Dean,

I very much enjoy your blog, but I think you are missing the point of the SS jihad.

The increase in payroll taxes was not ever a plan to "save" SS, but a way to switch regressive payroll taxes for progressive income taxes under Reagan--as documented in Batra's "Greenspan's fraud." That is exactly what the trust fund is, a fraud, as is becoming more apparent every day.

Of course the govt isn't going to default on the IOU's....they (supply-siders and the like) will use scare tactics to raise the regressive payroll tax and reduce benefits so the IOUs never need to be redeemed. If we are dumb enough they may get us to continue over funding SS for a longer period of time so that there can remain a substitution of regressive payroll taxes for more progressive income taxes.

Its time to call this fraud for what it is so that we can learn from the mistake.

I know from past columns that Dean doesn't consider the trust fund a fraud (I do, or at least I consider it an accounting fiction). I wonder though, in the spirit of his blog if he isn't perhaps engaging in some of the obfuscation that his targets often do. You can argue about whether the government can afford to default on the IOUs or whether that would be the same as not paying bonds held by people outside the government. But the real issue is, can we as a country afford to pay the benefits. To pay those IOUs the government will need to raise taxes, right? Possibly to an unsustainable level? Isn;t that really the point of the story? Or are you saying that no tax increases are needed for 39 years?

@Erik

I think Dean is saying that without any changes to the current system (no tax increases) that the SS can continue paying benifits for 39 more years.

This isn't just Deans opinion, its the official government opinion (from the Congrssional Budget Office).

Erik, tax increases, spending cuts elsewhere or other types of borrowing will be required.

Alan, your statement would be correct if you add (no "payroll" tax increases). Obviously in redeeming the IOUs the money has to come from somewhere, one possibility is increased income taxes...this has been pointed out in this blog.

WRT to "fraund", I meant it is a political fraud. In 1983 we were told that the increase in payroll taxes was to secure SS benefits in the future. If the benefits were not in fact secured, as we are being told now they arent, then I call the trust fund a fraud.

Erik L: doesn't consider the trust fund a fraud (I do, or at least I consider it an accounting fiction)

Yes, it's an accounting fiction. So is the US dollar. What's your point?

Canned goods, bottled water and firearms are not accounting fictions. However, it would be nice to continue our accounting fictions so we don't have to rely exclusively on investments in the aforementioned tangible items.

whether the government can afford to default on the IOUs or whether that would be the same as not paying bonds held by people outside the government

No need to argue. Defaulting on your debt is defaulting on your debt. Alexander Hamilton established a policy of not doing so. It worked during real crises like the Civil War and the Great Depression. Why would you want to change it now?

can we as a country afford to pay the benefits

Yes we can. The US is a prosperous country that needn't resort to defaulting on its obligations.

To pay those IOUs the government will need to raise taxes

Yes, the deficit in the General Fund is unsustainable.

Possibly to an unsustainable level?

No. If I recall the Clinton years were pretty prosperous, despite the "onerous" tax rates.

P.S. If you want to talk about unsustainable conditions, let's talk about the current account deficit. No point in talking about replacing some shabby furniture in the future, when the house is on fire now.

Erik L

If you are going to throw around phrases like "unsustainable level" you need to do some arithmetic and come up with some numbers. The increase in general taxes that would be necessary to pay the Trust Fund debt...remember that is money actually OWED to working people...would amount to about fifty cents per week starting in 2015 and increase by fifty cents per week each year until 2045, when the trust fund would be fully repaid. the baby boomers would mostly be dead, but by then the extra fifteen dollars per week would need to be shifted from general taxes to payroll taxes to pay for the increased life expectancy of the people paying the payroll tax.

If you have trouble doing the arithmetic, I can show you in more detail.

Another way to look at it is that IF people are going to retire at about age 65 (don't think that is too young until you get there) the "economy" is going to have to find a way to meet at least their basic needs out of then current production. It doesn't matter whether the money for that comes from payroll taxes, general taxes, dividends, or resale of stocks.

Moral here is stop letting them make you think in wooly concepts. Get the numbers and try to understand what they mean in the real world.

Dale- I didn't mean to make you mad. Excellent use of patronizing tone BTW. Don't they have question marks where you come from?

Let me put my MIT education to good use. The increase in general taxes will be 50 cents per week in 2015? Well that's 26 dollars right? Well I agree that doesn't sound so bad. Not even a rounding error compared to the federal budget. I wonder why everyone is so worried.

As for all the people who think the government lending itself money is the same as other entities lending it money, I suggest the next time you find yourself in a financial fix you tell whomever not to worry; you're going to lend yourself the money.

If you actually do consider SS separately, the problem with the budget isn't high spending, it's low taxes. Non-SS income as a percentage of GDP fell from ~15% throughout the 60's and 70's to ~12.5% during the Reagan years, to a low of 10.7% in 2004. On the other hand, non-SS spending was pretty constant at ~17% from 1962-1992 (it was 15.6% in 2004).

In other words, non-SS spending has not changed much in 40 years (except for a brief dip during the Clinton years), but non-SS tax revenue has been consistently declining. The choice is whether we like our spending or our tax cuts, but SS has almost nothing to do with this.

Erik,

Well, if you actually *had* the money to lend yourself, I'm sure whomever would be just fine with it.

People do this all the time: borrowing from retirement accounts and home equity lines of credit are two pretty common examples.

I should add that the interesting thing about the big drop in non-SS tax revenue is that the majority of it does not come from personal income tax, which is only slighly lower than it was in the 60s, but from corporate income taxes, which have dropped from about 4% of GDP to less than 2% of GDP, and from excise taxes, which have dropped from ~2% of GDP to 0.6%

I would support the use of the term 'fraud' when referring to the payroll tax increase of 1983. It did not do anything to help pay for the SSI of the baby boomers. In fact, it probably hurt because it allowed the gov't to spend more than it otherwise would have on general expenditures.

In hindsight, it seems the SSI surplus was a bad idea. It allowed on-budget spending to get out of hand. In short, SSI trust has been used as a slush fund for funding the defence and health care industries.

What can I say, other than baby boomers are greedy s.o.b.'s? These are the people that live by 'Greed is Good" and "The one that dies with the most stuff wins!" Now they have goofy commercials starring Dennis Hopper extoling the virtues conspicuous consumption in retirement. As a generation, these people are certainly worthy of contempt. They inherited vast wealth, and are leaving a legacy of vast debt.

Erik L,
sorry for the patronizing tone. I specialize in MIT graduates (?). The government is not lending itself money. The workers (under 97k/yr) are lending money to the corporations, rentiers, workers (over 97k/yr), proprietors, and other people who pay general taxes but not payroll taxes.

Having read Mark Thoma be a bit kind to Chairman Ben but then seeing a comment from one of his readers praising some insightful comments from Brad Setser, I went to Brad's place inviting him to go after this speech. I should have realized you'd already done so. Well done.

can we as a country afford to pay the benefits. To pay those IOUs the government will need to raise taxes, right?

The critical mistake you are making is treating repayment of the SS Trust Fund bonds as some sort of special luxury that we should forego in the face of financial difficulties.

If you think the country faces financial problems then there is no more reason to blame Social Security than there is to blame any other aspect of the government budget, like defense or the level of taxes, or whatever.

In fact, considering that funds were taken from workers specifically to fund future benefits(in the aggregate), I'd say there is much less reason to treat SS as a discretionary item than many other things.

What are you smoking? You really think your children are going to pay 50% tax rates for your retirement? Good luck, most of us college kids are planning to move abroad ASAP so we don't have to.

Dave,
so you're a college kid are you? do they teach critical thinking at your college? or simple arithmetic?

at the worst, the PAYROLL tax might go up 50%. but that's 50% of 6.2% for a total of about 9% of payroll. and that is only if you are going to live about 18 or 20 years in retirement (life expectancy at 65 is 85). The money goes to pay for YOUR OWN retirement, see. But the concept of pay as you go is difficult to understand if you've never thought for ten minutes about anything or learned to count on your fingers.

Why is there a cap on income subject to social security? Every year, I get a Christmas present from the government because my last few paychecks have no SS taken out. Eliminate the cap and take SS from all wages, from my $105K to some CEO's $200M.

Brian: surely you're joking. Social Security is a regressive tax? Really? How is that even remotely justifiable?

(signed, a foreigner)

Maybe we should follow the example of the Swiss:
- they do not call the payroll deductions for their system "taxes", they call them "contributions". That way the people there are much more aware that the trustfund and the federal tax revenue are two entirely separate pots of money. The government does not borrow money from itself; it borrows from the trustfund (which it administrates as well as it happens, but this is only a coincidence in this context).
- They do not have a cap on salaries, which makes the system more sustainable (and allows it to better withstand the growth in inequality that we are currently observing).

I also feel a little offended by this:
"What can I say, other than baby boomers are greedy s.o.b.'s? These are the people that live by 'Greed is Good" and "The one that dies with the most stuff wins!" Now they have goofy commercials starring Dennis Hopper extoling the virtues conspicuous consumption in retirement. As a generation, these people are certainly worthy of contempt. They inherited vast wealth, and are leaving a legacy of vast debt." (Maybe this sarcasm - I hope it is anyway.)
First of all the inventors of the trustfund and the surplus were not baby boomers, they were the WW2 generation - the richest few of that generation to be precise. Besides: the baby boomers were the ones who paid most of the excess taxes (except for the richest few percent). Now those same people - like Greenspan - who is not a baby boomer by any definition - want to screw them out of the benefits. Nice!

If you want to talk about unsustainable conditions, let's talk about the current account deficit. No point in talking about replacing some shabby furniture in the future, when the house is on fire now.

Amen.

What are you smoking? You really think your children are going to pay 50% tax rates for your retirement? Good luck, most of us college kids are planning to move abroad ASAP so we don't have to. - Dave

"Most of us college kids?"

Seriously?

I mean, I used to work for a University, so I had pretty regular access to college kids. And if there was a sense that some large percentage were ready to move abroad rather than face income taxes to support Social Security, I completely missed it. And this was at the height of Bush's "Non-Stop, Coast-to-Coast, Social Security Privatization, I mean Personalization Boondoggle Traveling Fustercluck Roadshow."

Brian Boru

The reason not to raise the cap in my opinion is that incomes over 100k do not get a good enough return from SS. Raising the cap would make these relatively influential people desperate to kill SS. The only reason for raising the cap that I can see that makes sense is for people who might earn 300,000 one year and nothing for the next two years. I have no idea how often that happens.

First of all the inventors of the trustfund and the surplus were not baby boomers, they were the WW2 generation

Er, did I say they did?

the baby boomers were the ones who paid most of the excess taxes

But they spent way more than they put it. To the tune of trillions of dollars. Moreover, the amount of debt rung up over the past 20 years is much much more than fiscal debt. It is environmental debt, human capital debt, current account debt.

I am glad somebody was offended because that means they aren't used to somebody talking to them in that way.

Um, where abroad are you going to move that has lower taxes? Not Europe or Canada. Only Mexico has lower total taxes, and Japan and Korea have comparable taxes to our current rates.

Once again: retirement has been paid for. Debt incurred over the last two decades is what needs to be paid for.

anonymous
i suspect no one was really offended by your comments once they understood them. Ronald Reagan, by the way, who started the big deficits, was not a boomer. otherwise i'd have to agree with you about the environmental "debt" of this generation. On the other hand we have always had greed. and consumption is built into our genes. the
boomers seem to be the first generation that has either faced it as a world ending problem or begun to dosomething about it.

the federal deficit etc is of course pure human stupidity, but that's not new either. we were taught in college that deficits were not a problem they really weren't. may not be yet, though the nature of the deficit has change. what is the problem is the mindless stupidity of both the free trade no tax fundamentalists and the momma owes me a living brainless liberals.

i need to say not all liberals are brainless. just some i have talked to recently. onthe other hand all free trade fundamentalists are stuid. even ones with nobel prizes and degrees from prestigious universities.

i need to say not all liberals are brainless. just some i have talked to recently. onthe other hand all free trade fundamentalists are stuid. even ones with nobel prizes and degrees from prestigious universities.

i respect that answer. to me, their are 2 different types of 'liberals'.

I just read HL Mencken Treatise on the Gods, its a darn good read. Now there is a real liberal.

vorpal,
you gave my comment a better answer than it deserved. i was just exasperated with some people i know very well whose hearts are in the right place but don't take the trouble to try to think past their first emotional reaction. i should shut up there before i start to sound like darth...er dick cheney.

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Actually, the dollar is immediately borrowed by the Government and put to use in all the things they do. In a way the Trust Fund is a type of forced savings. The payee eventually gets back the principal with interest when he retires or is disabled. Any kind of retirement savings does the same thing, though private retirement funds obviously invest much more in the private sector.