The millionaire retiree next door.

[Danmar]

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Originally Posted by Cato My understanding of the Canadian system is that it is a hybrid system - 75% of SS (If I may call it that - actually called CPP) is intended to be eventually funded as a PAYGO system - at present inflows are sufficient to fund outflows and there is no need to tap into investment income and reserves. Eventually due to demographics, inflows will no longer cover outflows and the projection is that inflows will cover about 75% of outflows and the rest will be covered by accumulated reserves and investment income. They have completely moved away from using inflows to provide cheap financing to the state and provinces. GIS and OAS (means tested) and to prevent retirees living in penury is covered by revenues.

Yes I think that is exaclty right. The key is that that projected receipts plus the accumulated fund are forecasted to cover projected payouts for the foreseeable future. The current CPP fund has something like $150billion in it and can only be used to pay CPP. Current collections must have been quite a bit higher than payouts to build up the fund?

[Independent]

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Originally Posted by GregLee I don't think I understand your question. The amount issued in any year would equal the SS tax collected in that year, and the amount redeemed at maturity with have to equal the SS pay outs to beneficiaries, whenever maturity is and however much those payouts are. I haven't worked out dollar amounts, and I don't see the point of doing that. It's a thought experiment, meant only to show that the claim that SS monies are not invested and so do not earn interest is not really meaningful. One can consider that they are invested in phantom bonds and do earn phantom interest.

The confusion started in the early decades of SS. I thought you meant something like we add up all the taxes paid by people born in 1900, assume they were invested in treasury bonds at the common interest rates in those days, then we redeemed those bonds to pay benefits to this group. It turns out that the bonds would have run out long before the 1900 cohort was done collecting benefits. We paid for benefits for that group by not investing the taxes paid by younger people in bonds, but by using those taxes to pay benefits.

Some people say "The government should have invested my taxes in bonds, and if it had there would be enough money to pay my benefits". But we know that didn't happen, the money we paid in taxes was used to pay benefits to our parents and grandparents. Our only claim on SS is the hope that our children and grandchildren will do the same for us.

I guess "meaningful" is the key word. We could have set up a SS system that bought real assets, but we didn't because that wouldn't have provided much income to the earlier generations of SS participants. That seems important to me.

[Gone4Good]

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Originally Posted by DoraM Also the article says the government has already spent the money, which is not true. The money is tied up mostly in IOU bonds. What happens in the private sector when an entity cannot pay their bonds? Their assets are liquidated. So if you can't pay me my due, then I will take a good chunk of ANWAR as payment and sell it to China, thanks!

Another way to say this is . . .

"I voted for higher federal spending in the past. I voted for lower federal taxes in the past. I voted for higher benefits in the future. I don't care if the country goes bankrupt and has to be sold off in pieces as a result. Give me what I voted for."

The sense of entitlement is breathtaking.

[GregLee]

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Originally Posted by Independent I thought you meant something like we add up all the taxes paid by people born in 1900, assume they were invested in treasury bonds at the common interest rates in those days, then we redeemed those bonds to pay benefits to this group. It turns out that the bonds would have run out long before the 1900 cohort was done collecting benefits.

I did mean something like that, except using some specialized security, not exactly like treasury bonds. In the hypothetical you describe, the obvious problem is that the bond interest was not high enough. So make it higher. It makes my point even more clearly: there is interest.

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We could have set up a SS system that bought real assets, but we didn't ...

Are Treasury bonds "real" assets?

[Gone4Good]

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Originally Posted by GregLee Are Treasury bonds "real" assets?

Not when the borrower and the lender are the same person.

Hey look, I just increased my assets by $1,000,000,000,000.00

I owe Brian Schmidt $1,000,000,000,000.00

Weeeeeeeeeeeeeeeee. I'm rich, I'm RICH!


And from the government's perspective, Treasury Bonds are always liabilities, never assets. What you're alluding to is 'selling' the internally held treasury bonds to third parties. This isn't an asset sale. It is borrowing new money. Doing this creates a new Full-Faith And Credit liability of the government in place of a political promise.

[Texas Proud]

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Originally Posted by Gone4Good Not when the borrower and the lender are the same person. Hey look, I just increased my assets by $1,000,000,000,000.00 I owe Brian Schmidt $1,000,000,000,000.00 Weeeeeeeeeeeeeeeee. I'm rich, I'm RICH! And from the government's perspective, Treasury Bonds are always liabilities, never assets. What you're alluding to is 'selling' the internally held treasury bonds to third parties. This isn't an asset sale. It is borrowing new money. Doing this creates a new Full-Faith And Credit liability of the government in place of a political promise.

Bad example....

The govmt spends more than it takes in... if they had not combined the SS trust fund with the general fund... the general fund would need to borrow money from someone to pay of it all... they can borrow from you and me (and the Chinese) OR the SS trust fund...

The problem is they spent all the money but did not show how bad the general fund was really doing...


Either way, the plan is not fully funded... nor was every close to be fully funded...

[Gone4Good]

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Originally Posted by Texas Proud they can borrow from you and me (and the Chinese) OR the SS trust fund...

You seem to think that the SS trust fund is an independent entity from the Federal Government. It isn't. Me 'borrowing' from my penny jar in return for an IOU isn't a transaction that creates an asset . . . it depletes an asset.

There is also an underlying assumption to this whole line of reasoning that is false: that SS beneficiaries have a legal claim to the 'assets' in the SS trust fund. They do not.

A simple example shows the fallacy of this assumptions.

The government has the legal authority to eliminate all current and future SS benefits. Once done, the Social Security Trust Fund can return all of it's 'Bonds' to the Treasury as the fund no longer has any obligations. The Treasury can then retire those trust-fund bonds and they cease to exist.

The trust fund owns nothing. And you have no claim on that nothingness.

[GregLee]

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Originally Posted by Gone4Good There is also an underlying assumption to this whole line of reasoning that is false: that SS beneficiaries have a legal claim to the 'assets' in the SS trust fund. They do not.

And what if they did have a legal claim? Laws can be changed. It's better to have votes on your side than laws.

[Gone4Good]

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Originally Posted by GregLee And what if they did have a legal claim? Laws can be changed. It's better to have votes on your side than laws.

Agreed. You can vote to force the government to borrow money to pay benefits.

That is a very different thing from claiming 'we've accumulated a bunch of assets to pay future benefits', which has been the argument here.

I'll also point out that it was the same voters who are now putting their muscle behind maintaining SS payouts who voted to 'raid the SS trust fund' in the first place. Basically we have folks who are trying to spend the same dollar a couple of times while claiming they're somehow owed it. Nice con, if you can get away with it.

[FinanceDude]

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Originally Posted by GregLee Are Treasury bonds "real" assets?

They used to be, but maybe not for much longer........

At least Bill Gross appears to have little faith in them as assets........

[Texas Proud]

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Originally Posted by Gone4Good You seem to think that the SS trust fund is an independent entity from the Federal Government. It isn't. Me 'borrowing' from my penny jar in return for an IOU isn't a transaction that creates an asset . . . it depletes an asset. There is also an underlying assumption to this whole line of reasoning that is false: that SS beneficiaries have a legal claim to the 'assets' in the SS trust fund. They do not. A simple example shows the fallacy of this assumptions. The government has the legal authority to eliminate all current and future SS benefits. Once done, the Social Security Trust Fund can return all of it's 'Bonds' to the Treasury as the fund no longer has any obligations. The Treasury can then retire those trust-fund bonds and they cease to exist. The trust fund owns nothing. And you have no claim on that nothingness.

No, I do not believe that... just to clairify...

I also know that the SS fund has never ever indicated that it was a system that had assets that was there to pay future benefits... pure and simple it is a ponzi scheme...

I was just pointing out that their is accounting rules that they have to follow for fund accounting... you rightly point out that they can change the rules and 'retire' the debt, but until they do they still have the bonds to pay... And who is to say that they do not pass a law stating that they will not pay any savings bonds held by individuals To me it is basically the same.... the gvmt is not going to extinquish the debt by fiat....

I was pointing out that there is a separatly accounted fund that 'lent' its money to another separatly accounted for fund... the second fund now has to pay back the first... the second fund did not have to borrow from the first, but could have borrowed from you... what is the difference? Nothing... it borrowed the money and spent the money.... now the second fund has to get the money to pay back either the first fund or you.... anything you say that can be done to not pay back these bonds can be done not to pay back you... either of these come with big political risks that nobody whats to get into...



If you think about it a bit.... any borrowing from the gvmt is just a way to delay raising taxes...

[Texas Proud]

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Originally Posted by Gone4Good Agreed. You can vote to force the government to borrow money to pay benefits. That is a very different thing from claiming 'we've accumulated a bunch of assets to pay future benefits', which has been the argument here. I'll also point out that it was the same voters who are now putting their muscle behind maintaining SS payouts who voted to 'raid the SS trust fund' in the first place. Basically we have folks who are trying to spend the same dollar a couple of times while claiming they're somehow owed it. Nice con, if you can get away with it.

IMO, what people were saying is that if SS was like a true pension and had assets to cover the future liability then you can not ignore potential income these assets would have earned IF invested...

SS is not a true pension, but all calculations of benefits etc. are like it is one...

All this talk about SS running out of money is just because of the large amount of people retiring right now and for the next 30 or so years... we know there isn't a big stash of funds (yet, I think it is upward of $3 trillion from what I remember... could be wrong)... the last few fixes were to increase taxes and to make the SS payments taxable.... never before has benefits been cut... until now (being proposed)....

[Independent]

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Originally Posted by GregLee I did mean something like that, except using some specialized security, not exactly like treasury bonds. In the hypothetical you describe, the obvious problem is that the bond interest was not high enough. So make it higher. It makes my point even more clearly: there is interest. Are Treasury bonds "real" assets?

We could, but the interest would have had to be quite high. For people born before 1885, the real rate would have been about 30%. That would be one way of saying the early entrants got a really good deal, but most people knew that without calculating an IRR. Real rates were still over 10% for people born in 1900 (hence reaching 65 in 1965).*

A treasury bond is a "real" asset to the owner, and a real liability to the Treasury. So when the gov't issues a bond to the SS system, it creates an asset to the SS system and an equal liability to the general fund.

In my world, the normal way I increase my net worth, that is increase the excess of my assets over my liabilities, is to earn more than I spend so I've got some "savings" left over. As a nation, we didn't do that when we started SS.

* Table 2 here http://www.ssa.gov/policy/docs/workingpapers/wp101.pdf

[Independent]

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Originally Posted by Gone4Good I'll also point out that it was the same voters who are now putting their muscle behind maintaining SS payouts who voted to 'raid the SS trust fund' in the first place. Basically we have folks who are trying to spend the same dollar a couple of times while claiming they're somehow owed it. Nice con, if you can get away with it.

I think you mean "same" in a generational sense. I agree with that.
But note there are some differences within generations.

I'd guess that the people most concerned about maintaining SS payouts are those who depend most on SS - the working middle. Those who benefited most from "raiding" the trust fund were the people who got the most benefit from the FIT cuts that the SS surplus funded - that would be the upper income people. (I'm assuming an unprovable of course - that if SS taxes had been set at a pure paygo level since the 1980s the political solution would have been higher FIT. I can't prove that.)

[SteveL]

The problem with the WSJ Art. is that it ignores the fact that previous generations, like my parents, who retired in the early 70's collected a lot more than they paid in to SS or Medicare, financed by the Baby Boom generation, whose work and taxes also paid for the Great Society of Mr. Johnson including Medicare. I've see some recent data that suggests that folks working today, won't collect amounts greater than they paid, especially if married with two careers.

Without a lot of population growth either from immigration or increased birth rates, we could end up in the same soup as Japan and Russia which have declining populations and much worse pension and aging demographics than do we.

It was during Mr. Reagan's admin that the Fed chair had the bright idea to "fix" SS with increased taxes and the "fictional lock box". Without this, the Feds would have had to face the deficit problem much sooner. $2.5Trillion was sucked out of SS taxes. No wonder the pikers in the govt. don't want to pay the piper.