RE: Is this a dumb Idea..... ???
I find it interesting that the author of the article that Fit linked has a biography that describes him as a PhD in Economics. I think he is using a variation of the Paul Krugman argument, "I'm a PhD in Economics, so take everything I say at face value instead of looking up the numbers." I prefer to look up the numbers, and when I do so I find some interesting contradictions.
Let's look at a few points. For one thing, he says that at the time Reagan said SS was teetering on the edge of bankruptcy, it was actually in good shape for two decades. If you understand how defined benefits plans (which is what SS really is) work, you know that "good shape for two decades" is actually the same as "teetering on the edge of bankruptcy." If you're not in sound shape for about 50 years, you're in deep doo doo. That's basically where SS is today, it can probably survive two decades or so, but after that it's pretty much kaput. And the way funding works, if you wait two decades until the problem manifests itself full bore, you are pretty much SOL. Ask General Motors, that's basically what bankrupted them. And yes, GM did go bankrupt. Remember all the stories about how if GM went bankrupt, it would be the end of the American car industry? Well, they did, and it wasn't. Nor was it ever going to be. But they had Uncle Sugar to bail them out. Who is SS's Uncle Sugar?
He also says, "Supply-side economics was not working like Reagan had promised. Instead of the lower tax rates generating more revenues as the supply-siders claimed would happen, there was a dramatic drop in revenue." Really? When? Let's look at the numbers. From 1980 to 1989, encompassing the Reagan years, on-budget federal revenues increased from $517 billion to $991 billion, and off-budget federal revenues increased from $403 billion to $727 billion. Both nearly doubled. Where is the dramatic drop in revenues there? The only year in which there was any drop at all ($617 billion to $600 billion on-budget, and $474 billion to $453 billion off-budget) was 1983, which is the year in which the tax INCREASES passed in 1982 took effect.
Then he makes the argument that the money from SS was supposed to be invested in Treasury bills, but instead went to fund the deficits. Several points here. One, this was Tip O'Neill's doing every bit as much as Reagan's. Reagan wanted to grow the military. The spending in that area ultimately paid off quite handsomely, as we basically spent Russia out of the Cold War, reducing the worldwide danger level and enabling the "peace dividend" that allowed us to reduce the deficit and generate a small surplus in the 1990s. In order to get his military spending, Reagan compromised with democrats and allowed them to ratchet up social welfare spending dramatically. Defense spending went up $170 billion, from $133 billion to $303 billion. At the same time social spending went up $255 billion, from $313 billion to $568 billion. So both parties punched big holes in the budget. Two, Smith tries to make some big deal out of the difference between "investing in Treasury bills" and funding the deficit. Umm, investing in Treasury bills IS funding the deficit. That's why the government issues Treasury bills. There may be some differences between T-bills and IOUs, for one thing T-bills are as he states marketable securities, but in reality neither is any better than the faith and credit of the federal government. If the government defaults on IOU's, T-bills would drop like a rock. This is way more a semantic difference than a substantive one. I guess one can be a PhD in economics without really understanding finance. He seems to think that buying T-bills is some sort of "investment" whereas funding the deficit with IOUs is just throwing the money away. Where does he think the money "invested" in T-bills goes? If you borrow money from a bank, you owe it back; if you borrow money from a friend, you owe it back. The bank may be more formal, like the T-bill, but it's the same person owing the money in either event, and if you don't have the funds to pay one, you don't have the funds to pay the other.
OK, having said that, let me make a couple of things clear about our current situation. I don't like having SS invested heavily in either T-bills or IOUs. Both have exactly the same problem. I find it very interesting that a number of people, primarily on the left, like to argue on the one hand that the accumulated federal debt is no big deal because "much of it is money that we owe ourselves" while arguing on the other hand that "SS is not in trouble because it's backed by the full faith and credit of the US." It's two sides of the same coin. For SS to come good, we have to repay that "money we owe ourselves." If we don't, then SS is not sound. You can argue one or the other, but you can't argue both. And for this purpose, it matters not one whit whether the money owed to SS is in the form of T-bills or IOUs.
We are in a bind on SS now, not necessarily to pay benefits for the next 20 years or so (although that time frame could change a bit based on the economy) but as I said above, if a defined benefit plan is not sound for 50 years, then it is in trouble NOW. So here's what I would do. And this is a compromise, because it includes some things the left wants to do, some things the right wants to do, and some things that "socialist" Sweden does. One, pass a law that recognizes that SS really does consist of accounts that belong to individual citizens. In conjunction with this make SS payments non-taxable again, since you are basically just getting your money back. One thing this should do is buy some goodwill with retirees and others approaching retirement, in order to keep them onboard with some of the other changes. Two, eliminate the cap on taxable SS earnings. This is a relic from the past and makes the SS tax one of the most regressive in our entire tax system. This idea from the left would generate substantially more in SS revenues. Three, ratchet down the growth of benefits. The way I would do it is to keep the low side of benefits growing at the current higher rate (because those are the people who made less money during their lifetimes and therefore really need it), while slowing the rate of growth on the high end (because those are the people who made more money during their working lifetimes and therefore should have more salted away and should need less from SS). Eventually, the two would merge, and from that point forward, move everybody at the higher rate. This has been proposed by both sides in various forms, and would reduce the cost of future benefits. Four, ratchet back the age of eligibility for benefits, one month per year until you hit 70 (so it would phase in over roughly 50 years). Still allow people to elect out at 62, with benefits reduced actuarially, just like now (the reduction would be slightly more severe each year as the standard age ratchets upward). This basically conservative idea would reduce the cost of paying benefits. Five, pay off the IOUs from the general fund by transferring operating assets to SS, which they would then run at a profit--the interstate highway system (which would become a national toll road network, like Europe), the postal service (like New Zealand), TVA and the western water and power authorities (like much of Europe, and not that these would then become vehicles to invest and develop green energy), air traffic control and airports (like Canada and much of Europe). Set them up to earn a 5% annual ROI. I have seen one calculation that the interstate highway system should be able to produce about $50 billion a year in net profits, which would justify a $1 trillion reduction in IOUs by transferring it. The others should also generate significant net income and therefore transferring them should reduce the IOUs to zero. Six, like Sweden, add a privatized portion of SS. I'd say let the rate be 7.5% employer/7.5% employee for basic SS, and add 2.5% each (total 5%) to fund what would basically be a super 401k for every citizen. The left likes to talk about wealth inequality. This would be a way to address it in a huge way. It could invest in those newly privatized activities listed above (which I would see ultimately capitalized something like 1/3 owned by the conventional SS fund, 1/3 owned by the privatized accounts, and 1/3 offered to the general public), in very safe index/mutual funds, and over a certain amount in individual accounts, it could be self-directed investments. Obviously, investment and growth in these accounts would offset to some extent the tapering off of growth in the basic SS benefits, as mentioned in point three above.
Anyway, that's how I would do it. Comments welcome.
(This post was last modified: 07-29-2016 12:14 PM by Owl 69/70/75.)
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