Built on Facts

Social Security is Toast

Mike the Mad Biologist links to a piece arguing that Social Security is fine thank you very much. Rumor to the contrary is pure political propaganda, and the fact that many young people think they’ll never see a dime is a result of simple fearmongering.

I am sorry to say that they’re not right. They’re not even wrong, having missed the point entirely. Indeed as a factual matter their understanding of the way Social Security and its trust fund operate is fine. It’s simply that “there is no crisis” does not follow from the premise that we can always borrow more.

First, consider the Social Security Trust Fund. It consists of a tremendously huge pile of treasury bonds. These are simply promises that the government makes to pay a specified sum at a specified time. As such it’s effectively a bureaucratic fiction. If I take $100 of my grad student salary and put it in self-issued “Built on Facts Bonds”, and use the “revenue” I get from the sale of those bonds to myself to buy $100 worth of pizza then I’m in great shape: I have lots of pizza and $100 saved in my bond fund. Right?

Well sure, if I have a source of actual income to pay myself back when it’s time to actually use those bonds. It would of course be simpler to simply forgo the whole bond middleman entirely and be honest that I simply spent $100 on pizza.

Which is exactly the situation with Social Security… and every other government program. Social Security takes in money and spends money. The fact that there’s treasury bonds involved means exactly zero when it comes to adding up the income and subtracting the expenses each year. Indeed there’s no point in treating Social Security any differently in terms of calculating the budget because its outflow of cash comes from the general fund, and its revenues in the form of Social Security payroll deductions go into the general fund. So let’s take a look at the numbers. The graph comes from Wikipedia, but the underlying numbers come from the GAO.

i-450802f2aa70fd8487cf33ae3d4282a7-ss.png

Social Security currently makes more in the form of payroll taxes than it puts out in the form of benefits. In 2007, Social Security pulled in $784.9 billion and paid out $594.5 billion. The difference was spent in the general fund through the previously described intermediary of treasury bonds. According to government estimates in 2017 the outflow will exceed the income. That’s not going to end Social Security by any stretch – obviously government programs don’t have to fund themselves. I doubt NOAA has ever had a net positive cash flow but they operate just fine with general revenue money. So will Social Security.

That is, of course, until the federal government as a whole runs out of money. Consider the national debt as a percentage of GDP (again straight from GAO data):

i-a5effd7b49b735db30535aab782a6547-debt.png

Government debt, like pretty much any debt, requires interest payments. This is another expense added to the federal budget. More debt, more debt interest. More debt interest, more expenses. More expenses, more debt. It’s a vicious cycle, made more vicious by the fact that the shakier the federal government’s fiscal position is, the higher interest it will have to offer to entice investors to buy the debt. It’s a dynamic at work in the corporate bond world – a sound company can sell its debt at a lower interest rate than a company in possible trouble.

Keep in mind that both of the above charts were made with pre-crisis 2007 data. What do the numbers look like now? I don’t know, but we can get a hint by looking at deficit projections:

i-2c71b51084b58a9a9401d28d0a968f59-wapoobamabudget1.jpg

Ouch. Well, we can always cover that deficit with more debt issues. Just ask China, as Mike suggested. Ok, let’s. Turns out they might not be so eager to keep buying debt that looks less and less likely to be repaid over the long term. And this will feed into the cycle described above, and at some point along that exponentially increasing debt/GDP curve the US will no longer be able to meet interest payments, resulting in a deficit that can’t be covered by selling debt. Bankruptcy, in a word. It is not merely a possibility, it is a certainty if the upward curve isn’t arrested at some point. It won’t be – neither of the major political parties even pretends that they have a plan to do it.

And if the federal government actually goes bankrupt – ie, it can’t cover its tax shortfall with debt issue – then Social Security really is toast. Along with Medicare, Medicaid, and pretty much everything else. At that point there’s three options:

1) Default on debt. This would end the financial world as we know it, certainly including Social Security.
2) Pay the debt back with hyperinflated currency. This would end the financial world as we know it, certainly including Social Security.
3) Massive spending cuts. In which case I do not in fact get Social Security.

A commenter at Mike’s suggests a solution:

It’s quite simple really. Rollback the George W. Bush tax cuts on the rich, then rollback the Ronald Reagan tax cuts on the rich, reduce our insanely high military spending and SS is just fine.

Is it? Let’s look at the numbers. The GWB tax cuts expire shortly and this is taken into account in the budget projections above. The effect is manifestly inadequate. As for increasing taxes to pre-Reagan levels, keep in mind that the combined total income of everyone making more than $200k is $2.5 trillion. More than half a trillion of that is already being taxed, not counting the expiration of the Bush cuts. In fact, the entire current after-tax income of every $200k+ household combined would just barely cover this year’s deficit ($1.96T versus $1.85T). And not even the most ardent critic of Art Laffer would argue that there isn’t at least some level of diminishing returns with increasing tax rates. God knows the pre-Reagan economy is not something we’d like to see repeated anyway, but let’s concede for the sake of argument that high taxes on the rich aren’t going to hurt growth much. There’s good reason to believe that in fact you simply can’t budge revenue upward all that much no matter how much you soak the rich:

i-2cc07bf9748748c1af6a4aff0660823b-tax.gif

Defense cuts? I don’t support them, but we should consider all possibilities again for the sake of argument. Even so, there’s only so much you can do. The entire DoD is only 18% of Obama’s ’10 budget. DoD spending is currently $663.7 billion for the fiscal year. Iraq and Afghanistan add to that, but they are (supposedly) being wound down anyway and their end is assumed in the above budget forecasts. In the wildly unrealistic scenario of slashing remaining defense spending in half, the ~$330 billion reduction doesn’t even dent the ’09 or ’10 deficits. Assuming the CBO is right it would nicely reduce the next few years worth of deficits (or at least bring them back down to the merely horrific levels of the last decade) before being swamped again a few years later.

Keep in mind that if you support something along the lines of universal health care or anything approaching serious CO2 emission reductions then some large fraction of the money you make in defense cuts and higher taxes is going to have to go to that and not deficit reduction. Add to that the fact that people in the US are living longer and having fewer children. We haven’t even considered possible external economic pressures like the swan dive into senescence in major trading partners like Europe and China, the increasing scarcity of oil, or the possibility of global hot spots (China/Taiwan, India/Pakistan, Israel/Iran, North Korea/South Korea/Japan, etc) flaring into war…

The numbers speak for themselves even in the best case scenario. I’m not going to see a dime of Social Security. Nor Medicare or Medicaid, for that matter. There is no way in the world the system will stay afloat until I retire in the vicinity of 2050.

What to do about it? I heard a wag suggest gold for the optimists; canned goods and ammo for everyone else. I’m not quite that alarmed. But I am preparing my savings and my future such that I’m not reliant on federal largess. To do otherwise in the teeth of the data is beyond foolhardy.

Comments

  1. #1 Daryl McCullough
    April 11, 2009

    Your post is extremely misleading. You want to argue that the federal government will be broke by 2050. Okay, fine, let’s accept your conclusion. That doesn’t have anything specifically to do with social security, any more than it has to do with government spending on police, education, the military, etc. So why title your article “Social Security is Toast” instead of, “The US Military is Toast” or “Education in the US is Toast” or more simply “The United States is Toast”? It’s bizarre. If the US goes completely bankrupt, then social security is the least of our problems.

    You write:

    But I am preparing my savings and my future such that I’m not reliant on federal largess. To do otherwise in the teeth of the data is beyond foolhardy.

    What do you think “savings” are? Unless you are actually saving, as you say, canned goods and ammo, then the whole concept of savings depends on a system of obligations. When I put money in the bank, the bank spends that money (hopefully in order to make more money in the future). So what am I getting for my deposit? An obligation on the part of the bank. If society completely breaks down, so will all systems of such obligations. If it doesn’t break down, then there will be continued enforcement of obligations to each other.

    You seem to think that government obligations are somehow different, and less dependable. Why do you believe that? What is your evidence?

  2. #2 Daryl McCullough
    April 11, 2009

    Another point: When you were arguing that we were going to go broke by 2050, you seemed to be assuming that this year’s deficits will continue, year after year. Why in the world do you think that? This year is a recession, the worst we’ve had since the Great Depression. With sane fiscal policies, governments run up deficits during recessions, and then pay down debts during good times. Of course, we haven’t had sane fiscal policies, because we alternate between Republicans, who run up huge deficits in good times, and Democrats, who run up huge deficits in bad times. If we could either have Republicans in power during bad times and Democrats in power during good times, perhaps the deficits could be fixed.

  3. #3 Matthew Platte
    April 11, 2009

    At some point in a comprehensive analysis, the role of health insurance (among other engorged ticks) will be revealed. I don’t have the numbers at hand but the insurance-induced inflation of medical costs is not insignificant.

  4. #4 BandTheory
    April 11, 2009

    Hmm. Honestly I never feel like I know enough about economical matters to form any kind of a reasonable thought. And failing to find reasonable thoughts, most people just form emotions. That aside though I do have a question:

    In the graph of actual and projected deficit, I presume the spike in dept next year comes from all the stimulus spending and such. That being the case, why does the debt fall so substantially the next year, followed by what appears to be an exponential increase.

  5. #5 Peter
    April 11, 2009

    Daryl – these are not Mat’s numbers, pulled out of his ass but the governments own estimates. Unfortunately Western governments, not just the US have been running giant Ponzi schemes based on the deomographics of the baby boomers – with unsustainable “growth” paying unsustainable benefits to those who cashed out early.

    The solution will include hyper inflation (printing money as we are seeing), reduced expectations and a lower standard of living in the future. The problem with Mat’s plan to save and be self-sufficient is two fold – firstly savings will be eroded by inflation, taxes, and charity (or do you plan to watch your neighbor starve?), and secondly one needs a source of income to save, and jobs will soon be difficult to find as spending in every field is curtailed…

    A more useful approach is to adopt a lower cost lifestyle now so your needs are significantly reduced. The changes needed are easier to effect now (ie setting up your life to be free of a vehicle or mortgage is possible today (I have done both) but will become more difficult in five years when everybody realizes this.) Taxes, and the job needed to earn 20K are significantly reduced from earning 40K yet the quality of life possible is little changed IF one plans it from square one. The secret is location location location – a fixer-upper house you can pay off quickly located where you can walk to work and shopping… The work does not need to be very well paid but security is critical.

  6. #6 Matt Springer
    April 11, 2009

    Daryl, I emphasize Social Security because that was the focus of the posts I was responding to. I argue that Social Security is toast – and so is everything else.

    “Unless you are actually saving, as you say, canned goods and ammo, then the whole concept of savings depends on a system of obligations. When I put money in the bank, the bank spends that money (hopefully in order to make more money in the future). So what am I getting for my deposit? An obligation on the part of the bank. If society completely breaks down, so will all systems of such obligations.”

    I don’t think the federal government breaking down is equivalent to society breaking down, but that’s immaterial to a good saving strategy. My plan is to save for now in fairly low risk, fairly liquid investments. Once we get to the point where the whole system begins looking like breakdown is around the corner, move the investments to whatever looks safest. Maybe foreign government securities, foreign bond funds, gold, whatever.

    “When you were arguing that we were going to go broke by 2050, you seemed to be assuming that this year’s deficits will continue, year after year. Why in the world do you think that?”

    I do not think that at all. My assumptions in this post directly follow the CBO data plotted in the third figure. My use of this year’s deficit in comparison to the combined $200k+ income bracket is simply to demonstrate the scale of the problem – noting that the government’s own projections assume we’ll be nearly back to these deficit levels by 2020 even with the recovery. Assuming we make it another 10 years without another recession requiring bailouts, which looks historically iffy. And even then we’re still 30 years out from my retirement. There’s just no way the debt/GDP curve can climb that long.

  7. #7 Johan
    April 11, 2009

    Much more likely than the federal goverment breaking down is for it to scale back its obligations. So Matt might not get all the social security he has been promised and their migt be less money spent on physics research. But there is no reason for the goverment to cease to function.

    The projected bankruptcy is based on the obligations assumed by the goverment but Congress can choose to scale them back.

  8. #8 Who Cares
    April 11, 2009

    Can but won’t. The time horizon for congress and senate is the next election not 40 years.

    It can happen. My government just suggested a plan, to save the government part of retirement funds, that won’t be effective for another 10 years or so and completes in 20, but there is a good chance that the parties which support it will lose the next election because of it.

  9. #9 CCPhysicist
    April 11, 2009

    Logic flaw. Your claim is that “Social Security is toast”, but all of your alleged evidence is polluted with things like Medicare (in your first graph), Medicaid (including nursing homes for retirees), interest payments (a major item), military spending (including, in particular, medical and retirement benefits), etc. As a physicist, you should choose data that address your specific claim. Medicare is not Social Security, and Social Security is not (unlike Medicare) funded on a cash basis.

    The flaw in the data presented regarding Social Security is that it is predicated on the false assumption that all benefits must be paid out of current FICA taxes. The reality is that there is a huge balance invested in T bills that will cover that cash flow “problem” for decades past the crisis point shown in your first graph. The problem that remains can be fixed with an additional tweak to the retirement age or early-benefit penalties, just as was done to avert the last CRISIS in SOCIAL SECURITY under Reagan’s leadership. There is no need to borrow money to pay SS benefits. The problem is in finding money to pay off the T bills that the SS trust fund (like many current post-crash retirement accounts) has invested in.

    The crisis in Medicare shown in the graph is already here, having been exacerbated by the Bush drug benefit, but mostly due to the same problems with our health care system that make it so expensive to provide health care to employees. My employer’s health costs exceed the employer’s share of the FICA tax.

    Important Question: Do you know the total hidden tax paid by your employer for your health and retirement benefits?

    The problem for taxpayers is that they will have to pay off those T bills and the SSA will stop buying them to fund the deficit in the regular part of the budget. I have diversified my retirement investments to emphasize post-tax (Roth) options under the assumption that everyone’s marginal tax rates will rise in the future.

    Finally, if your Hauser’s Law graph did not have an axis choice skewed by really old data, you would see that your claim is inconsistent with those data. (You can’t see a 20% change in the small fraction of income that is actually taken in taxes because of the emphasis on ancient marginal rates that nobody actually paid back then due to all of the loopholes in the system.) The modest increase in taxes on the top few percent of earners enacted in 1993 (yet still below the level of the Reagan years) resulted in a large and steady growth of tax income as a % of GDP from 1993 until the 2001 tax cuts *without* any increase in rates over that time period. This was partly because of cuts in other taxes that are not shown in that graph. The Bush 43 deficit shown in your other graph correlates directly with the drop in tax income below the 20% of GDP level after the tax cuts and spending increases, just as much of the deficit in the out years results from the massive Bush stimulus that was needed to keep the economy from suffering an utter and total collapse.

    The US has a long, really long, history of spending about 20% of GDP. It has a similarly long history of taxing below 20% of GDP. Push your budget graph back to 1950 and put it in % of GDP to get inflation out of the picture and you will see that nothing much is new. You can also find panicked claims like your last graph being made in 1929, as a previous generation of Hooverites argued that spending would not help the economy. That 100% deficit in the 1940s proved them wrong.

    IRONIC NOTE: None of the tea party folks were complaining about a generational shift in expenses in 2003 or were arguing that Reagan was “soaking the rich”. The fact that the truly rich pay a smaller fraction of their income in taxes than their secretaries (see, e.g., Warren Buffet) seems to get lost in the propaganda so persons like yourself never learn how our tax system – as a whole – is structured to be modestly regressive.

  10. #10 Carl Brannen
    April 11, 2009

    Of course social security will be deeply broken in a few decades. It’s a Ponzi scheme (used all over the world in one form or another) based on the assumption that the next generation pays for the retirement of the previous. The scheme only works so long as the next generation is sufficiently larger than the present. But birth rates are falling all over the developed world, hence the problem.

    Along this line, it might be useful to review the 25 points of the National Socialist party of Germany, from 1920.

  11. #11 Miko
    April 11, 2009

    As long as those like yourself who are concerned about our fiscal insanity consider a 50% “defense” cut as extreme, we won’t get anywhere. One thing we need to realize is that eventually our fiscal troubles are going to be completely apparent even to those sorts that like to bury their heads in the hand and pretend we can continue living on debt forever, and at that time a lot of things which aren’t politically realistic now are going to become politically realistic. Within our lifetimes, we will see a 90% cut in DoD budget as quagmires like Iraq and Afghanistan demonstrate that war is no longer winnable (million dollar tanks vs. bargain basement IEDs make warfare a great way to go bankrupt, but offer no prospect for victory) while our financial statements simultaneously demonstrate that we just can’t afford war. (This is a good thing, incidentally: science will eventually fulfill its promise of bringing us peace, not because one side will have clear dominance but because repelling attack will be so much cheaper than initiating attack, for all sides.) Of course, as you mention merely cutting the military budget isn’t going to be enough, so unsustainable things like Social Security are probably going to go away in the process too. But as long as we have some democratic (as in democracy, not Democrats: the dominant party is irrelevant) control over our government, we won’t go entirely bankrupt. As both major parties seem intent on severely limiting democracy, assuming we’ll always have democratic control over our government may be an unreasonable assumption, but in that dystopian case the U.S. probably won’t be worth saving anyway.

  12. #12 Matt Springer
    April 11, 2009

    “Logic flaw. Your claim is that “Social Security is toast”, but all of your alleged evidence is polluted with things like Medicare (in your first graph), Medicaid (including nursing homes for retirees), interest payments (a major item), military spending (including, in particular, medical and retirement benefits), etc. As a physicist, you should choose data that address your specific claim. Medicare is not Social Security, and Social Security is not (unlike Medicare) funded on a cash basis.”

    Addressed in comment #6. Social Security is toast because everything is toast. The entire system of federal entitlement spending stands or falls as a unit. Again, I titled the post as such to provide a counterpoint to Mike’s specifically SS commentary.

    “Push your budget graph back to 1950 and put it in % of GDP to get inflation out of the picture and you will see that nothing much is new. You can also find panicked claims like your last graph being made in 1929, as a previous generation of Hooverites argued that spending would not help the economy. That 100% deficit in the 1940s proved them wrong.”

    I dunno, are you expecting anything like the post-war boom to bail us out? The conditions for that growth involved extreme circumstances (a world war!) that are not going to be replicated. Even so the inflation-adjusted cost of WWII was in fact about $3.6 trillion – the size of this and next year’s deficits alone. Our economy is also much bigger now, but it gives a sense of the scale involved. The last graph, by the way, is not the panicked claims of partisans. It’s directly from the Congressional Budget Office and Obama’s own White House projections.

    “The fact that the truly rich pay a smaller fraction of their income in taxes than their secretaries (see, e.g., Warren Buffet) seems to get lost in the propaganda so persons like yourself never learn how our tax system – as a whole – is structured to be modestly regressive.”

    Please don’t be patronizing, I’m perfectly aware of how taxes work. In fact Warren Buffet does pay a larger fraction of his income than his secretary – he simply doesn’t have all that much income. He has a tremendous amount of wealth in the form of his stock holdings and therefore a tremendous amount of capital gains when he sells, taxed at 15%. You could raise the capital gains tax, but I don’t know that you could develop a more effective brake on economic growth if you deliberately tried. But all that aside, the numbers are paramount – how much money can you expect to raise with that method? Buffet’s $30b is not income from his job, it’s stock holdings. The bulk of his wealth is in that sense purely theoretical. None of it is taxable until he sells it, which he and other billionaires do not tend to do frequently as it defeats the entire point of investment. If the government nationalized Warren Buffet now, magically seized and liquidated all his assets at market value without damaging the market, and dumped it all into the budget, it would reduce the deficit by 1.6%, for one year. The levels of money required are simply nowhere near the levels of money that can actually be obtained from the standby method of taxing the rich, no matter what the rate.

  13. #13 Francis
    April 11, 2009

    umm, no. Matt, you’re slicing and dicing the legal issue with the economic issue.

    Legally, SSA is a separate entity from the Treasury. SSA has its own dedicated revenue stream and is currently running a substantial surplus of revenue over costs. It invests this surplus in a special non-tradeable version of T bills. The SSA Trustees predict that at some point in the future the surplus will vanish, and SSA will start running a deficit. Our elected representatives will at that point have the choice of making relatively minor adjustments in income and/or outgo, or do nothing and let SSA draw down its enormous pile of T bills. When that asset base hits zero, then legally our representatives will have to do something, either changing income and/or outgo or giving SSA the authority to borrow (the third seems unlikely unless it is in the context of getting revenues matching demand). (Defaulting on SSA’s T bills is not an option. You think the current economic crisis is bad? Wait until other holders of T bills, like US investors and foreign governments, see the US default on a validly issued debt.)

    The fact that the Trustees of SSA are ultimately responsible to the federal government does not make the legal case any different. It is, in fact, quite common for the boards of directors of cities and counties as well as private corporations to create separate legal entities and to have these special purpose entities interact with the principal one.

    Economically, Soc Sec is just another demand on the federal fisc, along with the debt payments, defense, medicare and medicaid. (These are the big five; everything else is pennies on the dollar.) The last two are the ones that are growing utterly disproportionately to total GDP so, not so oddly, the president is focusing his energies on solving how we pay for healthcare in this country.

    Even without immigration, we can pay current SS benefits in perpetuity given historic increases in productivity. With immigration, the problem is even less. Even if long-term productivity drops sharply, revenues and obligations can be brought into long-term balance with relatively minor changes to the benefit structure. The Angry Bear blog (found here) has an extensive series of posts on the long-term viability of SSA. Kevin Drum when he was at Washington Monthly also posted extensively on the ability of the federal government to take in enough revenue to meet long-term obligations without changes to the benefit side.

  14. #14 steve
    April 11, 2009

    This blogger should stick to physics. There are just too many errors in this post to address.

  15. #15 Kelly
    April 11, 2009

    You might want to spend a week or two with Bruce Webb’s Social Security posts at angrybear.blogspot.com. He’s been reviewing and explaining the Social Security Administrations reports in detail for quite a while.

  16. #16 Matt Springer
    April 11, 2009

    Feel free to point out your favorite, then.

    In any event I’m barely making any assertions in this post at all. I’m reporting the government’s own numbers. I’m open to being convinced that those are wrong, but in such a case your grievance isn’t with me. My single assertion is this: exponential growth cannot continue forever.

  17. #17 Tyler DiPietro
    April 11, 2009

    It’s obviously true that exponential growth can’t continue forever, but I would like to see the assumptions that are built into the GAO projections for government debt as a percentage of GDP (can’t find a link in your post elaborating on it). Given that such is well below historic levels currently (according to that graph), the extravagant predictions are causing me to raise an eyebrow.

  18. #18 Alex Besogonov
    April 11, 2009

    #16:

    And why can’t it continue forever?

  19. #19 Tyler DiPietro
    April 11, 2009

    “And why can’t it continue forever?”

    That exponential growth can’t be sustained forever in a system with finite resources is something we all learn in a basic DiffEQ course. I certainly wouldn’t argue this point.

  20. #20 Matt Springer
    April 11, 2009

    Here’s the source for the debt/GDP graph. It’s a GAO summary, with its own references to its sources of data. (Link added to the main post as well)

  21. #21 Krist
    April 11, 2009

    Your post is wrong wrong wrong. Stick to Physics.
    You will receive social security payments in 2050. SS is at the bottom of the list of government run programs that are in bad shape.
    Please read Krugman. You can start here:

    http://krugman.blogs.nytimes.com/2008/03/28/about-the-social-security-trust-fund/

    This fear mongering on SS is futile especially if you offer no clear alternatives. Privatize SS? Yeah after Great Depression 2.0, I think not.

  22. #22 Carl Brannen
    April 12, 2009

    The reason it’s different now is that our population is no longer increasing at the rate it was through the 40s and 50s.

  23. #23 Tyler DiPietro
    April 12, 2009

    Thanks Matt. It seems that the GAO’s projections of unsustainable growth are based more on the growth in the cost incurred from entitlement programs than interest on debt. That entitlements and our healthcare system are in need of reform to control costs is not something I deny, what I object to is the notion that exponential cost increases are inevitable due to them.

    It would also seem that the scenario projected disregards potential increases in productivity. This is understandable, since it is extremely difficult to forecast. It has however been reliably increasing.

    Also, the link about would seem to indicating that China is diverting a higher percentage of their own GDP to domestic stimulus spending. From what I can tell, it has nothing to do with U.S. Treasuries no longer being regarded as a safe investment.

  24. #24 Tyler DiPietro
    April 12, 2009

    “Also, the link about [China and U.S. debt] would seem to indicating that China is diverting a higher percentage of their own GDP to domestic stimulus spending. From what I can tell, it has nothing to do with U.S. Treasuries no longer being regarded as a safe investment.”

    Fixed.

  25. #25 Anonymous
    April 12, 2009

    #9:

    The flaw in the data presented regarding Social Security is that it is predicated on the false assumption that all benefits must be paid out of current FICA taxes. The reality is that there is a huge balance invested in T bills that will cover that cash flow “problem” for decades past the crisis point shown in your first graph.

    I think he covered that in the original post, 3rd paragraph. The T-Bills that “back” the SS Trust Fund (SSTF) are debts owed by the Federal Government to the Federal Government. If SS takes in less money in current FICA taxes than it pays out, the difference is made up by cashing in those T-Bills. What does that mean? It means that the Feds give the IOU’s to the Feds and ask the Feds to pay the money due. What does that mean? It means that to fund the SSTF, we (the “Feds”) have to make up the difference from general tax revenues, or borrow even more against future revenue. So yes, it is true that SS benefits do not have to be paid out of current FICA taxes alone, but they will in practice have to be paid out of current taxes of all kinds, FICA and general funds. This puts additional strain on the annual deficit, thus causing the problems identified.

  26. #26 parça kontör
    April 12, 2009

    thankss.

  27. #27 Matt Springer
    April 12, 2009

    Krist, did you even read the post? Krugman says the 2017 date has no particular relevance and I explicitly agree. See the paragraph under the first graph. The problem comes when the federal government as a whole runs out of money and borrowing power. At that point the system collapses.

    If you disagree, you’re not disagreeing with me. You’re disagreeing with the White House and Congress’ own numbers, which I have reported.

  28. #28 JM
    April 13, 2009

    Matt stick to physics please. You don’t understand finance (or economics) particularly well. Neither do I but I know enough to spot drivel.

    Matt’s Pizza Bonds differ substantially from US Treasuries. They’re only backed by the resources of a single graduate student of uncertain reliability. T-bonds are backed by a hugely rich government that has more guns than it knows what to do with.

    There’s quite a lot more taxing capability in the US treasury than exists in your hands.

    So I’ll trust T-Bonds, but pass on the Pizza Bonds if you don’t mind.

    The. Government. Is. Not. A. Household.

    But if you insist it be run it like it was one, there’s the Great-Grand-Mother of a Depression I can introduce you to.

  29. #29 Daryl McCullough
    April 13, 2009

    Peter and Carl,

    Calling Social Security a “ponzi scheme”, is sophistry. You are engaging in a kind of fallacious argument that I believe could be classified as an instance of the fallacy of equivocation. Roughly, it works like this:

    1. Xs are bad.
    2. Y is a kind of X.
    3. Therefore, Y is bad.

    This would be a valid argument if premise 1 were always true, and the meaning of X is the same for premises 1&2. But in a fallacious use of this argument, premise 1 is true only for a narrow understanding of what X means, while premise 2 is true for a broader (or just different) understanding of what X means. For example,

    1. Socialism is bad.
    2. Government-provided police protection is a kind of socialism.
    3. Therefore, government-provided police protection is bad.

    It’s an invalid argument because people agree to the first premise based on a typical understanding of what “socialism” means (by example of the Soviet Union, Cuba, North Korea, etc). But premise 2 could very well be true by some broad interpretation of what “socialism” means. Premise 3 does not follow, however.

    In the case of the phrase “ponzi scheme”, there is the typical understanding of the phrase, which is a fraudulent scheme in which investors are promised a guaranteed high rate of return on their investment, but the money going out is paid for by new people coming in. This typical understanding of a ponzi scheme carries with it the idea that it is inherently unsustainable, and it is the unsustainability that makes it bad. (Eventually, the promise to new investors will be broken).

    Social Security, in constrast, is perfectly sustainable, unless retirees live forever (in which case, we would have to rethink what “retirement” means). Letting f be the number of retirees per worker, B be the promised benefits per worker, and C the maximum cost per retiree, the system is sustainable provided that

    f < C/B

    Over the long run, this inequality must hold, for sustainability. If f gets larger, then either C must increase or B must decrease, but there is no problem in principle with maintaining this inequality.

  30. #30 matt
    April 13, 2009

    “1) Default on debt. This would end the financial world as we know it, certainly including Social Security.
    2) Pay the debt back with hyperinflated currency. This would end the financial world as we know it, certainly including Social Security.
    3) Massive spending cuts. In which case I do not in fact get Social Security.”

    Or 4: Minor modifications in the proposed benefits. For instance http://www.ssa.gov/OACT/TRSUM/trsummary.html suggests (this is just a partial quote):

    “Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 14 percent in payroll tax revenues (from 12.4 percent to 14.1 percent) or an immediate reduction in benefits of 12 percent or some combination of the two.”

  31. #31 matt
    April 13, 2009

    One more thing I thought of then (of course the thread is probably dead anyways but eh). In your original post you say

    “There’s good reason to believe that in fact you simply can’t budge revenue upward all that much no matter how much you soak the rich:”

    Then you have a nice graph of revenue versus tax bracket Well while it is an interesting graph (especially for people who claim that those in the highest tax bracket are shouldering the heaviest tax load) your conclusion can’t really be drawn from that graph. What you need is not a graph of tax bracket versus revenue but effective tax rate versus revenue. Without that we don’t know whether the actual taxes paid increased or not. A tax rate may go up but without knowing what the before and after effective tax rate is you can’t make assertions about the effectiveness of increasing taxes on generating revenue.

  32. #32 CCPhysicist
    May 2, 2009

    @comment #12: I’m not being patronizing (in comment 9) when talking about Warren Buffet’s tax rate. That statement concerns the tax rate he pays on his income, not his taxes divided by his wealth. He pays a lower tax rate because there is no FICA or Medicare tax on income above a fairly modest (if you are worried about a tax increase on income above $250,000) level, and because there are numerous breaks (such as the capital gains rate) for person’s whose income is not in the form of salary.

    Like I said, do you know what you actually pay in taxes, including your employer’s hidden tax payment on your part, and what fraction of that is income tax? (I don’t know if grad student compensation is still FICA-free like it was in my day. That was one heck of a deal for me and for the university.) Do you know how it works at higher levels?

    If I wanted to be patronizing, I’d point out that your job would be eliminated by the people whose politics you support. They don’t want to pay graduate students, or anyone else.

    And it *is* a logic flaw to conflate two very different problems, and an even bigger one to pretend I did not make the point you tried to raise in objection to it. SSA is a separate operation even if its account sheet profit is used to hide the actual size of the budget deficit we have had for decades. (The changes you worry about are peanuts compared to that one.) History is filled with worries about its future solvency, and each of them were fixed by comparatively minor tweaks to the formula like the ones pointed out in my comment and in later ones. Social Security is a minor problem.

    Health, whether Medicare or Medicaid (much of which goes to retirees), is a major problem. It is growing at an uncontrolled rate, mostly invisible to those of us with employer-paid health insurance unless you actually take a look at your benefits package. If we apply your analysis to health care, the cost of health insurance will exceed your salary in a few decades.

    Funding the government, and paying off its bonds, once the SSA is selling notes rather than buying them, is a huge problem. This is a simple result of the fact that Americans simply do not want to pay for what they get. They did not want to pay for the war in Iraq, or anything else. The “tea baggers” simply want something for nothing. We ran huge deficits during a period of prosperity, so we have little option during a period of huge economic risk.

    Yes, I do believe we will see huge growth if we come out of this current depression. I’ve seen it as we left recessions in the past. People who have not bought a car for a decade will need to buy a car. Houses will sell again, and be built again, once we reach a “market clearing” price for housing. If we don’t, we are in for a life-style change that you simply cannot imagine. You do know that we had a party line, not individual cell phones, back in those post-war glory days of the 50s and 60s, right?

  33. #33 fatima louise
    March 4, 2010

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