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Rick Perry: Let States “Secede” From Social Security

Texas Governor Rick Perry is making the rounds of the talk shows talking about his new book and yesterday he was pushing the very odd idea of allowing individual states to “secede” from Social Security:

Here he talking about it on MSNBC’s Morning Joe:

And then later in the day on CNN’s Parker/Spitzer:

The opt-out that Perry refers to was a provision of Federal laws that allowed states and municipalities to create their own pension systems separate from Social Security. It applied only to public employees and did not apply to people employed in private industry.

Frankly, I don’t know how a state opt-out system could possibly work, partly for the reasons that John Cole points out:

Could someone explain how this would work? How does a state secede from a program? What would the practical implication be? Could I pay into SS my whole life while a WV resident, then when I hit 65, I have a stroke and lose control of my senses and decide to move to Texas, and then I would not be able to collect SS? I’m honestly confused. What the hell is he talking about? Could a state secede from the Post Office? Or the Selective Service? Or the VA?

Well, if the law allowed it they could, but I don’t see how it could possibly be a viable national system.

Social Security is desperately in need of reform. Personally, I favor expanding the ability of individuals to direct their Social Security taxes into private investment accounts that they control, but even that solution won’t be easy to implement. Talking about half-baked ideas like the one Perry is pedaling doesn’t accomplish anything.

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. John Personna says:

    I’ve read that 30% of people with 401Ks have borrowed against them.

    Pretty shocking, if you think folks are rational guardians of their own future.

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  2. Bryan Pick says:

    You could look at it this way: since the SocSec trust fund represents nothing but a promise to tax or borrow in the future, and the system is reaching the tipping point where outlays exceed revenue, there’s no reason to treat this as anything but a welfare system. Letting the states take over pensions would be like the welfare reform of the Nineties.

    But good luck explaining that to seniors, who look on any changes to the system with extreme suspicion.

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  3. Bryan Pick says:

    Actually, I’ll concede this: a state-based system does mean that a person could live in a low-tax/low-pension state in their working years, and then move to a high-tax/cushy-pension state to retire (or vice versa, I suppose).

    One solution, off the top of my head, is that each state could promise benefits to people based on how long they worked in that state (or how much they “contributed”), and send checks to people no matter which state they live in now.

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  4. john personna says:

    You could look at it this way: since the SocSec trust fund represents nothing but a promise to tax or borrow in the future …

    You took it a bit far with “nothing but.”

    The trust fund exists because they did collect excess, for the future.

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  5. john personna says:

    The Trust Fund will gradually be drawn upon to cover the difference between tax receipts and benefit payments. It will be completely depleted by 2042 (according to the Social Security Administration) or 2052 (according to the Congressional Budget Office). However, if the US economy performs better than the economic assumptions and projections used by the SSA and CBO, the trust funds may remain in surplus indefinitely.

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  6. Bryan Pick says:

    You took it a bit far with “nothing but.”

    The trust fund exists because they did collect excess, for the future.

    No, they collected excess for the present. Congress spent that money. You could argue that the money they spent represents a kind of “investment,” but nothing’s being “saved up.”

    All of the “assets” of the trust fund are promises to tax or borrow in the future. The minute outlays exceed revenue, whether the trust fund is “depleted” or not, the government has to raise taxes or borrow to make up the difference to pay all benefits, which wouldn’t be the case if we were talking about, say, cash on hand.

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  7. Geaux Tigers says:

    Great idea. I love that someone is actually talking about it out loud. Grab and third rail and tie it in a knot. I thought this was a conservative outside-the-beltway blog, not a liberal insider establishment blog. Get your head out.

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  8. Kaleidic says:

    If you are saying that the money that congress took from the excess contributions will not be repaid by new borrowing, you are talking about out-and-out theft, nothing else.

    Like or Dislike: Thumb up 1 Thumb down 0

  9. Bryan Pick says:

    Kaleidic:

    That’d be defaulting on their obligations, and it’s reasonable to compare that to theft. But regardless of what they choose to do when the outlays exceed payroll tax revenues, we shouldn’t think of the trust fund as a reason not to have the states take over.

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  10. I’ve read that 30% of people with 401Ks have borrowed against them.

    Pretty shocking, if you think folks are rational guardians of their own future.

    Depends what they’re doing with it. I have a loan against my 401k that I used to pay down my mortgage. That way I’m paying the interest to myself instead of a bank and with the markets relatively flat right now, I’m not really forgoing any returns.

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  11. Tano says:

    “Social Security is desperately in need of reform.”

    Why?
    Because of the demographics of the baby boom, SS, as presently structured, will only be able to pay 70% of otherwise promised benefits starting in 2041.

    Thats the only problem with SS.
    We can do nothing, and simply accept the 30% cut in benefits in 30 years, and the system is then viable for the indefinite future.

    Or we can do a minor tweak now – some choice between, or combo of retirement age, or minor benefit cut, or tax increase, or income-limit rise.

    I imagine you are part of a vanishingly small minority who still thinks that putting the ultimate old-age safety net in the stock market is a good idea. Its rather hard to even begin to imagine why you would think that.

    We have plenty of options for that kind of gambling – IRAs, Roth IRAs, 401Ks etc. SS is a safety net.

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  12. Tano says:

    “All of the “assets” of the trust fund are promises to tax or borrow in the future.”

    The assets of the trust fund are government bonds. There is no reason to put the word assets in quotation marks. These bonds are assets to the same extent as any government bonds that you might own – i.e they are backed by the full faith and credit of the US government. How the Treasury will manage to pay off those bonds is not in any way an issue for the trust fund.

    ” The minute outlays exceed revenue, whether the trust fund is “depleted” or not, the government has to raise taxes or borrow to make up the difference to pay all benefits, ”

    You seem to have a strategy of blurring very clear legal distinctions in order to make some strange point. The government might have to raise taxes or borrow to pay off its bonds, both those held by SS, and those held by you in your portfolio. The “government” – the Treasury, does not pay SS benefits. SS benefits are paid by the SS Administration, using dedicated revenues and, in the future, their stockpile of bonds.

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  13. Bryan Pick says:

    Tano:

    To the government as a whole, those bonds are not assets; they are assets to the SSA but they are liabilities to Congress and thus to future taxpayers.

    John Personna asserted that the excess revenues of years past were collected for the future. In fact, they were not. Unlike true economic assets that represent wealth that’s already been created (like if the SSA had stockpiled cash), those bonds will not provide padding for the taxpayer against outlays exceeding payroll tax revenues. As soon as that happens, Congress must either tax or borrow.

    It is not a strange point that the Social Security shortfall is a problem requiring progressively higher increases in taxation and/or borrowing by Congress many years before the trust fund runs out. Many voters and even elected officials are acting like no tax hikes or extra borrowing will be required until the trust fund runs out, and then we just have a 30% drop in benefits. But that’s not true.

    In fact, I’ll take it a step further. As soon as payroll tax surpluses started to shrink, that’s less money available each year for Congress to pay for our government’s other commitments, such as defense, servicing the debt and running all the other federal agencies. That means we have to come up with the money somewhere else, or cut spending.

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  14. Tano says:

    “To the government as a whole, those bonds are not assets; they are assets to the SSA but they are liabilities to Congress and thus to future taxpayers.”

    But what is the sense of talking about “the government as a whole”? Yes. SS’s bonds are assets to them, and liabilities to the Treasury. Therefore, although the Treasury might have some problems in the future (a need to borrow or tax), SS does not have any problems – beyond the 30% cut in 30 years.

    “John Personna asserted that the excess revenues of years past were collected for the future.”

    Yes, he is correct. That is why they set the rates and benefits as they did back then – to generate excess revenues to stock away for future obligations.

    “those bonds will not provide padding for the taxpayer against outlays exceeding payroll tax revenues”

    You seem to be going out of your way to try to confuse yourself. The bonds are padding for the SS system, not for the taxpayer. Look – its not really that complicated. We knew, back in the eighties, that the baby boom generation would present a temporary problem for SS, because this large bolus of workers would at once be leaving the workforce (reducing revenues to SS) and starting to draw their own benefits. Instead of placing the entire burden for this double whammy on the backs of the workers at that time (the time is now upon us), the agreement was to actually make the baby boom workers themselves kick in a bit extra – by raising the payroll taxes to a level in excess of what was needed at the time. That extra income was lent to the Treasury, rather than sticking under some mattress in SS headquarters. It is not such a difficult concept. Its the same thing that you and I do with our own money as we look forward to retirement – we salt away a bit in T bonds or other investments for use later. That is all that is really going on here.

    Yes, of course, when the time comes for the Treasury to pay off those bonds, then it must dip into general revenues, or raise revenues, or borrow. That might be seen as a problem for the Treasury, and for the taxpayers in general, but it is not in any way a problem for the bondholders, including SS.

    “It is not a strange point that the Social Security shortfall is a problem requiring progressively higher increases in taxation …”

    Sure it is. You are trying to blame SS for the fact that the Treasury might have to raise more revenues. But SS is nothing but a bondholder, expecting its bonds to be honored. Your point is as strange as blaming you for being the cause of higher taxes because you may own some Treasury bonds, and damn it, you demand that they be honored.

    “Many voters and even elected officials are acting like no tax hikes or extra borrowing will be required until the trust fund runs out, and then we just have a 30% drop in benefits. But that’s not true.”

    Once again, you are confusing the payment of benefits by the Social Security Administration with the redemption of bonds by the Treasury. As SS starts to cash in their bonds, then obviously the Treasury will have less money than it would otherwise. Same is true if you or I cash in our bonds. But so what? That was envisioned 25 years ago when the rates were raised and the bonds were first purchased. Obviously the intention all along was for them to be redeemed when needed, when the boomers start making their big demand on the system. Now that the day has come, people like you seem all discombobulated about how it all works.

    If you want to make some argument about Federal government spending, then do that. Leave SS out of it though – they are not making any demands on the Treasury other than cashing in bonds, like any other investor might do.

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  15. Bryan Pick says:

    But what is the sense of talking about “the government as a whole”? Yes. SS’s bonds are assets to them, and liabilities to the Treasury. Therefore, although the Treasury might have some problems in the future (a need to borrow or tax), SS does not have any problems – beyond the 30% cut in 30 years.

    The point of talking about the government as a whole is that tax increases and extra borrowing are no small matter. Many people still talk about SocSec as if the trust fund means we won’t have to raise taxes until it runs out, and that’s not true.

    “John Personna asserted that the excess revenues of years past were collected for the future.”

    Yes, he is correct. That is why they set the rates and benefits as they did back then – to generate excess revenues to stock away for future obligations.

    Wrong. The concept of stocking something away, rather than relying on future flows, is key here. The excess revenues were not kept as a stock (like personal accounts) — that’s why it would be so expensive to convert to personal accounts.

    If you empty the piggy bank to pay your regular expenses each month, that may or may not be prudent depending on your circumstances, but the IOU you write that obligates your children to pay you is not money “stocked away,” even if you’re quite confident you’ll be able to collect it from them.

    “those bonds will not provide padding for the taxpayer against outlays exceeding payroll tax revenues”

    You seem to be going out of your way to try to confuse yourself. The bonds are padding for the SS system, not for the taxpayer.

    What makes you think I’m confused? I’m saying that since the trust fund is no padding for the taxpayer, it wouldn’t be so hard to have the states run pensions.

    Instead of placing the entire burden for this double whammy on the backs of the workers at that time (the time is now upon us), the agreement was to actually make the baby boom workers themselves kick in a bit extra – by raising the payroll taxes to a level in excess of what was needed at the time. That extra income was lent to the Treasury, rather than sticking under some mattress in SS headquarters.

    So, the “extra” that the Baby Boomers “kicked in” was spent by Congress on them. Doesn’t sound so prudent that way, does it?

    And now we are placing the Baby Boomers’ SocSec burden on the current generation, because it is the working population’s wages that will have to be taxed to pay to retire those bonds.

    Its the same thing that you and I do with our own money as we look forward to retirement – we salt away a bit in T bonds or other investments for use later.

    People buy T-bonds not because they expect the government to create wealth but because they’re risk-averse and confident that the government will be able to tax and borrow to pay them. But that confidence is based on the government not issuing too much of that debt and other borrowers not calling in too much of it at once. The bond market can turn on you in a snap, and a sovereign debt crisis is a hell of a thing.

    Read these — http://is.gd/gNtQL — while you watch this: http://honeywell.feedroom.com/
    (Transcript here: http://is.gd/gNtSU )

    “It is not a strange point that the Social Security shortfall is a problem requiring progressively higher increases in taxation …”

    Sure it is. You are trying to blame SS for the fact that the Treasury might have to raise more revenues. But SS is nothing but a bondholder, expecting its bonds to be honored. Your point is as strange as blaming you for being the cause of higher taxes because you may own some Treasury bonds, and damn it, you demand that they be honored.

    The payment of promised benefits at their current level will require the redemption of bonds, which will in turn require that Congress raise taxes, borrow more, and/or cut spending. I’m using the logic of transitive relations. X requires Y, and Y requires Z. Hence, X requires Z.

    The fact is, if promised SocSec benefits stay where they are, they will be to blame for higher taxes and/or borrowing, because Congress made SocSec that way.

    As SS starts to cash in their bonds, then obviously the Treasury will have less money than it would otherwise. Same is true if you or I cash in our bonds. But so what? That was envisioned 25 years ago when the rates were raised and the bonds were first purchased. Obviously the intention all along was for them to be redeemed when needed, when the boomers start making their big demand on the system. Now that the day has come, people like you seem all discombobulated about how it all works.

    I’m not confused, but I am upset.

    You seem to think that this system being envisioned by Congress changes anything in my argument. It doesn’t. The working population is looking down the barrel of higher taxes and debt because the Boomers obligated their children and grandchildren to pay for the Boomers’ retirement. 25 years ago, I was a toddler and had no say in this.

    If you want to make some argument about Federal government spending, then do that. Leave SS out of it though – they are not making any demands on the Treasury other than cashing in bonds, like any other investor might do.

    Again, my original point was that the trust fund is not padding for the taxpayer. It does not represent savings; it does not represent a stock of wealth. We’re reaching the tipping point where paying SocSec benefits requires raising taxes or borrowing. Thus, we could treat SocSec like welfare and let the states take it over.

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  16. sam says:

    “Thus, we could treat SocSec like welfare and let the states take it over.”

    One question that arises. It’s not clear to me how this would solve much of anything at all, tax wise. The poorer states are already net importers of federal tax dollars (see, Red States Feed at Federal Trough, Blue States Supply the Feed. What would lead us to suppose that if the states took over the functions of Social Security (and Medicare — how could that be resisted on the argument?), the poorer states would not see a much bigger share of federal tax dollars flowing in? For with federal dollars goes federal regulation: especially here, I can envision a federal response that mandates a minimum level of income protection across the states.

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  17. sam says:

    And btw, Social Security is a much more complex program than many people realize:

    In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance (OASDI) program.

    The original Social Security Act (1935) and the current version of the Act, as amended encompass several social welfare and social insurance programs. The larger and better known programs are:

    Federal Old-Age (Retirement), Survivors, and Disability Insurance
    Unemployment benefits

    Temporary Assistance for Needy Families
    Health Insurance for Aged and Disabled (Medicare)
    Grants to States for Medical Assistance Programs (Medicaid)
    State Children’s Health Insurance Program (SCHIP)
    Supplemental Security Income (SSI)

    Can we imagine a state like Mississippi assuming the burden of all that?

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  18. Dave Schuler says:

    Should we also confine people within the states in which they find themselves when the secession process begins?

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  19. Tano says:

    ‘Many people still talk about SocSec as if the trust fund means we won’t have to raise taxes until it runs out, and that’s not true.”

    Perhaps these people simply mean that we won’t have to raise SS taxes till the bonds run out, which is true (although raising them now a little bit would be wise, forestalling the date when the bonds run out).

    “The excess revenues were not kept as a stock”

    I don’t understand your point here. The excess revenue was invested in T bonds, just like you or I might do if we have income greater than our monthly bills. Thats what we mean by “stocking money away”.

    “If you empty the piggy bank to pay your regular expenses each month, that may or may not be prudent depending on your circumstances, but the IOU you write that obligates your children to pay you is not money “stocked away,” even if you’re quite confident you’ll be able to collect it from them.”

    Sorry, but I don’t follow this either. SS empties its piggy bank to pay regular expenses. Is this what you are referring to in your first sentence? Then, starting in the eighties, it started to generate excess revenue. It did not write IOU’s, to the contrary – it started collecting them, in the form of T bonds. Or did you first sentence here refer to the Treasury? But no one is claiming that the Treasury was “stocking away” money – SS has been. You seem terminally confused about the two entities.

    “So, the “extra” that the Baby Boomers “kicked in” was spent by Congress on them. Doesn’t sound so prudent that way, does it?”

    Why not? What do you think happens with your money when you invest it somewhere? If you buy bonds, you can expect that money to be used to support the ongoing activities of the bond issuer.
    The real problem here comes down to the Republican party’s real commitment to lower taxes, and their utterly phony commitment to lower spending. Democrats advocate for considerable spending, but at least would usually raise taxes to pay for it, if they had their way. Republicans do not wish to take the heat by actually cutting any real services, but they do refuse to actually pay for things. So we have these big deficits. Reagan, who was President when the SS agreement was forged, actually quadrupled the national debt in his 8 years (for reference, Obama is on track to only double it in 8 years).

    The idea at the time was that the government would be borrowing money from SS instead of borrowing that amount from the markets. So that when it came time for SS to cash in the bonds, there would be no real effect on the Treasury, since SS would simply be doing what those other bondholders would have been doing anyway. But since we had all these Republicans around who were so dead set against raising sufficient revenue, given the amount of spending they were agreeing to – the SS bonds became seen as an additional source of money to borrow, rather than simply an alternative source.

    So yeah, there are problems that we have now with debt levels, and there may well be unpleasant things we may need to do in order to pay off all our bonds, but those problems are NOT the fault of the Social Security Administration, just like they are not the fault of you and I when we decided to put a bit of our excess income in T bonds.

    “The fact is, if promised SocSec benefits stay where they are, they will be to blame for higher taxes and/or borrowing, because Congress made SocSec that way.”

    Sorry, but that is ridiculous. SS bought bonds. Those bonds need to be honored when presented for redemption. What SS does with that money is, in a sense, not the business of the Treasury, just like it is not the Treasury’s business what I do with the money I get from cashing in my bonds. It is a perverse logic that tries to blame SS, and what they are going to do with the money they get for their bonds, for the trouble that the Treasury might have honoring the bonds. The Treasury would need to honor the bonds no matter what SS does with the money, no matter what benefits they pay out.

    Once again, if there is a problem, it lies with the politicians (mainly Republicans) who refuse to raise sufficient revenues over the years to pay for government expenses, thus requiring a lot of borrowing. This problem is not the fault of SS.

    “The working population is looking down the barrel of higher taxes and debt because the Boomers obligated their children and grandchildren to pay for the Boomers’ retirement.”

    Actually, that is quite a distortion. SS was set up in the thirties as a system under which current workers would be paying for retirees. That is the way the system has always worked – it is not something that the Boomers did to their children. To the contrary – the boomers actually took some steps to ease the burden on present day workers, by taxing themselves in excess of what was needed to pay off their parents generation – this stock of T bonds that we have been discussing.

    “…the trust fund is not padding for the taxpayer. It does not represent savings; it does not represent a stock of wealth..”

    I don’t know who thinks it is. It is padding, and a stock of wealth, for the SS system, not for the taxpayers in general (the Treasury).

    “Thus, we could treat SocSec like welfare and let the states take it over.”

    What do you mean by that? Like welfare? You mean you want to deny benefits to those who are not destitute, even though they have been paying into the system all their lives? How do you imagine doing that? And have the states run it? Whatever for? Set up 50 new bureaucracies instead of having the one, quite efficient, administration we now have? What would be the benefit of that?

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  20. Bryan Pick says:

    “If you empty the piggy bank to pay your regular expenses each month, that may or may not be prudent depending on your circumstances, but the IOU you write that obligates your children to pay you is not money “stocked away,” even if you’re quite confident you’ll be able to collect it from them.”

    Sorry, but I don’t follow this either. SS empties its piggy bank to pay regular expenses. Is this what you are referring to in your first sentence? Then, starting in the eighties, it started to generate excess revenue. It did not write IOU’s, to the contrary – it started collecting them, in the form of T bonds. Or did you first sentence here refer to the Treasury? But no one is claiming that the Treasury was “stocking away” money – SS has been. You seem terminally confused about the two entities.

    I’ll be patient if you’ll read for comprehension. The government collects payroll taxes, and SSA immediately uses much of them to pay current benefits. Then Congress takes the rest, spends it on other stuff, and writes IOUs (bonds) that will have to be retired later with interest.

    For you to claim that anything has been “stocked away” is to claim that the money Congress spent is being stored as wealth somewhere. But since the “stock” you’re referring to is a promise within the government to tax future flows, it is a liability from the future taxpayer’s perspective, a claim on income that they haven’t even earned yet.

    Any household in which the parents (Congress, with the Boomers’ permission) spent all their working-years income (payroll tax revenue) and obligated their children (future taxpayers) to pay for their retirement would not be said to be “stocking away” anything.

    Tell us, what would be the difference if the trust fund did not exist, and SocSec and payroll taxes were just another part of the general budget? It would not change whether and when taxes and borrowing must be increased.

    “So, the “extra” that the Baby Boomers “kicked in” was spent by Congress on them. Doesn’t sound so prudent that way, does it?”

    Why not? What do you think happens with your money when you invest it somewhere? If you buy bonds, you can expect that money to be used to support the ongoing activities of the bond issuer.

    The difference is that private firms create wealth without having to seize it. Firms don’t claim any special authority to confiscate others’ wealth if they don’t produce enough to cover the bills. If people won’t lend a company money anymore, there’s no sovereign debt crisis, and taxes and inflation don’t unexpectedly rise.

    The real problem here comes down to the Republican party’s real commitment to lower taxes, and their utterly phony commitment to lower spending. Democrats advocate for considerable spending, but at least would usually raise taxes to pay for it, if they had their way. Republicans do not wish to take the heat by actually cutting any real services, but they do refuse to actually pay for things. So we have these big deficits. Reagan, who was President when the SS agreement was forged, actually quadrupled the national debt in his 8 years (for reference, Obama is on track to only double it in 8 years).

    You won’t find me defending Republicans who aren’t serious about cutting spending. And I won’t defend Reagan on this, because he failed to understand the SocSec reform proposals presented to him and thus did not pursue them. (That said, it’s not like everyone was aware of the problem that overestimation of inflation was causing until the Boskin Commission.)

    But you seem to be defending Democrats who aren’t serious about what kind of tax hikes would be necessary to finance their preferred spending, or the effects of those tax hikes. They could raise income taxes on the top two brackets to 100% and even assuming no ill effects from the tax hikes, it still would not be enough to cut the deficit to 2% of GDP during the next decade of planned spending.

    It’s hardly an accomplishment that Obama isn’t on pace to quadruple the national debt, since he’s starting with a much bigger denominator. Reagan quadrupling the nominal debt didn’t place us in danger of a sovereign debt crisis, particularly since it was offset by the total economy growing at a rapid clip, but if we don’t handle our projected deficits in this decade, we will be in that danger.

    The idea at the time was that the government would be borrowing money from SS instead of borrowing that amount from the markets. So that when it came time for SS to cash in the bonds, there would be no real effect on the Treasury, since SS would simply be doing what those other bondholders would have been doing anyway. But since we had all these Republicans around who were so dead set against raising sufficient revenue, given the amount of spending they were agreeing to – the SS bonds became seen as an additional source of money to borrow, rather than simply an alternative source.

    You could place the blame equally on Democrats for not cutting spending and leaving both taxpayers and the SocSec surplus alone. The Dems controlled the House for Reagan’s entire presidency, and the Senate for the last 2 years.

    So yeah, there are problems that we have now with debt levels, and there may well be unpleasant things we may need to do in order to pay off all our bonds, but those problems are NOT the fault of the Social Security Administration, just like they are not the fault of you and I when we decided to put a bit of our excess income in T bonds.

    Did I say it’s the fault of SSA? No, and why would I be interested in doing so? I said it’s the fault of keeping SocSec benefits at their promised levels after Congress spent the SocSec surplus. Either the benefits get cut, or we get higher taxes and borrowing in the near term.

    “The working population is looking down the barrel of higher taxes and debt because the Boomers obligated their children and grandchildren to pay for the Boomers’ retirement.”

    Actually, that is quite a distortion. SS was set up in the thirties as a system under which current workers would be paying for retirees. That is the way the system has always worked – it is not something that the Boomers did to their children. To the contrary – the boomers actually took some steps to ease the burden on present day workers, by taxing themselves in excess of what was needed to pay off their parents generation – this stock of T bonds that we have been discussing.

    See, you’re acting like those T-bonds will actually ease the burden on the taxpayers of today. I’ve been trying to tell you all along that they won’t. As soon as outlays exceed payroll tax revenues, Congress raises taxes and/or borrowing.

    Obviously, that’s a bigger problem for the taxpayers of the next few decades than it was for the Boomers, who had a much higher worker-to-beneficiary ratio.

    It’s odd: sometimes you sound like you understand that the bonds provide no padding, and sometimes you sound like you don’t. Like you wrote immediately afterward:

    “…the trust fund is not padding for the taxpayer. It does not represent savings; it does not represent a stock of wealth..”

    I don’t know who thinks it is. It is padding [...] for the SS system, not for the taxpayers in general (the Treasury).

    And I’ll save the last part of my response for my next comment.

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  21. Tano says:

    “The government collects payroll taxes, and SSA immediately uses much of them to pay current benefits. Then Congress takes the rest, spends it on other stuff, and writes IOUs (bonds) that will have to be retired later with interest.”

    You are carefully choosing your words for the purpose of confusing the facts. You say “Congess takes the rest and writes IOUs” – why not report accurately – Social Security takes the excess and invests in Treasury bonds”. We are referring to the same facts here, but your characterization is weird.

    “For you to claim that anything has been “stocked away” is to claim that the money Congress spent is being stored as wealth somewhere. ”

    And the reason for your weird characterization seems to be so that you can arrive at this mischaracterization. The money has very clearly been “stocked away” by the Social Security System. Just like when we stock money away – in T bonds. It most certainly is stored as wealth somewhere – to the same extent that T bonds in your portfolio are wealth. These bonds are not wealth for the taxpayers, as a category, – for the taxpayers they are a liability. For the SSA, they are an asset. Why is this so confusing?

    “it is a liability from the future taxpayer’s perspective,”

    Yes, of course. And an asset from the perspective of Social Security.

    “Any household in which the parents (Congress, with the Boomers’ permission) spent all their working-years income (payroll tax revenue) and obligated their children (future taxpayers) to pay for their retirement would not be said to be “stocking away” anything.”

    The SS system is designed to have children pay for their parents retirement. The “stocking away” refers to the temporary increase in SS revenues that has come about because the boomers decided to tax THEMSELVES, in excess of what they needed in order to pay off their parent’s retirement needs.

    “Tell us, what would be the difference if the trust fund did not exist, and SocSec and payroll taxes were just another part of the general budget?”

    In that case, payroll taxes would have probably been a bit lower these past 25 years (the “crisis” in SS was the justification for the increase in payroll tax rates) and the government would have had to borrow money from other sources. Lower taxes for a generation, but the money repaid by the government would not have gone to SS, but to those other investors. So now, with the large bolus of boomer retirees, SS would be in real crisis, and payroll taxes would have to go up.

    The trust fund set up a legal and financial framework to protect SS as a program. Ultimately of course, there is a certain set amount of money that will be needed to support the boomer retirees, irrespective of how that is administered.

    “You could place the blame equally on Democrats for not cutting spending and leaving both taxpayers and the SocSec surplus alone.”

    Well, I choose not to do that, because the Democrats were willing to raise sufficient taxes to pay for their spending. Whether it is good to go the high tax – high spending route is another question. For the issue of fiscal sanity, either a high-high, or a low-low strategy is equally responsible. The problem is wanting the spending. or recognizing that the spending is popular, and not being willing to pay for it.

    “I said it’s the fault of keeping SocSec benefits at their promised levels after Congress spent the SocSec surplus.”

    I don’t think it is proper at all to try to change SS benefit levels after people have been contributing all their working lives under an assumption of a certain level of retirement support. Once again, it is not the SS system that should bear the brunt of whatever measures need to be taken because politicians made poor decisions with the money they borrowed from SS.

    “See, you’re acting like those T-bonds will actually ease the burden on the taxpayers of today.”

    Actually, I said “workers”. I am referring to the levels of payroll taxes that today’s workers must pay. They are lower than they would have been if there were no trust fund.
    That the bonds will need to be paid off by tax money from general revenues is a different matter. I realize that there is large overlap in these populations, but they are not the same, nor are the tax rates the same.

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  22. Bryan Pick says:

    You are carefully choosing your words for the purpose of confusing the facts. You say “Congess takes the rest and writes IOUs” – why not report accurately – Social Security takes the excess and invests in Treasury bonds”. We are referring to the same facts here, but your characterization is weird.

    You’re acting as if one part of the government owing money to another part of the government is meaningful other than insofar as it affects taxpayers.

    What matters for policy today and in the coming decades is that the money collected in previous years was already spent and we will need to raise taxes/borrow more/cut spending the moment that benefits exceed payroll tax revenue. It matters a lot.

    I’m not confusing any facts here. I’m making myself very clear.

    The money has very clearly been “stocked away” by the Social Security System. Just like when we stock money away – in T bonds. It most certainly is stored as wealth somewhere – to the same extent that T bonds in your portfolio are wealth. These bonds are not wealth for the taxpayers, as a category, – for the taxpayers they are a liability. For the SSA, they are an asset. Why is this so confusing?

    Where is the money stored? If Congress issues a T-bond, builds a bomb and drops it in the desert, and then it comes time to pay back the T-bond, nothing has been “stocked away” to pay for it. They just tax current flows and borrow against future flows.

    If we’re lucky, Congress isn’t so destructive that the tax base is unable to grow faster than the interest on the T-bond. But the money hasn’t been “stocked away.”

    “it is a liability from the future taxpayer’s perspective,”

    Yes, of course. And an asset from the perspective of Social Security.

    And in the end, nobody cares what Social Security sees as an asset, since Congress sees it as a liability, so it’s a wash within the government and a liability for the taxpayer.

    The “stocking away” refers to the temporary increase in SS revenues that has come about because the boomers decided to tax THEMSELVES, in excess of what they needed in order to pay off their parent’s retirement needs.

    And who was the extra revenue spent on? The Boomers! The government taxed them an extra $Y and the government spent an extra $Y. Y-Y=0. Nothing “stocked away.”

    “Tell us, what would be the difference if the trust fund did not exist, and SocSec and payroll taxes were just another part of the general budget?”

    In that case, payroll taxes would have probably been a bit lower these past 25 years (the “crisis” in SS was the justification for the increase in payroll tax rates) and the government would have had to borrow money from other sources. Lower taxes for a generation, but the money repaid by the government would not have gone to SS, but to those other investors. So now, with the large bolus of boomer retirees, SS would be in real crisis, and payroll taxes would have to go up.

    You missed the point of the question. Assume that all else was held equal — all spending and all tax rates (after all, a SocSec crisis is a crisis for the general budget too). Everything is the same except that instead of the SSA handing over the payroll tax revenues in exchange for T-bonds, Congress just directly spent the payroll tax revenues.

    We’d be in exactly the same position today. As soon as benefits exceed revenues, Congress must raise taxes or borrowing.

    I’ll say it again: The government as a whole saved nothing. Everything was spent as it came in. Now Congress will have to borrow and tax every dollar of difference between payroll taxes and benefit outlays.

    “You could place the blame equally on Democrats for not cutting spending and leaving both taxpayers and the SocSec surplus alone.”

    Well, I choose not to do that, because the Democrats were willing to raise sufficient taxes to pay for their spending.

    Is that so? And you don’t think Republicans, if they’d had free reign, would have been willing to cut spending to cover their tax cuts? Reagan wanted to fundamentally restructure government, and he failed at many of the things he wanted to do (like eliminate the Depts of Education and Energy). Same with Clinton, same with Gingrich & Co. Face it: both sides were constrained by electoral reality. The voters wanted low taxes and high benefits, and both parties were only so bold about pulling in their own preferred direction.

    Whether it is good to go the high tax – high spending route is another question. For the issue of fiscal sanity, either a high-high, or a low-low strategy is equally responsible. The problem is wanting the spending. or recognizing that the spending is popular, and not being willing to pay for it.

    There we agree, though I’d argue that real-world constraints on tax collections make a “high-high” strategy very dicey. You raise taxes too high, and you get tax evasion, you get capital flight, you get people choosing not to produce. The “low-low” strategy doesn’t have that problem.

    “I said it’s the fault of keeping SocSec benefits at their promised levels after Congress spent the SocSec surplus.”

    I don’t think it is proper at all to try to change SS benefit levels after people have been contributing all their working lives under an assumption of a certain level of retirement support. Once again, it is not the SS system that should bear the brunt of whatever measures need to be taken because politicians made poor decisions with the money they borrowed from SS.

    Oh, it’s a shame that the government allowed people to believe that they had made a sustainable promise. But the Boomers wanted to believe it. They allowed the bill for their retirement to fall on their children and grandchildren, even though they’ll face a much worse worker-to-beneficiary ratio.

    Somebody has to pay. The government made too many promises to too many people. I don’t think it’s proper for a generation to leave their descendants with a worse situation than they had because they wouldn’t make the hard choices.

    “See, you’re acting like those T-bonds will actually ease the burden on the taxpayers of today.”

    Actually, I said “workers”. I am referring to the levels of payroll taxes that today’s workers must pay. They are lower than they would have been if there were no trust fund.

    Again, this is wrong. The payroll tax surpluses were treated by Congress as fungible. They were spent on general-budget items just like they were income tax revenues or excise tax revenues and so on. Congress can raise either payroll taxes or non-payroll taxes, and either one will pay the shortfall. So the T-bonds don’t help tax-paying workers or taxpayers.

    Again, let’s compare the annual budget in our world with that of a world in which Social Security and payroll taxes are just another part of the general budget:

    Our world:
    Payroll tax revenues = $X+Y
    Non-payroll tax revenues = $Z
    Benefits = $X
    Other gov’t expenditures = $Y+Z
    When Y starts to drop, Congress must increase Z to keep total spending constant.

    Without the accounting fiction:
    All tax revenues = $X+Y+Z
    Benefits = $X
    Other gov’t expenditures = $Y+Z
    When Y starts to drop, Congress must increase Z to keep total spending constant.

    So, does anyone really care which part of the government collects X and Y? Either way, the next generation pays the same amount when Y drops.

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  23. john personna says:

    I’ve been off for a day or so, but I find the idea that the trust fund is not for the future to be pretty outlandish. It is $2.4 trillion sitting there. If it is not for the future, what is it for?

    Wikipedia:

    As of the end of calendar year 2008, the accumulated surplus stood at just over $2.4 trillion.[5] Projections are that current receipts will continue to exceed expenditures until 2017 (according to Charles Blahous, Special Assistant to the President for Economic Policy). Thereafter, there will be a shortfall that will be made up by withdrawals from the Trust Fund, although the Trust Fund will continue to show net growth until 2025 because of the interest generated by its bonds.[6]

    The Trust Fund will gradually be drawn upon to cover the difference between tax receipts and benefit payments. It will be completely depleted by 2042 (according to the Social Security Administration) or 2052 (according to the Congressional Budget Office). However, if the US economy performs better than the economic assumptions and projections used by the SSA and
    CBO, the trust funds may remain in surplus indefinitely.

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  24. john personna says:

    Again, this is wrong. The payroll tax surpluses were treated by Congress as fungible. They were spent on general-budget items just like they were income tax revenues or excise tax revenues and so on. Congress can raise either payroll taxes or non-payroll taxes, and either one will pay the shortfall. So the T-bonds don’t help tax-paying workers or taxpayers.

    Dude, you are definitely outsmarting yourself on this. When government buys bills or bonds that return principle plus interest, it is not spent. It is returned. That’s what bonds and bills do.

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  25. john personna says:

    (It is true that if the debt is not repaid from revenues, it must be rolled over, which means that someone else, like China, or you, or me, or the Fed(!) must by an equivalent bill or bond.)

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  26. Bryan Pick says:

    I find the idea that the trust fund is not for the future to be pretty outlandish. It is $2.4 trillion sitting there. If it is not for the future, what is it for?

    The bonds are there to assure you that Congress will finance SocSec benefits until that quantity of bonds runs out, even though drawing down those bonds will require tax increases or higher borrowing.

    That $2.4 trillion that was collected in the form of payroll taxes was already spent, though. It’s not a bunch of cash sitting there.

    Dude, you are definitely outsmarting yourself on this. When government buys bills or bonds that return principle plus interest, it is not spent. It is returned. That’s what bonds and bills do.

    SSA used surplus payroll tax revenue to buy bonds from Congress. Congress spent the money. To retire the bonds, Congress must either raise taxes or issue new debt. What do I have wrong?

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  27. john personna says:

    The bonds are there to assure you that Congress will finance SocSec benefits until that quantity of bonds runs out, even though drawing down those bonds will require tax increases or higher borrowing.

    Well, you acknowledge that the bonds are there, and then you blend two issues.

    Imagine, just for a moment, that SS were “privatized.” Then imagine that the private firm bought government bonds to hold their monies. The government would have to pay those bonds somehow.

    Nothing has changed. That’s the key.

    That $2.4 trillion that was collected in the form of payroll taxes was already spent, though. It’s not a bunch of cash sitting there.

    Would that be true if Prudential or Fidelity held the same bonds? No.

    The government wears two hats here. Social Security is separate. It is like a Prudential or Fidelity managed by an arm of the federal government.

    Hell, I own government securities. How is my owning them for my retirement good, but the Social Security trust fund owning them for my retirement bad?

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  28. john personna says:

    Should be:

    That $2.4 trillion that was collected in the form of payroll taxes was already spent, though. It’s not a bunch of cash sitting there.

    Would that be true if Prudential or Fidelity held the same bonds? No.

    The government wears two hats here. Social Security is separate. It is like a Prudential or Fidelity managed by an arm of the federal government.

    Hell, I own government securities. How is my owning them for my retirement good, but the Social Security trust fund owning them for my retirement bad?

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  29. john personna says:

    Look, I get that the federal government has a debt problem. That’s why we have a “total debt” measure we can use to look at that. Numbers on total bills and bonds outstanding are out there, whether I own them, or Fidelity owns them, or Social Security owns them.

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