That Boring Blogger

In the debate as to what kind of a rate of return young people get from Social Security, it is often easy to forget that your Social Security taxes provide for more than just a check when you retire. So,

Pop quiz, hot shot*:

What percentage of Social Security benefits are retirement benefits?

Answer: About 66% (~327M out of 423M). The rest is more or less evenly divided between Survivor benefits and Disability benefits. That being said, retirement benefits are probably an increasing percentage of the pot, since disability rates and mortality are both decreasing. Still, 1/3 of your SS taxes go to these benefits which are truly insurance. This has two implications:

First, to the policyholder, the return on insurance is negative (policyholder pays for a transfer of risk, but diminished risk is not counted as part of the return). Second, consideration of Private Retirmenet Accounts needs to contemplate these other benefits.

One final observation - Disability benefits actually have their own trust fund (the DI fund which is separate from the OASI fund, which is for both life insurance and pension). This might have made me happy, as it would imply that SS does look out for them separately. Only thing is, the DI fund is already paying out more than it takes in and is projected to go bust before the OASI trust fund.

Memo to George Bush -- if you wanted to, you could fix the DI trust fund without having to haggle about PRAs.

As always, thanks for reading.


* - From the movie Speed, lest anyone accuse me of plagiarism

Certain Democrats are complaining about the expense of Bush' tour to promote his solution for Social Security. I don't agree with the main crux of the proposed solution (private retirement accounts) but I am less critical of the expense of the trip.

What should the President's role be? If I understand my Civics 101 properly, the President is the Executor - the Legislator sends the bill to the President who then puts it into practice. Of course this isn't really correct, since

a) The president chooses to sign the bill or not and
b) The president often proposes things before congress (e.g. budgets)

So what should a President be doing? If a President really believes in something, I think that it is appropriate to sell it to Americans, and even to spend tax-payers money to do so. I think that this is not so different from what Clinton did in support of his Medicare Reform.

So in the end, I am left with the conlcusion that the tactic is acceptable, even if the solution is not.

Before someone complains -- I specifically am not endorsing the pseudo-media blurbs coming out of the White House. The White House owes the public clarity when it sends out these shorts which are then aired by local news stations. I believe that the White House is on record as saying that it is the stations' responsibility to disclose the source, not the White House. That is wrong. When the White House fails to clearly identify its media messages it fails its duty to serve the people. Just my 2 cents.

As always, thanks for reading.

By now, everybody has heard the term "Ponzi Scheme" used in conjunction with Social Security. Is it a Ponzi scheme? To call SS a Ponzi scheme is a little like referring to investing in derivatives as "gambling." It is both meaningless and, to a certain extent, correct.

First, derivatives. A derivative is a financial instrument that derives its value from something else. A good example of a derivative is an option to sell AT&T shares at $100/share in 6 months. If AT&T shares are trading at $90/share, such an option has a fair amount of value (because first you buy, then you sell, maing $10). If they are trading at $110/share, it has much less value. Folks who trade options in the hopes of making money are, more or less, gambling. On the other hand, what if you already own a share of AT&T. Having the option to sell your share at $100 hedges the possibility that your share will fall below $100. Now it's not gambling, it's insurance.

A Ponzi scheme is one in which your profits rely on your being able to pull more people into the scheme. For example, you might pay me $10 for the right to enter the scheme. This allows you to charge 2 more people $10 for the right to enter the scheme. You put up a $10 investment and get $20 back on it. Not bad. Unless everyone is already in the scheme, then you just lose your $10.

SS has some of the same qualities. Workers contribute their earnings today in the hopes of getting something back in the future. Who pays that money in? Folks not yet in the scheme. It certainly sounds like a Ponzi scheme.

Here's the difference, folks pay into the system while they are working (easily 30-40 years) and take out after they are done working (on average, 15-20 years). This is another way of saying: there are about 3.3 workers contributing for every 1 beneficiary.

If that ratio (worker : beneficiary) were to remain constant, you could pretty much establish a tax-level that would keep the system solvent over the long-term. A major problem that SS is having is that the ratio falls every year (from 40:1 at inception). Why? One reason is increasing life span -- few lived to see much benefits when SS was instituted. Another reason is falling birth rates. As the U.S. fertility rate fell below the magical "replacement rate" (the number necessary for the current population to produce enough children that the population would hold stead, ignoring immigration) the ratio of worker to beneficiary dropped.

SS Actuaries project this number to keep falling, and it well may. Medical science continues to improve, dropping mortality rates and increasing life spans, but the fertility rates are actually increasing and are now back over the replacement rate. Will this reverse the trend? Only time will tell.

If it does, you can expect to see "Ponzi Scheme" fall out of the lexicon of the SS critic.

As always, thanks for reading.

Here's a fun post, thanks to Dennis Cauchon of USA Today (4/5/2005).

Clearly I'm not being hard enough on our chief executive because on Tuesday, President Bush headed down to West Virginia to check out the U.S. Bureau of Public Debt, where he found a filing cabinet containing records of who owns U.S. Treasury Bonds:

"Bush offered the filing cabinet as proof that 'there is no trust fund — just IOUs.'

"What did (Bush) expect to see there? Gold?" asked Dean Baker, a liberal economist who says Social Security does not face a financial crisis. "The trust fund contains government bonds that are just like any other government bonds."

But Bruce Josten, executive vice president of the U.S. Chamber of Commerce, applauded Bush, saying he punctured a myth.

"The public is fooled into thinking there's actually a fund where deposits and interest sit in some vault in West Virginia," he said. Josten says the trust fund is unlike the federal highway trust fund, whose assets by law can be spent only on highways. By contrast, Josten says, the government spends Social Security taxes on other programs but pretends the money is still kept in a trust fund."

This prompts an interesting question: what is the Federal Highway Trust Fund and how does it differ from the Social Security Trust Fund? Well, according to the Financial Year 2004 Report of the Highway Trust Fund (another excellent read), those funds in excess of what is "needed for expenditures" are invested in "non-interest bearing Treasury non-marketable securities." This appears to be pretty much exactly like the SS trust funds which pay out what they need to pay out (SS benefits) and invest the rest in interest bearing Treasury non-marketable securities. The major difference seems to be that the SS trust fund gets interest (the Highway Trust fund did until 1998) but other than that, they look pretty comparable to me.

I can't even guess at what Mr. Josten might have meant by "the trust fund is unlike the federal highway trust fund, whose assets by law can be spent only on highways." I, for one, am glad that the Social Security trust fund can be spent on things other than highways. As to the allegation that "By contrast, Josten says, the government spends Social Security taxes on other programs but pretends the money is still kept in a trust fund." I'm just not clear on what he means.

For example, in 2004, the OASI Trust Fund received about

* $473B of payroll taxes
* $15B of taxes on benefits and
* $79B of interest income from those mythical trust funds

That's a total of $566B (please excuse the rounding)

In 2004, the OASI Trust Fund pay out

* $415B of benefits and
* $6B of other expenses (including administration and other stuff)

For a total of $421B.

In 2004, the Trust Fund grew from $1355B to $1500B or $145B, exactly the difference between income and outgo. Perhaps what Josten meant is that the SS Trust Fund, unlike the FH trust fund, lends its money to the Government. That is just wrong -- they both lend all of their money to the government.

I suspect that many people who rail against the Social Security Trust Funds have no concept as to what the Trust Fund really is. Actually, I suspect that most Americans have little concept as to what the Trust Fund really is, but most of them (excluding myself) are polite enough to keep mum.

As always, thanks for reading.

One of my readers asked me to comment on the website http://www.thereisnocrisis.com/ I will, but I have not read them yet, so that I could give my own opinion of the question. Is there a crisis? Maybe. I know 3 things on the subject:

1) The actuaries best (conservative) guess is that there is a significant hole in the financing of Social Security benefits

2) The later we fix such a hole, the more dramatic changes will be necessary (especially benefit cuts and tax increases)

3) Over the past 10 years, the actuarial estimates have proven to be quite conservative, indeed.

Those 3 points, taken together, could certainly suggest to one that there is no crisis, just a bunch of conservative actuaries. The second point, by itself, makes the word "crisis" quite ambiguous when applied to the Social Security situation. It's not that we need a big change today. It's that the change required gets bigger the longer we wait. But the first point is where I hang my hat. While things have gone well for the past 10 years, I still think that the actuaries "intermediate" guess as to the financial health of SS is the one which we should base policy. Since it foresees a hole, I call it a hole and think that we ought to do something.

A crisis calls for crisis type measures. I definitely agree that this isn't a crisis, so we should be taking more carefully considered measures, and measures which leave the system largely in tact. So I guess that I almost agree with the sentiment "there is no crisis," but that doesn't mean that we don't need to take action, and today that action will be less drastic than if we wait for tomorrow.

I'll try and continue this thought after I have a chance to digest the main points of the above referenced website.

As always, thanks for reading.

It seems that there is some debate as to whether Bush's plan is an example of privatization (as Democrats seem to think) or not (as Republicans seem to think). Bush claims that the term is brought out as a "scare tactic."

I have to say that I side with Bush on this one. Bush's plan is not by definition privatization, as it would be totally conceivable that such a plan could be fully run by employees of the government. That being said, I'm not sure that Bush has ever gone on record as saying that he would arrange for that to be the case.

The good news is that opinions of the plan don't vary by what it is called, as Robin Toner of the International Herald Tribune noted on March 24, 2005:


"But one recent poll found that it made no difference whether the accounts were described as personal or private. Robert Blendon, an expert on public opinion at Harvard who helped conduct the poll for The Washington Post, the Kaiser Family Foundation and Harvard, said: "Since we know people are very negative about privatization, we thought it would spill over. But maybe people have adapted to it."

Score 1 for the viewing public.

Is privatization a bad thing?

It certainly has the potential to be. With even such legendarily moral business leaders as Warren Buffet being dragged into the muck (still likely to be innocent) its hard not to be cynical when so much potential for Backroom Buck Bagging gets passed into private industry. Still, if there were sufficient oversight, it is always conceivable that letting private firms bid to reduce costs and increase efficiency wouldn't be a bad thing. I don't support it per se, but I don't necessarily regard it as so bad that it could be called a "scare tactic."

One of my noble readers points out that Bush and his crew were the first to use the term Privatization and only backed off of it once it was clear that it carried negative connotations in the Public. My bad -- I didn't know the history and only knew that those same folk are out there now, circulating fliers to the Press which show why this isn't privatization.

I suspect that the truth might be slightly more nuanced. Early on, there certainly was talk about using private companies to manage this money (which would certainly have been privatization - and, in my opinion a bad idea). Nowadays that talk is nowhere to be found. If it re-emerges, the accusation of privatization will be fair game again.

Thanks for setting the record straight, Moan.

As always, thanks for reading.

One of the repeated arguments one hears on changing Social Security is the big price of doing nothing. One hears quotes like "Every year that we do nothing, the cost of fixing Social Security goes up by $600B." On this subject, I have been silent to date largely because I agreed in principle but didn't really know where the number comes from. On March 24th (I'm a little slow in my reading) the Editor of the New York Times published an editorial entitled "About that number" containing the following statement:

"Compounding the subterfuge is that the difference between this year's $11 trillion eyepopper and last year's number - $600 billion - is being used as evidence of a scary deterioration in Social Security's finances. That's just wrong. The two monster numbers are actually the same quantity - different ways of expressing an unchanging level of debt at two different points in time."

I would like to agree -- to an extent. The NYT is correct in saying that the Bush administration is misusing this number. Unfortunately, so is the Times. What would it mean that the two numbers are the same number at 2 points in time? That, by some valid measure of inflation or increase, $10.4B should turn into $11B. That rate of increase would be 5.8%, given that these two numbers came out about 1 year apart.

What has actually increased by 5.8% over the past year? Our estimate of future benefits on this infinite horizon. Our ability to pay for those benefits hasn't gone up nearly so much. Salaries have only gone up by a little over 2% in the same time period and we actually only use limited salaries (limited to $90,000) to pay for these benefits, so those have gone up even less.

So the NYT is correct in saying that $600B is an inflated estimate of the increasing cost of doing nothing to fix the system. However, the true number is probably still more than $300B.

Hey, a couple $100B hear, a couple $100B there and before you know it, you're talking about real money.

As always, thanks for reading.

My one and only poster has asked me to comment on "ownership," and the administrations take on it.  In the interest of rewarding posters, I will first try to relate the White House' opinion, then try to explain why I think ownership is an idea whose time has not yet come.

The meaning of ownership

At the following URL, you can find a 13-page acrobat file which lays the Bush position with more details than I would have guessed (shame on me).

http://www.whitehouse.gov./infocus/social-security/200501/socialsecurity.pdf

Page 5 of the document addresses ownership.  I think the following quote summarize this ownership pretty well:

"Personal retirement accounts offer younger workers the opportunity to build a "nest egg" [sic] for retirement that the government cannot take away… The money in these accounts would be available for retirement expenses.  Any unused portion could be passed on to loved ones."

So ownership, from the administrations' perspective, involves [1] freedom from seizure and [2] inheritability.  That seems pretty reasonable.  One hears lots of rumors in the media that sound a lot less like ownership, but if one takes the White House at its word here, that sure sounds like ownership.

Why don't I support ownership right now?

On page of the White House report, there is the claim that "Establishing personal retirement accounts does not add to the total costs that Social Security faces."

With all due respect, I disagree.  The best way to demonstrate this is with a common claim by those who support I.R.A.s which runs something like this: "And what happens, under the current system,  if you die before receiving your Social Security benefits?  They're gone."  Well, where exactly did they go?  The answer is: to other SS recipients.  Those who live less long subsidize those who live longer.  If we are to allow I.R.A.s to be inherited, that would end this subsidization, so we would need to find money from some other source (other than those who pass away early) to pay for the longer lived.

I don't have a specific problem with I.R.A.s, it's just that, given the current funding gap, I think that we need to first propose solutions which don't increase the costs of Social Security.  Bush recognizes this to an extant, planning to roll in I.R.A.s somewhat slowly.  If they could be rolled in slowly enough, I probably wouldn't have a problem with them, but they probably also wouldn't have any political value if rolled in that slowly.

One last thought.

Above, I quoted the White House as saying "Personal retirement accounts offer younger workers the opportunity to build a "nest egg" for retirement that the government cannot take away."  I'm no lawyer, but I'm not sure why I.R.A.s are any safer from the government.  Right now, Congress has the ability to legislate benefits away.  If we were to change the system such that I.R.A.s were created, I'm not sure what would prevent Congress from voting to increase the retirement age, decrease credited investment income or just wholesale refuse to distribute benefits.  I imagine that an outraged electorate could sue, protest or vote the bums out of office, but we already have those options.  So long as the government

*       collects tax revenue
*       manages the funds
*       and creates the laws by which funds are disbursed

I can't understand why they are any safer from the government.  I'm not worried about the government stealing my nest egg, mind you, I just can't understand this particular claim.

As always, thanks for reading.