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Home Publications Blogs Beat the Press Mark McKinnon Plays "How Many Things Can You Get Wrong About Social Security in One Column"


Tuesday, 29 March 2011 07:07




Next we are told that life expectancy has increased by 15 years since 1935 when the program was established. This is true, but mostly irrelevant. Most of this increase was due to a reduction in infant mortality. That means more retirees, but also more workers. Some of the increase was due to the fact that more people live to the point where they retiree. Only a small portion of the increase has been attributable to people living longer after they retire. And much of this gain has been eaten by the increase in the normal retirement age from 65 to 67 that is already in current law.

It is also important to note that in recent decades that most of the increase in life expectancy has gone to those at the top with the bottom half of wage earners seeing very little improvement in life expectancy. The increase in the normal retirement age to 70 proposed by McKinnon would actually leave lower-income workers who start collecting benefits at this age with fewer years of retirement. It is also important to note that these workers are the ones most likely to be have physically demanding jobs where working later into life may be difficult.

McKinnon then tells us that, "those hard-earned dollars you pay into Social Security today are paid out to somebody else tomorrow." Yeah, this pretty much true, but has nothing to do with the time of day. If you buy a bond from General Electric they are likely to spend the money. I suppose we can expect Mr. McKinnon to express outrage that GE spent the money it borrowed, but that is the way a modern economy works. People pay their taxes to Social Security, some goes to pay current benefits and some goes to buy government bonds, what exactly is the problem?

He then tells us that Social Security is short of cash. I suppose that this can be true in the same way that Bill Gates may occasionally be short of cash if he or his servants have not paid a visit to the ATM machine recently. Social Security holds more than $2.6 trillion of government bonds in its trust fund. McKinnon seems to think that there is some big problem with using this money for paying Social Security benefits. Of course this is why it is there.

McKinnon also envisions that we can fix Social Security for all time and complains that the 1983 fix only kept the program fully funded for 54 years. Actually, as long as we have a democracy we cannot fix Social Security for all time. In 40, 50, or 60 years the people alive at the time will structure Social Security in the way that they think makes the most sense. Odds are that they will not care a great deal about what the Congress thought was a good retirement system in 2011, just as we don't care too much about what people thought Social Security should look like back in 1951.

Finally, it is worth noting that the even the worst horror story highlighted by McKinnon probably wouldn't be too scary to anyone who understands the numbers. Even if we did nothing for the next 26 years and the Social Security spending and cost numbers followed exactly their projected path, the shortfall projected for the late 2030s would be less than 1.3 percent of GDP. By comparison, the increase in annual defense spending from 2000 to 2010 was 1.6 percentage points of GDP. While this sum is far from trivial, it certainly did not wreck the economy. In short, even this disaster story hardly looks like much of a disaster.  

Comments (20)Add Comment
Dean is mostly right here
written by AndrewDover, March 29, 2011 8:05
Yes, Dean's points about the McKinnon article are mostly correct.

But Dean is rather vague about just what he thinks is going to happen around 2040 when the trust fund has been repaid, and current benefits exceed current payroll taxes by 25%.

Does he really think Congress will up and raise taxes by 1.3% of GDP to meet the needs of one program?

See also
Where is Ronald when you need him.
written by Nassim, March 29, 2011 8:19
Yes these Social Security Kings and Queens, they are destroying the republic. You can see them driving their SEL 500 with the top down going to shop for the latest Gucci hats and bags. What a disgrace. No country should have such leaches.
I propose that we switch their high life with that of a WS banker, not even the top ones, any of them, and our congressmen as an experiment. Let these bastards experience the miserable life the bankers and politicians live to keep the nations humming while they live obliviously with that $920 monthly check, they think they worked for.
It takes a real actor like Ronald Reagan to give a perspective on government abuse. He was so effective 35% of his own men were put in jail for different abuses.
Its 2040, do you know in which group your kids are?
written by Virginia Wolf, March 29, 2011 8:51
The demographic change has been quite dramatic, far different than OMB's and demographers' estimates of 30 years ago.

1) Baby boomers are just memories. Including me.

2) There is a shortage of "skilled" workers, so incomes have gone through the roof. The few make a lot more and can support the smaller pool of retirees with the same SS contribution levels as 2011.

3) Half of the nation's population is working as migrant workers in menial jobs in China and Eastern Europe where 30 years of investment in education and infrastructure has tripled their standards of living. These absentee workers don't quality for SS benefits.

So, even if China and Eastern European countries swing to the right and try to get rid of the American wet back illegal migrant workers, we will have a problem. But it will be just a "social" problem, because these returnees will not qualify for SS.

Advances in medical knowledge has reduced the cost of health and sick care to match those in advanced, civilized countries in Europe and Asia. Thus, the wealthy live healthy.

Those without health care will die sooner and unburden society. The PPDP (Peter Peterson Death Panel) gets rid of the inefficient worker in a very humane manner. Their memories are preserved in a holographic microchip (patented by MicroSoft) for their families

At last, we have a country of 1% super wealthy with a huge lower class that due to their absences as migrant worker overseas do not qualify for any benefits and have to literally work to death or appear at a PPDP.

On which side will your children end up?
Baker Faker Continues Pounding McKinnon Minion in Tie - Round 99
written by izzatzo, March 29, 2011 10:26

Baker the Faker understands the difference between fixed and variable cost.

When the fixed cost plus variable cost of fixing SS is less than the current variable cost, then it's worth fixing.

It's like buying a new car that's so much more efficient than the old one, the running cost of the old one is higher than the combined capital and running cost of the new one.

Incapable of grasping such simple economics, McKinnon the Minion dropped his guard and allowed Baker to sucker punch him with the proposition that all costs are variable in the long run anyway, so it's not possible to fix SS for all time.

Upon which McKinnon complained to the referee that Baker was punching below the belt with Keynesian jabs because he - Baker - expected both of them would be dead in the long run anyway.
what a joke
written by dogface, March 29, 2011 11:28
He's right ... BUT THAT'S IRRELVANT.

All we need to to is go the ATM!

SS and Growth
written by Jeff Z, March 29, 2011 12:36
Depending on the growth of the economy, you may not need to raise taxes that much. Presumably, GDP, what ever else it may be, will be larger in real terms than it is today.

You could devote portions of a financial transactions tax to this end. You could reshuffle some current tax streams. But we will have a better idea what 2040 will look like in terms of the demographic trends and the financial flows in 2030 than we do today. Did we not have to revise SS and its sister programs every 10 years or so in the past? Yes, we did.

Why panic now, since panic often leads to poor decisions?
written by dilbert dogbert, March 29, 2011 5:08
My $135 per month has the wife and I dining out on champagne and caviar every night. Woo Hooo!
written by LexingtonGreen, March 29, 2011 5:27
Can you expand on the discussion of the trust fund. Specifically, do you forsee a problem if congress does not increase the debt ceiling.

Secondly, how does it work? If I put a billion dollars into my retirement plan and I fund it with a billion dollars of debt, am I able to retire?

Or another example, if I was to use a cash advance from a credit card to pay my monthly credit card bill would the cash advance debt really be a safe retirment investment that I could retire on?

Lastly, past generations have said, "deficits don't matter because we owe the money to ourselves." If it turns out there is no cash in the SS trust fund and we can't increase the debt ceiling, should current SS recipients be cut off because they did not care to invest past surpluses into real assets but rather spent it on foreign wars, building Mosques around the world, etc.
Dean Baker Gets Everything Wrong, Low-rated comment [Show]
written by Calgacus, March 30, 2011 2:27
Dean: Great post.
AndrewDover:Let the future take care of itself. If the SS Trust Fund needs a trillion in 2040, let Congress put a trillion into it, if we are still keeping up the silly Trust Fund pretense - all it is is a record of overtaxation over the past 30 years.

Mike: You have no idea what you are talking about. Except when you talk about paying IOUs with IOUs. That's what money - bonds or currency - is an IOU. A dollar bill is a financial obligation, just like the bond it pays off - they are both the same thing. The US does not pay off recipients with tax dollars. The problem with SS is that benefits are too low and taxes too high. Deficits are good and normal and necessary for financial stability, in growing economies.
written by AndrewDover, March 30, 2011 7:05
I guess this trillion will affect the deficit in 2040. So you are saying that SS does impact the deficit.

Mike's statement below is total nonsense:
"when a nation's promises of future benefits exceed its likely revenue sources, and further debt issuance is infeasible, those promises have a present value of ZERO"

Try instead: min( PV( rev ), PV(benefits) )

In other words, the value of future benefits cannot exceed the promised benefits, nor can they exceed the ability to pay.

But just because your promises exceed your assets, that does not make the promises worthless.

written by izzatzo, March 30, 2011 8:01
That's not true Calgacus. They know exactly what they're not talking about.
written by Mike, March 30, 2011 9:40
Wrong Andrew. A promise that is not wholly fulfilled is a promise wholly unfulfilled.

At my present rate of taxation, I expect a certain level of benefits promised by this system. If, when it is time for me to retire, my benefits are lower than promised either directly through means testing or benefit reductions or increases to the retirement age or indirectly through inflation, then my planned savings fails to meet my target savings. My target savings amount is designed to see me through to the end of my expected lifespan. The consequences of misplanning on my part are already severe - I must account for volatility in returns and unexpected increases in my retirement expenses and actually living longer than I expect.

But when government adds more risk by trying to save a system which is clearly insolvent, it's more risk and uncertainty than most people can bear.

At my retirement, I can expect to receive about 75% of my promised benefits - making a negative rate or return even more negative.

Any negative rate of return results in a broken promise.
This program was, from its inception, always supposed to be self-sufficient which is why the tax is kept separate from general income taxes.

Why can't people understand that the bonds in the trust fund are promises to pay, say in 2030, revenues toward SS benefits in that year, but that is no different than a promise to pay those same benefits from the same revenues that year? The trust fund is a complete fiction.

How about you lend me $1000. I'll pay you back $1020 in a year. I will repay you from my income. But since you're worried I might not have enough income to pay you back next year, I'll take out a $1020 loan from myself, due in one year, with interest. Then I'll certainly have the money to pay you back because you KNOW I won't default on myself!

And if I can't pay myself back so that I can pay you back, I'll just borrow another $1020 from someone else to pay me back so I can pay you back.

written by Mike, March 30, 2011 9:54
Oh, did I neglect to tell you that I've borrowed $1000 with a promise to repay $1020 next year to 100 people, that I make only $100,000 a year, and will have $110,000 in other expenses next year? Did I forget to tell you that I don't plan to invest that $1 million in anything - I just plan on spending it on myself and my friends?
written by Mike, March 30, 2011 10:04
Oops, I will waste $100,000 partying instead of investing Fat fingers, same correct point.
written by Calgacus, March 31, 2011 4:37

As originally designed, it didn't really, it was pay as you go total taxes=total benefits. For the last 30 years, it has impacted the deficit by making the deficit smaller - which was a BAD thing. The US, and particularly working people would have been better off with bigger deficits and lower taxation. The 1 year tax cut last year was "paid for" by putting bonds in the SS Trust Fund, so it impacted the deficit then. If the system is "short" a trillion in 2040, the time to fix it is 2040 - the government could just do the same thing and put a trillion in bonds in it then.

All this is economically meaningless, but not for the crazy reasons Mike adduces - it is just that a government trust fund is a logical impossibility - the government can't save its own IOUs, which we call "dollar bills". Do you create a "Trust Fund" if you write checks and keep them in your checkbook?

The government "saving" for the future with a Trust Fund of dollars is as crazy as fighting, bombing, shooting on a battlefield - where the enemy won't arrive for years.
written by Calgacus, March 31, 2011 4:41
Izzatso - some do. But if the problem were only lying, it would be lesser. We are up against mighty forces of stupidity - esconced in fortresses of ignorance like Chicago, Harvard, Wall Street & the Beltway.
written by izzatzo, March 31, 2011 8:25
Calgacus, most assertions about one side or the other knowing more about the 'truth' ('facts') than the other side usually comes down to claims that the opposing side is either willfully ignoring 'reality' (lying) or incompetent (too stupid) to understand it.

For example consider the rants above based essentially on zero sum exchanges of real economic value between individuals, which in that context are generally valid but constitute the drunk under the streetlight looking for macro solutions with irrelevant micro answers. Lying or stupid? Depends on the context.

In any case they rarely address for example, your points along with Baker made many times on the nature of fiat money and debt in general for a nation's currency, which ironically depends precisely on one accepted 'fact' that indeed spans both sides of these arguments:

The essence of fiat money retaining its value to reflect the underlying value of real economic output lies exactly in its acceptance as a medium of exchange, unit of account and store of value.

Keynes understood this and was the first to introduce expectations[/i} into the macro discipline that broke the 'Says Law' link between aggregate supply and aggregate demand that were always required to be equal at full employment.

That's why it's possible for the Fed to use fiat money to offset the deep recession. As long as expectations of excess inflation are held reasonably in check in one direction, it's possible to influence expectations that drive real output towards full employment in the other direction by infusing way more nominal money into the economy than exists in corresponding values of real GNP.

Further, notice in this case how the attacks on SS fail to acknowledge even its essential current role as an automatic stabilizer preventing an even deeper recession.
written by Mike, March 31, 2011 10:21

"crazy reasons Mike adduces"

I'm pretty sure I "adduced" the exact same argument YOU made. The bonds in the trust fund represent exactly the same claim on resources as the future social security benefits themselves. If government can't pay the SS benefits from SS revenues in the future, there is no difference between paying the remainder from general revenues and redeeming the maturing trust fund bonds with general revenues. And if those revenues aren't available because of other debt burdens, then the government will either have to devalue the currency or issue more debt. Its ability to issue more debt will be constrained by its poor credit quality, and inflation will reduce the real value of benefits paid.

So who are you psychoanalyzing when you call statements equivalent to yours as "crazy?"
The fed should just buy the debt
written by Patrick Tchou, April 03, 2011 6:14
Why can't the Federal Reserve just buy the treasury bonds as SS needs to cash them in? They essentially do this now at a loss to the tax payers when they lend money to institutions (banks) at below treasury bond rates while at the same time these institutions are buying these bonds.

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