Maybe I’m missing some of the subtleties of Cecil’s recently reprinted column on Social Security, but it seems to me his numbers didn’t add up. The question points out that the surplus money being collected (via taxation) for future higher Social Security payments is not being saved and implies this is a bad thing. To paraphrase Cecil’s answers, he says that while there is a certain amount of duplicity involved, it’s okay because everything balances out in the end. He says that this is because the United States is economically sound enough to pay the SS debt when it actually becomes due.
I agree with his point but I don’t think it necessarily follows that there is no difference between spending the money and investing it in Japan or GM (to use the examples Cecil gave). Let’s say that the SS expenditure for the year 2000 is $90,000,000,000 and it’s estimated that the expenditure for the year 2020 will be $110,000,000,000. To anticipate this future increase, the government collects $100,000,000,000 in SS taxes in 2000. Now if they take the $10,000,000,000 surplus and loan it to Japan, the Japanese will be obligated to pay it back in 2020, so there will be no need to collect taxes for that sum. But if the US government spends the surplus in 2000, it will then have to collect the full $110,000,000,000 in 2020 in order to make that year’s payment. So that expenditure will have to have to be paid for twice. In Cecil’s words, we’ll be “faced with the prospect of paying crushing taxes to finance the golden years of [our] obnoxious elders” without even having had the advantage of lower taxes before hand. And paying twice for the same expenditure would seem to qualify as a scam to me.
Cecil wasn’t saying that investing in Japanese bonds or GM stock was no different than what is being done. What Cecil said was that the government ‘invests’ in America on the assumption that America is least likely to default its obligations to itself. Obviously, to the extent it does this, America the non-Social Security paying entity ends up owing to America the Social-Security paying entity in the future; but this isn’t quite the same as Peter paying Paul, because the revenue streams are generated in different ways. Yes, it’s an awfully thin line, but as we are proving year after year, American politicians will never sacrifice Social Security, so future payment of the obligation seems pretty well assured.
(Course, you might need to be 75 to begin getting it when y’all retire in 2040!)
Thanks, Little Nemo, you illuminated the point that bugged me. We collect the money early but then spend it, then we still have to collect new money to pay it back.
DS points out the income streams are separate. We pay SS taxes one place, and other taxes somewhere else. The surplus SS taxes that are “invested” go into paying debts the other pool of money would go for, and when it comes time to pay more to SS, then we have to collect the income on that other pile.
I guess what bothers me about this is somehow Americans are still going to have to pay taxes somewhere to pay that extra SS benefits. It may not come in SS taxes, but will come in income taxes instead.
Nemo, your link is busted. You put the period for the end of the sentence too close to the link and it got sucked in. I think this is the fixed link. http://www.straightdope.com/classics/a5_027.html
DS, I’m not disputing that the United States is economically sound; more so than Japan or General Motors. Nor am I saying it’s not a good idea to collect taxes to pay off the deficit. What I’m saying is that the US is theoretically collecting taxes now for the purpose of paying out Social Security later and that money is not going to be there. The United States is not investing the money in any realistic sense of the word; ie by purchasing any assets which it will later be able to sell. In my opinion, collecting taxes for one purpose and spending it on another (regardless of how good that second purpose is) and knowing you’ll have to recollect for the original purpose is a scam. No project is so noble it should be paid for twice.
As for the idea that different revenues are generated differently, I’d say this whole discussion is an illustration of how weak that argument is. Right now, the government is theoretically collecting SS taxes seperately from other revenues, but as we’ve all conceded the money is being spent on non-SS expenses.
If the SS money wasn’t being invested in the Treasury Bonds, then those Bonds would be sold to someone else and the SS money would be invested somewhere else. The end result would not be any different (except perhaps more or less money would be earned in interest or lost through market devaluation, depending on what the SS money was invested in).
The problem with the way the SS trust fund is now set up is that it gets lumped together with the rest of the federal budget. How much taxes are cut, or how much new spending gets approved, is largely dependent on how well we think we’re doing. Currently, the federal budget is running a surplus of say $50b per year (probably not the real number, but I’ll pick some for illustration). We, through our legislators and president, say “wow, we’ve got extra cash - let’s cut taxes or give out more money to loafers.” The problem is that the surplus includes Social Security revenue, which should be thought of separately. If you did, the $50b surplus would turn into a $150 deficit, and we’d be a lot tighter with our spending.
There is some talk about investing the SS fund in other vehicles besides treasury bonds. An idea that has come up, but which scares the hell out of us knee-jerk conservatives, is investing it in the stock market. Could you imagine the government suddenly becoming the biggest shareholder in most corporations, what with its tendency to want to pressure anyone with its money into the “correct” policies? <shudder>
Cooper, I’ve think you’re missing the point. If the Treasury Department sells a bond to you or me, they’ve just collected some income. If the Treasury Department sells a bond to the United States, it’s a zero sum game. Basically, this is the difference between selling your stereo to your neighbor for a hundred dollars and selling your stereo to yourself for a hundred dollars. One represents real income and one doesn’t.
Curt, I appreciate your point about the United States putting money into private business either domestic or foreign. In addition to your concerns about the government having too much influence over business, I’d worry about business having too much influence over government. Imagine what the impact would have been on the Justice Department during their anti-trust hearings if the US owned a 25% share of Microsoft. Or if it owned a 25% share of Netscape. In either case, I’d see a problem.
I don’t quite see the relevance of this analogy - but maybe it’s just me. My take is, look at it from the point of view of the SocSecAdministration: you have surplus money now, today. Assuming that you won’t lower your portion of public taxes (we ARE talking about building up a fund to draw against in future - and about bureaucrats) you have to do something with that money. You could:
“Send” the money to the Treasury (it’s just accounting figures, not actual bills) with instructions to hold it for the future, or take it out of the Money Supply now but reissue it later, with probable consequences on inflation/deflation both times. (You could do the same thing with a bank, but why?)
Buy hard “stuff” (real estate, for example), with then probable liquidity problems in future AND with the problem that you’re likely to be on the wrong side of the supply/demand curve both times (you buy billion$ worth of land, driving prices up and guaranteeing yourself less land for your bucks, then you sell billion$ worth of land driving prices down and guaranteeing yourself less bucks for your land);
Buy equities, giving yourself the same supply/demand headaches as if you’d bought real property, replacing your liquidity problem with greater risk, and - as others have pointed out - REALLY opening the door to government-industry malfeasance.
Lend the money to someone against a promise for future payment.
Let’s examine the last choice, which looks least disruptive, because it’s politically and economically (relatively) safe PLUS that money stays in circulation. By lending to “the US Government” you get the best credit risk possible, period. If you go onto the corporate bond market with your billion$ you suffer the same supply/demand problem as if you’d put the money into equities (on the purchase side, anyway; on the “sale” side you just let the bonds mature), and if the US economy tanks someday it’s always riskier having your money in private hands than with the Treasury.
Now from the “government” side, that is, all the other branches. You have this huge budget deficit. You’re trying to build up the military, or pay for all those “entitlements,” and pay your rent, and pay your people, and etc. You need money, or you need to cut spending. Of course you look to get more money first. If you just issue notes and bonds and bills from the Treasury exclusively to “the market,” there’s not enough liquid money to soak them all up, interest rates skyrocket, the economy goes in the pooper AND you’re still short. Or look! You could take those funds the SSA is trying to do something with! So you do, and you promise to pay back in 30 years, and you spend them, along with whatever else you could get from the Treasury.
That’s what the National Debt is: money owed due to overspending. Some is owed to private citizens, some is owed to other governments, some is “owed” to the SSA. From this point of view, it’s not worth saying that it’s “a different kind” of owing. Do we have to pay the National Debt off? Yes, and with tax money. When we do, each party decides what to do with the funds liquidated on maturity of the instrument; the SSA specifically is supposed to put it into paying SS Benefits.
So look at the whole thing as a “smoothing” of the past and future process of spending government revenues, with the added wrinkle of a politician’s promise that Social Security is already partly funded for the future. In theory we are no more - or less - paying for something “twice” than if the feds had raised all those deficit-spent funds privately; the “extra” payments are called “interest.” Things could have been done differently (like, spending could have been cut), with different effects, but that doesn’t mean this way was tricky and illegitimate, and the way things were actually done was a lot less disruptive to the status quo and the economy than what might have happened.
(DISCLAIMER: Of course, ethics and morals and questions of the place of government and taxes are a separate question from that of how the budget deficit, the National Debt, and the projected SSA shortfall were actually handled. Those questions probably belong in Great Debates. This was just supposed to be an explanation.)
It is no different. The Treasury Department doesn’t get ‘income’ by selling a bond, they get cash in exchange for a liability (with interest offsetting the difference in time between payment of the liability). Their net worth has not changed at all. Different departments of the government (and different departments of universities, corporations etc) all operate on a cash basis with each other. For example, I work in an I.S. department. We charge our client for our services. Our client happens to be in the same company as us, but that hardly matters - they still have to work it into their budget. If the treasury department sells bonds to the SSA - well that is really no different than a corporation selling a bond to the SSA (with the nice exception of the supply/demand problem that would be incurred by buying so many bonds).
I understand the financial dealings of interdepartmental budgeting. And I fully support the idea of deficit reduction (I’d even favor a tax increase for that purpose). What I object to is the deception of paying in 2000 for the 2020 Social Security bill when I know I will have to pay for it again in 2020.
Oh for God’s sake, Little Nemo, get a grip on what is really happening! <lol>
Look, in 2020, the SSA has to pay out X dollars in social security payments. Of that X, they have determined they likely will be collecting some figure y from employees, where y is less than x. So, they are presently taxing employees more than they pay out and putting that money away for future use. When 2020 comes, that will include z, which is x-y. In other words:
x = money due 2020
y = money raised 2020
z = money invested 2000
Now, let’s look at the government side of things. In 2000 they are spending A. They are raising by taxes B, where B is less than A (possibly still true if you take the SSA surplus away from the overall taxes raised). They need C, where C = A-B.
Now, the Government can get C from a lot of sources, that is, they can borrow from many people/companies. When they borrow C, they end up owing C+i down the road, right? In 2020, they have to pay a portion of C+i back in order not to default.
So, regardless of where SSA invests, they will need to raise z now; regardless of where the Government borrows from now, they will have to pay C+i in 2020. You aren’t paying the same thing twice, your are paying two different things once each.
And just where would that be? If you are referring to the interest bearing IOU’s SSA accepts from the Federal gov’t., just how is this an ‘investment’, since the interest ‘earnings’ to the SSA will be additional tax dollars imposed by the Federal gov’t on the citizenry? (a tax by any other name is no less egregious).
Again, please explain how you figure the SSA ‘invests’?
DS, the whole point of this thread is that the government is not “putting that money away for future use.” It’s being spent now in 2000. When 2020 rolls around there will be no “z” to add to “y” so we will have to pay just as much for Social Security in 2020 as we would have if we had not paid any extra in 2000.
There is no trust fund. I can write myself an IOU for $3 trillion dollars, but that doesn’t mean that I’m “solvent” or “not solvent” in any sense.
This gets tricky because the government has the power to unilaterally create or destroy money. So, whatever the Feds bring in from SS taxes, they either spend or destroy, writing themselves an IOU in place. This has no effect on the real national “debt,” since the deficit that feeds into that is a function of government spending minus tax funding, as well as monetary creation and destruction by the Fed. A debt to one’s self is not a debt.
The Fed, furthermore, tends to overrule any fiscal contraction (i.e. surpluses) by issuing more money to counteract it. So, we’re faced with a choice–tight budgets and loose money, or the reverse. I am of the opinion (which I have not totally verified yet) that the latter is a more sound option–SS tax surpluses do create a bit of a disincentive for hiring and work, and they hit lower-income workers particularly hard.
This could all be avoided by a private-account system similar to Chile’s successful reforms. The question is how to get from here to there, since it would likely require a significant monetization. There are inflation risks due to concavity in output and possible stochastic discounting of uncertain future benefits. But, this is a bit technical.
The point is, the high taxes are designed to give Congress some money to spend without appearing to run deficits. They’re also, perhaps unwittingly, used to play the politics of interest groups by offering special deductions or exemptions. Politicians act according to incentives like everybody else. To believe not is naive.
You people don’t READ do you? SSA has to pay money later. It is taxing now to make those payments later. It invests the money it receives now with the federal government because it knows the federal government won’t fail to pay it back with interest later.
The feds need money now. They borrow it from the SSA because it is a readily available source of money. They get the money on their terms. Makes it easy, safe and reliable for them. They have to borrow from somewhere, they have to tax and pay later for that borrowing.
Whether they do it with themselves, or with others they have to do it anyway. Same taxes regardless!
I’m glad to hear you’re enjoying yourself DS, but I think you’re the one who needs to reread what’s been said. Keep the following in mind while you do so:
Spending is not necessarily a form of investing.
The money paid out on Treasury Bonds interest is collected through taxes.
It doesn’t matter. You’re confusing two different issues.
For the SS trust to be invested in US bonds is as sensible as anything else – more sensible, on the assumption that the US government is more likely to still be in business 20 years from now than any other given entity.
On the other hand, the government clearly cannot continue deficit spending indefinitely. That’s being worked on – but it’s still a different issue. If the US government goes belly-up, and cannot pay off the SS, then the SS will fail – but the failure of SS will be, comparatively, a very minor problem.
John W. Kennedy
“Compact is becoming contract; man only earns and pays.”
– Charles Williams
By the way, for those of us panicked - or at least worried - about the coming Social Security implosion as painted by the politicians and the media, perhaps this article would be interesting. Caveat emptor, of course.
Basically, Dr. Kellner’s position is that Social Security ain’t broke, so let’s move on to a real problem. (He’s the economist at CBS MarketWatch.) The core of his argument is:
[quote]
…The main reason why Social Security is projected to run out of funds stems from a very pessimistic growth rate assumed in the projections.
The [Social Security] actuaries project a growth rate of only 1.4 percent over the next 75 years—less than half the 3.5 percent rate of the past 75 years. Just adding another three-quarters of a point to the projected figure of 1.4 percent generates enough in added revenues and reduced benefits payments to swell the trust funds to nearly $10 trillion by 2032.
And this growth rate of 2.1 percent, I might add, is less than the 2.5 percent average rate of the 1990s.[/unquote]
So the actuaries are doing their jobs by planning for the worst case scenario. Maybe the rest of us should just stick our heads in the sand and wait for it to all blow over…at least, that might be safer than betting it all on Internet stocks.
DSYoung:
Either you’re on crack, employed by the federal government or both…
What everyone is saying here is that the whole cycle of tax and (deficit) spend is a downward self-perpetuating spiral.
Exactly. But it is not ‘investing’ in anything that will provide for the later payments. It is giving the money to another arm of the federal government to piss away. Those of us who were taxed for the original money will be taxed again to repay it…kabeesh?
It just isn’t true. They don’t have to borrow. They shouldn’t borrow, and if they didn’t have this elaborate ponzi scheme, they
wouldn’t be able to borrow.
“No, its not foolproof…unfortunately, fools are very clever people.” --Joseph Caro
