Powered by TypePad

« Two Years Later | Main | Stone Cold Killers »

March 18, 2005



Joe Lieberman gets a letter published in the NY Times. (And why can't I?)

Because Lieberman's a senator and you're a pajama-wearer ;-)

Tom Blumer

The $600 billion is, I'm reasonably sure, the increase in the Actuarial Net Present Value of Accumulated Plan Benefits, and I think it's the same as a shorter term called something like "accumulated benefit obligation" (ABO). Aren't you glad you asked?

The ABO represents the answer to this question: If I had to write checks to pay off all current and and future Social Security beneficiaries so that they would be treated equitably (from an actuarial standpoint) and give up all claims to future benefits, what would the total amount of all of those checks be? I think the answer is really $24 tril, but that may be SocSec AND Medicare.

The $600 billion Lieberman mentioned is how much the ABO goes up each year. I think it's a lowball estimate. It's more like a trillion per year according to Steve Forbes.

Paul Zrimsek

Now, the acid test: can Lieberman complain to Dan Okrent about an inaccuracy in an op-ed piece and get Okrent to take it seriously?


TM, Mr. Blumer is correct in his description, but the $10.4 or $10.6 trillion mentioned in all these stories is the unfunded portion of the ABO. The actual amount of the ABO is much higher. Both the $600 billion, and the $10-11 trillion numbers are from annual SS Trustees report on the condition of the program.

Miracle Max

The ten trillion might as well be ten gazillion. It's an utterly meaningless number. The only number that counts is the cash you need to pay benefits over and above payroll tax receipts, which cash supplement is projected at two percent of GDP or less for the next 75 years.

Warmongering Lunatic

Max, 11 trillion (current GDP) * 2% * 75 years = 16.5 trillion dollars.


As a display of the reliability of the numbers in question, in the 2004 report, the projected infinite unfunded liability of SS fell by about $100 Billion, or if calculated as a fraction of payroll, by about seven percent of payroll.

Yes, Joe might theoretically be correct, if you measure the infinite liability in nominal dollars, it might increase by $600 Billion, with inflation running around 3%.

If you measure it in terms of fraction of payroll, the liability ought to stay more or less constant. But it fell by seven percent of payroll last year.

The figures underlying the infinite liabilities are fed into exponential functions, but the underlying figures are just best guesses. Here we have a federal reserve chairman who told us, four years ago, it was unknowable that we wouldn't run out of marketable government debt in the upcoming decade.

Garbage in, garbage out.


Because Lieberman's a senator and you're a pajama-wearer...

I suppose I could take my pajamas off before sending the e-mail.

Anyway, words of wisdom on the eternal deficit of the Social Security Trustee's mind from Miracle Max.


MiracleMax: Yeah, you're absolutely correct! The way you fix any Ponzi scheme is to find away to fleece even more money from the sucker taxpayer so as to keep floating the scheme further down the road. Very responsible approach. Put off until tomorrow, what you don't have to do today.

Meanwhile more municipal governments will opt out of the program becuase they can offer better retirement programs.

And what's $10 trillion among friends? That's right, just dismiss it as an irrelevence. Powerful argument. You've won me over.

Harry Arthur

Here we go again... We have Corpus Christi totally privatizing their system some 20+ years ago and guess what, without using anything other than banking instruments (no risky stocks at all) they provide 3-5 times the benefits of SS, a far better death benefit and equal or greater disability benefits, without resorting to pay-go and without unfunded liabilities. Why would we possibly want such a ridiculous "risky scheme" for the rest of the country?

Harry Arthur

OK, who turned on the italics?

Harry Arthur

Oops! Forgot to mention that every participant owns their program - a real asset that can be passed to their heirs. Another pesky little point that doesn't apply to SS.

Brad DeLong

Let me emulate Paul for a second. But first let me put my internal Paul-Krugman-Emulation-Module on Xanax. There. That's better.

There are three things wrong with the "unfunded liability went up by $600 billion" number.

1. $250 billion of it is a simple inflation adjustment--measuring things in 2005 dollars rather than $2004 dollars. It isn't really there.

2. If we're going to close the gap by future benefit cuts, moving the valuation date forward in time raises the present value of the obligation but it also raises the present value of a given benefit cut. Delaying a year to pass a law cutting benefits in 2080 and beyond doesn't mean that the benefit cuts needed in 2080 grow: they don't.

3. If we were going to close the gap entirely by raising taxes *this* *year*, the $350 billion number would make sense: We'd have to raise $350 billion more in taxes this year to raise a fund to invest and fully cover the gap than we would have had last year. But we're not going to do that. If we are going to close the gap by raising taxes, the taxes will be raised over some long time span in the future--and once again moving the valuation date forward raises both the present value of the cost of the obligation and the present value of the future taxes we will have to levy to cover it: no greater tax increase is needed in 2050 and beyond as a result of delaying a year.

4. There is an important argument for making gradual adjustments. If we are going to (say) raise payroll taxes permanently by one percentage point as a big part of the fix, delaying the start of the fix an extra year raises the amount we would have to raise payroll taxes from 1.00 to 1.02 percentage points. Those extra 2-100s of a percentage point will have an adverse supply-side effect on the economy: it will discourage entrepreneurship and enterprise to the tune of costing us $0.5 billion a year--and since that sum grows over time, a rough guess is that it will increase the total economic cost of fixing Social Security to the American public by a total of $20 billion. $20 billion is nice to have around, but even a slightly slightly less inept Social Security fix four years from now promises gains that overwhelm the $20 billion or so real annual cost of delay.


As Max points out the figure used by Lieberman is useless. What is wrong with him? Why does he do this?

I really have no idea.


I think this addresses the $600 billion issue.


Geez, I know BDL is an economics professor and all, but the argument that a "less inept Social security fix four years from now will provide gains that overwhelm...the real cost of delay"--strikes me as disingenious, to say the least.

Perhaps BDL would like to share this fix with us because arguing based on an assertion, is well, no argument at all.

And thanks for the Xanax.

I wonder if the good professor teaches a course on Charles Ponzi ;)


We can't solve this by raising taxes now. Conservatives have told us there is no Trust Fund.

Clint Lovell

The reality of this morass is that the Social Security Trust Fund ("SSTF") insolvency crisis is but a symptom of a much larger problem - the mandatory spending that federal entitlement programs take out of the federal budget that cannot be slowed because these programs utilize taxation to support the goal of wealth redistribution (to one degree or another).

In a country that conducts commerce under a free market system, the introduction of wealth redistribution thru taxation of income is a doomed choice that has no basis as a sustainable social policy due to the laws of mathematics and business economics. This is no longer a question of theoreticals, but a simple matter of reviewing the historical outcome of these modern day policies to see what they have in fact produced in outcomes for the resources they swallow up.

First, let us look at the most dramatic result - the rise in mandatory spending as a percentage of the total federal budget. In 1964, this amount was 26% of the total federal budget. By 1984, it had risen to 42% of the total federal budget. Last year it was an astonishing 54% of the federal budget. It's the monster hovering at the edge of reason that continues to grow like the blob and consume every resource available and still need more.

If you don't like the Department of the Interior, or Homeland Security, or Defense, or any other governmental unit that is not part of mandatory social spending - you're in luck. Starting in 2018, you're going to get your wish as they are forced to cut these programs an average of 12% per annum to balance the budget. In 2028 we will have the military capacity of Mexico and the homeland security capacity of present day Iraq. You envrionmentalists will just be SOL because there will be no EPA and our kids will get to experience the kind of schooling that was available to the average person in the 19th century.

Next, let us take a hard look at what we have gained for this unprecedented level of taxation for the sake of wealth redistribution:

a) Social Security is broke. We have finally (maybe) come to the point in the road where we have begun to realize that political rhetoric cannot change the outcome of a program that is governed by the laws of mathematics and business economics. When FDR first signed it into law, the program was to only be voluntary and would tax the first 1.0% of taxpayer earnings up to $1,400 per annum. Since 1935, the taxation rate has increased at an average annual rate of over 17% - a rate that is a MULTIPLE of inflation, yet the program is broke.

b) Medicare and Medicaid are also broke. Yet we have poor people who cannot get access to health care, have no health care at all, or cannot afford health care - 40 years after the program was introduced. The same problems that brought these programs into place are still "unfunded federal mandates" some 40 years later.

c) Education remains a fiscal and service quality mess. You can't find any reasonable person who believes the quality of a public education is as good as that in a private school, yet we spend almost double per pupil/per annum on public education and we still have dumb kids, useless education workers and a refusal to accept the fact that public education is a total and complete failure for the American people.

If you want to know why these programs must fail from a purely mathematical or economic viewpoint, it comes down to two (2) things:

1. Competition.
The federal entitlement programs set forth above operate outside the free market system and the most confounding and direct negative impact of this approach to the funding and delivery of these entitlement programs is a lack of competition. Without competition, there is no efficient allocation of investment capital for capital expense, so the federal government (even though it is the biggest fish in the pond) gets a continuing raw deal for the investment of each of its capital dollars. Because there is no competition, worker productivity gains are non-existent and there are no competitive pressures placed on revenues, so costs spiral out of control. Now the math works against you because IT HAS TO WORK THIS WAY - THERE IS NO WAY TO STOP IT. Period. The end.

2. Inflation.
A little inflation is great because it provides a counter-balance to worker productivity efforts and thereby effectively awards competition, but in the case of these quasi-command economic structures under which our federal entitlement programs operate, the impact of inflation only ensures that it is impossible to control spending. Inflation eats at tax revenues, so it places pressure on the government to raise tax rates to gain the same inherent revenue value ("bang for your buck"). In turn, this means the government has to raise interest rates and this creates a negative pressure on capital investment as more and more money is taken out of the economy to service the programs. This isn't a merry-go-round. This is a vicious cycle that cannot be stopped because it creates a negative impact on the economy on a continuing basis - BY ITS VERY DESIGN.

So what does this mean to the average American out there? What can be done? What do we really have left to work with to fix this?

All you have is about $80 billion in SSTF surplus investment income the SSTF will receive until around 2018 when the income is then needed to start paying benefits that revenues won't cover.

A reasonable person would conclude that you must then come up with a fix that addresses the SSTF insolvency crisis based upon this $80 billion in proceeds (such that it is) - and fix it now.

This means the only solution will be to actually create wealth where none existed and have the government act as a co-investor in the program instead of a drag on the growth. In other words, the only fix for the government is to invest in the private economic sector and use its returns to pay down its obligations because it is already bankrupt (I should know, I'm a corporate bankruptcy consultant and I can assure you the federal government is indeed broke by every business accounting measure there is in existence today).

But the doom also carries within it a seed of hope. A single chance. A light at the end of the tunnel that has been heretofore ignored - INSTICERT.

INSTICERT is a proposed new electronic capital market exchange that is similar in concept to the existing NASDAQ. It won't trade stocks in corporations, or bonds, or futures. No, those are too risky my friends and we need risk-proof investing to solve this crisis, if we are to solve it for good and leave this world as good as we found it (at the very least).

INSTICERT will allow institutional, governmental, and public investors to trade a new class of securities in a special kind of business organization (that any business can use) that is inherently bankruptcy-proof and tort-proof so that the investment has less total investment risk than those cheesy Treasuries the Trustees now purchase on behalf of us (supposedly). Yes, there is a kind of business organizational approach that will make a company bankrupty-proof and tort-proof: it's called a "Royalty-Based Structured Finance Business Combination". The most common construction is known as a "Royalty Limited Partnership" (please visit our corporate website for whitepapers and further information on this matter).

The funny thing about Royalty Limited Partnership (or "RLP") constructions is that they are THE most cost-efficient stewards of capital investment because they are not capitalized (financed) with any debt capital (no debt means no liabilities and that means you CANNOT go bankrupt)- just cold, hard cash. This arrangement creates a massive competitive edge for the business and it creates the highest amount of financial investment leverage possible for the investors resulting in long-term earnings in the range of a 12% per annum IRR to over 20% per annum IRR - consistently.

Now back to our $80 billion question and INSTICERT...

If the federal government took its $80 billion per annum and invested it into companies listed on INSTICERT and reinvested its gains back into the system - in 10 years it would be able to completely defease (cancel out) the $11 trillion in SSTF borrowings that are now missing.

Guess what that will do for taxpayers?

Now here's the killer part - Republicans in Congress and the White House want nothing to do with INSTICERT because they are more interested in beating the Democrats to death over the failure of social security which they believe they can hang around the liberal's necks as the millstone to prevent them from making an electoral comeback.

Smart politics? Maybe. Smart policy? Nope. Never. No better than the Democrats who say and do nothing.


Jeez Clint where do you get that we will have the military capacity of Mexico?


clint, you have a source for your information? I googled "INSTICERT", "Royalty-Based Structured Finance Business Combination", and "Royalty Limited Partnership". The only results I got were your web pages and blog comments.


Well, he does tell you to visit his website for more information...hey crank or genius, who can tell through the verbiage.

Movie Guy

Put the Social Security Trust Fund Out Of Reach

I have problems with any discussion that focuses attention on increasing the surpluses presently paid into the existing Social Security program.

What is the benefit of that exercise? It's a black hole game.

It's clear that the Congressional leadership is scoffing at supposed value of the trust fund. Why pour any more tax monies from individuals into a fund that may never be honored in full? Why, indeed.

Where is the discussion that focuses on separating the trust fund and perhaps the Social Security Administration from the general government? Restructure it as a quasi-government agency.

At the present time, the loaning of funds from the Social Security Administration to the general fund of the U.S. government is very similar to what is happening with many corporate defined benefit pensions. The corporations borrow money based on the value of the underfunded DB pension plans.

I have recommended to a few employee groups that their interests would be better served if separate corporations with separate boards were set up to manage their defined benefit plans. Such DB plan corporations could continue to loan monies to the employer corporations (as a matter of partial appeasement). At the same time, the DB plan corporations would qualify as creditors of the other corporation, and would have redemption rights under bankruptcy laws. Existing in-house DB plans and participants have no such legal rights under U.S. bankruptcy laws.

Similarly, taxpayer participant ownership in the surpluses of the Social Security Trust Fund really doesn't exist. The government's ready ability to cut monthly benefits, further extend age eligibility, or raise payroll taxes nullifies that argument.

There needs to be a better answer than to support the notion of growing future surpluses of the existing Social Security Trust Fund.

The absence of this discussion indicates that we're not courageous or smart enough to seek meaningful alternatives to protect the existing surpluses.

Discussions focusing on any aspect of growing the surpluses simply overlook the statements of members of Congress who do not respect the obligations of the trust fund and will do whatever is necessary to severely limit redemption of interest and principal on the special issue Treasury bonds held by the Social Security Administration.

Bush and the Congressional leadership opened the door. Use it. Let's put the Social Security Administration and trust fund out of reach of the Department of Treasury. If the Secretary of Treasury is so brazen as to state publicly in Congressional testimony that the special issue Treasury bonds issued to the SSA are mere IOUs, let him support the needs of the general fund without them.

If there was every a time to launch a movement to protect the trust fund, this is it.

Cecil Turner

"If there was every a time to launch a movement to protect the trust fund, this is it."

Are you suggesting we protect the "trust fund" that's already been spent, or the minuscule amount that will accrue between now and 2018 when outlays begin to exceed receipts?

And do we also get to protect the general fund from SS?

Harry Arthur

Nice discussion. Heck, I'll be happy when we can get the "do nothing" crowd to agree there's a problem. We're not even there yet.

Harry Arthur

When we get to that point, perhaps we'll all also come to the conclusion that until individuals own their retirement programs, the government will spend the money. It's just that simple. If you want a "lock box" like Al Gore often suggested, give me complete ownership and, trust me, it'll be in a serious lock box. Ownership is the issue here, plain and simple. It's about time we restructured this 1935 model T into a 21st century Mustang. Privatize it completely.

Corpus Christi, Corpus Christi, repeat after me, Corpus Christi.


The Trust Fund has spent? Wow, that's news to the SSA. What did they spend it on?

Harry Arthur


Don't think I said the Trust Fund was spent, but the surplus SS "contributions" sure were. And we've had the discussion already about the bonds, the "trust fund", etc, yada, yada, yada. And of course by 2042/2052 the "trust fund" will be "spent", won't it?

Say, since you're lurking about, how about Corpus Christi? I know I provided several links in previous posts and I'm just wondering whether you've done any research on their totally privatized system that is 100% owned by the participants and that, OBTW pays multiples of SS benefits including a $125,000 death benefit. Of course I can see why you'd want to stick with "government run" SS, especially the lucrative $255 death benefit.

So, at the risk of being redundant, why was it that we can't do nationally what Corpus Christi has done locally? Still waiting for an answer from anyone as to why it is so essential that the government own your assets.


Harry, Is that the Galveston one? Or another?

Harry Arthur

Galveston, Brazoria and Matagorda Counties, two cities and an appraisal district privatized their retirement programs in early 1981. Judge Ray Holbrook provided this testimony for the President's Commission to Strengthen Social Security in 2001.

Among other things, the judge said the following: "Twenty-one years ago, three Texas counties-Galveston, Brazoria and Matagorda, plus two cities and an appraisal district-devloped an alternative to Social Security. Despite initial fear and anxiety, the details were explained and debated and workers approved the plan be a 3 to 1 margin. The results have been extraordinary. Our plan provides better retirement, survivorship and disability benefits than Social Security. Our plan provides a better rate of return-between 7% and 8% per year, compared to less than 2% under the current Social Security system. And our plan uses no stock market investments, only commercial banking products, annuities and bonds that provide guaranteed fixed interest rates and no risk."

The rest of the link provides more details. In the interest of full disclosure I somehow moved down the coast of Texas from Galveston to Corpus Christi so forgive my "senior moment", but my point remains the same. Is there some compelling reason to cause me to believe that these Texas counties have got it all wrong and we should ignore their claims of success, or should we look at them as an example of what would arguably be a tremendous improvement if the entire country were to emulate their program?

And of course my second point remains. What is so inherently wrong with everyone owning their own retirement program? Are the people in these Texas counties that much brighter than the rest of us?

Harry Arthur

Bottom line to me is this: It's been done. All the rest is speculation and talk. If Galveston, et al, have a program that has produced better results than SS, by some magnitude, then why the theorizing? SS wasn't handed down from Mt. Sinai on tablets. It was the best we could come up with in 1935. The world has changed and the demographics to support this system have changed even more dramatically. If this example of privatization (not to mention Chile's) aren't satisfactory answers, why not? What inconvenient facts did I miss?

Whether this is a SS system problem or a general fund problem really doesn't matter to me-I, and/or my children will pay for both. It's a problem at some level, so what is the solution? Doing nothing? I just don't believe that passes the common sense test.

The comments to this entry are closed.