A Prophet Without Honor

Max Sawicky, who occasionally graces us with a visit from the other side of the aisle, has a new paper out on Social Security.

He has already gotten some praise from TAPPED; I have no doubt he would welcome some constructive criticism from the readers here.  Or, I imagine he could tolerate a few "Hosannas", given the approaching weekend and all.

And of course, bilious scorn is always an option.  Just remember, if you start something up, you go in as a heavy underdog.

In other Soc Sec news, the Bush marketing plan continues to evolve.  I can not address the rumor that, having used posters saying "Strengthening Social Security" and "Keeping Our Promise to Seniors", the White House is going to roll out "Brother, Can You Spare A Dime?"

And here is reporting on the new trustees report:

The Social Security and Medicare programs will run short of money even faster than recent projections had anticipated, trustees for the programs said today in a report that immediately intensified an already bitter political debate.

Beginning in 2017, not 2018 as previously projected, the revenue from Social Security payroll taxes will be less than the benefits the government will be paying out, Treasury Secretary John W. Snow said, forcing the government to dip into reserves.

Moreover, those reserves, which have been built up by surpluses and will keep benefits at their normal levels even after payroll taxes are insufficient, will be depleted in 2041, not 2042, as previously anticipated, Mr. Snow said...

Max is satisfied that the fix was not in.

Comments

[Sinbad]

Well, thank goodness Max is confident that the trustees aren't lying. I mean, how many of us weren't on tenterhooks awaiting his judgement?

So how fortunate for all of us that he can now return to asserting that Americans are absurdly undertaxed, and/or advocating kicking Social Security's problems down the road.

[gt]

We are undertaxed. We want 20% of GDP in govt spending but only pay about 16%. That's undertaxed.

[Les Nessman]

"We want 20% of GDP in govt spending.."

No, we don't, but unfortunately we have grown accustomed to accepting the 16% needed spending along with the 4% pork-barrel extras.

We're overspending.

[Miracle Max]

By all means, send me your dimes.

gt, if you'll accept the position, I nominate you official MaxSpeak Ambassador to JustOneMinute.

[TM]

Hmm, isn't there normally some credentialing exercise?

Oh, you know we luv ya, GT.

I mean, how many of us weren't on tenterhooks awaiting his judgement?

Well, there was always the possibilty of a lovely brawl during which some of us would explain that whatever assumptions they used this year were the only reasonable choice, while some other group screamed that it was a Rovian plot.

[gt]

max,

So, how much do you pay?

And do I get a personal meeting with TM?

;)

Les,

What you call pork-barrel extras is spending Americans want as evidenced by the votes of their elected representatives.

[The Apologist]

"Moreover, those reserves, which have been built up by surpluses..."

It's been my understanding that the "Social Security trust fund" gets emptied every year for other spending and that what we have there is a pile of IOU's, not cash. Am I wrong on this?

[gt]

Apologist,

All debt of every kind is an IOU. If you buy a bond from GM that's an IOU. A Treasury bond is an IOU. When CA issues debt those are IOUs.

[rudy]

Redeeming 'bonds in the trust fund' after 2017 can only be done by printing money, borrowing money, increasing taxes, decreasing other Federal spending, or some combination of these.

The bonds are internal I OWE ME's by one part of the Treasury to another.

They have no intrinsic worth. Their face value is balanced elsewhere on the Treasurey's books by an equal Federal debt owed to the 'trust fund'.

Congress could put billions of dollars more of such paper I OWE ME's into the trust fund at any time without spending a nickel, and with no impact on the real situation, since the trust fund has a net value of zero regardless. That could run its 'expiration date' from 2041 up to 2100 or any other year with a stroke of the pen.

All the 'trust fund' does is to keep its books and to serve as a legal spending authority not dependent on the annual appropriation bills.

It contains no net assets whatsoever, and never has.

[The Apologist]

rudy, that's what I thought. So when does the money "really" run out? That is, when will we have to begin raising tax rates just to pay the current commitments?

[The Apologist]

Or did you already answer that with this?

Redeeming 'bonds in the trust fund' after 2017 can only be done by printing money, borrowing money, increasing taxes, decreasing other Federal spending, or some combination of these.

[JorgXMcKie]

Apologist: we all know that water runs downhill, but, Praise God, it never hits bottom. At least as far as SS and Democrats are concerned. You can, too, spend those IOMes, just have a bunch sent to you in lieu of your SS check and use them at the grocery. No Prob. As gt explained, it's all money.

[PJ/Maryland]

We are undertaxed. We want 20% of GDP in govt spending but only pay about 16%. That's undertaxed.

I've seen this claim in other places, and it strikes me as straight BS. We all want billions spent on our pet projects; we just want other people to supply the billions. It makes just as much sense to say we're overspending, as Les says.

So, yeah, GT, you're right. All Americans are undertaxed, except me. Also, all government programs are overspending, except the few that I support.

[Movie Guy]

Odd that no one is discussing the Bunning amendment.

Proposed tax cut resulting in $1 trillion revenue loss to Medicare over a 75-year period.

How many more tax cuts do we need?

[Patrick R. Sullivan]

"What you call pork-barrel extras is spending Americans want as evidenced by the votes of their elected representatives."

Are you really this ignorant, GT? If so, I suggest your acquaint yourself with these guys:

http://www.econlib.org/library/Buchanan/buchCv3Contents.html

[Patrick R. Sullivan]

"I have no doubt he would welcome some constructive criticism from the readers here."

He sure doesn't welcome it at MaxSpeak.

[Sinbad]

What you call pork-barrel extras is spending Americans want as evidenced by the votes of their elected representatives.

Well, now, gt, I'm sure that some American, somewhere, "wants" the pork that Congress serves. Every dollar in the federal budget has a constituency.

But are you seriously asserting that Congressional votes approving a budget indicate majority public support for every outlay in that budget?

I am, however, just thrilled with your new deference to the democratic process.

[ryan]

"So when does the money 'really' run out? That is, when will we have to begin raising tax rates just to pay the current commitments?"

Apologist, in a sense there's no particular time. Every year we get money from payroll taxes. If this amount is more than we're spending on benefits (as it always has been), the rest goes to the general fund. If the SS money was less, we'd pay the gap from the general fund. The difference between SS taxes and SS benefits constantly decreases and will one day be negative. I suppose we could argue about whether the year it becomes negative will be 2017 or 2018 or whatever, but if the concern is "when do we have to borrow more or tax more or spend less on other things to pay for Social Security," well, the answer is today.

[MattR]

Of course, this debate about the IOMes would be moot if Al Gore had won in 2000 and implemented his "lockbox" approach of forbidding the federal government from dipping into the SS Trust Fund.

[dogfacegeorge]

Why do we vote for spending 20% of GDP but only vote to tax ourselves 16%? Because our kids don't get to vote.

If I were a kid, I'd be complaining about taxation without representation.

[Miracle Max]

1. Let's see. If the government holds one of its own bonds, isn't it an IOMe? If not, why not? If yes, go on to #2.

2. If somebody is willing to pay for a bond the Gov holds, is it worthless? If so, why? If not, go to #3.

3. If somebody is willing to pay for the bond, doesn't that make it worth something?

4. If you say the IOMes are worthless because they can't be sold to the public, aren't you saying their non-tradability is the key, not the IOMe part?

5. Actually, the IOMes are tradable with the rest of the Gov for your tax dollars. In fact, by law they must be traded. If they are still worthless, then aren't your tax dollars worthless too? And if so, then why worry about being taxed?

Quod Erat Demonstrandum.

gt -- I can't pay you, but I can nominate you for the Nobel Peace Prize. TM -- no you have no say in the matter; it's the GWB style of diplomacy.

[TM]

I like the sound of that: GT, Nobel Prize nominee...

[rudy]

I receive a million dollars cash ... nice!

But I spend it all the minute I received it ...

So keep from being flat broke, I issue myself a non-tradable bond for the million dollars I spent.

So now I hold my own bond for a million dollars.

And Max comes along. I print and sell him a tradable bond for a million dollars, and use the nontradable bond as evidence of my wealth.

So now I have my million dollars back in cash from Max and still have the nontradable bond ... must mean I am now worth two million. Max thinks I am.

And I even got to spend the first million right away.

Life is good.

[Max Sawicky]

But I wouldn't buy your bond, but I or you would buy the Gov's bond.

[Jim Glass]

The IOMes are carried at $0 value on the government's balance sheet.

http://fms.treas.gov/fr/index.html

That very accurately reflects their value to the government for financing Social Security.

The IOMes are entirely distinct from other US government bonds -- such as those owned by China -- in that it is the government's choice to pay them off or not upon maturity (or before maturity), and not doing so does not result in default, but simply in their automatically being rolled over.

The US government does not have the option to choose to not pay off T-bonds owned by China while also avoiding default on them by rolling them over forever.

This option to avoid default on the trust fund bonds without ever paying them off, by rolling them over unto perpetuity, makes all the talk about the "value" of the bonds, the "full faith and credit" behind them, the horrible "default" scenario, etc and so on, all moot to the point of silliness.

(After all, the Treasury hasn't paid off any of these 15-year bonds in 30 years yet, and nobody's hollering "default!")

The question isn't whether the bonds have value -- the question is whether the past Congress's *promises* of future benefits worth trillions of dollars more than any resources provided to pay them have any value.

Alas, Congress's promises of Social Security and Medicare benefits are not backed by full faith and credit or anything else -- not even with trust funds that are stocked to the brim with these "may never be paid off without ever having a default" bonds standing behind them.

The last time Congress faced imposing a tax hike to pay for promised SS benefits for which there was no funding, it chose to cut benefits by 50% of the funding gap.

With a much, much larger funding gap coming, in a much, much more difficult fiscal time (Medicare), following this precedent we can expect much larger benefit cuts in the future. Then the bonds will be able to happily sit in the trust fund rolling themselves over until the Second Coming, with never a question of default.

And Medicare is entirely relevant to mention here -- remember, it too has a trust fund that's been collecting payroll taxes (which is why you pay 15.3% rather than 12.4%) without ever keeping a penny of them in savings to meet future expenditures, other than for the bonds carried at $0 value on the government's balance sheet of course. And the Medicare trust fund is in a lot worse shape than the Social Security fund.

By 2030 income taxes will have to rise 35% from today's level just to cover trust fund operation, the actuaries say, and the rise will continue after that.

Thus, today's workers under 40 who are scheduled to get a negative return from Social Security relative to just the payroll tax, will get hit again with this fat income tax hike to make up for the payroll taxes they alreay paid in order to fund their own benefits -- which means their return will be even more negative ... while their benefits will still be 25% underfunded! After paying for them twice!!

My questions for the regressive do-nothing "progressives" for which I've never gotten an answer are:

1) How do you rationalize screwing workers like this, when SS was always supposed to help workers? In particular, how do you rationalize changing SS from a program that always gave workers big positive returns into one that will give them negative returns and make them poorer -- which is exactly what you are doing -- as being a good thing?

2) Politically, what do you imagine these workers will do to Social Security 20 years from now, when they are the 55-and-under majority voting block, and have to vote on these tax hikes and further benefit cuts -- which won't enact themselves -- in order to screw themselves yet further?

Just how do you imagine you are "saving" Social Security?

[Max Sawicky]

Hi Jim. Short post beats a long post, but I'll spot you the extra words. I confine myself to the issue I addressed: Trust Fund bonds -- valuable or toilet paper.

We all understand the bond is at once an asset and a liability. You speak of "balance sheet," but the Gov has more than one balance sheet. On the SS sheet, the bonds are assets, backed by the magisterial power to tax of the nuclear-armed part of God's plan Government of the United States of America.

Your main point is that the bonds are worthless because they are susceptible to default, unlike bonds held by the public. I agree this is a problem, though not necessarily crippling. The solution is to exile all Republicans to Mars. The people in office yammering about the bonds are the ones most likely to support default, rather than raise taxes.

You say it would be better if something was set aside to back up the bonds. Putting macro considerations aside, I agree. But it's those Republicans who have opposed pre-funding. Opposed Gov purchase of private sector assets, opposed pay-down of the debt, opposed the "lock-box." See Mars, above.

So in summary. Bonds good. Big Mars mission. Pay Social Security benefits with income taxes. Retire happy. Kids have higher after-tax income anyway. Health care: Jesus is the answer.

[rudy]

Given what Max evidently smokes I'm sure he would buy my bond.

Look at everything else he buys into.

That last post displays an amazing capacity for random association and causal inference proven only by sheer blatent assertion.

A rare and unique talent indeed.

[Max Sawicky]

No Nobel prize for you.

[Harry Arthur]

Jim Glass,

Unfortunately you still haven't gotten an answer.

I'm still waiting for an answer to my question as to why Galveston shouldn't be a model for the entire country.

The tea must go into the harbor again.

[Harry Arthur]

If Mars is a red state I'll volunteer to move there but only if all retirement programs there are privately owned. Still not sure why owning your retirement program is a bad thing. Talk about a "lock box."

[rudy]

Seems that Jim got the only answer there is ... silent acknowledgement of the true state of affairs.

All the campaign talk of lock boxes and not raiding the trust fund is shown as the rank hypocracy it always was.
There is nothing to lock in any lock box except worthless paper, and no way to raid a fictional 'trust fund' that is empty of any real assets.

[Miracle Max]

Y'all think there is a free lunch in PRAs. There isn't.

Short explanation (longer one later): Suppose we let the SS system grind to a halt, issue bonds to workers to reflect their historic payroll tax contributions, let all future contributions earn a market ROR.

Now with those bonds, the Gov could either default on them (the Bush plan, through the guise of assorted benefit cut schemes 'on the table'), pay them off all at once, or carry them at a market interest rate. It should be clear that the present value of this obligation is eaten by someone, no matter how it is done.

That same obligation is what implicitly truncates future PRA contributions down from the market ROR in the accounts to lower the SS ROR.

The only excuse for the PRAs, transactions/adminsitrative costs aside, is founded on ignoring the risk that implicitly devalues the higher apparent average ROR. It would be much simpler for the Gov to sell bonds, buy stocks, and distribute its profits to SS beneficiaries (the Clinton plan). But if the sacred market correctly values the risk of assets, there wouldn't be any profits. Why does anybody own bonds?

[rudy]

No free lunch, I agree.

The picnic basket that held our lunch contained only a large hole in the bottom.

So do we keep trusting that kind of basket, and those who have peddled it, or do we need something better?

I'd like to see what all the options are and how they could work, and how we can keep from being hugely scammed this way in the future.

Fixing it won't be free at all, but the very worst alternative is leaving it the way it is.

The strength of PRAs is individual oversight and control of what is really there.

Blind trust in any socialized Ponzi schemes again would be folly.

If there are better ways out than PRAs, let's hear about them.

[Harry Arthur]

Rudy, agree except that the "strength of PRAs is individual" ownership - oversight and control admittedly being facets of ownership.

M&M, also agree that "there is not free lunch." Don't believe any of us have suggested that is the case, therefore, care to discuss my question? Jim Glass' question? Others? Or do you prefer to continue to address your arguments to straw men?

Is there something about the Galveston experience that suggests we not do everything we can to go down that road? The three counties and independent municipalities in Texas that have totally privatized their retirement system seem to have done an excellent job that may very well be worthy of imitation. I'm wondering why we're not at least discussing the pros and cons of what they have apparently done very well - with retirement benefits, death benefits and disability insurance far superior to anything available from SS, using only banking instruments (no "risky stock schemes") and with complete 100% ownership.

Is there something inherently untidy about owning your retirement account?

We all understand the transition "costs" involved. Definitely a serious problem that arguably would not exist if we had truly fixed the program in 1983 instead of just pretending to by raising taxes and lowering benefits. Had we elected to phase in personal accounts in 1983 (22 years ago) I would have been among those who would have immediately signed up to own my account and I dare say I would be far better off than I am today or will be in 10 years when I reach SS retirement age.

Even given the transition costs, is there a better way out of this problem? Sorry, but I just haven't been convinced yet that doing nothing passes the common sense test. It certainly doesn't help the general funding problem looming in 2018, oops, it's 2017 now, isn't it?

[norman]

I have learned about this at school today!