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Social Security And Distribution

Lurking behind a lot of the Social Security debate -- loose talk about averages and crises and trust funds and so forth -- is a pretty straightforward distributive issue. Compared to traditional Social Security, private accounts are good for two groups of people -- those who earn a lot of money, and those who die young. Since high-income people tend to live longer than low-income people, the distributive debate here isn't as clear-cut as it could be. But the negative impact of poverty on life expectancy is mostly a question of higher death rates among infants and young people, so the offset here isn't nearly as large as it could be. What makes things even more clear cut, however, is the issue of the trust fund. The main economic consequence of privatization is that it eliminates the need for income taxpayers -- primarily rich people, that is -- to pay higher taxes in the future in order to repay the loan they were granted by working- and middle-class Americans in the 1980s and 1990s. This is by no means the only issue in play, but it is in play, and it is very important.

January 28, 2005 | Permalink

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» The Bush Administration Is Even Crazier Than You Imagined from A Tiny Revolution
I just wrote something here about the Social Security Trust Fund. The point was that a default on the Trust Fund would be a massive transfer of money from the poorer 95% of Americans to the richest 5%. Because that's... [Read More]

Tracked on Jan 28, 2005 6:29:04 PM

» The Bush Administration Is Even Crazier Than You Imagined from A Tiny Revolution
I just wrote something about the Social Security Trust Fund. The point was that a default on the Trust Fund would be a massive transfer of money from the poorer 95% of Americans to the richest 5%. Because that's so,... [Read More]

Tracked on Jan 29, 2005 11:19:22 AM

Comments

Compared to traditional Social Security, private accounts are good for two groups of people -- those who earn a lot of money, and those who die young.

Compared to traditional SS, IOW, piratization is good for people who don't need a safeguard against old-age poverty.

Considering that that's the main purpose of SS, I'm not surprised that's the case with a plan that seeks to abandon SS's purpose.

Posted by: cmdicely | Jan 28, 2005 10:56:16 AM

They're going to take the money that was loaned to them and not pay it take. In the real world, when someone takes your money, its called "theft," so why can't we call these Bushist SS plans that?

Posted by: dstein | Jan 28, 2005 11:02:41 AM

For the benefit of the slow learners in the crowd, such as me, could someone please explain what "loan" Matthew is talking about?

Posted by: ostap | Jan 28, 2005 11:14:24 AM

I don't get it. Cato's SS plan involves the issuance of new debt (which would have to be paid off) as well as envisions a minimum benefit financed with general revenues. It's hard to see how that is more regressive than the status quo, in which the payroll tax only applies to the first $90k of income.

Posted by: Tim | Jan 28, 2005 11:16:14 AM

Thank you!

I've been talking about this at my blog for some time and have been surprised that no one has commented.

They don't want to pay the money back!

Posted by: Don | Jan 28, 2005 11:33:03 AM

Matt

I'm not so clear about why privatization is good those who die young.

as you've noted before, most of the privatization plans don't just cut the payroll tax and let people walk off with the proceeds - they mandate it gets plowed into an account that can't be accessed 'til retirement.

so, if i die before retirement, i get no benefit at all from the existence of private accounts. of course, i guess you could say that my survivors get a benefit from inheriting my private account, but, this is only a net benefit if the survivors' insurance component of social security today isn't gutted along with the old-age part.

so, unless i'm missing something (entirely possible), i think only the first group are clear beneficiaries of privatization.

joshb

Posted by: joshb | Jan 28, 2005 11:38:15 AM

Matthew,
Actually the only issue I see involved here is the desire of the wealthy to not have to pay back those loans. For "ostap": Since around 1983 or so we have been paying more in FICA than was needed to pay SS benefits. This is because back then it was recognized that the baby boomers would put a huge burden on the Social Security system when they retired. To ease that burden we have been overpaying FICA, and the excess accumulated in a trust fund in the form of T Bills, which is the only way it legally could be accumulated. Now, come 2018 or so we will need to begin redeeming those T Bills to cover SS benefits. In the meantime the wealthy have enjoyed artificially low income tax rates, the latest being Bush's ill conceived tax cuts. That is the loan referred to. In order to redeem the T Bills without just adding more to the budget deficit a tax hike on the wealthy is needed. And, that is the whole reason for the Bushies working so hard to find a way to avoid that.

Posted by: Vaughn Hopkins | Jan 28, 2005 11:42:16 AM

Paul Krugman had a good column on the distributive nature of Social Security today. I know, I know, everyone here already reads him, but still, it's a handy reference for all these discussions of black mortality, Social Security, etc.

Posted by: Julian Elson | Jan 28, 2005 11:52:33 AM

hehe... "piratization."

But as clever as that is, I doubt the appellation will gain much traction. You're talking about giving people back their own money. Sure, siphoning it away from an established program may be an unwise policy, but it's not the same as theft.

Posted by: Grumpy | Jan 28, 2005 11:54:59 AM

In the meantime the wealthy have enjoyed artificially low income tax rates, the latest being Bush's ill conceived tax cuts. That is the loan referred to.

The problem with this analysis is that it assumes that the amount of government spending is fixed, and that the only variable is the amount of income taxes paid to fund the spending.

BUT, the other (and better, IMO) way of looking at it is that it is not INCOME TAXPAYERS who were loaned the money, but the PEOPLE WHO RECEIVED ALL THE EXTRA SPENDING since 1983 that received the loan from the FICA-taxpayers.

Now, if Matthew wants to go ask for those welfare recipients and soldiers and AFSCME members to pay back the loans that the FICA-taxpayers made to them, he can be my guest.

Posted by: Al | Jan 28, 2005 12:03:20 PM


The problem with this analysis is that it assumes that the amount of government spending is fixed, and that the only variable is the amount of income taxes paid to fund the spending.


No it doesn't. Stop being so retarded, OK?

Posted by: Dan the Man | Jan 28, 2005 12:15:59 PM

Al, to spend is to tax. Surplus FICA revenue simply made it easier for income tax payers to get a pass. Feel free to urge spending cuts, but please don't say that the federal government doesn't have an obligation to repay those bonds held in the Social Security Trust Fund. That's the gist of Matt Y's point, and it's an important one in terms of fairness to those who have been paying payroll taxes since 1983.

Posted by: David W. | Jan 28, 2005 12:20:29 PM

as you've noted before, most of the privatization plans don't just cut the payroll tax and let people walk off with the proceeds - they mandate it gets plowed into an account that can't be accessed 'til retirement.

Supposedly, the assets are heritable, so if you die, your heirs get the assets in your account.

Posted by: cmdicely | Jan 28, 2005 12:30:15 PM

Everything that the Republicans have done since Reagan has been aimed at redistributing income and wealth and power from the poor and middle class to the very rich. You'd have to have been in a coma for the last 25 years to think that the SS proposal is not of a piece with the suppression of unions, the shape of the Reagan and Bush taxcuts, changes in environmental policy, etc., etc.

Republicans are very, very good at controlling the agenda and the debate by telling the world what "liberals" are "really" doing and saying; Democrats need to work harder at "revealing" what the Repugs are "really" doing.

Posted by: Bruce Wilder | Jan 28, 2005 12:32:08 PM

1st, low tax rates were the lead cause of economic growth over the past two decades.

2nd, lower taxes yielded lower govt spending, in turn increasing growth even further.

3rd, SS was always supposed to be a stand alone, self funded program, so if this particular Ponzi scheme is going to run out of money, don't blame it on other tax cuts, blame it on the fatal flaw of Ponzi schemes -- they always collapse.

4th, I wasn't "rich" in the '80s but according the govt I'm "rich" now. Does that mean I don't have to pay back the "loan"?

Posted by: ostap | Jan 28, 2005 12:34:22 PM

There is another Social Security distributional or rather redistributional issue that ought to be mentioned. With private accounts, the more that is invested, generally the more one can expect to get back. This is what benefits the wealthy. Social Security does not work that way; rather the less one puts in, the better the rate of return. This is because benefits are calculated by taking percentages of three increments of monthly salary: 90% of the first roughly $600; 32% of the next roughly $2500; and 15% of the remainder up to the salary cap. The result of this is that a person earning the minimum wage gets benefits that approximate 76% of final salary, but someone paying the maximum payroll tax (Those earning $90,000 in 2005.), gets back only an average of 24%. This can be justified given that fact that FICA is about the most regressive tax imaginable.

Posted by: Vadranor | Jan 28, 2005 12:44:08 PM

are good for two groups of people -- those who earn a lot of money, and those who die young.

Speaking as someone who usually has money left to save, I just don't see the appeal of private social security accounts. I have no trouble fantasizing about things that would be "good for" me. E.g., raise the 401(k) limit by some whopping amount; every thousand extra is a thousand protected (for now) from the IRS. Oh, and raise the income limit and/or contribution limit for Roth IRAs--there's another simple plan that's good for people with a lot of money.

But all Bush's plan does is siphon off some of the revenue ear-marked for a defined benefits plan into yet another defined contribution plan. I already have tax-advantaged defined contribution accounts out the wazoo, and this new one looks like peanuts to me compared to its effect on social security as a minimal defined benefits plan that serves as a crucial piece of the social safety net.

In short, it doesn't look like I'm the one who's supposed to like this scheme (I'm not expecting to die young either; knock on wood). I assume somebody is supposed to like it, though. My guess is that the two kinds of people who really like this plan are:

. Those who stand to cash in on administering private accounts.
. Those who want to phase out social security entirely and see this as a good start.

Posted by: Paul Callahan | Jan 28, 2005 12:55:13 PM

The main economic consequence of privatization is that it eliminates the need for income taxpayers -- primarily rich people, that is -- to pay higher taxes in the future in order to repay the loan they were granted by working- and middle-class Americans in the 1980s and 1990s. This is by no means the only issue in play, but it is in play, and it is very important.


Also form comments: "Actually the only issue I see involved here is the desire of the wealthy to not have to pay back those loans."

The problem with this view is that it has a static understanding of people paying taxes. Under your loan theory, young people in the market now get royally screwed. While they are entering the market they are earning wages on the lowish end and paying the marginally higher payroll taxes. As they age--at the time the SSA has to pull from the bonds--they are earning more money and getting taxed at a the then marginally higher income tax rates.

Meanwhile their parents had the reverse happen. When they were young and earning mostly on the the payroll tax, it was marginally low. When they were in their prime earning years the income tax was marginally low.

The rich avoiding their liabilities argument only works if you pretend that individuals don't age and progress in the job market (and eventually out of it).

Posted by: Sebastian Holsclaw | Jan 28, 2005 12:58:44 PM

I think this just follows the principle of the defining quality of the Bush administration: scratch any policy they really care about (tax cuts, Iraq, tort "reform," as well as SS privatization) and you'll find a group of well-connected rich people who will benefit. (Iraq is a little less obvious than the others, but Halliburton and other well-GOP connected firms have done VERY well, and of course part of the initial reason for the invasion was to get control of Iraq's oil.)

Posted by: Rebecca Allen, PhD | Jan 28, 2005 1:25:01 PM

1st, low tax rates were the lead cause of economic growth over the past two decades.

Of course. I'm sure we all remember how Clinton's devastating tax hikes eventually triggered the depression of the 90s, just like the Wall Street Journal predicted they would.

Posted by: chilly | Jan 28, 2005 1:31:43 PM

1st, low tax rates were the lead cause of economic growth over the past two decades.

Of course. I'm sure we all remember how Clinton's devastating tax hikes eventually triggered the depression of the 90s, just like the Wall Street Journal predicted they would.

Posted by: chilly | Jan 28, 2005 1:32:04 PM

How do we determine when we have redistributed enough? When the rich people and moderately well off start complaining a bunch? When the poor start protesting in the street?

It's an interesting question as liberals just seem to be saying we should do more and conservatives say less. But there isn't any formula to say, "Well, this is about right."

Posted by: Chad | Jan 28, 2005 1:37:46 PM

The disingenuous rhetoric about the "loan" made to the rich people in the 1980s and 1990s, to be repaid in the 2020s and 2030s, masks the fact that the rich people of the 1980s and 1990s are not the same rich people of the 2020s and 2030s. FICA taxes were a crappy idea from the day they were instituted; if there is to be a safety net for those unable to provide for themselves (and I think there should be) then fund the net in the same manner that other government activities are funded, without regard to age. A straight-forward guaranteed income plan, applicable to all citizens, and funded through a two or three tier income tax (if we are to continue to use the income tax) is a much better way to provide for people who cannot provide for themselves.

Posted by: Will Allen | Jan 28, 2005 1:53:08 PM

Compared to traditional Social Security, private accounts are good for...those who die young.

How are private accounts good for those who die young? They're dead.

Private accounts might be good for their heirs.

Doing away with SS altogether--without requiring "contributions" to private accounts might help people who die young. They could spend the money before they die.

Posted by: raj | Jan 28, 2005 1:58:33 PM

Interesting question, Chad, and many strong statists' implicit assumption is that the acquisition of power by a majority provides moral validation to any answer provided. Might makes right.

Posted by: Will Allen | Jan 28, 2005 2:00:57 PM

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