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October 18, 2004


John Thacker

Nope, I disagree with your suspicion. Mr. Halbfinger is arguing that since current payroll taxes pay current retiree's checks in a pyramid scheme, then diverting money into private accounts would reduce the revenue stream, and would have to be paid for with increased taxes, decreased benefits, or more borrowing.

Now, this is true so far as it goes, however, as you note, people who received private accounts would then not have to receive government funding in the future, when Social Security is supposed to be even larger trouble, with spending exceeding taxes moreso thanks to a decreasing birthrate.

All the Bush plan does is move that larger debt obligation forward, or rather actually put it on the books as opposed to ignoring it, the current situation. It's paying some of our future Social Security debt now, while the program is in better shape. Private accounts would make it much harder for the government to actually cut benefits; that's one of their advantages. That does mean, of course, that those who prefer to pretend that Social Security is in no trouble now will be unable to simply cut benefits when my generation becomes 65 and Social Security is unaffordable.


I'm pretty happy I'm not Daniel Okrent. I think I would rather be p*ss boy for the French king.


I think the inestimable Mr. Thacker and I are in agreement as to the mechanics of the privatization concept.

However, Halbfinger wrote:

Mr. Bush has not said whether he would borrow or cut benefits to make up for the diversion.

Bush has quite clearly said he would not cut current benefits. That leaves increased borrowing (and Bush probably has not acknowledged that point), or higher payroll taxes (hard to believe Bush will call for that).

However, as Mr. Thacker noted, the higher explicit borrowing today should be offset by a reduced future obligation, assuming that statutory benefuts are reduced for anyone who opts into the privatization plan.

This is actually not *that* complicated, but it is very easy to demagogue.

Mike Liveright

1) The Social Security is close to OK ~80%. If there is nothing done to it we agree that the "growth" in payments might be closer to Cost of Living, the age start of full payments might need to increase as the nominal retirement/death age increases.

Note: Bush's statements have left him a "window" to "effectively" reduce the SS payments by not increasing the payments as rapidly as planned, by modifying the payments for future recipients, and of course "slightly" increasing the charges to workers.

2) The more serious problem is that of Medicare. This is so "off wack" that it is expected to eat up major parts of the GDP unless we: a) reduce the costs of treatment (e.g. Cut Drug Profits, Dr.'s salaries, etc.) and b) Decrease the current and future level of treatment (e.g. let the aged die rather than keeping them on life support, delay optional treatment to discourage it, etc.)

Thus: as time proceeds there will probably have to be minor reductions in the growth of SS payments or some way to increase contributions, higher caps, which either Bush or Kerry will have to deal with probably thru a non-partisan, un0biased, commission, but the MAJOR problem, is that of Medicare, as with all of Medical Costs, and this is not a simple problem as it is often a life and death issue.


Ironic that the generation who bought us into this Ponzi scheme and will turn out to be the only bunch getting anything near market returns are the same greedy codgers refusing to even educate themselves on the issue.

I really don't care for old people.

Robert Speirs

One of the biggest problems is that oldsters eat too many pills, they go to too many doctors and darn it they don't die when they should. Seriously, the ones who live the longest are the ones who don't go to doctors or take medicine. The hypochondriacs are the ones who are costing all the money. In socialist medical systems the hospitals are so bad and waiting lists so long that a major percentage of the truly afflicted die sooner than they do over here, easing the burden on the system.


Thacker and everyone else,

Part of the plan in every scheme - or the vast, vast majority of them - is to index benefits to prices and not to wages, as they are indexed now. As time goes on, the gap will shrink, and thus, most of the problem will go away.

You do realize this, no?


Brian, what you know about this subject couldn't fill a thimble, apparently. The SS system is a Ponzi scheme. New investors (the young) pay into a scheme that pays a benefit to the earlier investors (over 65). There are no assets--simple intergenerational income transfer with shrinking age cohort payers (the young), and a growing benefit cohort (the elderly). Anyone else offering such a scheme to the public would be in jail.

You do realize this, no?

Lynxx Pherrett

"Max is not quite sure why the Republican Attack Machine is outraged. I share his puzzlement - am I really supposed to pretend that Bush does *not* plan to work on Social Security privatization?"

Strange that you would be puzzled. It's the exact same kind of "outrage" the Democrats would have if Bush were to say "Kerry's plans to nationalize health care will be a 'disaster for the middle-class.'"

Senator Nuance, Max and you all know there is a huge difference between the minor partial-privatization in allowing some sub-10% individual investment of FICA taxes that the Administration has proposed and "Social Security privatization." The latter phrase, as used by Kerry and Max (and you?), being nothing but sheer demagogic hyperbole used to frighten a portion of the electorate.

There is no difference between what Kerry said and exaggerated claims that Kerry's plans to expand Medicaid coverage, have the government take the role of underwriter for catastrophic health insurance, or whatever else, is 'Kerry's (secret or not) plan to nationalize the health care system.'


1. SS is a pay as you go funded system. The descriptions above that it can be considered a Ponzi scheme are, in my mind, accurate.

2. At anything like the current rates of compensation and given the aging demographics of my generation (baby boomers) the system is unsustainable without increasing the SS tax rate on my children to upwards of 50%.

3. At anything like the current rates the system will begin to expend amounts that exceed revenue by about 2015 (plus or minus a few years).

4. When this occurs the only options will be to either increase SS tax rates on wage earners or to decrease benefits or both.

5. There is no room at Ft Knox that holds the gold reserved for the payment of SS benefits. All SS revenue has been used to purchase US government bonds, in effect "loaning" the proceeds of your SS payments to the federal government to be used as general revenue. These bonds will have to be redeemed by the federal government when called by the SSA or the government is in default. (This borrowing has been done by every Democratic and Republican president since at least Lyndon Johnson, so there are no innocent parties in this discussion.)

6. The federal government, however, does not and will not have adequate disposable revenue with which to redeem these bonds so general revenues will have to increase or discretionary spending will have to decrease substantially. This is done through taxes of various types or extensive budget cuts.

7. If the federal government confiscated all wealth held by the top 1% of taxpayers it would be insufficient to redeem these bonds. Therefore the middle class will have to have their taxes raised to do so.

8. The public will not allow the tax rates to increase high enough to redeem these bonds to maintain a solvent SS system therefore ... see point #4 above.

9. The long term rate of return on your SS "investment" is something less than 2% (currently approximately 1.2%). The long term rate of return in commercial financial instruments averages somewhere between 5% to 10% even given the stock market bubble that burst at the end of the Clinton administration and including all historical recessions.

10. Some countries and municipalities have privatized their retirement programs with great success and benefits far exceeding those of SS.

11. If we partially privatize, as suggested by the "non-partisan, unbiased commission" Bush has already organized and conducted in the first few years of this term, it will cost something in the neighborhood of $1-2 billion transition expense from general revenue. If we wait until the government has to redeem the bonds held by the SSA the cost will be four to five times that amount from general revenue.

You have to ask yourself which is the worse of two evils.

The total unfunded liability of the SS system has been estimated to be far higher than either of these figures - in the tens of trillions of dollars. We cannot succeed with the "do nothing" philosophy. Both Alan Greenspan and the bipartisan SS commision co-chaired by that famous extreme right wing conservative, Daniel Patrick Monahan, agree on that point.

But it does provide a fine opportunity to scare retirees, so I suspect we'll continue to fiddle while the SSA burns.


Correction: Point number 11 above should have stated that "it will cost something in the neighborhood of $1-2 TRILLION transition expense ..."

A billion just ain't what it used to be.

The remaining thoughts follow just the same.


"Brian, what you know about this subject couldn't fill a thimble, apparently. The SS system is a Ponzi scheme."

It's amusing, to say the least, that someone who wants to come off as the superior intellectual resorts to a personal attack and throwing out an hysterical claim before anything else. Relying solely on garbage like that won't get you anywhere.

"New investors (the young) pay into a scheme that pays a benefit to the earlier investors (over 65). There are no assets--simple intergenerational income transfer with shrinking age cohort payers (the young), and a growing benefit cohort (the elderly)."

Everyone knows this. Why you feel the need to mention it is beyond me.

"Anyone else offering such a scheme to the public would be in jail."

Again, these hysterical claims are worthless.

So, Forbes, you never managed to actually refute what I said. That makes sense, of course, since you can't. It's a fact.

And why, with all of this talk of the amount of benefits paid out, nobody mentions this is beyond me. It's kind of important, no?


To address just a few points for now...

"2. At anything like the current rates of compensation and given the aging demographics of my generation (baby boomers) the system is unsustainable without increasing the SS tax rate on my children to upwards of 50%."

I think you are confusing or mixing together the problems of Medicare and Social Security. If memory serves me correctly, a 2% increase in taxes would cover the gap. Medicare, on the other hand, is a real problem.

"3. At anything like the current rates the system will begin to expend amounts that exceed revenue by about 2015 (plus or minus a few years)."

I don't think that's accurate. From what I gather, the system is fine until about 2042 or so, and even then, it will be able to pay out 75% of what it should pay out.

"When this occurs the only options will be to either increase SS tax rates on wage earners or to decrease benefits or both."

On this, I agree. It's a general point that glosses over much, but it pretty much sets the reality that we have to face.

Of course, once we get past that, the real issue is whether to gut the system by transforming it or making some changes. And interestingly enough, there seems to be some consensus for private accounts, just not a lot of agreement on how to actually go about doing them. (Generally speaking, the debate can probably be summed up to those who want them on top of Social Security versus those who want them within Social Security.)

"We cannot succeed with the 'do nothing' philosophy."

I agree. But my own feelings aside, we don't have to completelt change the system in order to save it. Both sides - although probaly Kerry and Edwards more than Bush and Cheney - are ducking the issue of tax increases and benefit cuts.


To put it even more simply I have a short story:

When young I decide that I will save for retirement so every month I set aside $1,000 in a savings account drawing the current interest rate. Unfortunately I soon determine that I cannot live on what's left and, not wanting to adversly affect my life style I decide that I will use the money after all. However, because I want to have something set aside for retirement, and being a responsible adult, when I borrow back the $1,000 to spend on my current life style, I put back in an "I owe me $1,000" note.

When I finally decide to retire, my bank account is full. Full of "I owe mes" that is. They are backed by my "full faith and credit" and I would never default on a loan to myself. But to redeem these notes to myself I have to either keep working longer than I would have liked or accept a lower style of living than I was planning.

Not bad! I have created my own personal SS system.


Point #2 is correct. I'm not confused. Medicare is actually in far worse shape. 2% increase in SS payroll tax might help in the first few years but the worker to recipient rate outstrips the ability to pay the tax rapidly in the last half of this decade. When you get down to 2 or 3 workers per retiree, the system breaks down rapidly and can only be recovered if you've set aside adequate resources to get through the age demographic. The problem is that we have set aside only "I owe mes" so we end up funding the differential with general revenue as I discussed in the remainder of the points.

Point #3 is correct also. Most pols will use the 2042 figure to justify punting this problem to the future. That is unfortunately when the system is totally broke. Today revenue exceeds expenses. In about 2015 (+/-) expenses overtake revenue. That's when we start redeeming the "I owe me" government bonds. In other words, general revenue will have to start paying for a portion of the SS benefit instead of the "pay as you go" so-called payroll tax. That means there must be either additional deficit spending, additional taxes, benefit reductions or age increases. There is no way to get around this.

Do a search on the Cato Institute. They are clearly economic conservatives (really libertarians) but their analysis is top rate. They have several excellent discussion papers on the SS system and its problems. Steven Moore's Club for Growth has also done some excellent analysis in this area. If you're not inclined to believe the Cato analysis or Steve Moore's analysis, do a search on Alan Greenspan's testimony before Congress. You may see the dates change a little here and there but the bottom line is the same. The system will have to change and partial privatization is the only viable solution in my opinion.

You might also look at Galveston, Tx and Peru (if my memory serves me correctly) as two examples of privatized or partially privatized systems that far exceed the return of the SS system.


Oops! Forgot another source. We spent something like a year with a bipartisan commission studying this subject. I would suggest that you search their work as well.


I sense you are a younger guy. Don't know for sure, but you have the passion of a young man in your posts so I'm guessing. I know this SS thing isn't very pleasant, but if I'm right it's not a bright future for you and your generation unless we all get together and tell both political parties to quit playing politics with this and get it fixed responsibly so that the system becomes self-supporting. If that means we means-test SS or even change the rules some more, then fine.

It won't matter a tremendous amount to me. I can take care of my family just fine with or without SS, but I fear for the economic well being of my kids and their peers as we continue down this irresponsible course we're on. Whistling past the graveyard is simply not an option.

Moreover, the current system is arguably racist in that the "average" African American male will not live long enough to recover much if any of his "investment" in this system. We simply have to transform at least some aspects of the SS system into personally owned assets.


Hey Minuteman -- you know you made today's Wall Street Journal? It's in the Personal Journal section (the fluff section of the WSJ).


Don't worry!! Kerry has just announced that he is going to SAVE Social Security by rolling back the tax-breaks for the richest 2%.

While this is great news on the Social Security front it does represent a set back for the National Medical Care program, since Kerry was going to use the tax roll back to pay for THAT.

Frankly though, the National Medical Care enthusiasts kinda had it coming, since Kerry had previously announced he was using tax rollbacks to fully fund No Child Left Behind, and then jerked the money back from them to fund the National Medical Care program.

Can’t REALLY feel sorry for the No Child Left behind enthusiasts either. They were getting the money Kerry had previously told the Police and Fire Fighter associations he was going to use to add 10,000 new police and fire-fighters, that he was going to get by rolling back the tax breaks for the rich.

Then there’s the funding of stem-cell research…paid for by the rollback, and adding 40,000 more to our Army…paid for by the rollback, and so on!

While I am a Christian, and love the “loaves and fishes” scene in the Bible, I don’t think Kerry has quite the same power!



I must ask for a specific link.


Hey Minuteman -- you know you made today's Wall Street Journal?

Be still my effing heart!

That does not make up for the Yankees, and I now feel terrible that I let my Journal subscription lapse, but I am not-so-secretly pleased.


Brian, your suggestion tht there is some middle political ground to compromise reform of the SS system is proof positive of a failure to understand how the system works. All the talk about what year the system is good 'til, misses the mark. The SS system is based a large cohort of young workers paying the benefits of a small population of older workers. That ratio was approx 9 to 1 when the system originated under FDR. It will move below 2 to 1 as baby boomers retire. Based on age demographics, it is not something to be fixed as it is not an economically derived program--unless, that is, you plan to legislate the large number of children one must have, in order to perpetutate the myth that such a scheme works.

Talk of indexes, benefit cuts and tax increases merely papers over the underlying problem. FDR used it as a method to raise taxes during the depression, and, at the same time to address the issue of the elderly poor, when life expectancy was barely 65 years. It was political expediency, and nothing more. Clinging to political expediency 70 years after the fact is moral and economic suicide.


Actually, the retirement age of 65 was chosen by Bismarck in the 19th century, as almost no workers lived that long. And those that did weren't on the public dole for long. Looking at my SocSec mortality tables from 1940, I see that the life expectancy (from birth) was about 66 for males and 70 for females (of course, men got bigger payments than did women, as most women just got survivor's benefits). Now, those figures are 74 for men and 80 for women -- a boost of about 10 extra years of Social Security payments (I'm going to ignore all the Medicare stuff, which is an even bigger drag on the federal purse). Of course, remember that these are just average lifetimes - if you want to think on how really bad it is, consider that those who are paid more, and thus receive higher SocSec benefits, tend to live longer than those who are poorer. But even considering the general mortality table, of those currently 65, of men, over half will live 16 more years, over 25% will live 22 more years. With women, it's even more extreme: a woman aged 65 today has a better than even chance of living 20 or more years, and a 25% chance of living 26 more years.

(I'm an actuarial type, so I do these calculations all the time. The reason that life expectancies and these probabilities don't line up is two-fold: there are long tails (meaning some people live to be really old, and skew the probabilities and averages) and life expectancy from birth is different than life expectancy from age 65. The second assumes you've survived to age 65, which eliminates all those people who died before retirement age.)

In any case, the American Academy of Actuaries have some easy-to-read voter's guides out on health insurance, Medicare, and Social Security. Check them out here:


Just a silly comment to end the bold



I must say, you have an amazing ability to write a lot, say very little, and still not refute what was said.

I know there is a problem with people paying in versus those taking out. Everyone knows that. But that doesn't negate the fact that benefits are doled out in a particular way. Maybe it's just me, but acknowledging how they receive those benefits and how they would receive them under reform plans seems to be an important part of the discussion.

I know I can be scatterbrained or foolish at times, but man, if you aren't playing with me hear, I don't know what to say.

I must say, you have an amazing ability to write a lot, say very little, and still not refute what was said.

Oh, the irony.


Brian, I'll compromise with you. What is the problem that needs fixing? Is it a welfare system for the elderly poor? Or is it an old age pension system? (Hint: If your answer is both, then you might consider two different solutions for two different problems.)

Since the over 65 age cohort are the wealthiest in this country--a significant changed situation than 70 years ago--it strikes me as disingenious to have the government transfer income from those less well-off, to those more well-off.

If you want to provide welfare for the elderly poor, then provide it out of general tax receipts, after enacting a system that provides for appropriate incentives for people to provide for their own elderly years, rather than having everyone rely on the government to provide old age benefits.

Since the elderly poor are a small fraction of the overall elderly population, why does the government provide an old age welfare program for all elderly?

The final issue. Why should the government be in the business of providing old age pension benefits? Especially so, when it is neither structured or run on the same legal and sconomic basis as the non-governement pension benefit provider? (That's how you end up in jail.)

My peeve with you or others, is that you see symptoms of the problem (funding and benefits), without (seemingly) seeing the underlying source of the problem (the need to be satisfied, i.e. welfare and/or pension). Though most politicians take this same approach due to their need to compromise.

In fact, I'll take it one step further, you may see the source of the problem on entirely different circumstances than I've outlined. In that case, we've been discussing different problems.



As you requested, here's a good place to start your search for the facts on SS:


There are several excellent articles in the /pubs/articles/ section, among which is the Tanner article that lays out many of the very large deficit numbers. There are also links to "women, minorities & the poor", "reform plans" and "transition financing" that you might find interesting. I believe you will also be able to track from Cato to the presidential commision recommendations and perhaps to other sites as well.

I think you will find that when you get beyond the political talking points of both parties that conversion of the system to at least some elements of a privately owned system is the only effective way to deal with future shortfalls and with, frankly, lousy returns.

To provide an example. When the stock market bubble burst, I "lost" some relatively large paper gains on a small mutual fund in which I had invested a small monthly amount for about 15 years. However, even given that loss, my rate of return on my investment was still roughly five times what my SS contributions would have paid at the same time. I have been paying SS "taxes" since about 1968.

Doesn't prove anything - just an anecdote. Don't forget to take a look at the Galveston program.




Thanks for your comments. Honestly, I've never thought about the SS problem in terms of really two different problems as you suggest - very insightful. There is an insurance component to SS that might very well be appropriately peeled off into a program supported by SS "taxes" while leaving the remainder to individual ownership. I don't even have a problem requiring employers to "match" my contribution to this plan. Maybe something along the lines of a mandatory 401K program.

I do agree that it is my responsibility to provide for my retirement and the support of my family. That's why, if we must have a SS program, my preference is to own as much of it as I possibly can.

You make good points. The problem is that most of the public has only listened to the politicians (who have an agenda to continue to be reelected so will promise that things are OK untill 2042 or whenever) and have not researched the true nature of this program and the true crisis which we taxpayers and voters have allowed it to become.


President's Commision on SS:


Links to 18 sources of SS information:


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