* Dan Minette ([EMAIL PROTECTED]) wrote:
>
> 1950: 1156%
> 1960 180%
> 1970 101%
> 1975 63%
> 1980 23%
>
> This reflects a true, immediate crisis.
My god! You're right, it is the crisis of proportionally spaced fonts!
Oh, the misalignment! The pain! The exclamation points!!!
But seriously, I'm not interested in debating whether a clear problem
constitutes a crisis or not. There was clearly a problem with SS in the
80's. Instead of fixing it, they raised taxes and passed the problem on
to the next generation.
We clearly still have a problem today. We can do our best to fix it, or
we can put our heads in the sand and let the problem get bigger. When
I see a problem, I like to think about implementing a fix for it, not
debate what to call the problem (to paraphrase Bones, I'm an engineer
not a linguist!)
That doesn't mean that I'll support a proposal from Bush that is not
likely to improve the system. If Bush comes up with a flawed plan (or
even a good plan that he will likely screw up the implementation of), I
will point out the flaws and not support it unless/until it is made into
a workable plan.
> The plan that was put in place resulted in a very significant increase
> in the trust fund.
That significance is dubious. Numbers in a book do not constitute true
savings for the future. Think about how not one person, but an entire
generation can save for retirement. The best way is to reduce current
consumption and invest the savings in people and capital that will be
able to provide the goods and services that will be needed when the
generation retires. Most things you will need cannot be stockpiled (with
the possible exception of housing) so you invest in means of production
and in improving the knowledge base and skill of practitioners who will
provide needed services. There is no evidence that the trust fund had
this effect.
Alternatively, paying down government debt held by the public is a
reasonable way to "invest" the higher tax revenues. This is equivalent
to an investment that earns the return that the government is paying
out on Treasury bonds. This is a good investment since it means the
government will not have to pay interest on that portion of the debt
that was paid off. So the resources that would have been used to pay the
interest can instead be used to support the cohort's retirement.
However, there is no evidence that this occurred. Using your figures
on debt held by the public as a percentage of GDP, we started at about
26% (1980-1981, after Carter), went up to 48% after Bush I, and are at
38.6% today -- for a net increase from 26% to about 39% over the period
of trust fund growth. About the best you can argue is that the public
debt would have been even higher without the trust fund, but I think
this is a poor argument. Most likely, the public debt would have been
slightly higher, but the difference would have mostly been made up by
less wasteful government spending.
> It also was projected, at the time, that the trust fund would stay
> in the black for the next 75 years. That was a tremendous difference
> from dipping below zero during the next year ('81 report on '80 data,
> with the deficit being in '82).
Not so tremendous. Besides the dubious economic significance of the
trust fund, they should have known that they just moved the problem to
the next generation.
> After almost 25 years, we find these assumptions a bit optimistic.
> Further, they didn't adress what would happen after about 2058, and we
> need to now. So, we are looking at steps to eliminate the chance of
> going in the hole in '43 or so, and how to stay out of the hole for
> the rest of the century. I agree with you that we should take the
> steps now. But, I hope you can see that, after going through a real
> immediate SS crisis in the early '80s, why I would consider this a
> needed mid-course correction.
In other words, you want to repeat the mistakes of the past, make small
patches and pass the problem onto the next generation? _tCGS_ has
something to say about the "fix" in 1983:
"...during the 1996 presidential campaign, he [Bob Dole] debated
Bill Clinton and claimed to have 'saved Social Security'...In 1983
Dole served on the Greenspan Commission, which was headed by (now)
Federal Reserve Board chairman Alan Greenspan. The commission was
charged with putting Social Security on a long-term financial
footing. Greenspan, Dole, and the other commissioners did what, at
the time, seemed a reasonable job in adjusting the system's finances
for the next seventy-five years. But in ignoring the years beyond
seventy-five, they knew -- or should have known -- they were leaving
a big problem that would come back to haunt the country.
So here we are, in 2004, twenty-one years after Social Security was
'saved' and the current seventy-five-year entree of pain is a 2
percentage point hike in the payroll tax rate....
The fact that we're now in 2004 means that part of the reason
we're facing a seventy-five-year Social Security shortfall is
that the _current_ seventy-five-year projection window includes
twenty-one years that the commission ignored. It turns out that
about three-fifths of today's seventy-five-year funding shortfall
could have been anticipated in 1983. The other two-fifths represents
the commission's use of overly optimistic assumptions and technical
mistakes made in projecting future Social Security receipts and
payments. Ironically, the combination of commission omissions,
wishful thinking, and mistakes has left us today with a larger
seventy-five-year problem than the commission faced back in 1983....
For his part, Secretary O'Neil realized that the real goal is not
saving the Social Security system but saving our kids _from_ the
system. So he instructed the Social Security actuaries to include
in the Trustees Report a measure of the entree of pain that did not
assume the world ends after seventy-five years.
This analysis survived O'Neill's exodus and was included in the 2003
Trustees Report. Mind you, the analysis is tucked far away in the
back of the report....
http://www.ssa.gov/OACT/TR/TR03/IV_LRest.html#wp253771
...check out Table IV.B7, you'll se the numbers $3.5 trillion and
$10.5 trillion. The $3.5 trillion stands for the present value of
the Social Security's fiscal gap looking out seventy-five years. The
$10.5 trillion figure is the fiscal gap if we look out seventy-five
years as well as beyond seventy-five years.
Rather than being hidden, this table should have been the first
thing to appear in the Trustees Report because it shows that Social
Security's long-run finances are precisely _three times_ worse than
the public has been led to believe. Stated differently, we don't
need an immediate and permanent 2 percentage point hike in payroll
taxes to cover future Social Security benefit obligations. We need a
roughly 4.5 percentage point hike...."
> It depends on what he offers. I reserve the right to say his plan
> is a step backwards.
Me too.
> Take the plan that I suggested. By changing the maximum benefit
> now from being normalized by wage increases to being normalized
> by inflation, and by keeping this as an absolute maximum benefit,
> we'll have everyone making about 55k or more having increases tied
> to inflation. That corresponds, assuming the same shape of salary
> distribution, to just over 30k/year in today's money....which is close
> to the mean salary.
I don't think we disagree that a good way to reduce future benefits
would be to remove the wage indexing.
> I'm not saying that my rough numbers are better than the plans you put
> forth, but they do illustrate how modest the changes have to be.
Again, I'm not interested in arguing whether changes are "crisis" or
"modest".
A more interesting question is would it be possible to pass a bill for
such a slower benefit increase (inflation indexing instead of wage
indexing)? I suspect many people will not consider what they will
perceive as "cuts" in their benefits as modest. The AARP has already
come out strongly against it (remember when Greenspan mentioned the
possibility last year?)
> reduce the increase in benefits from 1.5%/year to 1%/year and arrive
> at close a 21% reduction in benefits in '45 or so smoothly. Plus,
> we'll have accumulated savings...which should allow a very smooth
> transition.
If that were the best plan on the table, I would support such a plan. I
hope we can pass something at least as good as that.
> Also, I'm not really opposed to the idea of investments for up to
> $1000 year taken from SS tax and benefits, as long as the progressive
> nature of SS is not undermined.
Let's hope that the plan Bush comes up with has that money being
invested efficiently in low cost index funds. If people could stop
arguing against privatization for bogus reasons and instead argue
against INEFFICIENT or OVERLY-EXPENSIVE privatization, then we might
have a chance of getting some low-cost accounts set up.
> In some sense, I think we may be talking past each other. I see your
> main point as being:
>
> We need to act now, so that the folks who retire in 2045 will not
> demand and obtain benefits that are such a large fraction of GDP that
> it will overwhelm the economy. And if that doesn't break the economy,
> the next generation of retiree's demands will.
Yes.
> You also think that switching over to an investment basis would be the
> best way to do this, given the political climate.
Maybe yes. I would state it more clearly as switching away from a
pay-as-you-go system to a fully-funded system (but not necessarily
privatization, although that would be good too). If that is what you
meant by "investment basis", then yes.
> (If this misses your main points, I'm sure you'll tell me. :-) )
I'll even tell you if you didn't miss my main points!
> We agree that this is a good time to face this problem. I think it's
> because doing it now will be relatively pain free...we don't need to
> reduce SS benefits, we just need to slow the increase in benefits
> after inflation.
Agreed, but I'm afraid many people won't see it that way...
> IIRC, I got the idea of utilizing a change from wage indexing to
> inflation indexing from you. I sketched it out the way I did because
> I think that those with an average yearly earnings of $10k/year should
> have an real increase in benefits with time, while those with an
> average yearly earning of $90k/year don't need a real increase. I'm
I'd rather not make any benefit increases over inflation automatic. I
think it should require an Act of Congress, at least. Although I might
be persuadable that small automatic increases for low income people
could prevent more expensive considered benefit increases periodically.
> Finally, let me ask a couple more questions to see if I understand you
> correctly. First, I see that we have two separate issues that are now
> being mingled:
>
> 1) The need to slow the rise in real benefits by 2050, one way or the
> other. (We could theoretically raise taxes, of course, but I agree
> with you that we shouldn't solve this with taxes.)
>
> 2) The possibility of switching part of SS from pay-as-you-go (with
> a trust fund for the demographic bulge) to investment, with the
> government turning future obligations into explicit debt in the
> process. This, as long as the government addresses the debt, should
> have a side benefit of increasing the savings rate.
>
> Switching to investment accounts for future workers will not solve
> #1. Future promised benefits will have to be reduced, no matter what
> decision is made with regard to #2. I believe that you said a partial
> switch to an investment mode would illustrate the need to do #1, but I
> don't think you believe that this switch would eliminate the need for
> reduced benefits.
Agreed.
> The second point is that I see a plan that gradually switches us from
> wage based increases in SS to inflation based increases in SS being
> a realistic type of solution. If my sketch doesn't work, we could
> use a number of means to have the required decrease in the projected
> benefits by 2045. Plus, once the switchover is accomplished, SS as a
> % of GDP should start to decrease. I think we both agree that this
> would accomplish the desired goals. I see us disagreeing on whether
> we would have the political will to actually do this.
Yes, good summary. I think part of the reason we disagree about the
political will is that you consider the changes in 1983 to be a
significant step toward fixing SS, whereas they look like duct-tape,
at best, to me. I think raising SS taxes is hardly a fix at all --
the real fix involves creating economically significant savings and
slowing the increase in benefits. However, raising payroll taxes is
politically much easier than reducing scheduled benefits: whenever
taxes and benefits are simultaneously raised, the young have to pay the
higher taxes and the old get the higher benefits. The old are much more
powerful politically than the young.
--
Erik Reuter http://www.erikreuter.net/
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