Rationing Retirement

[Khufu]

Quote:

Originally Posted by Independent I can see that we differ on the "trust fund". Those extra taxes that would be collected this year, that are supposed to pay benefits 20 years from now, aren't going to be used to buy private stocks and bonds. They will simply disappear somewhere in federal spending. 20 years from now we'll be back to arguing about whether to cut benefits or raise taxes again. I think SS is only "self funding" when annual taxes = annual benefits.

That's an unrealistic standard. A perfect balance between revenue and payout can't work where one cohort, e.g. the Baby Boomers, is larger than the cohort that follows it. That is why the Greenspan Commission created the Trust Fund in 1983 to build up reserves to pay the increased claims that were certain to occur when the Boomers retired.

The idea that the Trust Fund has disappeared somehow is another bit of naivete. If the Trust Fund were not invested in US Treasuries (which are regarded by the global bond market as the safest securities in the world), the Treasury would simply have sold more bonds on the open market. The Treasury is paying interest on the entire $2.7 trillion to the Trust Fund now and will continue to do so. When Trust Fund bonds mature they will be rolled over into new bonds just like all the other Treasury bonds.

It is not even certain that the Trust Fund will ever be depleted as was intended from its creation. If the US GDP manages to grow in the future at the average post-war rate, payroll tax increases will be sufficient that the Trust Fund will not be depleted in the 75 year look-ahead window that is common used.

[scrabbler1]

Whenever I hear about an idea to "save" SS by raising the income cap of wages subject to the SS tax, my reply is that the cap also applies to benefits. So when someone complains about a lower percentage of wages being subject to the SS tax, I say, "Big deal!" That means a lower percentage of wages will be subject to the benefit formula, too. It does not matter if that percentage is 80% or 85% or 90%, the cap applies to both wages and benefits. There is nothing magic about any specific percent.

If the wage cap is raised but the benefit cap is not raised along with it, then all you are doing is turning SS into another welfare program, severing the tenuous link between wages subject to the SS tax and wages subject to income replacement in the SS benefit formula.

And increasing SS revenues today will only result in those excess revenues being spent today so the cashless SS trust fund will be just as cashless in 25 or 30 years as it would be without the increase.

More about the SS cap:

Social Security Series-Raising the Social Security Taxable Earnings Cap: Real Reform or Another Placebo? | The Concord Coalition


The Social Security Trust Fund is a nothing more than an accounting gimmick which indicates what one part of the government owes another.

Social Security Series-Social Security's Trust Funds Mask the Problem | The Concord Coalition

From the above link:

No nest egg in the trust funds

The argument that Social Security is on sound footing for decades to come rests on the proposition that its trust funds constitute a nest egg of savings from which future benefits can be paid. They don't. They are simply a matter of intergovernmental bookkeeping. As explained by the Congressional Budget Office (CBO):

Trust funds have no particular economic significance. They do not hold separate cash balances; instead they function primarily as accounting mechanisms to track receipts and spending for programs that have specific taxes or other revenues earmarked for their use.

[Independent]

Quote:

Originally Posted by Khufu That's an unrealistic standard. A perfect balance between revenue and payout can't work where one cohort, e.g. the Baby Boomers, is larger than the cohort that follows it. That is why the Greenspan Commission created the Trust Fund in 1983 to build up reserves to pay the increased claims that were certain to occur when the Boomers retired. The idea that the Trust Fund has disappeared somehow is another bit of naivete. If the Trust Fund were not invested in US Treasuries (which are regarded by the global bond market as the safest securities in the world), the Treasury would simply have sold more bonds on the open market. The Treasury is paying interest on the entire $2.7 trillion to the Trust Fund now and will continue to do so. When Trust Fund bonds mature they will be rolled over into new bonds just like all the other Treasury bonds. It is not even certain that the Trust Fund will ever be depleted as was intended from its creation. If the US GDP manages to grow in the future at the average post-war rate, payroll tax increases will be sufficient that the Trust Fund will not be depleted in the 75 year look-ahead window that is common used.

Sure it can work - we just adjust the benefits or taxes to make it work.

The WWII generation had 3 children per couple. Their children, the Boomers, had 2. The Boomers' kids will have more trouble paying for the Boomers retirement than the Boomers had paying for the WWII generation's retirement. Something needs to give.

What can't work is the idea that an entire economy the size of the US can "save" for retirement spending. Goods and services consumed by retirees are mostly produced in the year they are consumed. That was one of the good comments in the OP article. One individual can save more than another, and end up with a relatively better retirement. But, the entire economy can't save (at least if retirement income is indexed). The retirement puzzle is how to allocate economic goods between active workers who produce them and former workers who are no longer productive.

Re the trust fund "disappearing", I'd say that since the federal gov't reports on a "unified" budget, the past surpluses of SS taxes over SS benefits gave politicians and voters the sense that they could have lower Federal Income Taxes and/or higher general fund spending. In practice, the SS surpluses didn't reduce borrowing, they reduced general fund taxes and/or increased general fund spending.