The only way Social Security stays solvent between 2017-2042 is by cashing in the treasury bonds it's been piling up in the trust fund since 1983.Excellent. There are three reasons to want to contemplate private retirement accounts, transition costs notwithstanding. First, pensioners realize a lower return from Social Security than they would realize from putting their taxes -- and the misnamed employer "matching contributions" -- into a portfolio of assets of varying risks. To defend the return lower than the return on Treasury bills as a consequence of a stingy insurance program for survivors and disabled people is simply to avoid the question. Second, to the extent that Social Security taxes reduce economic growth, the government is collecting taxes to redeem bonds from a smaller base than it otherwise could. The assumptions people make about future economic growth, and expansion of the U.S. work force, affect the projections they will make about future liabilities of the so-called trust fund. Viking Pundit has been thinking about this second point.
The problem, of course, is that these bonds are redeemed by the U.S. treasury, which means they're basically an IOU from one branch of the government to another. What kind of a shell game is this?
Not a very good one, I agree. The trust fund was Alan Greenspan's idea in 1983, and it's a bit of sleight of hand that allows payroll taxes to stay low after 2017, but only at the cost of raising incomes taxes. Basically, the Social Security trustees redeem bonds every year after 2017, the feds cover the redemptions by increasing the income tax rate, and the additional income tax revenue is handed over to the Social Security trustees for disbursement to retirees. All we're doing is trading one tax for another.
But here's the thing: it doesn't matter. Maybe the trust fund was a good idea, maybe it wasn't. The fact is that it exists, and the federal government is not going to default on treasury bonds. Those bonds are going to be redeemed, they are going to be used to fund Social Security payments, and the money to redeem these bonds is going to come from the general fund — i.e., income taxes. That decision was made two decades ago and there's no way to undo it now.
So that's why Fierst is correct to use the 2042 date. She's assuming that the treasury won't default on the trust fund bonds, and in that she's quite correct.
But Andrew is also quite correct to say that we're going to have to increase income taxes (or run a bigger deficit) in order to redeem those bonds. There's no way around that.
Really, though, there's no way around any of this. Over the long term the only way to keep Social Security solvent is to (modestly) raise taxes or (modestly) reduce benefits. All the fancy arithmetic and doubletalk in the world can't change that, no matter how desperately people want to believe it. We could make progress on this issue an awful lot faster if there weren't so many ideologues in Washington pretending otherwise.
Let’s get a couple things straight: reducing benefits for seniors would be unpopular and political suicide for anybody in Washington. But increasing taxes on younger workers (again) is grossly unfair and threatens the prospects for the next generation. Finally, shifting a portion of the Social Security system to private accounts would be wildly expensive, although it would expand the “ownership” society and (maybe) ultimately reduce the overall burden on the SS system. All the other proposals are just nibbling at the edges. No matter what, there are no “easy fixes.”Third, the national government holds the nuclear option, which is to refinance the trust fund bonds with the Federal Reserve. Borrowing from the Fed is a subtle method for printing money. To the extent that that temptation isn't present let us all be grateful.
Alex at Marginal Revolution suggests that private retirement accounts provide investors with more accurate incentives.
If a worker works an additional hour, earns $10 and puts $1 into the IRA he knows the $1 will produce a benefit 30 years down the line when he retires. The $1 contribution to the IRA is not a tax, it's consumption, a benefit of working extra hours. On the other hand if a worker earns $10 and $1 is taken and paid into social security there is no clear connection to retirement benefits. Social security payments, therefore, are taxes - and like other taxes they deter work effort and create a dead weight loss.He's also been thinking about the lack of horizontal equity in promises not to cut current benefits, when future recipients' benefits are at risk.
Privatizing social security, or in some other way creating personal accounts, would reestablish a link between marginal payments and marginal benefits and thus would be equivalent to a cut in tax rates.