SS Ponzi Scheme is short $16 Trillion (w/suggested reforms): Kotlikoff

[Master Shake]

Social Security just celebrated its 75th birthday. Love it or hate it, it has done its job and should retire. We need a new system, the Personal Security System, which retains Social Security’s best features, scraps the rest, and covers its costs.

Social Security’s objective -- forcing people to save for retirement -- is legit. Otherwise millions of us would seek handouts in our old age.

But Social Security has also played a central role in the massive, six-decade Ponzi scheme known as U.S. fiscal policy, which transfers ever-larger sums from the young to the old.

In so doing, Uncle Sam has assured successive young contributors that they would have their turn, in retirement, to get back much more than they put in. But all chain letters end, and the U.S.’s is now collapsing.

The letter’s last purchasers -- today’s and tomorrow’s youngsters -- face enormous increases in taxes and cuts in benefits. This fiscal child abuse, which will turn the American dream into a nightmare, is best summarized by the $202 trillion fiscal gap discussed in my last column.

The gap is the present value difference between future federal spending and revenue. Closing this gap via taxes requires doubling every tax we pay, starting now. Such a policy would hurt younger people much more than older ones because wages constitute most of the tax base.

What about cutting defense instead? Sadly, there’s no room there. The defense budget’s 5 percent share of gross domestic product is historically low and is projected to decline to 3 percent by 2020. And the $202 trillion figure already incorporates this huge defense cut.

The 3-Year-Old Vote

Reducing current benefits, most of which go to the elderly, is another option. But such a policy is highly unlikely. The elderly vote and are well-organized, whereas 3-year-olds can neither vote, nor buy Congressmen.

In contrast, cutting future benefits is politically feasible because it hits the young. And that’s where Congress is heading, starting with Social Security. The president’s fiscal commission will probably recommend raising Social Security’s full retirement age to 70 from 67, for those who are now younger than 45. This won’t change the ages at which future retirees can start collecting benefits. It will simply cut by one-fifth what they get.

Some political economists point to Social Security’s 2010 Trustees Report and say, “Leave it alone. The system won’t run short of cash until 2037.”

Misleading Accounting

Unfortunately, the Trustees’ cash-flow accounting, like all such accounting, is arbitrary and misleading. In fact, Social Security is broke. Its fiscal gap, which the Trustees measure correctly, is $16 trillion.

This gap is small compared with the U.S.’s overall $202 trillion shortfall, not because the Trustees treat Social Security’s $2.5 trillion trust fund as an asset (a questionable choice), but because they credit one-third of federal revenue to the program.

But dollars are dollars. If we re-label Social Security “payroll” taxes as “general revenue wage taxes,” Social Security’s fiscal gap increases by $60 trillion, and the fiscal gap of all other government activities falls by $60 trillion, leaving the overall $202 trillion gap unchanged.

Even by the Trustees’ measure, there’s a massive problem. Coming up with $16 trillion requires permanently raising revenue or cutting benefits by 26 percent, starting now. In other words, the program is 26 percent underfunded.

Hitting Young People

Now cutting benefits of new retirees by 20 percent, with an increase in the so-called full retirement age, starting 20 or so years from now isn’t the same as immediately cutting the benefits of all retirees by 26 percent. Hence, the fiscal commissioners will need to hit young people with an even bigger whammy if they really want to solve Social Security’s long-term woes.

Most likely, Washington will simply raise the retirement age and kick the can further down the road. This is what the Greenspan Commission did in 1983, knowing full well that by 2010 the system would be in even worse shape.

I say, retire Social Security and replace it with a version that works. Do this by freezing the current system, paying today’s retirees their benefits, while paying workers only what they have accrued so far once they retire.

Next, have all workers contribute 8 percent of their pay to the new system, with half going to a personal account and half to an account of a spouse or legal partner. The federal government would make matching contributions for the poor, the disabled and the unemployed, permitting the system to be as progressive as desired.

Going Global

All contributions would be invested in a global, market- weighted index of stocks, bonds, and real estate. The government would do the investing at very low cost and guarantee that contributors’ account balances at retirement would equal at least what was contributed, adjusted for inflation.

Between ages 57 and 67, each worker’s balances would gradually be swapped for inflation-indexed annuities sold by the government. Those dying before 67 would bequeath their account balances to their heirs.

While this plan has private accounts, Wall Street plays no role and makes no money. Additional contributions would be used to fund life- and disability-insurance pools.
Our nation is in terribly hot water. Business as usual is no answer. The only way to move ahead is to radically reform our retirement, tax, health-care and financial institutions to achieve much more for a lot less.

The Personal Security System is a major step in that direction. It meets all the legitimate goals of Social Security without the system’s waste and penchant for robbing the young.

http://www.bloomberg.com/news/2010-0...kotlikoff.html

[aaron]

Re: SS Ponzi Scheme is short $16 Trillion (w/suggested reforms): Kotlikoff

With millions of unemployed ... there is plenty of excess capacity to support the baby boomers in their retirement.

[ASH]

Re: SS Ponzi Scheme is short $16 Trillion (w/suggested reforms): Kotlikoff

With millions of unemployed ... there is plenty of excess capacity to support the baby boomers in their retirement.

Indeed, if we have massive unemployment now, then there won't be such a big problem, because tomorrow's retirees won't qualify for benefits!

[KGW]

Re: SS Ponzi Scheme is short $16 Trillion (w/suggested reforms): Kotlikoff

Maybe not...

Co-Chair of Obama's 'Fiscal Commission' Calls Social Security a 'Milk Cow with 310 Million Tits'


http://www.alternet.org/


Alan Simpson has a long history of belittling advocates of the popular program -- he's the wrong person to lead the 'fiscal responsibility' commission.
August 25, 2010 |


Alan Simpson, the former Republican senator from Wyoming and co-chair of Barack Obama’s fiscal reform commission, sent a note to an advocate for the elderly that reveals the depth of elite scorn for working Americans. Simpson’s missive dripped with condescension as he derided our Social Security program as “a milk cow with 310 million tits!”
Simpson sent the note to Ashley Carson, Executive Director of OWL, a group that advocates on the behalf of older women, in response to a post Carson wrote on the Huffington Post in April. In it, Carson accused Simpson of painting a “picture that everyone receiving Social Security benefits is living the high life - driving luxury cars, dining out and living in gated communities.” The reality of poverty for seniors, she wrote, “is alarming. The most shocking of all is that almost one quarter of older African American women live in poverty and that 45% of older women living alone are poor. This means that each of these people lives on less than $10,400 annually.”
Simpson chose to respond to the column with petty insults. “Some of what you say is true,” he wrote. “Much is not … I’ve spent many years in public life trying to stabilize that system while people like you babble into the vapors about ‘disgusting attempts at ageism and sexism’ and all the rest of that crap.” Simpson sent a paper along with the note, and said Carson should “take a look at the chart on Page 6 which I hope you are able to discern if you are any good at reading graphs – or anything that might challenge your biases and prejudices. “
But the letter betrayed Simpson’s own long-standing ‘biases and prejudices.’ The commission he co-chairs deliberates behind closed doors, but what little light has escaped its proceedings suggests that, as reporter David Dayen noted, it is “stacked with people who want to target entitlement spending rather than any balanced proposal.”
The commission is ostensibly looking at all options for reducing America’s long-term budget gap, but in an interview with CNBC Simpson conceded, “We are going to stick to the big three,” meaning, Social Security, Medicare, and Medicaid. As the Alliance for Retired Americans noted, throughout the interview Simpson “leveled several attacks against seniors and senior advocacy organizations, accusing them of not caring ‘a whit about their grandchildren…not a whit.’”
Simpson has a long history of arrogantly belittling advocates for the working class and the elderly. When Alex Lawson of Social Security Works tried to ask Simpson to detail what the commission was discussing, Simpson went ballistic. FireDogLake’s Jane Hamsher described the scene: “Alex Lawson was incredibly respectful and polite as the cranky Simpson berated, interrupted and cussed him.” (A video of the exchange is available here.)
According to the Washington Post, Simpson “has chastised ‘greedy geezers’ for fighting to protect their retirement checks while their grandchildren face a towering debt.” But those “geezers” paid into the system over the course of their careers -- the rate’s been set at 7.65 percent of their incomes since 1990.
Social Security is in fine shape. It’s got a surplus that will run out in 2037, but even if nothing were to change by then, it could still continue to pay out 75 percent of scheduled benefits seventy-five years from now, long after the surplus disappears, and those benefits would still be higher than what retirees receive today.
Fiscal scare-mongers like Simpson make a great deal of fuss about the fact that by 2016, the total benefits paid out of the program will exceed Social Security tax revenues, and the fund will have to be tapped to make up the difference. Yet that’s exactly what it was always supposed to do. That’s why Congress created it -- to ease the boomers into the system without shock. (And because the bonds in the Trust Fund earn interest, the total value of the fund will actually continue to grow after that date. If nothing else changes, the total paid out in benefits won’t exceed tax revenues combined with interest on the bonds until 2024.)
But a long-standing campaign against the popular program has had an effect -- polls consistently show that younger people are pessimistic about the program’s stability and fear that it won’t be there when they reach retirement.
Advocates for the elderly are now calling for Simpson to be kicked off the commission. As Syracuse University scholar and Social Security Works co-director Eric Kingson writes, “Simpson should be sent packing because he is a crude bully whose disposition and biases render him totally inappropriate to co-chair this important commission.”


And, a comment on the hypocrisy of Simpson:


"Meanwhile, Simpson will be suckling off the Congressional Pension System to the tune of around $90,000/year when he retires. Plus he now gets healthcare benefits that make Medicare look like something from a third world country. I am so sick of the arrogance of these professional politicians. If there were only some way of voting in people who would gut the Congressional gravy train and then happily return to the private sector after one term."

[ASH]

Re: SS Ponzi Scheme is short $16 Trillion (w/suggested reforms): Kotlikoff

According to the Washington Post, Simpson “has chastised ‘greedy geezers’ for fighting to protect their retirement checks while their grandchildren face a towering debt.” But those “geezers” paid into the system over the course of their careers -- the rate’s been set at 7.65 percent of their incomes since 1990.
Social Security is in fine shape. It’s got a surplus that will run out in 2037, but even if nothing were to change by then, it could still continue to pay out 75 percent of scheduled benefits seventy-five years from now, long after the surplus disappears, and those benefits would still be higher than what retirees receive today.
Fiscal scare-mongers like Simpson make a great deal of fuss about the fact that by 2016, the total benefits paid out of the program will exceed Social Security tax revenues, and the fund will have to be tapped to make up the difference. Yet that’s exactly what it was always supposed to do. That’s why Congress created it -- to ease the boomers into the system without shock. (And because the bonds in the Trust Fund earn interest, the total value of the fund will actually continue to grow after that date. If nothing else changes, the total paid out in benefits won’t exceed tax revenues combined with interest on the bonds until 2024.)

This is only true if you look at Social Security in isolation from the total federal budget. Social Security is only in "fine shape" in the sense of the laws that dictate what resources shall be directed to Social Security, but not in the sense of actual revenue to pay for those benefits. The fact that one is legally entitled to something doesn't imply the physical means to provide it.

Whoever wrote this article is being intentionally misleading. They say "it has a surplus that will run out in 2037" which is true only if general tax funds are transfered to Social Security; the program is already running a deficit with respect to the payroll taxes which are dedicated to funding the program (not 2016, as the author suggests). See the latest Trustees Report:

Social Security expenditures are expected to exceed tax receipts this year for the first time since 1983. The projected deficit of $41 billion this year (excluding interest income) is attributable to the recession and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink substantially for 2011 and to return to small surpluses for years 2012-2014 due to the improving economy. After 2014 deficits are expected to grow rapidly as the baby boom generation’s retirement causes the number of beneficiaries to grow substantially more rapidly than the number of covered workers.

I would guess that if we have a double-dip recession, or anything other than a V-shaped recovery, those small surpluses projected for 2012 - 2014 will disappear.

The writer ignores the fact that neither interest paid on -- nor redemption of -- the "assets" held by the Trust Funds bring any new revenue into the Treasury; he portrays the Trust Funds as though they were a form of saving, when in fact, they only represent obligations on future tax revenue. The writer is completely full of shit... talking about interest on the bonds in the Trust Funds as if it were a means of paying the expenses of the program. The interest adds to the formal value of the Trust Fund on paper, when considered in isolation from the rest of the federal budget, but it does not actually represent any net revenue... the Federal Government cannot increase its revenue by paying itself interest!

EDIT: I have noticed that those who insist Social Security is in fine shape tend to emphasize the Trust Funds' legal status, without attempting to address the complete budget. Clinging to the theoretical solvency of the Trust Funds on paper while ignoring the practical mechanics of where the money comes from is both a form of magical thinking and an exercise in ruthless self-interest: "I'm owed what I'm owed, and it's not my problem how you pay for it! The Trust Funds hold trillions in government bonds, and those bonds can be used to fund Social Security expenses for decades to come!" Ironically, surplus payroll taxes were invested in the one, and only one form of "investment" that is of no value for covering future expenses -- an IOU from the government to the government (or, equivalently, IOUs from the tax-payer to themselves). A debt owed to you by someone else is an asset; a debt owed to you by yourself is Kleenex. Legally, the Trust Funds were set up as separate entities, and the idea of the Trust Funds loaning the general fund surplus tax revenue -- and the general fund owing the Trust Funds principal and interest -- has meaning. But practically, there is only one source of revenue here for both entities -- the US tax-payer. Those who make a nice distinction between the Trust Funds and "the government" are engaging in a delusion of no practical value, as far as paying the bills goes. The net value of the Trust Funds to the US tax-payer as a means to fund Social Security or Medicare is identically zero; had the surplus payroll tax been invested in the obligations of anyone other than the US tax-payer, then the Trust Funds would have some meaning to the US tax-payer. As it is, the Trust Funds merely represent a legal means by which the Boomers attempted to preallocate the taxes of their children to their retirement expenses, rather than to the proportional needs of coming generations.

[DSpencer]

Re: SS Ponzi Scheme is short $16 Trillion (w/suggested reforms): Kotlikoff

How about we retire it and replace it with nothing. I'm relatively young and consider my SS deductions to be a blatant robbery. Telling me "well this time it will be different, this new system will work because the politicians controlling your money won't spend it all before your retire" is simply not credible. Either let me have my own money to save or just admit that you're robbing me at the point of a gun so you can give away money to people who vote for you.

[ASH]

Re: SS Ponzi Scheme is short $16 Trillion (w/suggested reforms): Kotlikoff

How about we retire it and replace it with nothing. I'm relatively young and consider my SS deductions to be a blatant robbery. Telling me "well this time it will be different, this new system will work because the politicians controlling your money won't spend it all before your retire" is simply not credible. Either let me have my own money to save or just admit that you're robbing me at the point of a gun so you can give away money to people who vote for you.

That would be my preferred option, but of course, I'm 35 and make enough money to fund my own retirement.

In my opinion, the only useful purpose that Social Security serves is to provide retirement or disability income for individuals who don't make enough money to cover those expenses themselves, and who have no family capable of supporting them. There are an awful lot of people who fall into that category, but at the same time, the promise of Social Security ought not to free workers to consume today rather than save for tomorrow. I am happy to be taxed to prevent folks from starving in the street, but I don't want to subsidize luxuries for people who would otherwise be able to support themselves in retirement.

There has never been a saving component to Social Security -- the payroll tax revenue has always been spent as soon as it was collected. The false pretense of "savings" is what gives self-righteous boomers their sense of entitlement to benefits: "I paid in for X years, and I want my money!". In fact, workers have always paid to cover the immediate retirement expenses of current retirees, and to fund general government expenses when surplus payroll tax was collected. Because everyone pays payroll tax, the Trust Funds were a regressive way to lower income taxes for the better off while making low-income types shoulder more of the government's general costs. It was a politically viable way to raise tax revenue, because people were told they were funding their own retirement. But recognizing that Social Security has only ever been an immediate cash program addressing immediate expenses -- and recognizing that nothing which has been "saved" by the Trust Funds provides any way to pay for anything -- we shouldn't be talking about what people are "entitled" to, but rather what we can afford out of our immediate cash flow, and who needs it. If we can't afford to pay Social Security to, say, my parents (who have other resources and won't starve without Social Security), then lets not. If we can't afford to guarantee me any retirement income, then maybe we should say that too, so that I put that extra $1000 into a savings account instead of buying a new TV. Social Security has to be viewed as a means-tested safety net rather than a society-wide entitlement. I pay taxes that fund food stamps and welfare, too, but that doesn't mean I'm going to demand "my" food stamps and welfare unless I fall on hard times.

[tsetsefly]

Re: SS Ponzi Scheme is short $16 Trillion (w/suggested reforms): Kotlikoff

How about we retire it and replace it with nothing. I'm relatively young and consider my SS deductions to be a blatant robbery. Telling me "well this time it will be different, this new system will work because the politicians controlling your money won't spend it all before your retire" is simply not credible. Either let me have my own money to save or just admit that you're robbing me at the point of a gun so you can give away money to people who vote for you.

Agree, I think there could be plenty of charity to help those in need in later life...

SS is flat out robbery, like I said, they dont even pretend they will pay you what you pay in.

[flintlock]

Re: SS Ponzi Scheme is short $16 Trillion (w/suggested reforms): Kotlikoff

Come on, it's a tax. I thought everyone knew that by now.

But what are you going to do? Have old people wandering the streets? People have been irresponsible since the beginning of time. That is not going to change. I would like to see a little more pressure on people to actually save for their retirements, (we make it way too easy not to), but the nanny state we built has conditioned folks to expect to be taken care of.

I just always have to laugh when I hear people talking about SS and other taxes as if it makes any difference what you call them. It always basically boils down to those with the ability to pay taking care of those who can't. Would it make you happier if they just raised income taxes to pay for it? What's the difference?

I don't really have a big problem with SS. I'm sure there is room for improvement though. My guess is we'll end up seeing high net worth folks losing their benefits some day. No its not fair, but it's inevitable.

[aaron]

Re: SS Ponzi Scheme is short $16 Trillion (w/suggested reforms): Kotlikoff

Good points, all of them.

[ASH]

Re: SS Ponzi Scheme is short $16 Trillion (w/suggested reforms): Kotlikoff

I just always have to laugh when I hear people talking about SS and other taxes as if it makes any difference what you call them. It always basically boils down to those with the ability to pay taking care of those who can't. Would it make you happier if they just raised income taxes to pay for it? What's the difference?

Exactly. But not exactly. Objectively (and in aggregate), it all comes from one place (the tax-payer) and it is all disbursed by one actor (the federal government). But the voters' subjective impressions matter, and politicians find they can get voters to agree to taxes if they "package" them correctly. Which gets more votes: a new regressive income tax to support general government expenditures, or a special-purpose payroll tax that everyone has to pay in to in order to qualify for the retirement benefits it funds? At the end of the day, you still have to take care of the old and indigent (as you note), and taxes are taxes are taxes. But this isn't just semantics, as who pays the taxes matters, and most voters can't see past the subjective packaging to realize that the firewall is ultimately illusory. I'd argue that from a rigorous standpoint, the distinction between the discretionary federal budget and non-discretionary spending is masturbatory. But there are lots of people who disagree with me, because their slice of the pie is "protected" by statute, and it takes more political power to alter statute than the discretionary portion of the budget. Also, the distribution of taxation across income brackets matters a lot. If they just raised income taxes, then the burden falls more heavily on the well-off (upper middle-class; not the really rich). But payroll tax is regressive from the revenue collection side (and the entitlement programs it funds are progressive from the benefits side). It's probably the fact that benefits are progressive that made it politically possible to institute an income tax that is regressive from the revenue side -- and that is why it was necessary to link payment of the tax to receipt of benefits.

[flintlock]

Re: SS Ponzi Scheme is short $16 Trillion (w/suggested reforms): Kotlikoff

Agree Ash, but I'm just a bottom line kind of guy I guess. Politics is the art of BS. We are in the Golden Age of it.

[ASH]

Re: SS Ponzi Scheme is short $16 Trillion (w/suggested reforms): Kotlikoff

Politics is the art of BS. We are in the Golden Age of it.

The thing that fascinates me about this era is that BS carries the day only so long as endless credit and/or favorable demographics prevent the collision of promises with concrete constraints. Although there will be an enormous eruption of BS finger-pointing, buck-passing, scape-goating, self-righteous posturing, and what have you -- I believe that reality will finally intrude over the next decade or two, such that BS alone will prove inadequate. Yes -- I believe I will live to see a temporary period of pragmatic realism in American domestic politics. I also expect these events to be spun three ways from Sunday by different BS narratives, but nonetheless, I expect to see a reckoning about what we can really afford and whom among competing interests has the power to claim which slice of pie. (Queue laugh track from 99% of iTulip readers... cynics one and all.) It ought to be a lot uglier than when BS alone ruled the day, free from real constraints.

[ThePythonicCow]

Re: SS Ponzi Scheme is short $16 Trillion (w/suggested reforms): Kotlikoff

Yes -- I believe I will live to see a temporary period of pragmatic realism in American domestic politics.

So do I, ASH, and I'm a lot older than you.

However, when this pile of BS collapses, it's going to be one heck of a s*** storm.

[DSpencer]

Re: SS Ponzi Scheme is short $16 Trillion (w/suggested reforms): Kotlikoff

I just always have to laugh when I hear people talking about SS and other taxes as if it makes any difference what you call them.

I agree, but here's the part I don't understand. What is the motivation of regular people to defend these ridiculous articles that say "don't worry, everything's fine we've got a big ole' pot of money that will last us for another 30-60 years"? Do they really buy this BS or do they just think somehow this will benefit them so they defend it despite the obvious truth.

But what are you going to do? Have old people wandering the streets?

I'm young - is there some evidence that before SS old people just retired and then spent the rest of their lives wandering the streets? The same type of make-believe is often suggested when talking about healthcare. The idea that before Medicare/Medicaid etc poor people would fall off a ladder, break their leg and just be left to die in the street.