Investing Social Security (previously "Wow Bush got something right")

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@19ForMe

I disagree. From the perspective of the third party bond holders, what matters is the treatment of third party bondholders. They just want to be paid. Anything that makes it more likely that they will be paid is good news for them.

Quite.

Let’s take an extreme example. If in a fit of insanity, Congress abolished Social Security, kept the payroll tax and nullified the special bonds held by Social Security the entire US Government would be on much firmer financial footing. It is now much more likely that the existing third party bonds will be repaid.

The only harm done to bond holders will be the uncertainty of what will happen next once every Congressman is chased from office by a mob of voters.

But your second paragraph negates your first. Bond investors are not idiots. They realize perfectly well that any act of congress could be overturned by a sufficiently pissed off electorate. Abolishing SS or even simply reniging on the SS trust fund could bery well be an event sufficient to piss off enough voters to make their bonds less safe.

Some people might see the abolishment of SS as a cost saving measure. But those would be very short sighted people indeed. Not very likely to invest in long term government notes.

I agree the President shouldn’t dismiss it as mere IOU’s but the oposition shouldn’t equate them with third party debt.

I agree as well. Both sides treat the SS trust fund in an overly simplified manner. It is either dismessed as IOUs virtually equivilant to the IOU I have from my neighbor, or it is treated as an asset in and of itself that never has to be repaid from the general tax revenue.

If Congress decides to eliminate the debt, they can.

But this is true of many things. This is true of the debt owed to other parties. This is even true of the money supply. Congress could simply order the printing of a few trillion dollars. The problem is that none of this, not fooling around witht he money supply, not reniging on debt owed to 3rd parties, and not canceling debt owed to independant government agencies can happen in a vacuum. Any of these actions would have similar destabilising effects on the American economy.

Social Security simply wouldn’t press the case in court because Congress makes that decision for the Agency.

Perhaps. But I’m not sure a suit brought by the AARP on behalf of its members would be thrown out of court immediately. Especially if the abolishment of SS was not phased in in some way.

If a later Congress decided to reimpose the debt, that would also be their perogative.

Quite.

The debate is not really about the bonds held by Social Security. It is about the social contract we live with. The Congress and President will make that decision on political grounds.

Yes, but they will make such a decision taking advantage of advice handed down to them in the form of laws, docuemnts, and other writings of what was intended by earlier congresses, presidents, and electorates in general. It is true that Congress could abolish SS with a simple majority vote. But that fact makes the likelyhood of such an event seem muich more than it is. The truth is that reniging on the national debt, either third party or that held in trust funds, is unlikely in the extreme.

[RTFirefly]

@Sam Stone

At what point did Bush or anyone else suggest that the debt would not be paid?

The point is, once you reach the point where the influx of money into the system is less than the annual liability, the government must start subsidizing the system from general revenues.

Instead of thinking about debt instruments, think in terms of wealth. This is real wealth we’re talking about here, regardless of how the paper is worked out. The root problem is that fewer people will be creating wealth, and more people will be spending it.

And those fewer people will be more productive. You know all that stuff about how in 1940, there were 16 (or whatever) people working, for every retiree? Think of how little wealth they produced, in today’s terms.

It’s completely analogous to the shrinking farm population. The reason we only need 3 workers to support one retiree nowadays is kinda like how one person can grow food to feed 100. Productivity.

Getting back to that other issue, if borrowing to repay the bonds in the Trust Fund bothers you, the existing Federal borrowing must give you a coronary. Maybe we should repeal Bush’s tax cuts or something; the economy did quite well at the old rates, so it’s not like we’re stepping out into a hazardous unknown here.

[RTFirefly]

@pervert

Both sides treat the SS trust fund in an overly simplified manner. It is either dismessed as IOUs virtually equivilant to the IOU I have from my neighbor, or it is treated as an asset in and of itself that never has to be repaid from the general tax revenue.

I strongly disagree with this. Pretty much every critic of Bush’s plan that I’ve read over the past few months has focused in, laser-like, on the enormous non-Trust Fund deficit as the real threat to Social Security. It’s clear to the entire left blogsphere of any note that if the government as a whole was being run in a fiscally prudent manner, the only threat to Social Security would be proposals such as Bush’s, because there’d be no issue of how to pay back the bonds.

This is why Bush’s Social Security plan is regarded as a plan to gut the system on behalf of the rich: first, you initiate a Social Security tax that generates a surplus; second, you use that surplus to enable big tax cuts, and mask the fact that the true budget deficit is even bigger than it looks; and third, you say, Omigod, in order to redeem the bonds, we’ll have to raise taxes - well, we can’t do much of that, so maybe everybody should just compromise a bit, including you elderly people…guess we’ve got to cut your benefits.

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@RTFirefly

I strongly disagree with this. Pretty much every critic of Bush’s plan that I’ve read over the past few months has focused in, laser-like, on the enormous non-Trust Fund deficit as the real threat to Social Security. It’s clear to the entire left blogsphere of any note that if the government as a whole was being run in a fiscally prudent manner, the only threat to Social Security would be proposals such as Bush’s, because there’d be no issue of how to pay back the bonds.

But this is exactly the problem. This is simply not true. The threat to the federal budget represented by SS is enormous with or without the other debt. Completely repeal the Bush tax cuts and almost no change whatsoever will occur in the actuarial and the financial situation which is causing SS to be a concern.

This is why Bush’s Social Security plan is regarded as a plan to gut the system on behalf of the rich: first, you initiate a Social Security tax that generates a surplus; second, you use that surplus to enable big tax cuts, and mask the fact that the true budget deficit is even bigger than it looks; and third, you say, Omigod, in order to redeem the bonds, we’ll have to raise taxes - well, we can’t do much of that, so maybe everybody should just compromise a bit, including you elderly people…guess we’ve got to cut your benefits.

Just like this. This characterization is exactly what I was talking about. Thank you very much for proving my point.

Having said this, I should back off of my statement a little. I did not mean that all those opposed to the plan treat the trust fund simplistically. Only that some do.

One question though.

And those fewer people will be more productive. You know all that stuff about how in 1940, there were 16 (or whatever) people working, for every retiree? Think of how little wealth they produced, in today’s terms.

It’s completely analogous to the shrinking farm population. The reason we only need 3 workers to support one retiree nowadays is kinda like how one person can grow food to feed 100. Productivity.

There is a huge difference, you know. How much harder do we ask current farm workers to work than we asked those workers 100 years ago. I know you know how much more income we take from current workers (as a percentage) in order to pay for current retirees. Why, if they produce so much more (8 times by your math) do we need to take such a higher percentage of their wages (12 to 16 times by my math)?

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@RTFirefly

This is why Bush’s Social Security plan is regarded as a plan to gut the system on behalf of the rich: first, you initiate a Social Security tax that generates a surplus; second, you use that surplus to enable big tax cuts, and mask the fact that the true budget deficit is even bigger than it looks; and third, you say, Omigod, in order to redeem the bonds, we’ll have to raise taxes - well, we can’t do much of that, so maybe everybody should just compromise a bit, including you elderly people…guess we’ve got to cut your benefits.

Just for the sake of reducing ignorance, allow me to go through this point by point.

1st Bush did not initiate the increase in the payroll taxes. Those have been happening for a long time now. They started in the 70s so you can’t blame them on Reagan either.

2nd the budget deficits you are talking about have been going on for a long time as well. The vast majority of the SS trust fund has always been invested in special treasury bills. There was some attempt to put a little of the money elsewhere, but that ended in the 90s.

3rd there is no plan to default on the SS trust fund. There has never ever been a call for it. All of the money invested by the SSA in government treasury bonds will be paid back to the SSA out of the general fund.

Finally, Bush’s plan does not call for any elderly people to accept reduced benifits at all. It calls for the benifits of future retirees to be reduced. Bush has not called for retirees’ benifits to be cut anymore than Democrats (by favoring not changing the law at ll) are calling for all future benificiaries to accept full benifits one day and 70% benifits the next.

[Steve_MB]

@pervert

No, this will not default on the treasury bills. It might amount to a default on a promise to retirees, but that is not the same thing. Cutting benifits is not in and of itself a default on the SS trust fund. Go back and read the laws which created it. They never promised to secure specific benifit amounts.

Er, that’s what I just said – if the government decides that it doesn’t want to pay the debt represented by the Social Security “trust fund”, they can just change the rules so that they don’t owe as much (or even so they don’t owe anything, though that would probably push beyond the limits of what they can get away with politically).

[RTFirefly]

@pervert

But this is exactly the problem. This is simply not true. The threat to the federal budget represented by SS is enormous with or without the other debt. Completely repeal the Bush tax cuts and almost no change whatsoever will occur in the actuarial and the financial situation which is causing SS to be a concern.

OK, let me get this straight: the problem with the Social Security Trust Fund is that the government has to redeem those bonds sometime for it to have meaning. And the dubious fiscal situation of the U.S. government is the primary threat to redemption, assuming no changes in the law.

You agree with all that? Good.

Then bringing the budget more in balance increases the likelihood that the Trust Fund bonds will be redeemed without major problems. Right?

And the actuarial situation of SS with the Trust Fund having meaning is much better than if it has none. That should go without saying.

Just like this. This characterization is exactly what I was talking about. Thank you very much for proving my point.

Well, that’s sweet of you to say that. And your problem with what I said is…?

Oh, nevermind: I see you address that in the next post. Lemme follow you there in a moment.

There is a huge difference, you know. How much harder do we ask current farm workers to work than we asked those workers 100 years ago. I know you know how much more income we take from current workers (as a percentage) in order to pay for current retirees. Why, if they produce so much more (8 times by your math) do we need to take such a higher percentage of their wages (12 to 16 times by my math)?

1. Farm workers have a much easier life now than 100 years ago.
2. I didn’t do math; I did an analogy. No computation. (Of course, I don’t see your math either, but I really don’t care.)

[RTFirefly]

@pervert

Just for the sake of reducing ignorance, allow me to go through this point by point.

1st Bush did not initiate the increase in the payroll taxes. Those have been happening for a long time now. They started in the 70s so you can’t blame them on Reagan either.

OK, I should have said “Bush’s Social Security plan is regarded as part of a plan to gut the system on behalf of the rich.” (Or maybe the culmination of a plan…)

And it is, in many quarters. That’s fact.

I was referring to how many people perceive the Bush Social Security plan, and why. But I’m willing to debate the plausibility of their perception with you, just to be the devil’s advocate.

First, the payroll tax was increased to its current level, with the intention of building up a surplus to cushion the Baby Boom retirement years, in 1983. The plan was developed by a commission headed by Alan Greenspan, who is still a rather big player in this game.

2nd the budget deficits you are talking about have been going on for a long time as well. The vast majority of the SS trust fund has always been invested in special treasury bills. There was some attempt to put a little of the money elsewhere, but that ended in the 90s.

Yeah, since about FY 1982. Perfect timing - the Social Security surpluses started masking the size of the Reagan deficits right away. Those deficits were induced by tax cuts on the rich. Same as the more recent ones.

3rd there is no plan to default on the SS trust fund.

Really? Can you speak for everyone? Wow! Didn’t know you were psychic.

But really, what’s the point of repeatedly saying that there’s no Trust Fund, that all that’s there is a pile of (implicitly worthless) IOUs? Maybe Bush is being Paul Revere here, and saying, “Watch out - the Trust Fund is in danger of being worthless unless we do X” but I don’t see how Bush’s words can easily be made to fit that model. To many people (and to me; this is one place where I agree with the conspiracists), Bush sure appears to be selling the American people on the notion that the Trust Fund is a pack of foma, so nobody will be particularly surprised if, sometime not too far down the road, one of his successors does say, “look, we can’t afford to redeem these bonds.” To the extent that the citizenry has already accepted the meaninglessness of the Trust Fund and its contents when that moment comes, the easier it will go down, and the less opposition there will be, on that day.

The economics of it are unavoidable: there will come a point, sometime in the next decade or so, where we either increase taxes substantially, or we cut programs like Social Security and Medicare substantially. Bush is one of a generation of Republicans that has done their damnedest to turn tax cuts into a religion, and tax hikes into apostasy. You see where this is going. They can too.

There has never ever been a call for it. All of the money invested by the SSA in government treasury bonds will be paid back to the SSA out of the general fund.

And a law will be passed so that the SSA hands it right back to the general fund.

Finally, Bush’s plan does not call for any elderly people to accept reduced benifits at all. It calls for the benifits of future retirees to be reduced.

That’s what he says, but he’s only in office for another 45 months.

Bush has not called for retirees’ benifits to be cut anymore than Democrats (by favoring not changing the law at ll) are calling for all future benificiaries to accept full benifits one day and 70% benifits the next.

But if the consequences of our continued deficits are that today’s over-55s have to have their benefits cut, in order to fund Bush’s tax cuts, then that IS in fact what he’s arguing for.

Just as any Demcrats who argue that Social Security should never, ever increase its revenue stream, or cut benefits until the Trust Fund runs out, are in fact supporting a benefit cut (of whatever size it turns out to be - bigger if earlier, smaller if later, zero if never) when the Trust Fund is exhausted.

However, they point out that (a) there’s no guarantee that the Trust Fund will be exhausted, as one of the Trustees’ projections points out, and (b) even if the Trust Fund goes bust as early as 2041, this is a smaller benefit cut than the one required by Bush’s plan. And the point is that it’s only fair for Social Security ‘reform’ to yield a better outcome than doing squat.

[pervert]

@RTFirefly

OK, I should have said “Bush’s Social Security plan is regarded as part of a plan to gut the system on behalf of the rich.” (Or maybe the culmination of a plan…)

And it is, in many quarters. That’s fact.

Yes, but what quarters those are.

First, the payroll tax was increased to its current level, with the intention of building up a surplus to cushion the Baby Boom retirement years, in 1983. The plan was developed by a commission headed by Alan Greenspan, who is still a rather big player in this game.

Yes. But it was increased many times before that for the same reaason. It was not a new thing or really any sort of deviation at all.

Here is a very detailed history of SS.
After Social Security numbers were assigned, the first Federal Insurance Contributions Act (FICA) taxes were collected, beginning in January 1937. Special Trust Funds were created for these dedicated revenues. Benefits were then paid from the money in the Social Security Trust Funds. Over the years, more than $8.7 trillion has been paid into the Trust Funds, and more than $7.4 trillion has been paid out in benefits. The remainder is currently on reserve in the Trust Funds and will be used to pay future benefits.

Also this:

The main purpose of the 1977 Amendments was to address the financing of the program. Shortly after passage of the 1972 legislation, it became apparent that Social Security faced a funding shortfall, both in the short-term and in the long-term. The short-term problem was caused by the bad economy, and the long-term problem by the demographics associated with the baby boom. By their 1975 report the Trustees said the Trust Funds would be exhausted by 1979. This financing shortfall was addressed by the 1977 Social Security Amendments. These amendments raised the payroll tax slightly (from 6.45% to the current 7.65%), increased the wage base; reduced benefits slightly; and “decoupled” the wage adjustment from the COLA adjustment. These fixes restored the long-term balance of the program for the next 50 years (but not the full 75 years used by the actuaries). It was hoped the amendments would prevent an expected short-term financing problem in the early 1980s. This hope would prove elusive as the major amendments in 1983 would be needed to avoid the short-term problem, and to address the remaining long-range program deficit.

Yeah, since about FY 1982. Perfect timing - the Social Security surpluses started masking the size of the Reagan deficits right away. Those deficits were induced by tax cuts on the rich. Same as the more recent ones.

Nope. Simply not true. SS trust funds have been in existence for a long time. And they have been using special treasury bonds for much of that time.
Here is a history of the surplusses SS runs. It specifically states:
*Even though we presently have more FICA taxes coming in each year than benefits paid out, this has not always been the case. Since 1937, there have been 11 years in which benefits paid out exceeded income and so the assets of the Trust Funds had to be spent to make up the difference. This cashing-in of the Trust Fund bonds amounted to about $26 billion in those 11 years.

(Note: In actual practice the Trust Funds are cashing-in bonds all the time, not just in periods of income shortfalls. The Trust Funds regularly purchase new bonds and redeem mature ones (“rolling over” much of the debt) and the benefits paid are from a combination of new tax revenues and redeemed bonds. It is difficult in any given year to say precisely what part of the benefits paid come from new tax revenues and what part form redeemed bonds. However, in the 11 years identified below, since payroll taxes could not cover the benefits paid out, we can say fairly precisely that at least this amount of the benefits paid came from redeemed government bonds.)*

Really? Can you speak for everyone? Wow! Didn’t know you were psychic.

Actually, on this issue, yes, I can. The SS trust fund is held in Treasury bills. These are the same pieces of paper (with extremely minor differences) that you and I (and everyone else) can buy as an investment in the US government. They are backed by the full faith and power of the United States government. As someone else noted, just like the money. The only way to default on these notes is to declare that this full faith is not worth nearly what everyone thought. The economic repercussions would be enourmous.

But really, what’s the point of repeatedly saying that there’s no Trust Fund, that all that’s there is a pile of (implicitly worthless) IOUs?

But I don’t think that is an accurate representation of what has been said. And just to cover all the bases, I think I started this conversation saying that the extent to which it is accurate I disagree with. The point of the oversimplification IMHO is to draw a distinction between the SS trust fund and private accounts.

Maybe Bush is being Paul Revere here, and saying, “Watch out - the Trust Fund is in danger of being worthless unless we do X” but I don’t see how Bush’s words can easily be made to fit that model.

To many people (and to me; this is one place where I agree with the conspiracists),

could you point out where you disagree with them? Just curious.

Bush sure appears to be selling the American people on the notion that the Trust Fund is a pack of foma, so nobody will be particularly surprised if, sometime not too far down the road, one of his successors does say, “look, we can’t afford to redeem these bonds.” To the extent that the citizenry has already accepted the meaninglessness of the Trust Fund and its contents when that moment comes, the easier it will go down, and the less opposition there will be, on that day.

And now we have gone back into the quarters we spoke of above. What quarters they are indeed.

The economics of it are unavoidable: there will come a point, sometime in the next decade or so, where we either increase taxes substantially, or we cut programs like Social Security and Medicare substantially.

This at least we agree on.

And a law will be passed so that the SSA hands it right back to the general fund.

What was that about prognosticating?

However, they point out that (a) there’s no guarantee that the Trust Fund will be exhausted, as one of the Trustees’ projections points out,

Could you cite that for me? I missed it.

and (b) even if the Trust Fund goes bust as early as 2041, this is a smaller benefit cut than the one required by Bush’s plan. And the point is that it’s only fair for Social Security ‘reform’ to yield a better outcome than doing squat.

No, that is not the only way to be fair. The way to be fair is to re examine the purpose of SS in the first place. Is its main purpose to provide a safety net so that the elderly do not have to eak out their retirment in poverty? Or is it to force the country to pay ever increasing amounts of the GDP toward retirment benifits? You seem to think it is the latter. I tend to think it is the former.

[pervert]

Just to be thourough, I found this regarding where the SS trust fund is invested.

cite

• By law, all income to the trust funds that is not immediately needed to pay expenses is invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are “special issues.” Such securities are available only to the trust funds.

In the past, the Trust Funds have held “public issues” (marketable securities available to the general public). Unlike marketable securities, special issues can be redeemed at any time at face value. Marketable securities are subject to the forces of the open market and may suffer a loss or enjoy a gain if sold before maturity. Investment in special issues gives the trust funds the same flexibility as holding cash. *

The SS trust fund (again, in existence since the begining of SS) has never been invested in the stock market. It has always been invested in Government Bonds. There was a time when they invested in bonds available to the public. Now they are entirely invested in special bonds only available to trust funds.