borrowed is a dollar that eventually gets payed back, plus interest. It’s not a Social Security problem, but it may be a National Debt problem. If that’s true, then I don’t see why we should look solely to future SS recipients to balance the books.
You and Eric have both said the government will make good on its debt to the SSTF, so I don’t see a Social Security funding crisis, at least not for another 40-50 years — maybe longer.
On the other hand, you seem to be concerned that the “government as a whole” has taken on too much debt. Maybe so — we oughta look into that. Stiffing future SS recipients isn’t the answer, but you’ve already told me that’s not the plan, so maybe we agree more than you think.
February 23rd, 2005 at 3:50 pm
scottd - thanks for your input, but we still disagree mightly about how the debts owed to the Trust Fund are different than those owed to owners of traditional US Treasury Bonds. for further evidence on this, see:
http://www.heritage.org/Research/SocialSecurity/em940.cfm
the section on the Social Security Trust Fund versus other trust funds cites two independent sources of note on the matter so it can’t just be dismissed as being from a conservative think tank.
the financial markets have also said they don’t like the idea of turning the special Treasury Bonds in the SSTF into regular bonds in the absence of reform that deals with the system’s long-term unfunded liabilities. your solution of taking on more debt doesn’t avoid that problem. which if you listen to the financial markets means a cranky bond market post-2018.
cranky bond markets (which would likely have a more negative view of the dollar) would be a bad thing for our economy, especially given the issues we face right now with the global economy and how other major countries view our budget and account balance deficits. let alone the aging demographic problems Europe and Japan face which are worse than ours and would complicate our ability to borrow our way out Social Security’s financial challenges in future decades.
we clealry disagree on the meaning of what post-2018 means for Social Security, and many of the related implications. from my perspective, younger workers already face some tough choices because of the system’s finances. i think your solution is amongst the worst of the options we have. thanks for the debate nonethless.
February 24th, 2005 at 6:51 am
Here’s my suggestion for Social Security reform. If the fact that the Trust Fund is invested in Treasury Bonds is going to be such a problem post-2018, stop doing that! And, start cashing in the Treasuries currently held over the next 15 - 20 years.
Of course, this introduces some new problems:
(1) This will cause a current federal budget shortfall. But, isn’t it better to deal with that now rather than down the road when the numbers get huge?
(2) What does the Trust Fund do with all that cash? I guess investing in Treasuries is out. Invest in the equities market as has been suggested for the personal accounts?
February 24th, 2005 at 8:39 am
Alan– the plan of investing the trust fund in the equities market was brought up under Clinton and shot down–we don’t want the government to become a shareholder in the nation’s businesses. Europe does that, but it’s a terrible idea. If you thought Enron was bad, the scandals that would come from that would be even worse.
Honestly, I don’t care how the rest of Social Security is reformed. I want personal accounts for three reasons. First, it will provide a stable, self-enforcing system that we won’t have to go back to and fix every twenty years because people aren’t having enough kids. Second, it will better provide for me and my family. Third, it’s a better system than the current one because it gives each person in America a stake in society. When you have a financial stake in your society, you take care of it, and that’s something I’d like to see.
February 24th, 2005 at 9:20 am
Timothy:
A quick question: What do you mean by “personal accounts”?
I mean, if you could skip all the transitional details and arguments about the true status of the SSTF, if you didn’t have to worry about the status of people who have already contributed to the existing system, what would your ideal end state be for this country’s social security system?
February 25th, 2005 at 5:52 pm
Honestly, I don’t care what the final product looks like, as long as I get to put a sizable chunk of my payroll taxes into something that a) is mine, owned by me, and able to be passed to my wife should something happen to me, and b) gets a halfway decent rate of return. All the other details are just that–details.
February 26th, 2005 at 1:50 am
[…] wn hall tommorow
Don’t forget that Democrat Rick Larsen is holding his Social Security reform town hall tommorow–the one being held at the Everett Senior Cente […]