On Social Security Reform: Spearing the Beast

EastCoastKid if you want to take your vote of way above backI am sure there is a way to do it. For those of you that are offended sorry, it was not intentional.

No reason to get excited about this. I am sure that most of you have forgot to cite a source for one reason or another.

Not to be sensitive about this, but you did not quote the article, you did not extract bits and pieces from it, you did not cite the article, you didn't even comment at all in your post. This does not seem like an honest mistake, and if it was, then it is still against this forum's policies (as far as I know).

Something like this would get you thrown out of a University.

Okay, I just banned myself!!!!!

This does not make the points made in the article any less valid.

Heres my pet peeve with SS privatization. The current trend is toward partial privatization. A system where you are allowed to opt out of the privatized system and and invest in the market. The only people that are 100% certain they will opt out are those who feel they do not need an economic safety net. In other words a large portion of the population will remain in the old system. So how exactly does putting less money into Social Security result in a more stable system? Nothing is changing just now the rich get another way to make more money.

Originally posted by radardog
MODS, please note that cryptorsa1001 was plagiarizing, and this can be evidenced by the article nearly verbatim seen at:

www.stern.nyu.edu...

Plagiarization is wrong. Perhaps cryptorsa1001 overlooked linking to his/her source. In our zeal, we all goof up sometimes.

It doesn't change the validity of the argument, however. Wherever it came from, its excellent.

I wasn't saying anything about the article being invalid -- I just didn't care for the academic dishonesty. I however disagree; the article is off in many places.

apologists argue that:
- The current pay-as-you-go (PAYGO) Social Security system is bankrupt.

Strawman, no one argues that the system is currently bankrupt.

- Privatization would be self-financing and have no long run transition costs as you reduce the large future implicit liabilities of the current system, in spite of the fact that you are creating large transtion costs via privatization. So, it is a free lunch.

I haven't heard anyone argue that it was self-financing.

But this PAYGO system is currently not fully solvent as the aging of the baby boomers generation implies that the current contributions and the growing Social Security Trust Fund will not be able to fully pay the promised benefits in the current system after 2042. Estimates suggest that these unfunded liabilities of the current system are about $10.4 trillion dollars. However, these figures need to be put into context. For one thing, this $10.4 trillion hole over the infinite horizon is $3.7 trillion in present value terms over the next 75 years. Moreover, the entire gap comes from cash flow deficits after 2042; until then there are no deficits in the current system.

Other thinkers disagree,
"[trust fund assets are not] real economic assets that can be drawn down in the future to fund benefits ... [they are] claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures"
-- Year 2000 Budget Proposal by Clinton

In a Feb 1st USA today article, writer Michael Tanner notes:
"Thus, in less than 15 years, the federal government will have to begin finding billions of dollars to continue paying benefits — by cutting benefits, raising taxes or borrowing even more money. Overall, Social Security's unfunded liabilities total nearly $12 trillion, and the longer we wait, the worse it gets. Estimates suggest that each year that we wait to reform Social Security costs between $150 billion and $600 billion more. "

At the moment, Social Security is running a significant cash flow surplus about $180 billion in 2005.

Yes, but where do you suppose that surplus goes? It's not saved anywhere.

But given the current large build-up of the Trust Fund, the current system will have the funds to pay all expected benefits until 2042. Thus, the problems with Social Security, from a cash flow point of view do not start until 2042.

As shown above, this reasoning does not hold.

Even after 2042, Social Security is not "bankrupt": at that time, its revenues would still be able to cover about 75% of the promised benefits under current law. The fraction of promised benefits that can be paid then gradually falls from 75% to 70% in 2080. Thus, even after the Trust Fund is exhausted, a significant fraction of the benefits can be paid.

Yes, bankrupt is not a good word. Unjust is a better one: It is unjust to give someone less than their promised benefits.-

Of course, we cannot wait until 2042 to fix the problem of Social Security and restore its long-run actuarial solvency. But reforming the curent system, without any privatization, is a totally manageable problem.

Funny, it's still a problem -- just a manageable one.

Resolving this unfunded liability has a cost of only about 1.89% of taxable payroll if action is taken today to fix the hole in the current system.

Ah-ha! The system isn't the problem, the workers just aren't taxed enough. Instead of 12.4% of our wages going to SS, we should have over 14% taken away. This is called relieving the symptoms and not the illness.

This means that, rather than messing with social security and privatizing it, there are more sensible and reasonable ways to reform it in the context of the current pay-as-you-go system.

Never mess with our precious system! Never!

Specifically, authors such as Diamond and Orszag have proposed a combination of reducing modestly benefits and increasing modestly the payroll tax that fully fixes the $10 trillion hole of unfunded liabilities of the current PAYGO system and makes it solvent forever.

Yes. That's just what I want: I want to be taxed more and recieve less. What about you?

if the young workers contribute less to social security when part of their payroll tax is cut and goes instead to private accounts, you still need to pay for the benefits of the current old, retired and soon to be retired, who have earned their benefits via contributons while working.

Bad reasoning; not all young workers will contribute less to SS -- the private accounts are an option. Moreover, we're still recieving a cash surplus until 2040ish, right?

Official estimates by the CBO and other reputable independent sources imply that introducing private accounts (a diversion of part of the current payroll tax to private accounts as in one of the proposals in the Bush Social Security Commission) will increase the cumulative budget deficit by about $114 billion in the first year, almost $200 billion a year after ten years and over $350 billion a year in twenty years (i.e. by over $5 trillion over the next three decades including the interest costs of the additional debt) ... the costs would be a multiple of $5 trillion.

Oh REALLY?
Let me quote the CBO,
"If the system used the same collection procedures now used for payroll taxes, there would be no additional costs for that task] (assuming the private accounts were financed by payroll taxes at their current level; there could be some adjustment costs for employers and the SSA if the payroll tax rate changed)."

www.cbo.gov... (emphasis added)

Since actual legislation has not been written yet, we do not know exactly which method they are going to use -- thus, all things included the situation I just presented are speculation.

Third, a social security privatization financed by debt (increased deficits) is, as even the strongest supporters of privatization like Larry Kotlikoff admit, only a shell game that does not lead to the benefit of increased national savings and capital accumulation in the long run....

This portion is based on a bad premise. Social security privatization will not necessarily be financed by debt.

In other terms, those who argue that privatization would allow young workers in the new system to earn higher returns on equities rather than the miser returns of the current PAYGO system are totally misleading the economic facts.

Or he is arguing under a bad premise. Let's do some contrary math:

"Economic theory holds that private capital investment should provide a higher rate of return than a mature PAYGO Social Security system. If one accepts the Social Security Administration’s assumptions about future bond and stock returns, a balanced portfolio (50 percent stocks, 30 percent corporate bonds, and 20 percent government bonds) could be expected to yield a return of 4.9 percent. Subtracting 30 basis points of administrative costs provides a net yield of 4.6 percent.

...


On a cohort basis, there is no contest. Clearly, the 4.6 percent return to private capital markets exceeds the 2 percent or less available through Social Security. This return amounts to a substantial amount of money for the average worker. To provide a vastly oversimplified example, a worker earning $30,000 per year will pay $120,000 in Social Security taxes over a 40-year working lifetime. A 2 percent return on that money yields Social Security benefits equivalent to $185,000. But a 4.6 percent return would yield $344,000, nearly twice as much."

www.socialsecurity.org...

That was just from the conclusion section; for an interesting read, see the .pdf article.

It is true there is a 10 trillion dollar implicit liability in the current not fully funded PAYGO system but, as discussed above, the problem is not as scary as it is often made: resolving this unfunded liability has a cost of only about 1% of GDP (in terms of permanent increases in payroll revenues or reduction in benefits) if action is taken now. Indeed, Diamond and Orszag have proposed: a combination of reducing modestly benefits and increasing modestly the payroll tax that fully fixes the $10 trillion of unfunded liabilities of the current PAYGO Social Security system and makes it solvent forever.

Yep, again. He admits it is a problem, and could easily be solved by taxing you and I more, and cutting our benefits.

Suppose that these transition costs are another $5 trillion over the next few decades.

Again, working under bad assumptions.

So, the private accounts do not lead to greater national savings nor they lead to more investment in stocks and capital: the whole privatization ends up being a different way for those private accounts to purchase the same government debt that is now purchased by the current PAYGO social security system. So, social security privatization becomes again a pure "shell game" with no real effect on the economy.

...

And the argument that the higher return on equities in the private accounts will square the circle is, again, accounting-wise and economic-wise false. In fact, any scheme - i.e. either fixing the current PAYGO system or privatizing - requires reducing the benefits (or increasing the contributions)of the current young (prefunding); so, the two schemes are conceptually equivalent in that dimension. And either solution has not effect (or has the same effect) on national savings.

This depends on the set of premises you use, as I have shown. Of course, each side will use premises more favorable towards their core belief.


The article, for the most part, is Rubbish: great reasoning using horrid premises in order to scare people away from a politically heated plan. Though, isn't that the definition of political rhettoric?

In summary, thus article says "If privatization is done specifically like X, then horrible Y things happen. Since we need to fix social security, let's not change it but just help the symptoms of it: raise the amount we need to contribute to social security, and reduce the amount we get out of it."

Does anyone else feel screwed by that solution?

Originally posted by radardog
I wasn't saying anything about the article being invalid -- I just didn't care for the academic dishonesty. I however disagree; the article is off in many places.

As I said before, we all make mistakes. It was an oversight and they apologized.

I agree with their conclusions, nonetheless. Thanks for your contribution as well.

It seems that the beast is going to cause a very nice fight in Capitol Hill, it seems that some prominent groups are getting together to fight the government program and on the site a group of "pro security reform" will be handsomely paid by donations to promote it.

So get ready because is going to be dirty and tricky. I can wait to see the commercials and the brain washing.

Wow, I am impressed. I will shut up now and just listen Radardog

Originally posted by radardogDoes anyone else feel screwed by that solution?

Very simply , I do.


Why do these people not think that the Chilean folks got it right? I don't know about you but I would rather retire when I am 55 and enjoy the 20 years instead of working till I am 70 and getting 2 years in a nursing home and still have to pay Medicare premiums...

Ironic - Ol FDR would be proud of his system would he not?

"Lets just tax the # out of them, it works for the Europeans"

Great post radardog

Here is a site that I think has a lot of good information on the subject:
www.socialsecurity.org...

It is a "Social Security FAQ" supplied by the CATO institute. Visit www.cato.org... for other great policy analysis.

Originally posted by XX_SicSemperTyrannis_XX
Here is a site that I think has a lot of good information on the subject:
www.socialsecurity.org...

It is a "Social Security FAQ" supplied by the CATO institute. Visit www.cato.org... for other great policy analysis.

Thanks for the links.