The Bush Administration Clown Show Continues...

The White House's Charles Blahous confuses Brendan Nyhan, who quotes from Daniel Froomkin:

Brendan Nyhan: Do private accounts really protect you from benefit cuts?: Dan Froomkin quotes Chuck Blahous, the White House Social Security guru, pushing a common administration talking point:

Chuck Blahous, the White House's Social Security expert, took questions on the White House Web site yesterday. He didn't explicitly address whether the trust fund was worthless. But he did suggest a new link between the government's spending of the trust fund surplus and personal accounts:

'The President believes that surplus Social Security money should not be spent, which is one reason why he has proposed creating a system of personal accounts,' Blahous wrote. 'These personal accounts would save Social Security money, protecting it in the accounts of individual workers, where the government could not take it away.'

Think of it as millions of little lock-boxes.

But the government is going to take away most of the gains from private accounts with a clawback that will reduce your traditional benefit by the number of dollars contributed plus 3% interest above inflation annually. What's to stop them from changing that number and taking back more? It's just as easy or hard as cutting the traditional benefit. This argument makes no sense to me.

What's happening is that Blahous is making the ghost of an argument that he doesn't understand--it bears the same relationship to the real argument that... that... that... a cargo-cult "control tower" built of thatch does to a real airport's radar and control tower.

If you go to the real Republican economists, you will find the argument going something like this, where I have turned the frankness-and-blunt-speaking-o-meter up from its usual level of 3 to the Spinal Tap level of 11:

1. Currently, the U.S. government is running a Social Security surplus--taking in more in Social Security taxes than it spends in benefits.
2. When the baby-boom generation retires, the U.S. government is going to be spending more on Social Security than it will take in in taxes--so the government is going to have to borrow a lot of money in order to cover the deficit.
3. The government will only be able to borrow if creditors think (i) the debt is not already too high and (ii) the government will have the will to levy taxes to pay us off when our bonds come due.
4. Thus it's important that now--when Social Security is in surplus--that the government be not running up but running down the debt.
5. If the government takes the current Social Security surplus and spends it--doesn't run a big current surplus and buy back debt now--then it will be unable to borrow when the baby-boom retirement payments come do because the debt level from which we will then start will be too high.
6. The U.S. government--especially Frist, Hastert, Delay, and Bush--have a demonstrated incapability to not spend the Social Security surplus: there is no a snowball's chance in hell that a government run by them will buy back debt.
7. So we are in big trouble.
8. If only we could keep Frist, Hastert, Delay, and Bush from knowing that they have a Social Security surplus to spend, they would be forced to raise taxes or cut spending, and then the government would be able to borrow in the future to meet its Social Security obligations to the baby boomers.
9. So let's set up private accounts. That will cut government revenues now--and so eliminate the Social Security surplus. Frist, Hastert, Delay, and Bush will be forced into fiscal sanity, and so we'll have a lower debt when we really do have to borrow in the future. And we won't have to borrow any more in the future as a result of our private accounts plan because we will cut normal benefits by an amount that is in present value equal to the amount that we're diverting to private accounts.

If Blahous understood the argument he's making--and seriously wanted to communicate it--he would say something like this: "Think of it this way: Bush and Delay and Hastert and Frist are out of their minds, and are on a giant financial bender. They think they can drink up every bottle in the liquor cabinet, but if they do we'll have nothing left for the party we're giving tomorrow. Private accounts is a way of moving some of the good liquor to another cabinet and putting a lock on it so Bush and Delay and Hastert and Frist can't spill and waste it tonight. That's what we are really doing."

And, Blahous says, Bush really wants the bottles moved to the other cabinet--one with a lock on it--so he can't get at them. After all, Blahous says, "The President believes that surplus Social Security money should not be spent, which is one reason why he has proposed creating a system of personal accounts. These personal accounts would save Social Security money, protecting it in the accounts of individual workers, where the government could not take it away." You see, Bush really wants the government to run a budget surplus equal to the Social Security surplus, and we have to enact private accounts to force him to do what he really wants.

Yes. It's a clown show.

Comments

[battlepanda]

Bush has really gone too far this time, with his railing about how the IOUs are just useless pieces of paper in a filing cabinet. Imagine that! Financial documents in a filing cabinet! I'm sure he thinks the U.S. treasury still stores all of our wealth as doubaloons and pieces of eights on deserted island coves.

Maybe, just maybe, despite all the junk we have in our collective consciousness, a synapse will fire. Cookie...no...longer...in...cookie...jar......WHO TAKE?!

[Ken Houghton]

Hmmm, it's not so elegant as Paul Krugman's "loan your nephew the money to buy a yacht and have him then deny the debt" but "Republicans have their hands in the SocSec cookie jar" might not be a bad slogan...

[jm]

Don't stop at 9, Brad. I suggest adding:

10. So let's put the SS taxes into private accounts to buy stocks from people who for some reason just happen to need or want to sell them -- like insiders cashing out their options, smart speculators who figure they can't get any more overpriced, venture capitalists cashing out of superhyped startups, people already retired who need money to live, etcetera, etcetera. Why, then the money won't be spent by the evil government, it'll go into better things, like SUVs, yachts, McMansions, groceries (those poorer retired sellers), and since this will have happened through the buying of stocks, we can call it "investment".

[no name]

DeLong> If only we could keep Frist, Hastert, Delay, and Bush from knowing that they have a Social Security surplus to spend, they would be forced to cut taxes or raise spending, and then the government would be able to borrow in the future to meet its Social Security obligations to the baby boomers.

Brad, did you mean to say raise taxes or lower spending here?

[Electoral Math]

"If only we could keep Frist, Hastert, Delay, and Bush from knowing that they have a Social Security surplus to spend, they would be forced to cut taxes or raise spending, and then the government would be able to borrow"

I believe you meant "they would be forced to raise taxes and/or cut spending", since they have ably cut taxes and raised spending over the past four years.

[Steve V.]

Professor Delong-

I mean this is the most respectful, sincere way when I say I think you are missing a point here. When certain “pundits” say the bonds in the social security trust fund are worthless, they aren’t saying they’re worthless in the sense that they won’t be redeemed (or at least they shouldn’t.) What they’re saying is that they are worthless as a vehicle to save money now to pay for an expected expense later.

Why? Because the money isn’t being saved- it’s being spent- as fast as it comes in. Ironically, this is the very point you make so well- over and over.

That doesn’t mean I’m a fan of Bush, or private accounts- but I‘m definitely in the camp that believes the assets of the social security trust fund are worthless- at least as a saving vehicle.

[Julian Elson]

I find the "'explicitizing' liabilities will scare the government into wising up" argument the most compelling argument for Social Security privatization per se (though I think there are other arguments which are more compelling against the SS system as a whole, IMHO). However, it seems like with this particular lot, NO fiscal bad news is enough to make the wise up. They never stop cutting taxes, let alone contemplate raising them. They choose the least efficient way of doing things (prescription drug benefit, individual personal accounts, etc.). The only trace of fiscal discipline they show is cutting spending on projects that will bear fruit only after a few elections cycles, such as R&D, or cutting tiny spending programs for the poor, which do more for the psychological catharsis of knowing that you're inflicting suffering and not letting people get too soft than ease the budgets' problems.

Perhaps the Republican economists' argument still makes sense, as some future congress and future president WILL take the tide of explicit red ink from social security privatization seriously. Still, I don't think any level of debt would persuade the current lot that fiscal discipline is necessary.

[battlepanda]

The cookie analogy continues:

Alan Greenspan in '83: Let me put this cookie away for you so you can have it for dessert later instead of ruining your dinner.

Al Gore in 2000: I wouldn't keep the cookie jar right out in plain sight if I were you.

George Bush in 2005: Oh uh! Somebody ate your cookies! Or perhaps your cookies never existed in the first place.

American people: Why preznit hand in cookie jar?

GB: To make sure this terrible terrible thing never happens again, next time we're going to keep the cookies in a jar with your name on it!

American people: (...)

(Battlepanda's Back: http://battlepanda.com)

[Ralph]

Josh Marshall has an interesting take on the President's claim that the SS trust fund contains just worthless IOU's in his latest Talking Points Memo. Just one point is that Bush's own asset portfolio is fll of Treasury bonds.

[Larry M]

The scary thing - and a version of this argument actually came to me a few hours before I read this - is that this is almost a persuasive argument given the fiscal insanity of the Bush administration.

[kharris]

In case you should want to recycle this piece, it's "come due". (Pick, pick pick!)

Steve,

There is no form of government "saving" other than reducing debt. Greenspan told us to stop public saving, because it could lead to public ownership of private assets. Greenspan doesn't want the public secotr to own private assets, 'cause it would distort markets and lead to political schenaniganz. Better that we each hold private accounts which are only allowed (forced) to invest in certain assets, not in others, which will have to be converted on a particular schedule, all determined by a governmental authoity, because that won't distort markets.

The only way around a pay-as-you-go structure is "full faith and credit". Otherwise, no form of government liability represents an asset for the other party. Otherwise, it's just a lie. What we are doing, just like with Gingrich, is finding out whether the "full faith and credit" of the US government still means anything.

[p.lukasiak]

There is, in fact, a way to create a social security "lockbox"

1) dedicate part of the general revenue stream to redeeming the notes held by social security (I recommend using the Estate Tax, because it doesn't "burden future generations"

2) Until we need to redeem the Notes to pay full benefits, set up a new Trust Fund whose assets are used to provide direct Student loans, home mortgages, and loans for capital projects to state and local governments and educational institutions.

In other words, a dedicated revenue stream is created, where excess funds are not spent --- instead, the money is used for various federal loan programs and will be returned to the revenue stream as needed.

[P O'Neill]

It's time to start putting together a list of pundits who ridiculed Al Gore for his emphasis on the lockbox in 2000. Howard Kurtz was still at it in November 2003: "But at least the candidates would be arguing about something important, as opposed to all that '00 prattle about a lockbox that now seems totally irrelevant in an era of huge budget
deficits."

[bakho]

p. lukasiak. Your proposal changes the accounting but not the problem. SS will have to be paid out of revenue or borrowing at the time it is paid. The SS Trust Fund is the idea that all money paid out in SS benefits must come from SS taxes. So we are collecting surplus SS taxes now so SS taxes will not have to be so high during the boomer retirement. The SS "Fix" under Reagan merely assured that SS benefits could be funded from SS revenue (Payroll taxes + employer contribution).

However the surplus is stored, govt bonds, stocks, private accounts, IOU, the surplus will have to be paid back by cashing in bonds, stocks, private accounts, IOUs, borrowing, etc. What Bush really wants to do is to drastically CUT future benefits. This is the part Bush never discusses publicly. The clown show is all "Private accounts are great." Behind the curtain are the drastic benefit cuts. We are not amused.

If Bush would have kept the Debt at $5.6 Trillion instead of almost $8 Trillion and climbing, borrowing in the future to pay SS benefits would be an option. By exploding the deficit, Bush is making future borrowing not an option. SS is only not affordable if the Bush tax cuts are made permanent. Other developed countries operate good economies with a top tax rate much higher than the USA. Bush is setting up a class warfare shootout between soaking the rich or cutting SS. I vote to soak the rich.

[a different chris]

a) I don't disagree that it's the argument conservative economists are trying to make, but #3 is laughable (or horrifying, as can anybody dare imagine the Mad Max world in which this would be true?). Hell, freaking Argentina is still able to borrow money if it wishes, all that excessive national debt changes is the interest rate applied to said loan.

b) As a political tool, I like that idea of attacking the estate tax as a direct source of SS funding. I'm not sure I'd want it actually implemented, but if it picks up some steam it might just give the upper class the type of mind-clarifying fright that we need. Most rich people ain't stupid (although a surprising number are), they know the bills of the Bush years will eventually come due, but they have convinced themselves that they won't be the ones to pay them off. But I'm not so sure that mantra "Americans don't hate the rich" is on solid historical ground. It's a thin reed to cling to, in any case. Let's make them nervous.

[a different chris]

Er, bahko and I crossed - I would not want to imply I'm laughing at my friend here. But I think to be accurate you have to not say "Bush is making future borrowing not an option" but say "Bush is making future borrowing much more painful."

But, politically, yeah I'm OK with implying Bush is going to turn the US into a nation whose financial shape is so bad nobody would loan it money.

[Bruce Webb]

"When certain “pundits” say the bonds in the social security trust fund are worthless, they aren’t saying they’re worthless in the sense that they won’t be redeemed (or at least they shouldn’t.)"

You bet they shouldn't, but that is exactly the message they are knowingly transmitting.

In the final analysis the bonds in the Trust Fund are indeed little more than bookkeeping, but then again so is the value of that $100 bill in your pocket. In 1983 the decision was made to tax boomers now so as to lower the amount of debt that would be needed in finance boomer retirement. And to that degree it worked, the $1.7 trillion in the Trust Fund is $1.7 trillion that didn't need to be borrowed in the private market. Now you can argue that without it being available Congress would in fact have exercised $1.7 trillion in offsetting spending restraint. But I see little real world evidence of that, Congress willingly passed tax legislation that will dwarf that in the face of deficits.

Clinton had us on a glide path. If you ran the numbers you could see that the end result was a near one for one trade, public debt reduced to the minimum needed to maintain the bond market, total debt stable. Redeeming the Trust Fund bonds would have simply been a matter of winding that trade down, borrowing from the public to redeem the bonds in the Trust Fund while keeping overall debt stable.

The 1983 legislation was working exactly the way it was designed, it was almost eerie to see. But then along came Bush.

[bakho]

Steve V- I think that saying the SS trust fund and the bonds that back it are worthless is confusing rhetoric. SS security taxes are a very regressive tax. We could be collecting the same total revenue today in a way that made the wealthy pay their fair share, but we are not. The reason our tax structure is not more fair is that the poor and middle class have been sold on a social contract of paying higher SS taxes in return for a guarantee of future benefits. To say that the SS Trust Fund is worthless is to repudiate the social contract that raised SS taxes. If the SS Trust Fund is worthless, then I demand my SS taxes be cut back by 30% and I demand a refund of my share of the taxes paid into the SS Trust Fund. It is delusional to believe that our politicians will not be held to account for promises made under this social contract of higher taxes today for benefits tomorrow.

There is only a problem paying off the debt and SS taxes if Bush tax cuts for the wealthy are made permanent. Our economy was much better under Clinton and he collected much higher revenue as percent of GDP and had a much higher top end tax rate. The real problem is not an inability to pay for SS. The real problem is an inability to afford the Bush tax cuts for the wealthy.

[bakho]

different Chris- Good point, borrowing would not be not an option it would be a lot more painful than raising taxes, thus not a good option.

[DaveK]

"If Bush would have kept the Debt at $5.6 Trillion instead of almost $8 Trillion and climbing, borrowing in the future to pay SS benefits would be an option."

It's clear to me how this would work for addressing a short term demographic bulge. But the SSA projections don't show this. Instead, they show an increase in the cost of the SS benefit growing from a little more than 4% of GDP to a little more than 6%, and then staying at that level for what seems to be forever (or until the Robots take over, at least).

So, here is where I get confused. Setting aside that this may simply be another way to solve the accounting, but not the problem, how can an 'endowment', even in theory, be used to close a persistent funding shortfall? The SSA projects long term interest rates of 3.0%, long term GDP growth of 1.9%. So, to 'prefund' the long term 2% shortfall, we would need to accumulate an endowment of roughly 180% of GDP? Or am I doing something wrong?

[anne]

Of course, the bonds I may own today are a saving and investment for tomorrow. Why ever else would I own bonds? And, we ought to wish Congress would allow bond interest the same tax treament as stock dividends. We had best worry about the fact that this year our international income, our return on saving and investment internationally, will finally be less than what we owe in income abroad. Yes; bond holders save and we had best be saving more.

[anne]

http://www.nytimes.com/2005/04/07/opinion/07thu3.html

Shameless Photo-Op

Imagine this: On his next trip to Japan, President Bush visits the vault at the Bank of Japan, where that country's $712 billion in United States government bonds is stored. There, as the cameras roll, he announces that the bonds, backed by the full faith and credit of the United States, are, in fact, worthless i.o.u.'s. He does the same thing when he visits China and so on around the world, until he has personally repudiated the entire $2 trillion of United States debt held by foreigners.

Mr. Bush rehearsed just that act on Tuesday, when he visited the office of the federal Bureau of Public Debt in Parkersburg, W.Va. He posed next to a file cabinet that holds the $1.7 trillion in Treasury securities that make up the Social Security trust fund. He tossed off a comment to the effect that the bonds were not "real assets." Later, in a speech at a nearby university, he said: "There is no trust fund. Just i.o.u.'s that I saw firsthand." ...

[anne]

An endowment that is growing, as our endowment for Social Security is growing, as the economy is growing will readily enable us to pay full Social Security benefits. At least for 2 generations there is no Social Security, likely far longer if economic growth is historically reasonable.

[anne]

http://www.nytimes.com/2005/04/08/opinion/08fri3.html

Hunger-Based Lines Lengthen at the Faith-Based Soup Kitchens
By FRANCIS X. CLINES

The 1,130 soup kitchen guests, as they're respectfully called, began gathering outside the church doors an hour early, curling around the corner in a long line to await a free main meal - their safety-net highlight in another day of being down and out, part of the working poor, or surviving somewhere in between.

The repast, at 2,500 calories a serving, steamed aromatically: chicken à la king, rice, buttered spinach, peaches. A staff member in the nave of the building, the Church of the Holy Apostles, cued dozens of volunteer helpers: 'Ladies and gentlemen, it's showtime. Thanks be to God.' And from Ninth Avenue in Manhattan, the diners flowed in.

The sight of masses of Americans gratefully chowing down on free food is indeed a show, an amazingly discreet one that is classified not as outright hunger but as 'food insecurity' by government specialists who are busy measuring the growing lines at soup kitchens and food pantries across the nation. There were 25.5 million supplicants regularly lining up in 2002; they were joined by 1.1 million more the next year. And even more arrive as unemployment and other government programs run out.

Much as the diners at Holy Apostles peered ahead to see what was being dished up at the steam tables, soup kitchen administrators across the country are currently eying governments' trilevel budget season and wincing at all the politicians' economizing vows. They know that 'budget tightening' eventually means longer lines outside their doors.

'It's a desperate thing,' said the Rev. Bill Greenlaw, director of the Holy Apostles charity, one of the largest among 1,298 kitchens and pantries regularly helping more than one million residents in New York City. 'Every level of government seems to have the same mantra, that these programs are vulnerable.

'We're bracing that all three levels of government are coming down at the same time.' ...

[Richard Cownie]

You omit one aspect of the scam. Bush's proposal is to phase
in the private accounts starting in 2009 - after he's out of
office. So the proposal really is to keep on drinking for the
next week, and then move any liquor that's left into the
locked cabinet.

[anne]

The philosophical question and problem are reasonably simple, do we care to continue social benefit programs? Of course, we do and will if we understand the actual question. Can we afford social benefit programs? Of course, if we do wish them :)

[Chris R]

Come on guys, it's pretty simple accounting. Say I'm the gov't or a large corporation. I write a $2 trillion liability to myself; it's both an asset and a liability so its effect on my balance sheet is zero. I write a $4 trillion liability to someone else and then spend the money on candy; now that $4 trillion is an asset to him and I have no corresponding asset on my books since I ate it all. It's still a liability to me. Yes, it does matter for accounting and economic purposes who holds someone's liabilities.

In other words, the $2 trillion is both an asset and a liability to the gov't, so it cancels itself out when calculating its net asset positions. The $4 trillion is a liability to the gov't without any corresponding asset except higher taxes in the future (in present value terms). That's the difference between the "trust fund" and regular government debt. There's no offsetting position elsewhere on the books except "full faith and credit" which so far has worked fine.

Think of it another way--what can the gov't do with the $2 trillion; where can it redeem it? If it sells the $2 trillion on the open market, then it has to raise taxes in the future to pay it back. It can raise taxes now and pay it off, but then what was the point of the $2 trillion shuffle in the first place? Answer: In 1983, Messrs. Reagan, Kennedy, and Greenspan wanted a politically viable way to raise taxes. They lied. Reagan is not alive anymore, but Kennedy and Greenspan are still around. All of their hands were in the cookie jar, but they each blame the other.

Either way, in order to pay the benefits in the future, taxes will have to go up. A lot. Pretty soon. People my age (I'm 26.) will already lose quite a bit of money with probability one even under the current system. But that's nothing compared with the train wreck that Medicare seems to be heading toward. Let's get honest about these programs. They're not insurance. They're transfers. Finance them the same way that we finance TANF now--that is, honestly.

All that I'm asking is this: If you count assets, count liabilities too. Don't get fooled by paper shuffling.

[anne]

http://www.nytimes.com/2005/04/08/nyregion/08housing.html

U.S. Plans New, Deep Cuts in Housing Aid
By DAVID W. CHEN

The New York City Housing Authority could lose up to $166 million, or almost a quarter of its annual federal subsidy for operating costs, under a new cost-cutting proposal by the Bush administration that could force dozens of housing agencies nationwide to fire maintenance workers, reduce services or close buildings.

If the changes sought by the administration take effect, they will result in one of the biggest cuts since Washington first began subsidizing housing: as much as $480 million, or 14 percent, of the $3.4 billion federal budget for day-to-day operations, including labor, maintenance, insurance and utilities, at the nation's 3,100 housing authorities. Housing authorities in New York State would be among the hardest hit, under a new formula that works against older urban areas.

"I've never seen anything this devastating occur in public housing," said Stephanie W. Cowart, executive director of the Niagara Falls Housing Authority, which would lose nearly half of its $3.6 million subsidy, according to an analysis of spending data by two housing authority trade groups.

The proposed changes, several officials of housing authorities said, represented a turnabout from an agreement they believed they had made with the Housing and Urban Development Department last June. The administration has for several years advocated a new formula that would redistribute billions of housing dollars toward rural and southern areas and away from older urban areas in the Northeast and Midwest. Officials in those urban areas had negotiated a compromise they believed would minimize the cuts to their programs.

But last month, while Congress was in recess, the housing department began circulating a new proposal on Capitol Hill for far deeper cuts that bore little resemblance to that agreement, according to housing advocates and Congressional aides.

Instead, the housing agencies that were supposed to gain federal subsidies will gain much less, and those that lost money will lose much more....

[anne]

The philosophical question and problem are reasonably simple, do we care to continue social benefit programs? Oh well.

[philip]

bakho -
"It is delusional to believe that our politicians will not be held to account for promises made under this social contract of higher taxes today for benefits tomorrow."

While I agree with your general points, the statement quoted above, which i wish were true, assumes that more than, say 10%, of the American Public even understands the contract they entered into, which i don't beleive. Most people don't understand the differece between PAYGO and fully funded, they don't understand that their SS taxes in 2005 will be larger 2005 outlays, thus the surplus is still being built. And I don't think simple education woulod help, because most people simply don't want to understand. With the exception of the very few people reading this and other blogs (Angry Bear, Brad Setser etc.) They would rather watch american idol or donald trump, or really do anything besides listen to an informed dilogue on SS funding. Americans are either fat and intellectually lazy, or poor and uneducated and too caught up in the daily struggle to try and understand the exact details of how they are being fleeced. I would guess that that most still simply thing that its "fuzzy math" and that "lockboxes" died when the SC handed the election to junior in 2000.

Chris R---

While in principle your argument is true, the gov't owes a debt to itself, is going to be important to truely educate the americans as to why the gov't does not have the means to pay its debt to itself back, namely that bushes war was unaffordable without a tax increase, and certainly was unaffordable in conjunction with a large tax cut for the wealthy. It is going to be very important gto convince the american public at large that the best way to fix this is by taxing the tax revenue back from the rich that bush gave to them, such as with the estate tax as was mentioned above. Bush took the savings for American's retirement, agev it to the rich and then put a very expensive and unnecessary war on the "credit card". Now people of our generation (im 29) are going to have to pay for both his war and our parents retirement, because if you truely believe that SS benefits will be cut (politcaly unfeasable) or that bushes privatization scheme will result in SS slovency, well as the saying goes, I have a bridge in Brooklyn that I'd glady sell you at a reasonable price.

That bottom line it that we Americans must get out retiment security back from the rich people Bush gave it to. It's not class warfare and its not "tax the rich", its let back what was wronglfully taken from us by a government of criminals.

[liberal]

Chris R wrote, "Let's get honest about these programs. They're not insurance. They're transfers. Finance them the same way that we finance TANF now--that is, honestly."

A prescription for the eventual political destruction of the system. Ask yourself---what's happened to welfare (formerly AFDC) in the recent past?

"In other words, the $2 trillion is both an asset and a liability to the gov't, so it cancels itself out when calculating its net asset positions."

But this description fails to distinguish between the part of the government holding the asset---Social Security, representing beneficiaries who tend to be workers---and the part holding the liability---the general fund, which largely relies on progressive income taxes. Well, they used to be more progressive...

[elizabeth_a]

I think we have to understand this is a political game with very high stakes. There are 4 options, with different risk/ reward profiles and need to be considered in light of political realities. All will have unintended consequences.

1) Do nothing at the moment. Hope for better administration in 2009 and/or economic miracle.

2) Push a plan to make Social Security more independent, allowed to invest in assets besides government bonds. This is the most efficient way to implement "lock box" -- but thus far has little support.

3) Support private accts as way to establish some kind of lock box.

4) Reduce payroll taxes down to level of current outflows - my calculations show this would allow you to cut in half employee contribution. If fund is a fiction or at least way too dependent on good behavior on the part of policy makers, at least get rid of a regressive tax and face the music of the true deficit.

I have noticed that my preference rank changes daily with my level of despondence...

[anne]

Ah. Doing nothing about Social Security would be just right, for there is no problem for several decades and with reasonable economic growth not then. But, I too would like to consider investing a portion of the payroll tax surplus in a total stock market index of non-voting shares.

[linnen]

The way that I look at it is to compare it to the kid's combined college account. (To be more accurate, the younger children pay into the older sibling's account, but this can be ignored for the discussion.)

Over the years the kids were able to gather a respectible sum. But over those same years, various accounting changes were made. First, the college account was moved onto the same ledger as the general household accounts. Then, to keep creditors advancing more loans, portions of the college account were replaced by IOUs. Now the parents are willing to announce, "Your mother and father are going on another honeymoon. We will pay your college account back later."

The current situation is more along the lines of; the kids in senior high can still go to college (even if they need to transfer to a regional one after the first semester), while the parents are telling the kids in grades K thru 5 that they need to get individual accounts because the IOUs in the college account are worthless. The junior high kids might be able to go to the two year vocational college, if lucky.

[anne]

http://www.nytimes.com/2005/04/08/politics/08medicare.html

States Told Not to Steer Beneficiaries to Drug Plans
By ROBERT PEAR

WASHINGTON - The Bush administration has told states that they cannot steer Medicare beneficiaries to any specific prescription drug plan, even if state officials find that one or two insurance plans would provide the best deals for elderly people with low-incomes.

States like Connecticut, New Jersey, New York and Pennsylvania have for years had their own programs to help elderly people with drug costs. In some cases, the state coverage is superior to what Medicare will offer. Many states want to continue those programs to supplement the Medicare drug benefit that becomes available in January.

A federal advisory commission said recently that states should be allowed to enroll their low-income Medicare beneficiaries in "one or more preferred prescription drug plans." This would help ensure "continuity of care," it said.

But in a memorandum to state officials, the Bush administration rejected that recommendation.

State programs that steer people to a specific drug plan are "contrary to Medicare policy goals" and "may violate federal fraud and abuse laws," said the memorandum, signed by Leslie V. Norwalk, deputy administrator of the federal Centers for Medicare and Medicaid Services.

By enrolling low-income people in a preferred plan, Ms. Norwalk said, state officials are violating beneficiaries' freedom of choice and undermining competition among insurers.

Moreover, she said, if states receive money - rebates or other "financial benefits" - in return for sending people to a particular drug plan, such payments may constitute illegal kickbacks.

Thomas M. Snedden, director of the Pharmaceutical Assistance for the Elderly program in Pennsylvania, said the federal government was "threatening states that do not participate in the free-market model of prescription drug coverage" envisioned by the Bush administration.

"In Pennsylvania," Mr. Snedden said, "we may have 12 or 14 private plans offering drug coverage to Medicare beneficiaries. It would be extremely difficult for the state to coordinate benefits with all of them. We want to be able to pick a single plan and enroll our people." ...

[elizabeth_a]

I want to comment on this issue where everyone is concerned about government and voting shares. ON the one hand I see where it could get ugly. On the other hand, I feel strongly that one downside of the rise of index funds in current regulatory environment has been the further demise of any corporate governance by the shareholders. Imagine if CALPERS and others had had similar restrictions... I think we need to find a better way to delegate voting, not abdicate it.

[anne]

Agreed, actually. Calpers indexes much of its portfolio, but has been an activist shareholder till recently. Calpers has however been pushed to stop the shareholder activism, and appears to have stopped. Surely I like to have more corporate activism on behalf of both shareholders and community? A terrific subject :)

[bakho]

Philip, I agree with most of what you said, especially the financial aspects of SS. However, people are not so naive as you might believe. People may not understand all the details, but they do understand the basics of SS. People understand that a large chunk of their paychect goes to SS taxes. Believe it or not, most people do read their paycheck. People expect to receive SS benefits when they retire. These expectations will not change without a fight. Those with most invested in the system (the over 55 crowd) will fight hardest. This is why Bush exempted them from any changes. And Bush is still losing on SS. He is dead in the water on the SS issue and Bush's insistence is dropping his poll numbers.

As for affordability, please compare tax rates in the US to Canada or most of Europe. People in the US currently pay very low taxes. There is no problem with collecting enough revenue to pay for SS. It only requires the political will.

[anne]

Elizabeth A

Losing the California public pension fund as a corporate reform advocate may be more significant than we can tell. Mutual funds will not serve.

....

About Social Security plans, "all will have unintended consequences." I am snaguine enough about Social Security as is, that I wish above all no benefit or revenue reductions.

[DaveK]

But I remain confused. Here's another run at my confusion:

The trust fund, under the middle assumptions of the SSA, is said to peak at about 400% of annual costs in 2015 or so, and annual costs are about 5% of GDP then. So, the fund will peak at 20% of GDP. Again, using the SSA projections, this money could be used to fund an annuity by investing at the SSA assumed interest rates, and harvesting the growth above the rate of real GDP growth. But since that amount is only 1.1%, the fund will only generate 0.22% of GDP.

Of course, the current plan isn't to use the fund in this way, it's to spend it down. But this does the very long term no good at all. And using the fund as an annuity, as above, doesn't seem to put much of a dent in the long term shortfall. So, is the trust fund a fraud? Were we duped back in the 80's? Is elizabeth_a's fourth approach the right way to go? Or was the fund, when originally envisioned, intented to create a much bigger revenue stream?

[DaveK]

ps Does anyone know what the size of the SS program is projected to be, long term, as a percentage of GDP, for the low cost approach?

[ChasHeath]

> Cut taxes or raise spending.

Hold it! I see the problem. Somebody just reversed the sign, it's really just a transcription error. It's a simple fix after all! Somebody call congress!

The biggest problem I see with this is that Bush isn't just spending the current Social Security surplus. He's also borrowing another $450 Billion from the public, in addition to the $150 Billion of Social Security surplus, every year.

They've borrowed $1.2 Trillion so far. So, in four years, they've managed not only to spend the current Social Security surplusses, but also to carve out another $1.2 Trillion. In essence, they seem to be trying to make up for the lost eight years, when a good chunk of the Social Security surplus actually was used to hold down the federal debt.

The goal seems to be to structure the federal government so taxes are so low that it will be impossible to pay all Social Security and Medicare benefits within about ten years. But as Bartlett and others point out, nobody is going to pull the plug on seniors ten years from now.

Not even George Bush, who says we can't cut benefits for anyone over the age of 55. Or maybe that's just a bald faced lie - he's selling you the used car with no engine, but saying it has 400 horsepower. Once the rubber band in place of the engine unwinds, 50 feet out of the lot, Bush will already be retired.

[Oskar Shapley]

"""" He tossed off a comment to the effect that the bonds were not "real assets." Later, in a speech at a nearby university, he said: "There is no trust fund. Just i.o.u.'s that I saw firsthand." """"

Not exactly. Debt-financing the budget menas lower taxes today. This leaves more money to individuals and businesses, who can and should be investing it into those real assets. In fact, it was the whole reasoning behind Bush's tax cuts for companies: "that they should have more incentive to invest".

So there are some real assets on the other end of those bonds.

[HJL]

The Highway Trust Fund is to be spend on highways. Should we not believe that the Social Security tax that we paid should be spend ONLY on Social Security?

Bush is a crook to even suggest that the money is not there only IOU's. But people as stupid as Bush are willing to believe anything.

This was Greenspans promise in 1983 pay more beloved worker and we will be able to handle the boomers. And we did but our elected officals saw the money as a big large piggy bank and every year broke it open for their pet projects. In Bush's case Iraq and a nice tax cuts for the rich.

Who is dumber the politicals or John Q. Public?

[Ralph]

Chris wrote, "lets get honest about these programs. They're not insurance. They're transfers." Putting aside the survivor and disability insurance parts of OASDI (the official name for social security), we can say the old age retirement part is insurance against old age destitution. In a sense, contributors are insured against the possibility that they will survive past their retirement ages. This is in a sense the opposite of the (misnamed) life insurance which insures your survivors against your premature death (assuming you are the breadwinner and took out life insurance). Note that at present you do not own an account in OASDI or a piece that you can pass on after death but you are investing in a pool which insures you against surviving after retirement which is the definition of an insurance pool. Now on the question of accounting for the trust fund relative to the general fund, liberal and phillip have given a better explanation than the one chris offered. I would add the following. Insofar as SS has its own source of revenue (payroll tax contributions) and a separate trust fund (currently comprising $1.5 trillion of Treasury securities), it technically can be considered to have a balance sheet of its own. Now consider the following. The balance sheet currently has assets but no liabilities. As long as SS runs a surplus (revenues - benefits > 0), the balance sheet will continue to increase its assets. When the surplus becomes a deficit, somewhere around 2017, there will then be an operational deficit but this will be covered by at first the interest from the bonds in the trust fund and later by redeeming bond principal itself (about 2030). There will still be however no liabilities on the balance sheet until after about 2041. But what happens if private accounts are adopted. Estimates made by various organizations suggest that transition borrowing costs of more than $1 trillion in the first decade and $3.5 trillion dollars in the second decade will be necessary to make up for the pre-retirement withdrawals into the private accounts. These borrowing costs will be much larger than the current surpluses and show up as liabilities on the SS balance sheet. This will occur decades before the liabilities mentioned earlier in the absence of instituting private accounts. Another way to put this is that instead of 2017 as the year when the surplus turns into a deficit, the deficits will occur much earlier, about in 2012, or three years after the private account era begins (in 2009).