SOCIAL SECURITY: IT'S NOT WHAT YOU THINK

Steppenwolf, I'm not ready to concede that Schillings figures are not applicable to today, and I think the writer of the article you posted missed the mark a bit. Yes, revenues as percentage of GDP did rise dramatically toward the end of Clinton's last term, but at a huge price of recessive taxation and, by some estimates, triggering a recession that was already kicking in in year 2000.

As you can see, GWB's tax cuts returned the ratios to pretty much what they have always been and we are pulling out of the recession with greatly increased overall revenues. (Yes, the budget itself is way out of sight but that's a discussion for another thread.) So I don't think your writer's dog won't hunt here.

C.I., I have no problem with the system allowing the status quo for those who want it now, but the fact is, a few decades from now, the entire U.S. budget won't cover the 10 to 12 trillion dollar obligation we have promised to social security retirees. So if we don't start slowly changing the system now, it will be impossible by then.

At 7% return, investments will double about every 12 years - at 10% every 7.2 years - at 15% about every 5 years. Given the track record of the market over the last 60 years, that should be a piece of cake for just about anybody. I can't see why free people should not be allowed to take the relatively small risk if they choose to take it.

Only select jobs offer group IRAs (mostly for higher income individuals), and it's quite difficult to set up your own. Moreover, although no definite plans have been released, it was my understanding that the private accounts would only be optional. I also agree with your suggestions (1-3), but I don't see them as contradicting current proposals. Am I wrong?

steppenwolf, Wrong! All workers without company sponsored retirement plans can personally invest in an IRA. It's not for "higher income individuals." It's not difficult to set up. You can go to almost any bank or investment institution to set up one. Here are the IRS rules on Individual Retirement Accounts. We started ours when it first became available. Good luck. http://www.irs.gov/pub/irs-pdf/p590.pdf#search='irs%20IRA'

The 2003?-2004 ratios haven't been that low since the 60s according to your table. Regarding the estimates on 2005+, as I said before, even the OMB never estimated a return to 90s revenue. Most importantly, the 2005+ figures shouldn't be taken at face value. The OMB suffers from a major conflict of interest that makes these number highly questionable, which is why I focus mostly on the 2003?-2004 figures. Remember, the OMB is hired at will (subject to be fired without cause) by the president. The OMB's previous estimates, which were used to justify the 2000 cuts, can be found here. http://www.ombwatch.org/article/articleview/1004/1/136/?TopicID=2. As I'm sure you know, these "estimates" turned out to be totally bogus. Go figure?-the president's budgetary organ estimated numbers that were 100% favorable to his policies, but 100% off the mark.

The point about the 2000 recession is also an oversimplification, as is the idea that taxation and government expenditures are anathema to growth, per se. Taxed income and government revenue does not disappear into oblivion. Anyway, the debate on that point is too complex to deal with here; it's the major bone of contention between supply-siders and demand-siders (both groups of which include fantastic economists), and I don't pretend to have a meaningful answer to that debate. There's also a lot of other stuff going on there regarding incentive structures and presuppositions about the prevalence of market failures (for another thread, I suppose, and I also don't pretend to have an answer to those debates either).

Finally, I do not take expenditures and taxation as two separate issues. It is my belief that we should not decrease taxes without a viable plan for decreasing expenditures. This was the core of "paygo" (or pay-as-you-go), which was unfortunately dropped during Bush's tenure. As Greenspan said (quoted in the last article), paygo needs to make a comeback, and taxes are an integral part of the budgetary equation. I don't mind decreasing government expenditures (I prefer that option), but in the political world one needs to be a pragmatist. If that means raising taxes, it's better then letting our finances spin out of control.

Lol, yes I realize that it's available to everyone. My point was that not all employers set it up for you as a "group" (particularly in low wage jobs)--perhaps my original sentence was confusing. I'll also take it from you that it's easy to set up through your bank without your employer. However, SS and IRAs are categorically different. Irrespective of whether we have private accounts, SS taxes will be taken out of our paychecks. Giving you the option of partially privatizing your SS money thus doesn't require setting aside additional funds. I therefore believe that it's de facto harder for low income individuals to set up IRAs than to manage privatized SS accounts, not that they actually are prohibited from doing so .

Steppenwolf, I've always been under the understanding that it's not how much you earn that matters, but how you live within your means. I have lived at a time in my life when I lived from paycheck to paycheck without the possibility of putting away anything for a rainy day, so I know exactly what you're saying. But I'm addressing those folks that seem never to have that extra dollar to save even when earning above poverty level income. We have middle-class families in Silicon Valley that earn on the average some of the highest salary in our country, but they don't have any savings - and live paycheck to paycheck. They have no excuse not to be saving for their retirement. They just haven't learned how to live within their means.

I can't disagree with that, cicerone. I also know quite a few people who don't seem to realize that the future is inevitable, and that you might as well plan for it.

Steppenwolf, BTW, I like your above response to Fox concerning reliance on the OMB for accurate projections of revenue and expenses.

Credit cards and greed affect the rich just as much as they do the poor; paycheck-to-paycheck is a way of life for many rich people that I know...

In many cases, I think it can be much worse. Once a person has dedicated a significant proportion of their time/interest to the goal of acquisition of wealth/goods, the desire to have MORE wealth and goods can only grow along with the accounts that were worked so slavishly for.

The temptation to buy a house or boat that isn't really in your price range, even though you are rich, affects the rich perhaps much more than the poor. The recent massive surge in home prices in many major cities in America is a sign of how this has happened; people are willing to pay more, the price goes up, etc...

Credit is a trap. I don't use it; if I could, I'd sever myself from the system completely.

Cycloptichorn

C.I., in case you missed it, I posted the OMB figures for the last several decades and for their projections into the future, such projections being always iffy. CATO is the LEAST partisan think and analysis group out there, but at least Greenspan and other non partisan sources are agreeing with their version. But please guys don't make this a partisan discussion. There are other threads for that.

If you disagree with Spillman say why, not that he's out of date. If you disagree with CATO, say why, not that they are partisan. I think some other sources that have been posted are very partisan, but partisanship is irrelevant for this discussion. I hope all are capable of seeing that the OMB grid that I posted shows percentages but not dollar amounts, so we cannot know the significance of the percentages without also posting the dollar amounts each represent. I am only saying that the current percentages are comparable with the majority of the recorded history on the subject.

Everybody repeat after me: 1) Good information is good information no matter who puts it out, and 2) a good idea is a good idea no matter who comes up with it.

Since it has kept coming up so far, could those with a thought on the matter address any reason you might have for not allowing people who are willing to assume modest risk with their retirement $ to do so on their own behalf?

I have disagreed with the OMB whether the administration is/was democratic or republican. As a matter of fact, I disagree with most things our government does and says. It's not partisan; I just don't trust our governments, and that includes state and local.

Well that's fine C.I. Then maybe you also agree that government can't be trusted with our retirement money and letting people direct their own fate isn't such a bad idea?

Projectionss of revenue and expense for the next five years is impossible, because there is no economic tool that will provide for such projections. It's simple economics; those who claim to know how the economy of our country will do for the next five years is not playing with a full deck.

I specifically said any projections were 'iffy'. But let's focus on the question at hand. Because of the recommendations of so many economists that I trust and respect--though not one has any kind of accurate crystal ball--I am personally leaning toward some kind of privatization plan to stablize and protect social security.

Can any of you come up with a good reason that Americans who chose to risk some or all of their retirement benefits in return for a probable if not guaranteed higher return should not be allowed to do so?

Re: Our retirement money. I'm not worried one iota at my age. There is sufficient "trust fund" social security monies to fund the program for the rest of my life. There really is no immediate worry or shortfall in the social security fund; only the president's message makes it seem urgent. If you wil bother to do a search on the social security trust fund, you will find that there is enough money to fund social security for over 35 years before income will be less than payments. I think the year 2042 comes to mind, but you're welcome to find the actual year when money will begin to dwindle in the fund. Whatever the year that happens, I'll be long gone.

Social Security Trust Fund
From Wikipedia, the free encyclopedia.
The Social Security Trust Fund is the United States federal government's means of accounting for workers' paid-in contributions to the Social Security system that are in excess of current payments to beneficiaries. This excess, the amount not yet needed for Social Security purposes, is invested in securities issued by the government, and those securities constitute the assets of the Trust Fund.

The Social Security system is primarily a pay-as-you-go system, meaning that payments to current retirees come from current payments into the system. In the early 1980s, however, projections indicated that the eventual retirement of the numerous members of the post-World War II baby boom would cause expenses to exceed revenues. Accordingly, the Social Security tax was increased in 1983 so that it would be greater than necessary to pay for current expenditures, thus accumulating a reserve that could be drawn upon when necessary. The surplus is accounted for in the Social Security Trust Fund. As of the end of calendar year 2004, the accumulated surplus stood at approximately $1.7 trillion. [1] (http://www.ssa.gov/OACT/STATS/table4a3.html) Projections are that current receipts will continue to exceed expenditures until 2018 or 2019. Thereafter, there will be a shortfall that will be made up by withdrawals from the Trust Fund, although the Trust Fund will continue to show net growth until 2025 because of the interest generated by its bonds. [2] (http://www.philly.com/mld/philly/news/columnists/larry_eichel/10671774.htm) The Trust Fund will gradually be drawn upon to cover the difference between tax receipts and benefit payments. It will be completely depleted by 2042 (according to the Social Security Administration) or 2052 (according to the Congressional Budget Office).

I am as concerned about the next generation as this one, and both the previous administration and the current administration have put similar scenarios out there. Bill Clinton was quite convinced that Social Security would be in serious deficit before he dies and GWB has come to the same conclusion. So let's keep the issue of whether there is or is not a problem non partisan.

Again, why shouldn't Americans be allowed to assume voluntary risk re their own money in respect to their retirement?




Behind Social Security's Big Numbers
by Andrew Grossman

February 10, 2005

Are we $27 trillion in the hole on Social Security? Or is it just $3.7 trillion? It is difficult to make sense of all the numbers floating around as people discuss Social Security reform. To do so, one needs to understand just what the most-cited measures of Social Security's future burden really mean.

Total Cost vs. Net Present Value

Before plunging into the numbers, it makes sense to take a step back and think about what they actually represent. There are two ways to express the government's future obligations in terms of today's money: net present value and total payments.

Net present value estimates represent the amount of money the government would need to have on hand and invested today in order to make Social Security solvent. This lump sum and its accrued interest earnings would be used (along with Social Security payroll taxes) to pay future benefits.

Net present value is a financial measure that is commonly used to evaluate long-term financial decisions on a comparable basis: A family, for example, could think of the initial size of its home mortgage as representing the net present value of the loan. As a practical matter, however, the federal government should not invest in the private market in order to accumulate earnings. Additionally, it is difficult for the government to stash away funds for the future. For example, what happened to the decades of surplus Social Security income? Congress spent it.

Total payment estimates represent what the government will pay for Social Security benefits, putting just enough money into the system every year to be able to make its promised benefit payments to Social Security recipients. A total payment estimate, then, represents the sum of a stream of future payments, all adjusted for inflation into current dollars. A family could equate that number to the total of all the monthly payments they will make to retire their mortgage.

How Much Red Ink?
The numbers in this section all represent different ways of measuring and talking about Social Security's future shortfall. All are derived, in one way or another, from the 2003 and 2004 Social Security Trustees' reports.

$3.7 trillion[1]: This is the net present value of Social Security's unfunded obligations through 2078. In other words, this is the amount of money that the government would need to have on hand and invested today so that it could make Social Security solvent when combined with the Trust Fund bonds and future payroll taxes. This would balance out the program's future deficits so that it could fully pay promised future benefits through 2078.

This number (the technical name for which is the "75 year unfunded obligation net present value?-trust fund perspective") is misleading in three ways:

It does not account for the cost of repaying the Trust Fund bonds from 2018, when the system begins to run deficits, until 2042, when the Trust Fund is exhausted. This money will have to come from general revenues via higher taxes, increased borrowing, or huge spending cuts elsewhere.
It extends only through 2078, although the Social Security Administration projects deficits beyond that date.

It is the amount of money that is needed today, right now, to close the program's shortfalls; every year's delay in fixing Social Security costs a year of investment and compounding, increasing the cost of Social Security in net present value terms.

For these reasons, this number is a deceptively small measure of Social Security's future burden.

Social Security is in bad enough shape that even the small numbers are enormous. The relatively small $3.7 trillion estimate of Social Security's future burden is still nearly four times the value of all individual federal income tax receipts from 2003.

$5.2 trillion[2]: This is the net present value of Social Security's cash-flow shortfall through 2078. In other words, this is the amount of money that the government would need to have on hand and invest today so that it could pay Social Security's promised future benefits through 2078 and pay back $1.5 trillion for the Trust Fund's bonds.

Still this number extends only through 2078 and represents the amount of money that the government would need to collect and invest today. It is more than twice as big as the entire federal budget and is often referred to as the "75 year shortfall net present value?-budget perspective."

$5.8 trillion[3]: This is the sum of the payments, in 2003 dollars, that the government will have to repay to the Trust Fund between 2018, when Social Security's cash flow goes negative, and 2042, when the Trust Fund's bond holdings are finally spent. In other words, this is the total cost to keep Social Security going even before the Trust Fund is empty.

Without any changes in Social Security, these payments will come out of general revenues via higher taxes, increased borrowing, or spending cuts elsewhere. So what's wrong with this number? It doesn't account for Social Security's deficits after 2042. This number is called the "sum of trust fund payments."

$11.9 trillion[4]: This is the net present value of Social Security's cash-flow shortfall: in other words, the amount of the money that the government would need to collect and invest today so that it could pay Social Security's promised future benefits forever. This estimate uses a controversial infinite time-horizon. On the one hand, it doesn't ignore what happens after 2078. But on the other hand, it is an uncertain business to project so far into the future.

Like other budget-perspective estimates of Social Security's burden, this number represents the amount of money that the government would need to invest today to pay back the Trust Fund and fill the future shortfall. Excluding these Trust Fund payments, this measure drops to$10.4 trillion[5], the number that the President often cites to describe Social Security's future burden.

Though an imprecise exercise, projecting Social Security's shortfall so far into the future does illuminate several points. First, the difference between this measure and the analogous 75-year budget-perspective shortfall is $6.7 trillion. In other words, assuming standard returns, it is the amount of money the government would have to have on hand and invest today, and not touch at all for 75 years, and then use starting in 2079 to cover promised benefits. This demonstrates the danger of relying on estimates that stop short in 2078 and look no further.

The enormity of this number leads to a second point. Small changes in Social Security, such as have been made in the past and such as some propose now, are not enough to put the program on a permanently stable footing. At best, small changes push the problem of Social Security's financing into the future. This number is as big as the entire U.S. economy and is often referred to as the "infinite time horizon net present value."

$27.168 trillion[6]: This number is Social Security's total negative cash flow through 2078, in 2003 dollars. It does not account for Social Security's continuing shortfalls after 2078. Still, this number fairly represents, in today's money, the future stream of payments that will be required to fill the deficits so that Social Security can make its promised benefit payments through 2078.

Moreover, without reform, those payments will have to be made up somehow: from higher taxes than under current law, spending cuts elsewhere, more borrowing, or lower benefits. This number is more than six times the total federal debt held by the public and is called the "sum of the deficits."

Conclusion
An understanding of Social Security's future burden makes the need for reform all the more apparent. Specifically, it demonstrates clearly the great value of reform that would retire more than $27 trillion in future deficit expenses while also protecting the benefits of today's seniors and helping families to build nest eggs.

While each of the different ways of measuring Social Security's future burden tells us different things about the program's future costs, they all reveal the huge problems that Social Security faces if it is not reformed soon. By any measure, Social Security's burden is heavier than we can conscionably pass on to our children and grandchildren.

Andrew Grossman is Senior Writer and Editor at The Heritage Foundation.
http://www.heritage.org/Research/SocialSecurity/wm662.cfm

Fox, If you will go back on this thread, you will find my recommendations for improving the social security plan. In it, it includes a long term plan to divert some monies into personal investment accounts. Nothing I have written subsequently conflicts with my recommendations - as far as I'm aware.

Well that's good to hear C.I. I guess we all sometimes make statements or post stuff that seems to contradict what we said before.

I think to solve the problem of social security or really to solve any mega-bureaucratic issue of government, we're all going to have to think outside the box.

For instance: Has it every occurred to you that if social security was such a great thing, people wouldn't have to be forced by law to participate in it?