I have a new op-ed on Social Security over at Real Clear Markets:
"There is bad news to come regarding Social Security - not merely for the "1 percenters" but for ordinary Americans, who must either pay more to Social Security or receive less from it. Expanding Social Security, as some of members of Congress have proposed, isn't rearranging the deck chairs on the Titanic. It is like adding more passengers."Click here to read the whole piece.
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7 comments:
Andrew,
"Social Security’s funding problems aren’t due to the very poor – 20% of whom fail to even qualify for retirement benefits – but to benefits paid to middle and upper income Americans who do not save as much as their parents and grandparents did. "
There is a lot in that thought. First, what is the source for the pct of very poor who do not qualify for benefits. I have seen some SSA study's on never-beneficiaries but 20% seems high.
Separately, I am not sure how you can say that any of SS funding problems stem from what people save. Earnings from savings aren't part of the financing structure. I would also question that anyone does not save as much as their grandparents. Maybe as a percentage of income, but I save more in a year than my grandparents did in a lifetime.
Joe is right. "Earnings from savings aren't part of the financing structure." So, your assertion is just weird.
"If there is any definition of fiscal irresponsibility, it is to increase a program's benefits before paying for the benefits the program already has offered."
Frankly, I see this as part of the political process. If proposing increases gets people talking about SS, then it helps. The discussion will always be difficult because SS is insurance. Imagining that someone trashing their car or burning their house is possible, but imagining not saving enough for themselves is hard.
I cut the sentence which observed that the political process has untenable proposals all the time. I should have left it in and noted that is one part of politics that I see my side do as much as the other.
"Neither the administration nor the Congress has any plans to make the program solvent."
Social Security Old Age Survivors Insurance has never been actuarialy solvent EVER! Both Joe and Arne are correct, not saving as much as are grandparents is not an issue for SS-OASI. However, if you increase the payroll tax fro 2% to 10.6% and the base from $3,000 to $118,500 since 1950, now that takes a lot of dollars that would have gone for many things like;
Savings
lowering borrowing thus increasing wealth which is savings
Saving and investing income in the year earned versus spending this potential "savings" to be used years down the road to fund retirement, now thus increasing economic growth. In essence Social Security artificially stimulates the economy over a set number of years before it finally runs dry.
Individual Savings are like a flywheel on an engine. When bad times hit, the size of your savings can help keep you afloat. If you and others can maintain spending, then you help keep a demand for goods and services. However, this flywheel has been replaced by a trust fund that was used unwisely to pay benefits to a select few cohorts who did not contribute to its supply, thus draining the energy from the economy.
I have clippings from the 70's. 80's. 90'. 2000's and they all get worse with each passing decade. The reason why congress has not proposed any plans that make social security solvent is simple. It is mathematically impossible to do so. The money is spent and now the only way to fund future benefits is to raise taxes, thus taking funds in an ever higher rate of taxation than before, compounding the root cause of the problem.
"this flywheel has been replaced by a trust fund"
Analogies usually fail, but the analog between a flywheel in a mechanical system and the trust fund in a financial system is pretty good. The trust fund deals with the short term ups and downs. It has even dealt with the long term impact of the Baby Boom generation to a fair extent.
The trust fund cannot deal with the reality that we are living longer and that that costs more.
"The reason why congress has not proposed any plans that make social security solvent is simple. It is mathematically impossible to do so."
Mathematically, according to the SSA, increasing productivity will lead to increasing wages that will give our kids a better standard of living than ourselves - even after paying for the increasing cost of retirement. That increased cost should include more retirement savings and more retirement insurance. Making SS solvent will mathematically easy as soon as we can get Congress to realize that we really are willing to pay more for increasing value.
"Mathematically, according to the SSA, increasing productivity will lead to increasing wages that will give our kids a better standard of living than ourselves - even after paying for the increasing cost of retirement. That increased cost should include more retirement savings and more retirement insurance. Making SS solvent will mathematically easy as soon as we can get Congress to realize that we really are willing to pay more for increasing value."
Myth 4
Increased Economic Growth will save Social Security The initial Social Security benefit is based on average lifetime-indexed wages. Wage growth is used to adjust past wages of future retires; similar to inflation being used to adjust social security benefits for current retires. When rate of economic growth, and its resulting increase in wages, exceeds the rate of return on the social security trust fund, then social security is actually disadvantaged due to economic growth.
For example if wages were to rise 5% this year, the initial social security benefit for future retires would also be 5% greater. If the trust fund investment returns did not match or exceed the 5% rate of growth then the trust fund would be falling behind on its ability to meet the payout commitment.
In simple terms economic growth will not save Social Security and in technical terms, increased economic growth makes funding social security worse. [3]
Myth 5
Productivity growth is what is needed to save Social Security Social Security revenues are based on wages earned by the worker. Productivity can contribute to real wage growth (see myth 4) and/or the displacement of workers. Both of these conditions reduce social security revenues. Productivity growth will not help at all.
Below is a link to President’s Commission to Strengthen Social Security, Interim Report August, 2001, Page 16. My paper I wrote in the early 80's and put on the internet in the 90's was titled "Why Economic Growth was Bad for Social Security." When I included this in material sent to the commission in 2001 was retitled.
https://www.socialsecurity.gov/history/reports/pcsss/Report-Final.pdf
https://www.socialsecurity.gov/history/reports/pcsss/Report-Final.pdf
“The government could keep Social Security technically solvent forever simply by issuing new bonds to the fund. Alternatively, Social Security could be made technically solvent by requiring that a higher rate of interest be paid by the Treasury to the Trust Fund. Regardless, the need to raise taxes, cut spending or borrow would remain exactly the same. While the bonds in the Social Security Trust Fund will be honored, what is important economically is not the amount of bonds in the Fund but the resources backing those bonds. And the resources backing these bonds are quite simply the power of the government to tax and borrow from the public.”
Some believe that because our children and future generations will have a higher standard of living than us, that this will make it possible to fund social security. The problem with this method is that if we were to tax the increased standard of living, we would then reduce their standard of living at the same time. Standard of living includes taxes of all kinds. Limiting the ability of workers to utilize their increased wages to their benefit would limit the ability of all categories of workers to improve their standard of living.
The standard of living has improved simply because we as humans have sought the most efficient means of producing items. When this displaces workers, these workers find new thins to produce that humans utilize; cell phones, computers, 3D movies, food, etc. Taxing people will reduce the ability to sustain those workers who are displaced because the increased spending from productivity reducing costs to consumers is seen as free money to fund social security. It is not and will have a detrimental effect on our economy.
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