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June 02, 2013
Is Social Security running out of money?
The trustees overseeing the finances of Social Security and Medicare issued their latest report on Friday, declaring that a) the Social Security Trust Fund is expected to run out of money in 2035, the same estimate as last year; b) Medicare's hospital trust fund is expected to run out of money in 2026, a two-year improvement over last year's estimate; and c) the Disability Insurance Trust Fund is expected to run out of money in 2016, just as projected last year.
Here's why I don't believe that's the correct way to think about these numbers.
The Social Security trust fund ended 2012 with $2.6 trillion in assets. Under current law, the trustees anticipate this account to be drawn down gradually and become negative after 2035, an event that is sometimes referred to as "running out of money." But the $2.6 T in current assets consist of nothing more than a big I.O.U. from the U.S. Treasury to the Social Security trust fund. Where are the assets that the U.S. Treasury is holding that would enable it to make these payments? They don't exist. Taxes will have to be raised, other programs cut, or the Treasury will have to borrow more from the public in order to deliver the funds that Social Security is assuming it's going to be receiving from the Treasury between now and 2035.
Where did the $2.6 T balance come from? It represents the accumulated amount by which Social Security taxes generated more money for the government than have been spent on beneficiaries up to this point. But that surplus from Social Security didn't go to acquire any real asset that could be used at this point to pay beneficiaries. The money has already all been spent on other programs. If the Treasury is going to pay this $2.6 T to Social Security, the funds have to come from tax increases, spending cuts, or more borrowing.
The question of whether this $2.6 T should be counted as an actual asset of the Social Security trust fund is related to the question of whether it should be counted as an actual liability of the U.S. Treasury. Many of us prefer to think in terms of a unified federal government balance sheet. From that perspective, the $2.6 T represents money that the government owes to itself, and should be counted as neither an asset nor a liability of the federal government. This is why many economists summarize the debt load of the United States in terms of net debt, which excludes the money that the Treasury owes to other government programs like Social Security, rather than gross debt, which includes those intragovernmental obligations. Net U.S. federal debt came to $11.6 T, or 74% of GDP, at the end of 2012. Gross debt was $16.4 T, or 105% of GDP.
It is interesting that the same people who insist that net debt is the correct summary of the government's indebtedness are also are the ones telling us that Social Security will be adequately funded through 2035. But you can't have it both ways. It can't both be true that the $2.6 T is an asset of Social Security and yet somehow not a liability for the U.S. Treasury.
What I believe is the correct perspective is that the $2.6 T is neither an asset nor a liability for the federal government. There is, however, a significant unfunded off-balance-sheet liability associated with Social Security. Current and future retirees are expecting payments for which a source of funding has so far not been identified. The $2.6 T is an estimate of the size of the present value of the additional funding that would be needed to take us through 2035 given current Social Security benefit and tax schedules.
And what about beyond that? Another interesting calculation is the following. Suppose you took all the people who are over 15 years old today and asked what would be the present value of the cost of providing Social Security benefits to that group based on the current schedules. The answer is given in Table IV.B7 of the report-- $52 T. For comparison, the present value of Social Security taxes collected to cover those payments is calculated to be $25.5 T. In other words, providing all the benefits that have been promised to current program participants (both workers and retirees) requires coming up not just with an additional $2.6 T but instead somewhere finding an extra $26.5 T.
Now, you're free to propose some other (big) numbers for the size of the unfunded liability associated with Social Security. My point is not to argue for a particular number, but rather to call attention to the fact that the growing ratio of retirees to workers poses a major fiscal challenge for the United States. This reality should give pause to those who insist that the debt that we run up today will somehow become easier to manage at some date in the future, particularly to those who base their calculations on the net rather than the gross debt figures.
And I haven't even gotten to the numbers from the Medicare report yet.
Posted by James Hamilton at June 2, 2013 07:44 AMdigg this | reddit
Scenario #1: We have a $2.6 Trillion Trust Fund. Result, to quote you, Taxes will have to be raised, other programs cut, or the Treasury will have to borrow more from the public (to fully fund projected expenditures out to 2035).
Scenario #2: Pretend the $2.6 Trillion Trust Fund does not exist. Result, to quote you, Taxes will have to be raised, other programs cut, or the Treasury will have to borrow more from the public (to fully fund projected expenditures out to 2035).
Consider the plight of someone who started work, 20 years ago, at age 22, and who is now 42. First, he was taxed to build up the "Trust Fund," and now he will be taxed over the next 20+ years to generate the funds necessary to make good on the "Trust Fund" obligations.
Of course, if it looks bad for a 42 year old, imagine how it looks to a 22 year old.
And then we have the problem with vastly underfunded (and overpromised) public pensions. This led me to propose the following model:
The GELM (Government Export Land Model*)
Let's think of local and state (provincial), and for that matter, national governments as being similar to oil exporting countries, in that they consume a percentage of tax revenues and net debt infusions, in order to pay current benefits to employees and operating expenses and to pay current and future retirement/health benefits.
And let's just really focus on current and future retirement benefits.
As Michael Lewis noted in his recent book, "Boomerang," a lot of local governments, especially in California, are on track to consist of little more than a small staff that collects taxes and forwards virtually all tax revenue to retirees. And of course, most public pension systems are assuming a (highly unrealistic) estimate of 7% to 8% on future annual returns. Of course, the lower the actual investment return, the larger the unfunded pension obligation.
In any case, if we assume flat to declining tax revenue, combined with rising retirement obligations (especially as investment returns continue to disappoint), it seems to me that the net result would be an accelerating rate of decline in services provided to the taxpayers, perhaps even as governments try (probably) unsuccessfully to materially raise tax revenue, by raising tax rates.
*Export Land Model: Given an ongoing production decline in an oil exporting country, unless they cut their consumption at the same rate as the rate of decline in production, or at a faster rate, the rate of decline in net exports will exceed the production decline rate, and the net export decline rate will accelerate with time. For more info:
Posted by: Jeffrey J. Brown at June 2, 2013 08:23 AM
And yet ANOTHER post on retirement costs that avoids the elephant in the room.
I will be blunt - as the excellent New York Times article on Saturday documented, the United States is paying absolutely absurd costs for health care.
The central truth is this: the answer to the long term financial problems of the United States is Single Payer Health Care. Period. Full stop. The Canadians pay 9% of GDP to cover everyone. The United States spends about the same just on Medicare and Medicaid. No one pays anything close to what Americans pay for health care.
You will find none of these facts in Simpson Bowles, or in any of the other tomes like this one that seek to call attention to the looming on the fiscal crisis (not that a projection of even a 10 year cost of anything is worth a damn.)
Talking about the long term fiscal situation of this country without talking about the obvious fix is in my opinion at best misleading and at worst and outright lie.
There is a solution - but that requires confronting special interests.
Posted by: fladem at June 2, 2013 09:02 AM
While the trust fund is not an asset to the government, it is an asset to Social Security. In a fundamental sense, it is, or more appropriately, will become, very real as it represents a draw on the future productive capacity of the nation just as treasuries. That is as it should be; we have to pay for the the things we want. Tax cuts don't pay for themselves and neither does debt, though it could not come at a better time since currently debt does pay for itself, so what is a problem to some is an opportunity to others.
Posted by: Lord at June 2, 2013 09:36 AM
I don't think it's possible to present these issues in one correct way.
Example: note 1 to Table IV, B7 says "The present value of future taxable payroll for 2013 through the infinite horizon is $579.0 trillion." I would never use this to make a point other than one can't look at just the pv of one category without looking at the pv of other categories as well. Just as you do with Social Security generally - and which I agree with. We can't look at these long horizons and do more than guess wrong about future productivity or wealth. I suppose we can do a half-decent job of projecting population size but then maybe not.
I remember the movie The Year of Living Dangerously when Billy Kwan, shattered by watching the death of a young child he cares about, hangs a banner from a hotel "Sukarno Feed Your People" - for which he is killed. I can imagine a world in which there is no Social Security or Medicare. Some ideologues believe that would provide better for the people, though I've seen no evidence in the history of humanity for that idea other than vague religious hopes.
I also remember that when I was young, we spent time looking as a society about old people being unable to buy food, especially if they also had to buy any medicine. And of course my understanding is that 2 million children live in households receiving Social Security. In my dad's age, kids had trouble eating in many parts of the US, not just in Appalachia. It was a harsher world, something it is perhaps easy to forget when we have the internet and flat screens and smartphones and cheap goods from China and so on. (And yes, we traded - however induced - our "savings" for consumption and yes we financed that in part through home equity and so on.)
When Menzie posts about Wisconsin, what I take away is that there really is very little difference in economic performance between ideological regimes. And the history of economic growth between more welfare states in Europe versus the US shows not much either. In fact, I think economists generally would agree that if you want to show big growth rates, it helps to start poor and then join the modern world.
If the idea is that we should turn Social Security into a nothing, then I would hang a banner "Sukarno Feed Your People". A society that can't feed its people is not worth continuing. Some people take that caring to extremes: eliminate poverty (which I can't see as possible), eliminate mental illness, eliminate whatever. But the course of caring within rational societal bounds is to me the only moral choice.
As for promises extending into the far future, they're not meaningful to me. What if the aquifers in the middle of country do dry out? What if it turns out that fracking actually does make water unusable for agriculture - at least not without a lot of treatment? What if the sea level does rise? These promises are not Biblical in nature - and I mean no discussion of the emptiness or fullness of those. They are made in the same way any legal contract is devised: with a set of generally understood rational limits. That is how you "reform" a private trust: the purpose has been frustrated by the passage of time. An example is the Ann Getty Trust: she so mistrusted he son JP's risk taking that she required the trust to be invested in the sovereign obligations of a short list of countries. With JP gone, with the world changed by war, that made no sense so off to court they went ...
Posted by: jonathan at June 2, 2013 10:32 AM
I learned in Hungary politicians will spend all the money they are granted. If they run out of money, then they will spend less, and that's how the Social Security and Medicare budgets will ultimately be balanced.
The only problem, of course, is that spending can be maintained for some time using on and off balance sheet debt. Thus, the process of adjustment may be accompanied by considerable political and economic turmoil, as well as unexpected crises for those who thought their benefits were secure.
Posted by: Steven Kopits at June 2, 2013 10:48 AM
JDH: "In other words, providing all the benefits that have been promised to current program participants (both workers and retirees) requires coming up not just with an additional $2.6 T but instead somewhere finding an extra $26.5 T."
So since you went to the trouble to compute your big scary $25 trillion number over the infinite horizon, how about computing for us the NPV of GDP over the same infinite horizon for context.
Well, I'll save you the trouble. GDP over the same infinite interval is about $1700 trillion. Your big number is about 1.5% of GDP. Are you still scared?
This is perfect example of the reason for the outrage over R&R. I realize you have genuine concern over long term debt, but when you gin up misleading scenarios with no context to try to scare the public into accepting your point of view, you are being disingenuous. These big numbers with no context are intended to frighten. The end does not justify your means.
Posted by: Joseph at June 2, 2013 11:01 AM
Or, we can just lift the cap.
Posted by: two beers at June 2, 2013 11:34 AM
Prof. Hamilton: "[T]he growing ratio of retirees to workers poses a major fiscal challenge for the United States."
As does the trend rates of wages and salaries on which social insurance payroll taxes depend to fund the elder transfer programs.
fladem: "[T] United States is paying absolutely absurd costs for health care."
Indeed. From my experience, the vast majority of Americans do not know that the US spends 50% of medical services costs on the sickest 5%, those who are afflicted with chronic illnesses primarily associated with smoking, malnourishing salty, fatty, and sugary diets, and lack of physical activity. Another disproportionately large share is spent on costly late-life procedures and treatments for elders, leaving something like no more than 25-30% of spending available for preventative and other services for everyone else. It literally costs a fortune in the US to die.
The 18% of GDP the US spends on "health care" is not caring for health but a gov't-sponsored massive transfer from the masses to private insurance and medical industry cartels that are literally bankrupting households, small businesses, and eventually gov't programs.
In the meantime, the US gov't subsidizes agribusiness, and indirectly, supranational firms that produce processed junk "food" that is a primary long-term contributor to the epidemic of chronic conditions that cost us 50% of "health care" spending.
Beyond all of this, we have a debt-money-based, hyper-financialized system with OBSCENE wealth and income concentration to the top 1-10% that has reached the point at which additional debt-money growth per capita does not result in growth of per-capita private investment, employment, wage and salary income, after-tax purchasing power, and gov't receipts.
IOW, the total imputed compounding interest for total public and private credit market debt owed to term now consumes the value-added output of the entire US economy. We can no longer tax, borrow and spend, and print bank reserves and grow value-added output after price changes per capita.
The latest actuarial projections for public and private pension and benefit payouts using 5-7% total returns to assets are a fantasy. With equities historically overvalued, the real total returns to a balanced portfolio are likely to be closer to slightly negative to 2%, which implies that public pensions will be cut 35-50% for Boomer retirees over the next 10-30 years.
Posted by: Bruce Carman at June 2, 2013 11:54 AM
so is the same true for treasury bonds owned by banks they count as assets? those assets held by banks dont exist because to be redeemed the government will have to raise taxes, cut programs or borrow more?
are you sure?
Posted by: rjs at June 2, 2013 01:17 PM
At some point we will probably have to increase the amount of revenue going into Social Security, or cut benefits, or both. I suspect increasing revenue will be more palatable, although there may well be some sort of reductions.
But the $26.5 T number is, as other have pointed out, uninformative without context. And projecting what the US economy looks like in 50 or 75 years is a silly exercise. I expect the robots will have taken over by then, and payroll taxes will be obsolete.
Posted by: mwilbert at June 2, 2013 02:53 PM
Reasonable to point out that those who look at net debt should be careful about avoiding conflicting statements.
That said, the further out one goes, the more meaningless the numbers become, even probably to 2035, although the demographics are certainly in place for 2035 fairly clearly. However, if we run into serious problems with SS, tweaks will be made as needed, with the ease of ending the fica tax cuts earlier this year quite stunning, and how a lot of people who signed pledges never to raise taxes had no problem with that one, although they would probably fuss at the proposal to "just raise the cap," as urged above.
Two further points. One is that nobody should get worked up about the demographics. We are in far better shape than pretty much any other high income country on that. Indeed, the scary worker/dependent ratio of 2/1 we hear about hitting in 2030 or so, is about what Germany has right now. Eeeek! They are obviously in deep fiscal doo doo.
The other point is that the misinformation on this is indeed almost entirely on the side of people getting scared over serious misrepresentations and myths about how awful all this is. So, people read how the system will go "bankrupt" in 2035, and the majority think this means that all SS payments will cease, with this being particularly believed by young people. However, what would happen to benefits if the system went "bankrupt" then as forecast with no changes to anything would be that after a cut in benefits, recipients then would receive "only" about 115-125% of what current ones do today in real terms. Some crisis.
Posted by: Barkley Rosser at June 2, 2013 03:39 PM
Prof Hamilton had a good story going till you came along and wrecked it. Bad! rhs, No Cookie!
Posted by: dilbert dogbert at June 2, 2013 03:40 PM
rjs: Banks and the federal government are different entities. The federal government and the federal government are the same entity.
If you write an I.O.U. to me, it's appropriate for me to count it as one of my assets. If you write an I.O.U. to yourself, it's not appropriate for you to count it as one of your assets.
The point is that the federal government did not create an asset with which to fund Social Security through the process of writing an I.O.U. to itself. Taxes have to be raised, spending cut, or more money borrowed to make the payment.
It is true that taxes have to be raised, spending cut, or money borrowed in order to make the payment that the Treasury owes to the banks. That liability of the government is already included in the government's net debt. But the taxes that have to be raised, spending cut, or money borrowed in order to make the payment that the Treasury owes to Social Security is not currently included in the government's net debt.
So my point is that if you want to think of the $2.6 T as an asset of Social Security, then you need to think of current federal U.S. debt as 105% of GDP rather than 74%.
Posted by: JDH at June 2, 2013 03:58 PM
When you frame the problem as a problem with the SS/Medicare programs, then the implied diagnosis is to cut benefits to beneficiaries and breach promises the government has made to its citizens.
When you frame the problem as government squandering SS funds for other purposes and US paying double medical costs/capita than any other developed country, then the culprits and solutions look rather different.
Get rid of the rent seekers, lower costs in the medical system, create a few more jobs and then come back and we can talk about changing SS/Medicare.
If you have to reduce benefits at least clean house first. Otherwise you are just rewarding the rent seekers for their successful rent seeking. Kind of what we do for bankers.
Posted by: anon2 at June 2, 2013 04:01 PM
If you are moving on to Medicare, please spare us the $XX trillion NPV out to the infinite future. I realize those big scary numbers are intended to frighten the rubes, but it is a little insulting to the audience here. The only numbers that convey information are in terms of percent of GDP or revenues.
As for forecasting the infinite future, recall Alan Greenspan in 2000 declaring that "budget surpluses as far as the eye can see" were a threat to the economy requiring substantial tax cuts. There is no budget agreement you could make today to secure the future that cannot be undone by Republicans in just a year or two.
Posted by: Joseph at June 2, 2013 04:08 PM
JDH: "So my point is that if you want to think of the $2.6 T as an asset of Social Security, then you need to think of current federal U.S. debt as 105% of GDP rather than 74%."
Okay let's just do that then. Now our debt is magically 105%. ZOMG, suddenly we are over the R&R cliff. Yet not one single thing has changed, our GDP growth does not suddenly slow down, which shows you the arbitrariness of debt as a measure and the absurdity of the R&R argument.
Posted by: Joseph at June 2, 2013 04:27 PM
rjs: "[I]s the same true for treasury bonds owned by banks they count as assets?"
Treasury holdings by banks make up no more than 2-3% of total bank assets, of which bank cash assets comprise 15-16% of total bank assets.
However, bank MBS and cash assets make up 25-30% of bank assets.
Agency and trust mortgage assets make up 60% of the total US mortgage market, which is equivalent to 83% of existing household mortgages.
Further, total US bank assets plus Fed balance sheet/monetary base is equivalent to 100% of GDP vs. an avg. 60% before the onset of the tech bubble, Asian Crisis, Japan's debt-deflationary regime, 9/11, imperial wars in the ME and Central Asia, and the super-exponential growth of US gov't federal debt to US GDP.
The point? The TBTF/TBTE/TBTJ US and int'l primary dealer banks have perpetual claims on US mortgagees (land resource and place-value rent taxes), gov't receipts, and corporate profits after tax in perpetuity.
And the US gov't is the principal sponsor/guarantor/enforcer of the rentier returns to the banks and their owners in perpetuity (or until the 300 million-strong mass of debtors declare collective mass bankruptcy and walk away to roam the planet during the zombie apocalypse).
We live in a kind of global neo-feudal land tenure system in which zombie debt serfs toil (if they can find paid employment) for diminishing returns to their labor to fund the opulent, hedonistic lifestyles and hierarchical system of power relations imposed upon the bottom 99.9% by the neo-feudal rentier overlords.
The world will not end by fire nor ice but by parasitic bankers' debt service costs eating the after-tax incomes, brains, and lives of all of humanity.
Posted by: Bruce Carman at June 2, 2013 04:29 PM
GDP over the same infinite interval is about $1700 trillion.
Not really - it depends on your interest rate and growth assumptions.
Do you really think treasury rates will be 2% forever?
Let's try 5%, 6% and 7% with 2% growth, with next year's GDP at $17T.
PV = C0(1+g)/(r-g) = C1/(r-g) = 17T/.05 = $340T.
The actual number is probably somewhere between that and your number. But to claim as fact that the PV of GDP in perpetuity is $1700T is pure rubbish.
The bottom line is that the U.S. has incurred a number of future entitlement obligations that are not paid for. Add in a potentially large interest burden as rates rise, and you end up with negative dollars left for federal discretionary spending.
You are what we call an ostrich with its head in the sand, and that's being generous.
Posted by: tj at June 2, 2013 05:43 PM
Well, Barkley, let's see how well Germany has done.
According to the IMF October 2012 WEO, for the ten years ending 2000 and 2012 respectively,
German per cap GDP on a PPP basis was 77.7% of US pCap GDP on a PPP basis. In the decade ending 2012, it was 75.2%. No real progress there, and indeed, some erosion.
On a per cap current prices basis, the numbers were 89.5% and 84.4% respectively. Catching up should be easier than maintaining a lead. Germany has not been able to close the gap, as weak as US performance has been.
Further, German economic performance in the last few years has benefited from an over-valued Euro in the periphery countries. Thus, German unemployment is far lower than the European average (which also benefitted for market liberalization there).
On the other hand, the US and Germany have lost real ground to both Taiwan and Singapore. On a pCap PPP basis, Sg was 92% of US in the decade ending 2000, and 111% for the decade ending 2012.
For Taiwan, the respective numbers are 58% and 77%, ie, Taiwan has caught up to Germany on a pCap PPP basis.
I see nothing to commend Germany here. But US performance is also disappointing. Neither Germany nor the US has managed to pace Singapore or Taiwan, both of which can boast a higher standard of living than Germany.
Posted by: Steven Kopits at June 2, 2013 06:09 PM
rjs: "so is the same true for treasury bonds owned by banks they count as assets?"
Let's assume a bank sets up a defined benefits pension plan for its employees and let's assume that the bank invested all pension funds solely in the bank's own bonds, and let's assume that based on actuarial tables, the pension fund is fully funded.
The bank would have the liability for making future pension payments, and they would have the bonds as an asset to be used to fund the pension payments, but that asset is matched, dollar for dollar, by the liability that the bank has to make good on the bond payments.
So, the bond asset is matched by the bond liability and net bond assets = zero, so the bank has a net 100% unfunded pension liability, that is solely dependent on future bank revenues and/or future borrowing.
The Social Security's Trust Fund, is matched, dollar for dollar, by the liability that the Treasury Department has to make good on the bond payments, so the net bond assets are zero, and future Social Security payments are unfunded and are solely dependent on future tax revenues and on new federal borrowing.
Posted by: Jeffrey J. Brown at June 2, 2013 07:03 PM
Incidentally, if so many people believe that the Social Security Trust Fund has any net value to the federal government, as a way to partially pay future Social Security benefits, it's no wonder that so many people also see no problem with a virtually infinite rate of increase in our consumption of a finite fossil fuel resource base.
Posted by: Jeffrey J. Brown at June 2, 2013 07:43 PM
tj: "But to claim as fact that the PV of GDP in perpetuity is $1700T is pure rubbish."
If you think that $1700T is rubbish, take it up with JDH because it came from the very same table he used to get his $26.5T number for unfunded liabilities. If one is rubbish then the other must also be rubbish since they were both generated by the SSA using identical assumptions.
Posted by: Joseph at June 2, 2013 08:08 PM
Latest from Sivak at UMTRI, on who's buying cars in the US. Quite interesting and tends to refute "peak demand" allegations. In short, those buying cars are those who can afford to, that is, those with jobs.
Marketing Implications of the Changing Age Composition of
Vehicle Buyers in the U.S.
Posted by: Steven Kopits at June 2, 2013 08:32 PM
I think much of this debate comes down to the merits of a funded defined benefit plan versus a "pay as you go" defined benefit plan.
In a big, diverse, growing country, a pay as you go system works well provided benefit levels are kept at sustainable levels and tax revenues are reasonably stable.
A pre-funded plan has the benefit of being able to pay benefits when if the government otherwise runs out of money or will to pay. In other words, it helps keep the promise of benefits even when demographics turn bad, or economic growth slumps badly.
Our current social security surplus represents a very small amount of pre-funding in an otherwise pay as you go system. Eroding this surplus over the next couple of decades does not mean the bankrupting of social security. It simply means we are spending a small cushion we had built up - and for a very good reason as the baby boomers would otherwise cause the government to borrow $2.6 trillion from elsewhere, potentially increasing government funding costs.
I would favor a prefunded plan (and one tht would invest in productive assets), but don't see social security as a crisis given long term demographic and economic trends, and presuming reasonable political judgements on benefit levels.
Health care is another matter and much more concerning.....
Posted by: Steve at June 2, 2013 09:12 PM
Jim, I don't quite understand the point of this post. Because of the demographic bubble, SS has to invest in something in order to create a trust fund. What should it buy if not Treasuries? We could put it in corporate bonds -- an IOU against the uncertain future EBITDA of private companies -- and offer a government guarantee against default. We could make it a claim on future taxation of those same corporations, sort of like state level revenue bonds. Or a claim against the overall taxation power of the government. Could we have SS buy land? Annuities from regulated insurance companies? Commodities? The gold in Fort Knox? Mortgage backed securities guaranteed by Fannie Mae? Equities? (talk about inflating the stock market!) Could we secure the government bonds with a commitment to sell government controlled assets like spectrum rights, mineral rights, overseas military bases, patents? And no matter what asset is used, there would ultimately have to be a government guarantee of its value, or the defined benefit is meaningless.
Ultimately, it seems to me the best way to secure the future obligations to social security is what we actually do now: with the full faith and credit of the US in the form of Treasury bonds. That instrument comprises the ability to tap all of the sources of value available to the government above, including compulsory taxation.
Posted by: Tom in Wis at June 2, 2013 09:59 PM
I would submit that the numbers you note about relative PPP GDPs per capita in US and Germany are consistent with my argument. While Germany is behind the US, the two are growing at roughly the same rates, despite Germany being in the demographic situation that the US will be around 2030, when many are predicting that this situation will create terrible problems for the US. Your data suggests that whatever those problems might be (a need to raise the income cap for fica or the retirement age a year or two or both?), will not necessarily lead to some obviously slower rate of GDP growth.
As for your dragging in Taiwan and Singapore, what on earth is their relevance? Yes, several East Asian economies have been growing faster than most of the rest in the rest of the world, but so what? Does any of this have to do with their demography or social security systems? Taiwan's looks pretty similar to the US's, although Singapore has something more like mandatory private accounts backed by government partially.
As it is, Japan, of course, after earlier being the East Asian boom economy, has been stagnant for two decades, with many arguing that its declining population is a problem. Again, to the extent that a growing and younger population helps growth in the longer run, the US remains in much better shape to deal with the social security issue in the longer run than nearly any other high income nation, just as I argued earlier.
Posted by: Barkley Rosser at June 2, 2013 10:50 PM
IOU's from one corporate entity to another aren't irrelevant, even if the parent company is the same for both. Social Security is a special purpose entity, separate from the government albeit part of it, with a dedicated revenue stream, The Trust Funds are effectively IOU's from income taxpayers to payroll taxpayers. For the last 30 years, the less well off have subsidized lower tax rates for the more well off, based on the promise that this money would be returned to the program. There are two potential rationales for that, one being the supply-side argument, and the other the shameless bait and switch you're providing cover for in this post.
I find it interesting that the same people who argue that the Trust funds are illusory, are also usually those ignoring payroll taxes and talking solely about the gross progressivity of the individual income tax and the freeloading 47%.
Posted by: benamery21 at June 3, 2013 12:58 AM
Kopits: My sister lives in Taiwan on a work visa (she's an economic refugee from the U.S. Great Recession). Taiwan certainly has a lot to recommend it and has made plenty of progress. However, if you seriously advance the notion that the standard of living is higher than in Germany, you're allowing yourself to be deluded by misapplication of the data.
Posted by: benamery21 at June 3, 2013 01:34 AM
Inflation will be the solution.
Hope that Ben Bernanke (in his young years) can explain that to you. Jim, it's basic economics.
Posted by: Johannes at June 3, 2013 04:04 AM
Great post, Professor!
Steve Kopits and others who have pointed out that a lot will happen between now and 2035 but remember that any "austerity" that the government is forced into by their over-extension of largess will directly impact those retirees at that time.
Also remember that the government does not have customers. People who would be customers in a free market system are costs to the government. Each retiree is a cost center that takes resources away from government. So for the government to cut costs - so they can go to more conferences in Las Vegas - they have to cut services or people out of the system. National health care will do its part I am sure as the "death panel" reduces care for those considered too old to treat.
A rose by any other name may smell as sweet, but euthanasia by any other name is just as bitter (apologies to Shakespeare). a reminder to those of you posting here. You will be the "cost centers" at the end of the cycle.
Posted by: Ricardo at June 3, 2013 04:41 AM
"My point is not to argue for a particular number, but rather to call attention to the fact that the growing ratio of retirees to workers poses a major fiscal challenge for the United States."
Is this a joke? How is this a challenge? Does productivity growth no longer exist?
Posted by: Nick at June 3, 2013 06:17 AM
I am arguing that if you have a country like Germany that can't close a gap with the US over a long period when Singpore and Taiwan can, then that country has inferior policy.
Take it up with the IMF. I seem to recall the Taiwanese government was advertising their PPP with Germany. I don't have a feel for standard of living in Taiwan beyond what the IMF tells me.
Posted by: Steven Kopits at June 3, 2013 06:44 AM
Re: Tom in Wis, "Because of the demographic bubble, SS has to invest in something in order to create a trust fund."
Of course, the key word is invest. An IOU that one owes oneself is not an investment. You can't have the investment, and the liability for making good on the same investment and have a net asset at the same time.
But it's certainly entertaining to read the various explanations as to why the Social Security Trust Fund is not offset, dollar for dollar, by the liability that the Treasury Department has to make good on the bonds in the Trust Fund.
Posted by: Jeffrey J. Brown at June 3, 2013 06:50 AM
Leave it to Ricardo to bring out the "death panels!" I've always loved this argument from the tea partiers - spare no expense for every potential marginal treatment for everyone including blastocysts no matter what, paid for by the US taxpayer.
Oh, and "OMG gummint spending!@!!!"
At my firm they sent something around to the effect that workers will contribute about $250,000 towards SS and draw about $250,000 out. They will contribute about $65,000 towards Medicare and draw $250,000 out. So where's the problem again?
If we just pay benefits out of the SS taxes benefits won't need to be cut much, at least not at first. At the end 25%. Do that and have people pay for their own medical treatment. Problem solved! So lets do it. What courageous truth telling Senator or Congressman will put forward that bill? I will call mine to urge a yes vote!
Posted by: randomworker at June 3, 2013 07:21 AM
Tom in Wis|. it matters whether you use the surplus in the SS trust fund to buy private assets or public assets: when you invest in the private sector, you are adding productive capital that should generate additional growth in GDP that would be be used to pay benefits. However, given the massive investment necessary to fund the retirement of an increasing fraction of the population, the question is whether the marginal return on additional investment will decline to a point where little additional output is generated.
Posted by: Cordelia at June 3, 2013 07:26 AM
Yes, the $1700 comes right from the table.
However, you need to compare the present value of all future spending to the present value of future GDP, which is where I think JDH is going with this.
One way to look at this question is to estimate the fiscal gap, which is the difference between the present value of all future spending committments (SS, Medicare, Medicaid, defense, salaries, etc.) with the present value of future tax receipts. Kotlikoff has done that based on the CBOs alternative fiscal scenario and comes up with a figure of 222 trillion, which is enormous. You should compare that to your 1700 trillion.
According to Kotlikoff's calculations, closing the fiscal gap would require an immediate 64% increase in all federal income taxes or an immediate 35% cut in all federal spending, including interest on the debt. Every year you wait to do something, the problem gets a little worse.
Moreover, increases in tax rates of this magnitude would surely affect economic growth, meaning that the combination of tax increases and spending cuts required are even more draconian.
JDH and others may disagree with Kotlikoff's precise numbers-I don't know-but I think the point is that it's a big problem no matter how you slice it.
On your comment on R&R and the 90% threshold, you persist with the myth that R&R were saying that 90% is a magic number that you can't cross, so that if we are 105% we are all doomed. But what R&R are actually saying is that 90% is an indicator historically of a high debt regime. And the reason that growth slows down is that governments are forced to institute harsh policies. If you look at the U.S. fiscal gap, it's hard not to be worried that harsh policies are coming in the form of higher taxes and large cuts in government spending which will lead to slower growth for us in the future. That's R&R's message.
Posted by: Rick Stryker at June 3, 2013 07:46 AM
Rick: "Yes, the $1700 comes right from the table. However, you need to compare the present value of all future spending to the present value of future GDP."
Rick, you seem confused $1700 is the PV of future GDP. It is right from the table. The correct comparison is PV of spending to PV of GDP. That is, $56.5T to $1700T, about 1.5% of GDP. Are you scared yet?
Rick: "Kotlikoff has done that based on the CBOs alternative fiscal scenario and comes up with a figure of 222 trillion, which is enormous. You should compare that to your 1700 trillion.
Ah, see now you have moved the goal posts, and $1700 is no longer the correct number. You can come up with any big number you want for spending in perpetuity by changing the discount rate. Kotlikoff has chosen a smaller discount rate than the SSA and that gives him an even more frightening number for spending. But then you also have to apply that same discount rate to the PV of GDP. When you do that you get a PV for GDP of around $4400T. Are you still scared?
The point is that these giant PV to perpetuity numbers are nonsense. They are intended to frighten the innumerate. That is what R&R did. It seems to be what JDH is doing. The correct way to have a serious, honest discussion is to use percent of GDP for spending.
Posted by: Joseph at June 3, 2013 08:37 AM
It seems you have taken the premises of the "Shock Doctrine" to heart, but are in a bit of a panic over dissipation of the "Debt Crisis" as an excuse to end the great 20th century social insurance programs which you neoliberals find so repugnant to your sensibilities. Those little people need to be saving 40% of their earnings for retirement, just like the Chinese, and as for health care, we can all go back to the old 19th century remedies (get in bed until you feel better or die.) If you want health care, get rich!!!
Posted by: sherparick at June 3, 2013 08:47 AM
Where are the assets behind the treasury securities held by China, and the other $10 Trillion of treasury bond obligations?
The obligation is not an IOU from ourselves to ourselves; it is an obligation to specific people who worked all their lives and rely on the good faith of the nation for their earned benefits, from the general fund. You can call it 'off balance sheet' because of the FASAB's interpretation that they don't represent a legal obligation, or 'IOU', but those are just an excuse for an attempt of finalizing the biggest heist in the history of mankind.
Besides which, the tea party wouldn't take kindly to your actually stripping people's social security benefits, since many of it's more vocal adherents feel they earned their benefits. So even the GOP isn't willing to directly facilitate the heist; they'll go for sleight of hand but not a direct heist.
Posted by: Charlie at June 3, 2013 10:27 AM
Charlie: As I explained to rjs above, it is true that taxes will have to be raised, spending cut, or money borrowed in order to make the payment that the Treasury owes to China. That liability of the government is already included in the government's net debt. But the taxes that have to be raised, spending cut, or money borrowed in order to make the payment that the Treasury owes to Social Security is not currently included in the government's net debt. This is the essential point I am making, namely, that the growing ratio of retirees to workers poses a major fiscal challenge for the United States
Posted by: JDH at June 3, 2013 11:01 AM
There is no such thing as a govt that issues its own free floating currency having unfunded liabilities. The govt can create the money to fund anything. And before someone goes crying hyperinflation, just what is inflation doing these days now that we have run several years of trillion dollar deficits? Or how is it the yen has stayed strong with 20+ years of deficits that now total debt is 200% of GDP?
Again, the govt cannot run out of money. Could it lead to inflation? Maybe, but that is not the point you are trying to make.
Posted by: markg at June 3, 2013 11:37 AM
I encourage anyone who is interested to look at the personal savings rate and gross savings. Personal savings/GDP is back to the lows of '00 and '06-'07, whereas the net of gross savings since '08 is virtually totally attributable to the banks printing themselves free reserves and the resulting $1.7 trillion surge in cash assets on their balance sheets.
Growth of consumer spending is done for the cycle.
Imports yoy are contracting again as in '00 and '07, which is typical of recession in the US economy with the economy dependent upon cheap imports and consumer spending at 71% of GDP.
Gross savings less bank cash assets remains near the lows of the "Great Recession" to date (no "recovery" in gross savings less bank balance sheet liquidation), implying that private investment is going nowhere hereafter, suggesting further than private employment is stalling out and will decelerate and then contract later this year and into '14.
Thus, initial claims and the U rate have bottomed.
The US fiscal deficit/GDP will again expand hereafter.
The net of the fiscal deficit, bank charge-offs and delinquencies, and the low gross savings less bank assets to GDP (2% vs. avg. 12%) implies that the banks via the Fed will continue to print to permit deficit spending to prevent nominal GDP from contracting.
This is occurring with the post-'08 trend nominal GDP decelerating to 2% from 3.6% since '00 and 5% since '80.
M2+ plus large time deposits less bank cash assets is growing at the rate of nominal GDP around 2% (same as Japan since the late '90s) since '08.
With gross savings less bank cash assets at ~2% of GDP, personal savings now dipping below 2% of GDP, AND US gov't spending contracting, nominal GDP is set to decelerate further below the post-'08 trend rate of 2% in the years ahead.
Finally, the next recession could result in the U rate reaching 12-13% and fiscal deficits of 100% of receipts.
Any incremental deficit spending hereafter will likely be totally absorbed by the increase in income support transfers, including unemployment, food stamps, Medicaid, and Social Security and Medicare deficits to receipts, as well as net interest on the public debt. IOW, deficit spending hereafter will not be "stimulative" at a post-'08 trend rate of nominal GDP of less than 2%.
The decelerating nominal GDP trend implies a further deceleration of the 5- and 10-yr. wage and salary rates below 1.5% and 3% respectively, as well as the 10-yr. Treasury yield making new lows in the years ahead around 1% (as in Japan since the early '00s).
Therefore, additional QE to further liquefy banks' balance sheets will not be "stimulative" to private aggregate demand, as it was not in real GDP per capita terms since '08.
Currently, stock prices are discounting 3-4% real GDP growth and 9-10% earnings growth, even as the PEG on the basis of 6-yr. reported earnings implies the S&P 500 is 85-90% overvalued to trend earnings growth.
It won't be long before the bickering about R&R's 90% debt/GDP threshold will be moot and they will effectively be vindicated, although not that they want to be or that effective policy prescriptions will be forthcoming as a result.
Posted by: Bruce Carman at June 3, 2013 11:48 AM
"IOU's from one corporate entity to another aren't irrelevant, even if the parent company is the same for both. Social Security is a special purpose entity, separate from the government albeit part of it, with a dedicated revenue stream, The Trust Funds are effectively IOU's from income taxpayers to payroll taxpayers. For the last 30 years, the less well off have subsidized lower tax rates for the more well off, based on the promise that this money would be returned to the program. There are two potential rationales for that, one being the supply-side argument, and the other the shameless bait and switch you're providing cover for in this post."
"I find it interesting that the same people who argue that the Trust funds are illusory, are also usually those ignoring payroll taxes and talking solely about the gross progressivity of the individual income tax and the freeloading 47%."
Simply awesome response!!!!
Posted by: river at June 3, 2013 11:52 AM
My point is that you need to look at all future spending rather than just SS to make the comparison you want to make. But an even better comparison is to just calculate the fiscal gap.
That's what Kotlikoff did. Raising taxes by 64% or cutting spending 35% to satisfy the government's intertemporal budget constraint scares me, yes. It means that we are in for some serious economic and political problems and perhaps a long period of slow growth.
You are minimizing a very serious problem.
Posted by: Rick Stryker at June 3, 2013 12:11 PM
If we had had reasonable wage growth over the past 25 years, we wouldn't have an issue with Social Security. If income growth had been fairly distributed instead of being hoovered up by the top tenth of a percent, we wouldn't have an issue with Social Security. If we did something about wages and income distribution, then contrary to Professor Hamilton's assertion, we wouldn't have to raise tax rates, cut benefits or other programs, or go further into debt. The problem isn't Social Security, it's the financialization of our economy. Let's address the root source.
Posted by: ScottB at June 3, 2013 12:26 PM
Has anyone studied when the DOD (Dept of War) goes broke? Interesting concept to ponder.
Posted by: dilbert dogbert at June 3, 2013 01:48 PM
What I believe is the correct perspective is that the $2.6 T is neither an asset nor a liability for the federal government.
I agree. It is merely an accounting record of the extent to which the SS payroll tax has exceeded the payments going to SS recipients over the last several decades.
There is, however, a significant unfunded off-balance-sheet liability associated with Social Security. Current and future retirees are expecting payments for which a source of funding has so far not been identified.
This however is nonsense.
The source of the real resources consumed by retirees in the future will be exactly what it is today, namely the real productivity of the working age population at that time. The real purchasing power implicit in SS payments always comes from the same source: the forgone consumption of the current working age cohort.
Whether nominal benefits happen to equal, exceed or fall short of the program's dedicated revenues at any given point is mostly of political significance. Its economic significance is limited to its distributional impact (if that is not offset), and whatever macroeconomic effects can be attributed to that distributional impact.
This will be no less true when revenues are falling short of benefit payments, than it was during the long decades when revenues exceeded payments. In the same way that running surpluses then did not result in genuine "prepayment", running deficits tomorrow will not "underfund" tomorrow's payments.
You cannot have it both ways.
Posted by: Amileoj at June 3, 2013 01:56 PM
Anyone who takes infinite time horizon policy analysis seriously ndeserves to be scared out of the their everloving wits.
Would you like to link your comment on Taiwan and Singapore to the policy discussion? It may be that Taiwan now equals PPP per cap of Germany, although as someone who has been in both countries fairly recently, it does not seem so. Singapore is certainly doing very well. But, back to Taiwan, what about its demography or social security policy is involved with its recent high rate of growth (and it has had a recent high rate of economic growth)? If you cannot make that link, your argument is completely irrelevant.
Let us keep in mind what is going on here. We have all sorts of hysterians, Kotlikoff in particular, absolutely freaking out about what is going to happen with SS in the 2030s, even though if the system goes "bankrupt," recipients will be getting more in real terms than current recipients. They wave these demographic ratios at us as if we are all supposed to be just as terrified as Rick Stryker.
But when I point out that Germany currently has that ratio and is doing pretty well, all I get is some totally inane point that, gosh, there are other countries in the world growing more rapidly than Germany. In case you were unaware, Germany is pretty much the top performer in its part of the world. Trying to claim that Germany is in some sort of deep doo doo is just hilariously absurd.
Posted by: Barkley Rosser at June 3, 2013 02:38 PM
JDH The point is that the federal government did not create an asset with which to fund Social Security through the process of writing an I.O.U. to itself.
I'm not following you here. That $2.6T in bonds was paid for with real assets. Workers lent the government money over and above the amount needed to maintain a PAYGO system. The question is what did the government do with that $2.6T in labor income? If you were Greg Mankiw in 2003 the answer to the question you posed would have been that tax cuts were supposed to make labor more productive and that higher productivity would support future income tax claims needed to pay off the Trustee bonds. Of course, things didn't turn out so well. Capital's share of income has increased and labor's share has fallen. And the productivity gains from the dot.com era seem to be slipping away. Instead of investing that $2.6T in education and public infrastructure, we blew it on tax cuts and spending just about that same $2.6T blowing up 3rd world sh*tholes.
Yes, taxes will have to go up. A good place to start would be soaking the rich. Afterall, they voted for the clowns that gave us tax cuts and stupid wars.
Posted by: 2slugbaits at June 3, 2013 03:06 PM
"Has anyone studied when the DOD goes broke?"
Adam Smith taught that it is a mistake to think that governments raise taxes in order to raise armies; it is correct to conclude that governments raise armies in order to raise taxes."
Posted by: Les Baker at June 3, 2013 03:14 PM
tj The bottom line is that the U.S. has incurred a number of future entitlement obligations that are not paid for.
Strange way to put it. Here's a better way. When people are born and live long enough to retire, society incurs an obligation to support those people unless you want real death panels. The resources that retirees consume in order to maintain a civilized existence will be the same regardless of how that consumption is funded. The "drag" on the economy is due to having to support non-productive individuals. The funding mechanism only affects whose ox is gored; but the total amount of resources consumed is the same. It will still require the same percent of GDP to support those people regardless of how it is financed.
And it's always true that "future entitlement obligations..are not paid for." There's no such thing as the ghost of Christmas future that reaches into future to reserve economic goods not yet produced. Paying for a future obligation simply means presenting a legally recognized claim against a physical commodity not yet realized. A claim in the form of equity shares or corporate bond coupons is no different in this regard than a retiree's claim against future tax revenues. Those IOUs in the lockbox are legal claims against future tax revenues just as grandma's bond is a legal claim against future corporate revenue. When grandma cashes in her bond coupon it will be an act of dissaving in the same way that it will be when the SS Trustees cash in that IOU in the lockbox. The only difference is whether the burden of supporting retirees will come out of future tax revenues or future corporate earnings.
Posted by: 2slugbaits at June 3, 2013 03:26 PM
Bruce Carman We live in a kind of global neo-feudal land tenure system in which zombie debt serfs toil
Off topic, but this sort of thing really bugs me. Strictly speaking "feudalism" refers to a system of military obligations that a vassal owes to a lord. The relationship can be quite complicated, so in medieval France we find kings who are vassals to dukes and counts. The feudal era grew out of the collapse of the Carolingian system and peaked around 900 B.C.E. with Hugh Capet sitting in his mudhole of a duchy in France. In order to support a vassal's military obligation the lord would grant the vassal a holding (or fiefdom) in the form of land. The economic system that evolved around the lord and vassal's land economy is known as manorialism. Serfs were not part of the feudal society, but there were very much part of the manorial economy. Manorialism survived up until the Black Death, when labor shortages changed the ballgame.
The classic sources for this stuff on the difference between feudalism and manorialism can be found in "Feudalism in History," ed. by Rushton Coulborn, Princeton University Press (1956).
Posted by: 2slugbaits at June 3, 2013 03:42 PM
dilbert Dogbert Has anyone studied when the DOD (Dept of War) goes broke?
Yes. I don't know about the other services, but here is Army's last financial statement:
And here is a GAO audit of Army's cash management. This was a huge problem a couple of years ago when the Treasury came very close to defaulting on paying vendors because Army was down to just a couple of days cash on hand. See the graph on page 7.
Posted by: 2slugbaits at June 3, 2013 03:55 PM
Rick Stryker Raising taxes by 64% or cutting spending 35% to satisfy the government's intertemporal budget constraint scares me, yes. It means that we are in for some serious economic and political problems and perhaps a long period of slow growth.
It may be true that we're in for a long period of slow growth; but that's because the growth rate of labor will fall off. Sounds like a good argument for greater immigration. I think what you intended to say is that non-workers will absorb a greater share of total consumption, which will feel like slow growth to workers. But that will be true regardless of whether we fund retiree consumption through Social Security or some other funding device. Retirees will still consume the same share of GDP, which means less for tomorrow's workers.
Instead of blowing the FICA surplus on tax cuts and bombing 7th century economies, maybe we should have invested it in capital infrastructure, wealth sovereign funds, and education.
Posted by: 2slugbaits at June 3, 2013 04:14 PM
peaked around 900 B.C.E
Oops. Should have been C.E. Although it's also true that feudalism describes the 10th century B.C.E. Mediterranean world.
Posted by: 2slugbaits at June 3, 2013 04:22 PM
JDH the growing ratio of retirees to workers poses a major fiscal challenge for the United States
Aren't we talking about a shortfall of something on the order of 1%-1.5% of GDP...give or take? Maybe the problem is with the adjective "major." I think it's fair to say that healthcare (both public and private) costs represent a "major" economic challenge if Obamacare doesn't work. But calling problems with SS a "major fiscal challenge" seems to overstate the problem. Fixing Social Security is something that will almost certainly have to be done; but the challenge is political, not economic. As problems go, Social Security is pretty well down the list. Student debt is about 40% of the size of Social Security's IOUs, but I don't see it getting anything like 40% of the attention...maybe 2%. I would call Social Security a manageable problem. Now healthcare is a major challenge and that's where we should be focusing our attention.
Rick Stryker If you look at the U.S. fiscal gap, it's hard not to be worried that harsh policies are coming in the form of higher taxes and large cuts in government spending which will lead to slower growth for us in the future. That's R&R's message
OMG!!! You mean the top 1% might have their taxes raised and discretionary spending cut to the Clinton era levels!!! And we all know how bad growth was during those years.
I see you're still living in denial land pretending that R&R weren't seduced by the celebrity of their paper and allowed it to be used for evil purposes and that a "threshold" doesn't mean "threshold." A hopeless grasp of reality.
Posted by: 2slugbaits at June 3, 2013 04:53 PM
Well, if Reinhart and Rogoff are celebrities, no one told the online daters of America.
RedStateDate and BlueStateDate are online dating services that cater to putting people together who have like-minded political outlooks. Both sites do surveys of their members. One recent survey asked people to list their top 10 political philosophers.
Conservatives on RedStateDate came up with the following top 10 list:
10)Alexis De Toqueville
The top 10 political philosophers listed by liberals were:
R&R must be shocked that they didn't make the top 10 conservative list, given their worldwide fame. To add insult to injury, celebrity economist Paul Krugman beat out Plato and Thomas Jefferson on the liberal list.
Interestingly enough, liberals thought that Jon Stewart and Steven Colbert are more serious political philosophers than Krugman, which is probably true. I'm also surprised at some of the names on the liberal list. I would have thought that Orprah, Bono, and Angelina Jolie would have been ranked higher than Jefferson, Twain, and Ghandi.
Posted by: Rick Stryker at June 3, 2013 07:53 PM
Jeffrey J. Brown, my question wasn't an attempt to pretend the obligation doesn't exist, I'm just trying to figure out what the alternative is to putting it in Treasuries.
Cordelia, the trust fund's proximate goal should be safety on behalf of beneficiaries, not growth in GDP. But obviously from a macro perspective a productive investment is better than a non-productive one. So...
Are our government-funded interstate highways a "productive asset"? Sure. Does government-sponsored R&D (say NASA, NIH or DARPA) enhance our long term capacity for GDP growth? Yep. What about the CDC? Yes. Will an educated labor force be more productive? Yes. Will an effective military, good law enforcement, clean air, well regulated financial markets and effective court system make private capital more productive? Of course.
And again, what is the private sector alternative? Do you think AAA rated mortgage-backed securities in 2005-07 were "productive capital" or simply a bubble in the making? Was there a positive marginal return on equities in 1999-2000? Did those dot-com investments generate additional economic output or simply make the owners of Pets.com and Enron wealthy? Should the trust fund have invested in Bear Stearns' commercial paper? Commercial bank CDs? The S&P 500? PIMCO's Total Return Fund? AIG? Hedge funds? Junk bonds? Oil wells? Military contractors? Walmart? Google?
I'm not dogmatic about this, I just think it's too simplistic to say "invest in the private sector because it's more productive." What, precisely, does that mean? No matter where the money goes, the SS trust fund would be picking winners and losers, taking on risk, and distorting the private capital markets in the process.
Posted by: Tom in Wis at June 3, 2013 08:11 PM
Re: Tom in Wis
As someone up the thread noted, basically the "Trust Fund" is simply the sum of Payroll Taxes collected in excess of benefits over past years.
Where the Payroll Tax excess should have been invested or whether the government should have collected $2.6 Trillion in excess Payroll Taxes are both irrelevant at this point. The $2.6 Trillion was spent on other government programs.
Posted by: Jeffrey J. Brown at June 4, 2013 03:39 AM
“After we had awhile puzzled ourselves, without coming any nearer a resolution of those doubts which perplexed us, it came into my thoughts that we took a wrong course; and that before we set ourselves upon inquiries of that nature, it was necessary to examine our own abilities, and see what OBJECTS our understandings were, or were not, fitted to deal with.” – John Locke
A peculiar omission affects man’s thought. It is evolutionary in nature and from the beginning functioned in a survival manner. However, the complexities of the modern world no longer permit the now archaic nature of earlier strategies to give short shrift to the future. The long future has to be considered. More generally, as the future is only part of the overall, it is celestial dome thinking that must be engaged in, but all too rarely is. One of the reasons why this kind of thinking is not common – aside from its costs in terms of time – is belief structures. Beliefs act like blinders. Ideological and religious beliefs are most powerful.
Ideological belief in the reigning paradigm of economics is woven warp and woof with short-termism. Keynes said in the long-run we are all dead, and nowhere other than in the footnotes of the General Theory does debt appear. Yet debt is at the essence of the Reinhart Rogoff controversy. Also debt is essential to the Social Security issue, along with the real sector ability of workers being able to support retirees. The time dimension of debt separates immediate benefit from future cost. Yet in much analysis and opinion, the future either gets lip service or simply disappears into the ether. The practical consequence is that lopsided weight gets attached to short-term benefits. From which it is easy to make dismissive statements about debt that seem reasonable, but in larger scope are at their core fallacious. The butcher’s thumb is on the scale, and the butcher doesn’t even know it.
From my reading of the responses to this post, those who give the future its due include: Bruce Carmon, tj, Steven Kopits, Jeffery Brown, Steve, Ricardo, Cordelia, Rick Stryker, Amileoj, and of course JDH. This raises an interesting question. Does comprehensiveness of view, by which importance of time in economics also gets taken into account, say something about the acuteness of vision on other macro subjects as well?
Along these lines, a final point. We can see the near-term benefits of the QEs. But what about the unintended consequences and future costs? Don’t these deserve dedicated posts on a blogsite like this too?
Posted by: JBH at June 4, 2013 10:20 AM
More from Sivak:
US new vehicle mpg at 24.8, unchanged over last three months. New car sales have been improving mpg by about 1 mpg every year, a pretty impressive improvement.
Posted by: Steven Kopits at June 4, 2013 11:29 AM
Thank you, Lord. (Cringe..bet this isn't the first time...)
The Trust Fund is an asset to Social Security. It was created, set apart from the general fund, for a reason. It represents a commitment to those who have paid into Social Security. When we look at the "large" numbers that represent the net present value of the contingent liability of the Social Security program, the money lent from the Trust to the Treasury seems not all that big a deal. It is thus hard to understand the broad hints made by Republican lawmakers late in the Bush administration that Congress might not be willing to allow Treasury even to repay the Social Security Trust what Treasury borrowed from it, much less meet the rest of the obligation under current law to future Social Security beneficiaries. They were threatening to cheat Social Security beneficiaries of what is a paltry share of the overall promised benefit.
Then, as Joseph points out, the $26.5 trillion figure that Hamilton cites isn't actually "large" in budget or GDP terms.
So here's why arguing for one bland-sounding accounting arrangement over another matters. This is not an argument for which there is some obvious "right" solution. This is a political argument. One bland-sounding accounting arrangement makes a transfer of money from FICA payments mostly by the middle class to tax breaks mostly to the well-off disappear. Accounting that makes a transfer disappear has political consequences, and so is a political act. Political acts favor some interests over others. The political act Hamilton recommends favors the rich over the rest.
If we put the best reading on Hamilton's argument, he is worried that the debt is going to be a problem, and wants us to address that problem now. Here's the thing about broad, broad economic arguments: they work really well to hide the unfairness of the solutions they reach.
How many times have we read that trade liberalization can be a no-lose proposition because the gains are large enough we can tax only part of the benefit and make up for the costs to the losers. But there's no record of any large group of non-corporate losers ever being compensated for their losses. How long did we hear that tax cuts for the (fill in the blank with some euphemism for "rich guy") would gin up growth needed to create jobs for the rest? Who among our economic luminaries did not tell us that self-interest could do a better job policing financial activities than could the heavy hand of government?
So yes, there is an accounting logic to what Hamilton writes, but there is really strong reason to expect that his logic would be used to obscure the commitment that has been made to those who pay FICA. You can see Hamilton doing that in his "IOU-to-U vs IOU-to-myself" argument. The beneficiary is not the Trust Fund. The Trust Fund is held in trust - thus the name - for private citizens who paid FICA. Hamilton ignores the "trust" purpose of the Trust Fund.
Hamilton can insist that he personally would never sweep that obligation under the rug (thiugh in fact he is on his way to doing just that in his "IOU" argument), but what he would do doesn't matter. When the Petersons and Kohns of the world adopt your logic, they do not adopt your scuples.
Posted by: Anonymous at June 4, 2013 11:31 AM
Re: Anonymous, "So yes, there is an accounting logic to what Hamilton writes, but there is really strong reason to expect that his logic would be used to obscure the commitment that has been made to those who pay FICA. You can see Hamilton doing that in his "IOU-to-U vs IOU-to-myself" argument. The beneficiary is not the Trust Fund. The Trust Fund is held in trust - thus the name - for private citizens who paid FICA. Hamilton ignores the "trust" purpose of the Trust Fund."
I think that there is very much a "Shoot the messenger" theme in your comment and in other comments.
The guilty parties responsible for how the federal government handled the $2.6 Trillion collected in excess of SS benefits are the politicians in years and decades past, who could have either: (1) Invested the surplus in something besides self-serving IOU's or (2) Cut the payroll tax, so that the Trust Fund just held a few months of benefits, which I believe was its original purpose.
An observation that the bond assets in the Trust Fund are offset, dollar for dollar, by the liability that the Treasury Department has to make good on the bonds does not mean that the observer was responsible for the diversion of the excess Payroll Taxes to other purposes. It's simply an objective fact.
But to paraphrase a movie line, and to paraphrase the professor, it seems to me that a lot of people can't handle the truth.
Posted by: Jeffrey J. Brown at June 4, 2013 12:44 PM
"Where are the assets that the U.S. Treasury is holding that would enable it to make these payments? They don't exist. Taxes will have to be raised, other programs cut, or the Treasury will have to borrow more from the public in order to deliver the funds that Social Security is assuming it's going to be receiving from the Treasury between now and 2035."
The US government cannot run out of US dollars to pay any obligation. It does not have a stash of dollars somewhere, filled by taxes or borrowing and emptied by expenditures.
Your statement about what Uncle Sam has to do to get the US dollars to pay his bills applies to California, to any business, and to all of us, because we do not issue our own currency. It does not apply to Uncle Sam, whether he uses unified accounting or not.
Posted by: Anonymous at June 4, 2013 02:51 PM
Jeffrey J. Brown An observation that the bond assets in the Trust Fund are offset, dollar for dollar, by the liability that the Treasury Department has to make good on the bonds does not mean that the observer was responsible for the diversion of the excess Payroll Taxes to other purposes. It's simply an objective fact.
That's true. But in this case we know that some of those who are today expressing the greatest alarm over having to tap general revenue sources in order to honor those Trustee bonds are also the same folks who argued for tax cuts for the rich and deficit spending for Daddy Warbucks and Big Pharma. I have in mind people like Greg Mankiw, Glenn Hubbard, and Martin Feldstein. Basically the same gang who regularly pollute the op-ed pages of the print version of Fox News. We do have a Social Security problem waiting in the wings, but as problems go this one is at least manageable. It's important to keep the magnitude of the problem in perspective, and that means keeping it in perspective relative to the severity of other economic problems. All of our problems should be as easy to fix as the Social Security shortfall.
Rick Stryker Funny that conservatives would admire Thomas Paine (who was a far left radical and lover of the French Revolution despite being marked for the guillotine.) And Plato is usually considered a conservative philosopher (unless your name is Mark Levin, who wrote a truly ignorant book), so I'm surprised that he made the liberal list of worthies.
In my view the most original and boldest philosopher would be Spinoza, both with respect to his work in ontology and epistemology (Ethics and his unfinished work on political philosophy Political Treatise ). But he doesn't really fit along a liberal/conservative spectrum. Of the conservative leaning political philosophers I think Alisdair MacIntyre is probably the most interesting. On the liberal side it's hands down John Rawls, followed by legal theorist H.L.A. Hart.
BTW, I'm assuming conservatives only like the early and middle-aged Hayek. As he got older he fell under the logical positivist influence of his cousin Ludwig Wittgenstein. And eventually he evolved to the point where he agreed with John Rawls' application of Kantian principles. I don't think that's the Hayek that got those conservative votes.
Posted by: 2slugbaits at June 4, 2013 03:32 PM
If you write an I.O.U. to me, it's appropriate for me to count it as one of my assets. If you write an I.O.U. to yourself, it's not appropriate for you to count it as one of your assets.
Wouldn't gross debt be a better measure of liabilities with the debt held in the trust funds counting as assets? After all, the SS administrators don't need to go hat in hand to Treasury and ask them to petition Congress for additional appropriations. They can sell the debt on the open market. Since at any time this debt can become a liability to the Treasury why not count is as such now and list it as an asset of the trust funds?
Posted by: Ben Wheeler at June 5, 2013 11:33 AM
On a purely technical note, in response to Ben Wheeler, the trust funds hold a special type of bond which it is not legally possible to sell on the open market. It can only be redeemed (for cash) at the Treasury.
I'd like to note that while debt held by the public does not include Trust Fund holdings, it does include similarly sized Fed holdings, interest from which is returned to the Treasury. The "private" nature of the Fed is largely illusory.
Posted by: benamery21 at June 5, 2013 08:09 PM
Jeffrey J. Brown I'm not sure what you're getting at by saying the excess funds collected from SS beneficiaries -- and held in Treasuries -- "was spent on other government programs." OK, sure... and the money I hold in my muni portfolio was spent by a local water district, to be be repaid with dedicated future tax collections. The money in my bond fund was spent by the corporate obligors, and they have to pay it back, too. Heck, my bank deposits were lent to some guy in Sheboygan or Eau Claire and he used the money to buy a truck, or to fund a college education. In fact, I have both a deposit and a mortgage, so "I owe the money to myself," just like the government. That doesn't make my asset any less real.
Are you saying we shouldn't have collected excess payroll taxes to fund the retirement bubble in the first place? Or that the collections should have been taken in by the Treasury and left on deposit with the Fed, or in a non-interest bearing account at JP Morgan? Or, I don't know, used to buy gold and warehoused at Ft. Knox? If the money is put in Treasuries, even if they were purchased on the open market, it means the government spent it at some point. And if not held in Treasuries, then what?
Posted by: Tom in Wis at June 5, 2013 08:27 PM
I blame Reagan. He was the one who decided to spend all the social security tax collections on wasteful spending (or make it legally required for the excess taxes to be used to buy treasuries, that sly dog).
Just goes to show that you simply can't trust the Republican party. Thanks JDH for the information!
Posted by: river at June 5, 2013 10:45 PM
Actually on some issues Hayek got more "conservative" with age, most noticeably health care. In The Road to Serfdom in the early 40s and still in The Constitution of Liberty (1959) he fully supported national health insurance. However, his son worked for the British health service and did not like it, with this somewhat turning Hayek against at least the sort of socialized medicine that UK has in his later years, if not totally against the idea of some sort of minimum social insurance.
Posted by: Barkley Rosser at June 6, 2013 01:48 AM
" That liability of the government is already included in the government's net debt. But the taxes that have to be raised, spending cut, or money borrowed in order to make the payment that the Treasury owes to Social Security is not currently included in the government's net debt. This is the essential point I am making, namely, that the growing ratio of retirees to workers poses a major fiscal challenge for the United States"
The first point is entirely correct; you need to consider all debt (so US debt is 105% of GDP), or SS begins to run out of money early in the 2020s. But the "namely" is a different point and not a restatement of the first point.
The US debt at 105% is both better and worse than it seems.
It's worse because most countries don't put citizens in debt for their university studies; it's the countries themselves which go into debt to provide free or almost-free university. That's 1 Trillion of debt in private hands in the US (about 7% of GDP?) which gets included in government debt in other countries. So put US debt really at 112%.
It's better because the US government is sitting on lots of land and other assets which offset a fair amount of that debt, which other countries simply don't have.
Posted by: a at June 6, 2013 04:52 AM
I know you thought you were cute criticizing me about the death panels but they already exist, only it is not a panel but a person.
Already patients are having to go begging to the federal government to grant them life or death care. It is out of our hands. This is not something that happens in a civilized, free country.
Posted by: Ricardo at June 6, 2013 05:53 AM
Re: Tom in Wis, "The money in my bond fund was spent by the corporate obligors, and they have to pay it back, too."
As noted several times up the thread, the difference is that the corporation that issued the bond did not buy the bond. As noted up the thread, the appropriate analogy would be a corporation buying its own bonds with the money set aside for future defined benefit pension plan payments. Since the bond assets are offset dollar for dollar by the liability to make good on the bonds, the corporation has not reserved anything for future pension payments.
However, it seems that people want to believe that one can take in, say $100,000, borrow it from oneself via an IOU, spend the $100,000, then pretend that one still has a $100,000 asset.
As noted up the thread, it becomes increasingly clear to me why so many people seem to believe that there is no problem with a virtually infinite rate of increase in our consumption of a finite fossil fuel resource base.
At the end of the day, people are going to believe what they want to believe.
Posted by: Jeffrey J. Brown at June 6, 2013 07:31 AM
Essentially what Reagan did with the tax code was to reduce progressive income taxes while increasing regressive fica taxes. The overall average tax rate did not change all that much.
Posted by: Barkley Rosser at June 6, 2013 10:59 AM
Westtexas: no one is claiming that government bonds are a physical store of value. Like any other debt they are simply a claim on the resources of the issuer. That's irrelevant unless you expect society not to have the resources to honor its debt. That's another discussion, and one that your key issue certainly impinges on. However, that's very different from the key point here, which is the distinction between the party which sold the bond and the party which bought the bond. Conflating the two is a political act which attempts to obscure the fact that the Trust Fund represents a debt from the general fund (primarily funded by income tax) to Social Security (funded by dedicated payroll taxes). The incidence of these two types of tax on the populace is very different, and conflation of the two is an attempt at theft by the rich from the 99%.
Posted by: benamery21 at June 6, 2013 12:00 PM
None of this alters the objective fact that the federal government has not placed any assets in reserve to pay future SS benefits.
As noted up the thread, there is very much a "Shoot the messenger" theme here.
And what about a member of the 99%, who at age 42 has been taxed for 20 years to buildup the "assets" in the Trust Fund, and who is now looking at being taxed for another 20 years to make good on the same bonds that are in the Trust Fund?
Posted by: Jeffrey J. Brown at June 6, 2013 02:36 PM
now I like this much better.
i have publicised both this and Menzies contribution this week.
I do hope you gain readers from as a result!
Posted by: nottrampis at June 6, 2013 03:37 PM
JJB: if the message is that there's no difference between the general fund and the trust fund the messenger is a propagandist. If your 42 y.o. was in an upper income bracket his income taxes were reduced at the same time his payroll taxes went up. If he's not in an upper income bracket his taxes won't be going up to pay back the trust fund unless the propagandists succeed in obfuscating the clear distinctions between classes of taxpayer. 2slugbaits may remember me proposing on the old krugman forum, well before the "Tea Party" was extant, a TEA PARTY 2016 bill titled the "Trust Enforcement Act, or Progressively Accounting for Regressive Taxation Yields" The store of value was in deferred taxation of upper incomes, assuming one believes supply side hogwash those private parties grew the taxbase faster than the interest rate on the debt incurred to avoid taxing them...
Posted by: benamery21 at June 6, 2013 07:50 PM
Jeffrey J. Brown: "And what about a member of the 99%, who at age 42 has been taxed for 20 years to buildup the "assets" in the Trust Fund, and who is now looking at being taxed for another 20 years to make good on the same bonds that are in the Trust Fund?"
And the Bush tax cuts count for nothing?
Posted by: river at June 6, 2013 09:10 PM
At the end of the day, the objective fact is that the federal government has not placed any assets in reserve to pay future SS benefits, and future SS benefits will be funded by payroll taxes + income taxes + borrowing.
As noted up the thread, the Trust Fund is a simply an accounting entry showing the cumulative surplus of Payroll taxes in excess of benefits paid.
And to return to the 42 year old (who has been employed and paying payroll taxes for 20 years), regardless of his current tax status, you would agree that he was taxed over the past 20 years to build up a Payroll Tax surplus? Furthermore, assuming he is paying any income taxes at all, isn't it an objective fact that he is now looking at being taxed for another 20 years to make good on the same bonds that are in the Trust Fund?
Posted by: Jeffrey J. Brown at June 7, 2013 08:10 AM
Future social security benefits will be funded by past and future payroll taxes. Full stop. Interest and capital returned to the Trust Fund from the general fund is payment of a debt incurred by the general fund not payment of benefits by income taxpayers. Income taxes are NOT paying Social Security. Social Security is not borrowing money. The failure to distinguish between Social Security and the general fund is a political act.
Posted by: benamery21 at June 7, 2013 01:33 PM
By the way, Ricardo's claim that we "already have death panels" is wrong.
Large numbers of people die every day waiting for organs. There simply aren't enough transplantable organs, so there's no way to change this. This isn't about refusing care because big bad evil government wants to save money and refuse care that could have been provided. It just isn't.
Posted by: David J. Littleboy at June 9, 2013 05:54 PM
A room full of highly intelligent people cannot come to the same conclusion. Why is that?
Posted by: Dan at July 19, 2013 10:33 PM

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- ISTOOK: Obama wants to be impeached
- Obama to Central American leaders: I need help with border
- Military bans troops from Baptist church event honoring ‘God’s Rescue Squad’
- ‘Pocket drones’: U.S. Army developing tiny surveillance tools for the next big war
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LETTER TO THE EDITOR: Money for duck studies, but not for safety?
Question of the Day
I'm a lifetime member of the National Rifle Association, and I'm not embarrassed or ashamed to admit that. I'm a strong believer in my Second Amendment rights and the Constitution. The new laws and bans some legislators want passed are just aimed at the law-abiding, safe gun owners of America and will not do a thing to stop criminals or crime.
I'm a proud loving father; my child is the most important person in my life. In a recent letter to the editor, I discussed the need to have police officers or professionally trained armed guards in schools. For some reason I got a lot of negative feedback on this from some parents, who said we do not need police or armed guards in schools. I think the government should pay for school security for our children. But the government says it does not have the funds to put guards in every school. I find that hard to believe, since our federal government spends money on the following: $384,949 to Yale University to study duck private parts, $1.5 million on a menu for people going to Mars, $325,000 to build a robotic squirrel, $750,000 on a new soccer field for detainees held at Guantanamo Bay, a planned $16 million to $20 million helping students from Indonesia get master's degrees and more than $3 million in taxpayer money for President Obama's vacations. The list goes on and on — but still our government does not have the money to protect our children?
I worry every day about my child going to school. Let's face it: We are always going to have criminals and people with mental health issues to worry about in this world. We need to focus more on mental health care for the people who really need it, and stop blaming the object the person uses to commit a crime.
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The Venezuelan government has paid $1.8bn (£900m) in compensation to French, Norwegian and Italian oil firms after it nationalised key oil fields.
Hugo Chavez has threatened to cut all Venezuelan oil exports to the US
The move isolates US oil firm Exxon Mobil in its dispute with the country.
Exxon is seeking $12bn in compensation from Venezuela's state energy group, PDVSA, after its interests were nationalised last year.
Venezuela has accused the US oil giant of exaggerating the value of the firm's former investments in the country.
It said that Exxon's former interests were worth just $1.2bn.
France's Total, Norway's Statoil and Italy's ENI agreed to the settlement after accepting the book price for the assets that PDVSA took over.
Total accepted $834m, ENI accepted $700m and Statoil received $266m, France's AFP news agency reported.
In 2006, Venezuela enacted a law forcing foreign oil companies to give PDVSA at least a 60% share in their Venezuelan operations.
Exxon has won court orders freezing $12bn of PDVSA assets, pending the verdict of an international tribunal at a court linked to the World Bank.
The move prompted PDVSA to stop selling oil to Exxon.
Venezuela's President Hugo Chavez has also entered the fray, accusing the US government of being behind Exxon's legal move.
Mr Chavez has also threatened to cut all Venezuelan oil exports to the US, but analysts say such a move is unlikely.
The US government said it fully supported Exxon's legal move, calling it a "just and fair" compensation claim.
The dispute between Venezuela and Exxon has been one factor behind record oil prices.

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Will the ECB Cut Rates This Week?
Rowan Crosby • 2 min read
It could well be a make or break week for the Euro as the ECB is looking more and more likely to slash interest rates.
Try as they will, the ECB has thrown everything they can at the Eurozone economy but whatever they have done to date really hasn’t worked as hoped. From record low interest rates to QE, the ever-dovish Mario Draghi just hasn’t been able to pull the right levers.
So that leaves the ECB in an awkward spot, with Draghi getting set to hand over the reigns, little has changed in the past few years. This week, the expectation is that the ECB will reduce the deposit facility rate to -0.50% from -0.40%, while there could be more in store as well.
In July, the ECB left rates unchanged, but president Mario Draghi hinted officials could bring back quantitative easing to boost a soft economy. So if that does eventuate, their could well be some more details of what this plan will look like.
Interestingly, the decision comes a week ahead of the FOMC in the US, looking at a possible cut of their own. So the currency wars are clearly heating up at the moment.
The EUR/USD could very well be the big mover in the event the ECB turns back to some form of QE. While the market is widely expecting a response from Draghi, just what that could be is where the questions lie.
In reality, a 0.1% cut to rates might be high in percentage terms, but it won’t likely be the difference in changing the shape of the economy in any meaningful way. But it does suggest the ECB is still prepared to push harder.
The EUR/USD has traded as low as the 1.0930 mark in the past week and that level could very well be in line to be tested on the back of any significant QE program. So with that in mind, the ECB press conference could be a game changer for the EUR this week.
For trading purposes, this looks to be the big opportunity. As if there are significant changes, that can mean significant downside moves for the EUR/USD.
Bottom Line: I would be looking to short a break of the recent lows on any big announcement looking for some decent follow through.

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