Re: U.S. Heading For Financial Trouble?

Alan Lichtenstein wrote:

Islander wrote:

Alan Lichtenstein wrote:

El Castor wrote:

"Rubaiyat of Omar Bradley" <cowartmisc1@xxxxxxxxx> wrote:


On Mar 6, 1:38 pm, El Castor <NotAny...@xxxxxxxxxxxx> wrote:

If you think a spendthrift congress is
going to cut spending in order to pay off a two trillion dollar pile
of IOUs, I have a bridge I'd like to sell you.




Can you cite some historical examples of incidents where the US
government has declined to pay off on it's major debts/bonds? I can't
think of any. (but I don't want to buy that bridge, either).

John Cowart





Let me explain -- and I hope Islander is listening.

In just ten years, somewhere around 2017, Social Security
contributions will be insufficient to fund 100% of payments to
retirees. The time will have come to start cashing in the
non-negotiable bonds that are the IOUs of the Social Security Trust
Fund (actually two funds). It will be a few billion at first, but in a
very few years it will be in the hundreds of billions, per year.
The US Treasury has never defaulted on an obligation, and would only
do so under the most dire of circumstances .... BUT, congress has two
powerful incentives not to allow the trust fund to be tapped in any
significant way, and by that I don't mean default -- I mean, avoid the
necessity.

1. The money to redeem the bonds will have to come from somewhere, and
that's the problem. It will come out of the budget, either in the form
of tax revenues that will be diverted from other pet spending
programs, and Medicare (which is in worse shape than SS), or through
large annual increases in the deficit, or by a very large tax
increase.
2. So, suppose we cripple the economy. About 2040 the trust funds will
be exhausted and payments to retirees will have to be cut about 30%.
We will have screwed the economy to buy 23 years of relief. To keep
retirees whole, the drain will get even worse.

So, is congress going to sit by and watch this disaster befall the
economy, eventually screw retirees anyway, and eat up their pet
spending programs? No way. Congress will sooner, rather than later,
tweak social security in ways I described in a previous post (and
probably other ways I'm not smart enough to figure out), and voila --
social security inflow is bank in balance, and there is no need to tap
the trust fund! There never will be a need to tap the trust fund. It
will just sit there in perpetuity, gathering dust.

I'm sure you don't believe me, but wait and see, and my guess is you
won't have long to wait. It should have happened in the Clinton
administration, and if George Bush didn't have his head up his ass he
would have come up with a palatable solution already -- but he didn't.
The longer we wait, the worse it gets.




Jeff makes some cogent points regarding the obvious scenarios surrounding the deficit and Social Security. However, while most of what he says is correct, two things which he says bear refutation.

First, he fails to indicate other sources of money in item #1 above. Another source of income, which he ignores, is to raise taxes. doing so, will neither raise the deficit( in fact, if pay-as-you-go becomes the norm, there will be no deficit ), nor will money need be diverted from Medicare and other programs. Of course, the impending crisis in Medicare is, in and of itself, perhaps even more severe than that facing Social Security. However, that is another matter.

An additional source of money he fails to indicate in #1 above is money growth at market rates. Tapping the market, a circumstance not considered, and even under consideration by Congress, could serve to reduce the projected shortfall by as much as 10%/year. The American Association of Actuaries predicted three years ago, that if such a step were taken then, the projected shortfall would be reduced by a MINIMUM of 50%.

The second item he errs in is stating that whatever process he envisions should have happened, but didn't under Clinton. Jeff must remember that in the last few years of the Clinton Administration, we ran budget surpluses, which were used to offset the potential shortfall in Social Security. These surpluses allowed Democrats to say that they had 'saved' Social Security, and well they might had Gore been elected, for it was likely that such surpluses would have continued, or at least would not have been turned into deficits which George W. Bush achieved in one fell swoop.

So, Islander, DO take note. Especially of the things Jeff left out.



I'm glad that you are both so concerned about my education on this topic.


Islander, my last comment was made tongue in cheek, of course.

As was mine.

Even so, I have not heard an argument against simply eliminating the cap (except for Jeff's pitiful argument that the money would just be spent on other things). The cap has already been removed for Medicare and while it will not solve *that* problem, it appears that it would bring solvency to Social Security and change a regressive tax into a flat tax. I thought that conservatives were in favor of a flat tax!


If you eliminate the cap, you then need to eliminate the cap on benefits, since Social security functions like a quasi-annuity, and is claimed to be an insurance plan, NOT a welfare plan. Removing the cap and not permitting benefits to rise accordingly, turns Social Security from a retirement plan into a welfare plan. Not what Roosevelt intended, and not what the law establishing it intended. Even if you take Social Security's claim that it is an insurance plan, eliminating the cap effectively causes some people to pay higher premiums without receiving higher benefits, as they would with an insurance policy. Which is unfair.

Regardless of Roosevelt's intents, it is what it is. However, there may be legal reasons that it needs to continue to be an insurance plan and there may be legal arguments that support your point. I honestly don't know. In this sense, how does it differ from Medicare for which the cap was removed in 1994?

And conservatives are in favor of a flat tax only since it benefits business and the wealthy. This 'flat tax' would benefit working people and have no effect on business,for the most part, except that they would now have to match the higher taxes paid by their high priced employees.

The American Association of Actuaries does not project that this action, in and of itself will have any significant effect on the proposed shortfall, unlike the conversion of the fund into a money growth fund at market rates.

I think that you meant to say "American Academy of Actuaries" and there appears to be some disagreement on this point within the Academy. This may be a product of the change in the economy over the past 6 years, reflecting the difficulty in making long range projections. Eliminating the cap was one of the options offered by Gebhardtsbauer, senior pension fellow of the Academy in 1999. He has evidently changed his position on this recently and is now recommending that it be coupled with an increase in qualification retirement age.

It is interesting to note that this is motivated by the desire to put Social Security on a permanently solvent footing rather than to extend the solvency to 75 years which removing the cap would accomplish.

There is an interesting article on this at:

http://money.cnn.com/2005/02/24/retirement/wagecap_elimination/index.htm

The article also addresses the trust fund issues that Jeff raised.

I've read your posts and those of Josh on this topic and would have no problem with the change that you propose as long as safeguards could be put in place to prevent market manipulation by the government (or whatever agency would be responsible for managing what would be a very large fund -- estimated at 5% of the market). It is very unlikely that the public will go along with this however due to distrust of the market.
.

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  • Re: U.S. Heading For Financial Trouble?
    ... In just ten years, somewhere around 2017, Social Security ... Fund. ... Tapping the market, a circumstance not considered, and even under consideration by Congress, could serve to reduce the projected shortfall by as much as 10%/year. ... The cap has already been removed for Medicare and while it will not solve *that* problem, it appears that it would bring solvency to Social Security and change a regressive tax into a flat tax. ...
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  • Re: U.S. Heading For Financial Trouble?
    ... In just ten years, somewhere around 2017, Social Security ... Fund. ... he fails to indicate other sources of money in item #1 above. ... The cap has already been removed for Medicare and while it will not solve *that* problem, it appears that it would bring solvency to Social Security and change a regressive tax into a flat tax. ...
    (soc.retirement)
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