Social Security--We've Still Gotta Save It~
Didn't we save Social Security last year? Yes, but reportedly the Bush administration has simply moved privatization of Social Security to the back burner until times look more propitious for it. And with the baby boomers about to retire, the present might look like a good time to put it out there again.
So what's wrong with privatization? First, it would put the risk on every worker instead of spreading it out to all of us, and the world of investments is notably risky. Ordinary citizens do not have the expertise to gain good returns consistently. (Of course Wall Street would love it--having all that extra business.) Second, there would be no provision for dependents and the disabled. Third, it would tap existing revenues scheduled to go to current retirees. So where is the extra money to come from to finance it? In sum, are we to expect these uncertainties to yield an adequate replacement for the current guaranteed lifetime monthly checks retirees have been receiving for more than seventy years? Clearly privatization is not a satisfactory replacement for Social Security as we know it--apparently the most popular and successful government program ever, with administration costs around 1 percent.
Plans to get rid of Social Security go back to the Republican platform of 1936 and have never stopped. Current demographics make the present look like a good time to do that by declaring it in crisis. Suggesting that illegal immigrants collect benefits is a good arguing point too, even though it is doubtful that they collect as much as they pay in.
So let's look at the facts. Social Security is a pay-as-you-go system, with revenues coming from a tax on wages up to $94,200, with a current tax rate of 7.65 percent being levied on both employers and employees for a total of 15.30 percent. Revenues have exceeded benefits for a number of years, with the result that there exists a "trust fund" of $1.993 trillion. Yes, that's trillion. Now we come to the real argument, about the nature of the trust fund. Is it simply an accounting device? Of course, as are almost all monetary assets, including your bank balance. And has the government been using it to cover other programs? Of course. It's not sitting in a box somewhere. In fact, present law requires that the US Treasury borrow from the trust fund. The Social Security trust fund, then, consists of special non-marketable Treasury securities that bear a maturity date and earn a market rate of interest, which is now more than 5 percent.
How do we know they will be paid back? Well, I'll grant that the US in recent years has been incurring record budget deficits, and as a consequence the current federal debt is over $8.8 trillion, about half of it owed to foreigners. Things could get difficult if holders of US securities should start dumping dollars and holding euros. But the US, through wars and natural disasters and savings-and-loan bailouts and all the rest, has never defaulted on its obligations. In fact, US Treasury securities are (correctly) regarded as the safest assets in the world. But how can the Treasury honor so much debt when it comes due? Just as it always has, through other borrowing or out of taxes, as, for example, after World War II when it paid back much, much larger obligations relative to GDP, without any hardship to the economy. In short, we can be certain that the US Treasury will not default. And we can be sure someone has been paying attention to the maturity dates of those special trust-fund borrowings. It isn't as if it will be a surprise.
To continue: Let's look at the anticipated future health of Social Security. Around 2018 the fund's benefits will begin to exceed receipts but will continue to increase until 2025 because of interest receipts. And the trust fund will be exhausted by 2042, according to the Social Security Administration, or by 2052 according to the Congressional Budget Office, both of which used excessively pessimistic estimates of GDP. Or, it will last indefinitely if realistic GDP assumptions are used. Of course, GDP growth rates are very unpredictable so no one knows just exactly when the trust fund will play out. In any case, however, it can easily be fixed if and when there is a shortfall. The easiest and most logical recourse, it seems to me and to lots of others, would be to raise the cap on the level of wages that are subject to the Social Security payroll tax.
This is a crisis? Is there any other government program that is expected to run surpluses for decades and then to require only tweaking to produce surpluses? No, Social Security is not in crisis. However, one well might wonder how the projections can be so positive, given the dependency ratio (the ratio of workers to dependents) expected as the population becomes older, as it is expected to do. The projections come out as they do mostly because of estimates of productivity increases. More women entering the labor force help too. Expectations of fewer child dependents should make it larger still.
It should be pointed out, additionally, that concerns about the financial aspects of Social Security seem obsessive. Excessive payroll taxes can hurt effective demand and therefore real income. Also, the trust fund simply transfers purchasing power, not real income, from the present to the future. In other words, the trust fund is not about the level of real income but only about the share of real income the elderly will get. American financial institutions are very sophisticated. Should the focus on real output be less so? How is it that no one seems concerned about the production of real goods and services? In other words, instead of putting so many resources into manipulating the financial aspects of Social Security, it would seem more productive to invest more in human beings, in education and health care, for example, and in infrastructure, such as mass transit, Amtrak, roads and bridges, computers, and so on. Future workers will have to produce real income for everyone, not just to satisfy financial assets for seniors.
So what's wrong with privatization? First, it would put the risk on every worker instead of spreading it out to all of us, and the world of investments is notably risky. Ordinary citizens do not have the expertise to gain good returns consistently. (Of course Wall Street would love it--having all that extra business.) Second, there would be no provision for dependents and the disabled. Third, it would tap existing revenues scheduled to go to current retirees. So where is the extra money to come from to finance it? In sum, are we to expect these uncertainties to yield an adequate replacement for the current guaranteed lifetime monthly checks retirees have been receiving for more than seventy years? Clearly privatization is not a satisfactory replacement for Social Security as we know it--apparently the most popular and successful government program ever, with administration costs around 1 percent.
Plans to get rid of Social Security go back to the Republican platform of 1936 and have never stopped. Current demographics make the present look like a good time to do that by declaring it in crisis. Suggesting that illegal immigrants collect benefits is a good arguing point too, even though it is doubtful that they collect as much as they pay in.
So let's look at the facts. Social Security is a pay-as-you-go system, with revenues coming from a tax on wages up to $94,200, with a current tax rate of 7.65 percent being levied on both employers and employees for a total of 15.30 percent. Revenues have exceeded benefits for a number of years, with the result that there exists a "trust fund" of $1.993 trillion. Yes, that's trillion. Now we come to the real argument, about the nature of the trust fund. Is it simply an accounting device? Of course, as are almost all monetary assets, including your bank balance. And has the government been using it to cover other programs? Of course. It's not sitting in a box somewhere. In fact, present law requires that the US Treasury borrow from the trust fund. The Social Security trust fund, then, consists of special non-marketable Treasury securities that bear a maturity date and earn a market rate of interest, which is now more than 5 percent.
How do we know they will be paid back? Well, I'll grant that the US in recent years has been incurring record budget deficits, and as a consequence the current federal debt is over $8.8 trillion, about half of it owed to foreigners. Things could get difficult if holders of US securities should start dumping dollars and holding euros. But the US, through wars and natural disasters and savings-and-loan bailouts and all the rest, has never defaulted on its obligations. In fact, US Treasury securities are (correctly) regarded as the safest assets in the world. But how can the Treasury honor so much debt when it comes due? Just as it always has, through other borrowing or out of taxes, as, for example, after World War II when it paid back much, much larger obligations relative to GDP, without any hardship to the economy. In short, we can be certain that the US Treasury will not default. And we can be sure someone has been paying attention to the maturity dates of those special trust-fund borrowings. It isn't as if it will be a surprise.
To continue: Let's look at the anticipated future health of Social Security. Around 2018 the fund's benefits will begin to exceed receipts but will continue to increase until 2025 because of interest receipts. And the trust fund will be exhausted by 2042, according to the Social Security Administration, or by 2052 according to the Congressional Budget Office, both of which used excessively pessimistic estimates of GDP. Or, it will last indefinitely if realistic GDP assumptions are used. Of course, GDP growth rates are very unpredictable so no one knows just exactly when the trust fund will play out. In any case, however, it can easily be fixed if and when there is a shortfall. The easiest and most logical recourse, it seems to me and to lots of others, would be to raise the cap on the level of wages that are subject to the Social Security payroll tax.
This is a crisis? Is there any other government program that is expected to run surpluses for decades and then to require only tweaking to produce surpluses? No, Social Security is not in crisis. However, one well might wonder how the projections can be so positive, given the dependency ratio (the ratio of workers to dependents) expected as the population becomes older, as it is expected to do. The projections come out as they do mostly because of estimates of productivity increases. More women entering the labor force help too. Expectations of fewer child dependents should make it larger still.
It should be pointed out, additionally, that concerns about the financial aspects of Social Security seem obsessive. Excessive payroll taxes can hurt effective demand and therefore real income. Also, the trust fund simply transfers purchasing power, not real income, from the present to the future. In other words, the trust fund is not about the level of real income but only about the share of real income the elderly will get. American financial institutions are very sophisticated. Should the focus on real output be less so? How is it that no one seems concerned about the production of real goods and services? In other words, instead of putting so many resources into manipulating the financial aspects of Social Security, it would seem more productive to invest more in human beings, in education and health care, for example, and in infrastructure, such as mass transit, Amtrak, roads and bridges, computers, and so on. Future workers will have to produce real income for everyone, not just to satisfy financial assets for seniors.
posted by Gladys at 7:46 PM
0 Comments:
Post a Comment
<< Home