I hate to blog about things I really don’t understand, but what the heck is going on with the public discussion of Social Security? I mean, I heard Atrios on NPR the other day, for cryin’ out loud.
Look, and again, Your Humble Blogger understands all of this only on the MegaBloks level, all of the conversation about Social Security seems to be taking place outside of the entire point of Social Security, which is to actually provide social (that is, economic) security. Right? Whether there is or isn’t a “Social Security crisis” has to be talked about in that context, right? It’s not a system for racking up economic viability points, it’s actual public policy to address an actual society.
Now, either you think that Social Security is separate from the federal government in some non-accounting based way, or you don’t. If you do, then there isn’t a Social Security crisis: it’s been lending money for decades to the federal government, and as long as the federal government is willing to pay that money back, and to (as it agreed to do at the beginning of their little business relationship) lend a little money back (and comparatively, we’re really talking about a trifle) in advance of the big Baby Bump entering their prime earning years, then the whole thing is fine. In other words, there will be a few years of deficit, during which they will stop lending and start collecting, and then there will likely (but not definitely) be a few years when they have collected all the money owed them and have to start actually borrowing, before the cycle begins again and they start paying off those debts and lending out more. This is perfectly tenable as long as they are guaranteed the income from the upcoming generation, which will be even bigger than the Baby Boom. Sure, nobody likes the moment when your indebtedness is higher than your assets, but many individuals and companies consider such moments inevitable.
The only real problem with this scenario is that some members of the federal government seems to be unwilling to pay back its contracted debt to the Social Security Administration. It’s hard for me to believe that they will be allowed to prevail; surely if they won’t pay that debt, then my own savings bonds aren’t far from worthlessness, and that is just not going to happen. The US government, up against it, is going to raise the money to pay the debt. That may well mean a huge deficit in the relevant years; in fact, it probably will mean one. And we’ve dealt with deficits before, right? Either we swallow ’em (my preferred method) or we raise revenue, or we reduce spending in a variety of ways.
If, on the other hand, you think of Social Security as just part of the federal government, then you can skip all the above steps and say that as there isn’t any Social Security, there can’t be a crisis, and that the problem is just a deficit crisis, as said above.
OK, so where does that lead us? Oh, yes, to the point. Which, as far as I can tell, is that there will be a few years between the Baby Boomers’ retirements and the Next Generation’s peak earning when it will be very difficult for us to produce enough, you know, production to have enough tax revenues to do everything we want to do. OK, that could be a problem. It’s possible that we, as a society, are going to have to decide if we want to guarantee security for the elderly and the disabled, and widows and orphans. Or at least to what level we want to provide such security. I should really phrase that as how high a priority it is for us to do that; we may decide we’d like to do it, but we’d rather spend that money fighting terrorism or educating children or something.
I do agree with the floating discussion that it would be advantageous to have discussion about all this before it actually happens. I just don’t understand why it helps to have discussion that so carefully misses the point. How many times, in all the discussion, has anybody said “taking care of the elderly is expensive, and we’re going to have a lot more elderly”? That’s the starting point of the discussion, isn’t it?
Of course, all of the methods that occur to me as easy are probably wrong. Granting statehood to anyplace that has its population bump conveniently opposite ours, forced-growth cloning to have the new generation ready to enter the work force in ten years, cryogenic freezing of retirees (and possibly not reviving them), or simply wholesale slaughter of little old ladies, these are policies which directly address the issue. I’m not sure how some sort of mandatory IRA program does.
Thank you,
-Vardibidian.
plus there’s that little issue of the social security taxes increasing on non-rich people, the saved-up money going into the pool, and the rich people getting a tax cut out of the pool. not only does the money need to come from somewhere, it needs to come back from where it has gone. watch the hands carefully… did you see them move?
I’ve never viewed Social Security as a separate system which is paid into or invested in. Money goes in, money goes out. The money going in is a tax, and an extremely regressive one (competing with sales taxes on food or clothing for stupidest public policy in the taxation arena). The money going out is a handout which is not need-based and goes to an arbitrary segment of the population. That’s not a system; that’s a disaster.
It has some obvious consequences which I don’t believe are good for our society: low and moderate wage earners pay a greater percentage of taxes than makes any sense, employers are penalized for creating jobs, the public is misled into believing that the government will provide for them in their old age, and a political feedback loop is created which entrenches the incumbent powers.
Social Security payroll paperwork is the reason that I won’t hire employees any longer. A lot of small businesses come to the same conclusion.
it’s less regressive than state-run gambling and besides, if we’re a little short of civic-minded high income people at the moment, i don’t see how that’s the fault of a particular pension fund no matter how it’s run.
the phrase “create jobs” feels slippery, not that you’re using it that way, just that, it’s as though hiring people was a humanitarian gesture instead of a business decision. there are lots of ways that hiring people is a pain in the ass, particularly as paperwork:people heads toward infinity. paperwork can be reduced.
i don’t know how to get into whether or not people believe social security will provide all. i don’t believe it’s right to say “tough luck” to someone who’s worked their whole life putting food on other people’s tables, going month-to-month the whole time.
and i don’t see how SS is more of a feedback loop than the stock market, company-run pension funds, health care “insurance,” police departments, zoning laws, banks, or virtually fee-for-future-service scenario.
… virtually any fee-for-future-service scenario.
(oh and, were.)
Just to wade in, I don’t think that Michael’s wrong, that is, I think that Social Security is a problematic solution to the problem of ensuring a minimum standard of living for the elderly, the disabled, widows and orphans. It is the solution we have, and it has actually been tremendously succesful over a generation or so, and not a disaster at all.
If we are going to ditch it, I’d like to replace it with something that accomplishes at least as much. My point, though, is that any discussion of Social Security reform has got to start with its purpose, and start by asking if we are going to guarantee a minimum standard of living for everybody, or for some subset of everybody, and how we define that subset, and how we define that minimum. Then we can see if we can pay for it, and if we can’t, whether we’re willing to give up some of it, or whether we’re willing to give up something else.
Thanks,
-V.
Just a heads up to Paul Krugman’s NY Times column for 12/17 in which he points out some of the failures of countries who have switched to a privatized system.
The biggest pragmatic objection to it, I think, is that it’s a gigantic non-means-tested entitlement (i.e. the government just promises to give people piles of cash, which it intends to raise by taxing other people, with no check of whether anyone needs the money). If we want to put old people on welfare, we should line them up and hand out checks, just like we do for everyone else.
Part of what privatizers object to is this lingo of a “lock box” or a “trust fund”, as if the money you pay is somehow going somewhere for thirty years, and then you’ll get it back some day. Saying “this is a tax to pay for welfare for the elderly” is very, very different from “this is you saving for your retirement”. That’s the main way inw hich the Social Security crisis is worse than other uncontrollable entitlement programs: The rhetorical smokescreen that makes it seem like a savings plan rather than an entitlement program.
Pro-privatization folks generally argue that encouraging people to save for their retirement is better policy than promising welfare to the elderly, but that’s more philosophical.
but “savings plan” is itself a smokescreen by that definition. the only way your money is in a locked box is if you put physical assets in a physical locked box. otherwise, everything else you do, the money is promised to you in the future and used now for something else.
I want to add to david’s point that part of the rhetorical smokescreen is the accusation that Congress has “spent” the trust fund. Of course they did. If they weren’t going to spend it, why would they have borrowed it? If the SSA hadn’t lent it to Congress, they would have lent it to somebody else, who also would have spent it, right? There was never going to be a non-metaphorical lockbox, any more than your bank deposits are sitting in a vault.
Thanks,
-V.
David and V, I’m honestly speechless that you’re arguing that savings and spending are secretly the same thing. Do you really believe that?
The fact that your money at the bank isn’t in a vault doesn’t change the fact that giving your money to a bank (to put into a bank account) is a fundamentally different kind of activity than giving your money to a candy store (in exchange for a bag of candy, which you then eat).
Sure, there’s some chance that when you go back to the bank, they won’t give you back your money; but there’s no chance that you can go back to the candy store and get back your money. The bank promises to repay your money when you ask for it, and if they don’t, we think they have committed a grievous wrong, and destroy them for it. No one leaves the candy store expecting to come back tomorrow and get their money back.
The “trust fund” is not a bank account — it’s a candy store. The government doesn’t take the money and invest it somewhere where it can allegedly get it back some day; it spends it, and once it’s spent, it’s gone.
It’s slightly more complicated than buying a Snickers bar, because the government actually pretends to lend the money to itself; but this is like running a bank where the bankers take the deposits, give them to their kids to spend on candy, and then claim that they loaned their kids the money.
Spending and savings are not the same thing, and I still can’t really believe that you guys are arguing otherwise. I must have misunderstood.
Irilyth,
Spending and saving are different activities, but they aren’t discrete. The money you save is money somebody else spends, whether you put it in a bank (which lends it to housebuyers) or in stock
(which puts it in the hands of corporations, which spend it on products) or in the government. If nobody is spending the money, you can’t ‘save’ it at any interest, because saving is lending, and lending requires borrowing, which implies spending.
The SSA has a surplus. What should it do with it? It could, of course, set up its own arrangement for lending it to people who are building houses or apartment buildings or something, but that would require a massive expenditure on a lending department the size of Freddie Mac (which it would essentially be). It could lend the money to banks, which would be fine financially, but (a) the guarantor of those loans is the federal government, so it doesn’t solve the lending-money-to-itself issue, and (2) that would be open to all kinds of bribe/kickback situations in addition to the conflict of interest in regulations. It could invest the money in stocks, but then (I) there would be a higher risk, and (secondly) the bribe/kickback/regulator stuff would be even worse (in addition to a variety of problems involving government ownership of private companies). Or it could buy government bonds, which is just lending to the government so the government can spend, which is what you object to in the first place.
Now, you’re free to claim that the essential difference here is that the government never intended to pay back that money, or to fund the program during times of deficit. I think you may just as well believe that the government never promised to pay off my savings bonds. I don’t see the difference.
Thanks,
-V.
Molly Ivins wrote a column recently (if I were a more serious web-type I’d give a link here) arguing that a huge problem with the social security debate is that few people are accurately describing what is going on.
The distinction between spending and saving is true at a basic conceptual level, but there’s third term that has to be brought into this discussion if our model is to be sufficiently complex to describe accurately the Social Security trust fund: INVESTMENT, which is neither spending nor saving, but USING one’s savings. Investments can be good or bad, safe or unsafe. I’m not sure I have a good enough grasp of the issues to present a clear model, but here’s a stab at it.
Social Security is not, and has never been a personal savings account. Workers and employers pay taxes into a fund. The money in that fund is (officially) dedicated to paying retirement and disability benefits to American workers. What you get out of the fund when you become eligible is linked to what you put into the fund, but there is no one-to-one accounting of dollars-in, dollars-out as if it were a personal savings account, where a bank had agreed to pay you interest on your money regularly and to return your principal when you ask for it so that they could have the use of it for making investments. The justification for each worker being required to pay into social security is the promise that each worker will be eligible to get paid out of social security later when the worker can no longer work, though a worker has no way of knowing whether he or she will get more or less than he or she has put in.
So when one pays into social security, one is paying a tax, not spending nor saving nor investing. The government collects money and spends it in accordance with laws devised by elected officials in pursuit (ostensibly) of the general welfare, which is the purpose for which our Constitution was established. It is a social welfare program
The matter gets more complicated for two reasons.
1) Since the 1980s, American workers have been paying much more money into the Social Security fund than the government has been paying out. The (ostensible) purpose of this building up of the fund is to create a surplus that will enable the fund to stay solvent as the ratio of retired people to working people increases dramatically during the first half of the 21st century.
2) The federal government, having this surplus, did not just save it by putting it in a vault in Fort Knox to store it until needed. Rather, it did what most people with accumulated savings do in a post-industrial economy: it invested it. Much of this investment was made in the form of loans to the federal government, which began running huge deficits at about the time that Social Security began building up a surplus.
Josh argues, with some reason, that this was an irresponsible way to invest the money. I believe the federal government was irresponsible, but Josh’s depiction of this irresponsibility makes it appear that anyone making a loan to the federal government, which will then spend it on projects that won’t earn any return, is irresponsible, and that is, again, too simplistic. Governments borrow money all the time: that’s what bonds are. When a government sees a need to spend a larger sum of money than it has on hand for a major project of some sort, it may find it prudent to borrow the money rather than raise taxes dramatically for a short period of time not do the project. The borrowed money can be paid back gradually over a number of years, with minimal impact on tax rates, and the project gets done. Government bonds are usually thought to be good investments for private individuals.
Now, I do not know if the SS trust fund is loaning money to the federal government by investing in government bonds, such that the other parts of the federal government are promising to pay back the borrowed money with interest (which would help to maintain the balance in the trust fund) or if the trust fund is loaning money to the federal government the way I would be loaning money to myself if I transferred it from my savings account to my checking account and then spent it. I know what the balance in my savings account was before the transer, and I may have a goal of getting my savings account back up to the level it was before the transfer, but I have no formal obligation to do so, nor do I have an obligation to pay the money back with interest. Since I am a single entity with (more or less) a consistent set of financial interests, this is ok for me. It’s not ok for the federal government, and if this is what the government has been doing, then it abusing the trust fund badly; it should have been investing that money in other ways, as if it were a bank.
But V and David are correct, that the surplus was going to be invested in something — it’s just a question of what, and on what terms, and at what level of risk. To put it in a vault would have been nearly as irresponsible as lending it at no interest to someone with no real obligation to pay it back.
So we have a set of separate questions to consider as we look at the larger questions of a) is there a fiscal need to reform social security, b) if so, what would work, c) should Social Security be reformed to make it a better program, regardless of whether the program faces a fiscal crisis or not, and d) if the answers to the above questions happen to be “no,” what interests are driving the efforts to overhaul social security, what will the cost to the general public be if these interests succeed, and how might they be stopped?
1) Was accumulating a surplus in the Social Security fund a good idea?
2) Was loaning the surplus to the federal government a good idea?
3) What were the terms of those loans?
4) Why did the federal government begin running up huge deficits at about the same time the social security fund began to accumulate huge surpluses? What does the national debt and the federal budget deficit have to do with the perceived crisis of social security?
4) Is the design of the payroll tax that supports the social security trust fund good? What are the alternatives?
5) Given all the above issues, is it proper to say that Social Security needs to be changed in order to remain solvent? If so, what sort of changes could keep it solvent?
6) Is the design of the social security payments, “a non-means-tested entitlement” a good idea? What are the alternatives? Would these have any bearing on the solvency of the fund?
I could suggest answers to some, but by no means all, of these questions, but I’ve said more than enough for now.
Thanks.
both v’s questions of general goals and chris’s (and michael’s and all’s) questions of financial policy are enticing. i avoid both now to go back a bit because i never said that spending and saving were the same. there is no origating value anymore, if there ever was – personally i come down on the 3rd option on the chicken-egg – that the lines we draw upon the wider systems of the world are ours to debate, but that doesn’t mean the universe works according to our understanding.
i divide payments into 4 groups: things you’re getting now, things you got before, things you’re going to get later, and things you hope to get but the odds are against it.
this last group is very large and is partly created by fluctuations in the value of currency, changes in interest rates, consumer pricing, etc, so that people never really experience it as a gamble. but of course any time you turn over your personal power to the group, the group is going to revalue it out of your hands in some way. house always wins; house always takes something off the top.
although virtually nobody is paying for what they think they’re paying for when they spend money. generally people trade future-money for now-money because they need now-money to replace then-money. although that sounds weird – even when you buy something, you’re not actually paying for it. the seller has already paid for it. you are giving the seller money to use to buy something else – and the beauty of this is, the seller may have borrowed money from you, through a bank, to have the thing on shelf for you. blur the lines and you’re paying yourself back for something that you already owned. i get very confused…
okay don’t talk about that unless you think it’s definitive… it’s all OT…
sorry, that should have been “originating value,” and by it i meant, it’s impossible to isolate a single event in the world as an unconnected “purchase.”
Chris wrote: “What you get out of the fund when you become eligible is linked to what you put into the fund, but there is no one-to-one accounting of dollars-in, dollars-out as if it were a personal savings account….” Interesting; I had sort of had the impression that there was such a one-to-one accounting, but it looks like I was wrong. In case anyone else is interested, the Social Security website has a page about how retirement benefits are calculated that gives more info.
The site also has some interesting FAQs about Social Security history, among other things.
Oh, and they also have some info about how the trust funds are invested, if anyone’s curious.
Finally, they also maintain a list of most popular baby names.
Irilyth writes: “it’s a gigantic non-means-tested entitlement (i.e. the government just promises to give people piles of cash, which it intends to raise by taxing other people, with no check of whether anyone needs the money)”
From my experience with older folks, it’s not “piles of cash”. My relatives who received SS receive(d) between $500 and $800/month.
True, this is independent of any other income. One grandparent has this as sole income source, and is in Section-8/HUD type housing as a consequence; the other grandparents/greataunts invested in many other things along the way, and are in self-funding rather spiffy retirement aparentments.
Of course, I’d have to go look at the data to know how typical this income level is.