How Social Security Was Defended by Supreme Court Justice Robert Jackson





Mr. Barrett is Professor of Law at St. John’s University in New York City. He discovered, edited and introduced Justice Jackson’s previously unknown, never-published memoir, That Man: An Insider’s Portrait of Franklin D. Roosevelt, which now is available in paperback from Oxford University Press.

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Social Security, which grew out the political leadership and humane vision of Justice Robert Jackson’s great patron and friend FDR, has been a centerpiece of American life and law since the late 1930s. When Roosevelt took office in 1933, the country was at the depths of the Great Depression. Tens of millions of people, including many elderly, were living in poverty and desperation.

In January 1935, Roosevelt advocated the U.S. government using tax payments from employers and workers to insure literally the financial survival of both the unemployed and the elderly—legislation that would provide payments to people who had lost jobs and to senior citizens whose working years were behind them. Some, particularly businesses, objected, but most people and Congress supported Roosevelt’s ideas that government could do much to improve these basic aspects of “social security.” On August 14, 1935, Roosevelt signed the Social Security Act into law.

Businesses that were subject to new taxes soon filed federal lawsuits. They claimed that the U.S. Constitution did not authorize the federal government to create and administer the new unemployment compensation and old age pension programs. These lawsuits reached the Supreme Court—which by then had compiled quite a record of hostility to many New Deal laws—in spring 1937.

Although Jackson’s formal position in 1937 was Assistant Attorney General (the third tier of FDR’s team at the Department of Justice), Jackson became a central player in the Social Security cases as they headed for the Supreme Court. He was a co-author of the government’s brief in each case and, when it was time for the oral arguments before the Court, Jackson was one of the government’s principal advocates.

On May 24, 1937, the Supreme Court upheld the constitutionality of the Social Security Act. In one case, Steward Machine Co. v. Davis, the Court upheld the new unemployment compensation system. In another case, Helvering v. Davis, the Court upheld Social Security’s old age pension system. The Social Security cases thus go down as two of Jackson 31 victories in 41 cases that he argued as a government advocate before a not-always-receptive Supreme Court.

Many of Jackson’s specific arguments to the Supreme Court in the 1937 cases concerned constitutional issues that no longer, thanks to victories like his in these very cases, perplex us legally or politically. But in the course of making his arguments in Helvering v. Davis (which were transcribed and published in the legislative record on Social Security), Jackson also made eloquent statements that have contemporary importance.

The following selections from his words to the Supreme Court about Social Security for senior citizens reveal five key understandings of his time:

  • We were, even then, an aging population:

The uncontradicted evidence shows that there are developments in the matter of the old-age problem which differentiate that problem as it exists today from the problem as it existed in the past. In 1870, out of a population of 38 million, we had 1,153,000 or less than 3 percent of our people 65 and over. That proportion had more than doubled by 1936, and out of 128 million we had 7,700,000, or 6 percent of the population, that had reached 65. …It seems that science is extending life, but that science is not stimulating the birth rate.  

  • The general experience of Depression created a new public understanding, embodied in the Social Security Act, that senior citizen poverty can come to blameless individuals:

 Congress …came to the conclusion that the general welfare of the United States would be served by abandoning the system under which age looked forward to a road that led over the hills to the poorhouse. It came to the conclusion that poverty in age is no longer a moral judgment against the individual; that if the time has been in our economy when we could say that it was only indolence and prodigality that led one to the poorhouse, that time was no longer, and that if a poverty-stricken age was the judgment of a wasted life at one time in our history, it is not so today. The lesson of the Depression broke that tradition.

  • That new understanding was founded in part on the facts that personal wealth, private pensions, private charities and state governments were not adequate to alleviate poverty among the elderly:

The failure of private pension plans is explored by the evidence, and pointed out in our brief. The failure of private charity to meet this problem is conclusively shown by the figures of the Bureau of Internal Revenue. In 1928 the persons with $3 million and up of income contributed an average of $25,400 to purposes for which they were entitled to the charitable deduction. By 1931 they had reduced those contributions, the same group, to $12,900 average, showing that the well-to-do retrenched in their charitable contributions during the period of Depression, although the need was greater.

The resources of the States have been declining. Real estate reserved to the States as a source of taxation has been taxed to the limit of its capacity to bear, and personalty has never been successfully taxed locally. The Federal Government, which is able to tax incomes and to lay excises, has sources of revenue which have been drying up for the States, not because of any change in the legal system but because the economic emphasis on personal property has left the States without a comparative source of revenue such as they had at the beginning of our constitutional system.

  • That new understanding of poverty also was grounded in the facts that personal savings and investments do not guarantee financial security:

The condition which is promised as an implication of our system, that thrift would be followed by plenty, failed in the Depression, for the man who had responded to the inducements and had accumulated a bank account and selected the wrong bank, or the man who had saved to purchase a home, found himself in the same position as the one who had never saved at all. In fact, the man who had not tried to acquire a home perhaps was better off because he was not faced with a deficiency judgment. The unfortunate consequences of this Depression bring home to us the fact that self-denial had not assured comfortable age…  

  • We therefore recognized in the Social Security Act that fighting poverty among the elderly, which historically had been a local issue, now was a matter of national welfare:

…[I]f we are to review in this Court the question whether Congress has served the general welfare in fact, I am frank to admit that we face a tradition of 150 years of practice that is against the making of old-age relief a matter of national welfare. But I would call your attention to the fact that old-age welfare has been a constantly widening concern. The matter of the care of the old was at one time a matter for the family only. It became gradually a matter for the town poormaster if the family failed. From the town poormaster it became a matter for the county with its poorhouse, and then the State, because of failures of counties, intervened, and now we argue that it has become a matter of national welfare and this old-age-pension system was set up in the hope that it would make true the promise to men that if they were thrifty and industrious and self-disciplined their age would be spared at least extreme poverty. This plan does no more than spare extreme poverty, and may not in many instances do that. This plan was that if the workman during his productive years would contribute to the Treasury of the United States, then the Treasury of the United States in his unproductive years would contribute to his necessities.  

* * *

As we in 2005 consider Social Security and its future, selected words from Robert Jackson’s 1937 Supreme Court arguments may prove useful to various perspectives across the political and policy spectrum. Jackson’s general message, however, took only one position about Social Security for senior citizens: it was about decent, basic, reliable, public support to protect people from the dire poverty that life and turns of the economy otherwise will distribute.

Jackson ’s generation figured this out—it really was burned into them—during the depths of the Great Depression. We will, with reminders such as his fine words, not forget today that a basic, government-guaranteed social security is a defining part of our national greatness.


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E J T - 3/13/2005

How many people reading this believe that theft of personal, private property is acceptable?


E J T - 3/13/2005

John,

If as you say:
Quote –
"Actually on reconsideration, I wonder about my suggestion of taxing estates. It is difficult to tax the dead."
Unquote.

If taxing the dead is a taxing thought, I wonder how you can even swallow a thought regarding taxing the living – who are far more affected by any tax at all – talk about taking food out of the mouths of the needy ...


William . H. Leckie, Jr. - 2/28/2005

Hit the library.


John H. Lederer - 2/27/2005

"Your typical pyramid scheme, anyhow, is based on the extraction of money not dedicated to investment in the first place but harvested for immediate gain and--most significantly of all for insurance--not managed in terms of the law of large numbers and actuarial calculation flowing therefrom, including the maintenance of reserves required by state regulators."

Since almost all of the social security money taxed is immediately spent, I assume the difference that you see between social security and the typical pyramid schem is that social security is very large.

I concur.

Social security is not insurance (wuth the possible exception of disability). It is an unfunded pension fund, in which the funds to pay pensions are obtained from the next generation -- or if you will the next layer inthe pyramid.

Like all pyramid schemes social security needs a continually expanding base -- demographics (and the near exhaustion of forcing uncovered groups into the scheme) means that the base cannot keep expanding as fast as upper levels of the pyramid that are taking money from the lower layers.

We need to do two things:

1) Work ourselves out of the mess we are in. This will mean raising taxes and/or restraining benefits

2) Create a funded pension scheme in its place.



William . H. Leckie, Jr. - 2/26/2005

If your notion is accurate, all insurance devices are "pyramid schemes," which obviously they are not. You have an unfortunately poor grasp of what makes the Social Security system--a form of social insurance--work as well as it has since the New Deal. Your definition makes this clear, or rather, the American Heritage Dictionary's: "obviously fraudulent."

The system works with very low overhead, unlike for-profit private health insurance and pension schemes, in which management of risk involves excessive lengths to retain profit and sustain high levels of overhead; investment in Treasuries backed by the government's "full faith and credit" represent investment in highly conservative instruments, for which the trade-off is lower return, again unlike private carriers--particularly in "P&C" or property and casualty and liability, which in fat years overextended themselves in high-risk investments and now under the aegis of "tort reform" seek to transfer their losses to the public even while, yes, raising premiums.

The raw version of the Bush proposal represents a form of insurance for Wall Street, not retirees. In a sloppy regulatory environment, I admit, my distinction may be lost; having sold both investments and insurance, I acknowledge fraud exists out there and I was appalled by it, but it is fraud, deception, and the pressure for commissions that was at work, and those simply don't obtain in the Social Security system.

Premium increases exist even in plain vanila, solidly financed insurance policies: They are functions of changing risk over time, that "hierarchy" of age and the claims experience of an insured population. They are calculated and built into every instrument I can think of. We might find some common ground, I say might, on the transformation of Social Security contributions as a bastardized form of discriminatory taxation (if it were up to me, the ceiling'd be abolished completely along with a restructuring of the "self-employment tax" to encourage entrepreneurship and adjust it to the increasing numbers of individuals who for whatever reasons are "independent contractors" not employees, to extend mandatory contributions to their de facto employers).

Your typical pyramid scheme, anyhow, is based on the extraction of money not dedicated to investment in the first place but harvested for immediate gain and--most significantly of all for insurance--not managed in terms of the law of large numbers and actuarial calculation flowing therefrom, including the maintenance of reserves required by state regulators.

Certainly insurance companies have gone out of business either through unwise investment or rapacity or both, but that's a function of greed and fraud, and based on some insurance executives I have known downright stupidity, but not the principles by which insurance--pooling risk--is supposed to work.

So, instead misusing the dictionary (whether in sophistry or out of ignorance, I can't say), try learning something about insurance, investment, and tax concepts. I learned them from very conservative business professors, they weren't hard to understand, so you won't be mentally overtaxed.


Andrew D. Todd - 2/26/2005

Looking at the page you cited, which, after I had "defenestrated" it (*), reduced to:

http://www.nyse.com/marketinfo/1022963613722.html

This does not seem to have a set of footnotes, indicating how the figures were arrived at, but it looks as though the boundaries between American capital and European capital are very porous, and of course the major manufacturing corporations are globally integrated in any case. In any case, corporations hold eachothers' stocks and bonds, representing yet another layer of investment. I am not sure whether you could compute a value exclusive of other listed companies from the 10-K data.

Of course, as T. S. Kuhn would say, data is a product of a hypothesis, a paradigm, and if you change your paradigm, you naturally have to collect new data. The mindset in which people cook up derivatives is not one which spends a lot of time thinking about the actual underlying labor and production process. Rather, it is one of arbitrage, in which the internal rules of the game take precedence. As you noted, the trading volume works out to everything being sold more or less annually. Company fundamentals generally do not change that fast. By company fundamentals, I do not mean the numbers in a 10-K report. I mean the basic underlying facts, not necessarily in quantitative form, which a thoughtful person would use to assess long-term prospects. For example, General Motors manufactures very much the same kinds of automobiles it manufactured last year, and the year before, for that matter. It has no realistic prospect of selling a high-end vehicle which would enable the buyer to go two hundred miles in an hour's time without selective special training, or contrarily, to do work requiring the use of hands and eyes while traveling. I would argue that if you do not think about investments at this level, you are bound to be blindsided by illusions generated by management, a la Bernie Ebbers.

Microsoft represents 1-2% of the stock market valuation (278 bil), about 3/10 % of the GNP (25 bil ?), and 1/20 % of the workforce (50,000). Its ultimate value rests on one question: "will Linux become good enough for nearly all users?" With a reasonable number of similar questions, I think I could probably nail down the greater part of the total capital valuation.

I think, based on some very provisional tabulations, that there is a certain type of firm which seems to have much more than its share of capital valuation. Wal-Mart would be another good example. Such a firm has usually expanded about as far as it can expand, without significantly changing its business model. That is, it has come to hold half or more of its market. The firm has done so by employing the same business logic as its competitors, only with greater efficiency, consistency, and clarity of purpose, and in the process, it has devoured its competitors. Within that market, the only place to go is down. Breaking out into a different market generally requires different qualities, and proves unexpectedly difficult. Also, by the time a business principle reaches the level where success comes from applying it consistently rather than sporadically, it is generally approaching exhaustion. Wal-Mart's great weakness is the rise of internet shopping, offering goods just about as cheap, only in the comfort of the buyer's own home.

In this connection, one should note that a lot the stock of such companies are held by "paper billionaires." For example, Bill Gates has a large chunk of Microsoft, but if he were known to be unloading too much of it, this would adversely affect the share price. Much the same goes for the Walton family. That said, the portion of the stock of a "young turk" company which is actually "in play" may be a lot less than the number of shares outstanding. A paper billionaire, like the captain of the Titanic, is practically obliged to go down with the ship.

Another example of a type of company with high market valuation would be the "Baby Bells," the Regional Bell Operating Companies, that is, Verizon, BellSouth, SBC, and Qwest, with a joint market valuation of somewhere in the ballpark of 400-500 billion dollars. These companies no longer have a distinctive technology or skill base, and their position in the face of new consumer technologies such as WiFi and VOIP (which you can buy at Radio Shack today) is increasingly untenable. These companies' principal assets are their public utility franchises, and their emerging business strategy is to exploit their nuisance value in the hope of being nationalized. It is hard to say how this will play out, but they don't have a whole lot of time, maybe five years at the utmost. By contrast, the four big American railroads have a market valuation of about sixty billions, but there is no technological "magic bullet" threatening them in the immediate short run. Motor transportation is a comparatively mature technology, and it has fewer surprises hanging fire.


(*) Defenestrate, vt, to throw out of a window, 1) literally, as in the case of the Bohemian uprising of 1618, or 2) figuratively, to strip data out of a containing structure, such as an operating system window, or, in this case, a Java-driven frameset.


John H. Lederer - 2/25/2005

pyramid scheme
n.

A fraudulent money-making scheme in which people are recruited to make payments to others above them in a hierarchy while expecting to receive payments from people recruited below them. Eventually the number of new recruits fails to sustain the payment structure, and the scheme collapses with most people losing the money they paid in.

logo

The American Heritage® Dictionary of the English Language,4th Ed.


And Social security is not a pyramid scheme because...?

Note that the "surpluses" are from the tax payer's point of view fiction. Social Security will not have to raise taxes as it can cash its bonds, for which the government will have to raise taxes to pay them off.




John H. Lederer - 2/24/2005

You would think such a figure would be easy to find.

Try this as it explains some of the variances in the capitalization of the stock market:
http://www.nyse.com/Frameset.html?displayPage=/marketinfo/1022963613722.html



On the bonds, the figure of a hundred trillion is more "all paper" rather than what we would call bonds, and yes, it is way way high because it counts the same underlying asset again and again. As a quick example, a company creates a bond, the buyer borrows on the bond using it as collateral, the lender uses the paper to back up his borrowing, etc. etc.
At the same time the low figure I found of 10 trillion is for a rather tight definition of bond. For instance, it would not include much of what is in money market funds because the paper is of too short duration -- yet money market funds would be a likely investment for someone near retirement.

So the answer is somewhere in between for the size of the market for our purposes. And yes I agree that a million per person seems way, way high.


John H. Lederer - 2/24/2005

You would think such a figure would be easy to find.

Try this as it explains some of the variances in the capitalization of the stock market:
http://www.nyse.com/Frameset.html?displayPage=/marketinfo/1022963613722.html



On the bonds, the figure of a hundred trillion is more "all paper" rather than what we would call bonds, and yes, it is way way high because it counts the same underlying asset again and again. As a quick example, a company creates a bond, the buyer borrows on the bond using it as collateral, the lender uses the paper to back up his borrowing, etc. etc.
At the same time the low figure I found of 10 trillion is for a rather tight definition of bond. For instance, it would not include much of what is in money market funds because the paper is of too short duration -- yet money market funds would be a likely investment for someone near retirement.

So the answer is somewhere in between for the size of the market for our purposes. And yes I agree that a million per person seems way, way high.


Andrew D. Todd - 2/24/2005

I did some googling, and came up with some rather different figures.

Stocks:

http://www.google.com/search?hl=en&;lr=&q=%2B%22stock+market+capitalization%22++%2Bnyse+%2Btrillion&btnG=Search

N.B. I used the word trillion as a convenient filter to eliminate references to particular companies, rather than the market as a whole

http://www.treasurer.ca.gov/publications/NoDividends.pdf

http://www.cross-currents.net/charts.htm

These suggest a figure of 10-15 trillion for the stock market

Derivatives apparently account for the higher figures.

http://www.usagold.com/gildedopinion/Faber.html

http://registeredrep.com/mag/finance_regulators_warn_margin/

Bonds:

http://www.google.com/search?hl=en&;lr=&q=%2B%22bond+market+capitalization%22++%2Bnyse+%2Btrillion&btnG=Search

---

World bond market reckoned as ~30 trillion

http://www.findarticles.com/p/articles/mi_m0EIN/is_2000_April_12/ai_61454346

---

Figures mined from the World Almanac:
Bank deposits about five trillion
Federal dept, about six trillion
Consumer credit outstanding, less than two trillion
U.S. Holdings of foreign stocks, two trillion
Corporate profits, after tax, five hundred _billion_

I think it is possible that derivatives, people borrowing money to exercise options, etc. may account for a good deal of double and triple counting.

Your figure of something on the order of a hundred trillion, is immediately suspect, because it would work out to something like a million dollars per worker for the entire United States workforce, let alone the smaller number of workers who work for corporations. Someone who uses that much capital, ie. a piece of equipment orders of magnitude bigger and more expensive than an automobile, is a "worker aristocrat," e.g. a locomotive engineer or airline pilot. Office and retail workers, who, together might represent at least half the workforce, have capital usage on the order of $10,000 each (mostly real estate), exclusive of goodwill and similar intangibles. Of course one could argue that their real capital is actually mental capital, but, absent slavery, that does not enter into the scope of finance. It is a well-known phenomena that internet-based interlopers are able to break into many of these kinds of businesses with capital of only $1000 per worker, or, alternatively, to shift the paperwork off onto the customer and reduce their headcount by a factor of ten without any appreciable capital expenditure.

By contrast the Social Security Trust Fund seems comparatively well documented, and twenty trillions over forty years might be significant.


William . H. Leckie, Jr. - 2/24/2005

A big ten-four! And don't forget the British experience to match to the Chilean, one legacy of the University of Chicago econ department's big hitters, too, by the way. Let's here it for "rational choice."

On the other hand, I pose this question: When we write or speak of a health care system, is it appropriate to speak of efficient delivery to the well-off? Even their premiums are inflated by the need to offset the costs of the inadequately covered and uninsured. At least with regard to social security this is acknowledged--for solely political purposes that were, I think, naive, despite Karl Rove--in the recognition of borrowing trillions to make the deal "work."

A "privatized" or partially so pension system creates the same effects as in health care: In addition to imposing administrative and other costs (commissions, for example)radically redistributing the winner-loser curve means having to make up the "losses" on its left-hand side. I won't pursue the philosophical--the ethical and moral and civic--implications of treating social policy as a market-driven concept.


Marc "Adam Moshe" Bacharach - 2/23/2005

1- The president’s plan will propose paying for Social Security entirely from borrowing, since young people will not be putting money into the same funnel as before. Let us assume that this amount if $2 trillion.
2- My plan, which will require addition revenue to be put into Social security in order to pay for the shortfall due to fewer workers. Let us say that this will cost $1 trillion (I am making up the numbers here for illustrative purposes).

1) “I am not sure that eietehr of us can speak with conidence about the President's plan (since he does not yet appear to have one)”

This is a very good point.

2) “In example 1 above we borrow 2 trillion. However, young people put their money into private accounts to the tune of 2 trillion and we won't have to pay them social security.”

True, but if they were only going to collect $1 trillion if the system was strengthened, we are still out a trillion dollars.

3) “If the issue were 100% private accounts -- that is the totality of the balance sheet work. We have added 2 trillion to debt, and we have removed 2 trillion (with accemulation from interest/appreciation) from future obligation to pay social security when the young people retire.”

But according to my hypothetical case, we will not have removed 2 trillion from future obligation, we will only have removed $1 trillion. Thus the loss.

4) “Of course we are not talking 100% private so we would have to use some sort of a formula-- I assume the fairest would be to reduce social security payments on retirement by the proportion that the young investor put money into his retirement account rather than into social security payments. In other words, if he put 1/2 into investment accounts during his wage earning years, he is entitled to half of what his social security payments would be if he put all into social security.”

I don’t know if I really like that plan since it suffers from the same problem as my hypothetical plan one, but I would probably support it even with my reservations because at least then, the individual has some choice, and could still have the remainder of Social Security as insurance.

After all, that is what social security is, insurance. It is not a savings plan, it is not a retirement plan, and it is not a government pension plan, it is an insurance program that has been tremendously successful at preventing elderly from becoming totally destitute. So long as it retains that benefit, I have no objections to reform.


John H. Lederer - 2/23/2005

Actually on reconsideration, I wonder about my suggestion of taxing estates. It is difficult to tax the dead.

After all, one way of looking at estates is a generational transfer from the rich to the poor. Taxing reduces the amount of the transfer, and we ought to encourage it.

Perhaps if we taxed the inheritance as income to the heir with a 200,000 exclusion? The tax on estates would be progressive if treated as income.


Jonathan Pine - 2/23/2005

To a certain extent I couldn't agree with you more on the issue of fairness.

statement(2): Where one class subsidizes another, the subsidy should be from the richer to the poorer.

Jokingly, aren't we supposed to be a classless society? However, I don't consider the retiree whose net assets are worth a mere $107,000.00 to be rich. I don't think he would be happy being taxed more than a 35 year old theoretically in the prime of his working life. Maybe we should start with heads of household with assets in the millions and also eliminate those tax cuts for the upper 2% to help things along.

At the same time, just to be playfully a little argumentmentive, all this sounds a bit like a dispensing of a sort of equality to equals and un-equals alike, considering for a moment there is such a thing, or maybe even a passing reference to Democratic social communism (refered to in the book of Acts ) "And all that believed were together and had all things common and sold their possessions and goods, and parted them to all men, as every man had need."

Personally, I don't mind sharing and if I were allowed to hand over my social security benefits to a poor person I would.


Jonathan Pine - 2/23/2005

Mr.Leckie. …definitely, European social systems are far more efficient than anything parallel in the US., and strictly from my own experience, I must qualify that statement a little by saying that as long as you have an excellent health care plan in the U.S., then it's also just as efficient as the Europeans. Gotta have the money though, in America. Also, as a duel citizen I have experienced both U.S. and European systems. U.S. taxes I pay don't really seem to do anything that I find personally useful while my European taxes, high as they are, seem to be giving me a higher living standard economically, environmentally, and culturally, in comparison. The money I am paying out is actually coming back to me in many forms. I only wish the U.S. would adopt some aspect of the system but many US politicians, as well as their constituents, seem to think this is socialistic, a bad word in their vocabulary. Getting back to Jackson's general message which is the whole point of "social security", gamboling on whims of the stock market may not give the average US citizen a "decent, basic, reliable, public support to protect people from the dire poverty that life and turns of the economy otherwise will distribute." Stocks and other investments selected by a U.S. government notorious for foul-ups and computer systems that sometimes run at cross-purposes, through brokers who don’t know you from Adam, or care that much, well, the average investor could in the end have pitiful returns. Big Government will be breathing down our backs watching us closely our every move. That information will be disseminated to corporations. If they don’t own you now, they will then.

Also note:
25 years ago Chile embarked on something like what Bush is proposing to do. In Chile, rather than finance pensions through a system to which workers, employers and the government all contributed, millions of people began to pay 10 percent of their salaries to private investment accounts that they controlled. Many middle-class workers who contributed regularly are now failing to deliver as much in benefits as they would have received if they had stayed in the old system. I'm not saying this would happen with the Bush's plan but this thing is not just some little experiment. For Bush, for the elitists, of both parties, it won't matter much since they have their own security plans in place anyway.


John H. Lederer - 2/23/2005

Let us try to put some fundamental fairness into any reform of social security. Let me suggest the following general rules:

1) People should share the cost in proprtion to the benefit gained

2) Where one class subsidizes another, the subsidy should be from the richer to the poorer.

In any reasonable computation, those who have done very well from social security are previous retirees and present and immediate future) retirees. They got more out than they put in even with a reasonable rate of interest. The ones that do porly are future retirees. They will have to put in more than they are likely to get out.

Think of it as a pyramid scheme, with present retirees near the top and future retirees near the bottom.

This suggests taht the coming shortfall caused by the baby boomers retirment ought to be paid by the baby boomers. However, reducing benefits is not, in my opinion, a good idea. It certainly is not a politically salable idea.

However, suppose we reinstated the estate tax keyed to net social security benefits? As baby boomers retire we take back some of their equity on the theory that they have so much equity because they came out ahead on social security?

This would also correspond with the second rule. Heads of household uner 35 have net assets, on average, of less than 6,000. Heads of households over 65 have aveage net assets of 107,000. Yet we tax the under 35's heavily to pay for the over 65's golden years? This is backwards.

Granted assets are not the same as income, but they are sure more like income when they are in the form of an estate.

Historically the estate tax hasn't raised much revenue, but that is because it has not been a borad based tax. A low rate broad based tax might raise a lot.






John H. Lederer - 2/23/2005

Let us look at 2 plans:
1- The president’s plan will propose paying for Social Security entirely from borrowing, since young people will not be putting money into the same funnel as before. Let us assume that this amount if $2 trillion.
2- My plan, which will require addition revenue to be put into Social security in order to pay for the shortfall due to fewer workers. Let us say that this will cost $1 trillion (I am making up the numbers here for illustrative purposes).

I am not sure that eietehr of us can speak with conidence about the President's plan (since he does not yet appear to have one) but:

In example 1 above we borrow 2 trillion. However, young people put their money into private accounts to the tune of 2 trillion and we won't have to pay them social security.

If the issue were 100% private accounts -- that is the totality of the balance sheet work. We have added 2 trillion to debt, and we have removed 2 trillion (with accemulation from interest/appreciation) from future obligation to pay social security when the young people retire. It is a wash., though we have converted some fairly long term obligations (pay young worker when he retires) into fairly short term obligations (pay present retirees).


Of course we are not talking 100% private so we would have to use some sort of a formula-- I assume the fairest would be to reduce social security payments on retirement by the proportion that the young investor put money into his retirement account rather than into social security payments. In other words, if he put 1/2 into investment accounts during his wage earning years, he is entitled to half of what his social security payments would be if he put all into social security.


John H. Lederer - 2/23/2005

Bloggers are saying that the Democratic Party caluclator for comparing social security and private accounts is faulty.
http://www.awptimus.com/blog/index.php?p=210

I have not followed the math, but compared to the Social Security Administration's calculator and a standard compound interest calculator, it does seem to overstate social security payments and understate private investments.

If the allegation is true, the calculator is not very helpful to the discussion...


John H. Lederer - 2/23/2005

The size of the present stock markets are very roughly about 30 trillion both in total capitalization and annual trading volume.

The size of the bond/securities market is much more "squishy". Estimates run from 10 trillion to 100 trillion. I am not an expert but I gather the two problems in the estimates are (1) publicly traded versus privately traded bonds (2) the definition used .

Present social security payments are about 550 billion/yr. I should think the markets could absorb this amount without too much trouble.

Regarding assurances, it seems to me that this is a ideological pit. Should people be able to make their own decisions and suffer the consequences, or should we very closely regulate what they can do with their money.

Personally, I think I would favor the governemnet defining and offering a myriad of funds that people could choose from. Say several hundred, with some sort of risk/gain rating on each. The management of these funds could then be put out to bid.

If we require a myriad (save 2-300), then that might defuse the political pushes. Joe could invest in a fund that excludes the use of embryonic tissue in its medical holdings, Ann could invest in a fund that is more weighted towards bonds, I could invest in a fund heavy on nanotechnology, etc.

Having the government define them and assign each a risk/gain ratio would keep out the fly by nighters. Putting the management of each fund out for bids would keep the fees down ( they should be well under 1% a year- most advisers regard funds with mangement fees above 1% as rip offs).

Alternatively you could just allow present funds to "qualify" to be included. Qualifications would require low management fees, reasonable risk/gain ratios, etc.




Marc "Adam Moshe" Bacharach - 2/23/2005

1) “Yes. But you eliminate the obligation to pay future retirees. Technically that is not a debt (there is no legal obligation to pay social security), but i think we all recognize it as one.”

Let us look at 2 plans:
1- The president’s plan will propose paying for Social Security entirely from borrowing, since young people will not be putting money into the same funnel as before. Let us assume that this amount if $2 trillion.
2- My plan, which will require addition revenue to be put into Social security in order to pay for the shortfall due to fewer workers. Let us say that this will cost $1 trillion (I am making up the numbers here for illustrative purposes)

Both plans will cover both the older generation and the younger generation, but one is a trillion dollars more in the long (and short) run.

2) “Right now the generations before me and my generation (I am in my fifties), in most reasonable scenarios, are ripping off our children...we will get much more out of social security than we put in. They will get less.”

Which is why the system needs to be strengthened so that this does not happen. Doing nothing will not change this, but neither is a total transformation necessary, in my opinion.


John H. Lederer - 2/23/2005

"Isn’t incurred debt a material change in our wealth? If I take out a loan, has my wealthy not changed? It is still money that I now owe."

Yes. But you eliminate the obligation to pay future retirees. Technically that is not a debt (there is no legal obligation to pay social security), but i think we all recognize it as one.

Whether "we" come out a bit ahead or a bit behind depends on the assumptions of what interest rates,etc. will be. It also depends on what we mean by "we".

Right now the generations before me and my generation (I am in my fifties), in most reasonable scenarios, are ripping off our children...we will get much more out of social security than we put in. They will get less. That could change if expected lifespan doesn't just gradually increase but takes a leap.


Derek Charles Catsam - 2/23/2005

John --
You mean 2018, not 2017. And at that point we begin digging into a surplus that would not be exhausted until 2042 or beyond. This does not mean we do nothing. I tsimply means that we do not rush to one conclusion that has lerss of a chance of pasing with each day and that could well exacerbate the problem. There is no rush on this, and it ought not become something done out of political avarice or blind ideology.
Comparing social security to a pyramid scheme? Please. Serious people mount serious arguments. This is not one.

dc


Marc "Adam Moshe" Bacharach - 2/23/2005

1) “There may be "transition costs" - a loan fee, or a better or poorer interst rate, but there is no material change in our wealth.”

Isn’t incurred debt a material change in our wealth? If I take out a loan, has my wealthy not changed? It is still money that I now owe.

2) “So with social security. Social security has huge unfunded pension liabilities. If instead of using Peter Worker's social security payment to pay Paul Retirees monthly check, we instead put it a savings account for Peter's retirement, we haven't paid Paul, but we have reduced our future obligation to Peter. We effectively converted a long term obligation into a short term one.”

This is very true, and an excellent point that you make. My concern is that we would be spending far more in the long term paying for benefits when no money is coming in. Rather than there being fewer workers per retiree, there would be essentially zero workers for retirees. I am not convinced that this system is the most economically efficient. It may very well be that you are correct and this is the best way. I simply have not seen enough evidence of this yet.


John H. Lederer - 2/23/2005

"transition costs" is a misleading term.

If I pay my mortgage with my credit card am I richer or poorer? How about if I pay my credit card debt by taking out a mortgage?

Most of us recognize that the switch from long term to short term debt or vice versa doesn't make us substantially richer or poorer. There may be "transition costs" - a loan fee, or a better or poorer interst rate, but there is no material change in our wealth.

So with social security. Social security has huge unfunded pension liabilities. If instead of using Peter Worker's social security payment to pay Paul Retirees monthly check, we instead put it a savings account for Peter's retirement, we haven't paid Paul, but we have reduced our future obligation to Peter. We effectively converted a long term obligation into a short term one.

We still have to pay Paul. But that isn't a "transition cost". It is an immediate recognition of the fact that we
spent Paul's money rather than putting it in a savings account.

The elimination of long term future obligations and the necessity for recognizing short term/present obligations is what critcs are referring to as "transition costs"-- except they forget to remember that we are reducing future obligations.







Marc "Adam Moshe" Bacharach - 2/22/2005

Thus far, I would say that the system has worked quite well. You talk as if the system has collapsed when in fact, it has not only been one of the most successful federal welfare programs, but can continue to be successful in the future with the necessary adjustments (the transition costs to private accounts, for example, would alone cover over 2/3 of the projected shortfall and do nothing to ease the long term problem).

I am not really sure how social security takes money from the poor and gives it to the rich, as you suggest, but I would agree that in the long-term, neither Bush’s proposal nor the status quo will be able to keep the system solvent (although even doing absolutely nothing will still leave the system paying 100% of its promises until around 2042 or 2052, depending on who you ask, and almost ¾ OR 80% of the benefits after).

Let’s fix the system now, by perhaps raising the cap on wages subject to Social Security (it’s currently up to $90,000) or perhaps by investing Social Security surplus in places that get a higher rate of return than Treasury Bonds, like Clinton apparently proposed.

However, my points remain as follows:
1) Social Security does not currently face a crisis, but a shortfall in economic projections that are no more accurate than the whether
2) Private accounts will not fix the long-term problem, but will be extremely costly in the short-term
3) This country currently does face crises that are not being addressed because the administration is focusing on Social Security “reform”

PS. I am a little surprised that you used Enron shareholders as an example of how your children might make out, given the fact that if Social Security did not exist, and people invested in Enron shares as their retirement nestegg, they would have been left broke.


John H. Lederer - 2/22/2005

Adam,

Succinctly:
1) There are two problems. (a) We must get off a pay as you go retirement system. It does not work. (b)We have to clear up the accrued liabilities the current pay as you go system has left.

2) If this is justified as a help the needy program it is indefensible . We take money from the poorest age classes and give it to the richest.

3) I made out like Flynn on Social Security. My children and their children will make out like Enron shareholders. That's not right.



Marc "Adam Moshe" Bacharach - 2/22/2005

1) “To make the current social security system "work" we will always have to (as we have in the past) raise social security taxes ...ad infinitum. Those raises will come faster and faster because of the declining demographics (unless women have more babies now and their children do in which case things will look better in the next century). Nonetheless at any point the problem can be "cured" in a narrow time frame by raising taxes (or cutting benefits) just a "little".”

You are quite correct, taxes will have to be raised, or spending cut in other areas, or benefits cut in order to keep the system working. However, the narrow time frame you mention is not really narrow at all, but based on a 75 year forecast that changes all of the time (it should be noted that projections are actually better today than they were before due to the 90’s boom). Thus, as of now, I stand my concerns about the administrations plans: The system is not currently in a crisis and does not seem to be for quite a while and the personal accounts do not seem to actually be an attempt to fix it. Indeed, your posts seems to agree with this later point. By discussing Social Security as inherently “flawed” since its inception and by maintaining the belief that it can only work if taxes are increased to some indefinite number (perhaps it will end at 100% of earnings) it seems clear that you favor the reform because you do not believe the system itself is viable. I don’t mean to put words in your mouth, but would that be an accurate statement?

A fair position if so, but one which I disagree with.

2) “It is unsound if there continue to be fewer workers per retiree. Two demographic changes ssggest that will be the case. First people are not having many babies and this creates a demographic momentum -- because the next generation is smaller the number of children they will have will be smaller and so on...
Second, people are living longer. This trend seems likely to contiunue absent nuclear war.”

This is very true. However, many other social welfare policies are not offset by a pay-as-you-go system and yet they remain viable because our society values those services. The question of social security is now the same as it has always been: what are our priorities? If the system can be perfectly funded for the foreseeable future with some modest funding increases today (which I believe), than why not do that instead of attempting to dismantle the current system and replace it with a costly program whose effectiveness cannot be reliably proven? At a time with unprecedented national debt, massive trade deficits, a war on terror that may involve another nation(s) in the foreseeable future, and massive tax cuts that go primarily to the wealthy, why should Social Security be a top priority at this time? I do not believe that it should be, but even if it should be addressed over all the other problems we face right now, that does little to resolve the conflict (see below)

3) “That, of course, is really the key question. Shall we just kick the problem down the road or solve it. My expected life span is around 20 years more. Kicking it down the road solves things or me..but it sure creates a problem for my kids now in their 20's.”

You are correct and I agree 100%. Let us fix the problem now so that our children will not have to worry about it. Now that we agree on that, the question remains, how to fix it? Economists that I have read seem to believe that if the system were funded more today, it would remain solvent within the projected life-span of the program, depending on prevailing economic patterns, of course.

4) “The way to solve the problem is to get Social Security off of being a pay-as-you-go (or more accurately "my kids-pay-as- I-go") and onto an investment plan (save the money for retirement).”

Again, we agree, but what kind of investment plan? Thus far, the system has survived on Treasury Bonds, the most secure in the world, and I have no reason to believe that this cannot continue. We know that resources exist to secure the system because the administration is willing to borrow even more from our extraordinary debt in order to pay for it. And that will be something that our children will have to worry about very soon.

5) “Clinton proposed taking the social security surplus and investing it in the stock market.”

This plan is certainly nothing like the current plan of abolishing the system for future generations by creating private accounts, but I agree with you, it does sound far too susceptible to politics. After all, whoever controls which stocks will be selected has an awful lot of power to determine the rise and fall of major companies.

6) “We did not invest it. The treasury borrowed it, giving social security redeem on demand notes in exchange. then we spent the money.”

This sounds a lot like the problem has been with Congress too eager to steal from the trust fund than with a flaw of the system itself. Although Gore was often mocked for his “lock-box” plan, he was in effect saying exactly what you are saying, and he suggested that the solution lay in taming a greedy Congress rather than abolishing a perfectly good system that has done so much to help so many Americans.

7) “Any conversion to a save and invest program will, in one sense, have a cost of trillions -- but that depends on ignoring an obligation to pay future social security.”

Certainly, but if I may offer my own analogy:
You buy a car but can no longer afford the car payments, which total, say $10,000. You decide to trash the car and take out a loan for $25,000 to buy a new car. When you get home, you try to explain to your wife that you had no choice, you could not afford the car payments. She then asks why you did not simply use the loan money to pay off the car you had. Good question.

8) “Suppose I said, Adam, tell you what. You stop paying social security taxes. Invest the same money. Social Security will owe you nothing when you retire, but you don't have to pay taxes.”

What you are suggesting here is simply an argument against Social Security, not an argument for Bush’s plan, which would still rely on social security taxes and still rely on a Trustee system to invest those personal accounts. After all, under Bush’s plan, “the owners of personal accounts wouldn't be able to touch the money while they are working, not even to borrow. The money would remain in the hands of the federal government, which would administer the personal accounts.”

What you seem to be arguing for is simply an end to the program. Again, as I said above, this is a fair argument, and one that libertarians have been making for a long time now, but it is not one that I subscribe to.

Helping the elderly through social security is, to me, a national obligation and indeed a moral one as well. I simply see no evidence that Bush’s plan intends on doing this.

9) “But something else happened in my example. Social Security will not have to pay you when you retire. So social security was relieved of a future obligation. That is not looked at when they say privatization costs trillions.”

That is because the cost of privatization will be borne by all of society in terms of taxes and debt, while the benefits are individual in nature. This is especially the case since it, under your analogy, it would only benefit people who are knowledgeable enough about financial planning and investment. Those who are not will likely end up either spending the excess money in ignorance, or have to hire an accountant or money manager which often incurs an immediate output of funds that many families cannot afford.

10) “Would you be happy with Clinton's scheme on a bigger scale? I would be if there were some way to keep politics out o the management of the money. Maybe we should work on that if privatization is a scare word.”

I would have to see some of the details, but I would be far more amenable to this plan over private accounts because it leaves the social safety net intact. You and I don’t agree on much, so if we can agree on this, all we have to do is convince Congress and the President! :)


John H. Lederer - 2/22/2005

Adam,
I keyed these reposnes to your section humbers.

1) The shortfall, according to the CBO varies from +.63 of GDP now (surplus) to -1.73% in 2075.

The figures you cite for the whole period understate the problem by offsetting an increasing deficit by a surplus now and for the next decade or so. Given what we do with the surplus, this is not a true picture (see 3 below).

Moreover GDP is a very big number (~11 trillion for 2004), and social security does not directly affect GDP (these are transfer payments). More appropiate comparisons might be with total Federal revenue (~2 trillion) or Social Security (~550 billion).

Moreover it masks the problem. To make the current social security system "work" we will always have to (as we have in the past) raise social security taxes ...ad infinitum. Those raises will come faster and faster because of the declining demographics (unless women have more babies now and their children do in which case things will look better in the next century). Nonetheless at any point the problem can be "cured" in a narrow time frame by raising taxes (or cutting benefits) just a "little".

2). It is unsound if there continue to be fewer workers per retiree. Two demographic changes ssggest that will be the case. First people are not having many babies and this creates a demographic momentum -- because the next generation is smaller the number of children they will have will be smaller and so on...
Second, people are living longer. This trend seems likely to contiunue absent nuclear war.

And you are right. People have known about this problem for a long time. The political response has been to kick the can down the road. Raise taxes enough to delay the problem, but do not solve it.

That, of course, is really the key question. Shall we just kick the problem down the road or solve it. My expected life span is around 20 years more. Kicking it down the road solves things or me..but it sure creates a problem for my kids now in their 20's.


The way to solve the problem is to get Social Security off of being a pay-as-you-go (or more accurately "my kids-pay-as- I-go") and onto an investment plan (save the money for retirement).

That doesn't require privatization (see 3 below). It also doesn't solve the current problem (how to support this gneration whose money was not saved and invested. It does solve the problem for future generations.


3. Clinton proposed taking the social security surplus and investing it in the stock market.
I opposed this. I thought it too susceptible to politics ("it shouldn't be invested in companies that support Israel..", "it shouldn't be invested in companies whose predecessors had slaves till they pay rparations.." , "it should be invested in companies that pay at least a living wage..","invest in those who vote for me.." etc.)
But we threw out the baby with the bathwater.
We did not invest it. The treasury borrowed it, giving social security redeem on demand notes in exchange. then we spent the money.
This is the functional equivalent of me borrowing from my retiremnt savings to buy a Corevtte, putting an IOU in the plan in excahnge. "Don't worry", I tell my wife, "the plan still ha lots of assets. We'll just cash in the IOU's when we retire".
That is what social security has done and any examination of the problem that uses the "surplus" to offset deficits in social security is basically illusory. It is true that scoisal security won't need to raise taxes to the extent that it uses the surplus. Instead, the government will have to raise taxes to pay the notes to social security so social security won't have to raise taxes. John Q. Taxpayer feels better, right?

4), Any conversion to a save and invest program will, in one sense, have a cost of trillions -- but that depends on ignoring an obligation to pay future social security.

Suppose I said, Adam, tell you what. You stop paying social security taxes. Invest the same money. Social Security will owe you nothing when you retire, but you don't have to pay taxes.

There is an immediate cost to this. Social security still pays current retirees, and it doesn't have your taxes. So it will have to borrow or do something to cover the payments.

That is all that is looked at when people say privatization will cost "trillions".

But something else happened in my example. Social Security will not have to pay you when you retire. So social security was relieved of a future obligation. That is not looked at when they say privatization costs trillions.

What is the net cost? I don't know. It probably is negative (social security has to pay interest on the money it borrows) but not certainly (it would have to pay you more in social security payments when you retire than it pays someone who retires today because social security payments increase with time as they are indexed). In any event the real fiscal impact is a lot smaller than the trillions one sees if one ignores the offsetting gain (relief of the obligation to pay you in the future).

Looked at another way, we are in a pickle. We spent the money that we should have been saving for when present workers retire. We are going to have to make that up under any scheme. Given that we have a second choice. We can keep the current system and go into the pickle again in the far future or we can shift to an "save for retiremnt" scheme.

5) Would you be happy with Clinton's scheme on a bigger scale? I would be if there were some way to keep politics out o the management of the money. Maybe we should work on that if privatization is a scare word. Or maybe we should give people title to their saivings but so regulate private investements that democrats could say it is a government program, republicans could say it is a private program, and everyone could declare victory and go home. Call it the "Government Individual Social Retirement Plan"....

But paying current retirees from the contributions of future retirees is a no go. It is what landed Ponzi in prison.












John H. Lederer - 2/22/2005

Adam,
I keyed these reposnes to your section humbers.

1) The shortfall, according to the CBO varies from +.63 of GDP now (surplus) to -1.73% in 2075.

The figures you cite for the whole period understate the problem by offsetting an increasing deficit by a surplus now and for the next decade or so. Given what we do with the surplus, this is not a true picture (see 3 below).

Moreover GDP is a very big number (~11 trillion for 2004), and social security does not directly affect GDP (these are transfer payments). More appropiate comparisons might be with total Federal revenue (~2 trillion) or Social Security (~550 billion).

Moreover it masks the problem. To make the current social security system "work" we will always have to (as we have in the past) raise social security taxes ...ad infinitum. Those raises will come faster and faster because of the declining demographics (unless women have more babies now and their children do in which case things will look better in the next century). Nonetheless at any point the problem can be "cured" in a narrow time frame by raising taxes (or cutting benefits) just a "little".

2). It is unsound if there continue to be fewer workers per retiree. Two demographic changes ssggest that will be the case. First people are not having many babies and this creates a demographic momentum -- because the next generation is smaller the number of children they will have will be smaller and so on...
Second, people are living longer. This trend seems likely to contiunue absent nuclear war.

And you are right. People have known about this problem for a long time. The political response has been to kick the can down the road. Raise taxes enough to delay the problem, but do not solve it.

That, of course, is really the key question. Shall we just kick the problem down the road or solve it. My expected life span is around 20 years more. Kicking it down the road solves things or me..but it sure creates a problem for my kids now in their 20's.


The way to solve the problem is to get Social Security off of being a pay-as-you-go (or more accurately "my kids-pay-as- I-go") and onto an investment plan (save the money for retirement).

That doesn't require privatization (see 3 below). It also doesn't solve the current problem (how to support this gneration whose money was not saved and invested. It does solve the problem for future generations.


3. Clinton proposed taking the social security surplus and investing it in the stock market.
I opposed this. I thought it too susceptible to politics ("it shouldn't be invested in companies that support Israel..", "it shouldn't be invested in companies whose predecessors had slaves till they pay rparations.." , "it should be invested in companies that pay at least a living wage..","invest in those who vote for me.." etc.)
But we threw out the baby with the bathwater.
We did not invest it. The treasury borrowed it, giving social security redeem on demand notes in exchange. then we spent the money.
This is the functional equivalent of me borrowing from my retiremnt savings to buy a Corevtte, putting an IOU in the plan in excahnge. "Don't worry", I tell my wife, "the plan still ha lots of assets. We'll just cash in the IOU's when we retire".
That is what social security has done and any examination of the problem that uses the "surplus" to offset deficits in social security is basically illusory. It is true that scoisal security won't need to raise taxes to the extent that it uses the surplus. Instead, the government will have to raise taxes to pay the notes to social security so social security won't have to raise taxes. John Q. Taxpayer feels better, right?

4), Any conversion to a save and invest program will, in one sense, have a cost of trillions -- but that depends on ignoring an obligation to pay future social security.

Suppose I said, Adam, tell you what. You stop paying social security taxes. Invest the same money. Social Security will owe you nothing when you retire, but you don't have to pay taxes.

There is an immediate cost to this. Social security still pays current retirees, and it doesn't have your taxes. So it will have to borrow or do something to cover the payments.

That is all that is looked at when people say privatization will cost "trillions".

But something else happened in my example. Social Security will not have to pay you when you retire. So social security was relieved of a future obligation. That is not looked at when they say privatization costs trillions.

What is the net cost? I don't know. It probably is negative (social security has to pay interest on the money it borrows) but not certainly (it would have to pay you more in social security payments when you retire than it pays someone who retires today because social security payments increase with time as they are indexed). In any event the real fiscal impact is a lot smaller than the trillions one sees if one ignores the offsetting gain (relief of the obligation to pay you in the future).

Looked at another way, we are in a pickle. We spent the money that we should have been saving for when present workers retire. We are going to have to make that up under any scheme. Given that we have a second choice. We can keep the current system and go into the pickle again in the far future or we can shift to an "save for retiremnt" scheme.

5) Would you be happy with Clinton's scheme on a bigger scale? I would be if there were some way to keep politics out o the management of the money. Maybe we should work on that if privatization is a scare word. Or maybe we should give people title to their saivings but so regulate private investements that democrats could say it is a government program, republicans could say it is a private program, and everyone could declare victory and go home. Call it the "Government Individual Social Retirement Plan"....

But paying current retirees from the contributions of future retirees is a no go. It is what landed Ponzi in prison.












William . H. Leckie, Jr. - 2/22/2005

Just a note: I doubt seriously there will arise a full-scale European tax revolt as Mr. Lederer claims. There simply is no "Proposition 13" mentality here, although certainly the stagflation of the 70s is what induced that madness in California and European economies are not registering the growth that they could. Unlike the US, what's called "the social system" in major EU countries is an integral part of their civic life. In Germany, it evolved from the kinds of accommodations required to simply produce something like a unified nation-state in the first place--a Bismarckian compromise, as it were.

More importantly, pressures on the system there have been generated as much by cost-cutting employers who've encouraged very early retirement (indeed, the largest energy conglomerate in the Ruhr, RWE, was cashiering anybody over 51, transferring its own costs onto the state); a second and more critical pressure is not so much the demographic crisis but such things as the high costs of unification with the East, and difficulties arriving at what I guess could appropriately be called "adjustments at the margins" to liberalize labor laws that limit growth of a lower-wage job market. The demographic portents look rather different when you look at the long-term consequences of EU expansion and the availability of younger workers from the east.

Patterns of global investment are also a burden: interest rates remain high by US standards and a substantial portion (I've read figures as high as 80%) of "surplus savings" actually goes to sustain the US current accounts deficit. In other words, part of the problem here stems from the drag US economic policy has on its trading partners.

The fact remains, too, that the European "social systems" are far more efficient than anything parallel in the US, which spent as of 2003 about 13% of GNP on health care against 8% for the EU overall, and the Europeans got far more for it.

One solution, short-term, to rising health costs was to impose a 10-euro-per-quarter surcharge on doctor visits in Germany. There were howls and screams, but in fact the surcharge went far toward putting the system in the black, both by infusing modest revenue and discouraging overuse of health benefits. There is great anxiety about "Americanizing" the social system. The Europeans will keep it rather than enter a variation the inadequate and by their standards even cruel and wasteful system they see in the US, believe me. I don't know about Mr. Lederer, but I talk to Europeans every day; they are greatly concerned, certainly, but most realize that within the current structure solutions exist.

What they have to adjust to with the goal of preserving their social systems is that massive and mobile quality of capital in an economy that's global. A 600-million-population economic bloc with more mobile and younger labor will ultimately provide the resources. In Germany, more than elsewhere, cultural characteristics that make compromise difficult will make for a rocky road, I admit, but they'll get there. Even in the postwar "Elbonengesellschaft" they still realize the historical role of their social system and they value its benefits. As a non-resident alien over here, I happily pay my pension and health taxes and tell Germans I'd pay 10 euros every doctor happily, too.

As for pension challenges: I think Krugman's nailed the Bush agenda and I won't repeat him here. But to compare Europe and the US is simply hallucinatory. Almost half of US public debt is held by the Chinese, Japanese, and Europeans--a situation more like a Third World economy than a modern, developed one. The US system of healthcare--and the Bush pension vision would would be like this, too--is burdened by excessive overhead, fragmentation of delivery, and I think criminally inadequate coverage.

There is no way any partial privatization scheme can work without aggravating that Third World drift. The Bush scheme resembles nothing so much as an expensive variable whole life policy that finances its premiums by borrowing against its own cash value. Simply--and I mean simply--rolling back the Bush tax cuts (putting a dent in federal debt) and raising the ceiling for contributions will solve any "problems" the Social Security system might enounter.

Sometimes I think the current regime in DC imagines a US future more like a latifundista-run Latin American country in hock to London bankers in the 1920s than a nation of free and prosperous citizens. There were large swathes of Texas when carpetbagger George moved there that were just like that--I grew up in one. I'll take Europe any day.


Marc "Adam Moshe" Bacharach - 2/22/2005

1) “There is no "solution" to the present Social Security system that does not involve either much higher taxes or lowered benefits.”

I suppose it depends on what you mean by “higher.” If the economy does very well, then Social Security will not need a solution for quite a while now. If Social Security does become a problem, then like all government-run programs, it will have to use tax money to solve it. The real question then, is where our priorities lay. What are we willing to give up in order to save Social Security. If we are willing to borrow massive amounts of debt in order to change it, should we be willing to spend any less to fix it?

Even if taxes were necessary, here is some food for thought: The SS trustees estimate the size of the expected shortfall between what we have and what we need to ensure SS for its full 75 year projection period is 0.7 percent of GDP over this period, while CBO puts the gap at just 0.4 percent of GDP. By comparison, the cost of the Bush tax cuts is approximately 2.0 percent of GDP, with the richest 2 percent of families collecting an amount equal to 0.8 percent of GDP.

2) “To be blunt, the program is on a foundation of sand and is not sound. It has as a primary assumption that there will be little negative change in the ratio of workers to retirees. That assumption appears to a fairly high degree of certainty to be wrong.”

I disagree, and the government has known about the ratio change for some time. In the 1980’s it began collected more money that it needed in order to compensate for the projected imbalance.

For more, I think the following is useful:
http://money.cnn.com/2004/12/06/retirement/social_security/

3) “Now, forget this administration. Almost every democrat politician who now asserts there is no "crisis" asserted 8 years ago that there was an approaching crisis. The difference was that Clinon wanted to do something about it.”

I am not familiar with any of this, nor do I remember any aspects of Clinton’s reform ideas. Perhaps you could fill me in on what Clinton suggested and I will let you know what I think of it. I am not against reforming Social Security. What I am against is an attempt to dismantle a program that I believe is one of the greatest in the United States.

If you are claiming that my opposition to Bush’s plan is merely partisan, and groundless, I suppose there is little we can do to convince each other. Nevertheless, I am confident enough that the evidence does not hold up to the administration’s rhetoric and that in fact, there are many more urgent crises that would be better served with all of the attention.

4) “Whether today is a crisis or not is just a metter of how you want to define "crisis". The important points are (1) the system is unsound fiscally and (2) the longer one waits to do something about it the bigger the hole one will have to dig out of.”

But that is just it, the system is not unsound fiscally. It will be unsound sometime in the next several decades, but I agree with your second point, the longer we wait to fix it, the worse we will be. Now the question becomes, what is the solution? The president proposes a plan that will cost trillions in transition costs and it remains unclear whether this would actually repair the problem. If you have another solution, I would be more than willing to consider, but given the current “crisis,” I believe the most rational solution would simply be to plug the hole in the current system either with debt or with a repeal of a modest portion of the tax cut, or a combination of both.

5) “Private accounts aren't a solution to the present crisis. They do however remove the fatal flaw that was put into the system in 1935 so that we don't have continual future crises if the ratio drops more. That flaw could also be removed if the government kept and invested the money in the stock market -- or did most anything with the money except borrow it and spend it.”

Again, because I believe that the “flaw” to SS could be fixed by far less drastic, less costly, and more secure means, I have no reason to put my faith into private accounts. If the presidents wants to recommend a pilot program that would select a few thousand subjects and see how things turn out, I look forward to the results. However, given the fact that I believe these reforms are more ideological (pushed by people and groups who have always held disdain for this benchmark of the welfare state) and because I believe the evidence does not support such a drastic change, I cannot support it at this time.


Andrew D. Todd - 2/22/2005

You are proposing to dump hundreds of billions of dollars onto the stock market annually, for an eventual total of trillions. This is a fundamentally different situation from a country lawyer investing small sums for clients. In this case, your actions are going to substantially affect the market. You cannot just talk about a "balanced portfolio." You have to produce a fairly specific plan for what you propose to do with the money, and what the effects will be.

Do you propose to pump the money into existing corporate securities? Naturally, that will bid up the price. Now, the investor's time horizon is generally defined by his life expectancy, eg. retirement plans. The difference between the age of decrepitude and the age of death is unlikely to ever go over twenty years, especially as the age of decrepitude is increasingly being defined in mental rather than physical terms. Price-earnings ratios much in excess of twenty are therefore not sustainable over the long term. The present Dow-Jones price earnings ratio, of nearly thirty (?) is probably at the outer edge of the envelope. The present stockholders differ from social security recipients in an important particular-- they find work fulfilling. This means that they do it well enough to be paid a lot, and it also means that they enjoy work too much to retire, save under coercion. If people like this reach the sense that the stock market is fantastically overvalued, they will divert money away from it. With the Social Security Trust Fund unloading its T-bills for ideological reasons, it should be possible to buy those cheaply. If you flood the money into existing issues, the result will be a bubble and a crash.

Alternatively, do you propose to take up large numbers of new issues in new companies, 1990's fashion? In that case, you need to produce a capital investment plan, specifically describing what kinds of new industrial plant you propose to build, how much it will cost, and the extent to which it will be subject to competition. Explain, in some detail, the probable effects of the rapid growth of the internet, robotics, etc. However, if your proposed investments are in these fields, explain why they will not be subject to fratricidal competition.

Finally, what assurances do you have that the picking of stocks will be done in an ordinarily prudent way? Professional money managers tend to have the psychology of margin traders, because their earnings tend to depend on the rate of increase, or excess over bank interest. Ideally, Social Security's investment policies would be set by someone like Alan Greenspan. However, it seems equally probably that the system would wind up being run by someone like Alberto Gonzales or Condaleeza Rice, under pressure to show short term results. In that case, the system would tank up on highly speculative ventures. Then there would be political favors. They would invest large sums of money in Neil Bush's educational software company, places like that.


Jonathan Pine - 2/22/2005

Is this all about self-interest or ideology? Better ideology, it's less depraved.

The president is proposing to spend about 4.5 trillion dollars over 20 years to:

Change Social Security in a way which pays the average beneficiary less than is both promised under current law and payable under current projections for the next 75 years.

The cost of this is greater than the cost of fully funding the current program, such that under current projections benefits would not have to be cut at all relative to current law but instead would be fully payable.


The media (there are exceptions) continues to pretend to not understand this.


This politics of privatization depends crucially on convincing the public that the system is in imminent danger of collapse, that we must destroy Social Security in order to save it. I think the discussions on this are making it more complex than it is. Social Security is just a government program supported by a dedicated tax on payroll earnings.

And right now the revenues from the payroll tax exceed the amount paid out in benefits. This was deliberate, the result of a payroll tax increase - recommended by none other than Alan Greenspan - two decades ago. And projections in a recent report by the Congressional Budget Office (which are more realistic than the very cautious projections of the Social Security Administration) say that the trust fund will run out in 2052. The system won't become "bankrupt" at that point; even after the trust fund is gone, Social Security revenues will cover 81 percent of the promised benefits. Yes, there will be a long-run financing problem.

But it's a modest problem. The CBO reports that extending the life of the trust fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of G.D.P. That's less than 3 percent of federal spending - less than we're currently spending in Iraq. And it's only about one-quarter of the revenue lost each year because of President Bush's tax cuts - roughly equal to the fraction of those cuts that goes to people with incomes over $500,000 a year.

There's also a logic that's been devised: first, they insist that the Social Security system's current surplus and the trust fund it has been accumulating with that surplus are meaningless. Social Security, they say, isn't really an independent entity - it's just part of the federal government. If the trust fund is meaningless, by the way, then the Greenspan-sponsored tax increase in the 1980's was nothing but an exercise in class warfare: taxes on working-class Americans went up, taxes on the affluent went down, and the workers have nothing to show for their sacrifice.

Right now the closest thing to an actual Bush plan is "Model 2" from the "President's Commission to Strengthen Social Security" The plan figures that a median income worker retiring in 2050, 2070 will have his/her total retirement income, including private account annuity, in half relative to promised benefits and by a third relative to benefits projected to be payable under pessimistic and internally contradictory trustee projections by the CBO.

Progressive indexing of retirement benefits by wage level is also a way to go - increasing retirement benefits in line with consumer prices, in order to protect the purchasing power of those benefits.



John H. Lederer - 2/22/2005

Adam,

There is no "solution" to the present Social Security system that does not involve either much higher taxes or lowered benefits.

To be blunt, the program is on a foundation of sand and is not sound. It has as a primary assumption that there will be little negative change in the ratio of workers to retirees. That assumption appears to a fairly high degree of certainty to be wrong.

I say to a fairly high degree of certainty because of "demographic momentum" - a decrease in birth rates causes not just an immediate decrease in population but a longer range decrease because fewer women enter their fertile years in the future.

I suppose a very high rate of immigration could solve it--but our current rate is quite high and only offsets about 30% of the loss from a declining birth rate.

This is put quite starkly in the Trustees Report when they note that the key factor is number of workers per retiree. That currently is slightly above 3, it will become a bit above 2. Put simply at a ratio of 2, two workers will have to pay enough in taxes to support one retiree.

Now, forget this administration. Almost every democrat politician who now asserts there is no "crisis" asserted 8 years ago that there was an approaching crisis. The difference was that Clinon wanted to do something about it.

The seed of this crisis was planted in 1935 when Roosevelt decided against a save for the future plan in favor of a pay as you go plan.

Whether today is a crisis or not is just a metter of how you want to define "crisis". The important points are (1) the system is unsound fiscally and (2) the longer one waits to do something about it the bigger the hole one will have to dig out of.

Private accounts aren't a solution to the present crisis. They do however remove the fatal flaw that was put into the system in 1935 so that we don't have continual future crises if the ratio drops more. That flaw could also be removed if the government kept and invested the money in the stock market -- or did most anything with the money except borrow it and spend it.






Marc "Adam Moshe" Bacharach - 2/22/2005

The real problems I have with the president’s proposals is two:
1) I do not believe that Social Security represents a “crisis” as he says, and certainly not one that that should be addressed at a time when so many other issues (such as the national debt, our trade deficit, and other programs such as Medicare and Medicaid) are in DIRE need of attention and resources.

As factcheck.org reports:
“In fact there are two official projections -- one by the Social Security Administration (SSA) and a somewhat less pessimistic projection by the Congressional Budget Office (CBO). The President referred to the SSA projection, which calculates that the system's trust fund will be depleted in 2042. After that, the system would have legal authority to pay only 73 percent of currently promised benefits -- and that figure would decline each year after, reaching 68 percent in the year 2075.
The CBO doesn't project trust-fund depletion until a decade later, in 2052, and figures that the benefits cuts wouldn't be so severe, a reduction to 78% of promised benefits. But either way, even a "bankrupt" system would continue to provide most of what's promised currently.
Furthermore, the President did not specify what he would do to fix the problem. He again urged creation of private Social Security accounts. But those would be of no help whatsoever in shoring up the system's finances, as acknowledged earlier in the day by a senior Bush administration official who briefed reporters on condition of anonymity…”
http://www.factcheck.org/article305.html
http://www.factcheck.org/article302.html

2) My second problem with private accounts is that I do not believe they will actually solve the problem of Social Security rather than simply an attempt to get rid of the program entirely.

Under the Bush plan, transition costs could amount to more $2 trillion (with a T!). If Social Security received this amount today, it would, together with the expected interest earnings, cover the projected shortfalls (These transition costs are equal to about two thirds of the projected long-term shortfall of Social Security over the next 75 years).
Even the White House admits that these transition costs by themselves do nothing to address the expected Social Security shortfall in the long-run.
In other words, the resources that Bush wants to use to “reform” the system could simply be used to preserve it just as well. This is to say nothing of the fact that a repeal of part of the tax-cut (just those going to the top wage earners in this country) would also fix the problem.

To be blunt, I do not trust this administration. Unlike the situation in Iraq, in which intelligence communities can monopolize information creating an “I’m-sure-he-knows-things-he-isn’t-telling-us” approach, the reality of Social Security is a domestic issue that has numerous agencies working on it and disagreeing with much of the rhetoric of this administration.


John H. Lederer - 2/22/2005

Derek,

I disagree. The problem with doing nothing is that the size of the problem is steadily increasing.

Prosecutors try to promptly stop pyramid scheme frauds by getting injunctions because the longer the chain scheme goes on the greater the number of people that will be hurt and the greater the amount of hurt.

Nor will it be thirty years till we feel the pain. If the trustees estimates are correct, We will start feeling the pain in 2017. In that year Social Security has to start using "accumulated" surpluses to pay out benefits. Unfortunately, those "accumulated surpluses" were put into treasury bonds. When social security start to "cash in" its bonds, the bonds have to be paid out of general revenue. The amount is non-trivial.


Derek Charles Catsam - 2/21/2005

John --
We can keep the system as it is for now until we find a solution that is more workable than a private investment scheme fraught with potenial downfalls. There has been a whole lot of misreopresentation on the privatization side, not the least of which involves the dire nature of the crisis, a crisis that in fact will not be a crisis at all for three decades. I've no problem with re-examining social security. I have huge problems with demogoguing the issue by pretending that we must engage in wholesale change now because things will otherwise fall to pieces in ten years.
And the choice is exactly as you lay it out if the administration decides to make it that way -- in other words, if here will be no room to reconsider, then that is precisely what we are going to be forced to face. For now we can keep the system as it is. And changes ought to be more than a function of railroading or ramrodding them through.

dc


John H. Lederer - 2/21/2005

How does the risk of an investment in the general economy (some sort of broad based stock fund) compare to the risk that government will face a political "revolt" by workers because the necessary tax rates will be too high to be politically sustainable?


Europe seems certain to reach that point in the near future, because of a more severe demographic problem and higher relative pensions.

The choice is not between "keeping the system as it is" or instituting some "risky scheme". We cannot keep the system as it is.


Jonathan Pine - 2/21/2005

I agree with Jackson's general message that "a decent, basic, reliable, public support to protect people from the dire poverty that life and turns of the economy otherwise will distribute."

Bush's brainchild on social security is no security at all.

Before you invest your money with a respectable broker he should also ask if can you afford to lose that amount. Bush’s version of social security won’t be any different. The market risk will be high and some will do well and some not well at all during their lifetime. And if the economy doesn’t go as we’d like it to, like weak labor markets, rising health care costs, an increasing federal budget deficit and trade deficit which at the end of the day impacts the individual,
people’s contributions to their account will also decrease.

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