« The Whole Najaf/Teheran Thing | Main | Assumptions, Assumptions »

Bearish On America

As I've been saying, the Social Security Board of Trustees' analysis does not support the contention that there is a looming "crisis" in Social Security of the sort Americans have been conditioned to expect. If nothing is changed and things pan out as the Trustees expect, Social Security will still be there -- paying out benefits that are higher in real terms than todays benefits -- for my generation and every subsequent generation. What's more, the Trustees' analysis is based on a prediction* that we will experience a calamitous fall in productivity growth from the average 2.325 per year from 1995-2003 to just 1.6 percent per year. If productivity growth slows to merely 1.8 percent per year, we're out of the woods, and even the forecast pseudo-crisis will not arise.

I would be interested in someone asking the President why he's so bearish on America. What is going to happen that brings about this collapse in US economic growth? If we really are going to experience a seven decade long spell of sluggish growth, shouldn't the President be putting forth some policy proposals to forestall this disaster rather than meekly accommodating it with benefit cuts? The President has, meanwhile, outlined a variety of proposals that he does contend will boost economic growth. Is it the President's contention that the net impact of implementing his non-Social Security proposals will be to dramatically slow the expansion of the American economy? If this is true, shouldn't he be thinking of some better policies?

December 18, 2004 | Permalink


TrackBack URL for this entry:

Listed below are links to weblogs that reference Bearish On America:

» Sat. Morning Blog Hopping from ~Neophyte Pundit~
The Diplomad makes my morning, and I'll venture to guess you might chuckle, too. Ratman of the Far Above, a badge of honor? Robin Williams, who would have thunk it. Thanks Robin for supporting our troops. Ace of Spades surmises... [Read More]

Tracked on Dec 18, 2004 10:04:34 AM

» A mixed bag from Random Fate
People tend to post link-fests to other weblogs. I've got a lot of links, not just to other weblogs, to post here that I'd love to write about, but either don't have the time, the energy, or think that there... [Read More]

Tracked on Dec 19, 2004 4:43:37 AM


"If we really are going to experience a seven decade long spell of sluggish growth, shouldn't the President be putting forth some policy proposals to forestall this disaster rather than meekly accommodating it with benefit cuts?"

And just as pertinently, if the economy is up you-know-what creek for the next seven decades one presumes that the markets will be as well, which would seem to suggest that privatizing social security won't do us a damn bit of good, no?

Posted by: David | Dec 18, 2004 2:13:49 AM

Let them eat cake.

Posted by: Rep. Antoinette (R) AL | Dec 18, 2004 2:29:27 AM

He may well be privy to certain information. Hell, according to Stanley Hilton, former senior advisor to Bob Dole(R), the attacks on September 11 were a government-ordered operation, George Bush personally authorized it, and is guilty of treason and mass murder.


Posted by: Sarah | Dec 18, 2004 3:51:08 AM

Matt makes a good point, but for some reason he assumes the administration is rational. This is the same group that just invaded Iraq, right? Which is spending tens of billions on a ballistic missile defense system, against no known foe, which no one expects to work.

Sure, we should have a sane government. Unfortunately, the country just voted against the idea.

Posted by: bad Jim | Dec 18, 2004 4:42:45 AM

Just make it clear that George Bush's plan is the "Dog food for dinner" plan.

Posted by: Brad | Dec 18, 2004 5:52:59 AM

Matt, the 2042 estimate only applies if you consider the IOU's in the trust fund to be assets.

Going by revenues alone, which is more realistic, it will only last until 2018 before it starts running a deficit.

I would have thought you'd know better.

It would help if Sarbanes-Oxley was applied to the government. If any company reported money they owed as assets, the executives would be doing a perp walk.

Posted by: Adam Herman | Dec 18, 2004 7:01:11 AM

If IOU's in the trust fund are not assets, then there is no problem with SS at all. That would mean that SS is not a separate program but a part of the overall federal buget. Then it's the federal budget deficit that needs to be addressed - recent tax-cuts need to be reversed and so on.

Posted by: abb1 | Dec 18, 2004 7:10:38 AM

Yes, we all know that while the US government has never defaulted on its bonds (or its IOUs) its going to do so in 2018 even though he could easily just issues new bonds. And this really won't lead to higher real interest rates or high bouts of inflation and the under lying riskless asset will not take on huge default risk leading to choas in the financial market.

Posted by: Rob | Dec 18, 2004 7:48:10 AM

Arguments like these would be worth having if Matt's counterparts on the right had any intellectual integrity. But on this as many other issues (progressive taxation, for instance) they don't seem to. So I guess the main point is to reassure the rest of us and remind us that they don't?

As far as the public discussion, there's no point in playing "gotcha" with this administration. Everyone knows Bush has a limited understanding (to put it mildly) of policy details, they voted for him anyway (or maybe because of that -- who knows how deep the neurotic anger goes).

The only question we ought to be asking the President is, why are you against Social Security? The only argument to make is blunt and head on: The Republicans voted against Social Security when it was started... and they're still against it. The best ads to put on are videos of Bush in 2000 asking, "What do they think Social Security is? Some kind of Federal program?"

Posted by: larry birnbaum | Dec 18, 2004 8:45:27 AM

Hmmm ... why does Adam Herman hate the full faith and credit of the US government?

Posted by: praktike | Dec 18, 2004 10:29:39 AM

But if anyone actually asked Emperor Bush these questions, that would be rather like pointing out that he has no clothes on, when he wants to be admired for his wonderful, expensive (non-existent)clothing.

Posted by: Deborah White | Dec 18, 2004 10:52:30 AM

Am I the only one who sees how to frame the argument? "Thanks to Reagan intelligently having raising FICA tax rates in the 80s, Social Security was on track to be indefinitely solvent. It would still be solvent had Bush not raided the trust fund to pay for his tax cut, leaving in the lockbox a bunch of IOUs scrawled in crayon on toilet paper. The goal of "privatizing" SS is to cover up the theft, so that 30 years down the road when there's no money there, people will be told that it's their fault, because they didn't invest their savings accounts wisely."

I know this framing is not technically 100% accurate, but it's more accurate than Bush's framing. In making this argument, you need to talk again and again about Enron accounting, and the trust fund having been raided. When people say: but Social Security will eventually be insolvent," you say, "that's right! But the plan Bush is proposing is not a solution, it's a cover-up of the crime!" And offer, as an alternative, raising the cap on income subject to FICA tax, to make the benefiaries of the theft (the rich) pay back what they owe.

Posted by: the exile | Dec 18, 2004 11:27:32 AM

"..the 2042 estimate only applies if you consider the IOU's in the trust fund to be assets." The "IOU's" are treasury bonds. Surely you don't believe that treasury bonds are not assets. The high income group in this country have enjoyed artificially low income tax rates since 1983, because the surplus FICA taxes went to the general fund in exchange for treasury bonds. That high income group will soon have to begin paying back that largesse. Soon, being about 2018. The "fix" for Social Security is to raise the high income tax brackets to do this payback. Any other "fix" is a fraud perpetrated on low to middle income tax payers.

Posted by: Vaughn Hopkins | Dec 18, 2004 11:49:52 AM

That high income group will soon have to begin paying back that largesse. Soon, being about 2018.

This assumes, Vaughn, that budgetary pressures don't force an increase in payroll taxes, or, if such taxes are increased, it happens in a manner according to your wishes (targeting the rich). This is a big leap of faith, given the many decades of past increases in the payroll tax rate, under both Republican and Democratic administrations.

Posted by: P.B. Almeida | Dec 18, 2004 11:57:01 AM

praktike, it is a mistake to view the SS trust fund bonds as being as credit-worthy as the bonds that are auctioned in the open market, for the simple reason that the consequences of default are entirely different. If the taxpayers of the United States were to decide to skip out on the obligations that were sold at auction, nearly every taxpayer of the United States would immediately pay an extremely painful price. In contrast, if some taxpayers in 2020 decided to skip out on on the obligations (created in 1985) to older taxpayers, and had the votes to do it, those who buy bonds at auction would view their purchases as more credit-worthy, since the tax revenues of the U.S. would now have had fewer demands placed on them, and the consequences of default on bonds sold at auction would be as severe as ever.

Think of this analogy. Three brothers, ages 20, 35, and 50 (mom started early and finished late) have a partnership, which in turn operates a gravel pit. The oldest brother started the business, when his brothers were 1 and 16, respectively, and made his brothers equal partners, and decided that when he retired the partnership was to pay him a lump sum of one million dollars.

He writes up a piece of paper that says as much, but it doesn't have his brothers' legal guardians' (parents) signature, which is required to create a contract for the partnership. Thirty years later, he decides to retire, and tells his brothers to cough up the one million. His brothers reply, "No. We didn't agree to the arrangement, and our guardians didn't. We are equal partners with you, and we don't want to pay." The oldest brother shakes his fist and shouts, "You better pay up, or you'll wreck the credit-worthiness of the partnership, and you in turn will be ruined!" The younger brothers reply, "Go ahead, big brother, call the people we borrow money from, and see if they care if we don't honor a piece of paper you wrote up on your own, and have no ability to enforce. In, fact our creditors will be pleased to hear that the paper you created is not being honored, since it frees up cash to pay them." The younger brothers would be entirely correct.

Borrowers do not repay debts because of their moral rectitude, borrowers repay debts when the pain of default exceeds the benefit of default, and a creditor who lacks ability to inflict pain is in a far less safe position than one who can. The only pain that the older taxpayers who wish to be paid on the SS trust fund bonds can inflict is through the ballot box, and if enough other taxpayers decide to default, or to partially default, the older taxpayers have no recourse.

In contrast, if the taxpayers of the U.S. decide to default on the bonds sold at auction, the auctions become ignored, at least at the interest rates the U.S. taxpayer is accustomed to, and nearly every U.S. taxpayer immediately pays a very high price. The two instruments are not equally credit-worthy.

Is this to say that default on the SS trust fund bonds is inevitable? No, because it all depends on whether productivity growth is strong enough so the two workers who will be supporting one retiree in the future will view honoring the trust fund bonds as not being excessively painful. Nobody knows the answer to that question, but it is undeniable that the ratio of taxes paid to benefits paid has become continually less favorable since the inception of the program, and the possibility exists that it will become so unfavorable that younger taxpayers become very energetically opposed to participating.

I am ambivalent regarding private accounts. To the degree that private accounts give younger taxpayers property rights in the money that is taken out of their paychecks, I think it is a good thing. I'd prefer to avoid auctioning more debt to do so, but then I'd really prefer to get rid payroll taxes altogether, and aid people who are unable to provide for themselves the same, regardless of age.

Posted by: Will Allen | Dec 18, 2004 12:07:04 PM

No, Vaughn, all Treasury bonds are not created equally, as my post above discusses. How the bonds are issued, and who owns them, has great impact on their credit-worthiness.

Posted by: Will Allen | Dec 18, 2004 12:10:02 PM

The "trust fund" represents the amount of FICA taxes "loaned" to and summarily spent by the general fund. These taxes were raised from a very regressive FICA tax, where those earning and amount each year over a stated "maximum taxed earnings" suffered a lower tax rate the more they earned.

Social Security Administration's glowing predictions about being solvent forever are based on analyses which isolate SSA from the rest of the government (Note: it certainly IS a part of the overall federal government behemoth). These predictions assume (some would say justifiably) that it has no effect on SSA's forecasted solvency how the other parts of the government pay off the trust fund; it merely assumes that cash is going to come back in as needed until the trust fund has been completely redeemed for cash.

The political problem for this IS the trust fund. The money is long gone, having been spent the month the taxes were collected. We're not a banana republic, and we don't just print more money to pay off government debts (at least not that much, or inflation would destroy us), so the only way Treasury can supply the cash to pay off the trust fund is to raise income taxes, or increase the federal debt, just as that money relieved income taxes and/or federal debt the years it was spent, since the Johnson administration.) In either case, the government will be replacing cash previously raised with a regressive FICA tax with cash raised by the progressive income tax (whether they raise the cash with income taxes as it is needed, or increase the national debt and pay that back with income taxes later).

If we put aside conspiracy theories, as well as the assumptions that the current administration is a bunch of literal morons (somewhat of a stretch, no matter how much one would WANT to believe that's true), my opinion is that the problem on the right is the shift back to income taxes as the source of revenues for SS as the trust fund is being redeemed. But that will be the case no matter if nothing is done (and the federal government raises income taxes and borrows money to pay it back), or if huge amounts are borrowed now to initially fund "personal accounts" so that retirees in the future will accept much reduced SS benefits, because they'll be supplemented by income from their own personal accounts, created for them by Social Security reform.

Putting the problem of paying back the trust fund (in other words looking at the problem across the whole government, instead of just isolating the analysis to SS only) into the analysis, then all that is different is the timing of all of this. Do we borrow heavily under lame-duck Bush's watch, or leave that inevitable task to a later administration to decide if income taxes should be raised and the national debt increased, or if FICA taxes should be raised and benefits reduced.

Assessing which is best, in my mind depends on:

1. Which is less probable to fail (realizing that the later something is done, the harder it is to predict now that it CAN be done and harder to predict its consequences)

2. Which solves the problem the most fairly -- having income-tax payers pay for returning the cash that benefited income-tax payers while it was being used, or effectively let payroll taxpayers/retirees make up the difference from lower benefits or raised (regressive) FICA taxes?

3. If private accounts DO have the potential for actual capital appreciation, instead of depending on cost-of-living increases and more taxation, would the entire population benefit from doing that sooner, or later, or at all?

Before opposing something arbitrarily based on who's FOR it, first take stock of which is truly the fairest way to address the situation.

Posted by: deona | Dec 18, 2004 12:22:18 PM

Good post, deona, but I must note that what is "fair" is entirely in the eye of the beholder, and that a lot of those income tax-payers in the future aren't the same income tax-payers of the past. What was agreed to in a bi-partisan fashion in 1983, like in the Johnson years, was to essentially kick the can down the road. Those who did the kicking in the past won't be exactly the same people who face the can in their path in the future, so it makes calculations of "fairness" rather problematic.

Posted by: Will Allen | Dec 18, 2004 12:32:50 PM

use a move from the republican playbook, say:
there is no crisis, you are being lied to by powerful people with their own agendas.

Posted by: bryan | Dec 18, 2004 12:53:45 PM

In other words, the trust fund is no good because the GOP doesn't want to fulfill its promises. A bit of circular logic, no?

Posted by: praktike | Dec 18, 2004 12:57:30 PM

Will Allen,

Your posts have been excellent, Will, not just good.

I agree with your comments on my post.

And for the benefit of those ranting "Bush is robbing the Social Security trust fund", I refer everyone the the Senate Congressional Record on January 29, 1998, and some interesting words from none other than Senator Fritz Hollings.


I acknowledge that I stand corrected for my comment about Mr. Johnson. Anybody else want to pony up on their comments about Mr. Bush? (Or at least repeat them for Mr. Clinton!!!)

Posted by: deona | Dec 18, 2004 12:58:53 PM

praktike, drop the tribalism, and you might begin to understand the trust fund issue. It is all a matter of what future taxpayers (regardless of party) view as a worthwhile use of their income. This is by definition a difficult thing to do, especially in those instances when the incentives, both positive and negative, are unclear.

Posted by: Will Allen | Dec 18, 2004 1:12:01 PM

I must note that what is "fair" is entirely in the eye of the beholder, and that a lot of those income tax-payers in the future aren't the same income tax-payers of the past.

That's a valid point, but when discussing capitalism society it's helpful to invoke social groups - classes - instead of individuals.

Capitalists have borrowed a few trillions dollars from the workers and now they don't want to pay it back - that's the issue. I agree that "fair" is entirely in the eye of the beholder; same as with using slave labor, for example. Hopefully most people will see it the way I see it, but I've made a mistake of being too optimistic many times before...

Posted by: abb1 | Dec 18, 2004 1:26:05 PM

Oh, Will, I've read your long post now. Come on, it's ludicrous, these will be no default, it's just impossible. Your logic suggests that any state treaty or obligation can be annuled a couple of years after it was passed into law because individuals in the electorate are different. That's not true. It's not a bunch of individual voters who are guarantying those notes, it's the entity called the US of A.

There will be no default, instead they'll reduce the benefits, increase the retirement age and the trust fund bonds will be sitting in that safebox forever. I think that's how they are going to try to play it.

Posted by: abb1 | Dec 18, 2004 1:38:53 PM

First, abb1, capitalists and workers are often one in the same, and sometimes capitalists become workers, and workers sometimes become capitalists, especially over a several decade period. Furthemore, many of the capitalists and workers in future will have been too young to participate in the political decision-making that created the trust fund as it then exists, and won't have much reason to believe they are beholden to it. People don't vote in historical groups. They vote as individuals.

The problem with slavery wasn't that it was unfair. It was that it was unfree.

Posted by: Will Allen | Dec 18, 2004 1:41:42 PM

The comments to this entry are closed.