Monday, January 31, 2005

Responding to a commenter

In response to one of my recent articles on Social Security, reader Andrew writes;

If I may, I'd like to dispute your characterization of the motivations of "young voters." I've been getting my yearly statement from the Social Security Administration for a couple of years now, and they've been saying quite clearly that the system is going to run out of money before I retire. That's my motivation, and when the President addressed it, I said "About time."

I'm 28 and remember market crashes very well. We just had one, as you recall, but the economy didn't collapse as a result of it. Market crashes are only a worry of those who don't invest properly.

But, to your argument that Social Security is stable and solvent: please argue the point. I am given to understand that the number of workers to retirees is shrinking.

Okay, here goes. First, when you say that the Social Security system will run out of money before you retire, it all depends on what you mean by "run out of money." According to the Congressional Budget Office, a non-partisan, non-policy making arm of the Congress, Social Security outlays will exceed revenues- meaning more money going out than coming in- in 2019, which is decidedly within sight.

However, that alone doesn't mean the system will imediately fall apart. For many years, revenues exceeded outlays- more money in than out. That surplus was placed in the Social Security Trust Fund. When the outlays exceed the revenues, the difference comes out of the trust, which the CBO projects will only be depleted in 2052. Once the trust fund reaches depletion, all the money is due to come from the revenues collected. So while the system will run at a deficit in the foreseeable future, it will not go "bankrupt" any time soon. This is what I mean I say that Social Security is "solvent and stable."

As to the President's privatization scheme, the CBO has analyzed that as well. As I understand their analysis (and I am no economist) it doesn't appear to offer any susbtantial benefit. First, personal accounts would have no effect on the trust fund- according to CBO, it would still reach depletion in 2052 under the President's plan. Moreover, a retiree's benefits would be reduced at an amount equal to the annuity paid from the personal account. In other words, the retiree gets the same amount of money.

Which wouldn't be that bad if the retiree will be able to get more return than Social Security would be able to provide- put enough into the investment account, and you can opt out of Social Security altogether. Except you can't do that. Each taxpayer may invest no more than $1,000 per year, which is considerably less than the amount paid in Social Security taxes. In other words, it could supplement Social Security, but not replace it.

So if privatizing Social Security won't save it, why do it? Politics- the point of my posts from the last couple days. Individual accounts would be a boon to the banking and financial sectors- traditionally Republican contributors, and would undermine the strong association that Democrats have with Social Security. This White House is explicitly political, and so is this proposal.

This, of course, is no excuse to do nothing. The long-term viability of Social Security does need to be addressed, and sooner rather than later. The retirement age needs to be raised- people are living and working longer, and the law needs to reflect this. This could be phased in over a number of years- the retirement age stays 65 for people whose retirement is imminent- 55 and up, perhaps. For people between 50 and 54, raise it to 66- this will give those people enough time to adjust. Keep inching it upward until you get to people in their 20s, who have probably not even begun retirement planning and who will likely live into their 80s (if we do in fact keep living longer). Raising the retirement age both keeps people paying revenue into the system and defers benefit distribution. It's a simple solution, but there is enough time to try simple things before we try something radical.

3 comments:

Andrew said...

I'm sorry, but I don't believe that the Trust Fund actually exists. As I'm given to understand it, it consists of the Federal Government writing IOU's to itself, promising to pay when payment is demanded. If I am wrong in this, I would like to see the account that holds the excess Social Security money. Every 1040 I've ever looked at puts Social Security money and other money in the same pool of income and outlays.

I agree that the President's plan will not solve Social Security all by itself. To dodge this bullet, we are going to have to do a number of things; raising the retirement age and perhaps even raising the payroll tax among them (but hopefull not the latter, it kills the economy. Perhaps this is why the President wishes to tackle tax reform at the same time).

But we are going to need to move away from the sytem as currently constituted. We can't keep raising the retirement age forever; as it is, many Americans (blacks especially) never live to see their checks. As organized, SocSec is nothing more than a vast wealth transferrence device. It should not be confused with a pension plan. We cannot keep creating more and more expensive, while less and less effective, government mandates, like SocSec and Medicare. In the end, they threaten to devour wealth, rather than create it.

I take your point that the White House is being political. Attacking a bulwark of one's opponents is pretty much standard operating procedure. What's more, I don't see that the fact that they stand to gain politically automatically means that they are arguing in bad faith. FDR's legacy, such as it is, belongs to the last century. It could stand rethinking, rather than dogmatizing. It is becoming increasingly evident that centralization of economic forces is unsustainable, long-term. The pension states in Europe are about to run into similar problems. We need new ideas.

And if $1000 a year isn't enough, I'll take more. I do believe it's my money to start with.

Charlie said...

You are correct- the Trust Fund is not a "trust fund" in the sense that we usually think of the term. There is no fund manager or bank account holding the money. However, it is a pile of money which by law may not be used for general purposes. Moreover, there are Trustees who invest the Social Security Trust Fund monies, but by law the investment is limited to government bonds. In effect, the left pocket is lending the right pocket money. In other words, Congress has basically created an accounting trick to fund general expenditures out of the dedicated funds.

However, you are not correct that Social Security is funded via the same taxation collected by the IRS. Social Security is funded via FICA withholding, while general taxation is collected via a different withholding line- look at your paycheck stub, I can't remember what it is called. FICA goes directly to SSA- do not pass go, collect your $200 at the age of 65. All of the projections for Social Security's viability consider only FICA funding. General taxation is not considered.

I disagree with you that Social Security is "nothing more than a vast wealth transference device." The objective is for a person to get out of the system more or less what he paid into it, adjusted for inflation. Ideally, if a taxpayer pays $20K into the system, he should get $20K (in constant dollars) out. No transference there, just deferral.

You are also right to note that political motivation is not necessarily indicative of bad faith. Since I do criminal defense law for a living, I know very well that motive is not proof. Motive, however, is relevant to the extent that it reveals bias. And here, I smell a rat. True, I am predisposed at this point to doubt anything the White House says- if they held a press conference to announce that the sky is blue, I'd look up just to make sure. The GOP historically has been frindly to the financial sector and inimical to public welfare spending- it just so happens that this plan is both a handout to the financial sector AND trims back a major federal program.

Here is where we reach impasse- which is okay, an issue this big and this complicated is something on which reasonable people can disagree. However, you wrote, "We cannot keep creating more and more expensive, while less and less effective, government mandates, like SocSec and Medicare. In the end, they threaten to devour wealth, rather than create it." You also wrote, "And if $1000 a year isn't enough, I'll take more. I do believe it's my money to start with."

This is a fundamental difference on which debate is meaningless- your basic assumptions (the goal is to create wealth; it's my money to start with) are extremely different from my basic assummptions (the goal is not to create wealth, the goal is to ensure susbsistence; it's NOT my money, taxes are the price of living in a free society). The distinction is paradigmatic- we just see situation differently- which does not necessarily mean that either of us is wrong.

The fact of the matter is that this is extraordinarily complicated, and the response proposed by the President is overreaching and radical. The benefits do not outweigh the costs, and the system is not in the kind of immediate danger that requires a radical solution. It seems to me that privatizing the system is unnecessarily risky and a gift to Republican benefactors.

Andrew said...

Here's my problem. If there's no "account" then how can the money be said to be anywhere? If we're taking in more than we're spending, where is the excess going? One may be guarunteed to recieve 20 back for 20 taken, but that's nothing more than the government's promise...an IOU. They may say they're not allowed to spend it, but if they don't have it somewhere, then it's probably been spent.

I'm well aware of FICA and have been for some time. I was referring to the budget, not the source of the budget. If FICA tax is inviolate, it shouldn't be counted as part of the federal budget, but it is. This leads me to doubt.

You mentioned a philosophical impasse, and I fear you are right. One thing I would like to underline. You said that, in your understanding, "taxes are the price of living in a free society." As you might expect, I don't agree. Taxes are the price of having any government whatsoever. A king taxes as vociferously as the Dept. of the Treasury. The king's justification for this was that all land belonged to him; you were just using it. In a free society, we know that all government, and hence all of government's functions, spring from the people (Jefferson's line about "with the consent of the governed."). In a free society, government is the people's employee, commanded to perform certain functions. That it may do this, we give it money. It IS your money, and it IS my money; we give it to the government in exchange for services. If the service becomes poor or antiquated, it is our right and obligation to change the service. To be otherwise makes us nothing more than the serfs of a (temporarily) benevolent, elected king.