Social security and fiscal policy

by on February 25, 2009 at 10:48 am in Economics | Permalink

This should be widely understood (which means it isn't), but it bears repeating nonetheless.  Josh Patashnik writes:

the projected growth rate of health care costs is unsustainable, and
finding ways to change that ought to be, far and away, the country's
top fiscal priority. But it's not as though the chunk of money going to
Social Security and "other spending" is simply an afterthought; this is
15 percent of GDP we're talking about.

The fact that, over some time horizon, Social Security nearly "pays for itself" is irrelevant when the goverment's fiscal position is viewed in a properly consolidated manner.  There is further commentary from Andrew Sullivan.  I am dismayed that some left-wing bloggers are breathing a sigh of relief that the supposed "fiscal responsibility showdown," scheduled for this past Monday, turned out to be a non-event.

Obama mentioned "universal accounts" in his coverage of social security last night and I am surprised the blogosphere has not picked up on this more.  This is probably Gene Sperling's idea and the key question is how much is "carve out" from existing benefits and how much is "add on."  In any case doing this reform at Dow = 7,000 makes more sense than doing it at Dow = 11,000.  It's even a way to boost stock prices (and possibly confidence?) though presumably it involves borrowing yet more money.

When you consider the speech as a whole, Obama is promising the largest and most ambitious attempt at rate of return arbitrage in the history of the human race.

Obama's speech was very effective but it is mostly about borrowing more money.  It is odd that in a time when capital markets and attempted arbitrage have so failed us the solution is to resort to…capital markets and attempted arbitrage.

The more events progress (what's the implicit A.I.G. liability for the
government these days? near one trillion?), the more I believe that the tax cuts in Obama's stimulus plan were a mistake.

If I were Taiwan I'd feel a wee bit more worried these days.

1 Scott Wentland February 25, 2009 at 11:11 am

Borrowing at a lower return and investing at a higher return is only arbitrage if the investment is guaranteed or riskless.

I think few would call Obama’s fiscal policy riskless. Call me dismal, but I think there is a real possibility of a negative return. Arbitrage may be the wrong word here.

2 anonymous February 25, 2009 at 11:49 am

I wonder how fed up and disgusted people are. Would anyone support a constitutional convention to completely abolish our existing federal government or is this too far?

3 Alex F February 25, 2009 at 11:59 am

John: I think the argument is that the US is becoming more dependent on borrowing from China, and hence less able to commit to defending Taiwan.

4 E. Barandiaran February 25, 2009 at 12:32 pm

After going quickly over JP’s post I don’t see any reason to spend time reading his posts. Regarding AS, I still regret a $50 donation I made to him years ago; I understand he is still on the slippery slope.
So Tyler let me comment on your views on Obama’s speech. You say “… in a time when capital markets and attempted arbitrage have so failed us…” I don’t think you’re right; actually, I think you’re wrong. All capital markets, everywhere, have been very much regulated at least since the Great Depression. In the past 80 years there have been many changes in how capital markets are regulated (including changes in the extent to which national governments and to a much lesser extent international organizations have supervised the applications of the regulations). To talk about capital markets as if they were not regulated, it makes no sense. If you’re referring to the period since the Asian crisis of 1997, I doubt that anyone has been able to read the thousands of official documents and research papers about how the financial system (that is, banks and the capital markets) have to be regulated. Because of my work, until 2006 I read many of them but I know that I missed a lot and most important I was not able to keep track of all the regulatory changes in national and international markets. For example, have you thought what happened in China between 1993 and 1997 that allowed in the past 12 years the transfer of well over one trillion US dolars largely to the US? I know because I was living and working there as part of the WB advisory mission to reform state banks and enterprises. I can give you many examples of regulatory changes but the point is there have never been free capital markets so to say that they fail, you have to explain yourself what you mean. To talk about the failure of attempted arbitrage, most likely you are referring to the persistence of price differentials (I don’t think you refer to regulatory arbitrage). I think you’re too neoclassical–that is, you want to believe that two pieces of paper that say the same, except for the name of the parties, are perfect substitutes. Try to be more Hayekian, especially when you refer to the pieces of paper that are traded in capital markets. You can ask any trader how difficult is to price each of the risks associated with each piece of paper.
From your assumption about the failure of capital markets and attempted arbitrage, you jump to “the solution to … capital markets and attempted arbitrage”. You were right to say that Obama’s speech is mostly about borrowing more money but you don’t need to relate it to capital markets and attempted arbitrage. In the ongoing discussion about the stimulus plan and its financing, many economists are willing to assume that regardless of the current state of capital markets, the US government can finance the projected deficits for the next few years and some go even further and assume that much higher deficits could be financed without precipitating premia or inflation too high to be politically acceptable. So far they are right, but they don’t know how much further and longer they can go. I know (remember I’m Argentinian) that one day the US treasury may have to pay a high risk premium, perhaps a very high one (it will be a serious problem but not a failed arbitrage). When it happens, it will be Obama’s day of reckoning.

5 Shaun February 25, 2009 at 1:05 pm

I’d agree that Alex’s comments are the underlying argument Tyler was eluding to, but I’d also venture Obama’s explicit mention of significant cuts to defense spending are a secondary motive.

6 RobertD February 25, 2009 at 1:38 pm

I’m confused with what the difference is between universal accounts and private accounts. I understand the government is matching them, but is that only for the poor? Can everyone have a universal account?

7 MM February 25, 2009 at 2:08 pm

Strange, I had this funny idea that the Chinese just a few weeks ago said they had no choice but to buy our treasuries, and that China’s economic health was every bit as intricately linked to our own as vice versa, yet when I read comments like Tyler’s and others here I’m disabused of that silly notion. China is sitting in the driver’s seat, and could crush us with a single decision, with no repercussions to itself.

Thanks, econ types!

8 MM February 25, 2009 at 2:17 pm

Funny how I was able to Google up thousands of articles in the western press discussing China’s response to Clinton’s “pleas,” the “earful” Clinton gave to China on a host of other issues (which apparently your non-western press failed to cover, and which included Clinton interviews with state media where rather than “pleading” she seemed to be layout out the case in a very straightforward fashion, which is that China needs the U.S. badly, and the two countries have to cooperate), and how she then went to Japan and was effusive about the military alliance.

Knowing the style of Bloomberg, I would not be at all surprised if they ‘misconstrued’ things a bit. (Ooops!)

9 Yancey Ward February 25, 2009 at 2:32 pm

Propping up the stock market will not be the goal of “universal accounts”. Who do you think is going to buy this avalanche of new government debt coming our way from now until Obama leaves office? You are, thats who, and you won’t have choice; and I am willing to bet tax law will be changed to force you to convert 401K money into the new vehicles when they are enacted.

10 Gabe February 25, 2009 at 2:42 pm

It is funny to hear Tyler indicate he is looking for good ways to prop up the stock market. Coercing massive groups of idiots to pour money into stocks and thus “prop up the market” is a recipe for continued destruction of corporate governence. It is no mistake that the biggest corporate governence scandals occurred after 20 years of escalating 401k contributions and “index investing” dogma. Attentive, hawk eyed, intelligent shareholders is the only real way to have good corporate governence…forcing millions of receptionist to invest in stocks is a recipe for fraud.

11 Gabe February 25, 2009 at 2:47 pm

Giving money to AIG is simply a deciatful way to shuffle more tax money to Goldman and JP Morgan. Who do you think bought all those Credit Default Swaps from a company that had no way of backing up it’s bets?

12 jorod February 25, 2009 at 2:56 pm

What’s wrong with this picture?

Let’s see. First we run up a deficit of $1.5 trillion. Then we cut the deficit by 50%, then we are happy we only have a deficit of $750 billion.

Obama will go “line by line” through the federal budget in search of wasteful and ineffective programs. The horses are out of the barn courtesy of Mr. Obama and he is looking for waste? Doublethink?

I am reminded of a song by Neil Diamond –Brother Love’s Travelin’ Salvation Show….

13 Lee A. Arnold February 25, 2009 at 3:22 pm

Mike Rulle Why are there no savings? The answer isn’t Social Security. Nobody depends on Social Security for a comfortable retirement, it just isn’t that big. Social Security is not supposed to be a “Government managed deferred retirement account.” It is a safety-net done by a tax transfer, rolling over every generation and increased at the rate on Treasuries.

14 John Emerson February 25, 2009 at 5:55 pm

SS is a racist program….If we need more welfare just have more welfare…don’t call it a investment and don’t place a regressive tax on hard-working, early-dying people.

This is truer than the person who wrote it knows. Social Security and unemployment insurance could have been welfare programs from the beginning, and a bill was proposed to define them that way (the Lundeen Bill). But racist Southern Democrats realized that black people would benefit from it, so they made sure that Roosevelt tweaked the bill to minimize their advantage. (Note: if you’re younger than 40 and have have trouble thinking of a racist Southern Democrat, just think of a racist southern Republican of the present day. Storm Thurmond and Jesse Helms and many others were both in succession.)

People who say what this guy said never actually want a welfare system. They also never care about black Americans dying young. They’re just attacking Social Security in what they think is a clever way.

15 Will February 25, 2009 at 6:50 pm

Not to be contrary here, but has anyone else gotten the feeling that Taiwan is SAFER THAN EVER now?

If the US and China go to war, the US is suddenly relieved of a massive obligation: all the government debt China owns. The US will have gotten all of the benefits without having to pay any of it back. If I were holding fistfuls of IOUs, the last thing I would do is piss off the guy who owed me.

I actually think now would be a great time for China to use some of those dollars, especially if their currency appreciates strongly against the dollar. They can start to build up their domestic consumer base, and the US gets an economic boost from providing the exports.

16 In Check February 25, 2009 at 7:28 pm

“And when I say significant, I mean huge. There was no mention of Taiwan. The discussion cited items like troop reduction/withdrawal from S. Korea and Japan.”

Now that IS interesting. It probably means that China sees Taiwan’s dwindling support in the UN as a problem that will take of itself.

If the US pulls troops out of Japan, Japan almost certainly will respond by changing their constitution so they can militarize. That should cause all sorts of excitement regionally.

It’s also hard luck on Korea whose Zaytun units faithfully stood by the US in Iraq.

I wonder if this also has anything to do with the huge natural gas reserves that are supposedly sitting between those two countries. A US withdrawal would mean both those countries would find it harder to assert themselves if the reserves are confirmed to exist.

17 Brian J February 25, 2009 at 9:26 pm

Jim Glass,

Some sort of link to support that $16 trillion claim would be nice.

18 wc0350 February 25, 2009 at 11:30 pm

In a time when our country is in a “financial crisis,† it seems like we are throwing more and more money into more and more useless things. I feel that President Obama is promising many changes in America’s current financial situation that seem very unlikely, if not impossible.
Saying that over time “Social Security nearly ‘pays for itself’† is like saying that if you leave a huge mess in your kitchen, it will eventually clean itself up. It is clearly impossible today considering that each year there are more people drawing Social Security and less people paying Social Security. Eventually this ratio will catch up with us and Social Security will cease to exist.
Even President Obama’s plan to boost stock prices involves borrowing more money, putting an even greater financial strain on our country. When will our government realize that they need to think over their actions and find better ways to “fix† or economic situation?

19 Lee A. Arnold February 26, 2009 at 12:17 pm

Gabe — I think the solution is to improve healthcare outcomes and black mortality rates. If you need evidence of “incentives…to covertly kill people,” as you wrote, then have a look at private health insurance coverage denial. If you want to help the government to kill people, a good way to start is to create a means-tested retirement welfare bureaucracy. As for the continued statements from you and other commenters that the money isn’t going to be there or that it will be devalued, please go study the Social Security Trustee reports and stop falling for the disinformation and nonsense. Is the United States racist? You bet it is: look at police attitudes and incarceration rates, it’s disgusting. Here I suspect, many readers of Marginal Revolution haven’t a clue.

20 Bruce Webb February 26, 2009 at 2:02 pm

Jim Glass The Social Security Trustees report that Social Security will cost future participants — including the poor — $16 trillion present value net, after paying past participants $16 trillion more than they paid in. That’s the arithmetic of a paygo program.

Brian J Jim Glass,

Some sort of link to support that $16 trillion claim would be nice.

Well Jim at one point gave me that link, he pointed me to Table IV.B6 in the 2007 Social Security Report which corresponds to Table IV.B7 in the 2008. Table IV.B7.—Present Values of OASDI Cost Less Tax Revenue and Unfunded Obligations for Program Participant The problem is that he doesn’t understand the terminogy.

Past participants is not directly defined but corresponds to dead former beneficiaries.
Future participants is defined as everyone under 15 years of age.
Current participants is everyone in between. Which includes ALL Gen-Xers. And the now $17.4 trillion in ‘unfunded liability’ includes all cost for that closed group until 2108. And on inspection something like $14+ trillion is for benefit payments due after 2058 and before 2108 for this ‘closed group’.

The youngest Boomer (born 1964) will be 94 in 2058. Essentiall NONE of that $14+ trillion will go to us. Almost ALL of that is scheduled to go to Gen-X.

So Jim Glass’s statement is literally wrong. The Trustees at no point say that benefits to ‘past participants$16 trillion more than they paid in’. Instead they say that ‘past and current participants’ (including everyone in Gen-X) will pay out (now) $17.4 trillion by 2108 more than they put in.

Quite different propositions.

I went through the benefit tables and broke out what actual payouts had been for various time periods.
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

The Trust Funds went to near depletion in the course of 1982 but had managed to pay out the $999.7 billion in benefits due by 1980. By 1992 that total was up to $3.4 trillion. at which point almost legacy costs (people collecting even though they didn’t work their whole work lives under SS) had been covered out of current collections. Even by the end of 2007 the total was up to $12.6 trillion. But all of those costs had been paid with $2.2 trillion left over.

Which makes Jim’s comment somewhere between underinformed and bullshit. He is blaming a benefit payout that largely will not be incurred until after 2058 and blaming it on the Greatest Generation getting a better ROI.

Now maybe he can provide an alternative source or calculation for that $16 trillion, but last time I asked he (rather snottily) told me he had supplied it to me before. Sorry Glass Table IV.B6 in the 2006 Report doesn’t mean what you thought it mean. You simply didn’t grasp the meaning of ‘current participant’.

21 Bruce Webb February 26, 2009 at 2:53 pm

Jim Glass says :

First, Social Security was designed by FDR as a funded retirement program that paid each generation of retirees what they paid into it, plus the federal bond rate — it’s mildly “progressive” benefit structure being within annual cohorts of retirees, not among them. That’s why it wasn’t going to pay full benefits for 30 years, until they were earned. FDR’s Social Security was not a “tax transfer”. It was funded by savings.

But I don’t think he could source it. Though he is welcome to try starting with the resources on this page.

Social Security started out as two programs: Title 1 which was a welfare based model paid out of current income taxes and Title 2 which was an insurance based model paid out of worker contributions into the Trust Funds which then would payout benefits to then current retirees. Title 1 was intended to (and did) phase out in favor of Title 2 which is what we know as Social Security today. This is the source of the myth that Social Security was supposed to transition to a personally funded retirement system, instead it was supposed to transition from welfare to insurance. And much of the blather about earlier workers getting a better ROI under Title 2 ignores the fact that they were simultaneously paying taxes for Title 1.

Angry Bear readers asked me for a clear summary of the supporters’ version of Social Security which I supplied with Social Security: Simple Story vs. Myth Busting accompanying it with a post at my SS site Social Security: 2009 Myth Busting Edition

The amount of disinformation floating around on this topic is almost overwhelming, some of it simply being repeated by the credulous but all too much deliberately spread by the duplicitous.

22 Linda November 3, 2010 at 3:53 pm

I keep thinking about the obama plan to spread the wealth. What is his plan to spread the work to those on public aid? Free TV’s and new Cell Phones? Health Care Reform is one of his plans to spread the wealth. Will he place a limit on government costs of producing crack babies and fetal alcohol syndrome babies. will he continue to increase payments to support illegitimate babies for public aid mommies. What comment do right to life advocates have on these issues? What is the incentive to stop public aid mommies from having more public aid babies?

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