Social Security for Beginners

By James Kwak

In Monday’s Atlantic column, the part that upset the most people was (not surprisingly) the following paragraph on Social Security:

“The dollars are in programs like Social Security ($740 billion), which, per dollar, has a relatively small impact on the economy. Social Security doesn’t say what businesses can or can’t do, and it doesn’t say what people can do with their money: it mainly moves money from people’s working years to their retirement years, which means that in part it’s doing something that they would have done anyway.”

One commenter, for example, said that Social Security does tell you what you have to do with your money: you have to buy an annuity. Another said that if he could opt out of Social Security right now, he would, since he thinks it is a losing proposition for him.

I don’t think that any of the criticisms really addressed the main point I was trying to make: that Social Security has a smaller per-dollar economic impact than a regulatory agency like the CFPB. They are fairly typical of criticisms of Social Security, however, so I want to address them in a little more detail.

The debate is really about what Social Security is. A lot of people take the starting point that Social Security is an individual investment vehicle, and then they decide they don’t like it because it doesn’t look like the other individual investment vehicles they are familiar with (brokerage accounts, 401(k) plans, etc.). Other people think that Social Security is a welfare program, and since they don’t like welfare, they don’t like Social Security. But it isn’t either.

Before you can say what kind of animal Social Security is, you have to understand how it works. That’s actually pretty simple. Almost all working people pay a payroll tax of 12.4 percent of their wage earnings up to a cap of $106,800.* In exchange, you get monthly benefits after you reach retirement age. The full benefit retirement age right now is 66 (and will go up to 67 gradually). If you start collecting benefits then, you get a monthly check equal to a percentage of your average monthly contributions while you were working; that percentage declines from 90 percent to 32 percent to 15 percent as your average contributions increase.** So the higher your average contributions, the higher your benefits, but your marginal benefit declines.

What about inflation? While you are working until you start collecting benefits, your contributions are indexed to the average wage level in the economy, which grows faster than inflation. So the effect of Social Security’s benefit calculation is to give you a specified percentage of the earnings that people like you were during your career are making now, not that percentage of the earnings that you made in the past.***

Those are the basics. Social Security also pays benefits to surviving family members and to disabled workers—an important benefit overlooked by most people who say they don’t need Social Security.

So what is that? It’s most similar to a traditional defined benefit pension plan where you get a monthly pension based on your earnings while you worked. It may look different because it’s financed by a payroll tax, but that’s a cosmetic difference. Back in the heyday of defined benefit plans, employees didn’t always have to make explicit contributions to their pensions, but they were paying for them implicitly in the form of lower wages. The main difference between Social Security and a defined benefit pension is that Social Security is less generous to high earners. Traditional pensions were often based on your last few years’ earnings (Social Security, by contrast, averages your top thirty-five years) and paid a fixed percentage of your earnings (Social Security pays a declining percentage).****

That brings us to the other thing that Social Security is like: an insurance plan. Even leaving aside the most obvious insurance features of Social Security—survivors’ benefits and disability insurance—it still provides two huge forms of insurance. One is insurance against living too long, which you get because benefits are paid as an inflation-indexed annuity. The other is insurance against not making enough money during your working career, which you get because of the progressive benefit formula. If benefits were just a fixed percentage of contributions, then you would have insurance against living too long, but you wouldn’t have insurance against your career not working out (which could be due to a recession in your early twenties, family emergencies, health problems, or any number of reasons short of full disability).

So Social Security is basically a pension plan that is partially used to fund an insurance plan. Although it has a progressive component, it isn’t welfare because you don’t qualify by being poor: you qualify by making contributions. (There’s no minimum benefit level anymore.) And it isn’t an individual investment vehicle because it’s not your money to invest any more than the money in your defined benefit pension plan or on your insurance company’s balance sheet is your money to invest.*****

The reason Social Security has a relatively small per-dollar impact is that it moves money from your working career to your retirement years, which is something that people do anyway to some extent. The claim that it forces you to buy an annuity is wrong and mainly irrelevant. It’s wrong because at age 66 you don’t have a cash balance that you are then forced to convert into an annuity: what you have is more like a pension plan that entitles you to a monthly benefit. (You may wish you had a cash balance, but you don’t, and I’ll come back to that later).

It’s mainly irrelevant because when you reach retirement age, you either have plenty of money or you don’t. If you have plenty of money, being forced to buy an annuity is irrelevant because you can just spend your other money sooner. If you don’t have plenty of money, you really should take the annuity rather than the lump sum and the shiny red pickup truck,****** and this is a case where I’m willing to argue that a little paternalism is a good thing.

The other important thing to realize about Social Security is that in the aggregate, over its history, it is completely fair—by construction. All the money that comes in goes out to pay benefits. Unlike most insurance products or investment vehicles, there are no shareholders and bondholders that have to be paid, and the administrative expenses are low (because the program is so big). So in the long term, the average person breaks even. It is true that the first generations did better than break even because they didn’t make contributions for very long before collecting benefits, so from now forward the rest of us will do a little worse, in aggregate. But we can spread that aggregate loss over any number of generations, so in the limit it can be vanishingly small.

This means that the average participant basically breaks even with Social Security. But that doesn’t mean that the program helps exactly half of us and hurts the other half, because the program is insuring all of us. Social Security pools risks—the risks of not making enough money and of living too long—and therefore provides benefits to anyone who is risk-averse (that is, virtually all of us). People value insurance and are willing to pay for it even when it has a negative expected value. (Most insurance has a negative expected value for most people—that’s how insurance companies make money.) So the total value provided by Social Security is greater than the amount of money that we contribute

(Social Security arguably reduces people’s utility by reducing their control over when they consume. The question is whether in our society this cost outweighs the benefits provided by insurance. I think it doesn’t, especially given that most people don’t save enough as it is (that is, they are already over-consuming in the present). Furthermore, if you’re upset about the timing of when you receive Social Security benefits, there are other ways to move your consumption around in time (loans). But I can’t quantitatively prove that the insurance utility exceeds the timing constraint disutility. You can disagree with me about this, but you should be clear that this is where the disagreement lies.)

This is why Social Security should be popular –and why it is popular. Of course, there are people who don’t like it—mainly ideologues who think that anything the federal government touches is bad by definition and rich people who are convinced they will be net losers. Some of the people who are convinced they will be net losers are suffering from optimism bias, but some of them are probably right: if you have ten million dollars in the bank at age thirty-five, you don’t need the insurance, so Social Security isn’t very attractive to you. (If you plan to keep working, that is; if you never work another day in your life, then Social Security is a net benefit to you, as long as you made contributions for at least ten years.) Hey, I don’t have ten million dollars in the bank, but I will probably be a net loser, too.

Well, I have two answers for you. The first is that you can’t decide whether or not you want insurance after the event you’re insuring yourself against has already occurred. Complaining about Social Security then is like paying for homeowner’s insurance for twenty years, selling the house, and complaining that the house didn’t burn down.

The second is: tough luck. Social Security delivers net positive social benefits, and to deliver those benefits it has to be a compulsory program. If you allowed people to opt out, you would get adverse selection, both rationally and because of optimism bias, and the program would melt away. Depending on your theory of democracy, the question is whether it provides net benefits in the aggregate, or provides net benefits to a majority of the citizenry, or provides net benefits to a majority of people behind a Rawlsian veil of ignorance. Saying you should be able to opt out of Social Security makes as much sense as saying you should be able to opt out of the Iraq War and get the appropriate share of your income taxes back. We make some decisions on the national level for the national benefit.

Of course, if you are a rich person who expects to lose money to Social Security, you could say, “I understand that I don’t have a cash balance at age 66; I want to eliminate Social Security so I can invest my payroll taxes however I want.” There’s nothing illogical or hypocritical about that, and I can’t stop you from trying. I also can’t stop you from trying to frame Social Security as a poor alternative to a 401(k) plan (or as “big government”). This post is just my attempt to explain to everyone else why Social Security is good for most people. Even with higher payroll taxes (or lower benefits), Social Security still benefits a majority of the population—because it’s cash-neutral in the aggregate, it pools risk, and it increases savings. And if people will just vote in their economic interests—no sympathy for the poor necessary—Social Security should do just fine.

* Right now the payroll tax is 10.4 percent because of the 2010 tax cut. The cap on earnings is indexed for inflation. Some state and local employees are not covered by Social Security, which means they don’t pay taxes and they don’t get benefits.

** If you start collecting benefits earlier, you get lower monthly benefits; if you start collecting benefits later, you get higher monthly benefits. These adjustments are supposed to be actuarially fair: that is, if you start collecting benefits earlier, you get smaller monthly checks because you are going to get more of them before you die.

*** After you start collecting benefits, benefit amounts are indexed to inflation, not to average wages.

**** There’s a good historical reason for that. In the postwar period, companies offered defined benefit pensions as a way of attracting desirable workers; their benefits were even skewed toward the highest-income employees because they were allowed to count Social Security benefits toward their low-income employees’ pensions. In other words, the traditional defined benefit pension was primarily intended to serve the needs of employers, not employees (not that there’s anything wrong with that in itself).For more on the history of Social Security, see The Divided Welfare State by Jacob Hacker.

***** The money in a defined benefit plan is held in trust for all plan participants and beneficiaries, so it is your money in that sense, but there’s no chunk of it that’s yours. Social Security’s money is also held in trust for beneficiaries.

****** One state, I believe it was West Virginia, started offering lump sum payouts to state employees on retirement. Several years later, they switched back to mandatory annuities after realizing that many people had spent their lump sum payouts on new pickup trucks and were now destitute.

67 responses to “Social Security for Beginners

  1. 1-) Social Security is a transfer of wealth from people in the working age to retired people, not from one´s working years to the retired years. You simply can´t keep all this money in the bank without creating distortions.

    Besides that, most people takes more money from SS that than pay in payroll taxes.

    2-) Yes, Social Security is a welfare program. And there is no problem with that.

  2. Besides that, most people takes more money from SS that than pay in payroll taxes

    I wish this could be proved true, first you have all the individuals who died before even collecting, and then there is the employer side of the SS equasion, even though you make minimum wage and only collect minimum payments, your employer paid for you also, and could have made hefty profits from you that you don’t get to collect on even though you participated in possibly making them wealthy. So SS can also be a weight born by business to be balanced by higher prices to the consumer or by a reduced margin rates for business. Its a slippery slope that so far has eluded a negative balance sheet, but for how should an economy crash.

  3. Amen to SS the greatest program ever. I expect it to be there when I need it because I didn’t have wealthy parents to bail me out or send me to good schools or set me up in good jobs

  4. “We make some decisions on the national level for the national benefit.”

    Or, as in the case of Iraq war (and Afghanistan and many other wars) to the national DETRIMENT.

    But otherwise, a very informative post. Thank you, James Kwak.

  5. Average wage is a bit skewed, isn’t it? I mean, wages follow an L-curve, so very few people will have the average wage. Middle class wages have decreased over the last 30 years when inflation is taken into account. Why isn’t the median wage level used instead of the average?

  6. Steve from Cranbury

    James, very useful post. As always I learned something. I suggest a followup.

    Can you refer me to a website or source that will answer this question:

    Are the monies we pay into Social Security actually set aside, the way I would if I were saving up
    to buy a car or pay for a college education. In this case, there would be real money in a savings
    account that would be on hand when I buy the car or college education.

    The reason I ask this is I’ve read in a number of places that since the 1980s, when the Social Security
    tax was increased to ensure future solvency, the money was never put aside like a college fund. I’ve
    heard that instead, the government spent the SS payroll tax to pay out that year’s SS claims and spent
    the surplus on non SS government programs, in the general budget.

    The “surplus” that was put into the SS savings account was not a monetary asset, but an IOU in the form of a non-marketable Treasury bond with no actual monetary value…..just a promise to pay in the future.

    Can you please get to the bottom of this? I think it is especially relevant today because if the money is not there, it explains the urgency both political parties feel to cut SS benefits because SS will run out of money in a couple years instead of a couple of decades.

    Please consider taking on this assignment or delegating it to someone you trust to come up with a clear
    answer non accountants like me can understand.

  7. Only works if there are enough workers to support current retirees – a bit of a Ponzi scheme in the long run, although I like it in principle

  8. James,

    This piece should be required reading for ALL Americans. One additional point you might mention: a) social security’s extremely low administrative overhead (0.9%) could never be replicated by the market (see http://www.ssa.gov/oact/STATS/admin.html)

    And, I really wish someone would do a takedown on this Cato piece, which lays out the strategy that Republicans have executed over the past 20 years, to undermine the system by making it less popular:
    http://www.cato.org/pubs/journal/cj3n2/cj3n2-11.pdf

  9. Sure, that’s social security, but what’s an annuity? Are you addressing people who grew up when “annuity” was a part of the English language (as opposed to accountant-speak)? Similarly, I’m not quite sure what this “cash balance” thing is, but at least each component word is comprehensible!

  10. I agree with Steve from Cranbury and anonymous at 1:13. This is an interesting explanation of how social security ought to work, but it seems at odds with how social security has in fact worked, i.e., that the Congress treats social security tax revenues like general revenues and spends them like general revenues, not putting anything aside or investing for future recipients. Without those components, I am not sure how illuminating the explanation is. Are the people who claim social security is going to ‘run out of money’ mistaken? If it is not now and never was a savings program, but a program where current workers support current beneficiaries, what will happen when there are no longer five or six workers supporting each beneficiary, but four? three? two?

  11. @ Anonymous

    “Life is a Ponzi scheme from the moment of inception?”

    @ Steve from Cranbury

    Ref: http://en.wikipedia.org/wiki/Federal_Insurance_Contributions_Act_tax

    Abstract/ “The Decline of Corporation Income Tax Revenues — Center on Budget”
    Ref: http://www.cbpp.org/cms/index.cmf?fa=view&id=1311

    Noteworthy: Social Security Medicare recipients pay and extra premium out of pocket (deduction taken automatically for program choice) deduction for medicare premium coverage.

    Thankyou James and Simon

  12. Sorry about link above: must google titled “The Decline of corp income…..

  13. It’s interesting that recently President Obama threatened to stop sending checks to Social Securitiy beneficiaries if the debt ceiling is not raised by August 2, 2011. Interesting because all the money paid in is supposed to be sitting in a Social Security Trust Fund somewhere which he should be able to tap to pay benefits.

    And the rate of return earned by the Social Security Trust Fund is … ?

    Re: Annuities. I think people would like to know what kind of monthly check would they receive from an annuity that they funded over their working lifetime with the same amount of money that is paid into their Social Security account. If nothing else, an annuity has some cash value so that if the owner died before reaching retirement, his beneficiaries would receive the cash value or a stream of payments.

    The bottom line is that in the world of ways to save and invest for retirement, Social Security’s return pretty poor.

  14. what will happen when there are no longer five or six workers supporting each beneficiary, but four? three? two?

    This was Japans problem in the 90’s, and the reason for their debt problems of yesterday/today. That same situtation here would be expodentially increased. Which is why there is a sudden urgency to get the economy going again, and why we still use old formulas for today problems.

  15. CBS from the West

    ” If it is not now and never was a savings program, but a program where current workers support current beneficiaries, what will happen when there are no longer five or six workers supporting each beneficiary, but four? three? two?”

    This is the key question. It remains the key question even if it really _is_ a savings program. Savings is an illusion for these purposes. You can’t eat dollars. You can’t live in dollars. You can’t wear dollars. Most of what retirees need to survive is perishable goods and services that must be produced at the time they are consumed–only a small amount is durable goods that could be produced in advance and set aside. So the “saved” dollars are only as good as what they can purchase at the time the retirees get them. The actual stuff of survival that retirees will demand in the markets must be produced by the people who are still working at the time. And the demographic forces already in place assure us that the burden generation X and beyond will bear to support the retired baby boomers will be much greater than earlier generations of workers incurred supporting their parents.

    We could have planned ahead decades ago and overcome this by investing in ways that would have greatly improved worker productivity: that would enable the smaller group of workers to produce enough for themselves (and their children) and the retirees easily. Or we could have imported a large population of younger workers through our immigration policies. Or we could have invested heavily in or loaned money to the rising economies of the developing nations, so that we could now call in a share of what they produce to meet the demands of our retirees. But, in fact, we did the opposite in all three cases. We have squandered our dollars on consumption or investing in industries like finance that, at their best reduce friction but don’t produce anything real. Our immigration policies have been primarily exclusionary. And we have been borrowing from China to finance our bubbles!

    So we screwed ourselves. Now it’s all an inter-generational struggle over how to split up the too-small pie. And our moral character as a nation will be judged in the future by how we choose, in the coming times of scarcity, to allocate resources between the people of the past, the people of the present, and the people of the future.

  16. People also don’t think 401(k)’s are welfare programs. But they are. They are tax expenditures, which means that in absence of the tax break, the interest deducted would go to the Treasury.

  17. Bill Woessner

    This means that the average participant basically breaks even with Social Security.

    The CBO does not share your optimistic appraisal of the situation. They estimate that the median American born in the 1940s will only get back 88% of what they pay in to Social Security. And the trend is not improving. The median American born in the 2000s can only expect to get back 76% of what they paid in to Social Security.

    The first is that you can’t decide whether or not you want insurance after the event you’re insuring yourself against has already occurred.

    Agreed. And that’s exactly why health insurance companies didn’t cover pre-existing conditions. But that didn’t stop the government from passing a low forcing health insurance companies to cover pre-existing conditions. So if we can legislate that private health insurance companies allow ex post facto insurance, why not do the same for Social Security?

  18. “It’s interesting that recently President Obama threatened to stop sending checks to Social Securitiy beneficiaries if the debt ceiling is not raised by August 2, 2011. Interesting because all the money paid in is supposed to be sitting in a Social Security Trust Fund somewhere which he should be able to tap to pay benefits.”

    I think that is a clear sign as to how much our leadership takes for granted their ‘get-out-of-jail-free” card that is the SS cookie jar.

  19. Bill Woessner

    James,

    social security’s extremely low administrative overhead (0.9%) could never be replicated by the market

    I’m not so sure about that. My Vanguard S&P 500 index fund only has an expense ratio of 0.17%. You’re right that doesn’t replicated Social Security’s overhead – it’s less than 1/4 of Social Security’s overhead.

  20. Reply to Steve: indeed the government has been using SS surpluses to fund general obligations, while issuing IOUs to the SS trust fund. So some people are now claiming that the SS fund has “no money left”, and the IOUs are worthless. That’s not quite correct, and you can’t have it both ways: raid the SS fund the years it is in the black and refuse to pay up for the years it is in the red.

    The bigger issue is demographics, not the validity of the IOUs (which is a true red herring). But, as far as my math skills go, the program should survive indefinitely with only minor tweaks (slight increase in retirement age and/or taxes, slight decrease in benefits, or a combination thereof). Unlike health care, it’s not a major fiscal problem for the US.

  21. Andrew Hicks

    I just want to put in a plug for the survivor’s benefit. My father died when I was a junior in college, age nineteen; my mother was a stay-at-home housewife with no prospect of suddenly finding a well-paying job. The Social Security survivor’s benefit, alongside loans and work-study, allowed me to finish my degree. I could not have done so otherwise.

    Many others have benefited similarly.

  22. Bottom Line,… America needs jobs, period! Sure,… opening up the flood-gates for immigration will work to some degree as it had once worked with Reagan,.. but in all reality just, an overt nostrum of futility. China is America’s problem because of its lax corporate governance regarding the worlds superpowers, and pathetically cheap slave labor force, and cost. There is a storm a brewing in China as I write, that might well send all corporate america back home with there tails between their legs. The indigenous people have had enough inflation and are demanding higher wages. China will have several options, one will be to impose higher external corporate taxes, or two, “Raise the Value of the Yuan” which the dollar will love, but U.S. Corporate will scorn? Anyway you look at it, the party is almost over for American business as China’s new-five year plan is to grow internally without the need for exogenous, overreaching, free profiteering American Multi-National Capitalist!
    This certainly will bring back jobs to the United States and employ American’s. Thusly, contributing to Social Security, and Medicare. The “Obama Health Care Act”, nor the “Balanced Budget Act (a bunch of swill, and hogwash)” has anything to do with stabilizing, or funding Social Security,simply, because they were initially implemented as stand-alone-programs, and virtually part of a eight-hundred year old Magna Charta in its beautiful written and magnificently articulated abstract format too boot. Indeed, the American Multi-National’s will look elsewhere only to find an unwelcoming Chinese footprint posted on a “Hangman’s Noose Boot-Limb”?

    The reckless greed and malfeasance of past administrations has placed these free-loading US Corporation’s/ Multi-National’s on top of america’s fiscal food chain free lunch program! Guess what? It’s about to end. Time to take out the trash!!!

    Ref: “History of Income Tax in the United States”

    http://www.infoplease.com/ipa/A0005921.html

    Ref: [pdf] “Tax Revenue is at its Lowest Since 1950 1″

    http://www.americanprogress.org/issues/2011/06/pdf_low_tax_graphs.pdf

    Note: If link fails must google :-))

    Great read, Thankyou James

  23. Interesting because all the money paid in is supposed to be sitting in a Social Security Trust Fund somewhere which he should be able to tap to pay benefits.

    And the rate of return earned by the Social Security Trust Fund is … ?

    Should is the operable word here, trust is what really happens to the funds. What most likely occured here is, somewhere back when the trust fund got raided, it was written into law that the payments had to be made just after the countrys interest was paid. Why have money sitting around waiting to be paid when we can write it into law and spend the trust funds money then. Since the gvt takes in more money each month than it has to pay in interest and SS and the military, it was deemed a safe bet by congress. This can be done without raising the debt celing but by not raising the debt celing the souvern bonds will begin to have no time to be paid as of 8-3-2011 and afterword. This in turn would raise the interest rate on the countrys debt possibly to amounts that could not be paid by incoming gvt reciepts ( by say a slowing economy), causing the SS payments to be suspended or delayed. So there is some truth to what you have heard, its just how one interprets it all, and if it registers or not.

  24. I want to add one little tidbit to earles taxes. During the napolieanic wars Europe was ravaged and needed American grown food to bring to Europe. This caused the price of food to rise above what the ordinary family could afford, not only that, it brought in more tax money, and the value of land increased (taxes too) due to the amount of money an acre could make. This brought the nations debt to a record low around 1832, giving the gvt more reason to keep land taxes the same, and find more reasons to borrow money. It has not ceased that operation to this day, only added to it.

  25. A good explanation. Unfortunately I suspect it is still far too complex for most people who need to understand it to understand it. Particularly when Tea Party and other types are telling them they don’t need it or whatever…..

  26. CBS from the West

    @ Speed

    “The bottom line is that in the world of ways to save and invest for retirement, Social Security’s return pretty poor.”

    True, but this misses James’ entire point. Social Security is not a way to save and invest for retirement–it is insurance against career failure and outliving whatever you can put away while you work. Certainly, if you could be sure from the start that your career will take off and will not be substantially disrupted by illness, injuries, “acts of God,” financial crises, family difficulties, etc., and that your investments will not be wiped out in a market crash just at the time you need to start living on them, then you can get a better return elsewhere. But none of these alternatives will be there for you if things go haywire. It’s insurance, not an investment plan.

  27. @Steve from Cranbury: I don’t know quite how to break it to you.

    There is no money.

    Money is not a thing. Money is an idea. Money is a function of law.

    But there is no actual money that is stored anywhere — for Social Security or anyone. Never has been.

    You may say, “Oh, but I have an ounce of gold. That’s money. It’s worth $1,596 (or whatever the latest spot price is).

    Really? Well, just a few years ago, that ounce of gold would fetch maybe $400. Tomorrow it could fetch $1,900 or $900. I’m actually describing a good dog, that will chase whatever is tossed, fetch it and bring it back to you. Let’s hope that by the time that dog (the ounce of gold) returns to you, it’s carrying more an ounce of, ahem, dog poop.

    Then, one might ask, what do rich people hoard? Well, they hoard ideas, and they hoard the law. In short, they hoard power. BECAUSE WE LET THEM.

  28. Since 1980 many have experienced long periods of unemployment. Afore this one is over, if it ever is, many will have expended any and all forms of savings, including 401ks. We see estimates that currently some 25million are solely dependent on Social Security. The rest is bullshit.

  29. @Owen owens: “Interesting because all the money paid in is supposed to be sitting in a Social Security Trust Fund somewhere which he should be able to tap to pay benefits”

    Who says? I think this is just wrong: not only does SS not achieve this (it would be just ridiculously underfunded if judged according to this standard – but then it would be unreasonable to try and judge it so), but that’s never been it’s purpose, nor has it ever be run or legislated as if it was. Is there any chance you could explain this claim?

  30. I don’t agree with Andre’s assertion that: “Social Security is a transfer of wealth from people in the working age to retired people, not from one´s working years to the retired years.”

    The working age population is not paying today’s Social Security benefits. Approximately 18% of US debt is held by the Social Security Trust Fund, and another 8% of US debt is held by trust funds for veterans benefits and federal government pensions.

    The Social Security Trust Fund represents cumulative excess reserves set aside to cover future payments, and it earns interest. It consists of $2.5 trillion invested in US Treasury securities. Today’s working population is replenishing that fund, and they will eventually reap their own old-age benefits…. unless they are SCAMMED.

    There are lots of reasons why the finance industry, globalist corporations, and wealth hoarders would like to kill off Social Security. They certainly are employing a lot of “think tanks” and lobbyists to find clever ways to undermine confidence in the viability of one of a well-run and well-liked system.

  31. > The Social Security Trust Fund represents cumulative excess reserves set aside to cover future payments, and it earns interest.

    At best this is true but (IMO) somewhat misleading, or just false depending on what you mean by the word “cover”. The reserves (and any interest) are of course to be used to *help a bit* with future payments and will be especially useful as a buffer if we have a small depression or some other medium term productivity glitch.
    But smoothing over temporary glitches aside, future payments depend – to a first and maybe even quite good second approximation – almost entirely on the willingness and ability of current workers to pay for today’s retirees, and then future workers to pay for ours, and – as Mr Kwak indicates – this carry-forward needs to go on for “any number of generations”. (Which is a deep question of demography and democracy!)

    If we close down the SS tax today, and likewise close any additional SS benefit accruals, the reserves (about $2.4T) could carry all _current_ retirees for another 4.5 years, more or less. For them, nothing beyond that period is “covered” by reserves. For those more than 4.5 years away from SS, nothing at all is “covered” by Trust fund reserves. This is by design (a design I don’t disagree with, to be clear).

    If by the word “cover…” you mean “intended to contribute slightly to, and maybe more than slightly to during limited economic slowdowns, … ” I can’t disagree though!

  32. Note that if you compare SS to an immediate annuity, there are features of SS that are far better than a standard whole life annuity. The first is the spouses share that is 1/2 of the benefit if the spouse has earned a lower benefit (also applies to divorced folks who were married 10 years). The second is upon the death of the prime spouse the survivors benefit gets shoved up to the benefit of the spouse. These would cut the payout on an immediate annuity a good bit. So the comparisons about amount paid versus benefit need to keep these in mind.

  33. @ken melvin: 25 million solely dependent on Social Security– 25 million unemployed–25 million here, 25 million there…how many children living in poverty? how many families subsisting just above the poverty line? how many who have used up their unemployment benefits and so don’t appear in the figures anymore? Pretty soon you’re talking real population.

  34. @bxg: just remember, there is no money.

  35. @Anon: You will have to refer to speed at 1:59pm, I used it as a premise for my responce.

  36. hmmm, “foreign aide” is not up for cutting, but SS is…

    and the FRB is “actively” gearing up for the process of covering some checks and not others….

    that’s why I visit this blog, I can read between the lines….

    thanks, y’all, especially Owen Owens who could not help but gleefully admit his next moves where going to “hurt her even more”….

    And that will finish off USA producer class (was it as good for you as it was for me?) – and then – with nanosecond accounting to polish off the entire planet – my guess is full blown WWIII in under a year – next spring in northern hemisphere, for sure…

    Still pondering the logical inconsistency of Ayn Rand’s way – why the hysterical imperative to have their very own country – why do a bunch of it’s-all-about-ME!ME!ME! believers need their own country? – how are they going to govern themselves….? Steal from everyone else…?

    “…In the beginning there was *MONEY* and then came life…”

    Life, all of it, as a *slave* for the Supreme Being – MONEY…

    who knew…?! Counter-intuitive, ain’t t?

  37. @Jim – the decade long “war” – or whatever this psychotic nihilism is – emptied out the SS fund – we ALL know it and they know we know it….

  38. @bxg: just remember, there is no money.

    I don’t think this matters. “Something” is in the SS trust fund. A lot of people get hot and bothered by what that something is, but it’s somewhat silly distraction. People who think it’s some phantom government fraud written on meaningless paper have some arguments, those who think it’s the worlds’ safest investment instrument have others. In the big picture, it’s a triviality either way. Treat it as zero or as the world soundest instrument, it’s third order interesting at best .The soundness of SS does not, by design, hinge on it.

    I wonder if might agree with you – from the 64000 foot level there is no (/not much) money if if you mean a store-of-value that we can carry forward. The workers of that future time will agree to provides us then-retirees with their services (hoping the yet next generation will do so in their turn) or they will not. That’s part of what’s called the social contract. There is no investment, no “money”, in our time that will impact this future decision more than marginally.

    We might have had a SS system where my previous paragraph was legitimately controversial. But in the US, and again I do not disagree with this choice, we did not go down that path. Our SS system is 95% a trust that the next generation is willing and able to support us in our old age, and so forth – “money” is minor issue.

  39. > @Anon: You will have to refer to speed at 1:59pm, I used it as a premise for my responce.

    I apologize, I did not realize this.

    I actually don’t disagree with Speed (I think?). I think we should be legally able to pay SS
    benefits for quite a while out of the trust fund, and our ability/moral-right do so so should be on par
    with other US creditors such as the Chinese. We should default this year on SS benefits if and only if we default on the Chinese, because SS can draw for the medium term on its decent-sized checking account (aka trust fund balances). Financial advisors sometimes say people should have 6 months worth of
    reliable, liquid, savings in case of sudden life crises – well, the SS administration has that and more: it has about 4 and a half years’ expenditure worth of savings (we call this: the trust fund). Conservative indeed!

    But saying that the Trust Fund has a legally strong _short term_ buffer fund to draw on (which it does have)
    is different from suggesting that it has investments to cover more than a tiny fraction of its obligations. Imagine the trust funds investments were 100% safe (I think they are, but people argue), held independently of the treasury, and yielded as highly as anyone thought reasonable in this climate. Even in this fantasty land, it would still cover small fraction of accrued SS obligations. *By design.* I’m just not sure that everyone in this thread realizes that.

  40. The one thing you miss are the significant issues that accompany demographic change. Since it’s a PAYGO system, the baby-boomers make out like bandits (even though they paid all through their working lives), since there were so many of them supporting so few retirees. Their kids (me) not so much. In a sense, the baby-boomers *haven’t* paid the full costs of their own benefits; and I will either have to pay more to pay their benefits, or their benefits will have to be cut.

  41. These articles by columist David Lawrence Dewey are the most fact based articles I have read pertaining to the social security problem, the jobs we have lost and why. He provides the facts and the truth. Everyone should read them.

    Hello Washington Politicians…
    Putting People Back To Work Will Resolve Deficit
    and Save Social Security and Medicare
    The Facts You Need To Know America

    http://www.dldewey.com/jobs.htm

    The Banking Meltdown – The Cause
    Carter, Reagan, Bush, Clinton and another Bush…
    Deregulati­on and the Slippery Road to Poisoned Assets

    http://www.dldewey.com/feb10.htm

    Dewey warned people in 2004 of what was coming concerning the financial meltdown.

    The Truth About the Jobs Losses and More to Follow

    http://www.dldewey.com/feb04.htm

    He warned people again in 2008:

    Job Loss Hits Records Highs

    http://www.dldewey.com/jobloss.htm

  42. Merrill Matthews in Forbes.

    http://blogs.forbes.com/merrillmatthews/2011/07/13/what-happened-to-the-2-6-trillion-social-security-trust-fund/

    What Happened to the $2.6 Trillion Social Security Trust Fund?

    If the budget crisis has done nothing else, it has exposed the decades-long lie about the solvency of the Social Security trust fund. The trust fund may be backed by the “full faith and credit of the federal government,” as defenders constantly remind us, but if it had real assets the president wouldn’t be talking about seniors missing their checks.

  43. the medium age of the global population is what? It’s NOT 65 or older – the OLD people are not sucking the life out of the young – what preposterous crap! That’s why no one is leaving the future in the hands of the *economist* bloggers! Your PhD stands for piled high and deep…

    maybe if you stayed off the speed you’d get some math right – that’s MATH, not meth…
    the POINT is – with FIAT $$$ – the value is not in the $$$ itself

    we are at war…or is even war now a one way street – you get to conduct philosophical and psychological nihilism against the human species and planet earth and no one gets a shot back at you?

    Wisconsin threw the bum out….media blackout on the FACTS….

  44. I paid into the system for 36 years but will only see 40% of my benefit. As a CA school teacher – I moved back 14 years ago – I fall into the Windfall Elimination trap. They say only 20 years of my 36 qualify under the “substantial earnings” qualifier. Some years I earned three times the minimum…but I only received credit for one year. In the years where I was say..$100 short of the substantial earnings level – they threw out the year. (No, you do not get credit for a percentage of the year – that would be fair.)

    Why is the system unfair? Because someone earning the exact amount to qualify for the substantial earnings each of their 30 years can receive their full benefit. I actually earned $120,000 over the minimum but it didn’t fall into the neat little categories each year. I was raising children and going to school – working part time for several of the years my employers and I paid in.

    So, were I to receive even partial credit for those 16 years they do not qualify, I could work up to the 30 year mark and be paid what I am owed. As it is, someone who has not paid in will receive my money. The money I paid in while working in banking and as a school teacher in OR where you DO pay into SS, will be collected by someone else. I needed those funds to make a decent retirement check. Instead, I am still teaching at 63 and must continue to do so.

    Any “Social Security for Beginners” article should include this convoluted mess. It always makes me furious. Windfall elimination…windfall? Give me a break!

  45. In your article you stated that “Almost all working people pay a payroll tax of 12.4 percent of their wage earnings up to a cap of $106,800.” That is not true. The Employee pays 6.2% and their employer pays the other 6.2%. The same is for Medicare’s 2.9%, the employee pays 1.45% and the employer pays the other 1.45 %. So the employee pays 6.2% on earnings up to 106,800 and 1.45% on all earnings.

    See SSA.gov. http://ssa.gov/pubs/10003.html

  46. What’s missing from the discussion above are some salient facts about the payouts SS beneficiaries pay out of their benefits.

    For the 26-33% of the beneficiaries, who are SS dependent & who have paid in to SS & Medicare during their working period, they continue to pay into Medicare out of their benefits, Even though the average benefit is approx $14K/year, they pay into Medicare Parts A/B/D a premium amount of $1345 this year.

    These premiums do not contain their further payments in deductibles, co-pays (Part D co-pays have gone up even during the 3 year benefit freeze) & the situation will get worse in 2012.

    Why? Because in January 2012 the freeze is off, but the COLA increase (based only on CORE CPI thanks to Clinton) the COLA will only account for 3rd Quarter 2010 to 3rd Quarter 2011. Therefore the cumulative CPI increase – already limited to “Core CPI” will not cover the increased deductibles, premiums & co-pays on Parts A/B/D that start then. The rise will probably negate the COLA “increase” by a factor of 4 or 5, thus making the COLA a net loss for the average beneficiary whose sole or majority income is SS.

    This does not take into account that Medicare does not cover dental and vision services that are increasingly important to maintaining health for the elderly & thus all those they contact in person.
    The public health/epidemiology fallout will make our national health profile continue to deteriorate in comparison to the EU/Canada and other countries who actually believe that people are their most important resource & who take steps to keep their populations healthy.

  47. In my experience, there is about a 10%/90% split of workers who would willingly save/invest for retirement versus those who would spend the money in the present. Many of those present expenditures would be unavoidable (food, shelter, education, transportation) but much of it would also be discretionary bad choices (smoking, drinking/drugs, gambling).

    Social Security was founded as a Social Insurance program wherein we all contribute to ensure that those aforementioned 90% don’t ultimately become a burden on the rest of us. In the 1930’s, prior to the advent of Social Security benefits, over 90% of the elderly had incomes below the national poverty level. Today, that figure has dropped below 10%. Social Security has succeeded in its primary goal – spectacularly in my opinion. The arguments against Social Security, as noted by Mr. Kwak, come from the well-off. Unfortunately (?) they are the ones who are heard because of their economic positions. However, there is a good reason that Social Security is known as the “third rail of American politics” – it is the one sure-fire issue that will bring voters to the polls, and the 90% who NEED the program will make their voices heard on election day.

  48. http://www.weeklystandard.com/articles/fling-welfare-state_576909.html?page=1

    “When Roosevelt signed social security into law, it was meant to start coverage at age 65 at a time when 58 was the average lifespan of male Americans.”

  49. A few days ahead of your time I see. A major problem with health care in general, is simply how our democracy is approached. Its a monetary based life with little consideration for one own well being as a youth. Even now aged football players want to sue from injuries caused in ones youth. Even though they agreed to be handsomely paid then, not knowing of their destiny. We as a society demand to be entertained at the cost of others reguardless of the consequences. If you want to reduce health care costs, you must start from the begining of life and take care of yourself as best you are taught, which in America, starts from the bottom and struggles for some reason from there.

  50. “Unfortunately I suspect it is still far too complex for most people who need to understand it to understand it…”

    Hell, it’s far too complex for most of the commenters here….

  51. @Aaron: If they take the cap off the salary limit for contributions, it will go a LONG way toward making Social Security workable. Now, sure, if you’re a high earner, you can say: that’s a contribution increase for me. But given 25 million seniors living on $1,000 a month Social Security benefits, my sympathies would go to them, and not you. And if you make less than $106,000 a year or so, you wouldn’t have to pay more at all. If anyone would do the reasonable thing and remove that cap.

  52. Count de Money

    Mr. Kwak treats Social Security as if it indeed had a trust fund which earned real returns that paid current benefit, until this line:

    “But we can spread that aggregate loss over any number of generations, so in the limit it can be vanishingly small.”

    That quotation is the entire nod he gives to the issue of intergenerational transfer, which is, to me, the central issue of Social Security as it has been operated since its inception.

    It is surprising how many commenters in these pages think that there actually is a trust fund with real assets (instead of IOUs that Americans owe themselves). Mr. Kwak does nothing to disabuse anyone of this notion when he writes, “(t)he reason Social Security has a relatively small per-dollar impact is that it moves money from your working career to your retirement years”. It does no such thing. It moves money from today’s worker to today’s retiree. And it will do so ad infinitum through the generations.

    One problem is that generations are different and the ones to come may be smaller than the ones before.

    Another problem may be that social security, as a safety net, may be helping to limit fertility rates in the United States (and similar safety nets with the same effect in other developed countries). (I also don’t like China’s prospects in this regard in another 60 years or so – but that’s another story.) Does not Social Security create an incentive to avoid having children? Why spend 250,000 in today’s dollars to raise a rugrat when you can avoid the expenditure and have someone else’s children pay for your retirement?

    In the end, Social Security will continue one way or another, but I share no measure of confidence with Mr. Kwak that, as presently constituted as an intergenerational transfer, it is either economically sound or even moral. (But why should morals stand in the way of a comfortable life?)

  53. @Carla, I totally agree with you. I wasn’t actually complaining (although re-reading my comment I can see how it could be taken that way). My point was that the generational/demographic issues are the defining issue for Social Security and are missing from James’ rendering.

  54. @de money “One problem is that generations are different and the ones to come may be smaller than the ones before.”

    What part about 7 Billion people on the planet with a medium age in their 20s don’t you understand?

    And you want to do the math for grandma?

  55. CBS from the West

    Let me try saying it again. The whole issue of whether there is or is not an account with real money or not is bogus. You can think of it either way. It makes no difference to anything. In real terms, social security is an intergenerational transfer.

    But, in fact, the elderly have ALWAYS AND EVERYWHERE been supported by the labor of their descendants, except when they have not been supported at all and simply left to die. With few exceptions, the real stuff of survival is perishable goods and services that must be produced at the time of consumption–it is simply impossible in principle for anybody to “save for their own retirement” in real terms. So, if you don’t think leaving the old to die is acceptable, then the only alternative is for their descendants to support them. The question then becomes what is the best way to do that.

    The concept behind a system like social security is that during their working lives, people forego some consumption (by paying taxes) and those resources are used instead to enhance the ability of the next generation to produce enough to support both themselves, their children, and their elderly. (When the succeeding generations are of the same or increasing size, it’s not really much of a problem. But when, as now, the succeeding generations are shrinking, and the elderly are living longer, to boot, it is the recipe for catastrophe.) Increased productivity in the next generation could have happened through research and development investments that lead to productivity-boosting technologies. It could have happened through investments or loans to developing economies so that we could later demand and receive a share of what they produce. In the face of the demographic problem (which has been anticipated for at least 50 years) one could also have promoted the immigration of young productive people. But we have done none of those things. We have, indeed, done the exact opposite. We have squandered our own resources, excluded foreign workers, and borrowed from the very people we should have been investing in or lending to.

    Now the first chickens are coming home to roost, and a large invasion of them will follow. Now matter how you juggle the money in the accounts, our real productive capacity will decline as the workforce shrinks in the absence of new ways to increase their productivity. We have nobody to turn to for help. The pie will shrink and the generations will battle over how to divide it. Even if we fork over huge numbers of dollars into social security accounts, those dollars will not be able to buy more than our descendants can produce and deliver to us beyond their own subsistence needs. Even if we literally enslave our children, the time will come when they simply cannot produce all we need.

    We should stop squabbling over dollars and start figuring out, in real terms, what the needs and wants of each generation will be over the next several decades and try to figure out a distribution plan that distributes the pain as equitably as possible.

  56. The $2.7T of IOUs in the trust fund represent the amount the general fund owes FICA payers of 1984-2009 (and their heirs).

    The Greenspan commission raised FICA contributions (and yes, Harry, the employee is actually paying all 12.4% regardless of how SSA counts it) such that a surplus would accrue, and it has.

    What happens to this $2.6T is the interesting bit — the population it is owed to numbers 100M or so so it’s something like $25,000 per person.

    The Gang of 6 wants to push out the repayment to 75 years. This is a takings of the trust fund in that those who were overtaxed 1984-now will not benefit from the FICA money they were forced to contribute.

    The trust fund was contributed to over the past 25 years so it should be drawn down over the next 25 so those who contributed get their money back. That was the Greenspan deal.

    (note that the money that pays back the trust fund MUST come from incomes above the current FICA cap; anything less would in fact be taxing the same people twice, first with FICA 1984-2009 and then with income taxes 2011-?)

    “One problem is that generations are different and the ones to come may be smaller than the ones before.”

    “Another problem may be that social security, as a safety net, may be helping to limit fertility rates”

    The above exhibit the “lump of labor fallacy” fallacy. There are 16 million unemployed people now. We don’t need more people here, we need fewer. As for declining population, as long as productivity — especially of what older people need, medical care and old-fart TV shows — continues to rise we will be OK.

    “When Roosevelt signed social security into law, it was meant to start coverage at age 65 at a time when 58 was the average lifespan of male Americans.”

    This is commonly-found BS that circulates among conservatives.

    http://www.ssa.gov/history/lifeexpect.html

  57. Count de Money

    @ Annie. you’re quite right: it would be great if we got those seven billion people to pay FICA.

  58. “We should stop squabbling over dollars and start figuring out, in real terms, what the needs and wants of each generation will be over the next several decades and try to figure out a distribution plan that distributes the pain as equitably as possible.”

    Thing is, since 1980 — i.e. when the Greenspan deal was made — the top 1% share of income has risen from 1/10th to 1/4th of the national income.

    This is the elephant in the room. THE IMMENSELY WEALTHY benefited most while FICA payers were overpaying their FICA taxes by $1.5T 1989-2009.

    And now it’s time to raise income taxes to pay back the FICA surplus, the immensely wealthy are fighting a pretty damn good propaganda campaign (via AEI, Cato, Heritage, etc) and media properties.

    This nation is probably too collectively stupid to prevent having its $2.7T FICA surplus ripped off. My share of that overtaxation is only $20,000 or so when they take it, it won’t be the end of the world.

    But I’ll be mighty pissed at Obama if this happens on his watch.

  59. “The trust fund may be backed by the “full faith and credit of the federal government,” as defenders constantly remind us, but if it had real assets the president wouldn’t be talking about seniors missing their checks.”

    The problem is the wealthy recaptured government in 2010 and are in the middle of implementing a tax-payer strike.

    http://8020vision.com/2010/11/16/when-does-the-wealth-of-a-nation-hurt-its-wellbeing/

    They prevented the return of the 39.6% marginal rate last year and they will keep fighting that fight. They are holding the government’s checkbook hostage as we speak in the effort to prevent the tax increases that are necessary to bring down the way-too-big deficit government is running now.

    The wealthy want to pay less taxes not more. Like George Carlin said, they want it all.

    Though I do think we need Clinton’s tax rates (plus a little more) on everyone so we can pay down the money we borrowed to liberate Iraq. Excess military spending over the FY00 baseline is over $3T now, 30% of the debt held by the public. Of course, if we had to pay for our wars, we wouldn’t have any more.

  60. @ de Money – yup, keep it FLOWING – well, I’m thrilled we finally got down to the truth, eh?

    There was never any $$$ to begin with that anybody had – it was all software “informatics”…slave labor is FREE and volunteered – pick one potato for yourself and 1 billion for “Count of De Money”

    god’s work, I know…

  61. CBS from the West

    @ Troy

    “There are 16 million unemployed people now. We don’t need more people here, we need fewer. As for declining population, as long as productivity — especially of what older people need, medical care and old-fart TV shows — continues to rise we will be OK.”

    The 16 million unemployed people may eventually go back to work in the next decade or so. But many of those will retire in the decade after that. The demographics we have set up will force a shrinkage in the total size of the work force, not in the immediate future, but over the next several decades.

    The special need that older people disproportionately consume is medical care. But they will also be competing with the young for food, clothing, shelter, utilities, and transportation on more or less the same basis as the young. There aren’t that many things they consume less of: education, entertainment and recreation.

    Yes, if productivity rises sufficiently to overcome the rapid escalation of the dependency ratio, then we will be OK. But there is no reason to think productivity will rise like that. We have done nothing to lay the groundwork for that to happen. While computer technology has enhanced the productivity of some types of workers and will continue to do so for a while longer, industry has often responded to that by reducing its workforce, so total productivity does not necessarily rise. The question is whether existing and pipeline technologies will lead to a sufficient rise in total workforce productivity to cancel out the adverse demographic trends. It looks to me like it won’t, not even close. Do you have some reason for your optimism?

  62. @CBS from the West: “But, in fact, the elderly have ALWAYS AND EVERYWHERE been supported by the labor of their descendants, except when they have not been supported at all and simply left to die.”

    Uhm, in fact, the elderly ALWAYS AND EVERYWHERE have taken care of their descendents for many years, housing, feeding, clothing and educating them, until those descendents were able to exist as independent mature adults, without such support.

    MY MOTHER DID MORE FOR ME IN MY CHILDHOOD AND ADOLESCENCE THAN I EVER DID FOR HER IN HER OLD AGE.

    How did the elderly become deadbeats? When some rich ENTITLED SOBs with net worths of millions decided to call a $1,000 a month Social Security benefit an “entitlement” and brainwashed the American public thus.

    Which one of you can say you have done more for your parents than they did for you while raising you?

    Honest to God, it’s disgusting. Absolutely disgusting.

  63. Which one of you can say you have done more for your parents than they did for you while raising you?

    Trust me, I am the bridge over troubled parents.

  64. @CBS: do you support taking the salary cap off FICA contributions immediately? Do you support Medicare for All to provide universal health care so we’re not always demonizing, and failing, our oldest and the sickest citizens?

    Yes, we are going to have to agree on reallocating our resources as a society. The top 1% will have to give back. The next 10% might even have to give back a little.

    Does anyone remember the phrase “From those to whom much has been given, much is expected.” ??? I haven’t heard that one for years, but I haven’t forgotten it either.

  65. @ Troy “But I’ll be mighty pissed at Obama if this happens on his watch.”

    Which Obama do you mean? The real one? That’s rather like the picture of Dorian Gray, isn’t it? Or doesn’t a massive betrayal of the American electorate mean much today?

    http://www.truthdig.com/report/item/the_obama_deception_why_cornel_west_went_ballistic_20110516/

  66. CBS from the West

    @ Carla

    “Uhm, in fact, the elderly ALWAYS AND EVERYWHERE have taken care of their descendents for many years, housing, feeding, clothing and educating them, until those descendents were able to exist as independent mature adults, without such support.”

    Well, ALWAYS AND EVERYWHERE, until here and now perhaps. I foresee the possibility that my generation (baby boomers) will extract from its descendants far more than we have given them. Both because we seem rather disposed to impose excessive demands on them, and, frankly, we haven’t given them nearly as much as our parents gave us. In particular, I would point to the fact that most of my generation had their education paid for by their parents, whereas my generation’s descendants are typically being placed into indentured servitude to finance their education. And whereas our parents’ generation saved and invested to build a thriving industrial economy for us, our generation has squandered and dissipated that legacy and we are poised to leave our descendants a neo-feudal economy.

    To clarify my original post, because I think you have misunderstood me, I am by no means in opposition to an inter-generational transfer to support retirees. In fact, as I pointed out in my post, there is really no alternative acceptable in a civilized society.

    But I want to call attention to some things relating to it:

    1. Despite the attempts of some to deny it and paint it as some alternate form of retirement savings, Social Security is, in fact, an intergenerational transfer. (And, to repeat, there is absolutely nothing wrong with that–there isn’t even a decent alternative.)

    2. There is a lot of discussion going on about whether there is “real money” in the social security trust fund or just IOU’s from the government to itself. I think this is a distraction–it doesn’t matter and it wastes our time.

    3. The demographics we are facing pose a new challenge to programs like social security, challenges that cannot be overcome by moving money around between accounts. The reality is that providing for the huge number of retirees coming up is going to be a greater burden to the next generations of workers than it was for my parents generation or mine. There are things we could have done to mitigate that burden–but we didn’t do them and it is probably too late now. Even though I am a baby boomer myself, I am frankly more concerned about the kinds of lives my descendants will lead with this burden. I think that a) this issue is not discussed enough, and b) discussing it in terms of dollars instead of real goods and services is misleading. The amount of real pie available per capita is going to shrink as the work force shrinks but the retiree population grows. It will not be possible for my generation to retire in the style my parents’ generation did and my descendants’ generation to also lead the lifestyle that my generation did. So we ought to be talking about that and figuring out the most equitable way possible to allocate our declining resources across the generations.

    “@CBS: do you support taking the salary cap off FICA contributions immediately?

    Yes, I think the FICA salary cap makes no sense, never has. Ought to be eliminated–never should have existed. But doing that won’t solve social security’s problems–it will just move around dollars that won’t buy enough when the time comes to spend them. Social Security’s real problems are fundamentally demographic. The salary cap is about redistribution between wealthy and poor within generations. It has nothing to do with the inter-generational problem I am talking about.

    “Do you support Medicare for All to provide universal health care so we’re not always demonizing, and failing, our oldest and the sickest citizens?”

    Well, yes and no. We have a thoroughly rotten, predatory health care system in this country. Medicare is probably the least noxious part of it. I do not support expansion of the existing health care system–which is why I am staunchly opposed to the ACA. And I would not support extending Medicare to all within the context of the existing health care system. Giving the existing system a larger captive audience to prey on is not my idea of good health policy.

    I support radical reconstruction of the health care system so that it serves to promote, support, improve, and sustain the health of the people. In the current system any health gains to the public are incidental benefits, against which we have to trade off enormous rent extraction by the industry and lots of collateral damage as unnecessary churned treatments maim and kill people. It is also quite clear to me both on theoretical grounds and having lived through over 30 years of failed attempts, that “market based” solutions cannot work for health care.

    Within the context of a radically reconstructed health care system, a single payer approach that looks like Medicare for all appeals to me as the preferred way to go. But I think if we really rebuilt the health care system to serve health, it might be possible to include the private sector as well.

    I think it is preposterous for Washington to even contemplate trying to control Medicare’s expenses without reining in the larger health system it is embedded in. Medicare’s cost explosion is merely a reflection of the health system’s, and it cannot be controlled as if it were some autonomous program. Any attempt to do so can only have one effect: to keep the elderly from getting the health care they actually need. (And, I’m pessimistic enough to believe it will _not_ lock them out of the lucrative tests and treatments they _don’t_ need.)

  67. I haven’t read the mass of comments above, and maybe someone has already said this, but —

    Social security is cash-neutral in the absence of changes in the age composition of the population. Which is not true, ever. Thus the “baby boomer weighing down a smaller generation” problem, which manifests itself not only in the macroeconomic balance problem, but in the larger intergenerational justice problem.

    Which in turn, is not only about post-boomers having to pay for the extended lives of a large cohort of senior citizens, with their life-extending cholesterol pills and whatnot, but about resource allocation at the microeconomic level — too much stuff chasing the Old People Money; too many drugstores and too little hobby shops or whatever.

    I do agree about the folly of an “opt-out” Social Security system (that was a great analogy, homeowner insurance); it’s just that we should be aware that it’s something that affects this larger demographic system. (For one, what if a financially overburdened population breeds less as each generation comes?)