The millionaire retiree next door.

[Independent]

Suppose that payments into the system were not spent immediately but used to buy government issued securities that do pay interest, and payments out of the system were made by redeeming those securities. To account for the fact that more will be paid out in the future than is being paid in now, the interest rate would have to assumed greater than zero. This system would work just as our SS system does now, so far as amounts paid in and out go, but it would be slightly less efficient, because of the accounting work in buying and selling, possibly even printing, the securities. Since the effect is the same, if it's pleasing to think of the SS being funded through interest bearing securities, why not think of it that way? Thus, SS does, in effect, benefit from compound interest.

To me, the "Suppose that payments ...." scenario is not the same as " just as our SS system does now".

From it's inception, most of the taxes collected by SS were paid as benefits very soon after they were collected. The small difference was kind of like the balance in my checking account - just enough so my checks don't bounce, but not enough to provide any meaningful long term interest.

I guess I don't know how to figure out the dollar amount on those government issued securities in the "Suppose that the payments ..." scenario. Maybe you could clarify that.

The reasons we get interest on corporate bonds is that we're willing to consume less than we earn. The consumer goods we don't buy are instead being consumed by people who produce capital goods for the corporation that borrows my money. The return of my principal plus interest comes from the productivity created by those capital goods. I see that as a fundamentally different economic process than the IRR in a paygo pension system, so I look for different words to describe them.

 

[Danmar]

@Independent. Thanks for the link interesting read. Yes I think the term "fully funded" is open to interpretation and I stand somewhat corrected. The study says the current steady state funding methodology will result in an optimal funding plan and will ensure assets are in place to fund expected future payouts. I think it is fair to say it is " actuarially sound". It is not a pay as you go system as SS is.
OAS(Old Age Security)is a supplementary additional payment that pays additional funds to people earning less than about $65k/ annum & max payout is around $6k/ annum. This is a pay as you go scheme like SS. This is paid from general revenues not participant contributions.

 

[mickeyd]

I recall watching The Millionaire as a kid and the larceny in that TV-watching-kid always wondered why Michael Anthony didn't just keep one of those $1,000,000 cashiers checks for himself and vanish, after all that was when a million bucks was worth a million.

I think that I later theorized that Mike probably was paid a million bucks by Mr. Tipton so that kept him home and employed. Your theory?

 

[Danmar]

I recall watching The Millionaire as a kid and the larceny in that TV-watching-kid always wondered why Michael Anthony didn't just keep one of those $1,000,000 cashiers checks for himself and vanish, after all that was when a million bucks was worth a million.

I think that I later theorized that Mike probably was paid a million bucks by Mr. Tipton so that kept him home and employed. Your theory?

This was one of my favourite shows as a kid. I always assumed Anthony was a lawyer whose firm was hired by Tipton. Obviously Tipton being the smart guy that he was would design control systems to prevent your senario.

 

[mickeyd]

This was one of my favourite shows as a kid. I always assumed Anthony was a lawyer whose firm was hired by Tipton. Obviously Tipton being the smart guy that he was would design control systems to prevent your senario.

You really had a much more sophisticated insight into their business relationship that did I. I was thinking that all the Mike did was deliver the checks on a weekly basis and waited around until the next check was typed up and ready for the next delivery.

 

[GregLee]

The return of my principal plus interest comes from the productivity created by those capital goods.

So if as an investor you were offered a bond backed by the US government which offered a high rate of interest, you would refuse it if the principal and interest could not be associated with any capital goods. Right? You're not looking just for a return on your money and safety of the principal, but something else -- returns must come from productivity.

 

[Nords]

@Independent. Thanks for the link interesting read. Yes I think the term "fully funded" is open to interpretation and I stand somewhat corrected. The study says the current steady state funding methodology will result in an optimal funding plan and will ensure assets are in place to fund expected future payouts. I think it is fair to say it is " actuarially sound". It is not a pay as you go system as SS is.

Is Canada's population rising from birthrate and immigration, slowing, or declining?

I think the U.S. concern is that the population is aging from longevity while no longer rapidly growing from birthrate or (legal) immigration.

 

[Independent]

So if as an investor you were offered a bond backed by the US government which offered a high rate of interest, you would refuse it if the principal and interest could not be associated with any capital goods. Right? You're not looking just for a return on your money and safety of the principal, but something else -- returns must come from productivity.

As an individual investor, the first step is that I have to have some savings. I need to consume less than I earn in order to buy the gov't bond. In your example, I didn't see how that was happening, but I figured that could easily mean I didn't understand the example. I'm still stuck on this question "I guess I don't know how to figure out the dollar amount on those government issued securities ...". Clarifying that could help.

As you're pointing out, sometimes private lending isn't tied to real capital accumulation. I could lend my neighbor money for a new car, and he could repay me later with some interest so I can buy a slightly nicer car than he bought. I earned interest, but he paid an equal amount. That nets to zero in the entire economy.

So, when the gov't borrows from its citizens, where is the interest coming from? and are we better off as a country?

Maybe the borrowing goes to pay for roads or basic research or education that will make us more productive in the future. There really is a productivity gain that funds that interest.

OTOH, it may be simply this generation of taxpayers wanting get more gov't services than they are willing to pay taxes for, and promising some other citizens that if they are willing to forgo some private goods, future taxpayers will repay them with interest. That looks a lot like private consumer-to-consumer lending to me. It may make sense for me as an individual saver to lend my money to the gov't on that basis, but any interest I earn is a loss to somebody else. I see a zero net, but that may be okay if I understood your idea better.

 

[Danmar]

Is Canada's population rising from birthrate and immigration, slowing, or declining?

I think the U.S. concern is that the population is aging from longevity while no longer rapidly growing from birthrate or (legal) immigration.

I believe Canada's population is growing-mostly via immigration. Bottom line is the amounts collected are fairly high in relation to the payouts. Max payout is only about $11k /year. I think the amounts collected are about $3-4 k per year including employer portion.

 

[GregLee]

I'm still stuck on this question "I guess I don't know how to figure out the dollar amount on those government issued securities ...". Clarifying that could help.

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.

 

[Tadpole]

Independent: I guess I don't know how to figure out the dollar amount on those government issued securities in the "Suppose that the payments ..." scenario. Maybe you could clarify that.

I'm not sure what you are looking for since this discussion has supposes and the Canadian system but there is almost nothing you can't find about the finances of the SS system in the yearly report. For example the bonds issued to the trust fund can be found at:
2011 Trustees Report: Appendix A

Other tables are listed at:
2011 OASDI Trustees Report: X1_trLOT.html

 

[Nords]

I believe Canada's population is growing-mostly via immigration. Bottom line is the amounts collected are fairly high in relation to the payouts. Max payout is only about $11k /year. I think the amounts collected are about $3-4 k per year including employer portion.

OK, thanks. I'm always befuddled by the relative population ratios & demographics between our two countries.

 

[chinaco]

Political editorial!

Funny how the author couched the burdened.... "on the poor deprive Chilllllllllllllllllllldrrrrreeeeeeeeeeeeeeeeennnnnnnnnnnn!

Hey we were children too. And we paid into the system.

The sooner our leaders begin to move toward the middle, the sooner an acceptable plan can be crafted.

The fix will involve some adjustments to the program and an increase in taxes.... probably higher FICA and High Estate Taxes to pay back those SS BONDS!

 

[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.

 

[Danmar]

OK, thanks. I'm always befuddled by the relative population ratios & demographics between our two countries.

Canada's population is 34 million yours is 308million. I was under the impression that the US is growing faster than Canada but I could be wrong on that. Actually I just looked it up and the US is growing slightly faster (.97% vs .9%) period 2005-2009.

 

[Danmar]

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]

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]

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]

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.

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

Are Treasury bonds "real" assets?

 

[Gone4Good]

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]

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]

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]

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]

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]

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........