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When Is An Entitlement Not An Entitlement?

Larry Lindsay has ideas about Social Security:

Consider, for illustrative purposes, a plan that asked employees to contribute 1 ½ percent of their wages to their own personal account, with no change in their current taxes. For only a slightly higher short run budget effect than the President’s proposal, Social Security could offer a four-for-one match on employee contributions made on the first $10,000 of earnings and a one-for-one match on contributions made on earnings above that amount. A worker making $10,000 would thus contribute $150 a year to his account and be matched $600 from existing payroll tax revenue – producing a $750 account. A worker making $50,000 would contribute $750 a year and be matched $1,200, producing a $1,950 personal account. The resulting accounts would build up much more quickly, generate more earnings, and provide far more funds for retirement.
That's a much better deal for workers than what the President has put on the table. His later remarks, however, are puzzling:
This proposal is not a “carve out.” Nothing is carved out or removed from the Social Security system. The dollars allocated to personal accounts impose no additional strain on the Social Security system. This proposal is not an “add on.” There is no new entitlement. In fact, adding yet another entitlement to our system would be among the worst things we could do for national saving.
How is this not a new entitlement? Under Lindsey's plan everyone making at least $10,000 would be entitled to a $600 check -- minimum -- from the federal government. That's an entitlement program. I would quibble with various details that Lindsey's putting forward here, but the big stinking flaw in the whole thing is that there isn't any money to pay for any of this unless you cut Social Security benefits both drastically and suddenly. But this plan, at least, unlike the White House's proposal gives genuine evidence that its crafter spent at least a little time thinking about how to try and help poor people.

May 14, 2005 | Permalink

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Well, I haven't read the Lindsay proposal, just Matt's summary, so, here goes...

How is this not a new entitlement? Under Lindsey's plan everyone making at least $10,000 would be entitled to a $600 check -- minimum -- from the federal government. That's an entitlement program.

One could argue that it is indeed not a new entitlement, but rather a reform of an existing program. Perhaps that was Lindsay's meaning?

...but the big stinking flaw in the whole thing is that there isn't any money to pay for any of this unless you cut Social Security benefits both drastically and suddenly...

How do you figure that? Presumably, the existing Social Security suplus could be used, at least initially, to fund such an enhancement. I believe the current SS surplus exceeds $100 billion annually, so, provided Lindsay's idea costs less than this amount, we could fund such a scheme for without cutting Social Security. (Though yes, the surplus money otherwise earmarked for the general budget would have to come from somewhere, and that means more red ink). It would be more valid to say we couldn't fund such a program without "spending" cuts (Social Security or non-Social Security), or tax increases, or increases in federal borrowing, or some combination of all three.

Anyway, under Linday's plan, Social Security's cashflow would turn negative in, say, 2010 (I'm guesstimating) rather than 2018. So, we'd move the day of reckoning (when the Social Security System ceases to be a net contributor to the general budget) up by a few years. Overall not a wonderfully creative idea, but not that terrible either.

Posted by: P. B. Almeida | May 14, 2005 1:13:27 PM

"That's a much better deal for workers than what the President has put on the table."

This is a proposal for an additional 1.5% payroll tax if you want to put some of your own money into a personal account. I'm not opposed to people putting their own money in an account, but realize that the people who would benefit the most from personal accounts are already suffering from the 12.4% payroll tax. How many of them would be able to volunteer an additional 1.5%?

People who are better off would (and SHOULD) jump at such an offer if it were made law. I'm not too sure people at the lower end would. That extra $150 coming out of their checks would be a burden.

Posted by: Brian H | May 14, 2005 1:45:10 PM

... genuine evidence that its crafter spent at least a little time thinking about how to try and help poor people.

Well, first of all this has nothing to do with any 'poor people'. And second, there is only one way to imporve the program: wrestle some loot away from the rich crooks and raise the benefits.

Posted by: abb1 | May 14, 2005 2:03:26 PM

Having just recently submitted my income tax forms here in Canada, where I pay 25 per cent of my income in federal and provincial taxes, plus provincial and federal sales taxes, plus property taxes to the city and the school system, I must say that I find America's obsession with the detailed percentages and nuances of its tax code to be amazing.
Other than the accountants, there are virtually no Canadians who could tell you how much of a percentage of their income tax goes into Old Age Pension or to Employment Insurance or to Medicare, or whatever -- we just demand that the country set a tax rate which pays for the services we want and doesn't run a deficit.
Maybe not sweating the small stuff is the reason why Canadians have this reputation for acting so nice? Just asking.

Posted by: CathiefromCanada | May 14, 2005 2:17:05 PM

Cathie

We know the OASDI (AKA Social Security) rates to the point because they are a separate tax line item on our paychecks in addition to all the taxes you mentioned.

While income taxes fluctuate and you really don't know what rate you paid until you file, SS taxes are a fixed rate.

Posted by: Brian H | May 14, 2005 6:22:21 PM

Thanks Brian H -- I haven't ever seen a US tax form or paycheck, and so I hadn't realized how this was done -- of course, as a line item, its much easier to remember the exact amount.
Still, I do feel in general that people should focus less on how much they pay in taxes, and more on what they are getting for their money (not an approach that politicians encourage -- politicians, both in the US and Canada I think, much prefer that people don't ask whether they are getting value for the taxes they pay!)

Posted by: CathiefromCanada | May 15, 2005 1:01:44 AM

"Still, I do feel in general that people should focus less on how much they pay in taxes, and more on what they are getting for their money"

Yep, I agree. The problem is I don't think we're always getting a good value. For example of the 12.4% that's supposed to be for Social Security, about 1/3 of it is spent for other purposes. I think that's an outrage.

I won't even start on the fraud, waste and abuse in other areas of government spending (but I'm sure those are concerns in Canada too). We do get some good benefits from our tax dollars. We also disagree on the areas the government should legitimately be spending money. That last is probably one of the biggest differences between Liberals, Conservatives, and Libertarians. Again I'm sure you have the same issues in Canada.

Posted by: Brian H | May 15, 2005 1:17:16 AM

The Liberals are likely to be booted out of power over fraud and contracts which are way too much for nothing in return. Same issues. And we're somewhat pissed...unusual for our laid-back lot. Now if we'd just have the sense to send the new ambassador back and scuttle free trade we'd be making headway.

Posted by: opit | May 15, 2005 1:42:23 AM

Brian H.
"For example of the 12.4% that's supposed to be for Social Security, about 1/3 of it is spent for other purposes" Translation: the Trust Fund is a fraud.

P.B.
"Presumably, the existing Social Security suplus could be used, at least initially, to fund such an enhancement. I believe the current SS surplus exceeds $100 billion annually,"
Under current law that surplus plus accrued interest is already earmarked, unless the Trust Fund is a fraud.

The Trust Fund is not a fraud unless you assume that US governments in the near future are going to be a bunch of thieves and liars. The Trust Fund is working in precisely the fashion it was designed, collecting additional tax from Boomers now so that their impact on the system can be minimized later. All assertions to the contrary rely on assuming that the Trust Fund won't be there, either by claiming it in fact doesn't exist (Brian) or that the current surplus can simply be diverted with no consequences (P.B.), i.e. it won't exist.

There are millions of Boomers out there that expect they will get value for their money, and they are in prime voting age. Any blatant attempt to repudiate the Trust Fund is going to have dire electoral consequences for someone. There is still plenty of juice in the Third Rail of American Politics.

And Cathie, the reason Americans are superficially knowledgeable about Social Security is not because it is a line item on their paycheck. Instead it cuts deeply into the psyche of the two parties. For Democrats it is the prime jewel, the core of whatever unity we have left. For Republicans of a certain stripe Social Security has been an object of hatred for seventy years. All of this talk about financing is just the froth on a raging storm about the proper role of governments as opposed to markets. Certain Republicans hate Social Security on principle, their worst nightmare is that it will be found Solvent, hence the violent arguments that the Trust Fund simply doesn't exist in the first place. No one doubted the reality of the Trust Fund in the early nineties, everyone assumed it was there, would be burned through in short order, and boom there you are at depletion. Now that dates like 2041, 2052, and 2055 are floating around you can only maintain urgency that taking the Trust Fund off the table.

Despite what you think you are seeing, little of this debate is driven by numbers, at least on the privatizers' side, their numbers derive from talking points, this battle is at its core ideological not economic.

Posted by: Bruce Webb | May 15, 2005 6:59:45 AM

What Bruce isn't telling you is that the Trust Fund is in effect, the government loaning money to itself, then spending it.

Imagine if you will, I receive a paycheck of $1000 (net after taxes). Out of that $1000 I allocate $150 to retirement funds, $100 to my child's college fund, $250 to housing, $250 to food and the remaining $250 to misc. items.

Then you decide that I want a new car that's not in my budget. This new car will require a payment of $350. No problem I say, I'll just use $200 of my misc funds, borrow $50 from my kid's college fund and $100 from my retirement funds. But it's not a problem because I'm going to issue a bond to myself and I'll pay it back (I'm good for it). I also get a real urge to buy pricy consumer goods, so I start loaning myself the rest of the money intended for retirement and college (after all, I'm good for it).

After a few years, my kid's ready for college and needs his college fund. No problem I say, I've got this stack of bonds to pay myself back with. I'll use them to fund my kid's college. The only problem is, I don't have any excess money to repay the bonds. Not only that, but the $100 I was borrowing from the college fund is no longer available so I have to find a way of covering that as well. I need to cut expenses in other areas or increase my income in order to pay back that stack of bonds. I still have a car payment I have to make, I still have housing and food expenses, my only choice is to get a second job or ignore the loans I made to myself. Sorry kid, you'll have to apply for a pell grant.

This is roughly what's happened in our Social Security system. The government has loaned the money to itself. It then spent the money. In order to pay it back, it will have to raise general fund revenues. Guess what, that is still going to amount to a tax increase on poor working slobs in order to repay Social Security. This is going to happen somewhere around 2018. Somehwere around 2050 (give or take a few years), the stack of bonds will run out. At that point benefits will be cut by about 27% (with a downward trend) because the law requires that the Social Security system fund itself. The only way to avoid this cut is to (yep you guessed it) raise payroll taxes by 27% to cover the shortfall.

"Despite what you think you are seeing, little of this debate is driven by numbers, at least on the privatizers' side, their numbers derive from talking points, this battle is at its core ideological not economic."

Bruce may not looking at the numbers, but I am. No talking points for me, I've come up with most of this independently (which is why sometimes it's not too eloquent). (The link to the report on worldwide population trends I pointed to on another thread was given to me by a liberal friend on another site, I can't claim that one as independent.) The math is pretty simple. The data is easily found (even Bruce found it). There is some estimation required, but a reasonable range of numbers can be used based on historical trends (I use the mid to low range of numbers for investment growth, and the mid range for estimating worker:retiree ratios). If you actually look at the data instead of listening to talking points, it's not hard to reach the same conclusions I did.

Posted by: Brian H | May 15, 2005 7:51:25 AM

Brian, this is pathetic.
"At that point benefits will be cut by about 27% (with a downward trend) because the law requires that the Social Security system fund itself. The only way to avoid this cut is to (yep you guessed it) raise payroll taxes by 27% to cover the shortfall."

First of all you are assuming Intermediate Cost. Which makes you an idiot. The economy is not going to limp home at 2.0% productivity growth this year. We are on the verge of hitting that number already and it is only May. Your 2018 and 2050 dates are totally bogus, they rely on counter-factual economic assumptions. Which assumptions also produce your 27% (which by the way is 27% of 12.4% and not 27% of wages). Engage Low Cost, explain why we will not hit its numbers. Either explain why they are numerically wrong, or are unlikely.

Low Cost requires productivity growth of 2.2% or less in every future year. It produces a fully funded Trust Fund, it comes from the same data set as those that supplied every number you use. 2050 comes if any only if the economy returns the numbers assumed by Intermediate Cost. By deploying that date you are implictly defending the numbers that produce it. And by ignoring the clear implications of Low Cost you are denying the numbers that produce it.

Do you believe the economy will return 2.0% this year or not? If not what is your projection? And what is the effect of that projection on Solvency?

Put some numbers on the table. Per you "The math is pretty simple". When I took math I was required to show my work. You claim you came up with "most of this independently". Well from where and how? To me it is clear that each and every number you have cited comes directly or indirectly from the Intermediate Alternative of the Trustees of Social Security. You have fallen into the common trap. Because everyone uses the same set of numbers and because they are the product of a group of people called "Trustees" there is an assumption that the numbers are the product of a neutral assessment. Well they are not, they are political numbers at heart, the Trustees are all political appointees and half are Bush Cabinet Secretaries.

It all derives from Low Cost. Each and every year the Trustees produce a Report that specifies the numbers required to produce Solvency. The don't call it that but that is exactly what it does. What is the Low Cost Alternative? They then set Intermediate Cost at some point South of that. In 1993 that allowed for a comfortable gap, in this year's Report you can hardly fit a razorblade between fully funded Low Cost and Intermediate Cost. 2005 Social Security Report: List of Tables see particularly Table V.B1. Fully Funded Trust Fund: 2005 2.1%, 2006-8 2.2%, 2009 2.1%, 2010-11 2.0%, 2012 on 1.9%. Tell me with a straight face why we won't hit those numbers?

Social Security is not broke. At all. Show your work, give me your economic assumptions. After all per you this is all "simple". Pretend I am from Missouri and "Show Me".

Posted by: Bruce Webb | May 15, 2005 10:49:41 AM

Yes Bruce,

I use the intermediate cost numbers. Those are the middle estimates and the numbers that the SSA actually EXPECTS. They give 2 alternate analysis scenarios that they term Low Cost and High Cost. These are estimates of the cost of running the Social Security system. In other words they are estimating how many beneficaries they are going to have, how many workers are paying into the system, how much they are paying in and how much each beneficiary is going to receive. I chose to use neither the rosiest scenario nor the most disaterous scenario, but instead the expected scenario.

A paragraph from the SSA's report.

"Combining the above assumptions for future fertility, mortality, and net immigration with assumptions on marriage and divorce based on data from NCHS, projections were made of the population in the Social Security area by age, sex, and marital status as of January 1 of each year 2004 through 2080. The starting Social Security area population for January 1, 2003, uses as a basis the Census Bureau's estimate of the residents of the 50 States and D.C., and U.S. Armed Forces overseas. The base estimate is adjusted for net census undercount and increased for other U.S. citizens living abroad (including residents of U.S. territories) and for non-citizens living abroad who are insured for Social Security benefits. This starting population was then projected using assumed rates of birth, death, marriage and divorce, and assumed levels of net immigration. "

This has nothing to do with growth in the GDP (with the exception that changes in the GDP will effect the unemployment rate).

In the Low cost scenario, the worker to retiree ratio is expected to be about 3:1 in 2050, under the intermediate cost scenario it'll be about 2.6:1, under the high cost scenario the ratio will be about 2.2:1 (the current ratio is about 5:1). The worker to retiree ratio is expected to drop under all 3 scenarios (fewer workers for each person drawing benefits). The only difference is the rate at which the ratio drops.

Didn't you study ratios in math? I did.


If you want to figure what account values would be, again the math is pretty simple.

How about some psuedocode?
account_value=0;
Get rate from user;
get period deposit amount from user;
get num_periods from user;
for x = 1 to num_periods repeat
{
gain = account_value * rate;
increase_in_account = deposit + gain;
account_value = account_value +gain;
x = x+1;
}
Print results;

Again it's pretty simple math. I typically use a monthy compounding when estimating a future account value. Chose whatever rate you want. Rates below about 4% and periods less than 20 years will not be very impressive. 4-6% will over a long term will look good. Any rate above that will be an eye opener.

The deposit amount I've been using is 4% of income, but if you REALLY want to see what's going on, try the full 12.4% that the government gets in payroll tax. I know that's not fair because OASDI covers disability, etc.

Posted by: Brian H | May 15, 2005 11:23:01 AM

I just realized I rushed a little in that psuedo code.
The line:
account_value = account_value +gain;
should be
account_value = account_value + increase_in_account;

Posted by: Brian H | May 16, 2005 12:07:11 PM

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