JustOneMinute: There's A Timesaver

There's A Timesaver

I was planning a zippy post exhorting the White House to drop the implausible "crisis in Social Security" rhetoric and promote personal accounts as a good idea on their own merits. However, George Will is miles ahead of me.

MORE: Matt Yglesias is a skeptic; here is a true believer. Let's see if Mr. Will struck a nerve (yes, I will be kicking myself for not posting sooner...).

UPDATE: Matt Yglesias responds:

Many liberals have no problem with private accounts. What we have is a problem with paying for private accounts with drastic cuts in Social Security benefits.

Well, participation will be voluntary; further (to the extent the plan mirrors the Federal Thrift Savings Plan Bush has lauded) one of the invetsment options is a Government Bond fund that essentially owns the same type of bonds held by the Social Security Trust Fund.

Consequently, a person can elect not to participate; or, having once chosen toparticipate, a person can switch their account balance back into a Soc Sec Trust Fund look-alike.

So, if you are worried about your own financial well-being and the level of your benefits, don't join. If you are worried about someone else's, educate them - make Non-Participation a big Dem thing, and televise prominent Dems burning their sign-up card, or checking the "Count Me Out" box on the enrollment form. That just lightens the funding problem for the rest of us.

But if you are choosing on my behalf, thanks for your concern, but I'll take my chances with personal freedom.

Posted by Tom Maguire on January 20, 2005 | Permalink

Comments

You (and George Will) are right on target. If private accounts are an opportunity, enact a good plan and Social Security may become irrelevant.

The two subjects—the actuarial soundness of Social Security and private accounts are two different subjects. And we need to talk about both of them. But private accounts won't bring actuarial soundness to the Social Security system.

Posted by: Dave Schuler | January 20, 2005 at 01:49 PM

Says Will:

"If Social Security is in crisis, what word can describe the condition of Medicare and Medicaid? Thirteen months ago this administration improvidently enacted a Medicare prescription drug entitlement that by itself adds to Medicare's solvency crisis a sum much larger than the entire Social Security system's shortfall."

Is that really true? Cuz if it is...

Posted by: creepy dude | January 20, 2005 at 02:10 PM

Social Security is the most efficient, low cost, effective, compassionate government program in the history of western civilizaton. Giving President Bush the benefit of the doubt for having the best intentions, do we really want to turn Social Security over to the same sorry group that gave us the fiscal abomination known as the Medicare Prescripton Drug bill? And trade subsidy tax reform?

It is reassuring that there are signs of resurgence from GOP conservatives. At this point I don't see any rational reason for trusting the 109th Congress with the opportunity to reform franking privileges.

Posted by: JollyBuddah | January 20, 2005 at 02:44 PM

I don't know, Tom. It might be fun to answer the "there is no crisis" talking point with some of the Democrats own words.

In any event, I think the problem with the "crisis" meme is that both sides are talking past each other. Both sides are right, as far as they go...but the Democrats are ignoring some of the implications of the problem.

Posted by: Jon Henke | January 20, 2005 at 02:46 PM

Since everyone's gone link-happy all of a sudden, here's a little something that casts some light on a tangent from an earlier SS post: the latest outbreak of mass contentment in progressively-taxed Europe.

Posted by: Paul Zrimsek | January 20, 2005 at 03:19 PM

Jon's link to statements by President Clinton are interesting, but not relevant to the current debate. At the time, Clinton was proposing a modest reform of setting aside roughly 15% of the Social Security surplus into a distinct investment pool instead of putting it into the trust fund. Republicans blocked even that modest and necessary reform for the partisan reason that they did not want Clinton or the Democrats to get credit for fixing Social Security.

There are two primary questions in the current Social Security debate:

(1) Does Bush's secret plan to reform Social Security exacerbate the problem of unfunded liabilities?

(3) Can the 109th Congress be trusted not to take any Social Security reform bill into a Republican exclusive House/Senate conference committee and not emerge with another fiscal abomination like the Prescription Drug bill reform?

It's difficult to evaluate the first question, because Bush's plan is still secret. The answer to the second question was written in the history of the last session of Congress. Our Republican Congress is not trustworthy. Democrats should give Bush and the Republicans the exact same treatment that Republicans gave Clinton's Social Security reform proposal.

Posted by: JollyBuddah | January 20, 2005 at 03:34 PM

To keep that link-happy spirit going, let me just welcome the Jolly Buddah and point out that he (she? Might God be a woman?) has been doing yeoman work on Social Security over at Somebody's DD.

As to this notion:

At the time, Clinton was proposing a modest reform of setting aside roughly 15% of the Social Security surplus into a distinct investment pool instead of putting it into the trust fund. Republicans blocked even that modest and necessary reform for the partisan reason that they did not want Clinton or the Democrats to get credit for fixing Social Security.

Here is a bit of background on Clinton's plan.

The notion that Reps were motivated solely by a desire to deny Clinton a victory overlooks the fact that the Reps have been concerned about the government becoming a massive shareholder/private investor since the inception of Social Security (see the NY Times mag for some interesting history.)

If CalPers, with its assets, can be a leading shreholder activist, how influential might the Soc Sec Trust become? Reps have no desire to find out - creeping socialism, we call it.

Jon, good job on old "crisis" quotes; it puts my earlier effort deeply in the shade.

And here, Max Sawicky admits that Clinton promoted the notion of a crisis back in the day.

But my current official position is that, since private accounts don't solve the long term funding problem of Soc Sec, why keep talking about a crisis?

Posted by: TM | January 20, 2005 at 04:07 PM

Thank-you for the welcome TM, and good to run into you again as well Jon. I agreed with your pre-election post to the effect that Kerry and Bush were possibly the two worst presidential choices in American history. If anything, my opinion of both gentlemen is lower now than it was then.

I hold no opinon about God's gender, but I happen to be of the male persuasion. Since disclosure is all the rage on blogs these days, let me confess to being a casual participant at Daily Kos and a regular at MyDD. I am an ex-RINO who was a delegate for Bush 41 in 1980 and am currently fighting the ex-smoker's syndrome, to detest that which you formerly embraced, in my opposition to the current flock of Republicans. So far resistance has been futile.

At the risk of being contentious, I believe a little moral relativism is in order. Clinton made hyperbolic statements about both Iraq and Social Security. His response to both situations was proportional to the threat. That is why the answer to question (1), Does Bush's secret plan to reform Social Security exacerbate the problem of unfunded liabilities?, is vital.

Is President Bush's response to the genuine level of crisis proportional to the seriousness of the threat? Which brings us to question (3) What the heck is Bush's proposal anyway?

FWIW, I continue to believe in principled conservatism. I just see precious little sign of those principles in today's Republican leadership. I would have far less concern about debating and implementing reasonable Social Security reform with Jon Henke, but Hastert and DeLay are a horse of an entirely different color.

The risks of failure are too great and the advantages too theoretical. If Bush was truly interested in bi-partisan reform, he might surprise me and introduce exactly the reforms Clinton proposed. I don't think anybody should have any problem with shoring up the trust fund and it might be a step in the direction of cooperation that Bush claims to embrace.

Posted by: JollyBuddah | January 20, 2005 at 04:43 PM

"...even in the worst-case scenario for Social Security and health care, tax levels would put us at no higher than European levels".

Which is from the basis for the other thread Paul is referring to, in case Max is reading. I wonder if 10% unemployment qualifies as 'a crisis'.

Posted by: Patrick R. Sullivan | January 20, 2005 at 05:07 PM

The other thing, Tom, which the notion that Reps were motivated solely by a desire to deny Clinton a victory overlooks is that those same Reps were more than happy to give Clinton a victory on welfare reform.

Posted by: Paul Zrimsek | January 20, 2005 at 05:16 PM

"Social Security is the most efficient, low cost, effective, compassionate government program in the history of western civilizaton...."

Maybe it was back in the days when it was making its participants *richer*.

Now that has changed to making its participants *poorer* is it still?

Posted by: Jim Glass | January 20, 2005 at 06:12 PM

"...even in the worst-case scenario for Social Security and health care, tax levels would put us at no higher than European levels".
~~~~~~~~

"A Standard & Poor's survey predicts that France and Germany could see their public debt grow to more than 200 percent of G.D.P. by 2050.

"Europe may find itself locked into a vicious circle: an aging population means more public spending, which means higher taxes, which means lower growth, which means higher unemployment, which means more public spending, which means more taxes, and even lower growth.

"The former Dutch prime minister, Wim Kok, recently released a scathing report that found that 'the pure impact of aging populations will be to reduce the potential growth rate of the E.U. from the present rate, of 2 percent to 2.25 percent, to around 1.25...'

"As Olaf Gersemann has pointed out, the U.S. economy has enjoyed an annual real growth rate of 2.9 percent over the past 25 years. That's 55 percent more than western Germany, 48 percent more than France and 39 percent more than the E.U. as a whole.

"Back in the 1970's, European standards of living were catching up to U.S. standards. Now American G.D.P. per capita is about 30 percent higher than Europe's and the gap, if anything, is getting wider ...

"Meanwhile, in the United States ... many liberals are claiming that we don't need to fundamentally revamp our system because there is no crisis.

"To the extent that's true, it is because we have not been taking their advice for the past 50 years."

-- D. Brooks.

Posted by: Jim Glass | January 20, 2005 at 06:17 PM

"But my current official position is that, since private accounts don't solve the long term funding problem of Soc Sec, why keep talking about a crisis?"

My feeling is that we don't know yet what even the initial proposal will be. But if it doesn't at least help in long-term viability, it has zero chance of approval.

"Maybe it was back in the days when it was making its participants *richer*."

Yeah, you don't want to be the bottom guy in the pyramid. And everyone's natural disinclination to be that guy makes the crisis nearer than it would otherwise be.

Posted by: Cecil Turner | January 20, 2005 at 06:22 PM

"Yeah, you don't want to be the bottom guy in the pyramid. And everyone's natural disinclination to be that guy makes the crisis nearer than it would otherwise be. "

Yes, this is what's going to do Social Security in, the negative returns that make everybody poorer. Nothing else.

The "funding gap" is trivial. Just raise taxes or cut spending. Done. Gap closed. Just like with the Agriculture Dept. or Defense Dept.

Except that either raising taxes or cutting benefits drives returns even more negative to hasten the rise of the losers' ire against SS and the politicians.

And that's why the politicians have been paralyzed for so long about taking the "little" steps needed to close the funding gap.

Posted by: Jim Glass | January 20, 2005 at 10:53 PM

Jim, I'd like to get you on the record, right here and right now: Suppose the Administration settles on a Gingrich-style plan that creates private accounts, but has no (or small) benefit cuts. In other words, suppose the Administration's plan makes Social Security's funding gap larger rather than smaller. Would you oppose it?

P.S. For bonus points, demonstrate Social Security's return is negative while counting the benefits of disability insurance, survivor's benefits and annuitization all of which (in a fully privatized system) would have to be purchased by an individual.

Posted by: Ravi | January 21, 2005 at 02:18 AM

Jim, I should add two points (if only to see if rational argument can get you to stop waving around the irrelevant specter of Europe):

1. I'm not advocating European tax levels in 2030. I'm advocating Clintonian tax levels now so we don't have European tax levels in 2030. If those were your only two choices, which do you think is better policy?

2. Can you *prove* the difference between US and European unemployment rates is entirely caused by taxes? Here's a list of other factors I'd insist on seeing accounted for before I'd entertain that hypothesis:
- different rates of incarceration (equivalent to roughly 2% of the labor force, IIRC). Locking up more people (however necessary) doesn't count as greater economic efficiency in my book.
- different labor laws and regulations (which make companies more careful about hiring in the first place). A genuine difference, but one that has nothing to do with tax rates.
- different sizes of typical severance packages (When my previous employer was laying people of people in the US got, at best, 1-3 months of severance, depending on seniority. Our European colleagues got a minimum of 6 months of severance and (often) more.). Personally, I think most people would take longer to find a job if they got 6 months of severance instead of 1.
- different lengths (and levels) of unemployment compensation (i.e. government benefits beyond severance). I think the same argument applies here.
- differences in the measurement of "discouraged workers". I don't know if this is a factor, but because of this (and because of different incarceration rates) I'd recommend starting with the employment to working-age population ratio.

Now I agree that's a tall order, but that's what you need to address before you can (reasonably) assert that European levels of taxation necessarily imply European levels of unemployment. My gut feeling is that together these factors are more than enough to explain the difference between a 5.5% unemployment rate and a 9% unemployment rate (which according to my quick googling were the US and EU unemployment rates for the middle of 2004).

Posted by: Ravi | January 21, 2005 at 04:07 AM

European taxes without the European regulation? It is a fair point; both derive from a particular view of the role of government, but I suppose that conceptually they could be separated.

Although I am not so sure - as tax rates rise and the benefit to cheating rises, more rules to ensure compliance probably become necessary. In that vein, more taxes certainly suggest an increase in some regulation.

And if those new regulations increase employment friction to the point where new jobs are harder to find, folks might turn to the government and ask for new protections on firing, severance, unemployment compensation, and so on. This would not be an inevitable progression (to progressiveness?!), but it might not be unlikely, either.

Posted by: TM | January 21, 2005 at 06:10 AM

But my current official position is that, since private accounts don't solve the long term funding problem of Soc Sec, why keep talking about a crisis?

Oh, I think the "crisis" rhetoric is as off-the-mark today as it was a few years ago. More specifically, I think there's a problem lying a few years in the future, and SS is not the largest part of the problem, but it is a *part* of it.

But Bush has specifically noted--in his "the crisis is now" remark--that the problem lies in the future, and we're dealing with it now because *this* is the point at which we can still deal with it before it becomes too onerous. I find the "crisis" rhetoric excruciatingly inexact, but I understand the point he's communicating. (and the point Clinton communicated)

As far as solving the long-term funding problems, I see some value in shifting a percentage of the responsibility away from the government, but I don't really think this is primarily about fixing SS, so much as it's about fixing the paternalistic-paradigm of US government. That will, I believe, increase the dynamism of the US economy, and reduce our risk-averse slide towards a European economic stall.

In short, I (at this point) support the private accounts on ideological grounds, and on long-term economic grounds. In terms of "saving" SS, I'm agnostic.

Posted by: Jon Henke | January 21, 2005 at 08:21 AM

Hey, I know nothing, and I know that I know nothing. But I remember stuff. And I remember a lot of discussion from 1980 forwards about a "crisis of failing infrastructure" and the need for "investing in America's future" -- meaning building roads and bridges and subways and trollys and stuff. A lot of this stuff was built way back when and it's kinda small and light-duty, by today's standards, even if it isn't rusting away. As I recall a lot of it was initially built by private funds but taken over by gov't at some point to control costs. Or maybe I mean: "control costs". But anyhow, talking about crisis management, here's one that's been going on almost as long as the Social Security debate and sort of related. If we invest for the future, the debate must include -- though I understand we must not not restrict ourselves to -- consideration of such big transportation investment projects.

So I guess my question is whether governments generally, and the US Federal Gov't specifically, have a good track record on making investment decisions on these sort of projects. There are privately or locally funded toll roads, bridges, tunnels, canals, etc all over the world. Ditto public/gov't-sponsored projects. Just in general, which ones have delivered more bang for the buck?

If private projects do better than gov't projects ( The Boston "Big Dig" comes to mind ...) then isn't that an argument for diverting some moneys now paid in taxes toward private investments. On the other hand, I could be wrong -- perhaps most gov't bridges and tunnels and stuff are in exactly the right spot and are built safer and more cheaply and come in on time and under budget. Could be. I dunno. And if so, then, of course it would be better for our children and grandchildren's traffic and transportation needs if the gov't collected taxes and appropriated it towards US Army Corps of Engineer Projects and the ilk. I mean, I have no problem supporting the Army, that's okay. I just want somebody who understands such things to assure me that they have done the studies and can demonstrate that gov't invests money (in some limited example domain of general public interest) more wisely than hoards of individual investors. Or not.

Then I can decide if I want to trust my money to the gov't for my retirement or whether I'd rather buy bonds with somebody like McCarthy Building Companies ...

Posted by: Pouncer | January 21, 2005 at 09:13 AM

Jim:
"The "funding gap" is trivial. Just raise taxes or cut spending. Done. Gap closed. Just like with the Agriculture Dept. or Defense Dept."

I'm no economist and perhaps it's just ignorance, but looking at the various spending projections is what concerns me. The worrisome trend is the rise in social spending, specifically SS+Medicare+Medicaid, which went from 2.5% of GDP in '62, to 8.3% of GDP in '03 (though admittedly SS, the largest part of the problem, is also the flattest curve). The geometric growth in entitlement spending has flattened somewhat in recent years, but I'm comfortably persuaded demographic changes and basic benefit formulae will cause it to accelerate again.

Again, I'm just reading projections (but at least I have a degree in mathematics, and can read the charts handily), and the basic problem appears to me to be diverging curves of benefit payments and GDP. The claims about specific funding gaps being manageable all appear to truncate the problem at some arbitrary point--where the curves are still diverging. In the extreme long term (though we'll all be dead by then) we have to do something to stabilize the rate of spending growth at or below average GDP growth, or it's unsustainable. Or am I missing something?

Ravi:
"I'm not advocating European tax levels in 2030. I'm advocating Clintonian tax levels now so we don't have European tax levels in 2030. If those were your only two choices, which do you think is better policy?"

"Clintonian tax levels" isn't very precise. Do you mean the 17.6% of GDP in 1993, or 20.9% in 2000? Or the steady increase of effective tax rates? I suspect the optimal answer is in there somewhere, but it's toward the beginning.

"Now I agree that's a tall order, but that's what you need to address before you can (reasonably) assert that European levels of taxation necessarily imply European levels of unemployment."

Unemployment is a secondary effect, and I'd agree with you it's not a terribly good measure of merit. However, the primary effect of higher tax rates, as Mr Glass made clear, is lower GDP growth (which will have an obvious impact on unemployment).

Posted by: Cecil Turner | January 21, 2005 at 09:17 AM

"I'm advocating Clintonian tax levels now so we don't have European tax levels in 2030."

That won't do it. The 21% take of GDP seen at the end of the second Clinton term was a fluke, and not sustainable. From the end of WWII through today, we've seen it between 17-19% of GDP. With very few exceptions.

The average take of GDP for the Clinton years was 19%.

Posted by: Patrick R. Sullivan | January 21, 2005 at 09:23 AM

"Can you *prove* the difference between US and European unemployment rates is entirely caused by taxes?"
~~~

Entirely? Geeze, you mean if only half of the difference was caused by taxes then that would be fine? ;-)

Of course other things contribute to unemployment in Europe -- and it is equally true that higher taxes have many costs other than unemployment, such as underemployment, reduced economic efficieny and low economic growth.

If you want *proof* refer to any Econ 101 textbook's demonstration that the deadweight cost of taxes increases with the *square of the tax rate*.

Taxes today are 30% of GDP. Current trend will take them to 40% of GDP during the life of the SS trust fund.

Taking those to be the tax rates, the deadweight cost to the economy of the increase will be 7 points of GDP, *on top of* the visible out of pocket costs to taxpayers.

What does a loss of 7% of GDP translate into in terms of, say, unemployment and underemployment?

Of course 30% and 40% aren't the tax rates to use because it is the marginal tax rates that matter -- and marginal tax rates are higher. So the squares will be larger and the real-world loss higher.

But if you want a textbook proof of the costs of taxation, there it is, just look in a textbook and see.

Posted by: Jim Glass | January 21, 2005 at 11:04 AM

"I'm no economist and perhaps it's just ignorance, but looking at the various spending projections is what concerns me. The worrisome trend is the rise in social spending, specifically SS+Medicare+Medicaid, which went from 2.5% of GDP in '62, to 8.3% of GDP in '03"
~~~~~~

Here, read this and feel worse:

http://www.scrivener.net/2005/01/question-how-much-will-federal-income.html

Or for a visual display that will make you feel really worse, look at this...

http://www.ssa.gov/OACT/TRSUM/trsummary.html#wp31181

... that's not the growth in spending, that's the growth in unfinanced spending, future general revenue deficits in these programs on current law, that will have to be covered with income tax increases.

Social Security is included even during the trust fund years because, of course, the $5 trillion in trust fund bonds as of 2018 will have to be paid off with income taxes.

(For perspective, the entire publicly held national debt of the US accumulated from George Washington's first inaugural until today is $4.4 trillion.)

Posted by: Jim Glass | January 21, 2005 at 11:16 AM

> $5 Trillion in SS trust will have to be paid off with income taxes.

Sure, just like the $15 Trillion projected as the additional debt required for transitional financing by around 2036 for Plan II would eventually have to be paid back from future payroll taxes. Rather than paying future payroll taxes to beneficiaries, we'd have to use them to pay down the privatization debt.

But here's a simple way to limit the problem of that $5 Trillion that will be in the SS trust in 13 years. Instead of pissing the additional $3.5 Trillion away over the next 13 years, get the rest of government so it's only spending $1.10 for every dollar brought in, and actually use the SS surplus to pay off publicly held debt as it matures.

If we do that, we'll have that much less debt to pay off starting 25 years from now (we don't need to actually pay any of the SS debt off until around 2028 - just need to start paying interest), and we'd get to 2018 with the current budget in a reasonable position rather than spending $1.40 for every dollar of revenue, as we have the last couple years.

Or, we could simply free the SS trustees now, and let them contract out management of the trust to private financial firms. Doing that wouldn't require the federal government to borrow a dime, unlike the projected 23% of GDP by 2036 transitional financing required for Plan II.

Posted by: Buckaroo | January 21, 2005 at 11:45 AM

Cecil discusses the real issue here. I have watched the debate on SS carried on by our political leaders with a sense of foreboding. If we can't get some real dialogue going on SS and some sense that it is important to do something meaningful now, how are we ever going to address Medicare? SS is child's play compared to Medicare.

When I think of the long-term challenges facing this country I think that there is no way our economy can remain the largest AND most dynamic economy in the world. However, whenever I get too morose I remind myself that these same problems confronting us are in many ways even more acute in the other industrialized economies of the world.

Posted by: Bruce Berger | January 21, 2005 at 11:46 AM

"Or for a visual display that will make you feel really worse, look at this...

">http://www.ssa.gov/OACT/TRSUM/trsummary.html#wp31181"

Exactly. Chart B suggests (even after an extremely suspicious leveling of the OASDI curve in about 25 years) SS+Medicare will rise to 20+% of GDP in the next 75 years, and continue rising. That eats up the entire budget (before we even start spending on defense, infrastructure, etc.), along with any feasible tax increase. Obviously the current path is untenable.

It makes zero sense to me to keep driving this train down the track, waiting for the wreck. Medicare may arguably be the more emergent issue, but both need to be addressed. And sooner is better than later.

Posted by: Cecil Turner | January 21, 2005 at 11:51 AM

Well, most of those arguing for or against "crisis" tend to rely on one set or other or government financial projections. Let's remember the First Law of Government Financial Projections: they are always, always wrong, and usually very wrong.

Posted by: Crank | January 21, 2005 at 03:28 PM

Exactly. Chart B suggests (even after an extremely suspicious leveling of the OASDI curve in about 25 years) SS+Medicare will rise to 20+% of GDP in the next 75 years, and continue rising...
~~~~~~~~~

Except it will *never happen*.

We have precedent with this. When SS ran out of money in 1983 the shortfall was made up -- in perfect political compromise fashion -- 50% with benefit cuts. Including means testing (that as carefully disguised).

This is what will happen in the future, well before 75 years are up. In more like 10 or 15 years.

Income taxes are going to have to be increased in the 2020s far more than the needed tax increase of 1983 to make benefits whole, with vastly more income tax increases in the pipeline.

1983 will be repeated on a far grander scale. There will be much angst and pulling of hair, and in the resulting compromise benefits will be cut.

If benefits are cut once more by 50% of the coming shortfall -- a very plausible compromise, as we've already seen before -- then these programs will have to be redesigned in a major way.

Liberals who are so fond of these programs should be the first to see this danger -- yet they are being total ostriches about it.

As to SS, if benefits for the young of around 2020 are cut and means testing comes in overtly -- furthering the 1983 course -- sufficiently to close 50% of the shortfall, SS as we know it will be dead and gone. You'll be able to put a fork in it.

Returns for the young will plunge so far negative that the young will hate -- and means testing will mean they won't be able to count on what little it does promise them. Politically it will be converted into welfare. Remember how everybody loved welfare and what happened to it?

But what will be the alternative then? Will Max Sawicky and Paul Krugman stand up and say:

"We want income taxes on the working classes increased 63% -- 23% just for Social Security -- by 2030, with more later, so we can make transfers to the rich! Bill Gates was promised his SS benefits and by God he's going to get them, because we're not going to let SS and Medicare entitlements be destroyed by means testing. We're liberal and this is the progressive way!"

Paul and Max will be around then. Let's wait and see!

Posted by: Jim Glass | January 21, 2005 at 04:36 PM

Jim, first, I would like to note, for the record, that you refused to answer my other two questions:

1. If the Administration proposed a Social Security reform that increased Social Security's actuarial gap (instead of decreasing it), would you oppose it?

2. If your only two policy choices were Clintonian tax levels today or European tax levels in 2030, which would be better policy?

P.S. Patrick, I know "Clintonian" is ambiguous, but given that the smallest % of GDP collected in taxes under Clinton is almost 1.5 percentage points higher than the 2004 estimate from the CBO (which I consider a reasonable midpoint since more tax cuts are planned), fiscal responsiblity has to start somewhere.

Note that the linked study by EPI says that policy shifts (not economic forecasting or technical assumption shifts) account for an over $800 billion swing in our fiscal position in 2011 (from a $300 billion+ surplus to a $500 billion+ deficit). Given that, it sounds to me like we have lots of room for more fiscal discipline.

Posted by: Ravi | January 21, 2005 at 04:54 PM

Jim, just as taxes have economic consequences, so does borrowing. If we don't deal with the current general fund crisis, I don't think anyone will care what income tax rates are in 2030.

I did a quick simulation, using our current debt/GDP ratio (about 70%), our current structural general fund deficit (about 3%, excluding interest costs), and the Social Security trustees' assumptions in their pessimistic scenario (about 2% GDP growth and a 6% interest rate).

I came up with:

debt/GDP of over 100% in 2010
debt/GDP of over 164% in 2018
debt/GDP of over 300% in 2030 (Jim's favorite year)
debt/GDP of over 526% in 2042 (no trust fund to blame now)

Note that this is an optimistic scenario because I'm assuming the structural general fund deficit doesn't get worse with time. Given the past for years of spending increases and tax cuts, I think that is an incredibly charitable assumption.

So I ask again (fruitlessly I know, but it helps me sleep at night), to everyone who thinks reforming Social Security is our immediate fiscal priority: How do you intend to handle our immediate general fund deficit?

Posted by: Ravi | January 21, 2005 at 05:10 PM

"SS+Medicare will rise to 20+% of GDP in the next 75 years, and continue rising...
~~~~~~~~~

Except it will *never happen*."

Of course not . . . it can't. So why wait around pretending the system isn't broke? The earlier the change is made, the less drastic it has to be.

"So I ask again (fruitlessly I know, but it helps me sleep at night), to everyone who thinks reforming Social Security is our immediate fiscal priority: How do you intend to handle our immediate general fund deficit?"

Grow our way out of it? Or perhaps raise taxes until they spark another recession? And of course, we can't address the long-term problems until we solve the short-term ones, eh? This, just like the projections of a $300 bil surplus (based on an unsustainable tax rate applied to a stock bubble that amounted to a modern version of tulip-bulb futures) is completely unpersuasive.

Posted by: Cecil Turner | January 21, 2005 at 05:40 PM

Hey, if we "grow our way out of it", Social Security lasts a lot longer too... It's not honest to use the conservative projection to say "Social Security is bankrupt" while simultaneously saying the budget will be balanced on a "rosy scenario". As as for short-term problems vs. long-term problems, you're absolutely right. Unaddressed short-term problems compound a lot faster than long-term ones. Just like it is crazy to borrow money from Mastercard to put it in your IRA, it is more important to worry about today's general fund deficit than it is to worry about the long-term actuarial gap in Social Security. And if you think otherwise, I'll never take financial planning advice from you and I want your ideas as far away from the federal budget as is humanly possible.

But free lunches don't last forever. You want to balance the budget without raising taxes, go for it. Just tell me how you're going to cut 3-5% GDP of spending, permanently. And should your favorite spending cuts prove unpalatable for the crowd in Washington, tell me what your backup plan is. Until you do that, I think you just want your free lunch for however long it lasts and you don't care about the long-term consequences for the country.

Posted by: Ravi | January 21, 2005 at 07:38 PM

"Hey, if we "grow our way out of it", Social Security lasts a lot longer too... It's not honest to use the conservative projection . . ."

It may last longer . . . but current social spending policies aren't sustainable under any projection. And waiting to fix it just makes it harder.

"But free lunches don't last forever. You want to balance the budget without raising taxes, go for it."

Again, a short-term vs long-term problem. A war can be expected to cause a spending spike, and raising tax rates during a recession (or early in a recovery) isn't sound policy. Projecting the current trend out makes no more sense than the rosy projections in 2000 did. As to raising taxes, ~18-19% of GDP seems to make sense, but it appears to take some fine-tuning of the marginal rates to hold it there. And in the immediate aftermath of bubble burst/recession/trade center attack/follow-on war, getting the economy growing is more important.

Posted by: Cecil Turner | January 21, 2005 at 08:54 PM

"If we don't deal with the current general fund crisis, I don't think anyone will care what income tax rates are in 2030."

What general fund crisis? The deficit this year was 3.5% of GDP.

During the whole 12 years from 1982-1993 it averaged 4.1% of GDP. Was that a 12-year "super-crisis"?

"I did a quick simulation, using our current debt/GDP ratio (about 70%), our current structural general fund deficit (about 3%, excluding interest costs), and the Social Security trustees' assumptions in their pessimistic scenario (about 2% GDP growth and a 6% interest rate).

"I came up with: debt/GDP of over 100% in 2010..."

Hello?? The Congressional Budget Office has, on current law, deficits running about $300 billion a year until 2010 with the national debt held by the public, now 36.1% of GDP, rising to 40.5% of GDP.

http://www.cbo.gov/showdoc.cfm?index=5773&sequence=2

Debt held by the public rising from 36.1% to 40.5% of GDP, 4.4 points, over six years is hardly a general fund crisis.

From 1982-93 it rose 20.4 points over 12 years to a total that equalled 12 points more of GDP than it is now, and 8 more than it will be in 2010. Was that a crisis??

(After 2010 CBO has the expiration of the Bush tax cuts causing the deficit to plunge, so we'll disregard their further projections.)

Now, to get the current debt up around 70% of GDP you have to add in "intra-government debt" -- the trust funds, those funny IOUs the government owes to itself.

But heck, if you want to add those in why be a piker? Count all the net accruals for entitlements each year, not just the little portion represented by the bonds.

Doing that, the Treasury says the deficit was $11.1 trillion -- yes, with a "t" -- in 2004. Discounted to current value.

http://www.scrivener.net/2004/12/you-thought-2004-federal-deficit-was.html

Of course, just like the intra-government debt in the trust funds, which is a little bit of that, none of that hurts the general fund now. We'll have to wait a few years. But the general fund sure will be feeling it around, oh, 2030.

Well, if you were able to sleep at night from 1982-1993 you should sleep like a baby now.

But as to me -- that $11.1 trillion accrual accounting deficit for one year does keep me up at night sometimes. Do you have a sleeping pill for me?

Posted by: Jim Glass | January 21, 2005 at 09:53 PM

"Jim, first, I would like to note, for the record, that you refused to answer my other two questions:

"1. If the Administration proposed a Social Security reform that increased Social Security's actuarial gap (instead of decreasing it), would you oppose it?"

Ah, for my own policy preferences you'll have to come over to my own blog sometime.

(I have to drum up some traffic somehow!)

But if they are reflected in anything that comes out of the Bush Adminstration I will be very surprised indeed.

"2. If your only two policy choices were Clintonian tax levels today or European tax levels in 2030, which would be better policy?"

The choice is irrelevant to the real world.

I think I've made it clear that as a matter of practical reality I have no doubt that taxes will be going up a lot in the middle-term forseeable future; and that IMHO the optimum specific amount of that increase -- in light of the direct deadweight loss of taxation that rises at the square of the tax rate, compounded by politicians' notorious inefficiency in allocating real resources (see "world experience, 20th Century") -- is, very precisely: as dang little as possible.

Posted by: Jim Glass | January 21, 2005 at 10:08 PM

Cecil, I hate to burst your bubble, but the war has a little or no impact on the revenue trend. Which, in the first term of this administration, was roughly consistent - tax revenues down about 1% (as a percentage of GDP) per year. If the administration weren't talking about more tax cuts (I'm sorry "tax reform"), I might think this would change (flatlining at 16% of GDP would be bad, but better than the alternative of continued drops), but I'm pessimistic.

As for the spending trend, none of the 2011 projections include a war (in fact, none of the "official" budgets include Iraq and Afghanistan spending at all - those are separate "emergency" appropriations). I'll also point out that if you think revenues of 18-19% of GDP are appropriate, then we've got a ways to go. 2003 clocked in at 16.2 (CBO) and 2004 is lower based on the latest estimates.

Beyond that I'll note that the Federal Reserve is raising interest rates. If you think the economy isn't growing fast enough, you might want to write them a letter (though I'll admit that I think their hand is weak given our fiscal and currency problems). From a more practical perspective, I'd say that this is supposed to be the growing part of the business cycle. Since our fiscal situation isn't improving, I think we're doing something wrong.

Posted by: Ravi | January 21, 2005 at 10:58 PM

"Now, to get the current debt up around 70% of GDP you have to add in "intra-government debt" -- the trust funds, those funny IOUs the government owes to itself.

But heck, if you want to add those in why be a piker? Count all the net accruals for entitlements each year, not just the little portion represented by the bonds."

I thought I'd made my position on that point clear. I think the political and moral ramifications of the trust fund balances are different than those for programs funded out of general revenue. I mean one could hire an actuary to calculate the present value of our future defense spending and the run around screaming about the Pentagon's "unfunded liabilities", but that's silly.

I proposed an experiment - calling up your Congressman and Senators and persuading them to propose a resolution repudiating the balances in those trust funds. I don't think you'll bother doing it because (like me) you realize that they won't get near it (because doing so would be political suicide).

Given that, I see no credible reason for your belief that (in 2018 or 2030 or whatever your favorite future year is) that the US government will wake up and decide to repudiate those trust fund balances (either directly or indirectly through benefit cuts). The population will be more elderly at that point, not less. AARP will be out in (more) force and their constituents will be a larger fraction of the electorate.

That is why I think anyone who wants to claim the mantle of fiscal responsiblity must first address our immediate general fund deficit. Doing so gives us more time to broadly address our many health-care problems. And after all that, there will still be plenty of time to take care of Social Security. When your priorities are in the reverse order, I think something other than fiscal responsibility is motivating your choices.

I am under no illusions. I expect that if the pessimistic scenarios play out, benefit cuts in both Social Security and Medicare will be required to reach actuarial balance. But I think people who believe that the public will accept both benefit cuts *and* a literal or implicit repudiation of the trust fund balances are being foolishly naive (or don't really care about the long-term consequences as long as they get whatever short-term benefits they're looking for).

P.S. A pointer to specific posts on your blog where you discuss Social Security reform plans you find acceptable and unacceptable would be appreciated.

Posted by: Ravi | January 21, 2005 at 11:20 PM

"Cecil, I hate to burst your bubble, but the war has a little or no impact on the revenue trend."

Not sure where you got the idea I thought it did. (Seems to me I used the term "spending spike.")

"As for the spending trend, none of the 2011 projections include a war . . ."

This reminds me of my college days, tutoring calculus for beer money. More than half my students were taking business math, and while the math was trivial, the jargon was nearly impenetrable. I had to comb through the text and make a key (e.g., "marginal=first derivative") just to be able to help them set up the problems. I'm not sure if you're trying to be obfuscatory or just picking extraneous pieces of data, but taking three years of data and extrapolating trends (and comparing them to fantasy trends from 2000--ignoring the recession and the war) is not convincing or particularly useful.

"I'll also point out that if you think revenues of 18-19% of GDP are appropriate, then we've got a ways to go."

Yeah, no kidding . . . but we should go there slowly. And if we have another recession, we should lower taxes and provide stimulus spending, accepting the short-term increase in the deficit to kick start economic growth . . . just like we did this time.

Posted by: Cecil Turner | January 21, 2005 at 11:55 PM

I apologize if I'm being unclear. I'm not trying to be deliberately confusing. My read of the political landscape is that the Administration and the Republican leadership in Congress think that they need a "tax cut a year" to keep their coalition together (see Grover Norquist, among others). Now there's some political opposition (from fiscal conservatives and Democrats), so they don't get everything they want, but they've proven they can successfully cut the tax collected by the federal government by 1% of GDP per year and get reelected. Therefore, that is my baseline expectation unless the political leadership (or their political success) changes.

"accepting the short-term increase in the deficit to kick start economic growth . . . just like we did this time."

Cecil, you do know (it was extensively covered at the time) that the fiscal costs of the President's tax cuts (even with the patently dishonest sunset provisions) were heavily back-loaded (the estate tax only being eliminated in 2010, for instance and most of the bracket reductions being phased in over several years), right?

I'll add that if we have a recession in the short run I expect it to be caused by a currency crisis that makes long-term interest rates spike... and, in that case, fiscal medicine won't be an option because it will only exacerbate the situation (since more borrowing by the US government at that point would only further weaken confidence in the dollar).

But maybe a few specific questions will clarify your position:

1. Did you support the 2003 and 2004 tax cuts (I will note, for the record, that the NBER claims the recession ended in November 2001 - see link)?

2. Do you support proposals to make the 2001-2004 tax cuts permanent (instead of letting them expire according to their current sunset provisions)?

3. If you do not support making the tax cuts permanent, do you think the existing sunset provisions (including such gems as the estate tax vanishing in 2010 before returning, full force in 2011) are good economic policy, or should they be changed?

Posted by: Ravi | January 22, 2005 at 12:31 AM

"My read of the political landscape is that the Administration and the Republican leadership in Congress think that they need a "tax cut a year" to keep their coalition together . . ."

ISTM you're so busy analyzing political landscapes and Administration motives that you aren't addressing the central question of whether or not SS should be overhauled.

"But maybe a few specific questions will clarify your position:"

Now you appear to be questioning my motives, which are even less pertinent. Sorry, Ravi, but as someone else pointed out, this stuff causes headaches, and I'm not in the least interested in extraneous departures into economic theory (especially as it relates to your opinion of whether my positions are internally consistent or hypocritical).

What I don't believe there can be any argument about is that social spending (SS+Medicare+Medicaid) is rising at an unsustainable rate. We're going to have to fix it sooner or later, and sooner is easier. And though I broadly agree with your position on general fund spending and taxes--reducing the former, increasing the latter--it makes no sense to insist it's a prerequisite for tackling the other part of the problem.

On that note, it's well past my bedtime, so . . . cheers.

Posted by: Cecil Turner | January 22, 2005 at 01:09 AM

OK.

So, we've got an unsustainable "current" budget, which is the only real threat to SS solvency for the next 35 years.

Since Y2K, nominal on-budget revenues are DOWN about 19%, while spending is up 32%. On-budget revenue is roughly where it was in 1996, adjusted for inflation. So, there's a crisis that needs to be addressed, given that the economy has had real growth around 28% since 1996 but revenues are flat.

We've got a general crisis in health care, where costs for everyone, including the government, are skyrocketing and only projected to get worse.

So why are we talking about phasing out Social Security?

Posted by: Buckaroo | January 22, 2005 at 01:38 AM

Cecil, does it make sense to worry about contributing to your IRA when you have an overdue Mastercard bill? Especially when, wait for it... you plan to fund contributions to your IRA by borrowing more on the Mastercard? I agree the more you put into your IRA sooner the easier it will be to save for your retirement. But a financial planner who tells you to fund your IRA by taking out a cash advance on your credit card is a fraud (and presumably has some other motive).

The broader point I'm making is that the "magic of compound interest" works as well for debt just as well as it does for investments. Even if we waved a magic wand and had magic entitlement reform (i.e. ignore the trust fund balances and all other accrued liabilities), come 2030, if we don't deal with the general fund deficit our debt/GDP ratio would be over 200% and (assuming a 6% interest rate) we'd be spending 12% of our GDP on interest on the national debt! I believe that anyone who is more worried about the 3% of GDP required to redeem the trust fund bonds in 2030 rather than the 12% of GDP required to roll over (not pay back) the compounded general fund debt has the wrong priorities.

Posted by: Ravi | January 22, 2005 at 02:25 AM

"Cecil, does it make sense to worry about contributing to your IRA when you have an overdue Mastercard bill?"

Puh-leeze. This analogy fails on so many levels that it's completely useless. A sermon on loaves and fishes would be as appropriate as comparing the current SS system to an IRA.

"I believe that anyone who is more worried about the 3% of GDP required to redeem the trust fund bonds in 2030 rather than the 12% of GDP required to roll over (not pay back) the compounded general fund debt has the wrong priorities."

Again, you're artificially truncating the SS problem at 25 years (just when it starts to get interesting) and focusing on the trust fund red herring rather than escalating costs. You're also drawing a best fit curve on the general fund using three data points (and paying compound interest to the SS fund from it). I may not be an economics expert, but I recognize shoddy math when I see it.

Posted by: Cecil Turner | January 22, 2005 at 07:39 AM

At least you didn't object to comparing the general fund deficit to an overdue Mastercard bill... You were the one who objected to prioritizing short-term problems over long-term problems. I think that is a general problem-solving principle and gave you an example of a situation where the correct prioritiation is obvious.

I'll also add that the simulation that showed a 200% debt/GDP ratio *ignored* the present trust fund balances - it started only with the 30+% of GDP held by the public (as I asserted, a *magic* wand solving all entitlement problems, I'm not talking about any interest being paid to the trust fund). It held the structural (general fund) deficit at 3% of GDP (rather than as an increasing share of GDP which is what I expect) and used the same economic projections as the Social Security trustees - 2% growth and 6% interest rates. And if we leave our general fund deficit uncorrected for 25 years, we have a 200% debt/GDP ratio - and 12% of our GDP paying interest. My point is that the general fund problem compounds *faster* than Social Security, so we should focus on it first.

And I focus on the trust funds because I think you do not understand their political significance. Those trust funds keep track of the taxes collected specifically for the purpose of Social Security (and Medicare in the case of the HI fund). I agree that these programs (as currently configured) are probably unsustainable over the long run (though I suspect we'd differ on the sorts of adjustments that should be used to bring them into balance), but...

Do you honestly think a benefit cut *plus* a repudiation of the trust fund balances will be politically feasible? Benefit cuts are going to be unpopular on their own (and they'll be more unpopular when the retired and the near-retired are a greater share of the population and a greater share of the electorate). Tell people that you're going to cut their benefits and will also divert the taxes they've been paying for years for those benefits and I think the other side (whatever the other side is at that point) will pounce. What I think you do not understand is that it *doesn't matter* whether the trust fund balances are real or not. Those numbers are reported and politicians will take advantage of them, whether you like it or not.

Posted by: Ravi | January 22, 2005 at 06:55 PM

Social security is an unconstitutional, government-mandated ponzi scheme.

Posted by: Hank Dagny | January 22, 2005 at 09:47 PM

"I think the political and moral ramifications of the trust fund balances are different than those for programs funded out of general revenue..."

Well if you think it's morally different in that way, then the time for you to get upset was back when the politicians decided to consume the SS surplus for their convenience rather than save it in an economically meaningful way -- so that saved SS revenue could actually be spent on future SS benefits.

I'd have agreed with you if you'd gotten upset then. So would Moynihan, who called the politicians' consumption of the SS surplus "not theft, embezzlement". That's when you should have shown your moral outrage. You'd have had good reason.

But it's too late now. SS has been converted into a general revenue program to the extent it needs the trust fund, like it or not, that's what it is. A general revenue program.

Now you may think it will have a "moral claim" to that general revenue -- but so will everyone else who wants that same finite revenue.

There will be a "moral claim" on it for health care, and to fight poverty, and to keep farmers from being evicted from their farms, and to defend the country from enemies...

Your claim will be "more moral" than theirs?? They won't think so, and they'll outvote you -- at least into a compromise. Like in 1983, with its 50% of shortfall benefits cut.

"I proposed an experiment - calling up your Congressman and Senators and persuading them to propose a resolution repudiating the balances in those trust funds. I don't think you'll bother doing it because (like me) you realize that they won't get near it (because doing so would be political suicide)."

Who's talking about "repudiating the trust funds"?? Nobody will repudiate them. The fact that you have to throw up a straw man like this is revealing!

Benefits will be reduced, that's all. With benefit cuts the trust funds will need less general revenue. More bonds will be rolled over, just like today! Not "repudiuated", seesh.

And, yes, of course any proposed SS benefit cut *today* would be suicidal -- but then tax paying voters aren't today facing a 63% income tax increase to fund those benefits, eh?

"Given that, I see no credible reason for your belief that (in 2018 or 2030 or whatever your favorite future year is) that the US government will wake up and decide to repudiate those trust fund balances (either directly or indirectly through benefit cuts)."

You see no reason for benefit cuts? Really?

When *big* tax increases threaten the welfare of the average worker, what will be the moral argument to force them through to pay SS transfers to Bill Gates and all the millionaires of America? I want to hear the moral argument for sticking the average worker to pay the rich!

Seniors aren't "the poor" any more, you know. They are the richest demographic group by far, and will be even more so in the future -- far richer on average than those who pay them their benefits. "What's so moral about that?" those facing the tax hikes may ask!

So you'll again get means testing, on moral grounds, just like we did in '83. And then what will be the moral argument against cutting benefits for the young who aren't yet dependent on SS and have plenty of time to adjust to benefit cuts?

So we'll have another round of benefit cuts for the young, as before, only on a much bigger scale than in '83. Leaving the young hating a program that pays them back even less than it does now -- and knowing they might not even get that little if they are successful in life, since they'll be means tested out.

So SS is turned into welfare, as the logical moral outcome for a general revenue program. Happy?

"The population will be more elderly at that point, not less. AARP will be out in (more) force and their constituents will be a larger fraction of the electorate."

And any political science text book will tell you that's when an interest group loses its clout and poltical influence.

When it is a small minority it is cheap for the majority to throw its members subsidies. But when it becomes a big minority it becomes expensive for the majority, and the majority -- which is still the majority -- gets pissed and irate at it. And unsympathetic to its additional demands.

"That is why I think anyone who wants to claim the mantle of fiscal responsiblity must first address our immediate general fund deficit."

Closing the non-entitlement related deficit, a mere couple hundred billion a year compared to $11 trillion current value entitlement accruals and rising about $3 trillion a year(!) does nothing to help you. You are dreaming.

But speaking of deficits, you never explained why the 12-year "super general fund crisis" 1982-93 -- during which time the debt was larger than even it will be in 2010 by GDP, and deficts were larger than today's all along -- didn't kill the US way back then.

Posted by: Jim Glass | January 23, 2005 at 02:05 AM

"At least you didn't object to comparing the general fund deficit to an overdue Mastercard bill... "

I object to both. We're not paying different interest rates on various shortfalls, so the analogy is inapt.

As to the rest, Bill handled it rather better than I could. The SS "trust fund" may have some moral significance, but what it lacks are actual funds. There's no obvious benefit to maintaining an accounting fiction in order to half-balance one side of the books (while throwing the other even farther off-balance). Nor does feeding endless money into a failing Ponzi scheme make sense, even if we promised we would.

"Do you honestly think a benefit cut *plus* a repudiation of the trust fund balances will be politically feasible?"

Here, I think you're correct. It probably won't be feasible until we get a critical mass of people holding discounted government promissory notes objecting to those who are cashing theirs at face value. But there's no moral high ground in that inertia, and delaying the fix will just make it harder.

Posted by: Cecil Turner | January 23, 2005 at 07:59 AM

Oops. Should have been:

"As to the rest, Jim handled it rather better than I could."

Sorry, Jim. I better go get some coffee.

Posted by: Cecil Turner | January 23, 2005 at 08:04 AM

Jim, there is a Social Security surplus now. I have supported and continue to support allowing the trust fund to invest something other than Treasury bonds (and if I believe estimates I have read merely saving the 2005-2018 surplus alone would be enough to fund full benefits through 2030 or so). But I don't think the moral or political situation changes depending on whether or not that happens.

As I said, I expect that benefit cuts and reforms (particularly in Medicare) are going to be required. But I think it is dangerously foolish to think that such cuts can be combined with not honoring our obligations to the trust funds. The party out of power (whichever it is at that point) will merely produce ad after ad featuring ordinary people who've paid into the system for years whose benefits are going to be cut. They'll say things like "I know times are tough and we all have to cut back, but that doesn't make stealing from the trust fund right. That's stealing the taxes I've paid over 40 years."

As for the deficits of 1982-1993, I was against them then and think that the $1 trillion+ borrowed then is still a difficult fiscal constraint for us now. Wouldn't you prefer being able to borrow that trillion dollars in the future (instead of having to raise taxes)? As I said earlier, "the magic of compound interest" works for debt just as it does for saving. If you really want taxes to be as low as possible then you should want tax increases and spending cuts sooner rather than later.

I'll also note (looking at the political power of those who are or are near receiving benefits) that (according to the 2004 exit poll) people aged 45+ are already a majority (54%) of the electorate (with 24% 65+). So (with respect to entitlement cuts) I don't think we'll be talking about the political power of a minority...

Posted by: Ravi | January 23, 2005 at 04:53 PM

A small correction. The 24% number applies to voters aged 60+ (so 45-59 are 30% of the electorate). But the broader point stands.

Posted by: Ravi | January 23, 2005 at 04:55 PM

"I'll also note (looking at the political power of those who are or are near receiving benefits) that (according to the 2004 exit poll) people aged 45+ are already a majority (54%) of the electorate (with 24% 65+)."

Um, I'm 45+ and paying taxes, not receiving transfers. Which way do I vote on this issue?

Now, your 24% exactly illustrates the point of the textbooks.

When seniors were 12% versus 88%, to pay each one $100 cost each member of the non-senior majority a mere $13.64.

But as the ratio moves to 24% - 76%, the cost of that same subsidy for seniors rises to $31.58 per member of the majority, 2.3 times as much.

Do you see why the majority 76% begin to feel less sympathy?

Especially when as a class the 24% are much richer than the 76% -- and don't have such costs as raising kids, and paying for college costs, as the likes of 45+ers like me face -- so the majority poorer are making a tranfer to the minority richer.

The majority at that point become rather more open to questioning the inherent morality of the arrangement!

Remember -- in the days when SS was building its popularity, payroll taxes were 3% and everybody got a good 10% (or more+) real return on what they put in! What was not to love??

Now for the young payroll taxes start at 15.3%, and on top of that they face a 35% increase in income taxes to pay just for the trust funds ... and they are never ever going to recover even what they contribute in payroll taxes -- forget the income taxes.

All to pay transfers to people who as a class are much richer than they are.

Does that sound like a formula for maintaining popularity for this program?

On the basis of its morality? ;-)

BTW, if you count people a good 20 years away from retirement as retirees to get their number up to 51%, I have no doubt that you can produce any number you want for the annual general fund deficit. ;-)

Posted by: Jim Glass | January 23, 2005 at 10:04 PM

I agree, the 2004 exit poll didn't cut the demographic groups where I wanted. I was hoping to get a good number for 55+ (I'd guess it is around 40% of the electorate, but that is a guess), but that doesn't obscure the broader trend. You're arguing about the power of a political minority and I'm pointing out that in the out-years when you expect huge benefit cuts the relevant section of the electorate is likely to be a majority. I think expecting a majority to elect representatives who will slash their own benefits is unlikely (and depending on that is not likely to produce realistic budgeting).

As for the general fund, if you don't trust my numbers, write your own spreadsheet. Show me why you don't think a persistent and increasing general fund deficit isn't a problem (or is a smaller problem than entitlements). I laid out my assumptions completely (3% structural deficit - i.e. without interest, debt/GDP today of 70% or 35% in the "magic entitlement solution" scenario, 2% economic growth and 6% interest rates). If you prefer a different forecast, lay it out and justify it (though if you vary the economic growth and interest rate assumptions you should, to be fair, redo the entitlement projections under the same assumptions - and not just take numbers from the trustee's reports, unless you are using one of their alternative scenarios).

Until you do that, I don't think you can honestly advocate for entitlement reform in preference to closing the general fund deficit from a platform of fiscal responsibility.

Posted by: Ravi | January 24, 2005 at 07:39 PM

When I did my own spreadsheet I came up with considerably smaller numbers than Ravi-- who is possibly mistaking the 6% nominal interest rate assumed by the Trustees for a real rate, and probably applying the Trustees' end-state figure for real GDP growth from Year 1 (their intermediate assumptions actually have us on a glide-path from 3.6% growth in 2005 to 1.8% from 2023 on). This was accepting a constant 3% structural deficit, even though OMB expects it to decrease to about half that over the next few years.

I don't think anyone's assuming a "magic entitlement solution"-- merely recognizing that whatever laborious, non-magical solution we come up with will still be an entitlement solution, and therefore really ought not to be lumped in with General Fund debt when drawing invisious comparisons between the urgency of fixing the GF deficit and the urgency of fixing entitlements.

Posted by: Paul Zrimsek | January 24, 2005 at 08:36 PM

Thanks for the catch on the real vs. nominal rates. Plugging that into my program (leaving the other numbers unchanged), that does make the numbers somewhat smaller, but still doesn't change the relative urgency of the problem. Ignoring entitlements, that still leaves us with a debt/GDP over 120% in 2030. Which means that we'd be paying over 7% of GDP as interest on our non-entitlement debt as opposed to roughly 3% of our GDP to redeem our trust fund obligations (as previously cited).

Put another way: if we do nothing about the trust funds, they will be a problem equal to 3% of GDP in 2030. If we do nothing about the general fund deficit, it will be a problem of more than 7% of GDP in 2030 (since you should use the nominal rate to figure out how much interest pay in a given year, the real rate just reflects that, next year, some of your debt has been inflated away, so the debt-to-GDP ratio looks better). It seems straightforward to me that 7 is still more than double 3 and, therefore, is the bigger problem.

As for the OMB numbers, I don't trust them as realistic forecasts (and prefer a structural deficit assumption) because of all the well-known games that are played with them. For instance, they don't include spending for continuing operations in Iraq and Afghanistan (there's a $100+ billion appropriation that was recently announced), prominent tax initiatives like making the 2001-2004 tax cuts permanent (which I oppose, but expect to pass) and so on.

Looking at the last few years, spending is up slightly from 18% of GDP (2001) to almost 20% of GDP (19.9 2003 actual, 19.8 2004 estimated - CBO), while revenue is down significantly from 19% of GDP (2001 - yes there was a trust fund surplus that year), to 16.4% of GDP 2003 actual or 16.2% of GDP - 2004 estimated - CBO). Obviously if both trends continue we will face a disastrous ever-growing structural deficit (particularly if, as I fear, our foreign creditors get spooked and there is a currency crisis which increases interest rates and sparks a recession), but even if they hold steady at their current levels we have a very serious problem.

Posted by: Ravi | January 25, 2005 at 01:49 AM

Small corrections on the Iraq and Afghanistan appropriation. Apparently it is merely being leaked right now, it hasn't been officially announced. Also the first article I read was fuzzy about the distinction between the $25 billion appropriated in October and the additional $80 billion requested (and cited a $105 billion number). I presume the $25 billion is already factored in (though I wouldn't be shocked to be wrong about that), though the $80 billion is new. Also, the linked Washington Post article quotes an Army General as saying troops remaining through 2006 as "the most probable case". If that's correct, this isn't the last of these we're seeing (from a future budgeting perspective).

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