NationStates Jolt Archive

If you think Social Security is in trouble and needs to be privatized, you must read this article:

http://www.nytimes.com/2005/01/04/opinion/04krugman.html?th

NEW YORK TIMES
OP-ED COLUMNIST
Stopping the Bum's Rush
By PAUL KRUGMAN

Published: January 4, 2005

The people who hustled America into a tax cut to eliminate an imaginary budget surplus and a war to eliminate imaginary weapons are now trying another bum's rush. If they succeed, we will do nothing about the real fiscal threat and will instead dismantle Social Security, a program that is in much better financial shape than the rest of the federal government.

In the next few weeks, I'll explain why privatization will fatally undermine Social Security, and suggest steps to strengthen the program. I'll also talk about the much more urgent fiscal problems the administration hopes you won't notice while it scares you about Social Security.

Today let's focus on one piece of those scare tactics: the claim that Social Security faces an imminent crisis.

That claim is simply false. Yet much of the press has reported the falsehood as a fact. For example, The Washington Post recently described 2018, when benefit payments are projected to exceed payroll tax revenues, as a "day of reckoning."

Here's the truth: by law, Social Security has a budget independent of the rest of the U.S. government. That budget is currently running a surplus, thanks to an increase in the payroll tax two decades ago. As a result, Social Security has a large and growing trust fund.

When benefit payments start to exceed payroll tax revenues, Social Security will be able to draw on that trust fund. And the trust fund will last for a long time: until 2042, says the Social Security Administration; until 2052, says the Congressional Budget Office; quite possibly forever, say many economists, who point out that these projections assume that the economy will grow much more slowly in the future than it has in the past.

So where's the imminent crisis? Privatizers say the trust fund doesn't count because it's invested in U.S. government bonds, which are "meaningless i.o.u.'s." Readers who want a long-form debunking of this sophistry can read my recent article in the online journal The Economists' Voice (www.bepress.com/ev).

The short version is that the bonds in the Social Security trust fund are obligations of the federal government's general fund, the budget outside Social Security. They have the same status as U.S. bonds owned by Japanese pension funds and the government of China. The general fund is legally obliged to pay the interest and principal on those bonds, and Social Security is legally obliged to pay full benefits as long as there is money in the trust fund.

There are only two things that could endanger Social Security's ability to pay benefits before the trust fund runs out. One would be a fiscal crisis that led the U.S. to default on all its debts. The other would be legislation specifically repudiating the general fund's debts to retirees.

That is, we can't have a Social Security crisis without a general fiscal crisis - unless Congress declares that debts to foreign bondholders must be honored, but that promises to older Americans, who have spent most of their working lives paying extra payroll taxes to build up the trust fund, don't count.

Politically, that seems far-fetched. A general fiscal crisis, on the other hand, is a real possibility - but not because of Social Security. In fact, the Bush administration's scaremongering over Social Security is in large part an effort to distract the public from the real fiscal danger.

There are two serious threats to the federal government's solvency over the next couple of decades. One is the fact that the general fund has already plunged deeply into deficit, largely because of President Bush's unprecedented insistence on cutting taxes in the face of a war. The other is the rising cost of Medicare and Medicaid.

As a budget concern, Social Security isn't remotely in the same league. The long-term cost of the Bush tax cuts is five times the budget office's estimate of Social Security's deficit over the next 75 years. The botched prescription drug bill passed in 2003 does more, all by itself, to increase the long-run budget deficit than the projected rise in Social Security expenses.

That doesn't mean nothing should be done to improve Social Security's finances. But privatization is a fake solution to a fake crisis. In future articles on this subject I'll explain why, and also outline a real plan to strengthen Social Security.

Exactly. Plus, Social Security is one of those things you just don't privatise. At all.

It's Paul Krugman dude. He's crazy-like.

And I'm not going to trust his statistics until he shows me everything about how he came to them. Hell, I try not to trust any statistics until I find out more about them.

Hear hear.

Social Security privatization is a screw-job waiting to happen. Under the intermediate estimate, the Social Security Trustees predict that the trust fund (currently consisting of 1.6 trillion dollars in treasury bonds) will grow to a peak of nearly 7 trillion dollars in 2028. This is not imaginary money, this is money that has been handed over to the government through payroll taxes. The federal government has borrowed against this money, but guaranteed the loan with treasury bonds. It is truly frightening that one outcome of a social security restructure could possibly be a default on these bonds, which is essentially a massive, retroactive tax hike on the individual.

Another major problem is the expense of the various privatization schemes. Under the 2-3% carveout plan, it may cost up $1 trillion dollars to switch over. Right now, Social Security administrates the funds with a very low operating cost. When you go to private investment firms, there are going to be a lot of folks clamoring to wet their beaks. Money intended for disbursal back to retirees will instead go to the good people of Goldman Sachs et al.

Even under the worst possible predictions, Social Security will remain solvent until 2032. Yet the current administration is running around like chicken little. Why? Because fear and panic will motivate people to make bad decisions.

Really. This is one of those issues where every working American ought to write their reps and senators. It's out of our hands as voters, but we really have to make our reps accountable. Let them know that we're not going to stand by and watch our invested dollars get jacked and rolled over to pay off federal debt and line the pockets of execs at investment firms.

And Anda, you want statistics? Here's the granddaddy of SSA statistics cites.

www.ssa.gov/OACT/TR/TR04/tr04.pdf

That's the full 2004 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors and Disability Insurance. Those are the guys who manage the Social Security trust fund. This is where Krugman gets his numbers regarding the projections. If there's somebody with a better angle or more insight than the trustees, I'd like to meet em.

I say scrap the whole thing completely. It doesn't pay out enough to matter anyway.

I say we put out a cut-off age, maybe 50. Anybody at or above that age or currently recieving SS will continue to recieve SS when they become eligible, and continues to pay taxes for it. Everybody else is booted out, no longer paying taxes for it. If we can manage the funds, maybe even a refund of taxes paid into it up to this point.

I say scrap the whole thing completely. It doesn't pay out enough to matter anyway.

I say we put out a cut-off age, maybe 50. Anybody at or above that age or currently recieving SS will continue to recieve SS when they become eligible, and continues to pay taxes for it. Everybody else is booted out, no longer paying taxes for it. If we can manage the funds, maybe even a refund of taxes paid into it up to this point.
All you're advocating is a lowering of the age and basically the same system we have now. I might point out that by allowing an additional fifteen years worth of people you will actually create the same kind of finance problems that privitization will cause.

Two-thirds of retired individuals receive half their annual income through Social Security. They make roughly 20,000, 10,000 of which comes from the SSA. For 12 million additional households, SS makes up 90% of their income.

In 1950, pre-SSA, 35% of retired individuals lived below the poverty line. Today, we're closer to 10 percent below the poverty line, strictly because of the SSA.

10 grand a year ain't a lot of money, that's true, but when you look at those numbers and what that 10 grand does, it's colossal. You scrap the SSA and we backslide to a third of retirees dying in poverty. Is that a good plan?

All you're advocating is a lowering of the age and basically the same system we have now. I might point out that by allowing an additional fifteen years worth of people you will actually create the same kind of finance problems that privitization will cause.

Nope. I'm talking about getting rid of it completely, so I wouldn't be getting it when I turn 65 in a few decades.

10 grand a year ain't a lot of money, that's true, but when you look at those numbers and what that 10 grand does, it's colossal. You scrap the SSA and we backslide to a third of retirees dying in poverty. Is that a good plan?

So now it's poverty line we're talking about? How about this: as far as I know, I'm below the poverty line, and I pay almost twice as much SS tax as I do income tax, and I can get a refund for most of the income tax! As for the benefits, last I heard the average retiree was getting $444 per month. Where I live that barely rents you an efficiency apartment. I think that I could do much better on investing my money and getting a good return than the government.

Sorry, but odds are you wouldn't do as well on your own. A Securities Exchange Commission study has demonstrated that professional money managers themselves consistently perform below standard market indexes. This means that by participating in any mutual fund or by listening to your broker, you're likely to grow slower than the Dow. Moreover, SSA operates at less than 1% management costs. This is far better than your private investment concerns. Finally, SSA money is backed by the U.S. govt. Short of some legislative shenanigans, the only way that money vanishes is through the failure of the govt. Can you say the same about stocks, mutual funds, or other private investments?

Take as an example, TIAA-CREF. I've been watching their fund performance and looking at a well-diversified array of their products, so I can say that they've been hovering right around break-even for the past year. If I put my money there, it would not keep pace with inflation. Meanwhile, Social Security remains steady.

Am I managing my funds poorly if I sunk my retirement in there? If so, how many other millions would make the same mistake? Or invest in stocks themselves and risk a bigger bath.

The primary virtue of the SSA is its predictability. So many of the short-sell, penny-stock, get-rich-quick plays go busto, that we could see a generation sink into severe poverty because they treat their retirement loot like a casino.

Today let's focus on one piece of those scare tactics: the claim that Social Security faces an imminent crisis.
Ahh, but this is wrong. It indeed does face an imminent crisis: Bush.