Milton Friedman on Social Security

by Bruce Webb
(this post was originally intended for publication at Angry Bear, but I am not totally satisfied with it so will just leave it here)

Opposition to Social Security is most often expressed in terms of efficiency with assertions that ultimately it will not work at all ('bankrupt', 'dead broke') or that it will require unacceptable tradeoffs ('tax increases', 'program cuts') or that it is simply unfair burden shifting ('intergenerational inequity'). These arguments generally reduce to 'Private (or Personal) Retirement Accounts would work better'. But on examination the proposals to transition to PRAs don't actually seem to work better, not from the standpoint of individual workers. Which has led supporters of traditional Social Security to accuse opponents of being thieves dying to get ahold of the future revenue stream and/or not wanting to pay back past borrowings.

There is some justice to this charge, an appeal to the banks, insurance companies and others that would benefit from private accounts is explicitly laid out in the 1983 battle plan presented by Butler and Germanis Achieving Social Security Reform: a 'Leninist' Strategy. And a fair reading of the Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan (aka LMS) shows that their emphasis is first on 'sustainable solvency' which is to say putting Social Security on a new pay-go basis over the Infinite Future, secondarily 'fiscally responsible' which they define as minimizing future Fund Borrowing, thirdly on 'economically beneficial' which translates to increased national savings. But at no point if there any real emphasis on return to actual beneficiaries, all pay more and get less and all the benefits are shifted outwards and onwards.

So we cannot dismiss the profit motive OR the desire to minimize the external tax burden to finance Social Security. They are both present. But historically opposition to Social Security has been driven by deeper motives, some people led mainly by Friedman in recent decades simply believe the system is "immoral" and that arguments about efficiency and the "nuts and bolts" are just the needed tools to drain the electricity out of the Third Rail of American Politics. So below the fold I am going to give some links and quotes of people who regret we even HAVE a system of Social Retirement.

As the title suggests the foremost proponent of this view was Milton Friedman. In 1999 the rumblings of 'Reform' were getting louder as Republicans saw they were finally see a possibility of gaining control of the White House and so get past Clinton's 'Save Social Security First' and Gore's 'Lockbox'. In April of 1998 Cato published the following Briefing Paper 46 by Friedman SPEAKING THE TRUTH ABOUT SOCIAL SECURITY REFORM. Which 'truth' is summed up as follows:

A privatized SocialSecurity system should not be mandatory. The fraction of a person’s income that it is reasonable for him or her to set aside for retirement depends on that person’s circumstances and values. It makes no more sense to specify a minimum fraction for all people than to mandate a minimum fraction of income that must be spent on housing or transportation. Our general presumption is that individuals can best judge for themselves how to use their resources.
The ongoing discussion about privatizing Social Security would benefit from paying more attention to fundamentals, rather than dwelling simply on nuts and bolts of privatization.

People who wish can examine the details of the Friedman plan, basically it makes implicit debt explicit and then eliminates Social Retirement altogether, he doesn't want your money and he doesn't think anyone can provide a more efficient solution than the market. And Friedman was even more blunt in the following exchange from 2005 Milton Friedman: Eliminate Social Security, Medicaid, Medicare

Friedman, Paul Snowden Russell Distinguished Service Professor Emeritus of Economics at the University of Chicago, shared his economic theories over lunch October 15 at a California restaurant with nearly two dozen alumni and students who are members of the Milton Friedman Group, the student-led organization that promotes Friedman’s free-market approach.
The event gave participants a chance to pose questions that Friedman had fielded for years from critics. “If you’d abolish Social Security for everyone, what would you do with people who are indigent and incapable of taking care of themselves if they didn’t save during their younger days?” asked second-year student Andrew Van Fossen.
“Social Security isn’t a program for them, it’s for everyone,” Friedman replied. “There’s a much stronger case for government having a program for them than for everybody. But if you look at the record, private charity is a much more effective way of helping people.”
“If you’re going to go from where you are to where you want to go, in the process you’re going to have to have programs of that kind to do it,” Friedman continued. “That’s why, in order to get rid of Social Security, you’re going to have to have private accounts.
“What you should do, in my opinion, is to give every person who now has a claim on Social Security bonds equal to the value of his claim, and set him free. Let him save. Let him do what he wants with it. That would not add a dollar to the debt we now have; it would just convert an unfunded debt into a funded debt,” Friedman said.
Van Fossan asked, “If you did that, how would you protect people from making really stupid decisions?”

“I don’t!” Friedman replied. “Why should I?” a response that drew laughter from the group. “You mean freedom does not include the freedom to make a stupid decision?”

Now I would have a little quarrel with that "private charity is a much more effective way of helping people" piece, after all the guy was born in 1912 and experienced the Depression in full, but at least you can't accuse this guy of hiding behind 'intergenerational inequity' or ducking past debt.

Butler and Germanis on Social Security in 1983

Social Security Reform: Achieving a Leninist Strategy

Marx believed that capitalism was doomed by its inherent contradictions, and that it would inevitably collapse—to he replaced by the next stage on the ladder leading to the socialist Utopia.

Lenin also believed that capitalism was doomed by its inherent contradictions, and would inevitably collapse. But just to be on the safe side, he sought to mobilize the working class, in alliance with other key elements in political society, both to hasten the collapse and to ensimre that the result conformed with his interpretation of the proletarian state. Unlike many other socialists at the time, Lenin recognized that fundamental change is contingent both upon a movement’s ability to create a focused political coalition and upon its success in isolating and weakening its opponents.

As we contemplate basic reform of the Social Security system, we would do well to draw a few lessons from the Leninist strategy. Many critics of the present system believe, as Marx and Lenin did of capitalism, that the system’s days are numbered because of its contradictory objectives of attempting to provide both welfare and insurance. All that really needs to be done, they contend, is to point out these inherent flaws to the taxpayers and to show them that Social Security would be vastly improved if it were restructured into a predominantly private system. Convinced by the undeniable facts and logic, individuals supposedly would then rise up and demand that their representatives make the appropriate reforms.

While this may indeed happen, the public’s reaction last year against politicians who simply noted the deep problems of the system, and the absence of even a recognition of the underlying problems during this spring’s Social Security “reform,” suggest that it will be a long time before citizen indignation will cause radical change to take place. Therefore, if we are to achieve basic changes in the system, we must first prepare the political ground so that the fiasco of the last 18 months is not repeated.

First, we must recognize that there is a firm coalition behind the present Social Security system, and that this coalition has been very effective in winning political concessions for many years. Before Social Security can be reformed, we must begin to divide this coalition and cast doubt on the picture of reality it presents to the general public.

Second, we must recognize that we need more than a manifesto—even one as cogent and persuasive as that provided by Peter Ferrara. What we must do is construct a coalition around the Ferrara plan, a coalition that will gain directly from its implementation. That coalition should consist of not only those who will reap benefits from the IRA-based private system Ferrara has proposed but also the banks, insurance companies, and other institutions that will gain from providing such plans to the public.

As we construct and consolidate this coalition, we must press for modest changes in the laws and regulations designed to make private pension options more attractive, and we must expose the fundamental flaws and contradictions in the existing system. In so doing, we will strengthen the coalition for privatizing Social Security and we will weaken the coalition for retaining or expanding the current system. By approaching the problem in this way, we may be ready for the next crisis in Social Security—ready with a strong coalition for change, a weakened coalition supporting the current system, and a general public familiar with the private-sector option.

JS-Kit work around edition

Okay lets take a simplified example which is close to the numbers of say 2006.

Before: Total public debt $10 trillion
Debt held by the Public $6 trillion
Intragovernmental holdings $4 trillion
( which includes SS Trust Fund $2 trillion)

Current Year: Proposed general fund spending $5 trillion
Tax revenues $4.9 trillion
SS cash surplus $100 billion
SS interest @ 5% $100 billion

Unified surplus for the current year +$100 billion ($5.1 trillion - $5 trillion)
Borrowing needs from the public +$0 ($4.9 trillion income tax + $1 billion FICA cash surplus - S5 trillion general fund spending)
Total public debt -$200 trillion ($10 trillion rolled over + $100 billion in Special Treasuries for the cash surplus + $100 billion in Special Treasuries for the interest accrued)

After: Total Public Debt $10.2 trillion
Debt held by the public $6 trillion Total Intragovernmental holdings $4.2 trillion
(which includes SS Trust Fund $2.2 trillion)

In this scenario the General Fund is running a mild deficit of $100 billion totally financed by the cash surplus from FICA. From the perspective of the bond market the budget is balanced with only existing maturing debt needing to be refinanced. On the other hand the Unified Surplus/Deficit scores at +$100 billion because interest is included as revenue even though not financed out of the public markets. Leaving total public debt up +$200 billion.
So it is simple! General Fund in deficit by $100 billion, Unified Budget in surplus by $100 billion, Social Security Trust Fund in surplus by $200 billion, Public Debt in deficit by $200 billion. Net borrowing needs $0.

Balanced cash budget plus Unified Budget and Social Security both in surplus = $200 billion in additional long-term debt. Why is my head throbbing a little bit?

Angry Bear Social Security Blogging: Spring 2009

Looting Social Security: (the Basics Revisited)

Social Security in a Time of Recession

Why the 'Prefunding Boomer Retirement Myth' is Dangerous

Late to the Seminar: (Guide to the series)

Social Security: Simple Story vs. Myth Busting

Social Security has no Unfunded Liability

Social Security and the Debt Clock

Social Security 101: Arming for Battle

The Fierce Urgency of "Nothing"

Who gets to define Social Security 'crisis'

Low Cost and the 100/100 Plan Revisited

Half of workers would opt out of Social Security if they could

Bipartisanship and "Temporary" Payroll Tax Holidays

Lady Liberty Douses Her Torch: Social Security and Immigration Policy

Diagnosing the Dynamics of Social Security

Bestest Day of the Year: SSRR Day

New Tactics in an Old War: Vanishing the Social Security Surplus

World Economic Meltdown: Crisis for Social Security? or Opportunity to Kill it?

Tables Tell Tales: Did the Social Security Surplus Vanish in February?

Trust Fund Operations and Assets: Why 2017 Doesn't Matter

Political Calender Calculus: How Social Security Reformers Got Hemmed In

Vanishing Surplus-Revealed

DI: Sick Man of Social Security

'Headline' Surplus/Deficit and 'Headline' Debt

Vanishing Surplus-Yet Again

1981-1983 Social Security Commission: Myths and Realities

CBO Presentation to the Social Security Advisory Board

Social Security Report Release; plus the Gathering Storm

Figures for AB 'Social Security has no unfunded liability' post

Coberly on Social Security at Angry Bear

Jan 16, 2008 Coberly on Social Security

July 15, 2008 Money and Childhood Understandings

Sept 9, 2008 Op Ed on what Social Security is for

Oct 8, 2008 Social Security: unpacking the lies

Oct 12, 2008 Here it comes

Nov 16, 2008 Dancing around on one nail not Social Security

Nov 24, 2008 Why Bill Gates gets Social Security

Jan 16, 2009 Retirement is not a game...The Choice

Feb 19, 2009 No Crisis in Sight

Feb 22, 2009 Will you still feed me in 2041

Mar 27, 2009 Social Security: Return on Investment

May 13, 2009 Misdirection: How They Keep You from Seeing the Good News

May 13, 2009 One of the Less Noticed Passages

Social Security: 2009 myth busting edition

The BruceWeb started out in Nov 2004 in response to then President Bush's call to 'reform' Social Security in response to 'crisis'. I put the two terms in scare quotes because on examination we see that 'reformers' use 'reform' and 'crisis' in quite different ways that regular people do, and indeed much of there argument comes down to a bait and switch. To understand this we have to lay out the standard narrative and then set it in actual numeric context.

The standard narrative is simple and well understood. It holds that the pending wave of Baby Boomer retirements will inevitably overwhelm Social Security and ultimately drive it to bankruptcy. Moreover promoters insist that we can't just tax our way out, nope we need to take action as soon as possible even if that means accepting painful cuts in benefits. In fact they insist that the whole system is so flawed that we need to transition it to a new sustainable form based on a system of PRAs (Personal Retirement Acounts).

What is missing from this picture? Numbers and dates. This is actually pretty typical of the debate, dollar figures are rarely used and when they are tend to be stated in mysterious ways like 'unfunded liability over the infinite future horizon", and when dates are deployed they are rarely put in real context. Does crisis start in 2017? or 2023? or 2041? or 2049? or has it started already? Well it depends on who you ask and how they define crisis.

So lets put some dates and numbers in. The Social Security Act of 1935 established two different programs, one under Title 1 and the other under Title 2. Title 1 was a straight out government pension funded directly from the General Fund and meant to replace a hodge podge of inadequate state plans. It was designed to phase out over time and be replaced by a new worker funded Title 2 insurance plan. Which is the source of MYTH 1 that FDR envisioned Social Security as being temporary and that PRAs are just what had been planned all along. Instead the replacement is precisely what we know as Social Security today, i.e. Title 2 insurance. Title 2 was set up on a Pay-Go basis, while your benefit was determined by your worklife contributions, the actual funding would mostly come from current working people making contributions to the Social Security Trust Fund via payroll reductions. Which leads to MYTH 2 that the Trust Fund is just a product of the 1983 Reform. Instead it has always served its function as common pool and reserve and allowed to grow and shrink as needed to meet projected needs. The first benefit checks under Title 2 did not go out until 1941 with people retiring before that point relying on Title 1 while waiting for the Trust Fund to grow to a size to support Pay-Go. Just as banks have to be capitalized and have specific reserves so too did Social Security.

Which leads us to MYTH 3 that early retirees got much better rates of return than later ones do. These calculations never seem to measure the taxes being paid to support Title 1 benefits which continued to make up a larger share of overall Social Security benefits right up to 1951. This seems also the source of MYTH 4 that FDR promised that payroll taxes would never exceed some low percentage of your first X dollars in income. Instead there was the recognition that over time as Title 1 retirees died then payroll taxes could be raised to offset income taxes no longer needed. In any event any legacy costs were met by 1980 (assuming a typical entry into the work force by 21 year olds in 1936).

Giving us MYTH 5 that current problems in Social Security were caused by over-generosity to people in the past. This where it is not just driven by confusion over the terminology is shown to be strained argumentation. Take the following numbers which show total benefit payouts under Title 2 since program inception.
OAS 1941-1956 $25.6 billion
OASDI 1957-1968 $181 billion
OASDI 1969-1980 $793.1 billion
OASDI 1981-1992 $2.476.5 trillion
OASDI 1993-2000 $2.829.3 trillion
OASDI 2001-2007 $6.330,9 trillion

For a grand total of $12.636.4 trillion. Total benefits paid out by 1980 totaled $999.7 billion dollars. All of it paid out under a Pay-Go system. All legacy costs associated with people not being covered under Title 2 their entire working lives have now been liquidated. There are still certainly a handful of people collecting benefits who entered the work force before 1936 but the youngest would be 93 years old. To suggest as some people do that the $1 trillion in benefits paid out by 1980 somehow leapfrogs over the current $2.4 trillion surplus to create a $17 trillion dollar gap over the infinite future is absurd. Yet some people solemnly point to Table IV.B7 as if it were proof of what they call 'Backwards Transfer', when instead it is a failure to understand what the Trustees mean by 'past and current participants'.

And lastly MYTH 6 that Social Security should be viewed as an investment fund and Myth 7 should be measured against a theoretical standalone retirement plan set up in 1936. Myth 7 blows away when you realize it takes into no account the transition costs stemming from the need to pay for Title 1, all of which was paid by the same people who are blamed for getting over generous returns under Title 2. In any event a transition to PRAs has to include some way to cover people too close to retirement to benefit, which fact tends to sink all such privatization plans. Fundamentally they face the same problem getting rid of Social Security that the crafters of the original system did, what do you do about people who are already old? MYTH 6 largely blows away on the same grounds but also ignores the fact that the Trust Funds never served as an investment fund to begin with. Certainly the balance in the Trust Fund has always drawn interest and that interest was drawn down during years when the system ran overall deficits as for example in the 1959-1965 span and in the 1971-1981 Table VI.A4.—Historical Operations of the Combined OASI and DI Trust Funds, Calendar Years 1957-2007 [Amounts in billions]. But at no time were those interest earnings really important, indeed I see no year before 1983 where interest was more than 5% of all income. People can do all the calculations they want but Social Security remains what it always has been since Title 1 phased out, a worker funded Pay-Go insurance plan.

Having hopefully disposed, or at least cast doubt on, the prevailing myths we can proceed to talk about what Social Security is rather than what is is not

Freedom vs. Four Freedoms

(Ouch. This post was designed to go up on Angry Bear but went some other directions. I stand by it but want to rework it in more economic terms.)

My last post (ed. at Angry Bear) led to some confusion. I was trying to suggest that much of the current debate over the stimulus package boiled down to world view. Well lets take it to the basics. What does freedom mean? For Democrats it boils down to this taken from the State of the Union in 1941:

In the future days, which we seek to make secure, we look forward to a world founded upon four essential human freedoms.

The first is freedom of speech and expression -- everywhere in the world.

The second is freedom of every person to worship God in his own way -- everywhere in the world.

The third is freedom from want, which, translated into world terms, means economic understandings which will secure to every nation a healthy peacetime life for its inhabitants -- everywhere in the world.

The fourth is freedom from fear, which, translated into world terms, means a world-wide reduction of armaments to such a point and in such a thorough fashion that no nation will be in a position to commit an act of physical aggression against any neighbor -- anywhere in the world.

Now some of us believe this is just an attempt to fill out the plain reading of the Preamble to the Constitution

We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

Whereas the right wants to reduce everything to Friedman's Capitalism and Freedom

The citizen of the United States who is compelled by law to devote something like io per cent of his income to the purchase of a particular kind of retirement contract, administered by the government, is being deprived of a corresponding part of his personal freedom. How strongly this deprivation may be felt and its closeness to the deprivation of religious freedom, which all would regard as "civil" or "political" rather than "economic", were dramatized by an episode involving a group of farmers of the Amish sect. On grounds of principle, this group regarded compulsory federal old age programs as an infringement of their personal individual freedom and refused to pay taxes or accept benefits. As a result, some of their livestock were sold by auction in order to satisfy claims for social security levies. True, the number of citizens who regard compulsory old age insurance as a deprivation of freedom may be few, but the believer in freedom has never counted noses.

My obligation to free this group from any social responsibility to provide for retirement security for others somehow doesn't equate to a right to ask them to get the hell off the public road because they were interfering with the Commerce Clause in that same Constitution. For some people freedom only flows one way.

To put it another way the right has reduced 'freedom' to 'personal autonomy

Pick your Pork Series at Angry Bear

There is an ongoing discussion of the effects of the stimulus package at Angry Bear. My contributions have focused on claims that the bills are larded up with liberal pork, which I maintain is just not true. In any event here are the links.

Pick your Pork: an Open Invitation

Results of the Pick your Pork Wonkathon

Ruben Navarrette Picks his Pork

GOP Senators Pick their Pork

Columbus Dispatch Picks its Pork

Senate Version of Stimulus Bill

Senate Package Infrastructure

Pick your Pork: semi-final edition

Senate Stimulus Package: CBO Summary

Will the stimulus package be a pork fest?

by Bruce Webb
reader Buffpilot in comments insists the answer is clearly yes on the grounds

The Dems, have NEVER, shown fiscal responsibility when in charge of the purse strings (or at least since before LBJ). So you have zero track record to back you up on thinking that the Dems will suddenly cut back government expenditures and raise taxes to at least get close to balancing the budget. Can you imagine the Dems actually cutting the size of the Federal governemnt? Or reducing its power? Neither do I. BTW the Rs have not been any better.

Well the historical record tells us something different. If we examine Total Debt as a percentage of GDP it went down or stayed even under every post-war President not named Reagan or Bush. We were able to fund the post-war GI bill, the Marshall Plan, Korea, the Great Society, Vietnam, navigate the first Oil Shock all of it except for two years with a Democratically controlled house. And came through the whole thing with debt as a percentage of GDP bottoming out in 1980. I am afraid the old narrative of Democrats as the party of tax and spend policy leading to ever increasing deficts while Republicans being the party of fiscal responsibility has really not been the case since Eisenhower left office. Instead the whole concept of Small Government has since 1964 and the birth of the Modern Republican Party meant "don't spend tax money on undeserving poor people".

CBO Director Testifies on Economic Impact of HR1

by Bruce Webb
Movie Guy further requested some discussion on CBO Director Elmendorf's testimony to Congress from yesterday. The whole text is here Elmendorf testifies before House Budget Comm I didn't have time to go thourghly through the whole thing but these tables were interesting enough to put up for comment.

CBO Letter to Rep. Ryan re Stimulus Debt Service

by Bruce Webb
Reader Movie Guy suggest that the following letter and table merit some discussion. It seems to speak for itself but the whole thing is short enough simply to post (I deleted some returns and added some commas to save space, the original PDF is here CBO Letter to Rep. Ryan). Please add any contributions in comments.

Honorable Paul Ryan, Ranking Member, Committee on the Budget, U.S. House of Representatives

Dear Congressman:

As you requested, the Congressional Budget Office has estimated the costs of additional debt service that would result from enacting H.R. 1, the American Recovery and Reinvestment Act of 2009. Such costs are not included in CBO’s cost estimates for individual pieces of legislation and are not counted for Congressional scorekeeping purposes for such legislation.

Under CBO’s current economic assumptions and assuming that none of the direct budgetary effects of H.R. 1 are offset by future legislation, CBO estimates that the government’s interest costs would increase by $0.7 billion in fiscal year 2009 and by a total of $347 billion over the 2009-2019 period (see enclosed table).

If you would like any additional information, we would be happy to
provide it. The CBO staff contact is (redacted).

Sincerely, Douglas W. Elmendorf, Director

CBO Tables: Bigger Images

CBO Estimate for HR 1: Jan 26th, 2009: the Tables

For some reason the outlay/revenue tables vanished from the PDF. Which has led to more tin foil hats. In the interest of sanity I have put up a version here:

It can't happen here(?)

Prescient Young Blogger Did What S. Korea Couldn't -- Foresee Global Financial Crisis

He had been a so-so student who studied communications at a so-so junior college in a backwater town south of Seoul. Thirty-one years old and single, he spent much of his time alone in his room. As his father noted, "He can't even get a job."

But he knew a global economic smack-down when he saw one.

Minerva saw it coming last fall, far earlier and with far more acuity than the South Korean government, which his blog has humiliated and angered.

Besides getting mad, the government got even. In a move widely perceived by the public as a chilling echo of the 1970s, when a military dictatorship ruled South Korea, the government detained Park this month, invoking a seldom-used telecommunications law that charges him with harming the public by spreading "false rumors."

Well I doubt that any Angry Bears needs to fear being locked up. On the other hand the following from Sec 802 of the Patriot Act could be pretty broadly interpreted.

5) the term `domestic terrorism' means activities that--
`(A) involve acts dangerous to human life that are a violation of the criminal laws of the United States or of any State;
`(B) appear to be intended--
`(i) to intimidate or coerce a civilian population;
`(ii) to influence the policy of a government by intimidation or coercion; or
`(iii) to affect the conduct of a government by mass destruction, assassination, or kidnapping; and
`(C) occur primarily within the territorial jurisdiction of the United States.'

.That is if Larry Summers thinks that your comments have the appearance of being intended to influence the policy of the government and decides he is in some way 'intimidated' you could be picked up and detained just like poor Mr. Park.

I'll admit the concept is kind of far-fetched. But then again just three days ago former NSA analyst Russell Tice dropped a bomb shell on CountdownNSA Whistleblower. What he alleges there couldn't happen either, not here. Except maybe it did.

January 2008: A flurry of Social Security Posts at Angry Bear

Hoo boy, Social Security is back in the news with the MSM trying to whip up the idea that Obama is going to prove Bush right by going after Social Security (similar narratives are floating around about Iraq and torture all in an effort to prove that Bush was never, never actually wrong about anything). I do some push back.
Social Security Monthly Balances: Nov update
Social Security 'Reform': the Undead Return
Bruce Webb and Barkley Rosser and Social Security Not actually by me, but if you think I am going to pass that title up you are nuts. My Mom reads the site.
Obama and Social Security: why NOT to worry
2008 Social Security Balances: Projections vs. Actual
Recalculating 'Nothing': Social Security in a Time of Recession
Social Security?: It's Stochastic!!
Social Security: Goldilocks curves, Not too hot, not too cold
Is Obama echoing Bush on Social Security?
Orszag (and Diamond) Flunk Reading & 'Rithmetic: SS Legacy Debt
Unleash Your Inner FDR: Social Security as Political Opportunity

Even More Posts from Angry Bear: late Aug to Dec 2008

In late August I stopped numbering my Social Security posts, because it had gotten increasingly pretentious And cut them back somewhat. Which made them harder to distinguish as a block. So as a public service (?), I'll try to gather all the links here.
AUG: CBO: Updated Long-Term Projections for Social Security
Social Security 2027: A date for action?
Backwards Transfer is Back: Social Security's Unfunded Liability
SEPTUnfunded Liability Bookended
Intergenerational Equity, Unfunded Liability and Selfish Boomers
R.I.P. Social Security Crisis: "We hardly knew ya" This was the point I thought the series would go on hiatus. Who could have known that the MSM would blow up some post-election comments by Obama and get this issue right back on the table? I thought the Wall Street meltdown would put an end to all this. But clearly not.
Social Security Actuaries score the Warshawsky Plan
OCTSocial Security Checkup: Monthly Trust Fund Reports
NOVWhy Conservatives Hate Social Security
Social Security: Inter and Intra-Temporal Contingency
DECSocial Security Monthly Balances: Oct update
Is it true that foreigners finance American debt?What does this have to do with Social Security? Well nothing. But an interesting topic.
2008 Financial Report of the United States
Why does Santa hate poor kids?Nothing about Social Security here either. I rant on how we use things like Santa to teach the poor that life is just unfair, suck it up and accept the fact that rich people get a better deal from Santa, the Easter Bunny and the Tooth Fairy.

I skipped some non-financial posts, but I think this includes all the relevant ones for this site.

Unfunded Liability, aka Legacy Cost

This graph is being used in a forthcoming post on Angry Bear called 'Orszag and Diamond Flunk Reading'

Alternative Shapes

(Update. Commenter RDF points out that these graphs mean nothing for those who don't have the context. And I plead guilty. Some of my posts here are just prep pieces for longer work over at Angry Bear. For example these graphs were incorporated into Social Security: Goldilocks Curves, Not Too Hot, Not Too Cold. And for the record the 2004 and 2007 curves were originally reversed, something I fixed Jan 18.)
1997 II.F6

2000 II.F6

2004 II.D7

2007 II.D7


2008 II.D6

Trust Fund Monthly Reports: 2008 Preliminary

OAS::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$2.023 trillion // $2.216 trillion //$193 billion// $2.221 trillion// $198 billion

DI::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$214.9 billion//$218.7 billion//$3.8 billion//$221.3 billion// $6.4 billion.
Per IV.A2 the opening balance for DI was $214 billion, projected year end under IC $218.7 billion, under LC $221.3 billion

June 30th/Mid-year: OAS $2.140 trillion// DI $220 billion

Aug 31st/Two-thirds: OAS $2.164 trillion// DI $219 billion

Sept 30th/Q3: OAS $2.177 trillion// DI $219 billion

Oct 30th/Five-sixths: OAS $2.187 trillion// DI $218 billion

Nov 30th/Eleven twelvths: OAS $2.197 trillion//DI $217.5 billion

Dec 31st/Year End: OAS $2.203 trillion//$215.8 billion

Social Security: 'Crisis' and 'Reform'

In a rational world there would be no need to talk about Social Security. The combined OASDI program is currently running a surplus and is projected to be in Short Term Actuarial Balance (the legal test for solvency) until at least 2028. Yet Dean Baker at Beat the Pressis constantly having to stamp out fires lit by people at the NYT and the WaPo. Fires which are serving to light up the blogosphere. The other day their was a dKos diary on Obama and Social Security that had nearly 600 comments. And David Sirota had a similar thing up on Open Left. And just this morning Digby talks about CNN bloviation on 'Entitlements'. To understand why they are so persistent you have to start with the language. So in this post I want to talk a little about the various definitions of 'Crisis' and 'Reform' as they apply to Social Security.

Social Security 'crisis' has typically been framed as crisis at Trust Fund Depletion. Rarely are the specifics spelled out, instead there is a lot of loose talk using terms like 'bankrupt' and 'flat broke' which naturally has led many, many people to translate as 'no check', 'Social Security won't be there for me'. Now a few seconds of reflection on the mechanics of Social Security shows this to be nonsense, as long as the FICA payroll tax exists Social Security can be paid out at some level, the real question is what will that level be and do we need to do anything about it. But instead of diving into that lets just stipulate that a gap between projected revenue and cost is the definition of 'crisis at depletion'. And right now that gap is projected to be 22% starting in 2041, or to turn it around a 78% payout of the scheduled benefit.

In more recent years a new definition of 'crisis' has surfaced. This is 'crisis at shortfall' which is the point at which revenue from taxation fails to meet costs. Now while it is really, really odd to call this a crisis given that Social Security is projected to have about $5 trillion in US Treasuries when this event is projected. But for the purposes here we will simply grant the crisismongers the point and pretend that the Trust Fund doesn't exist.

So that is the two 'crises' we are dealing with: 'crisis at depletion' which at root is defined as inability to pay benefits and 'crisis at shortfall' which is defined as inability to finance benefits, two slightly different concepts.

When we turn our attention to 'reform' we once again see two different frames. One would think that the goal of any 'reform' would be to fix the crisis. But that assumes we all share the same goal and the same interpetation of what the crisis is, something that as it turns out is not true at all among reformers.

When I look at 'crisis at depletion' I see it as a potential for a benefit cut that would be if not fatal be certainly painful to retirees in whatever year it occurs and for whatever years it persists. If the gap can be avoided altogether or mitigated at a reasonable cost I would prefer to try to close the gap as much as possible. But certain reformers don't see that benefit cut as a problem in and of itself, instead they see it as a threat and a call for a bailout. Thus you get a certain tension between people like Coberly who insist that the cost of the fix is cheap and people like FA who don't even like what they are paying now and certainly don't want to pay a penny more, not now and not in 2041. Now we know what the Coberly cost would be, a 1.7% point payroll increase now or roughly double that if we simply let 'crisis' run its projected course and avoided a tax increase until the last minute. But this assumes that we stick with the scheduled benefit which itself is based on a formula where initial benefits are based on real wage increases and subsequent benefits by CPI. Alternatively we could alter the schedule by changing the formula and so close the gap from the opposite direction. That is we can simply lower people's expectations about the replacement value of their retirement check in the interests of avoiding any need for a sudden bailout down the road. Now this approach is not inherently cruel, there are ways of doing it right and ways of doing it wrong, a lot of it comes down to achieving a good faith consensus on what our targeted outcome should be. If 78% after 2041 is not enough, what compensating benefit reduction between now and 2041 would place Social Security back on a pay-go basis under existing rates with permanent outcomes better than 78%. But whether we are talking a tax increase or some sort of benefit cut the goal here is to provide a fix for that sticker shock. This is 'reform' as 'fix' for 'crisis at depletion'.

On the other hand there are those who define 'reform' quite differently, instead of a 'fix' they look for a 'transformation'. If that transformation supplies a fix then great, but for some of these guys 'crisis' translates to 'opportunity'. That is there is a substantial group of people who hate Social Security for reasons that have nothing fundamentally to do with solvency. And while many of them may sincerely believe that their preferred system will out perform Social Security as currently configured, that belief is clearly secondary to their policy preferences. This becomes apparent when you look at plans like LMS whose outcomes for most seniors are not much better than simply letting the system go and whose interim costs are much higher than a simple Coberly-like fix would be. Now I suspect there are some mixed motives going on. Some free-market purists simply prefer privatization as an end in itself, the anti-socialist solution as it were. Other supporters of privatization seem more motivated by a desire for tax avoidance down the road, the no-bailout solution in this case. But neither group is really focused on maximizing retirement security for all, although they recognize that paying lip service to it may be politically unavoidable. When evaluating 'reform' plans you need to see if the reformers are really looking for a 'fix' or just a 'transformation'.

Okay that is 'reform' as it applies to 'crisis at depletion'. Fix Social Security or transform it. But what about 'crisis at shortfall'?

Well this one is a lot more cynical. After all at least at depletion we have an undoubted event: benefits and revenues have to be brought into line one way or another, there is a real imbalance internal to the program. Shortfall is different. A plan was put in place in 1983 designed to mitigate the impact of future revenues falling behind future costs. And that plan wasn't free, instead future retirees who were then working took on an additional tax burden in order to postpone benefit cuts for as long as possible. And those additional taxes, which are still being collected, have grown with accumulated interest to $2.3 trillion today and are projected to total more than $5.6 trillion by the peak in 2023. An amount sufficient to pay full benefits until 2041 (SSA) or 2049 (CBO) or potentially through some sort of reform continue to pay out some benefit better than 78% for the foreseeable future. But for some people 'crisis at shortfall' simply means being unwilling or perhaps unable to pay back the money they borrowed and their proposed 'reform' comes in the form of short to medium term changes in taxes, benefit levels or retirement age. In this case 'reform' pretty much boils down to 'tax avoidance' with 'fix' meaning 'not with my dime pal'. Note that in this case there is no immediate appeal to private accounts, no one even pretends they could be a solution to a cash shortfall projected to happen in less than ten years. This can't be excused as just an exercise in preferences for free market solutions, it is just out and out theft. Some will argue that they have no choice. Which doesn't change the moral equation.

Social Security 'Reform': the Undead Return

They won't give it a rest.

Dean Baker in his post The Post's Jihad against Social Security points to this article Obama Predicts Years of Deficits over $1 trillion and notes that they don't hesitate to single out the usual suspect. Is it the cost of the war? The cost of the bailout? The cost of the stimulus package? Nope apparently those are just short term problems. Instead as always the first stop for deficit reform is Social Security.

WaPo: The mounting debt has raised an alarm on Capitol Hill, where some Republicans and moderate Democrats are pressing Obama to tackle the looming challenge of skyrocketing Medicare and Social Security spending, and to adopt tough new budget rules to prevent future deficits from ballooning.

Which leads Dean to reply with some exasperation:

The article includes a comment about "the looming challenge of skyrocketing Medicare and Social Security spending. " Of course Social Security spending is not projected to skyrocket. It is projected to increase gradually, and its costs are fully covered by its own tax stream until 2048, according to the Congressional Budget Office's latest projections.

In a related note Paul Krugman poses the question in a Jan 5 post A Bullet Dodged

What would have happened if George W. Bush had actually succeeded in his plan to privatize Social Security?

and suggests an answer 'Ask the Italians' Bloomberg News: Italian Pensions Sapped by Private Funds Bush Backed

In my view it is practically criminal for policy makers to be wasting a second talking about Social Security given the very real possiblity we are headed for a new Great Depression. And so equally criminal for opinion makers to be twisting current events to pursue this old vendetta. It is a shame that people like Baker and Krugman still have to keep a vigilant eye out for the zombies intent on eating the flesh of Social Security. Maybe we can make a deal. If the Right will simply stop taking every possible opportunity to take a bite at Social Security then I promise to shut up. And then maybe we can let Krugman and Baker continue the really important discussion.

"Social Security 'reformers'! Report back to your graves!"

Italian Pension Privatization: a Cautionary Tale

Krugman: A Bullet Dodged

What would have happened if George W. Bush had actually succeeded in his plan to privatize Social Security? Ask the Italians.

Italian Pensions Sapped by Private Funds Bush Backed (my extract is a little different than Krugman's)

Jan. 5 (Bloomberg) -- Italy did for retirement financing what President George W. Bush couldn’t do in the U.S.: It privatized part of its social security system. The timing couldn’t have been worse.

The global market meltdown has created losses for those who agreed to shift their contributions from a government severance payment plan to private funds meant to yield higher returns. Anger is rising both at the state, which promoted the change, and money managers such as UniCredit SpA and Arca Previdenza, which stood to profit.

Prime Minister Silvio Berlusconi’s administration is now considering ways to compensate as many as 1.2 million people who made the switch, giving up a fixed return for private plans linked to financial markets. It’s also letting people delay redemptions on retirement funds to avoid losses after Italy’s benchmark stock index fell 50 percent in 2008, destroying 300 billion euros ($423 billion) in wealth.

“The reform didn’t help anyone,” said Gabriele Fava, who heads the Fava & Associati law firm in Milan and writes about labor law. “Not the government, which was hoping everyone would make the switch to take the strain off its coffers, nor the workers who have not resolved the problem of needing a supplement to their social security pensions.”

Are Economic Arguments just Beards for Ideology?

Right now the United States is either near the trough of a recession that will yield to recovery sometime at the end of this year, or it is just at the beginning of a multi-year recession not much different than other post-war ones, or it is on the verge of a Second Great Depression. And if you are not worried about which of these paths the country is on then you just are not paying attention because it is really important that we get this right. So why would anyone even be concerned about a government program that is currently in surplus and whose problems (if any) are ten to twenty years down the road? Yet against all odds the issue of Social Security 'crisis' simply refuses to die, you think you have driven a stake through its heart and it just rises again.

In the wake of the "There is no Social Security crisis" struggle of 2005 a commenter at DeLong asked this question in re Social Security 'reform'

"What puzzles me is energy and persistence of this propaganda campaign with scant positive results."

. Well I made a stab at answering that question in that much different economic environment: Why are they so insistent? and then made the same case at greater length at AB with What does Lenin have to do with it? in May 2008. Yet in comments on my previous AB post Social Security Monthly Balances, a dry as dust reporting of some not really interesting numbers, the whole argument blew up again this time in the context of a dollar meltdown. Those interested can follow the more heat than light discussion which rapidly broke down (as almost always) in ad homs and accusations of ad homs. Personally I would advise you not to waste your time. But it does raise the same question posed by that commenter at DeLong's three-plus years ago. Of all of the possible political and economic crises that we are well and truly facing why would anyone (except obsessives like me) even enter in on a discussion of Social Security? Well I suggest it is for many of the same reasons that Congressional Republicans are threatening to derail the current stimulus package in the face of near consensus from both left and right economists that something needs to be done and that currently the federal government is the only entity with the means (and hopefully the will) to do that something. These people would rather lose the battle and take all of the resulting collateral damage than give up the war.

What follows below the fold is just a reprise of my May 'What does Lenin' post, and really just is intended as a case study to illustrate the following question. Can we ever truly separate an economic argument from the underlying ideologies? Or are we doomed to simply fight the old politico-ideological battles in new economic uniforms? Or you could ask a parallel question. Why is Amity Shlaes et all still trying to beat up on FDR?

What does Lenin have to do with it?
It is clear to me that most of the people who are pushing privatization are fundamentally opposed to Social Democratic solutions generally. There is a large group of people who never liked the New Deal, continue to argue against historical evidence that it was a fundamental failure, they hated Social Security from the start, and indeed ran against it as their central platform plank in the election of 1936. They expected it would fail, they see the various rounds of tax increases over the years as proof that it will fail. The 1983 reform was particularly bitter to them, to the point that they gathered all the anti-Social Security folk to a conference in DC organized by Cato. The results of that conference were published in the Fall 1983 issue of Cato Journal under the title Social Security: Continuing Crisis or Real Reform but which might as well been called "Never again! We'll get you next time FDR!"

You can get a flavor of this by reading through the introduction. There is zero interest expressed in the idea that worker retirement be in any sense a social responsibility long term, instead Social Security is described entirely in terms of diluting investment and retirement planning and of increasing the ratio of labor costs to capital. Most telling is point 2 of their 8 point conclusion:
"2. Social Security is ultimately a manifestation of the welfare state. Real reform, therefore, may require constitutional change that effectively limits the taxing and spending powers of government."
The Cato types see it as welfare, they disagree with government welfare programs in general, and would like to see all of them vanish over time. To use the words of Newt Gingrich to see them "wither on the vine"

Now in reading this from 1983 you can see that these people, while a little bitter at missing their shot in 1982 when Social Security crisis hit, were convinced they would get another shot at some point. But they also saw they needed more than hope. They needed an alternative vehicle and they needed a plan. They had the alternative vehicle, the IRA-the Individual Retirement Account, and they got busy pushing those. But they also understood they needed to win the message war, and so they turned to strategy crafted by Stuart Germanis and Peter Butler. On the title page of the journal the article title was softened somewhat by prefacing it with 'Social Security Reform: but the article itself's title page was more blunt Achieving a "Leninist" Strategy. While they had the minimal grace to put Leninist in scare quotes a reading of the whole article revels that they meant it. At a certain risk to free use doctrine I am going to quote at some length.

Marx believed that capitalism was doomed by its inherent contradictions, and that it would inevitably collapse—to he replaced by the next stage on the ladder leading to the socialist Utopia.
Lenin also believed that capitalism was doomed by its inherent contradictions, and would inevitably collapse. But just to be on the safe side, he sought to mobilize the working class, in alliance with other key elements in political society, both to hasten the collapse and to ensure that the result conformed with his interpretation of the proletarian state. Unlike many other socialists at the time, Lenin recognized that fundamental change is contingent both upon a movement’s ability to create a focused political coalition and upon its success in isolating and weakening its opponents.

As we contemplate basic reform of the Social Security system, we would do well to draw a few lessons from the Leninist strategy. Many critics of the present system believe, as Marx and Lenin did of capitalism, that the system’s days are numbered because of its contra dictory objectives of attempting to provide both welfare and insureance. All that really needs to be done, they contend, is to point out these inherent flaws to the taxpayers and to show them that Social Security would be vastly improved if it were restructured into a predominantly private system. Convinced by the undeniable facts
and logic, individuals supposedly would then rise up and demand that their representatives make the appropriate reforms.

While this may indeed happen, the public’s reaction last year against politicians who simply noted the deep problems of the system, and the absence of even a recognition of the underlying problems during this spring’s Social Security “reform,” suggest that it will be a long time before citizen indignation will cause radical change to take place. Therefore, if we are to achieve basic changes in the system, we must first prepare the political ground so that the
fiasco of the last 18 months is not repeated.

1. Create a political movement
2. Weaken and isolate your opponents
3. Prepare the public ground
Oh and make it clear that the 1983 Reform was in fact from your perspective a "fiasco"

I would urge anyone really interested in Social Security to read the plan in full. Because you will see that the Economic Right followed it to the hilt, for example you hear clear echoes of Butler and Germanis in every speech Bush has made on this. I am not sure that everyone that draws from the messaging plan created at that 1983 conference is as directly and openly cynical about means and motives as these two. Operationally it doesn't matter much. Butler and Germanis' is a hugely successful marketing scheme and it worked. Brilliantly. The old were reassured, the economic stakeholders were drawn on board, the young were convinced that Social Security just wouldn't be there for them, and all blame conveniently placed on the Boomers. Evil genius to be sure, but marketing genius none the less.

Trust Fund Monthly Reports: Nov update

OAS::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$2.023 trillion // $2.216 trillion //$193 billion// $2.221 trillion// $198 billion

DI::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$214.9 billion//$218.7 billion//$3.8 billion//$221.3 billion// $6.4 billion.
Per IV.A2 the opening balance for DI was $214 billion, projected year end under IC $218.7 billion, under LC $221.3 billion

June 30th/Mid-year: OAS $2.140 trillion// DI $220 billion

Aug 31st/Two-thirds: OAS $2.164 trillion// DI $219 billion

Sept 30th/Q3: OAS $2.177 trillion// DI $219 billion

Oct 30th/Five-sixths: OAS $2.187 trillion// DI $218 billion

Nov 30th/Eleven twelvths: OAS $2.197 trillion//DI $217.5 billion

'Natural Born Citizen' Nonsense: Donofrio v. Wells

Trust Fund Monthly Reports: Oct update

OAS::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$2.023 trillion // $2.216 trillion //$193 billion// $2.221 trillion// $198 billion

DI::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$214.9 billion//$218.7 billion//$3.8 billion//$221.3 billion// $6.4 billion.
Per IV.A2 the opening balance for DI was $214 billion, projected year end under IC $218.7 billion, under LC $221.3 billion

June 30th/Mid-year: OAS $2.140 trillion// DI $220 billion

Aug 31st/Two-thirds: OAS $2.164 trillion// DI $219 billion

Sept 30th/Q3: OAS $2.177 trillion// DI $219 billion

Oct 30th/Five-sixths: OAS $2.187 trillion// DI $218 billion

Galloping Gertie: Tacoma Narrows Bridge Collapse

Trust Fund Monthly Reports: Q3 Update

Sept cash balances for the OAS and DI Trust Funds were just released for September, i.e. Q3. Since Social Security works on a calender year basis and the Federal Budget on a FY basis you could use these numbers to compare directly to OMB projections (and I will) for now here are just some straight numbers.

The web page for all the Trust Fund Reports (including Medicare HI, Highways etc) is Trust Fund Monthly Reports While generally Social Security is reported for convenience as having a single Trust Fund which will go to depletion (or not) in some future year (currently 2041), in reality there are two Trust Funds which are legally distinct and can have different levels of solvency and so different projected depletion dates. The larger by far (about 10 to 1) is the OAS (Old Age Survivors) TF. Its report can be found at OAS Monthly TF Report. Its smaller companion the DI (Disability Insurance) TF can be found at DI Monthly TF Report These can then be cross checked against the relevant tables in the 2008 Report:
Table IV.A1.—Operations of the OASI Trust Fund, Calendar Years 2003-171 [Amounts in billions] and Table IV.A2.—Operations of the DI Trust Fund, Calendar Years 2003-171 [Amounts in billions]
OAS::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$2.023 trillion // $2.216 trillion //$193 billion// $2.221 trillion// $198 billion

DI::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$214.9 billion//$218.7 billion//$3.8 billion//$221.3 billion// $6.4 billion.
Per IV.A2 the opening balance for DI was $214 billion, projected year end under IC $218.7 billion, under LC $221.3 billion

June 30th/Mid-year: OAS $2.140 trillion// DI $220 billion

Aug 31st/Two-thirds: OAS $2.164 trillion// DI $219 billion

Sept 30th/Q3: OAS $2.177 trillion// DI $219 billion

I'll have some more thoughts later and cross-post the expanded post to Angry Bear. But it looks like for the first time since at least 1997 Trust Fund cash balances for the current year will slightly trail projections under Intermediate Cost. Whether this is a 'half full, or half empty' situation depends on how you evaluate 'slightly'.

What do you get for $150,000?

Social Security: Hard Solvency vs Soft Solvency vs Sustainable Solvency

'Sustainable solvency' is a new buzz phrase floating around with 'intergenerational equity' and 'unfunded liability'. But before exposing how the term blurs the real issue we need to examine the concepts of what I call 'hard solvency' vs 'soft solvency'.

'Hard solvency' is used here to describe a Social Security system that can pay 100% of all scheduled benefits over the seventy-five year actuarial window with no changes to current law in the form of tax increases or increases in retirement age. If and when we ever achieve it supporters of Social Security can clearly call 'game over, and we won'. But we are not there, instead the most recent Report would have us being able to pay out full benefits until 2041 and 78% after that. These numbers are subject to change and on balance have been improving (the 2007 Report had a 75% payout at Trust Fund depletion). Still as long as the numbers continue to improve supporters have a good case for pushing a plan consisting of 'Nothing'.

Now 'soft solvency' is conceptually a little more difficult. The current schedule of benefits is set up so that future generations of retirees get a fair share of real wage increases over their working lives, that is it provides improvements in standard of living equivalent to those of people still in the work force. Per Prof. Rosser of JMU this improvement means a benefit in real terms of 160% of what similarly situated retirees get today. And if we use what I call Rosser's Equation we see that 78% of 160% = 125%. Which is to say that after TF depletion future retirees will be able to buy a basket of goods 25% better on average than my mom can today. Now it might be that the future basket will pale somewhat when compared to people still in the workforce or to the basket that retiree was collecting in 2040 but it can hardly be described as some huge crisis. By this standard any time Rosser's equation delivers a result of 100% or better we can say that the overall system is in 'soft solvency'. Another way of describing this would be in terms of 'intergenerational equity'. If the Gen-X retiree of 2041 is still getting a real benefit as good or better than his grandmother did in 2008 there can hardly be any equity issues to resolve.

If we establish soft solvency as a floor and hard solvency as a goal we can say that currently we are 40% of our way home. Whether we really need to take positive steps in the short run to boost the result of Rosser's Equation is a question of policy preference and a balance between current utility of dollars for workers today against future utility for retirees thirty years down the road. And by the way not forgetting that these two populations largely overlap. That is it may be more efficient to hope to close the gap between 125% and 160% by mechanisms outside of Social Security itself.

But in any event both hard and soft solvency look at the outlook from the standpoint of the beneficiary for whom results closer to hard are on balance better than results closer to soft, but not necessarily so much so as to simply accept higher payroll taxes to achieve 'hard', 'soft-plus' might be perfectly acceptable if need be.

When critics of Social Security use language like 'dead broke' and 'bankrupt' all they are really saying is that Social Security is not currently passing the test of hard solvency. Which is fair enough, but it also suggests that any fixes should move the needle away from current levels of soft solvency towards hard, that is getting that 78% number up. Instead they pivot and invoke the concept of 'sustainable solvency'.

'Sustainable solvency' in practice means eliminating 'unfunded liability' which in our terms is the difference between the current projections of soft solvency (78% of 160% = 125%) and hard solvency (100% of 160%), that is it is a gap in benefits. But in their terms 'unfunded liability' is a pure burden on future taxpayers and so seen as a gap in future income vs cost. From that perspective it doesn't matter whether you address the gap on the income side or the cost side, instead the focus is on eliminating it one way or another. What this implicitly does is to kick hard solvency to the curb. Even though in a real sense 'crisis' starts out as a failure to achieve hard solvency, the solutions simply accept that some version of soft solvency is in fact good enough, if that is if it can be used to introduce a system based on Personal Retirement Accounts (PRAs).

So the task for supporters of Social Security as currently configured is to put the privatizers' feet to the fire. Does their solution give a better result then the current level of soft solvency projected? If not why should current workers and near retirees buy in? The system as currently configured is projected to deliver a minimum of soft solvency plus and is trending more and more towards hard solvency. Why should we accept a result that doesn't deliver more solvency at equivalent cost?

Social Security Checkup: Monthly Trust Fund Reports

Near the end of each month the Treasury Dept releases Trust Fund Reports giving balances to the penny for the previous month. By comparing these balances to the projection in the Annual Reports we can get a rough idea of how Social Security is doing year to date. This year's Report was released on October 2. Two caveats:
One, these numbers are not seasonally adjusted and I couldn't tell you the relative impact on total wages of summer employment vs harvest vs holiday. Each are marked by the entry of temporary workers into the system.
Two, Social Security collects FICA on your total check right up to the point you hit the annual cap at which point they stop collecting at all. For example if you have a salary of $200,000 per year you would see full deductions for Jan to Jun, a small deduction for July and nothing thereafter. This should make for the earlier parts of the year seeing relatively higher collections than the latter. But once again I can't quantify the effect.

So this is an imperfect tool. But it is what we have. So lets have some numbers.
The web page for all the Trust Fund Reports (including Medicare HI, Highways etc) is Trust Fund Monthly Reports While generally Social Security is reported for convenience as having a single Trust Fund which will go to depletion (or not) in some future year (currently 2041), in reality there are two Trust Funds which are legally distinct and can have different levels of solvency and so different projected depletion dates. The larger by far (about 10 to 1) is the OAS (Old Age Survivors) TF. Its report can be found at OAS Monthly TF Report. Its smaller companion the DI (Disability Insurance) TF can be found at DI Monthly TF Report These can then be cross checked against the relevant tables in the 2008 Report:
Table IV.A1.—Operations of the OASI Trust Fund, Calendar Years 2003-171 [Amounts in billions] and Table IV.A2.—Operations of the DI Trust Fund, Calendar Years 2003-171 [Amounts in billions]
OAS::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$2.023 trillion // $2.216 trillion //$193 billion// $2.221 trillion// $198 billion

DI::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost
$214.9 billion//$218.7 billion//$3.8 billion//$221.3 billion// $6.4 billion.
Per IV.A2 the opening balance for DI was $214 billion, projected year end under IC $218.7 billion, under LC $221.3 billion

June 30th/Mid-year: OAS $2.140 trillion// DI $220 billion

Aug 31st/Two-thirds: OAS $2.164 trillion// DI $219 billion

I had some calculations up but they all got garbled in my head so I deleted them. Bottom line 2008 is shaping up to be a kind of sucky year for Social Security. What was a decent picture for OAS mid-year now is kind of dim, it is unlikely that we will even hit Intermediate Cost projections. What was a really bright picture for DI is now less shiny, from June to August the balance actually shrank, if that continues at the same rate it too will fail to hit IC projections.

Which just goes to show the ultimate truth about Social Security, it prospers in good times, it shares the pain in bad as receipts react to covered employment and real wages. (We have a parallel here with the late seventies, a reform was put in in I believe 1977, it didn't fare well when stagflation simultaneously choked off revenue while boosting cost. The result was a new crisis and a need for a bigger reform in 1983).

Social Security Actuaries score the Warshawsky Plan

(Cross posted at Angry Bear)
Andrew Biggs directs our attention to a new detailed PRA plan by Mark Warshawsky, a member of the Social Security Advisory Board: Notes on SS Reform: Actuaries Score New Reform Proposal The post does not link to the plan itself but instead to a detailed scoring of it by the Office of the Chief Actuary in a memo to be found here (PDF) Estimated Financial Effects of “A Reform Proposal to Make Social Security Financially Sound, Fairer, and More Progressive” by Mark Warshawsky

I just came across this and haven't studied it in detail (and boy is there a bunch of detail) but like any plan it raises some standard questions.

1) Is the rate of return assumed on the PRAs actually reasonable under Intermediate Cost assumptions? (The No Economist Left Behind Challenge).

2) The plan assumes a direct transfer from the General Fund to supplement the PRAs starting in 2012 equivalent to .5% of payroll. Given that one current definition of 'crisis' is 'General Fund transfers starting in 2017 to pay partial interest', adding an additional transfer amount starting even sooner seems to undercut the overall message. How do advocates of the plan address this?

3) The Warshawsky Plan assumes a whole range of cuts and adjustments to retirement age, tax on benefits, and to the benefit formula generally. Each is scored individually as seen in Table A (which follows the actual memo page 14). Any combination of those scored cuts and adjustments that add up to 1.7% of payroll would put current Social Security in Long Range Actuarial Balance. What happens if we just take this cafeteria style?

Provision 3 would modestly raise the cap for a net addition of .15% of payroll. Provision 4 would gradually expose all SS benefits to taxation for an additional .24% of payroll. Provision 6 would bring in all new State and Local government employess for a net addition of .22% of payroll. Provision 7 would increase early and full retirement ages for an addition of .56% of payroll. Provision 8 is a little obscure but it would seem to just reduce lifetime benefits for disabled workers for a net addition of .35% of payroll. For a total combination of 1.52%. I don't really get provision 5 but it would give you an additional .65% of payroll for a new total of guaranteeed tax increases and benefit cuts of 2.17 of payroll. Which is to say .47% more than would be needed to simply fix the program as is.

Now Warshawsky sweetens the plan by reducing payroll tax by 1.0% (presumedly translating to a increase in worker pay of .5%) but offsets that with a new transfer from the General Fund of .5%. Now given the different incidence of Income tax and FICA this means a lower income worker would benefit more by the reduction of FICA by .5% from his first dollar than he would from some theoretical increase in income tax to fund that transfer from the GF. But enough to offset the guaranteed increases proposed?

No one really doubts that you could close the proposed 1.7% gap by some combination of tax increases and benefit cuts and Warshawsky's plan does that up front. But in this scheme where do PRAs come in?


This is where the water gets deep. The proposed FICA tax cuts in provisions 1 & 2 total 1.26% of payroll. Hurrah for workers! But the guaranteed cuts in benefits in provisions 3 to 8 equate to 2.17% of payroll. Which means workers are .91% behind right from the get go. Plus you add in whatever their share of that additional .5% of GF transfer. Then you get the whopper, Warshawsky proposes to change the benefits for everyone by an ADDITIONAL 1.46% of payroll under provision 9, meaning the worker is guaranteed a combination of 2.37% plus of average cuts in the face of a gap now scored at 1.7%. But wait, some of that money was steered into private accounts, surely most people will make up the gap from the equity premium. Won't they?

Well maybe. If the economy grows at a rate that allows for assumed returns and if you are willing to take higher levels of risk some people after 2029 or so get a better deal overall. But not everybody and not anything is guaranteed. The actuaries put it this way

The personal account annuity replaces the smallest portion of the reduction in the scheduled benefit for the married couple with only one earner. The annuity would fall somewhat short of covering the PIA reduction for one-earner couples retiring at 65 in about 2030 or earlier. For single workers and two-earner couples retiring after 2039 with low career earnings, however, this approach would generally be expected to provide an overall increase in retirement income.

Translation: Boomers and most Gen-Xers get less net than they would be leaving the system alone.

This is by no means a complete analysis of the plan, more like a skim, and for those with the chops I encourage you to dig in. But I just don't see how the average worker really benefits under this plan given the risk involved. The benefit cuts are guaranteed, the gains from the PRAs are contingent. Plus we haven't even examined the NELB component, can they really get these projected PRA yields at Intermediate Cost assumptions?

Intergenerational Equity, Unfunded Liability and Selfish Boomers

The newest buzzphrase in the Social Security world is 'Intergenerational Equity'. It is indeed the theme of the new movie IOUSA (to whose webpage I link) which itself is pretty much a documentary of the Concord Coaltion's Fiscal Wake Up Tour. (The fact that Concord was founded by Pete Peterson and rights to distribute the IOUSA film are in the hands of the PGPF: Peter G. Peterson Foundation not being a coincidence at all.)

One of EconomistMom's (who is a/the chief economist at Concord) first posts was entitled The Young People Get It which in turn was plugging the Youth Entitlement Summit 2008 in turn sponsored by Americans for Generational Equity an organization first founded in 2006 and funded by the usual group of conservative foundations.

The idea isn't new exactly, in Googling around today I found this lengthy article from Sept 2003 that probably explains it better than I can (I have only read the first page so far) Generational equity, generational interdependence, and the framing of the debate over social security reform. But before I turn this one over to a discussion of that let me highlight one thing.

If you go to the IOUSA webpage and look for the first part of the description of the overall issue you find it framed as follows (bolding mine) :

I.O.U.S.A. boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. As the Baby Boomer generation prepares to retire, will there even be any Social Security benefits left to collect? Burdened with an ever-expanding government and military, increased international competition, overextended entitlement programs, and debts to foreign countries that are becoming impossible to honor, America must mend its spendthrift ways or face an economic disaster of epic proportions.

Sure they go on to talk about military spending and foreign debt but the discussion ALWAYS starts and mostly ends with Social Security and equally ALWAYS with a dig at Baby Boomers.

Having run into this particular article I want to post this now as Part 1 and get some discussion going on the overall topic and then return to the theme of 'Social Security Crisis = Selfish Boomers' in a latter post.