The important thing is this: to be able at any moment to sacrifice what we are for what we could become.
Charles Du Bos
Embarrassing Quotes From Paul Krugman:
Be Careful of What You Wish For...
You Just May Get It!
"Mr. Enron Consultant" Paul "We Need Lots More Spending" Krugman, like Obama, a Nobel laureate, New York Times columnist and ABC This Week contributor, has been having lately a devil of time with past opinions. What did Krugman write about social security 15 years ago?
Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today's young may well get less than they put in). - Paul Krugman, Boston Review Dec 96/Jan 97I don't recall former Fed Reserve chair Greenspan being awarded with a "Mission Accomplished" banner:
To fight this recession [of 2001] the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble. - Paul Krugman, Dubya's Double Dip?Social Security Continues to Draw Attention
There's a fascinating food-fight going on right now on the GOP/conservative side where Democrats remain universally Pollyannish about social security.
You will not be surprised to know that the Social Security Administration bureaucrats actually have a webpage arguing it's NOT a Ponzi scheme. (The argument they make begs the question: they argue pay-as-you-go systems have sustained for several generations whereas Ponzi schemes usually go bust in a short period (hmmm, let me think--the business cycle, maybe?)). They gloss over some inconvenient facts: keep in mind FICA is shared percentage size from employees and employers: the amount is capped by a ceiling in the wage base subject to the flat tax rate. That rate has ranged from 2% in 1937 to 12.4% last year. (The current year has rolled back 2%, i.e., 6.2% to 4.2%, for employee contribution. Obama has proposed to cut that even more! Needless to say, benefits still have to go out, even though even last year, before the payroll tax cute, we were running at a deficit: no matter how you shrink the inputs, and in essence we have to cash in IOU's--essentially we have to sell to the public debt owed to the social security trust fund. This makes the social security solvency problem WORSE.)
We can look pay-as-you-go in a blackbox approach where inputs are collected FICA taxes, and we have outgoing checks (for the most part, retirees, although we also have disabled and survivor benefits). Now SSA can claim it's not a Ponzi scheme, but the rationale is disingenuous: first, in order to sustain this pay-as-you-go scheme, we've had to increase payroll tax rates nearly six-fold over the past 75 years and the maximum income ceiling subject to tax from $3000 to nearly $107,000.
Now keep in mind there are routine increases intended to keep up with the cost of living (I'm oversimplifying for purposes of clarity). We conservatives believe for technical reasons these increases have been more generous than circumstances warrant. Here's the point: the more beneficiaries, the more the adjustments; the less we have left going into the black box--the trust fund.
The core problem is actuarial in nature: for this program to be sustainable, we need the number of beneficiaries to level off (at least for a given number of active workers paying into the system), but with people living longer that's not happening. Now there are other ways to boost inputs, e.g., resolve our chronic unemployment problem so more workers are contributing to FICA and/or boost incomes through productivity increases in the economy.
But I'm arguing we need to look at what's in the black box--these IOU's. What are these, do you think? Are they investments, say, in forests, which you can indefinitely grow, harvest and sell, yielding dividend income? Say, apple trees that routinely bear fruit and can be sold? Keep in mind: these dividend payouts occur indefinitely and can be used to back retiree checks. We know that diversified portfolios of stocks will yield , adjusted for inflation, something like 7% since the 1950's.
Lawrence Hunter makes the following critical observation:
As economics professor R. Wayne Counts concluded in a 2008 paper, the overall rate of return for Social Security contributions is a mere 1.8%, and for many workers in higher income levels, the return is actually negative. In their landmark 1998 study on Social Security, Caldwell et. al. found:
Those born right after World War II will earn, on average, a 2.4% real rate of return. Those born in the early 1970′s will average about a 1% real rate of return, and those born at the end of this decade will average essentially a zero rate of return. Baby boomers will, under current law, lose roughly 5 cents of every dollar they earn to the OASI program in taxes net of benefits. For today’s children the figure is 7 cents. Measured as a proportion of their lifetime labor incomes, the middle class are the biggest losers, but measured in absolute dollars, the rich lose the most. Out of every dollar that postwar Americans contribute to the OASI system, 74 cents represent a pure tax.What about the people before now? This, once again, shows the pyramid-like structure of the program The SSA talks about the first recipient:
The first recipient of monthly Social Security payments was Ida May Fuller. Miss Fuller worked for about three years under the new Social Security program and paid $24.75 in payroll taxes. Her first Social Security check in January 1940 was for $22.54--she almost got her money back in her very first payment. Miss Fuller lived to be 100 years old and collected more than $22,000 in benefits.The Wall Street Journal also came out with a relevant example:
Part of the problem is that current seniors get more than they put in thanks to the formula for increasing benefits over time. Eugene Steuerle and Stephanie Rennane of the Urban Institute estimate that a two-earner couple both earning an average wage who retire in 2010 will get $906,000 in benefits having paid $588,000 in payroll taxes. The same couple who retires in 2030 will get $1.23 million (in constant dollars) while having paid $796,000.And, of course, we have the following well-known facts:
In 1950, more than 16 workers paid into Social Security for every person who received benefits. Today, the ratio is down to three workers paying in for every beneficiary taking out. Social Security already pays out more in benefits than it collects in payroll taxes. The system has built up a $2.6 trillion surplus (due to run out in 2036).Now let's consider the following highly salient point that Hunter discusses:
According to research by Martin Feldstein and Elena Ranguelova, if workers were free to invest their retirement savings and earn a market-based 5.5% rate of return, “individuals could purchase the future benefits promised in the current Social Security law (the benchmark level of benefits) by saving 3.1% of earnings, just one-sixth of the payroll tax that Social Security actuaries project will be needed in the paygo system.To me as a libertarian, I of course believe the individual should be able to control his own money towards his own retirement, but for purposes of this discussion, I want to focus purely on what's inside the black box: we have a bunch of IOU's (what Democrats call "investments"--you see, in Democrat-speak, "investments" are made in things like clean-energy companies, i.e., Solyndra or the Big College Bubble; "gambling" is when you allow people to buy shares in say, Warren Buffett's Berkshire Hathaway, which has made many investor his money back time and again).
Yes, let me think: by the rule of 72, it would take me 40 years to double the social security base, assuming a return of 1.8%. Assuming Feldstein's conservative estimate of a 5.5% annual return, it would take us 13 years to double our base. Here's the key point I'm trying to make, one I've repeated in over a dozen commentaries on the blog: we have a trust fund that is a shrine to moral hazard: the trust fund HAS to buy bonds covering government overspending. This is totally unconscionable. If we had a diversified investment base--say, for instance, getting bids on market index fund management from major mutual fund companies, we would not only extend the trust fund beyond its projected 2036 endpoint, but we might be able, in conjunction with other reforms, to reduce payroll taxes, a regressive tax.
This is a problem which needs to be addressed sooner, not later. Saying we can wait until 2036 constitutes a de facto declaration of war on that generation's citizens, whom will probably still be paying interest on Obama's $4T debate. Should we follow the sage advice from Hunter for Republicans to remember "it's the economy, stupid!", and jettison ObamaCare, a weapon of intergenerational mass economic destruction (my words), focus on pro-market reforms, get rid of Dodd N. Frankenstein, and more misguided, counterproductive rules and regulations that our economic competitors ever dreamed we would be so stupid to unilaterally surrender our economic leadership? For God's sake, we've actually got a President pushing investment tax increases, class warfare tax hikes (it isn't as if he needs the revenue--he's willing to surrender the 75% of the Bush tax losses to the middle class, of course--hypocritical in every sense of the word) simply based on ideology, never bothering to consider the effect of higher brackets on S corporations (i.e., small businesses). Unbelievable! Republican candidates: look at the big issues!
Political Humor
"At the United Nations in New York, Iranian President Mahmoud Ahmadinejad was bragging that Iran now leads the world in captured hikers." - David Letterman
[President Obama countered that the US leads the world in "soak the rich" tax hikers.]
Letterman Top Ten Highlights Of Barack Obama's Deficit Plan
5. Change the definition of the word “deficit”
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6. Have the People's Republic of China sponsor all new Democratic bills.
4. Make the Warren Buffett tax the Warren Buffett tax.
3. Replace Richard Foster (Chief Actuary of CMS) with Bernie Madoff; prison labor is cheap!
2. Put the USPS in charge of delivering spending bills from Congress.
1. Buy Ben Bernanke another printing press.
]
Musical Interlude: My Favorite Groups
Fleetwood Mac, "Say That You Love Me"
