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Culture War Roundup for the week of October 2, 2023

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What would privatizing Social Security look like?

”No one’s gonna take away your grandma’s pension.” - José Piñera, Minister of Labor and Social Security in Chile, right before he took away your grandma’s pension.

Privatizing Social Security has been a conservative pet issue for as long as I can remember, despite being politically unlikely and unpopular. Even Paul Ryan, who paid for his college tuition with SS survivor funds, still reminisced on halcyon days of planning with his Delta Tau Delta bros to privatize SS at keg parties. If it were possible, what would it even look like?

The Background

Social Security is a defined benefit, "pay-as you-go-system," funded by the $1 trillion Old-Age and Survivors Insurance and $142 billion Disability Insurance trust funds, paid via payroll taxes, plus a $63.78 billion Supplemental Security Income from the General fund.

Before FDR passed SS, senior citizens were the poorest demographic in America. Nowadays it’s one of the most popular programs and everyone wants to preserve it in some way.

Problem is, we’re going broke.

Since 2010, the fund that SSA uses to pay benefits to retirees has been paying out more money than it has been receiving in taxes. At the current rate, the fund's trustees estimate that it will exhaust its reserves in 2033 and be unable to pay full scheduled benefits.

What if Ayn Rand was Acting Commissioner of the Social Security Administration?

It should be said that the freest of free market solutions here still imagines coercion of mandatory contributions. Still, the position advocates switching to a privately managed, defined-contribution system, which would get a higher returns by investing in the private market instead of government securities.

Because these are personal accounts, hopefully you fix the problem where an increasingly smaller working population pays for swelling retirees. In reality, those old obligations don't disapear:

Social Security has accumulated trillions of dollars in liabilities to workers who are already retired or who will retire soon. To make room for a new private system, policymakers must find funds to pay for these liabilities while still leaving young workers enough money to deposit in new private accounts. This requires scaling back past liabilities – by cutting benefits – or increasing contributions from current workers. Most large-scale privatization plans also involve major new federal borrowing.

Given that this transition would be pretty expensive and the main benefit is getting to invest in the private market, the counter is: why not just let the government invest in the private market? Such a case is made here.

More Consumer Choice?

A privatized system should give individuals more control over their investment decisions. It’s hard to weigh that benefit against the risk of dumb people ending up with less retirement savings than they get under the current system.

Would Management Costs be Lower?

Surprisingly hard to figure out! SS obviously has no marketing costs and boasts astoundingly low administrative costs of >1%. However, some admin work is outsourced, ie employers and the IRS collect the funding.

But hey, the government’s gonna keep doing all that stuff anyway; a privatized system would just have to duplicate them elsewhere, plus means testing, plus marketing costs.

Costs in proposed plans vary a lot:

In some privatization plans, contributions would be collected by a single public or semi-public agency and then invested in one or more of a limited number of investment funds…By pooling the investments of all covered workers in a small number of funds and centralizing the collection of contributions and funds management, this approach would minimize administrative costs, but it would limit workers’ investment choices.

Another strategy is to allow mutual fund companies, private banks, insurance companies, and other investment companies to compete with one another to attract workers’ contributions in hundreds or even thousands of qualified investment funds. This strategy would permit workers unparalleled freedom to invest as they chose, but administrative costs might be high.

But forget all these technical hypotheticals. The question we’re all wondering is, what does this look like in practice what would a South American military dictatorship do?

El Ladrillo

The largest scale example of a country privatizing its retirement system is under the Pinochet dictatorship in Chile. Initially their rollout was a big success with high returns. However, even Niall Ferguson, a prominent advocate for their system, notes many of the downsides I wondered about above:

There is a shadow side to the system, to be sure. The administrative and fiscal costs of the system are sometimes said to be too high. Since not everyone in the economy has a full time job, not everyone ends up participating in the system. The self employed were not obliged to contribute to Personal Retirement Accounts and the casually employed do not contribute either. That leaves a substantial portion of the population with no pension coverage at all…

On the other hand the government stands ready to make up the difference for those whose savings do not suffice to pay a minimum pension, provided they have done at least 20 years of work. And there is also a Basic Solidarity pension for those who do not qualify for this.

That public pension was in fact created by a socialist government specifically to make up for extremely low coverage under the neoliberal system. I find it pretty damning that the most extreme example of a privatized retirement system ran into all the problems its critics said it would, and handled it in the same way every public system does - through backup government funding. If we’re going to end up doing a mixed market system anyway, it might behoove us to keep our publicly managed system but give them leeway to invest privately, rather than pay a ton to transition to a privatized system then pay more later to fix the holes that left:

Chile’s system hasn’t worked as promised or expected. The creators anticipated that the average worker would save enough to earn 70% of their salary in retirement; the reality has been closer to one-third. They thought the new system would expand the number of workers with retirement funds; instead nearly 40% of Chileans have nothing to fall back on. Rather than improve the lives of Chile’s elderly, most pensioners live on less than the minimum wage...

The private system hasn’t let the government off the financial hook either. The transition period was always going to be expensive as the government footed the bill for those retiring on the public dime without receiving payroll taxes (as these contributions all headed to private accounts). But the government has also had to backstop far more of the new system’s retirees than expected. Officials thought less than 10% of wage earners would rely on public largesse for a minimum pension. Today, more than 40% need the government to step in.

A broader review of the other countries that followed suit seems similarly disapointing:

Starting in Chile in the 1980s, and then in Mexico, Peru, El Salvador, Colombia, Argentina, and Bolivia in the 1990s, countries turned to systems where contributions would be deposited directly in workers’ individual accounts...

the system has done little to stimulate voluntary savings; few workers have channeled additional resources to their accounts. Further, the market for workers’ individual accounts has been far from competitive. On the demand side, workers as consumers of financial products for retirement had difficulty comparing the various combinations of fees and investment options offered by pension fund administrators, particularly when the “product” that workers were buying (or rather, were being forced to buy) would be delivered many years from today. On the supply side, there were few private firms competing, partly because the presence of economies of scale in the administration of funds naturally led to a monopolistic market structure.

Less Radical Funding Solutions

  1. Raise Payroll Taxes - “even a modest change, such as a gradual increase of 0.3 percentage points each for employees and employers (or less than $3 per week for an average earner), could close about one-fifth of the gap.”

  2. Raise the payroll cap - The payroll tax is actually regressive, exempting incomes over $160,200. “The Congressional Budget Office estimates that subjecting earnings above $250,000 to the payroll tax in addition to those below the current taxable maximum would raise more than $1 trillion in revenues over a 10-year period”.

  3. Widen the tax base - “In 1982, 90 percent of earnings were subject to the Social Security tax, but by 2017 the share had decreased to 84 percent.” “Including employer-sponsored health insurance premiums could close over one-third of Social Security’s solvency gap; including other fringe benefits could close one-tenth.”

The most regressive aspect of social security is simply that poor people die younger than rich people.

https://crsreports.congress.gov/product/pdf/R/R44846 (pdf warning)

There is about a 10 year gap in life expectancy between the richest and poorest. Which overwhelms nearly any difference in generosity between payouts and the taxes collected.

In general I think social security is a horribly designed system for multiple reasons:

  1. Its a pyramid scheme and would be strictly illegal in the private sector. Newcomers pay into the system to support the people that were already in it.
  2. Its goal was to not let people become destitute if they could no longer work. But used a poor proxy measurement to determine if people couldn't work: age. The disability payments system seems like it could accomplish the same goals.
  3. Its a generational trap. The system places the burden of funding on kids that are not yet born, and couldn't have possibly voted to not have the system.

Even if it is a horrible system. I don't think we are getting rid of it. I'm guessing the US government will continue to take the easy way out. They will inflate their way out of the obligations, and slowly scale back how much they pay. Anyone in my generation (30's) would be an idiot for making any retirement plans based on social security payments.

The whole thing should probably be replaced with a disability insurance system.

As you become disabled from doing certain types of work you can receive payments to supplement your income back up to where it would have been. With benefits maxing out at some minimum standard of living. If you were once a construction worker at $20 an hour, but you hurt your back and can now only be a walmart greeter at $10 an hour, then the disability payments make up for that lost $10 in wages. If you instead learn how to program and start making $50 an hour you get no payments.

Possible adjustments to the system if you want to be a nanny state:

  1. Increased minimum standard of living if you raised kids.
  2. Increased funding for medical research that solves common disability issues.
  3. Lists should have three things, but I'm blanking on another idea.

Its a generational trap. The system places the burden of funding on kids that are not yet born, and couldn't have possibly voted to not have the system.

Is this not true of any store of value system? Ultimately the question of caring for the old is a question of how the resources of those that are young enough to work will be redistributed to those who are too old to work and what precisely counts as too old to work. If we allowed old people to save thing X in their productive years, protect thing X from being taken with force by those who are young enough and strong enough to do so, and thing X is then used a store of value to pay those who are young and strong for food, services, etc. then we are essentially back in the same place.

This isn't to argue for or against social security, but simply to point out that any system to care for the elderly is going to do so by using some element of coercive redistribution on the young because the scarce element is their productivity.

protect thing X from being taken with force by those who are young enough and strong enough to do so

...

some element of coercive redistribution on the young

Seems like a bit of topsy turvy logic to call "not allowing young people to steal" the same as "coercive redistribution". Most people would consider is "coercive redistribution" if you did allow young people to just steal whatever resources they wanted just because they are young and strong.

Old people aren't the only ones who like to save resources, I'm young, I still like to save up and occasionally splurge on larger purchases. A system of saving benefits everyone. Even if I knew for a fact that retirement was unavailable to me I'd still often save money. I wouldn't be saving as much maybe, but still saving.

Saving valuable assets is really just a continuation of owning that thing in the first place. If you want to think of ownership as coercive, then sure go ahead. I wouldn't want to live in a world without ownership. There probably isn't enough common ground for us to have an economic discussion if you believe ownership is coercive.

The idea of stealing and the system that disallows it are just social technologies and systems that are agreed upon prior. "Don't steal and that's the law" isn't different in principle from "young people have to support old people and that's the law." In fact, both are pretty straightforwardly Biblical.

Ownership relies on violence which means it's not coercive only by some means of special pleading, which you make pretty explicit by hinting that it's not coercive because you prefer to live in a world that includes it. That's fine for what it's worth, but recognize it more forthrightly. It is coercive, just a type that you specifically prefer.

The most regressive aspect of social security is simply that poor people die younger than rich people.

https://crsreports.congress.gov/product/pdf/R/R44846 (pdf warning)

Good point, thanks for the link.

against the risk of dumb people ending up with less retirement savings than they get under the current system.

Do we want a larger share of power and capital in the hands of dumb people?

Similarly, the "funding solutions" you consider all involve taxing labour more, in order to make it easier to have extended idleness for increasing proportions of people's lives. You don't have to be a fanatical Lafferian supply-sider to see this as part of a general slide of the US economy into stagnation and gerontocracy. As Western Europe has already experienced, social democracy via tax-and-spend plus regulation ends up in a trap of stagnation that is politically hard to escape:

https://danieljmitchell.wordpress.com/2022/02/05/comparing-economic-growth-united-states-vs-europe/

(Note that much of EU growth is catch-up growth in the especially backward Eastern European economies like Poland, the Czech Republic, Romania, Bulgaria, and the Baltics. Western European growth is slower.)

Do we want a larger share of power and capital in the hands of dumb people?

I'd like for them to be provided for in retirement! Certainly better than them being up-in-arms against their poverty, even if it's self inflicted. The problem is much larger than a cohort of dumb people at the bottom of the population as well, insofar as you trust self-reported surveys, various studies are always showing that even surprisingly numbers of well-off people report living paycheck-to-paycheck (25% of people making over $200k, 30% of people making over $250k). If these were middle income folks I would happily accept the counter that raising their payroll taxes would make this worse, but if even the Americans with the most disposable income don't save any of it, it's hard to imagine this would be better in a less-guaranteed retirement system.

Similarly, the "funding solutions" you consider all involve taxing labour more...As Western Europe has already experienced, social democracy via tax-and-spend plus regulation ends up in a trap of stagnation that is politically hard to escape:

These just aren't very high taxes on labor. 0.3% isn't going to bring us to anywhere near Europe. I'll note that even if we were, the Scandanavian countries are the pretty central example of high taxes on labor/consumption, low taxes on capital, and have done some of the best in terms of keeping pace with the US.

But we could even skip that and go with option 2 and only tax the top 5% of laborers. If you'd rather fund it by taxing capital I'm fine with that too. But even the conservative Tax Foundation agrees payroll taxes are more efficient than taxes on capital:

due to the inelasticity of the supply of labor, payroll taxes generate a comparatively small amount of deadweight loss compared to other forms of taxation. This means that payroll taxes lead to a relatively small amount of economic inefficiency, since the quantity of labor in the market does not dramatically decline as a result. Overall, payroll taxes do much less economic harm than taxes on capital. This is evidenced by our analysis of Senator Bernie Sanders’ tax proposals, whose payroll tax rate increase raised nearly four times as much revenue as his proposed increases on capital gains and dividends, but with a fourth less of the impact on GDP.

We've also been pretty committed to keeping entitlements funded via payroll tax partially because it's the least unpopular tax, since people see it more as an investment.

We've also been pretty committed to keeping entitlements funded via payroll tax partially because it's the least unpopular tax, since people see it more as an investment.

Yes, because social insurance has been sold as if it's an insurance programme.

Certainly better than them being up-in-arms against their poverty, even if it's self inflicted.

So your principle is that, if someone threatens you after they suffer the consequences of bad decisions, then you'll give them what they want?

The problem is much larger than a cohort of dumb people at the bottom of the population as well, insofar as you trust self-reported surveys, various studies are always showing that even surprisingly numbers of well-off people report living paycheck-to-paycheck

This falls foul of the Lucas Critique: you're inferring saving behaviour under Policy Regime A from behaviour under Policy Regime B, when a switch from B to A would change the incentives for saving behaviour. Insofar as people have guaranteed consumption in retirement, it makes sense for them to save less now.

These just aren't very high taxes on labor. 0.3% isn't going to bring us to anywhere near Europe.

Not in itself, but my point was it's another step in that direction. And such steps can be aggravating: by reducing take-home pay of workers, you decrease their incomes relative to their expectations; maybe they respond by demanding more generous tax credits; perhaps these are funded by an increase in taxes on capital; perhaps these deadweight losses lead to slower growth, which requires higher payroll taxes to keep Social Security going...

Social democracy in Europe evolved by a series of steps, most of them seemingly modest in themselves, but ending in stagnation that is extremely difficult to escape, because escape requires pissing off huge numbers of people. The dogmatic and often boneheaded American prejudice against taxation, while often leading to decisions that seem stupid in context, has been tremendously successful in the long-run. This is an example of time-inconsistency: doing the optimising thing at each stage in a process can lead to suboptimal long-run outcomes, whereas precommittment (or equivalently, an irrational dogmatism) to a dogmatic rule can lead to better outcomes. So, even if a 0.3% rise in payroll taxes seems rational now, it weakens the US's culture that has avoided a slide into the relative stagnation of European social democracy.

(Of course, someone might argue that European social democracy is preferable even given this relative stagnation, but that's a different argument. My thesis is only that funding Social Security via increased taxation is one more step in that direction, and that that direction is not without costs.)

So your principle is that, if someone threatens you after they suffer the consequences of bad decisions, then you'll give them what they want?

My principle is that if you can 100% count on people to mess up, prudence suggests preparing in advance. To not do so is poor governance.

This falls foul of the Lucas Critique: you're inferring saving behaviour under Policy Regime A from behaviour under Policy Regime B, when a switch from B to A would change the incentives for saving behaviour.

Well, that was why I tried to look into real world examples of what the system looked like in practice. Per the quote in the Brookings Report: “the system [in Chile, Mexico, Peru, El Salvador, Colombia, Argentina, and Bolivia] has done little to stimulate voluntary savings; few workers have channeled additional resources to their accounts.”

(Of course, someone might argue that European social democracy is preferable even given this relative stagnation, but that's a different argument.

I would be one of those people in favor for social democracy, partially because I’m pretty unconvinced taxation is really the root of their slower growth. Europe has had consistently high taxes than America for a long time but the divergence is only in the last 20 years, if anything a period marked more in Europe by slightly falling taxes. But as you say, that’s another argument.

My thesis is only that funding Social Security via increased taxation is one more step in that direction, and that that direction is not without costs.)

Sure, no disagreement there, my position is just that cutting SS by almost a quarter also has costs, and they seem larger to me than a small tax raise.

My principle is that if you can 100% count on people to mess up, prudence suggests preparing in advance. To not do so is poor governance.

Granted, but your previous argument was not "preparing for people to mess up" but that one should cater to irresponsible people, if they will be "up in arms" about having outcomes that disatisfy them.

Well, that was why I tried to look into real world examples of what the system looked like in practice. Per the quote in the Brookings Report: “the system [in Chile, Mexico, Peru, El Salvador, Colombia, Argentina, and Bolivia] has done little to stimulate voluntary savings; few workers have channeled additional resources to their accounts.”

My point is that "living from paycheck-to-paycheck" doesn't mean that these people won't save more for their retirement under a different system. Whether they save enough depends on how smart and self-disciplined they are.

Additionally, the evidence cited in the quote doesn't do much to support the quote's conclusion: you'd need to look at the overall savings rate (ceteris paribus) to make such a causal inference, not just one category of savings (the retirement accounts).

Europe has had consistently high taxes than America for a long time but the divergence is only in the last 20 years

The divergence in growth rates is recent. The divergence in levels is much older for most Western European economies:

https://fred.stlouisfed.org/graph/?g=19QJO

Note how Germany actually caught up with the US by 1975, but then fell behind again. Also, events in social science are rarely monocausal, so it's not so much "Western European taxation causes slower growth than the US" but "Western European taxation and regulation are part of a set of factors that tend to leave them indefinitely stuck behind the US." Of course, there are exceptions like Norway, but planning on the basis of a massive natural resource boon isn't a development policy; it's closer to a prayer to God.

Sure, no disagreement there, my position is just that cutting SS by almost a quarter also has costs, and they seem larger to me than a small tax raise.

It's doesn't have to be either/or. An equal increase in the solvency of the system through tax rises and spending cuts (later payment age, slower uprating with inflation etc.) could be a reasonable compromise.

Granted, but your previous argument was not "preparing for people to mess up" but that one should cater to irresponsible people, if they will be "up in arms" about having outcomes that disatisfy them.

It feels like a distinction without a difference to me tbh, it's just a different way of wording the same policy need that we'll always have to deal with.

My point is that "living from paycheck-to-paycheck" doesn't mean that these people won't save more for their retirement under a different system. Whether they save enough depends on how smart and self-disciplined they are.

Them living paycheck to paycheck is less a particular reflection on SS and more on their spending habits with the money they do have control over; this seems like as good a starting place to make assumptions about how smart and disciplined the best of us are going to be with more cash in hand.

But really, this is part of why I wrote this post in the first place. We don't know fully what people will do under an alternative system, so it makes sense to look at examples of how that system looks in practice. If we note their savings accounts are worse, that certainly shouldn't upgrade our priors to thinking private retirement accounts will help us either.

Additionally, the evidence cited in the quote doesn't do much to support the quote's conclusion: you'd need to look at the overall savings rate (ceteris paribus) to make such a causal inference, not just one category of savings (the retirement accounts).

For the purpose of this discussion it seems most relevant to me whether or not they made use of the retirement savings, but fair enough. The best I can find for personal savings rates is for Latin America overall:

Saving rates in Southeast Asia have been on an upward trend over the period, while in Latin America the trend has been downward...

Government saving crowds out private saving only partially; social security expenditures are associated with lower private saving, and the fully funded pension schemes (which exist in some of the countries in the sample) generally have a positive effect on private saving.

Here's a little closer to the present and after all of these countries went through their SS reforms that seems to say the same thing about overall national savings (which correlates with private savings):

Latin America was the only region that exhibited lower savings in the early 2000’s as compared to the second half of the 1990’s. The gap in national savings rates between Latin America and East Asia widened to about 20 percentage points during 2000-03 from about 18 points in 1990-1994.

Public savings can be a mechanism to spur national savings given the empirical evidence showing that an increase in public savings is less than fully offset by a decline in private savings...

The association between savings and a private pension system has also been found controversial as it depends largely on fiscal policy developments and consumers’ reaction.

Note that you can look at the specific countries that reformed their SS (Chile, Colombia, Bolivia, Mexico, Peru, El Salvador, Argentina) on pages 12-15, though unfortunately they're not modeled on a chart for easy comparisons with other countries.

Also, events in social science are rarely monocausal, so it's not so much "Western European taxation causes slower growth than the US" but "Western European taxation and regulation are part of a set of factors that tend to leave them indefinitely stuck behind the US."

Sure, in the inverse, the multifactoral nature of growth is what makes me so suspicious of the original claim that we should be confident European higher government size is the main, or even primary factor here. I don't often see much attempt to isolate those affects, or to account for the fact that many of the countries that have maintained the highest tax levels, like the Scandanavians, have also maintained the highest growth rates (the graph I linked above was supposed to include all of the OECD growth rates, not just Sweden's - sorry about that). Heck, America's own government as a percent of gdp has been moving steadily up forever and we seem to have mostly just gotten richer.

Note how Germany actually caught up with the US by 1975, but then fell behind again.

Everywhere faltered around the mid 70s, but when we talk about Germany catching up to America before then it's worth noting this was under a period of famously active state intervention, tight regulations, high union participation, and an expanding welfare state - this is true not just of the Miracle on the Rhine, but of Les Trente Glorieuses, and the Belgium, Italian, Greek economic miracles, etc.

I am no particular advocate for dirigisme (and indeed many of these countries also had pro market reforms that I think contributed to growth as well) but I do need more of an argument for Europe's mild-by-historical standards government size is definitely responsible for its (relative) stagnation now, but its tightly regulated, highly interventionist and welfare expansionist state in the mid twentieth century definitely isn't responsible for its success then.

It's doesn't have to be either/or. An equal increase in the solvency of the system through tax rises and spending cuts (later payment age, slower uprating with inflation etc.) could be a reasonable compromise.

Agreed! A fair middle ground position.

I'd like for them to be provided for in retirement!

You know the parable of the grasshopper and the ant, right? What's the point of being an ant if the ants are going to do all their work AND work to support the grasshoppers too?

I probably should make an effort post about (not so) useful fictions, but in the meantime you get this: "Retirement" without a greater support structure has two critical components: 1. Provide for your own parents once they can't anymore 2. Have kids that can then provide for you once you can't anymore.

Pensions are a useful fiction that, similar to money, fulfill the same function while reducing friction and risks. But unlike money, which has a single requirement to be useful - other people taking money in exchange for goods & services - and a single result - YOU being willing to take money in exchange for goods & services - which incidentally are perfectly aligned by incentives, pensions actually still have both requirements - people still need to now provide for the current pensioners, and someone still needs to have kids so that someone is around to provide for us - while only having one result - people providing for the current pensioners through the pension system. The second requirement is just left hanging, at best handled with a blasé "well we can't force people to have kids" or at worst with a stonewalling reality denial "but I paid into the pension so I deserve to get my care!".

The incentives are totally fucked up; I've recently talked with a friend about it who isn't sure whether he wants kids, and one of the main counterarguments for him was (retirement) money. If he has no kids, he can work more, save up more, and also has to spend less, so he will have waaay more money than in the alternative reality with kids, where he has to work less and also has to spend more. So the incentives are aligned so that the people are outright punished for actually fulfilling the second basic requirement for retirement to work at all. In fact you get double punished; I still also get punished for other people not having kids, since my pension later on will be worth much less since we lack the manpower to provide it to the degree we'd like. Useful fictions aren't magic, the things that need to be done still need to be done, it's only about setting up the incentives right as well as reducing friction and risks. Letting the market handle it may clear up some inefficiencies but doesn't really change the fundamental issue, while increasing taxes one way or another may fix issues now but doesn't unfuck the incentives.

Immigration can stuff some holes, but ultimately you're just putting it off on other countries and the realities of immigration in most western countries is a thoroughly mixed bag.

Why does no one mention the unthinkable? I.e - No government funded pension at all?

I know, I know, straight up impossible. Free money is just too strong of a drug, and once you've had it, nothing short of rebuilding civilization from scratch can make a people get used to the idea of not having it.

But as a dreamer, I am left wondering that a lot of our economic and social worries wouldn't exist in the absence of giving people free money.

People would actually have to plan for a retirement, They would have to have kids such that the kids can look after them. The kids won't move too far away from their parents (reducing social atomization), Those two things in and of themselves are a massive restructuring of incentives, with so many knockon effects.

Why does no one mention the unthinkable? I.e - No government funded pension at all?

I know, I know, straight up impossible. Free money is just too strong of a drug, and once you've had it, nothing short of rebuilding civilization from scratch can make a people get used to the idea of not having it.

Because free money creates extremely strong voting blocs. This is a general problem with democracy, at least democracy with short-sighted voters by and large.

I would like to tie social security to an official retirement age.

Once you hit the retirement age you are expected to retire from any publicly held office. No elected officials older than that age.

This would tie in with the other solution that is my favorite: just raising the age of retirement to save money.


As a young person I have little to no expectation of receiving social security money.

As a young person I have little to no expectation of receiving social security money.

Yeah, this is the most brutal part. Seeing such a huge chunk of every paycheck taken, knowing that you'll never see a cent of it again even though the justification is that you're 'saving for your own retirement.' What a huge disaster, sigh.

Should just be labelled "Boomer bribe" on my taxes. That is the oldest generation that is cogent enough to still defend it, and why it is untouchable as an issue in elections.

If historians were competent they'd label this FDR's greatest blunder. He established a generational pyramid scheme, and instead gets seen as some great savior. This has been a ticking time bomb since day one.

I think that FDR's only real blunder was not realizing how quickly the average life expectancy of a 21-year-old American would rise. The first monthly payment of Social Security was issued in 1940 to a 65-year-old. Of all the men who were born in 1875 and made it to 21-years-old (thus eliminating the infant mortality effect on life expectancy statistics), about 54% made it to 65 and collected social security. Those were the numbers FDR was working with. A little over half of people, dragged up by women's longer life spans (60% of their cohort made it from 21 to 65), would live to actually collect social security.

By 1960 this number was 60% of men, 70% of women. In 1990 the men who turned 65 that year and got their social security checks represented 72% of their age cohort who made it to 21, along with 83% of women.

Similarly, those men that turned 65 in 1940 were expected to live another 13 years, and collect benefits for all 13. The women, 15 years. In 1990, the men were expected to live 15 years, the women 20. This is all from the Social Security Administration's own website. I'm sure that if you found the actuarial tables on the cohorts turning 65 in 2000, 2010, and 2020, you'd see this number just keep going up.

That's why its going broke. It was designed for a certain amount of people to live, and gosh darn it people just kept on living more.

That was predictable. Life expectancy had been going up at the time.

There were other predictable problems:

  1. If the number of children born decreased. The demographics have to look like a pyramid, if it looks like a tube the thing falls apart.
  2. If the government ever touches the money allocated for social security.
  3. If any politician comes along and offers to make social security more generous.

If the government ever touches the money allocated for social security.

It's actually mandated by the program that they do. It purchases treasuries. What would you have them do with it?

Anything other than US treasuries. The whole point of the trust fund should be not to require government action to repay.

Raise the age to 70 or 72 and yeah that makes a lot of sense.

A 20 year plus non-working vacation at the end of your life should not be something the rest of us are paying for. If you can afford it, great for you.

Problem is, we’re going broke.

Since 2010, the fund that SSA uses to pay benefits to retirees has been paying out more money than it has been receiving in taxes. At the current rate, the fund's trustees estimate that it will exhaust its reserves in 2033 and be unable to pay full scheduled benefits.

As the annual trustees' report shows every single year, of the 4 trust funds, HI/DI/OASI all have exhaustion dates projected in the near future, but SMI always passes with "adequately financed indefinitely" terminology. Which is merely because of how they were set up differently, with SMI being able to be part of the normal government deficit. There's no reason the other three can't be changed in a similar way, which would be a bit awkward for doomsayers if the trustees report every year said a brief 'all funds are adequately financed indefinitely'.

For who points this out, I've only seen MMTers who are trying to show there's no real fundamental economic viability problem here, rather than an accounting & legal issue with how the rules are currently written. And also Cato writers who aren't big fans of the trustees' flowery language and want it to be more explicit about SMI's potential governmental deficit spending.

Politically impossible solutions are economically inevitable. The US population pyramid is doing fairly well by first-world standards but it's still getting older and older. The US is also addicted to spending, racking up enormous debt. COVID is over. The US isn't even in a recession, officially. And yet debt keeps on going up at global pandemic rates.

https://tradingeconomics.com/united-states/government-debt

There's a $2 Trillion deficit planned for this year. Again, the US economy is officially doing well. What does the US economy doing badly look like?

Unless there are radical changes, eventually the US economy is going to collapse under the weight of this enormous and growing debt, now at 120% of GDP. Yes, Japan is over 200% debt to GDP but their interest rates are kept extremely low to keep this manageable, plus they have large current account surpluses to prop it all up. The Japanese economy is not an example to emulate. The US doesn't have the luxury of very low interest rates or current account surpluses, only a diminishing position as reserve currency. People aren't going to trade real goods and services for bits of paper forever, no matter how classy and prestigious those bits of paper might be. High debt, high inflation and high interest rates spells out economic Armageddon, it will make stagflation look like a joke. Imagine the Greek financial crisis but if there's no EU or IMF bailout coming.

What's the premise that a current account surplus allows higher government deficits? It should be the other way around: a current account surplus is the only way you can get away with running a government surplus. Otherwise, if the foreign sector is saving in your currency, and the domestic private sector always wants to net save, then the government has to run even larger deficits because it's all zero sum.

If the government is unwilling to run those deficits, then the domestic private sector would be hammered and run down savings / run up private debt like in the late clinton years until 2008 finally blew up: https://fred.stlouisfed.org/graph/?g=k16a

People aren't going to trade real goods and services for bits of paper forever, no matter how classy and prestigious those bits of paper might be.

Well, people also said that when a million dollar debt was a large amount, and then when a billion dollar debt sounded like a lot, and then again when a trillion sounded like a lot. Historically it does look like this can go on perpetually unless the economy stops working for people pragmatically, fear of large numbers or not.

current account surplus allows higher government deficits

It strengthens the value of the currency, so states can print more money to finance their deficits. If your foreign assets are growing, then you have more room to borrow and print, compared to if your foreign assets are shrinking.

From wikipedia:

Nations with chronic current account deficits often come under increased investor scrutiny during periods of heightened uncertainty. The currencies of such nations often come under speculative attack during such times. This creates a vicious circle where precious foreign exchange reserves are depleted to support the domestic currency, and this forex reserve depletion – combined with a deteriorating trade balance – puts further pressure on the currency. Embattled nations are often forced to take stringent measures to support the currency, such as raising interest rates and curbing currency outflows.

Raising interest rates is obviously a threat to government deficits!

The US is not in much danger currently since it has a lot of foreign assets and a valuable currency, plus people are buying US bonds which used to have a fairly low interest rate, so outflows were/are fairly low. Nevertheless current account deficits are a threat to the long-term stability of the $US. Someone has to buy all those dollars and it would be helpful if there were more exports for them to buy with those dollars. Furthermore, fiscal prudence never goes out of fashion, that should be a key lesson of 2008.

From wikipedia:

Hmm what someone wrote there sounds like some kind of narrative argument based around fixed exchange rates, but not very relevant in the world of floating currencies. Like when Soros 'Broke the Bank of England', he was specifically targeting their policy peg, and eventually forced them to abandon it and let it float.

As for net-exporting in order to have a stronger currency, that's kind of a self-correcting system with floating exchanges. Countries that want to keep a current account surplus (in order to target export-led demand growth) have to continually buy up foreign reserves and leave them untouched in bank accounts, in order to devalue their own currency to keep their exports competitive, like Japan and then China have done. And the countries on the receiving end like the US have foreign countries intentionally 'saving' in our currency like this, basically benefit for free (as long as we don't succumb to a fear of big numbers from the required government deficit, as the previous FRED graph showed in red, in order for green & blue to both be positive).

But I would say it's still unclear just how exchange rates are at all enabling or making space for borrowing or printing domestically. There just isn't a mechanism there. For the interest rate, the government raising their own interest rate can increase the deficit, but monetary policy can't exactly discipline fiscal policy in any way. The government has the power to levy taxes, has its own currency, and has its own central bank, so I'd think the debt that's gone up for centuries should be able to continue at pace without any economic armageddon.

But I would say it's still unclear just how exchange rates are at all enabling or making space for borrowing or printing domestically. There just isn't a mechanism there.

If you print money, then each dollar is going to be less valuable. Increasing the supply of something reduces its price. Say the US printed $50 trillion tomorrow. The value of the USD would fall compared to foreign currencies because each dollar would be worth less (and because the rest of the world would think the Fed was off their heads). Inflation applies to buying things from other countries too. Or if you're currency is plunging, you don't have much room to lower interest rates.

the countries on the receiving end like the US have foreign countries intentionally 'saving' in our currency like this, basically benefit for free

Only so long as the USD is perceived to be valuable. What happens when they stop buying US bonds because they know that the only thing backing US bonds is more US bonds to be printed in future years? Interest rates on US bonds will have to rise, borrowing will be more constrained. Massive deficit spending sucks capital out of the rest of the economy, it's not a good thing.

Look at how much govt revenue the US is spending just on paying interest. It's verging towards the territory of the dodgy countries like Angola, rather than the safe countries like Australia or Norway: https://tradingeconomics.com/country-list/interest-payments-percent-of-revenue-wb-data.html

Oh inflation, yeah that will continue and definitely feeds into exchange rates when different from other currencies. In the story about how people thought $100 million was too much government debt in the early 1800s, then $2-3 billion sounded crazy after the civil war, then $20 billion, $1 trillion, $30 trillion, etc., that's obviously also underscoring that over time inflation changes the value of a single dollar. All the prices just have to adjust, which can be annoying and unpleasant but not apocalyptic, especially if the inflation is fairly low/constant over short time frames.

If you print money, then each dollar is going to be less valuable. Increasing the supply of something reduces its price. Say the US printed $50 trillion tomorrow. The value of the USD would fall compared to foreign currencies because each dollar would be worth less

Although more accurately the identity is MV≡PQ where all parts can be independent, bringing in quantity of goods sold and especially velocity, which both can't simply be assumed to be fixed. So if the $50 trillion is issued (and counted in whatever monetary aggregate you want to use) but it just sits in an account, then you can say that M went way up and V went way down, with the price level unaffected.

If the hypothetical is that the government actually pushes out $50 trillion in spending tomorrow, it would massively juice GDP and also a ton would come back in taxes, but yeah the price level would adjust well upward from that kind of shock (with some short-term chaos) and the exchange rate would move accordingly (or more). The question for importing though (and the economy in general) isn't what a single dollar can buy, but what all the dollars can buy. And as for americans themselves, some may wish to say 'this isn't worth the paper it's printed on anymore', but they still have to pay taxes every year payable only in USD, and pretty soon in this hypothetical, the median annual income tax bill might go from ~$15k to $100k+.

There just isn't evidence that inflation or national debt are disastrous powder kegs waiting to explode. On the other hand, every time the national debt was significantly reduced, it ended with our only depressions. Which makes sense, because the government debt is simultaneously the non-government net savings, and things get dicey when you drain the savings from the private sector and force up private debt:

In its first 150 years, the government periodically undertook systematic multi-year reductions in the national debt by taking in more revenues than it spent.

Each of six such sustained periods led to one of the six major depressions in our history. The last three of these crashes were the truly significant depressions of the industrial era.

This is the record:

  1. 1817-21: In five years, the national debt was reduced by 29 percent, to $90 million. A depression began in 1819.
  2. 1823-36: In 14 years, the debt was reduced by 99.7 percent, to $38,000. A depression began in 1837.
  3. 1852-57: In six years, the debt was reduced by 59 percent, to $28.7 million. A depression began in 1857..
  4. 1867-73: In seven years, the debt was reduced by 27 percent, to $2.2 billion. A depression began in 1873.
  5. 1880-93: In 14 years, the debt was reduced by 57 percent, to $1 billion. A depression began in 1893.
  6. 1920-30: In 11 years, the debt was reduced by 36 percent, to $16.2 billion. A depression began in 1929.

What happens when they stop buying US bonds because they know that the only thing backing US bonds is more US bonds to be printed in future years?

That's the 'bond vigilantes' threat story, but it's just not a relevant factor in the real world of governments that issue their own currency and have their own central banks. Even with the self-imposed legal constraint that the Fed can't directly buy treasury bonds at auction or let the treasury's reserve account go negative/overdraft, they still effectively make sure that every single treasury auction goes off without a hitch at the policy rate (even 0% forever if they want). The NYFed manages primary dealer commercial banks who are tasked with this, in order to circumvent the law against 'direct' central bank funding.

Look at how much govt revenue the US is spending just on paying interest.

Yeah I think it's crazy as well, although mainly because I find the argument compelling that they're currently wrong about whether low rates are inflationary / high rates are disinflationary, and that there's good evidence that it's the reverse (so all those years of 0% interest but they couldn't get inflation up to target 2%, and now years of inflation sparked by supply chain issues that stubbornly won't come down no matter how high they raise rates). Precisely because the government is a massive net payer of interest, so raising rates increases government spending, which we would expect to be expansionary not contractionary.

I'd agree with a policy of just setting the FFR at 0-1% and leaving it there, because it's just not a cleanly useful policy lever, and we shouldn't otherwise have any goal of the government subsidizing risk-free savings by choosing to pay interest.

Also, isn't a very high proportion of Japanese debt domestic? Domestic debt still causes problems, through deadweight losses, but from a national perspective, it doesn't mean buying things today at the cost of selling your grandchildren's labour to foreigners.

from a national perspective, it doesn't mean buying things today at the cost of selling your grandchildren's labour to foreigners.

It does mean redistributing wealth from younger to older generations, though.

True, but those older generations then die, and pass on that wealth to the next generation. The big problem is that generations are not people, so you end up with deadweight losses. For example, the younger person who inherits the national debt might be quite different from the person who would have had more wealth as a result of earning more in their working lives. As people's outcomes in life become more the product of what their parents did, this reduces their own incentives to work hard and smart in order to succeed.

I saw this recently in China, where "Lying Flat" culture (do the bare minimum to avoid getting fired from a job that provides you with an ok lifestyle) is becoming more common. From what people told me and from what I've read, it's because success is increasingly a product of whether your parents are well-connected in/with the Communist Party, rather than whether you are hard-working or innovative. So, after a period where upward mobility encourage a Herculean work culture in China, the younger generations are increasingly reverting to the work ethic of their peasant ancestors: do as little as you can while staying out of trouble, because no matter how hard you work, you will never become an aristocrat. Ironically, "Socialism with Chinese Characteristics" is becoming "Capitalism with Feudalist Characteristics."

Similarly, the decline in aristocratic privilege and the necessity of inheritance for wealth were driving forces behind the Industrial Revolution and the Great Enrichment. Unlike almost all of human history, people could rise to wealth and prestige through enterprise, saving, and hard-work, whereas the traditional routes had been (a) being good at splitting open people's heads in battle, (b) marrying up, or (c) being born into wealth.

National debt and intergenerational inequality encourage the same social sickness, by making people's inheritance of wealth more important relative to their own efforts.

Korea has a "National Pension System" much like Social Security, except that the fund is invested in the domestic stock market. This has a number of negative consequences:

  1. The fund has immense power over private businesses due to its size. Via its minority share, it has even vetoed restructurings of the Samsung group (remember that the Samsung group accounts for roughly 20% of Korea's GDP).

  2. The fund is not invested well. It gets put in places for political as well as economic reasons, and in theory a purely economic fund would perform better.

  3. The fund makes transparent financial decisions. This means everyone with assets who pay attention to the news has a chance at front-running the fund.

  4. There are going to be issues in liquidating the fund when it is needed. This to me is the biggest issue - that selling off the assets of an entire generation is going to devalue those assets, and I'm not sure that anyone realistically accounts for this when determining the present value of such a huge fund.

All that said, NPS is currently in surplus by an amount corresponding to 1~5% of Korean GDP, and is expected to remain solvent until 2055. So perhaps there really is an argument for "privatization" (at least until the end of this stock market bubble).

While I'm sure any American version of this would give the voting power to the same investment companies that get the voting power on the shares held by pensions and 401(k)s (e.g. Vangard, etc.), and not the government, it certainly would be amusing if the "free market" reworking of social security ended up being a very socialist policy.

Thanks for the context, interesting to see what the potential issues (and possible benefits) are.

Given that this transition would be pretty expensive and the main benefit is getting to invest in the private market, the counter is: why not just let the government invest in the private market?

I'm not an economist, but doesn't this just amount to increasing the money supply in a way that makes the government responsible for more direct investment decisions? The government (and Federal Reserve) already control the size of the money supply, what makes it better than increasing investment some other way like lowering interest rates or qualitative easing? The linked article talks about higher returns, but money doesn't create wealth, investment of actual resources creates wealth and money decides where those resources go. Right now the money is forcibly invested in government treasuries, which seems identical to the money ceasing to exist for a period of some decades. Since the money is simultaneously collected and paid out, and the amount paid is currently larger, this represents money creation, as well as obviously trasfer to the elderly. If in between it was also invested, this would constitute a lot more money creation, which in general can be done in other ways and right now does not seem like what the economy needs. I guess the main other thing it would do is change the ratio of investment and consumer spending, is that currently desirable in the U.S.? The linked article doesn't say, instead it talks about monetary "returns" to the entity that already prints the money.

I think this is the right concern but, just intuitively, isn't it less distortionary to do what a rational individual who wanted to save money for decades would do, invest it in stocks, rather than disappear the money for a few decades and then reappear it? Other policies might need to be adjusted in response of course.

Since the money is simultaneously collected and paid out, and the amount paid is currently larger, this represents money creation, as well as obviously trasfer to the elderly.

They're actually paid out of reserves that we had built up in prior decades right now, we're just running out of those reserves.

They're actually paid out of reserves that we had built up in prior decades right now, we're just running out of those reserves.

The "reserves" are treasury bills. The money that was collected was spent immediately.

I can't tell whether you're making a pedantic point about the payroll tax money is invested or are arguing against us having financial reserves to tap. In 1983 we reached a similar place where the trust funds were facing (much more) imminent deficits. Congress worked together and responded by both cutting benefits and raising contributions; in the years that followed we fixed the shortfall and built up accumulated surpluses (page 36) from all the boomers in the workforce. We've been currently spending down those surpluses for SS payouts but we aren't printing money or borrowing from elsewhere in the general fund (except for the marginal SSI fund).

Hey, we fixed it once, no reason we can't do it again.

A treasury is a reserve to entities other than the government, but it's not to the government itself. Another government's debt would be a reserve.

Everyone including the SSA themself refers to the trust fund's accumulated surpluses as reserves.

I can cut the tusk off a narwhal and call it a unicorn horn but that doesn't actually make it a unicorn horn.

If Apple Computer buys a US government bond or a Germand Bund it will receive money at some point in the future without any further action from itself. This is an actual reserve.

If Apple Computer issues a bond to Beats Audio (a company Apple Computer wholly owns), Beats will receive cash from Apple (conditional on the creditworthiness of the parent). So, when we consolidate these, they net to nothing. Apple owes just as much as Beats will recieve. From an outside perspective they fully cancel each other out and can be ignored. Apple will need to get the money elsewhere that pays Beats.

When the US government issues a bond to Social Security Administration. The US government owes just as much as Social Security will receive. So, when we consolidate these, they net to nothing. The US owes just as much as Social Security will recieve. From an outside perspective they fully cancel each other out and can be ignored. The US doesn't get to claim that it has a reserve via SSA. The US will still need to borrow (or tax) the money needed by Social Seurity in order to repay their debt.

If Social Security owned bonds issued by a non-US Government entity, those would be real reserves, since they should be able to expect the third party to give them money without any required action from another US government entity.

Everyone understands this, they're clearly talking about earmarked tax payments plus interest exceeding defined tax outlays. If you want to be precise and call it accumulated payroll tax receipts plus 6% of money the US government will pay on treasuries, you can, but who cares? This is a semantic argument that doesn't have implications for the fiscal operations of the trust funds.

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Any privatization that is not radical enough hands another, insanely powerful weapon to the statists: The selection of available equities.

If we were to switch to a system tomorrow in which the SSA was choosing where anyone could invest, there'd be ESG requirements out the wazoo. Corporations with government contracts would be aggressively shortlisted - especially anything in the military industrial complex! Foreign investments wouldn't be permitted of course, and for some reason Mutual Funds would be the default selections.

Just as in healthcare, expense ratios for various pooling securities would start out as X, with some short-sighted legislated maximum rate of change like Y, and then a dozen loopholes that fuck everyone who bought into the system to make the actual costs Z + Z + Z + Z. The brokerages could sink pennies into lobbying for billion-dollar payouts from coerced contributions.

The popularity of Social Security is unfathomable. A ponzi scheme in which the government steals from you to invest in itself. The sheer selfishness of the first free riders (and the soon-to-be bailout recipients) shows just how cheap political support is to muster.

And then if the privatization is radical enough and coercion actually is removed - well then the idiots who can't think past the next paycheck are going to starve. I've seen too many 6-figure earners with 0% retirement contributions in my life to have any faith in people's ability to care for themselves. A political crisis will ensue as the dumbest among us live in shacks in old age, a rousing call to action will follow, and our wheelchair-bound president will....well.... you've seen this movie before. Why bother trying?

I don't think it'd have to be too different from incentivized investment accounts. And there are plenty of existing pension funds for govt employees that hold international equities and not-particularly-green companies, so govt control doesn't necessarily mean doom.

so govt control doesn't necessarily mean doom.

Not necessarily, but a massive centralised government investment fund would be a much more attractive target for lobbying.

I suspect the government will raise the payroll cap to the point where it doesn’t matter(there are simply not enough people with million dollar salaries to make any difference whatsoever), and then lie about inflation numbers when adjusting SS payments to make up the difference.

What makes you say this, based on the CBO report that raising the cap could raise an extra trillion?

The government will somehow find a way to come up short.

I think what’s getting left out is how 1) this probably won’t raise an extra trillion, because wealthy people use tax avoidance strategies(and to my knowledge payroll taxes are specifically on wages, not on passive income- eg ceo pay is often structured to give compensation in terms of assets which appreciate to reduce tax burden, and it’s not inconceivable that this could extend down the ladder to cope with a sudden large tax increase on high wages) and 2) inflation isn’t going away, so social security outlays are going to continue to rise because they’re inflation adjusted(which is absolutely ruinous to an optimistic planning model for a pay-as-you-go system based off of payroll taxes when wages rise slower than inflation), and also people are living longer(and thus drawing social security for longer). Yes, yes, I know that average US life expectancy is dropping, but that’s mostly due to premature deaths of people who wouldn’t have drawn much social security anyways- both because they weren’t going to push the average lifespan up regardless, and because they were poor and social security outlays are tied to your working income.

Agreed that part of the problem with taxing wages is that businesses can respond by shifting compensation, generally to benefits. That's one of the problems "option 3: Widen the tax base" is trying to account for. Worth noting though that payroll tax is already considered the hardest to dodge:

payroll taxes are very hard to evade. According to the IRS’ criminal enforcement data, investigations into payroll tax abuse make up less than 3 percent of all tax investigations, despite payroll taxes generating about a third of all federal tax revenue.

I'll also note that the (conservative, pro-low tax) Tax Foundation has similarly ambitious estimates for raising the whole cap:

removing the payroll tax cap entirely would lead to $1.8 trillion in additional federal revenue over ten years on a static basis, and primarily impact high-earners. Furthermore, this additional revenue could be used to lower marginal rates on corporate and personal income, growing both wages and GDP by 2.2%, while still raising revenue.

Alternatively you could take the option of raising taxes very slightly on normal people, or even just tax capital directly if we really want to be sure the rich to pay.

Hmm. That significantly changes my priors towards raising the cap significantly improving the health of social security. I do still think the ‘outlays are higher than anyone expected’ problem is going to get worse, however.

This seems like an uncharacteristically low effort take from you.

That’s true. I’ll edit in a steel man to one of my posts above when I have more time to think about what that entails.

No worries & no rush

All right, it’s in the post two above that one.

Less Radical Funding Solutions

Alternatively, decrease costs by increasing age.

Yeah I imagine we'll end up doing this. My original subtitle to that section actually said "other than the obvious stuff like raising the age or cutting benefits," just cause I felt like they didnt add any new info for people. I assume in reality it'll be a combination of both of those plus raising taxes.

Oh, my bad, missed that. I guess I would regard just raising taxes as similarly obvious though (as framed in solution 1). Of course, both age-raising and tax-raising suffer from the same problem of always requiring just a little more every decade or so.

No worries, I chopped a bunch of stuff to make it less long. The tax increase in general is def pretty obvious, I just thought it would be helpful to give some specific proposals and estimates.

Minor point of contention: "The payroll tax is actually regressive, exempting incomes over $160,200."

It's only regressive if you ignore actual retirement payouts. SS payouts scale with how much you put in, and stop scaling up at, you guessed it, $160,200.

Further, those with lower incomes get a much bigger share of their wages as a benefit thanks to the way bend points are used in the PIA calculation. Everyone's favorite fix (raising the cap on wages) means effectively creating one more bend point of 0% at the current social security income cap.

Fair point. The regressivity is broader than just the cap, generally as you get poorer people pay a larger sharer of the income for payroll, but payouts should ofc be factored in too.

The progressivity is in the payout structure.

Let's take 3 people. Follow along if you iike there's a quick calculator here. For simplicity lets assume all 3 were born on Jan 1, 1980 will retire in January of 2050 and remain single their entire lives. We'll assume they earn the same amount after adjusting for inflation for the 35 years that are relevant for calculating social security benefits.

  1. Alice earned $13,500. She contributes 6.2% of her income or $837 and her employer contributed the same this year. When she retires in 2050 at 70 she will get a benefit of $14,500 (in today's dollars) per year of retirement.
  2. Bob earned $80,000. He contributes $4960 (nearly 6x as much as Alice) and his employer matches. When he retires at 70, he'll earn a benefit of $40,200/yr (in today's dollars). So, after paying 6x as much as Ailice he gets a bit less than 3x the benefit.
  3. Charlie earns $160,000. He contributes $9,920 and his employer matches this. When he retires he gets a benefit of $55,300 yer year (in today's dollars. Despite contributing nearly 12x Alice and 2x Bob, Charlie will get a bit less than 5x Alice's benefit and 1.25x Bobs.

Alice and Bob's incomes were chosen at the bend points of the PIA calculation, incomes in between any of those three people's will be some mix of those.

Yes, social security taxes are flat, but the benefit is enormously progressive.

Alice earned $13,500. She contributes 12.4% of her income or $837

I'm afraid this math is not mathing.

You're right, I started writing with the full (employer and employee contribution) then split them and forgot to edit the percentage. She contributes 6.2% or $837 and her employer contributes another 6.2% on her behalf. The full contribution per year is 12.4% or $1,674.

Yeah, US social security is a redistribution program stealthing as a forced savings program ("and that's a good thing," many progressives/leftists might add). As if a forced savings program isn't bad enough.

Given the strongly progressive nature of SS disbursements, financially literate high-earners are far worse off than an alternate universe where they just took their social security contributions and their employer matches to go home and invest on their own, even in something vanilla like short, intermediate, or long-term treasuries depending on duration appetite and the shape of the yield curve. The difference becomes even more drastic if one throws the option of investing in equities into the mix.

Unfortunately, while "financially-literate high earners" might be able to outperform on returns, I can't see a scenario where Alice, who likely isn't terribly financially literate or prone to long-term decisionmaking (admittedly, this is generalizing heavily about the lower class, but is probably right in aggregate) doesn't get convinced to invest either in high-risk, flashy strategies (NFTs, bro! Can't go tits up!) or outright frauds (Enron, etc).

If retirees ends up destitute from mismanagement of the funds they supposedly saved on their on behalf, it's easily a sympathetic case (and large voting block) that we'll end up bailing them out anyway. I think privatizing would really need a mechanism to prevent this sort of outcome. For better or worse I could point to how the SEC defines "accredited investor" to only allow rich folks to invest in certain poorly-regulated securities. Is Alice prevented from making those sweet returns? Yes. But if high-income Charlie loses his shirt the median voter is just going to laugh, not support a bailout. It's not a good definition, but it seems to work in that context.

If the only options are index funds covering the S&P 500, msci world ex us, Russell 2000, Lehman bond, and average cost of Treasury bonds it's really hard to lose your shirt.

The government is already admistering a plan with those options. Just make the default option a target date retirement plan based on birthday and 99.9% of people will have an extremely hard time screwing it up.

The scaling also heavily favors low earners:

For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2023, or who dies in 2023 before becoming eligible for benefits, his/her PIA will be the sum of: (a) 90 percent of the first $1,115 of his/her average indexed monthly earnings, plus (b) 32 percent of his/her average indexed monthly earnings over $1,115 and through $6,721, plus (c) 15 percent of his/her average indexed monthly earnings over $6,721.

Social Security has great returns if you earn minimum wage your whole life, and terrible returns if you consistently cap out every year.

I will strongly oppose any increase/stealth increase (raising the payroll cap/widening the tax base) in taxes. Raising the payroll cap is just kicking the can down the road as the CBO mentions:

As a result, outlays for Social Security would increase, and that effect would grow for many decades beyond the 10-year period of the estimates as more individuals subject to the new taxable maximum claimed their benefits.

But it looks great in their 10-year horizon becuase most of the people earning it are well beyond 10 years from retirement.

Bush's partial, optional privatization proposal was probably as close as it will ever get. After the sound rejection that got, I am looking forward to the plan failing. There's no political path to fix it.

My likely XIRR on contributions and statutory benefits under is already a nominal 2.77%. I'd be in favor of privatization whose only option was taking any part of even future social security contributions and sticking them in a treasury direct account, anything beats 2.7%. What a gigantic waste of almost a million USD.

I will strongly oppose any increase/stealth increase (raising the payroll cap/widening the tax base) in taxes. Raising the payroll cap is just kicking the can down the road as the CBO mentions

I'm referencing the second of the two options they describe:

The second alternative would apply the 12.4 percent payroll tax to earnings over $250,000 in addition to earnings below the maximum taxable amount under current law. The taxable maximum would continue to grow with average wages but the $250,000 threshold would not change, so the gap between the two would shrink. The Congressional Budget Office projects that the taxable maximum would exceed $250,000 in calendar year 2039; after that, all earnings from jobs covered by Social Security would be subject to the payroll tax. Earnings under the current-law taxable maximum would still be used for calculating benefits, so scheduled benefits would not change under this alternative.

I'm referencing the second of the two options they describe.

Which is taking my 2.7% return and likely driving to near zero or even negative because now I'm paying taxes on more income but only getting a benefit based on a fraction of my contributions. I'd much prefer ending universal social security and setting up a much smaller means tested welfare program for seniors.

Yes wealthy people would be paying a larger share under this sytem and the benefits would be distributed downwards, like most other taxes.

Someone making $160k/yr in NYC or SF, while very fortunate, is likely quite far from being wealthy. The New Yorker would need a roomate to afford median rent, and neither can afford the median home.

This proposal doesn't hit people making over $160k, it hits people making over $250k, about 100 stacks more and solidly in the top 5% of the nation. I empathize with their higher cost of living, but if we have a funding shortfall, who other than the most well off should we be raising taxes on first?

but if we have a funding shortfall, who other than the most well off should we be raising taxes on first?

Its always best to tax people who can't avoid the tax. Which means things like VATs, Payroll taxes, and sales taxes. All the most efficient taxes are flat or regressive. Taxing the rich is a waste of time and resources with little actual benefit to the treasury.

Its always best to tax people who can't avoid the tax. Which means things like VATs, Payroll taxes, and sales taxes.

Yes, this is a tax on payroll.

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Because the $250,000 isn't indexed to inflation it's just a slow transition into removing the cap on taxed income while providing benefits only on the social security max income. We've already increased taxes significantly to cover these future benefits. It's high time for benefit shortfalls to match funding shortfalls.

Because the $250,000 isn't indexed to inflation it's just a slow transition into removing the cap on taxed income while providing benefits only on the social security max income.

Yeah, the title of that section was "Raise the Payroll Cap", this wasn't hidden. Unpleasant decisions will half to be made either way, a decade and a half transition from the payroll cap that fundraises a trillion in the first decade off the top 5% of earners is one of the more reasonable ones I've seen.

It's high time for benefit shortfalls to match funding shortfalls.

Should we cut benefits by over almost a quarter? That's what we're on track to do currently.

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I empathize with their higher cost of living, but if we have a funding shortfall, who other than the most well off should we be raising taxes on first?

The most numerous, who already aren't paying their share of the tax burden.

From my OP:

  1. Raise Payroll Taxes - “even a modest change, such as a gradual increase of 0.3 percentage points each for employees and employers (or less than $3 per week for an average earner), could close about one-fifth of the gap.”

One big issue is the privatization benefits - higher returns - is likely false for a large economy like the US. The problem is changing a massive amount of money from government bonds to equity risks would change all market pricing. The equity risks premium is maybe 3% a year now.

The government would need to sell trillions in debt to transition and then you would have trillions in cash flowing into investments. Equity premium would shrink. Government would face some significant negatives of higher financing costs. I don’t think this program would scale well.

A small country like say Norway can do things like a sovereign wealth fund and capture equity risks premium as $1.1 trillion isn’t enough to vastly change market pricing. The US would change every price in the markets. China is likely at that size too.

One minor tweak to social security which would only be a tiny footnote for the system, is that already-wealthy individuals can't opt-out of social security as it stands. As such, even if you wanted to give away your income to other elderly in less fortunate positions, you would have to personally find them and give that cash away.

In this case, distributed coordination by way of opting out from those who have enough cash to pay for their own expenses isn't even possible.

I don't think this is an issue. Opting out of benefits is effectively equivalent to choosing to pay extra taxes. That's not something many people want to do.

In a manner of speaking, that's sort of already built into the system. The money a wealthier person pays in tax is then invested and helps replenish the broader trust fund which helps secure benefits for other, less fortunate people . One of the advantages of our system is that it pools risk by doing this.

Yes, but at the end of the day, they cannot simply tell the SS administration they do not need the money to be paid out to them.

Ideally the taxes would outweigh the costs, and it's only a small footnote, however it is indicative, I think, of the structural inefficiency.

What about the effects of the Covid/fentanyl/suicide/etc. life expectancy drop, steeper in US than in many other Western countries?

Interesting question. I'm not sure about deaths of despair, though I think they're hardest among the tax paying population. I had no idea about Covid so I looked it up, I think it won't change because even though more elderly people passed, the economic contraction meant we lost a lot in payroll taxes. Here's an Investopedia brief on it:

Social Security trustees have concluded that the long-range implications of COVID-19 on Social Security would be “minor,” with any pandemic-induced recession recovered by 2023 with “little permanent effect.”

I'm not sure any solution can be evaluated outside of what has caused the problem. Probably chief among them, an aging population. Even if it's aging slower than other first world nations "thanks" to immigration, it's still aging. So the ratio of young people supporting old people on social security keeps skewing worse and worse.

The other reason, which may be less supported, is Federal Reserve policy. When the whole system is funded with T-Bills, every time inflation spikes or rates get slashed, social security takes it dry. Even in good times, the same "use it or lose it" dilemma the Fed forces consumers into to keep our consumer economy consuming along with their 2% inflation target is punishing social security. Both by increasing the rate at which it needs to make it's inflation adjusted payouts, and for the last 15 years of low rate environment destroying it's interest payments because inflation supposedly wasn't high enough.

Raise the payroll cap, raise the payroll taxes, widen the tax base, privatize the system, none of it will matter. You need to goose the fertility rate, and not play silly games with immigration to fake the numbers. And you need sound money. Everything else is a bandaid doomed to fail.

Raise the payroll cap, raise the payroll taxes, widen the tax base, privatize the system, none of it will matter.

What makes you say that? The numbers I looked at suggest those tax changes would go a very far way towards addressing funding shortfalls. Raising birthrates would be ideal but if we could do that on command, we definitely already would. Most likely we'll have a combination of raising taxes, cutting benefits, and raising the retirement age - all stuff nobody likes, unfortunately.

What makes you say that? The numbers I looked at suggest those tax changes would go a very far way towards addressing funding shortfalls.

Do those numbers take into account continued declines in fertility? Do they take into account Fed policy decisions in line with the last 20 years of Fed policy decisions? What assumptions did they make about T-Bill returns or inflation?

I just can't be brought to trust the numbers anymore. Estimates in advocacy for policy changes always make optimistic assumptions to make the numbers work. Although perhaps I did come on too strong saying "none of it will matter". It might buy us a few more years, and I'm sure some politicians will pat themselves on the back for yet another non-solution.

Do those numbers take into account continued declines in fertility?

Social Security makes projections 75 years into the future and does take declining fertility into account:

The costs of both programs will grow faster than GDP through the mid-2030s primarily due to the rapid aging of the U.S. population, and generally continue to increase thereafter at a slower rate through 2076. This is because the number of beneficiaries rises rapidly as baby boomers retire and also because the persistently lower birth rates since the baby boom cause slower growth of employment and GDP.

Re:

What assumptions did they make about T-Bill returns or inflation?

The return on investment in the trust funds has been consistently about 10% total and 6% for OASI. Social Security payouts have a COLA increase based on inflation each year, and can sometimes adjust upward month to month based on the CPI. This is all factored into their budget & projections.

I'm sure some politicians will pat themselves on the back for yet another non-solution.

I mean it may be imperfect but raising taxes is more of a solution than hoping we have more kids.

I mean it may be imperfect but raising taxes is more of a solution than hoping we have more kids.

They're somewhat in opposition, insofar as raising taxes in the ways you suggest would transfer resources from the fertile population to the infertile population. Imagine raising social security contributions, but transferring the extra income to people under the retirement age who are medically certified as infertile. Of course, it's hard to say how much of an effect such transfers would have on the birth rate, but presumably they would be negative.

Fair counterpoint. OTOH, raising retirement ages probably also has some effect on the job market & wages as well, in terms of decreasing potential promotion opportunities. No idea how large that would be either and I assume in reality we'll do a mix of everything, maybe raise taxes slightly plus raise retirement ages and reduce benefits.

Yes. My preference in such cases is usually for reducing benefits (either in each case or through means-testing) but I appreciate that it's not usually a sufficient solution.

Raise the payroll cap, raise the payroll taxes, widen the tax base, privatize the system, none of it will matter.

Yes it will. Read the trustees report and stop being so hysterical.

All in all, I view social security as unfixable. Giving a large percentage of people a check every month turns those people into single-issue voters whenever their check is threatened.

The original sin of Social Security was treating it as something you earned, and not as welfare for old people. People paid in. Now they want their money back, $30 trillion debt be damned. This line of reasoning isn't entirely bullshit. After all, people who paid in more do get more later which is why this "tax" is regressive. It's not really supposed to be a tax. It's supposed to be insurance.

To me, the biggest takeaway is that Universal Basic Income is a bad idea and should be avoided at all costs. Once it starts, it would be impossible to kill even if it fails at all its goals. And of course it will never be enough. The check-getting group will always vote to get larger checks and the expense of everything else.

I think going back to it being insurance rather than a welfare check is probably the only way to really permanently fix it. The problem is that the system was built on the notion that the retired people would be too old and sick to productively work and too poor to live. When retirement started in the thirties, you retired pretty much at the median life expectancy and might live a couple of years before you died and thus the payouts never really got too burdensome. Fast forward 40 years and people retire at 65 and live to 80 or so and you’ve got a problem. And this isn’t even counting the demographics problems presented by having the largest cohort in the USA be retirees and near retirees with fewer and fewer workers holding up the system.

If you go to an insurance scheme, it would probably work fine. You’d have to have a documented reason why you couldn’t work, or have to be within 5-10 years of median life expectancy. No more 20-25 year second childhood boating and traveling and so on while suckling the government tit. Now if you can afford to retire, fine. But I think the idea that workers should give up large swathes of their income and the government should be trillions in debt to finance people living at leisure seems a bit crass, especially since that cohort also are far more likely to own assets and have investments and so on.

Boomers are the richest cohort in America even before social security. Millennials and Zoomers are not only unable to get assets, most are paying off decades of student loans and renting. They can’t afford kids, even with roommates. Most are struggling financially. Investment in making life better for the cohort paying for things might create the opportunity for that cohort to build more small businesses, or buy houses, or afford children. They could spend that money on consumer goods that they need as they buy houses, raise kids, build businesses, and so on.

I think going back to it being insurance rather than a welfare check is probably the only way to really permanently fix it.

I wish. But the whole concept of insurance has been undermined already. Look at health insurance. Ever since insurance companies were prohibited from turning people away with preexisting conditions, it was no longer insurance. It became a healthcare system that guaranteed access, and "insurance" was the entrance fee.

I understand insurance is extra fucky in that it's tied to your employer a great deal in the US, and losing your job then forces you into the situation where you may be shopping around for insurance with a condition that is preexisting to your new insurer. I just wish that had been fixed instead of dispatching with the entire concept of "insurance".

I think we may not mean the same thing here. What I mean by insurance is that it only pays out for people with a demonstrable need, rather than being a defined benefit that you get at a given age regardless of any need. You can be perfectly able-bodied to the point of being able to hike twenty miles and climb mountains— if you’ve reached retirement age, under the current system, you get SS. Likewise, you can be filthy rich have millions in assets— if you’re at the right age, you get the same check as everyone else. My ideal system is based on turning people away who don’t need it either because they can still work or because they have enough money to not need money to retire. I’ve little objection to paying for people who literally can’t work for various reasons but are too poor to afford to stop working. Fair enough. But we’re showering money on able bodied people who can provide for themselves which doesn’t make sense.

That's not "insurance", that's "welfare".

I'm with @WhiningCoil. I agree with what you're getting at, but I think it's a tough sell because people literally don't understand what "insurance" means, in part due to how severely the concept has been undermined in health markets, where we have effectively banned actuarial tables as well as requiring people be insured for things they have effectively zero risk for or need of. I absolutely promise that I don't need PrEP to be covered by my insurance, nor do I need weight loss drugs, but I actually could use significantly more coverage for sports injuries than the median person. Can't do it, all bundled, because telling homosexuals or fat people that they're higher risk and have to pay more would be discrimination.

Why wouldn't this pan out the same in social security? Someone is going to get their ox gored if it isn't just everyone gets it after whatever age.

I absolutely promise that I don't need PrEP to be covered by my insurance, nor do I need weight loss drugs, but I actually could use significantly more coverage for sports injuries than the median person. Can't do it, all bundled, because telling homosexuals or fat people that they're higher risk and have to pay more would be discrimination.

As Scott once said, dealing with the biology side of things is relatively easy; changing human behavior is what we don't have a solution for.

Besides, pharmaceutical costs aren't really high because other people's problems are uniquely expensive, they're high because we pay for patents - about 75% of pharma costs are from on-patent drugs. From my table napkin math Truvada was about $2 billion a year when on-patent, which is about 0.34% of pharaceutical spending, or not enough to notice any difference in your premiums if you opted out.

Prep, Ozempic, and other such stuff were never even costly in the first place because lifestyle-choice preventative medicine is more expensive than any other kind of medicine; on-patent drug prices can just be raised as high as the market can bear. Truvada fell over 20x in price after generics were released and will now be a fraction of a fraction of a percent and save us significantly more in down-the-road hospital costs. Ozempic will plummet in price soon as well because Medicare has made it target #1 for the next round of price setting.

But even if you it opt them and all the other "lifestyle" stuff out of the bundle now it would still all be a drop in bucket. Make it illegal for companies to even produce that stuff and they'll just invest in different drugs you don't need and raise the prices just as high.

Well, through those patents we’re actually paying for the drugs to be developed in the first place. The reason those drugs exist despite the huge costs of development is that the patent lasts long enough and Medicare doesn’t bargain down the costs of the drugs. Yes the cost falls after generics come out, but without the patent and guaranteed profit, no one would spend billions of dollars and ten years developing the drug in the first place.

I agree 100% - that's part of why I'm against some theoretical unbundled system.

These were two examples of things I don't want and would never need, not a full cataloguing of things that I have zero interest in insuring myself for. I am very confident that if my insurance options were similarly varied to what I can select for other situations that I would have substantially lower premiums than current pricing.

Raise Payroll Taxes - “even a modest change, such as a gradual increase of 0.3 percentage points each for employees and employers (or less than $3 per week for an average earner), could close about one-fifth of the gap.”

Yes, this is extremely important. Whenever people discuss Social Security they often act like the funding shortfall some irresolvable apocalyptic problem when really a moderate increase in rates can close the gap. From the latest trustees report;

consider that for the combined OASI and DI Trust Funds to remain fully solvent throughout the 75-year projection period ending with 2097: (1) revenue would have to be increased by an amount equivalent to an immediate and permanent payroll tax rate increase of 3.44 percentage points to 15.84 percent

Considering the possibility you mention of raise the cap, the actual tax increase needed without touching benefits would be decidedly moderate. And the above figure is all the way to the end of the century!

That is a huge tax increase though. For a median household that is an additional $2565 which is more than my rent and we are not even close to a median household. You are talking about a tax increase equivalent to 5+ car payments, 2x rent payments, etc.

Where did you get that number from? In 2017 the average person paid about $3,045 in SS tax. Even if you multiplied that by two for a household, a 3.44% increase in the tax wouldn't come close to $2565.

Remember that even though workers really shoulder the full burden of the tax, half of it comes from your employer's account so that's not literally a 3.44% increase on whatever your takehome salary was before.

I took median household income and multiplied.

Your mistake is not doubling your 3045 number.

Even if you multiplied that by two for a household, a 3.44% increase in the tax wouldn't come close to $2565.

$2565 is the median household income multiplied by 0.0344. Unless you are increasing the 6.2 (x2) % SS tax by merely 3.44% which would take the total tax rate to 12.8% instead of 12.4% (while I thought you were increasing it from 12.4 to 15.88%) my math works out perfectly.

Remember that even though workers really shoulder the full burden of the tax, half of it comes from your employer's account so that's not literally a 3.44% increase on whatever your takehome salary was before.

But that makes it worse, not better. If you have an ostensible 100k salary, your take home after SS payroll taxes (ignoring everything else for now) is 93.8k. But you aren't actually a 100k salary employee. Your post-payroll cost to your employer is 106.2k. So you are actually a 106.2k employee. That is, the take home pay of an employee "worth" $100k to an employer is significantly less than 93.8k it is actually around 88k. Because your adjusted base pay ends up coming down to around $94k, and then you lopp 6.2% off that ("the employee part of SS" and you are down to 88. All of the 3.44% is eventually born by employees. It doesn't "come from the employers account" it comes from you having a reduced wage. That some people are not informed enough to realize this, and as a result we get slightly less rioting from the working class, doesn't make it not true.

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