6% of GDP…so what!
Lifted from an e-mail from Dale Coberly regarding Social Security and the dangers of increasing ‘costs’ of helping our old folk live a bit above a level of destitution:
…that while SS will eventually cost 6% of GDP, this is not a lot of money for the basic needs of 25% of the population. Moreover, they will have paid for it themselves.
And that is what it is going to cost “us” in any case, however the money is arranged… that is what the old people will “eat.” And the bread will be baked by “us.” You can fool yourself with financial transactions, or you can take the money directly via a payroll “tax.” At the end of the day…in terms of distribution of goods and services to the elderly vs the “young,” it will come out exactly the same.
You would have to show that laundering the money through the financial markets will result in more production or a fairer distribution, and while the first is an article of religious faith with some people, there has been no evidence whatsoever to support it for the past eighty years. I suspect it has something to do with the maturation of capitalism, but I am no economist. Merely an observer of what is.
To put it in terms any might understand: Granny is going to consume 6% of what “we” produce. So what? (She produced a hell of a lot of what we consumed in her prime time.)
(Rdan…lightly edited for readability)
Angry Bear front page author Bruce Webb has kept the numbers straight and well covered, and Dales’s Northwest Plan offers an especially workable answer to the possible problems in the money stream for workers, but sometimes you just gotta say it out loud and in real family terms many of us actually believe about the over 65 group. Thanks for working hard.
I always feel compelled to speak up for economists on this issue (tho I aren’t one neither, but the silence is deafening), but an important macro issue is that this 6% of GDP is AGGREGATE DEMAND, and AGGREGATE DEMAND is what our economy so desperately needs!
Just trying to give coberly some credibility and put a little Ivory Tower polish on this.
Next we need to re-tool Bernanke.
Tho not an economist, I have been getting better at it from reading so much, and disbelieving much of it, and am getting to the point where I even sometimes recognize naive concepts and embrace some sophisticated ones.
There is an economic concept called “wedges”, and it is used by an Ivy League, Ivory Tower economist whose name I can’t remember, but that is how I know “wedges” is a real economic word.
In general, abstract, scientific terms, it means “a thing of great strength which is driven between a rock and a hard place”. It prevents the gap between a rock and a hard place from closing, much to the distress of those occupying the gap, as depicted in many Hollywood movies. However, in economic terms it is purely a metaphor.
The way the theoretical concept is applied to the economy, the worker exists in a “gap” between the hard place known as “cost of living” and the rock known as “personal income”. Believe it or not, these are extremely powerful economic forces that have an irresistible tendency to close the “gap”, (we will have to take the economist’s word on that one.*) This makes the act of voluntarily saving money for retirement nearly impossible for the majority of people, and only marginally possible for most of the rest. So in other words we need a “wedge” in the “gap” otherwise we would be penniless or at least underfunded once the inevitable retirement age comes.
So this is the real reason we have social security, and the rest of the developed world does too, tho the implementation details vary.
*It has something to do with either the cost of living will rise, and/or income falls to “a living wage”, and no more.
The big issue with redistributive activities is not how much will be produced, but who will get to consumer it. Yes, that 6% of GDP will be consumed, regardless of whether there is a Social Security program. The difference is who will consume it.
As things now stand, the people with whom we have made a social contract will get to spend that 6%, because that’s what the contract said would happen. Since that will require Treasury repaying money that was borrowed from the Social Security system, the 6% of GDP paid through the system will be funded partly by taxes or Treasury borrowing.
Now, for those who experience an irrational reaction to the term “redistribution”, well, that sounds like a personal problem. See your therapist. But on the way there, keep in mind that there has already been a redistribution, from workers who paid FICA to those who would have otherwise had to pay other forms of tax, but were spared paying some part of that tax from around 1983 to the present because of Treasury borrowing from the Social Security trust fund. Since 1983, more of our national income has been consumed by those at the high end of income and wealth scales, while their taxes have been lowered. So since 1983, as a result of our social contract, the rich have been advantaged by regular Jo(e)s. Now, the other end of that contract is that Treasury will repay Social Security.
What we can see here is a financial transaction – the rich borrowing from the rest from 1983 till now, with an obligation to repay in the future – dressed up in the form of a social contract. Why drive a financial transaction through a social contract? Social contracts are not written down with precision. We instead hire politicians to intermediate and stand in for the piece of paper. If the rich had simply gone to the bank and borrowed, they would have an obligation, and a piece of paper which specifies the obligation. By borrowing through a social contract, the opportunity to corrupt the process arises. The combination of no contract and sleazy politicans provides room for walking away from obligations.
To work well, societies and financial obligations both must rely on trust. You know, a bond is a “bond”, a promisory note is a promise, a security is secure. The language of finance carries an implication of trust. Neither finance nor society works well if we stop expecting the other party to meet their obligation. There is an obligation for Treasury to repay the money it borrowed from the Social Security trust fund. “I got mine” is not how societies thrive.
That is a nice way of explaining why social security should be “off the table” at the catfood commission and on the talk shows when deficit and debt reduction is discussed. Apart from breaching trust on the special treasuries, there is simply no part that social security can play in reducing the deficit or debt, at least before 2037. Indeed, even defaulting on the special treasuries might be counterproductive because it would further cripple the economyto have older Americans further reduce consumption–the economy does better when the oldsters catch the early bird specials a couple of times a week rather than just opening another can of catfood. In that regard consider Alan Simpson’s comment today that social security is a “cow with 310 million tits” Does that give anyone comfort that the catfood commission will deal with social security in an honorable manner?
i wouldn’t want to get into a discussion of anthropology, but the Neanderthal burials show signs of old people with injuries that could not have lived on their own without help from their family.
We may be coming to a time when we have to make some compromises with our morality and our feelings about death. But the sad fact is that the catfood people want us to arrive rather prematurely at that time, not to abandon those too old to walk and chew rawhide, but to force the elderly to chew rawhide for our moccasins until they can’t any more. then we can send them to rest homes to see that their “social security” money gets into good hands.
The hellishness of it is that civilization has reached a point where it is possible for most people to work a reasonable life and then enjoy a long retirement, having paid for it in advance, to do those things they might have wanted to do if they didn’t have to work in a cubicle. But Alan Simpson can’t stand the thought that the slaves could buy their freedom. Only rich people get to retire, don’t you know.
“But your safety has passed. He does not need you — he has many more useful servants — but hobbits as miserable slaves would please him far more than hobbits happy and free. There is such a thing as malice and revenge!”
Ok Coberly says no. I await the Webb response.
Those that say that this is not an issue, that is not a problem are going to be disappointed. Changes are coming. Higher taxes (I hate that) and lower benefits (you hate that) are in the cards. You can’t stop that from happening. But you might be able to shape what is to come. But you chose to sit there and say, “No problem”. You are living in a vacuum. So you are going to get hit over the head and the worst options will be the result. Your stubborness on this is part of the problem. Be part of the solution instead.
No. I want a cap on the benefits side that is tied to GDP.
good idea Krasting.
lets say we cap your grocery budget at, say, 6% of your income. or whatever percent of your income it is today.
now, let us suppose that in the future you suffer some loss of income. so then we would hold your grocery budget to 6% of your new, low, low, income. thus saving 94% of your new low low income for sports cars and trips to Las Vegas.
sounds like a good idea to me.
no one here has said there is no problem. they have said that the way to fix the problem of high deficits is not to cut Social Security which has nothing to do with the deficits.
it would be funny if it wasn’t so dangerous to watch people like you drop from their thinking entirely the facts that don’t fit their narrative.
I haven’t jumped in on this as I believe both Webb and Coberly have proposed solutions that are economicly viable, similar in spirit to several NASI proposals and have done the hard work running recognised numbers and explored possiblities and scenarios outside the numbers. Simply because current media reports big bucks being spent on one heavily advertised message for a solution does not make that the only one.
If you want to claim that a political solution is being fashioned then fine, but to claim that yours is the only one is to simply promote the notion that some government people need to look like they are doing something is certainly not a basis for sound policy.
I believe there is a lot of money and undercurrents on the issue, and the recent meeting of bloggers with the Treasury team suggesting the Commission is pre-determined on the issue makes it more alarming.
There are several solutions if action by politicos is deemed necessary, and much less damaging than a cap to the system itself, and these have been offered in other posts. But to suggest that yours is the only solution because of political capture and expediency by this administration begs the question of what you are actually saying and have tried to convince readers as necessary.
If trade policy, health care costs, and war costs are off the table, so to speak, then the conversation is certainly inadequate, and political partying will be in turmoil over time.
I am curious how people would propose handling the surplus?
Would we continue as is?
the Social Security surplus is disappearing. It was created to pay for the boomer retirement. The boomers are retiring. The surplus will be used for the purpose for which it was created.
Then SS will return to pay as you go, with a “surplus” that is a constant ratio to costs in order to have a buffer to pay for times of shortfalls in tax income due to things like the current recession.
All I can say is USof A treasuries are regarded as the best place in world to put your money, and even if we did have a true national pension fund like Canada or a sovereign wealth fund like many other countries, the single largest holding would still be treasuries, tho they can dump them at anytime if they believe the US is flaking out, but we are stuck with them in the SS fund.
Unlike a person who can be laid off and lose his source of income, the government can never lose its source of income. Thus treasuries are a safer investment than lending it to your neighbor.
Unlike a company that may fail to guess what next year’s consumers want, the government can never lose its source of income. Thus treasuries are a safer investment than buying stock.
By the way, never say never, or someone will point out that there are countries that are considered riskier than Microsoft or Intel.
Nonetheless, the US is not one of them.
strictly speaking, the economy doesn’t even have to grow for the government investment to pay off.
we borrowed a lot of money to fight world war two, investing the money in defense. while paying that money back was made easy by the growth in the economy following the war, it coul have been paid back, and would have been one way or another, even without the growth.
don levit and the people he cites start with an assumption they never state, or even make clear to themselves.. their assumption is that taxes are illegitimate and only the private sector creates wealth. those assumptions are both wrong. in fact ridiculous. but they are not merely an article of religious faith with those people, they are a matter of hard wiring in their brains. they can’t even imagine thinking without them. this someone limits their chances of ever understanding how the real world works.
Private pirates voluntarily paid booty to the King because they needed a friendly port to dock in and also a way to re-stock supplies and repair the canonball holes in the ship and sails.
This injected money into the economy and was a fine showcase for how trickle down economics can really work for dockworkers, shipbuilders, and even farmers!
Coberly wrote: Social Security is a legally separable entity from the U.S. government. It is not a case of Uncle Sam borrowing from himself.
Can you back that up with a reputable citation?
Pension funds are invested 60% or more in Treasuries.
Can you back that up with a reutable third party citation?
it would be hard to find a “reputable” citation. both observatioins are so obvious they have never been questioned.
you’d have to wonder why they went to all the trouble to create social security and the payroll tax, and issue all those treasury bonds if there was no legal distinctioin between Social Security and ‘the government.”
and here is a hint for you. there is no such person as “Uncle Sam.” The United States consists of about 300 million people with complex legal relationships to each other. One of which includes the relationship between payers of the income tax and payers of the payroll tax. Legally distinguishable entities.
When you are a grown up, you will learn to think for yourself… however inadequately… instead of calling for “third party citations,” which is essentially a sophomore trick. It’s what happens when you send people with no talent for scholarship to college and teach them the forms without the substance.
There is no legal distinction between Social Security and the government.
The government is composed of many internal entities, of which Social Security is only one.
All the tax dollars go to the Treasury Department, to be divvied up for the general welfare.
Trust funds are accounting mechanisms to gauge how much each fund can draw down from the Treasury.
As I explained before, there are two perspectives, the Trust Fund Perspective and the Budget Perspective.
The trust fund perspective supports your idea of a separate entity for Social Security, as for other trust funds.
‘However, the BUdget perspective is considered more meaningful, because financial decisions are considered from a more broad perspective.
Social Security is merely one piece of the broader perspective.
I have provided citations.
If you don’t provide them, I can only assume you don’t have them.
Well, coberly. There you have it. I for one am content to turn it over to the Supreme Court and let them sort it all out.
Don can write the dissenting opinion.
The government invests in infrastructure, and as long as the economy grows, the investment pays off.
I am not doubting that statement.
Let’s assume the investment did pay off, years ago.
What does that have to do with redeeming Treasury securities today?
Unless you can liquidate thseinvestnents to help pay Social Security benefits, then the trust fund is, indeed, only in a bookeeping sense, for, in and of itself, it does not help tp pay future benefits.
I have provided citations fro several government agencies attesting to that opionion.
Now, am I supposed to believe you and your cronies, or the government agencies?