We don’t know what the world will look like in 2040, 2050, and 2060. Under very plausible assumptions, Social Security will remain fully solvent right through these decades with no changes whatsoever

And in any event , why should we care? Surely what matters is the solvency of the country itself in 2040 etc.

Let us assume that come 2040 the necessary SS benefit are  half a Zillion , the "Social Security Trust Fund" has a a surplus of more than that but the country is insolvent: the inflow to the Treasury from all sources , including SS withholding" is say 10 Zillion, the outflow-excluding SS-  is 11 Zillion and the National Debt is 5 times the GDB.So no one will buy our bonds.. Surely in that case retirement benefits will be in grave danger even tho the Trust Fund is " solvent"

Now make the contrary assumption that the poor old Trust Fund is insolvent in 2040 but the Treasury inflow is 11 Zillion , the outflow is 10 Zillion, and the National Debt is  half the GDP. Surely in that case the half Zillion of retirement benefits will be paid.

In short isn't the Trust Fund an irrelevant convention? Aren't SS witholdings simply part of the Government's overall inflow and SS retirement benefits simply part of the overall outflow.

Note that there's no DOD  Trust Fund but somehow the DOD spends its billions each year.

It's an historical fact , which we could ascertain but my suspicion is that FDR's advisors created the concept of a trust fund as a marketing tool to gain the votes of George of Georgia and other sound money types.

But since then all it has consisted of is writing down on a legal paid the total inflow for the year, comparing with total outflow and shouting "Eureka the Trust Fund is solvent" . For all the world as if there were a Trust Fund.

Had those Trust Fund surpluses been certificated with tradeable securities there would actually have been a TF. But they weren't and there isn't.

I do  understand that the TF can be employed as a discipline : If Congress proposes an increase in benefits the Administration can oppose it by rolling out the TF argument. But it's a phoney argument because it assumes the existence of the TF whose actual reality falls somewhere between a UFO and a Unicorn.  

I am worried. I have always assumed that the money I put in the bank and don't immediately spend is being held by the bank awaiting my decision as to how to spend it. But, today I learned that I was wrong. My money is long gone and all I really have is a bank statement mailed to me once a month. Alas, I doubt that my money really exists.

Before all of you jokers start in on me - yes, I realize that the difference between what I deposit each month and spend each month is extremely small, but I have really been counting on having that $19.23 if I ever need it.

Hoppy in Sacramento

Actually, at the hour they throw the daily newspaper, I'm liable to think IT'S a UFO.

Under very plausible assumptions, Social Security will remain fully solvent right through these decades with no changes whatsoever.

Whenever you say "solvent" you are talking about UFOs.

There is no "system" that can remain "solvent."

SS has been pay as you go from the git-go. The 1983 reform raised taxes and cut future benefits. But the taxes that were paid over the last 25 years had no impact on future taxes needed to pay for SS, because the surpluses that the politicians promised to run in 1983 weren't run.

So it's time to dismiss this whole idea that there is a "system" that is "solvent." Using that frame reintroduces the great bamboozlement that led to the Federal taxation system to be made more regressive, as payroll taxes were raised significantly and the the federal income tax structure made less progressive--funded by the increase in payroll taxes.

Alternatively, if you must use the "solvent system" frame, we're just fine. There's 25 years of accumulated bonds in the "trust fund" that will be used as a revenue source in the future. Just as the Chinese government trusts the full faith and credit of the US, so should future seniors.

But better to drop the frame entirely. SS has always been funded out of general revenue. The payroll tax has always gone into general revenue. There is no linkage between the payroll tax and the benefit payout.

There is, of course, a linkage between individual payroll tax payments and SS benefits received, but that's irrelevant to the question of where payroll taxes go, and the relationship between total benefit payout, and total revenue received.

Sorry Jay,

under the law there is very direct linkage between the SS trust fund and the benefits paid out. I understand that you don't like the law, but the fact that you don't like it doesn't change it.  

Jay , can't change it, Congress could. But as I wrote elsewhere : "Always keep a hold of Nurse , for fear of getting someone worse."

W of course was full of passionate intensity
to reform SS. Fortunately we dodged that bullet.

Under the law, SS benefits are paid from current SS taxes or from the trust fund. The trust fund is the surplus of tax revenue over SS benefits in prior years. Under the law, this money is invested in U.S. government bonds. These bonds earn the same interest rate as any other government bonds. The government is obligated to repay the bonds held by the trust fund (now around $2 trillion), just like any other government bond. 

The money to repay these bonds comes from general revenue not SS taxes. General revenue comes almost entirely from the personal and corporate income taxes, which are very regressive, rather than the SS tax which is extremely regressive. Under CBO projections, the trust fund will be sufficient to meet all benefit payments through the year 2046. Even after 2046 we would always be able to pay much higher benefits (adjusted for inflation) than we do today. 

That's the basic story. 

Well, Andrew, that's because republicans have been telling you for 25 years that you're not going to get a Social Security check. And when Obama buys into the bamboozlement, he contributes to that belief.

It's bad enough that the news organs buy into it.

SS is in fact funded by payroll taxes.

Payroll taxes in excess of that needed to pay benefits are borrowed by the treasury. Even though there was no surplus run, the payroll tax reduces the level of general revenue required to fund the government. I exchange for that, future generations will have access to general revenue to help pay SS benefits without having to rely on payroll taxes alone.

Yes, payroll taxed paid over the last twenty five years have no impact on the level of future taxes, but they do help determine who pays them.

deleted

Oh boy.

As is typical on Social Security threads no dollar signs get harmed in the course of production (Hoppy's $19.23 aside).

Opponents of Social Security have a valid point, they just don't understand which direction it actually is pointing to. The key variable is overall GDP going forward, the Trust Fund balance on the whole is just the tail, it doesn't really shake the whole dog.

It can't be shown that the 1983 reforms were really designed to 'pre-pay' anything. At least as I read through the report of the Commission it was pretty clear that the focus was a little more narrow, that of putting the system back in 'Short Term Actuarial Balance', meaning having a 100% reserve in each of the following 10 years. The Commission set forth four alternatives, a high cost, a low cost and two intermediate versions. If the economy performed at the mid-point of this range then Short Term Actuarial Balance could be expected to be reached. But even then there was no suggestion that Long Term Actuarial Balance would be achieved, under intermediate assumptions the Trust Fund was always expected to go to Depletion just as the peak of Boomer retirement hit the system. Which would make for a pretty funny scheme for pre-payment.

An examination of the actual numbers show that Social Security went out of actuarial balance for good in 1971 after bouncing in and out since 1965. Table VI.A4.-Historical Operations of the Combined OASI and DI Trust Funds, Calendar Years 1957-2006 The Trust Fund Ratio (reserves expressed as a function of time) then drifted down to effective zero in the 1982 to 1983 period with only some tricky inter fund borrowing actually avoiding benefit cuts. The 1983 reform put the entire system back on track for actuarial balance and in fact achieved that by 1993. This was a result of the economy performing in line with the intermediate assumptions. But there was no delusion that the 1983 Act was a permanent solution, it was fully understood that an economy continuing to perform in the mid-range would put the system out of balance right at the point it was faced with maximum strain.

Now the Commission did understand that if the economy grew more than the mid-range projection that it was possible that the system would in fact self-fund over the long range and in fact provided an alternative projection that would achieve that. I don't know how many if any of the Commissioners predicted the very strong growth period we did in fact experience after 1993, maybe they would have dismissed it as a pipe dream. But it happened. The high employment rates and the real wage gains that occurred in the mid to late 90's and which more of less continued to now grew the economy and the Trust Fund balance to a position where solvency was more likely than not.

Table VI.C6.-Operations of the Combined OASI and DI Trust Funds
in Fiscal Years 2002-16 Under current projections the system is comfortably in short term actuarial balance with a 2006 Trust Fund Ratio of 330 (three and a third years of reserve) projected to ramp up to 407 in 2015. Where it goes from there depends critically on whether the economy performs in line with Intermediate Cost assumptions (as it did from 1983 to 1993) or comes in closer to Low Cost assumptions (as it did from 1993 to 2003). In my view performance near the top of the projected range is more likely than mid-range, I gather from the totality of Dean's posts that he has a more neutral stance. But either way we need to shift our focus from the reality or otherwise of the Trust Fund to the prospects for growth going forward in the short to medium term. If we hit Low Cost numbers it is more or less match over, Income excluding Interest continues to exceed Cost until 2023, after that only a portion of the interest has to be paid out and the remaining interest compounds until the Trust Fund balloons to $78.5 trillion in 2085 Table VI.F8.-Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2007-85 On the other hand if the economy underperforms historic trend and slows to the level projected by Intermediate Cost (ultimate 2.0% Real GDP) then the result will be as normally expressed: Shortfall in 2017, repayment of principal starting in 2023, Trust Fund depletion in 2041. But really we need to shift the focus from high end conceptualization about the reality or not of the Trust Fund to the short to medium term growth numbers. At one level of growth the system maintains its current Pay/Go status, at another level it doesn't, the dialogue really should be revolving around that question. Instead the debate seems reduced to the 'How many angels can dance on the head of a pin' level.

Can we inject some numbers into this discussion? When Dean wrote "Under very plausible assumptions, Social Security will remain fully solvent right through these decades with no changes whatsoever." ears should have perked up and the question should have been 'What assumptions?' and 'How plausible?' Yet no one seems to have gone there.

Bruce,

can you summarize your post in 5 short sentences?

I don't know what circles of society, measured by education, most people who post on TPM travel, but I feel confident in guessing it would be the University educated circle. Not so with me, the vast majority of my circle is like me, blue collar, high school/trade school educated, and I believe this is where the great majority of the public exists and they don't know shit from Shinola about investing.

I can say from experience that the people who traveled in my circles knew as much about the market and investing as Denny Dimwit knows about Particle Physics. The idea of giving these souls their Social Security taxes to invest because "its their money and they can invest it better than the Government can" is ludicrous.

I'm not a professional investment counselor, but years ago I did learn the basics of investing and for many years I advised my siblings and their children on where to put thier money and I did this because they didn't know the difference between a stock and a bond. The public is so divorced from investing reality they don't realize they already have a private account, apart from SS; their IRA or 401K.
Lets not bring up how they got snookered away from Defined Benefit Retirements, to Defined Contribution Retirements by the same gang that wants to privatize SS.

The people who want to privatize Social Security are the same people who want to dump Medicare, the same people who are wealthy enough to not need either program, and they know quote well how to demagogue.

Here's my point, if we don't have a compulsory retirement program there will come a day when we're on overload with destitute people, I mean people who don't have "a pot to piss in", and what do we do with them?

Alarmists  is kind.

Try liars -for the conservative economists who know better, fools -for the republican politicians who actually believe what they've been told in part because it sounds like something they read somewhere in  Ayn Rand , gullible- for the DLC types who for whatever reason have drunk the kool aid and, misled- for some of the folks here who have been , well, misled into believing this nonsense.

rather than the SS tax which is extremely regressive

flavius,

you obviously have yet to learn that if it sounds good it must be good!

I can't wait for the flat tax that I can fill out on a postcard!

By the way, Flavius, will I see you at the bacchanal tonight?

The amount you receive is very loosely tied to the contribution. And, of course, if you die, you get nothing. Moreover, since the payroll tax isn't actually dedicated to paying for benefits, but is used to do things like reduce taxes for the upper brackets, it isn't anything like a 401K, or pension plan.

On another hand it's not like Medicare tax, where
everybody get's equal benefits and there is no cap. It seems that SS is in a special category.
So the question is should SS be loosely tied to the contribution with a cap on taxes or it should be like Medicare, equal benefits and no cap?
In other words, If Buffet and Gates pay for our SS, why should we get not equal benefits? Why poor should get less benefits than middle class seniors?

Benefits are certainly tied to contributions by very explicit benefit formulas.

Payroll taxes are indeed dedicated to paying benefits and can not be used for anything esle.

I think you really inderstand all this.

Are you seriously asking why it is the way it is?

SS was made to look like a "pension plan" with a "trust fund" to avoid the charge that it is socialism. And while the "trust fund" does formally exist, all the money taken in by the payroll tax has ended up being used as general federal revenues, and when the payroll tax no longer covers the current benefit payments, general federal revenues willl be used to pay SS benefits.

In other words, If Buffet and Gates pay for our SS,

The cap means that Buffet and Gates don' t pay for Social Security, in the way you mean. They pay the same amount as anybody in the top decile or so does.

I happen to think that formally decoupling the program from the payroll tax would be a good idea. That has been done, partly anyway, by SSI.

You'd have to do it over a fairly lengthy period, because you'd lower the top benefit levels, and increase the amount of money people could shelter from taxes for retirement savings.

And, of course, your first priority would be fixing the health care system, which costs twice as much per capita as the rest of the OECD and provides much worse service. That's a big problem. Social security is not a big problem.

Are you seriously asking why it is the way it is?

SS was made to look like a "pension plan" with a "trust fund" to avoid the charge that it is socialism. And while the "trust fund" does formally exist, all the money taken in by the payroll tax has ended up being used as general federal revenues, and when the payroll tax no longer covers the current benefit payments, general federal revenues willl be used to pay SS benefits.

In other words, If Buffet and Gates pay for our SS,

The cap means that Buffet and Gates don' t pay for Social Security, in the way you mean. They pay the same amount as anybody in the top decile or so does.

I happen to think that formally decoupling the program from the payroll tax would be a good idea. That has been done, partly anyway, by SSI.

You'd have to do it over a fairly lengthy period, because you'd lower the top benefit levels, and increase the amount of money people could shelter from taxes for retirement savings.

And, of course, your first priority would be fixing the health care system, which costs twice as much per capita as the rest of the OECD and provides much worse service. That's a big problem. Social security is not a big problem.

I happen to think that formally decoupling the program from the payroll tax would be a good idea. That has been done, partly anyway, by SSI.

It's a beautiful thing. Ruth Marcus who may be a fine columnist overall simply set out to embarrass herself this morning. Krugman vs. Krugman Yes indeed by selectively pulling and then misconstruing quotes from Krugman from 1996 and 2001 you can show some apparent inconsistencies with what he is saying today. Which ignores the fact that it is no longer either 1996 or 2001.

You see you don't need to do any original reporting on Social Security before mocking tenured Professors of Economics. Nope you can just accuse Prof. Krugman and Dean Baker of simply being liars.

The argument has two equally dishonest components. The first is to deny that Social Security faces a daunting financing problem -- one that will be much easier to fix (and less onerous for the low-income retirees that the head-in-the-sanders purport to care about) sooner rather than later. The second is to mischaracterize the arguments of those who advocate responsible action, accusing them of hyping the system's woes.

It is nothing like a pension. A pension is guaranteed by some level of backing assets and a contractual, legal, obligation to pay.

It is nothing like a 401K plan - the value of your benefits is not inheritable.

There is no binding legal obligation for the government to pay a future retired person a dime - what is payed out is whatever the Congress of the day decides to pay out subject to the normal legislative process.

It is pay-go welfare, always has been, and likely always will be.

Actually, your money does not for the most part exist in the bank - that is how banks work. They take your deposit and INVEST it, usually in the form of interest bearing loans. The difference between the interest they give and the interest they take is what covers the operating costs and profits of the bank.

All you have is a promise by the bank to pay. The solvency of the bank is to a degree ($100,000 iirc) backed up by the FDIC and by the Federal Reserve requirements that they have some proportion of their deposits held as cash or highly liquid intruments.

The Federal Government does not invest the SS surplus, they spend it on current outlays and then stick an IOU in the ledger.

Don't you feel better now?

Yes, the future governments can indeed refuse to pay back the SS trust fund simply by raising the payroll tax or cutting benefits as you said they would.

If you purchase a treasury bill and the government uses your money to pay for an F-22, did you pay for the F-22? No, the person who gets taxed to pay you when your T-bill matures paid for the F-22. Exactly the same as those who paid payroll taxes did not pay for any F-22s when the treasury borrowed their excess taxes, assuming the government pays back the borrowed money.

The “lock box” was a clever term used to convey some sort of mysterious attributes to the SS trust fund for gullible voters. I was just a bit taken aback to find someone commenting on an intelligent political blog who had actually fallen for that slight of hand.

Good point on the “trust fund” terminology, again a political slight of hand. It has become common usage so I use it.

Yes, there is no need to raise the payroll tax today unless the goal is not to use the SS trust fund.

Since the SS trust fund is an intra-governmental accounting scheme, the government could indeed “default” on them without adverse affect on public debt. Of course it would not be done that way, their redemption would simple be deferred indefinitely, a de facto default.

I don’t think there was ever any promise to in 1983 to use the excess payroll tax to reduce debt (“run surpluses for the amount SS receipts will exceed SS payments”).

Yes, Gore was the scam artist who coined the term “lock box” as a metaphor for raising taxes.

Payroll tax is not treated as general revenue since it is borrowed, just as money borrowed from China is not considered general revenue I don’t know why this is so difficult to understand unless you are being deliberately obtuse.

otghand said:

That would be a question for the tax payers of the day to decide, would it not?

Not a day goes by that the taxpayers have no input in what happens. But to answer your question, 'yes.'

You appear willing to use the compulsive force of the government "for their own good" - I find this a dangerous principle.

If you find that a dangerous principle you might wish to consider starting your ouwn country somewhere, because its standard operational procedure in the USA.

I must say, you're good at creating worst case scenarios, kinda like Bush;
"If you don't support me terrorists will get you."

I think our tax system should be ala carte, you pick which tax for each government dept you wish to fund, then decide how much you wish to contribute. I protest government
compelling me to fund a $600 Billion annual military Budget. I also protest Bush compelling me to fund Faith Based Initiatives.

So, tell me, which government programs you are now compelled to fund that you find distasteful. Police? FBI? CIA? Military? Environmental laws? Traffic laws? Criminal laws?

And....you may want to address my question; If we don't have a mandatory retirement program for all, what do we do with the tens of millions who eventually have to stop working but have no funds?

otghand said:

The Federal Government does not invest the SS surplus, they spend it on current outlays and then stick an IOU in the ledger.

And the IOU is a Government Bond, the same thing people, banks and foreign governments invest in.

Bush wants to borrow money via Gov't Bonds to pay for his SS reform, which will allow people to buy Gov't Bonds for their accounts, all this because according to Repugs, the Gov't Bonds in the SS trust fund are worthless.

I sent an argumentative letter on the Marcus column.

I was born in 1951, so I consider myself right in the middle of the bump. My cohort will be about 90 years old at the time of projected (w/GDP assumption) fund depletion. We'll be dying off fairly thoroughly within a few years of that, so what's the problem?

There is a difference in taxes used to fund government services and taxes used as one half of a simple income transfer. Social Security, except for its administrative overhead, is not a government service, and certainly is not one of Congress' enumerated powers. It is simply an income transfer from the young to the old.

To answer your question - we take care of them, but government is not the way to provide that care any more than government is the way to provide moral education.

Please address my question of the principles involved.

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States...

[The Congress shall have Power] To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.

Social Security certainly falls within that generous envelope.

I disagree. The enumeration does not authorise simple transfers of wealth.

The relevant section is Article 1, Section 8 in its entirety:

Section 8 - Powers of Congress

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

To borrow money on the credit of the United States;

To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;

To establish Post Offices and Post Roads;

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;

To constitute Tribunals inferior to the supreme Court;

To define and punish Piracies and Felonies committed on the high Seas, and Offenses against the Law of Nations;

To declare War, grant Letters of Marque and Reprisal, and make Rules concerning Captures on Land and Water;

To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;

To provide and maintain a Navy;

To make Rules for the Government and Regulation of the land and naval Forces;

To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions;

To provide for organizing, arming, and disciplining the Militia, and for governing such Part of them as may be employed in the Service of the United States, reserving to the States respectively, the Appointment of the Officers, and the Authority of training the Militia according to the discipline prescribed by Congress;

To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States, and the acceptance of Congress, become the Seat of the Government of the United States, and to exercise like Authority over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings; And

To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.

Thanks for the excess.

Note the generality of the first and last, which encompass non-specific capabilities. Not all powers have to be specifically enumerated, if they are subsidiary. The Supreme Court took the argument too far, perhaps, in Kelo, but I don't think there is any S.C. support for your view.