Specious Speculation

In the course of raising some valid enough questions about the funding of a Social Security transition to private accounts via debt, Paul Krugman engages in some breathtakingly tortured logical contortions:

[I]n essence, such schemes involve having the government borrow heavily and put the money in the stock market. That's because the government would, in effect, confiscate workers' gains in their personal accounts by cutting those workers' benefits.

Once you realize that privatization really means government borrowing to speculate on stocks, it doesn't sound too responsible, does it?

So, let's follow this. If the government switches from a system of taxing you in order to pay back benefits to a system in which they require you to invest the money yourself, that counts as government "speculating" in the stock market, since they "confiscate" "your" benefits in the process. So, I'm curious: if a government that had previously nationalized food, serving "free" tax-funded meals on the Smurf model, chose to cut taxes and let citizens buy their own groceries, would that count as "government speculating in agricultural markets"?

Comments

[Jason Ligon]

Well, this comes from the same camp that insists that the social security funds are invested in the most secure investment possible, so OF COURSE anything else is speculating.

What a flaming hack he’s become.

[dlc]

Krugman used to be a reasonably respected economist and ardent free-trader. It’s really a shame what has happened to him. I can understand his rants against Bush about certain issues, but when he argues economic issues in a way that directly contradicts both rational economic thought and even his own writings on economics – well, that just doesn’t make any sense.

Either his NYT column has gone to his head, inflating his sense of self worth; or the air associated with the NYT causes all mortal men to stop thinking straight.

[Gilbert Martin]

Oh yeah it was REAL responsible to create the largest Ponzi scheme on earth in the first place.

And it’s REAL responsible to keep pretending the the social security “trust fund” actually contains anything of value.

[Ron Hardin]

It’s painful to agree with Krugram on anything, but on the bright side he doesn’t get it exactly right either.

Not only is it impossible for the government to save (ie. it _must_ spend away its FICA receipts when they come in), the problem can’t be financed away in any manner at all, since all private citizens cannot save at once either. Saving requires somebody spending, and you must hand him the money you’re saving so he can spend it. You either do it directly (investing) or let the government do it (spending the lockbox).

The problem, such as it is, in solved in only one way : the retirement age has to go up with the life-span, so that there are enough workers for each retiree.

I don’t know why this is politically difficult. The same thing would happen if everybody saved themselves without involving the government, _except_ for the side effect that the average stock market return would fall for everybody (too many buying stock now, and too many selling stock later), the return falling until the retirement age goes up.

[Pavel]

I was *just* reading that article before checking H&R.

I think a lot of confusion comes with conflating SS “privatization” with diversification of the SS trust fund. Diversifying simply means putting the trust money into stocks in addition to the government bonds it’s currently in. One could rightly call that “using government money to speculate in the stock market.”

When it’s done in the form of personal savings accounts, i.e. privatization, it’s a bit of contortion indeed to call it “government speculation.”

Still don’t know how good of an idea any of this is in the long run. But that’s that.

[Jennifer]

My main problem is the gov’t “requiring” people to invest in anything as risky as the stock market. How many commissions did the Stockbrokers’ Lobby have to spend to push that idea through?

My money’s going into real estate.

[joe]

I just discoverd a shocking fact: There is no trust fund for the Air Force.

Really. Which means, obviously, in 30 years, there will be NO AIR FORCE.

Given this harsh reality, I guess the only way to make sure those military capabilities still exist is to cut taxes, so people can by their own anti-aircraft systems.

[Todd Fletcher]

“I don’t know why this is politically difficult.”

AARP.

[Russ D]

Just have another amnesty of illegal immigrants so that we can start taxing their wages, and write the law such that formerly illegal immigrants must pay into FICA but can never receive benefits; problem solved. If that’s not enough, put FICA taxes on imported goods since the reason we can’t cover the SS debt is those damn foreigners taking our jobs.

[SixSigma]

Krugman lies so much that I’m not sure why anyone would want to listen to him at all. He lost all credibility some time ago when he stopped arguing what anyone considers real economics and started arguing for a progressive policy. Then he simply changed his economic thoughts in order to compensate his slanted view.

Think about it this way, if your doctor changed his medical theories based on politics, would you listen to them at all?

Hell, a broken clock is write twice a day, but that doesn’t mean I pay attention to it at those specific times.

[Paul Souders]

if a government that had previously nationalized food, serving “free” tax-funded meals on the Smurf model, chose to cut taxes and let citizens buy their own groceries, would that count as “government speculating in agricultural markets”?

If the citizens were forced to spend all their Smurf dollars on groceries instead of non-food items, yes.

[Russ D]

Hmm. I tried to comedically enter “/Lonewacko” bracketed with “lessthan/greather than” at the end of my post and it didn’t show up. Must get used to hitting “Preview”. Doh!

[Gilbert Martin]

“I just discoverd a shocking fact: There is no trust fund for the Air Force.

Really. Which means, obviously, in 30 years, there will be NO AIR FORCE.

Given this harsh reality, I guess the only way to make sure those military capabilities still exist is to cut taxes, so people can by their own anti-aircraft systems.”

Do you enjoy posting total non-sequeters or is it just some involuntary compulsion on your part?

[dead_elvis]

If the government weren’t *requiring* a certain class of investments, then I would agree that the logic is tortured. But somehow I imagine that when this is all over, there won’t be a box to check that says “Elvis commemorative collectors plates” or “Vienna Philharmonic gold coins” or “bury in mason jar in backyard” or, like the above poster wants, real estate. Because then you might live in the house, or rent it out for profit, and we can’t have anyone enjoying their money now, before they retire, can we?
If the gov’t requires certain investments, then that’s just really messing with the market though.

[Steve]

Jennifer,

Real estate is a speculative investment, as well. If you look at the typical returns of the S&P 500 over any long-term period, they’re pretty good. Real estate might be better or worse, depending on where you’re buying. But it’s no less speculative.

Sure, there’s a bottom to how low a property’s value can go. Unlike a stock, it won’t hit zero. But an index fund isn’t going to hit zero, either. And unlike stock, most people who invest in real estate (their homes) borrow hundreds of thousands of dollars to do it. That’s very risky.

I’m not saying you shouldn’t own a house. It’s not only (usually) a good investment and a good tax move, it provides a handy place to live. Just don’t expect the real estate market to magically go up all the time, while stocks go up & down.

[gaius marius]

So, I’m curious: if a government that had previously nationalized food, serving “free” tax-funded meals on the Smurf model, chose to cut taxes and let citizens buy their own groceries, would that count as “government speculating in agricultural markets”?

mr sanchez, i would submit that doesn’t quite capture it.

previously, it was nationalizing enough food to feed everyone, plus a little.

now, it proposes to give everyone all their food immediately, pass some laws on how much they can eat in a year, and hope that it doesn’t spoil before you get to eat it all.

[Jennifer]

Steve-
Of course real estate is risky, but nowhere near as risky as the stock market. I’ll bet all those small investors who lost their shirts in Enron, Tyco, WorldCom or other such scandals wish they’d invested in something more solid, like Florida swampland. Heck, even oceanfront property in Nevada would have been a better choice.

Right now I’m waiting for the real estate bubble to burst, and the first house I buy will be a multi-family, so I can have a place to live AND generate some extra income.

But going back to the original topic: having the government REQUIRE people to invest in the stock market is like REQUIRING them to invest at the blackjack table. Why not just let people save their money, if they so choose? Or invest it in other ways? Instead, the government is proposing a plan that will provide a guaranteed income for stockbrokers while playing roulette with the economic futures of everyone else.

[Ironchef]

True Steve, but I’m with Jennifer.

Real Estate, unlike cash, at least won’t lose 3% of it’s value per year.

[Gilbert Martin]

Government is already requiring the riskiest “investment” of all – a belief that future politicians will keep providing them with benefits (paid for by somebody else) in exchange for they taxes they pay now (to pay benefits for somebody else).

The courts have already ruled that people have no legal right to receive any particular level of benefit (or benefit at all) just because they’ve been paying into the system.

Most of the people in the middle class and up would be far better off if they’d had all their SS taxes (plus the employer match) invested in a private account in a stock fund. They’d be able to retire much earlier with a much higher level of benefits. It’s all about return on investment.
Currently the return on investment of middle class and up workers on their FICA taxes is lousy and getting worse all the time.

[Kurt]

Do workers even have “personal accounts”? I’d like to know where my personal account is, so I can go there and count the money. All I see in my SS statments is some mumbo-jumbo about “estimated benefits”.

[Drooling Richard]

“Saving requires somebody spending, and you must hand him the money you’re saving so he can spend it. ”

No, Mr. Hardin, that would be called an investment.

There is no such thing as Social Security, so even discussing it’s existence is an evasion of reality. Your FICA taxes go directly into the pool of revenue that the government is spending like there’s tomorrow. The government is not using this revenue to save a single dime for you.

I propose one, and only one, simple change to FICA taxes – eliminate the hidden employer contribution. An employee’s paycheck only reveals that he is paying 6.2% of the first $85,000 he earns. He is really paying ~12.4%. That’s NOT being payed by the employer, it is just part of the cost of paying the employee.

If the average joe knew just how much this boondogle was costing him, other reforms would quickly follow.

[WSDave]

True Steve, but I’m with Jennifer.

Real Estate, unlike cash, at least won’t lose 3% of it’s value per year.

Comment by: Ironchef at December 10, 2004 03:08 PM

I just watched Roger and Me (little Mikey Moore’s first propaganda fest) last night. I’ll bet that the property values in Flint lost more than 3% of their value per year. The lesson is: Invest wisely, whether in the stock market or the real estate market.

WSDave

[joe]

Mmm hmm Richard. Because every dime collected in taxes from a corporation would have gone directly into workers’ salaries. It’s not as if top brass keeps anything for themselves, or for investors. Or if “too high” labor costs drive down stocks’ values these days, even for hightly profitable corporations.

[dead_elvis]

“If the average joe knew just how much this boondogle was costing him, other reforms would quickly follow.”

If nothing were deducted, but instead once a year you had to write out a check, wow, people would be all over it demanding something better. Same thing for income tax. People don’t think about what a bad value they’re getting because they don’t ever see the money, it just gets magically deducted.

[Jennifer]

WSDave-
I live in southern New England, roughly halfway between Manhattan and Boston. I’m not too worried about the local rental market bottoming out in my lifetime.

[gaius marius]

Real Estate, unlike cash, at least won’t lose 3% of it’s value per year.

unlike cash, however, its highly levered and far more dangerous because of it.

[Isaac Bartram]

“I just discoverd a shocking fact: There is no trust fund for the Air Force.”

joe, nobody pretends we NEED a trust fund for the Air Force. Everybody knows that normal government programs are funded out of General Revenue.

When it comes time to spend the “Social Security Trust Fund” ie when FICA ceases to produce a surplus, the money will have to come from General Revenues or borrowing. Why the fuck does anybody pretend that we NEED a “trust fund” for pensions for geezers.

Frankly Paul O’Neill proposed the only sound SS “reform”. Abolition.

[Mo]

I’m in favor of privitization, though not Bush’s off the books boondoggle, but what’s with the myth that there’s nothing in the trust fun. It’s in T-Bills which, last I checked are real and safe. Just because the federal government pissed away the extra money in a non-progressive tax to keep progressive taxes down, doesn’t mean they don’t exist. A lot of money that people gave (or if you prefer were forced to give) on the basis that it would be paid off at a later date to keep the system solvent.

The shortfall between receipts and money given out was planned by Reagan and Greenspan and it is working to how it was planned when it was initiated. Take more than needed in payroll taxes, when the inflection point hits, 2018ish, the bonds will be paid back and income taxes will cover those bonds. This seems to me a case of not paying the price of going into debt. Why do people act surprised that taxes are going to have to go up in order to pay back debt? No fucking shit, that’s why incurring excess debt is BAD and what people mean when they say lowering taxes without sufficient spending cuts is making your kids pay for your taxes in the future. Welcome to the future and we’re the kids.

I guess I’m pissed because Republicans act like this was a surprise when it was designed this way. Social Security isn’t nearly as bad an unfunded mandate as Medicare is, though we should increase retirement age to match the rate of increase in life expectancy.

[Brett]

I’m no financial expert, but in the past 7-8 years, hasn’t Krugman:

1) blasted privatization as idiocy
2) admitted there’s a case for privatization
3) claimed SS was in dire straights and needed rescuing
4) claimed SS was secure for at least 100 years, thus nothing needs to be done

What a hack. Whatever direction the political winds are blowing.

[Gilbert Martin]

“Real Estate, unlike cash, at least won’t lose 3% of it’s value per year.”

“unlike cash, however, its highly levered and far more dangerous because of it.”

Real estate is only highly leveraged by those that choose to highly leverage it. It isn’t inherently so.

Ever heard of REIT’s (real estate investment trusts)? They’ve been a pretty darn good investment for the last several years.

[fyodor]

joe,

Technically you’re correct and Drooling Richard is exagerating when he says workers pay the full amount of the employer’s contribution. But the fact remains that the employer’s contribution does cost the worker money. Exactly how much depends on a variety of factors such as the elasticity of demand for labor, etc. But in most cases, the difference would likely be significant.

Regarding your Air Force analogy, point taken. However, if the taxpayers in 30 years could only ante up for either the Air Force or Social Security but not both, which one do you think would get the axe?

[Gilbert Martin]

“I’m in favor of privitization, though not Bush’s off the books boondoggle, but what’s with the myth that there’s nothing in the trust fun. It’s in T-Bills which, last I checked are real and safe.”

Go back and retake econ 101, MO. No IOU in the hands of it’s maker is an “asset”. If someone entrusted you with $50 grand to hold for them and you went out and blew it on a new corvette and wrote an IOU to yourself for $50 grand, that piece of paper would have no real value whatsoever.

It’s just as true when the federal government does it. There are no “special” principals of ecnomics for governments – the same principals that apply to any other economic entity applies to governments as well.

[Isaac Bartram]

“It’s in T-Bills which, last I checked are real and safe. Just because the federal government pissed away the extra money in a non-progressive tax to keep progressive taxes down, doesn’t mean they don’t exist. A lot of money that people gave (or if you prefer were forced to give) on the basis that it would be paid off at a later date to keep the system solvent.”

But those T-Bills have to be redeemed with current revenue. It’s not like someone else owes us this money.

The rest of your post is spot on.

The joke is that someone created a politicized welfare and taxation scheme and now that the chickens are coming home to roost everybody’s pointing fingers at everybody else screaming “Stop politicizing Social Security!”

[Mo]

Gilbert,
Then we don’t have a progressive taxation system. We have, in essence, an overly complicated flat tax system. You can’t say the rich are overly taxed by not counting payroll taxes and then turn around and say that the trust fund is worthless. Either both are true or neither.

That would be another benefit of killing Social Security, it would get rid of a lot of shitty rhetoric.

[Slag]

Points to Gilbert Martin for calling SS what it is: a Ponzi scheme. I don’t think that phrase is used enough in privatization discussions. Whenever I bring it up, it stops the conversation cold.

A coworker of mine, whose mother is a president of small private college, once told me a story about how his dad once called the Feds (not sure what dept, exactly — the Treasury? The IRS?) to ask how much was in his SS account. They politely laughed at him and the dad was flabbergasted that there is no personal account with his name on it. And this was a well-educated, upper-middle-class guy.

[Mo]

And I understand that the taxation system isn’t being debated here, but it is a part of the whole scam.

SS is a huge con committed on the poor and is welfare marketed as a savings plan for everyone. People hate welfar, so Social Security was welfare “for everyone”

[Mo]

FYI, I know that an IOU to yourself is not an asset, but it’s not like this was an unexpected shortfall, this was BY DESIGN. Few seemed to care when it was the poor that had to pay the extra fund, but now that the piper has to be paid, which due to our tax system will be mostly by the wealthy, they’re getting rid of it. That’s a fucking crime.

[Gilbert Martin]

“Gilbert,
Then we don’t have a progressive taxation system. We have, in essence, an overly complicated flat tax system. You can’t say the rich are overly taxed by not counting payroll taxes and then turn around and say that the trust fund is worthless. Either both are true or neither.”

LOL

You must have been taking non-sequeter lessons from Joe.

Whether anyone thinks the rich or anyone else are overtaxed has nothing to do with whether an IOU in the hands of it’s maker represents anything of value or not. It doesn’t. It doensn’t work that way for individuals, it doesn’t work that way for corporations and it doesn’t work that way for the government either.

[Gilbert Martin]

Oh and I forgot to mention the MOST irresponsible thing about Social Security of all – it’s UNCONSTITUTIONAL.

It is not pursuant to any ennumerated power delegated to the federal government in the text of the Constitution and is therefore in violation of the 10th Amendment.

[Tony Suruda]

Arnold Kling has an amusing analysis at http://www.techcentralstation.com of why Paul Krugman should be in favor of privatization of Social Security. It includes a cartoon of Paul in an episode from Winnie the Pooh. Arnold cleverly indentifies borrowing to finance private SS accounts as indirectly shifting some SS costs from the payroll tax to general revenues, making SS funding more progressive.

[Mo]

Oh and I forgot to mention the MOST irresponsible thing about Social Security of all – it’s UNCONSTITUTIONAL.

Yeah, like that’s stopped them before. Want to start a list?

– Social Security
– War on Drugs
– FCC
– McCain-Feingold
– FDA
I could go on, but I don’t have a week to kill.

[Jose Ortega y Gasset]

Social security won’t change until there is an economic crisis of epic proportions. The political bloc of older Americans and leftists is simply too large. On the positive side, the realization that the Social Security teat will be dry in a few decades has and will continue to increase the marginal savings rate of younger workers.

[gaius marius]

Ever heard of REIT’s (real estate investment trusts)? They’ve been a pretty darn good investment for the last several years.

fair enough, mr martin — if your REIT does not borrow on the capital they raise, as many do.

but let us not pretend that even unlevered REITs are not also the benficiaries of those millions who leverage to enter the property market. these people have been driving up property values by borrowing ever more money at low rates locked in for long terms. eventually, that debt bubble will be forced to contract. and REITs (not to mention banks, some of which are essentially REITs) will be a terrible investment.

housing has become a greater-fool game since 2000, no matter how you’re in it. if you’re not levered into it, brilliant — but you will still be damaged by the delevering.

[Mo]

Oh and just because social security is a bad idea, doesn’t mean privitization is a good idea. The management costs alone would be a killer. Just shift the money into an increase in the IRA deduction amount and let people shop around. 300 million mini IRAs run by the feds? Good lord.

[thoreau]

I have absolutely no objection to paying less in payroll taxes.

I have absolutely no objection to diverting some of what would have been paid in payroll taxes into various investments.

However, I want to know just how much flexibility I’ll have with the money that I’m supposedly keeping for myself. If I don’t have much control over it then

(1) Is this really privatization if my money is still allocated as the government sees fit rather than as I see fit?

(2) Markets only work well when people are allowed to move their money around and respond to conditions. Flexibility is key.

(3) If my discretion with this money is limited, that means that the government is acting as a financial planner. You know the government, they’re the people who run Amtrak at a loss.

Basically, I want to know more before I join my fellow libertarians in an orgy of celebration.

Actually, on second thought, I’ll join that libertarian orgy of celebration anyway. Any group of people that favors ending all regulations on drugs, guns, gambling, prostitution, porn, booze, and greasy food probably throws one hell of a party! ;->

And if it turns out that this SS “privatization” scheme is nothing to celebrate, well, the fun I have at the libertarian celebration will at least make up for my disappointment!

[Ruthless]

Jennifer,
While I haven’t read the details, I’m going to assume bonds–including money market funds–will be an investment option, so that should answer your concern about being able to “just save.”
I doubt any plan would be directed in favor of stockbrokers, although the tax deferred “annuity” available only to teachers and employees of non-profit organizations, was, for years, before 1974, I believe, a “monopoly” for the insurance industry. (Their lobbying paid off–for a while.)
Also, it is possible to invest in real estate through stocks–REITs and other things.
I can’t see this account being used to buy real estate you choose on your own.

[Constitutionalist]

Gilbert said:
“Oh and I forgot to mention the MOST irresponsible thing about Social Security of all – it’s UNCONSTITUTIONAL.

It is not pursuant to any ennumerated power delegated to the federal government in the text of the Constitution and is therefore in violation of the 10th Amendment.”

Don’t you know? The 10th Ammendment was declared inconvenient 60+ years ago. The 9th, too. I’m amazed the things are still printed in reference books.

[Isaac Bartram]

“The shortfall between receipts and money given out was planned by Reagan and Greenspan and it is working to how it was planned when it was initiated.”

Actually, Mo, “…(t)he shortfall between receipts and money given out..” was built into the system from the very beginning. All Reagan and Greenspan did was postpone the inevitable for a few years. All any “reform” now will do is put the eventual collapse a little further into the future.

The fact is that in the early years Social Security taxes produced such great surpluses that it was a great cash cow for FDR to milk for all his other spending schemes. It is when one understands this that one can appreciate that it was designed as a revenue producing tool in the first place. The designers simply never anticipated the demographic shifts that would occur. They figured most people would kick off before they collected too much lucre.

It was such a lucrative cash cow, in fact, that CONgress couldn’t resist an ever more generous expansion of the program over the years. Thru the 50s and 60s they just kept acting as though the ratio of taxpayers to beneficiaries would stay as high.

“Oh and I forgot to mention the MOST irresponsible thing about Social Security of all – it’s UNCONSTITUTIONAL.”

But, Gilbert, haven’t you heard of the “general welfare clause”. 🙂

[Thomas Paine's Goiter]

If the gov’t requires certain investments, then that’s just really messing with the market though.

It depends on the depth of the basket that the government makes available as investment vehicles. There are the obvious: stocks, bonds, mutual funds, savings accounts, money markets, cd’s, derivatives, annuities; but they could get creative and add many more options to the basket to allow the average person to diversify.

[Dwilliams]

I want an amnesty program. Eventhough I’ve “contributed” about $50,000 in my 35 year life to SS I’d give it up today if it meant that I wouldn’t have to pay payroll tax ever again. I will provide for my own future welfare, I am already anyway. The current system is unfair to future generations and encourages generational hostility. There is no “trust fund,” when future retirees expect their checks we can only pay them with tax increases or more borrowing. However we have borrowed so much already that our currency is becoming more and more devalued and borrowing will become even harder. Without serious reform and soon I can see our way of life changing drastically with another economic downturn/recession/depression.
wooooo……

[Drooling Richard]

fyodor says to joe:

“Technically you’re correct and Drooling Richard is exagerating when he says workers pay the full amount of the employer’s contribution.”

I said ~12.4%, notice the tilda, but it is only slightly less. This becomes obviouse to anyone who is self employed, like myself. Here’s the way it works:

The employee pays 6.2% right out of his paycheck. The employer has to match that contribution. That matching contribution is part of cost of employing someone, including yourself. It does not matter to the employer who gets the money. That’s what it costs.

The only reason 12.4 is just a little bit high, is that the extra 6.2% contributed by the employer is not part of the employee’s gross income, and is not, therefore, taxable by other agencies.

Like I said, it’s ~12.4%.

[Dan]

I want an amnesty program. Eventhough I’ve “contributed” about $50,000 in my 35 year life to SS I’d give it up today if it meant that I wouldn’t have to pay payroll tax ever again.

Amen to that. I’d love to opt out of the system entirely.

[Thomas Paine's Goiter]

“If the average joe knew just how much this boondogle was costing him, other reforms would quickly follow.”

I think that costs AND opportunity costs need to be stressed to the average joe here. If you look a person making $30K (adjusted yearly for inflation) every year of their life from 22 to 65 (retirement age), if they were to have their SS taxes put into their PSA’s and earn 5% per year, they’d have $727,000 at retirement.

Do the same with Medicare and these people would have $170,000 in their PHA’s at retirement.

The government is costing the average joe $1 million over their lifetime…

[dlc]

Whatever you invest in has inherent risks, but to say real estate is safer or REIT’s are better is not necessarily the case.

For one, there has never been any individual ten year period where the S&P 500 has lost value (even during the 1930’s). Of course any individual stock can fall to $0; but over the course of time bundled securities have proven to be a safe investment generating greater historical returns than real estate. REIT’s in general have outperformed other securities over the past few years, but performance of individual REITs has been up and down, with the ups and downs sharper than, say, a growth-oriented mutual fund.

Also, although it is technically correct that the value of real estate will never fall to $0 because land is typically always worth something; real property carries inherent risks not associated with securities. For instance, catastrophic damage, environmental contamination or more benign risks like lax management and excessive deferred maintenance. In certain markets, certain parcels of land simply cannot be sold at any price due to market conditions or environmental problems – rendering those properties useless. Furthermore, few small RE investors realize they are actually getting worse returns than they thought, because they are deluded by the fact that they are receiving an income from the property, whereas not all stocks pay dividends. Also, I doubt somebody renting out their house or duplex is sitting there calculating their IRR – but in most case renting out a single-family home yields a very, very low return.

Also, Jennifer, while I agree that your investment in rental real estate is a wise one, I would not be overly optimistic. I am sure real estate owners in California thought the same thing in the 1980’s. Shit happens – there is no such thing as a risk-free investment.

[Drooling Richard]

BTW, joe

FICA taxes, given that are are being used for general revenue, are very regressive. Something a man of the left would not defend.

[Mo]

Drooling Richard,
That 12.4% is assuming that the whole contribution would go back to the employee. In reality 6.2% would be kept by the employee and somewhere between 2 and 4% from the employer would also go back to the employee. The rest, the employer would keep for other reasons. It’s kinda like how when a 5% tax is levied on a manufacturer, the whole 5% doesn’t get added to the cost. Elasticity and all that jazz.

But I’ll be polite and I won’t tell you to go take an econ class.

[Dwilliams]

Drooling Richard is right about being regressive. Considering the difference between white women and black men’s life expectancies SS is to a large degree an income distribution system that takes money away from black men and gives it to white women.

[Drooling Richard]

Mo,

What the heck are talking about ? All ~12.4% goes directly to the government. You don’t get any of it back, ever. Someone else, HOPEFULLY, will pay into the fund so you can take their money later.

[Mo]

DR,
I was talking about what would happen to the funds if the payroll tax was eliminated, not where they curerently go.

[Don Miguel]

I find it amazing that Krugman is a professor of economics and international affairs at Princeton but consistently shows a limited knowlege of both subjects in his columns.

[Gilbert Martin]

“but let us not pretend that even unlevered REITs are not also the benficiaries of those millions who leverage to enter the property market. these people have been driving up property values by borrowing ever more money at low rates locked in for long terms. eventually, that debt bubble will be forced to contract. and REITs (not to mention banks, some of which are essentially REITs) will be a terrible investment.”

There are different types of REITS that react differently to various market condition – not all (or even most) of them are tied to the values of single family home prices. There are REIT’s that primarily invest in shopping centers and regional malls, some that invest in office properties in tight markets like NYC, some that invest in health care properties. Even if one believes that there is a speculative “bubble” in real estate values, it doesn’t follow that all REIT’s are overvalued on that basis.

[Drooling Richard]

I wasn’t suggesting that any tax be eliminated. Perhaps I was not clear about that. What I suggest is that the full burden of the FICA tax, which again is about ~12.4%, show up on joe average’s paycheck. Joe would have the same take-home pay. The employer’s cost in hiring joe would be the same. The difference is that joe would know how much he’s really paying in FICA taxes.

[fyodor]

Drooling Richard,

I partly apologize because rereading your original post I see that you only said that the total cost of FICA ~12.4% per employee. However, joe, Mo and me (hey, I like that!) all thought you were saying that the worker was losing out on this full ~12.4%. As Mo & I have pointed out, workers would get part of the “hidden” portion of the cost that the employer pays, but not all of it.

Anyway, we’re arguing about essentially nothing. The logic of making employers contribute was dubious to begin with, and the way it plays out for the self-employed is downright tragic. But then, taxes suck and any logic you attempt to employ (no pun intended) to make them equitable is likely to be a tortured rationalization.

[Mo]

Sorry, misread your conversation w/ joe. I thought it was a number regarding how much more money would go back to the employee after a repeal of FICA. My bad.

[Jennifer]

Ruthless–
All of those options you describer have one thing in common: they all involve me putting my money somewhere that *I* do not directly control. (Insert ironic remark about you being an anarchist here.)

If we could all go back in time a few years, and I got to keep my memories but you-all didn’t, I could scam almost all of you and provide voluminous amounts of irrefutable evidence (at least to most people) that you should put a good chunk of your life’s savings into Enron, and similar though less-iconic companies who were already, invisibly, failing at that point.

Or I could be nice, and have you invest in the companies that turned out okay. You’re entirely dependent upon MY knowledge and how *I* choose to apply it; even if you do the responsible thing and check the numbers for yourself, the numbers will all turn out to be wrong.

So I figure, living in this area will cost at least X hundred dollars in rent a month, and with inflation that is likely to go up a bit each year; if I save for a couple of years then (even taking fix-up costs into effect) I’ll have enough to buy a decent multi-family house with a fixed mortgage of LESS that X hundred dollars a month, plus I’ll have whatever I can get from renting out an additional apartment or two. Any money from rent would go to extra mortgage payments, and upkeep.

Of course there are risks, and a certain amount of work and aggravation involved, but I, personally, choose to assume those risks rather than put my faith in a member of a class of people who haven’t proven to be too trustworthy, of late.

[Fabius Maximus]

I for one am glad that we have social security because before we had it everyone starved to death when they were too old to work.

Wait. That didn’t happen.

The amount of the dole can never go down until the system collapses.

And people say the comparisons with Rome are overdone.

[Steve]

Fabius,

They didn’t starve, but they didn’t stop working until they were almost dead. Then their families took care of them.

[deron]

We should be protecting wolf packs in all national and state parks and forests. The retired should be encouraged to hike in the woods for health reasons.

[Carlos]

I know most libertarians are a bit crazy, but this discussion beats everything. As a private account user (in my country) let me tell you a few things. A) You will NOT have much control over where your money goes (unless you want everybody to spend a substantial portion of your savings on transaction costs). B)You can’t say that T-Bills in the Trust Fund have no value because it’s a debt from a branch of government to another AND say that there is a Social Security deficit. SS is financially indepandent or not. You don’t say that there is a DOD deficit, do you? C) The whole idea of the current initiative is to invest in the stock market, ?how is that not speculating?. Also, the truth is that if SS were abolished tomorrow there is a very good probability that most of the population wouldn’t save enough for their retirement and in the end some form of welfare would have to be established. In fact, that’s the reason why SS was created in most countries in the world in the first place. It’s not like this is a peculiar american problem. Before talking about this, look at another countries where this has already been implemented. There are some success stories like Chile and some failure stories like Argentina. In the end everything depends on the government ability to manage its budget deficit (exactly like before privatization).

[Carlos]

On the starvation comments, let me point out that before industrialization, most of the population did not have a job in the modern sense. They rented a piece of land and lived off the sale of whatever they could grow there. Also, in most families the sons never left the house and when the father was too old for work, the kids would take the load. It’s the combination of the industrial era and the nuclear family that makes retirement a problem.

[Anthony Gregory]

If the government still pays entitlements to seniors, funding it with debt, then workers still have to pay into the system indirectly, through hidden inflationary taxes or raised taxes in the future. The “privatized” accounts amount to forced savings on top of the continued burden of paying for the benefits. Any promise to phase this out over 40 years is ridiculous and cannot be taken seriously. Social Security privatization is a scam. The program should be cut. The benefits and payroll taxes should be reduced on their way to elimination. If seniors continue getting entitlements through debt, we must as well totally eliminate any amount of the payroll tax that was going to be “privatized.” Any program that expands government expenditures and doesn’t shrink the system is a step in the wrong direction. The Republican plan is just that: continuing the intergenerational wealth distribution while adding forced savings.

[MikeP]

A number of you have incidentally likened social security to welfare. If only social security were welfare, it would be far less expensive and far less pernicious.

As I had to learn to get the answer right in 9th grade civics class, social security is not welfare — it is insurance. As such, it is supposed to apply equally to everybody.

Let’s compare social security and welfare.

Welfare is supposed to be a transfer of income from those who need it least to those who demonstrate that they need it to live at some minimal level. As such, the costs and benefits are generally progressive, or at least advertised as progressive.

Social security, on the other hand, is ferociously regressive. The first dollar is taxed at full rate. The last dollar is capped. The poor start work earlier, retire later, and die younger. Pay-back is not related to present income or wealth, but rather to prior pay-in.

In other words, the people who get the most out of social security are those who demonstrably need it the least. The people who get the least are those who pay the most proportionally to their income — and those who need it most.

But whenever social security is threatened, pictures and stories of poor old citizens are trotted out to show us who will be hurt. And whenever anyone asks about those other people with the two houses and the boat, the reply is, “They are getting back what they were promised.”

Well, boo hoo. To the nearest 100 million, 0 people in this country get back from the government a return value worth what they contribute.

If social security were treated as welfare — if “contributions” were called “taxes” and “benefits” were called “handouts” — then we could actually get somewhere.

A 40-year phase-out of current payout rates — increasing the means-testing and decreasing the payroll tax all the way — followed by straight welfare payments to those who need it would save social security.

Yes, yes, we have to destroy social security in order to save it.

[Tim Higgins]

re: REITs

I work with a bunch of investment consultants as part of my job, and I have been instructed that REIT values are more closely correlated to large cap equities than real estate. If so, they are not a good way to get real estate exposure, even if they are ostensibly backed by actual real estate properties.

[Ruthless]

Jennifer,
I hear you.
It’s like as if marijuana were legal.
It’s not the way I would choose to end the WOD, but what I’m suggesting comes under the category of “to get along, go along.”

Everything is hypothetical at this point.

You should put the bulk of whatever money you and Lurch can dig from sofa cushions into exactly the investment that suits, but we’re talking about something tangential here to your future happiness and enrichment.

[Tim Higgins]

Joe:

“I just discoverd a shocking fact: There is no trust fund for the Air Force.

Really. Which means, obviously, in 30 years, there will be NO AIR FORCE.

Given this harsh reality, I guess the only way to make sure those military capabilities still exist is to cut taxes, so people can by their own anti-aircraft systems.”

You’re absolutely right, joe. Social security benefit obligations won’t go away just because we haven’t prepared adequately to fulfill them. So we’ve got four options: raise taxes, cut other programs, borrow more money, or reduce benefits. Whatever we’re going to do, we’d better make a decision, and sooner is better than later.

[Luthress]

Give it up, Him Tiggins.

[Fabius]

You mean people used to support their parents as I have chosen to support my mother in her old age? And I thought I was the first one.

Social Security may be called insurance but it is a dole. It will not be repealed or changed before it collapses. Up until that time, the only reforms will be like the recent Medicare reform – not any kind of reform at all. We have created a nation of infantilized parasites (who do not even know they are infantilized and parasitic) who will continue to vote themselves more money.

Sorry to be so negative, but there you have it. It’s sad really. Can you even imagine someone refusing charity anymore? Can you imagine someone being shamed by being “on the relief”?

Bread and circuses for the plebs, state protected rents for the tax farmers and life tenure for the senators. Wait. That was Rome, not America.

QFMC cos. V

[raymond]

We should be protecting wolf packs…

First time I’ve actually laughed out loud while reading something on Hit&Run.

Before talking about this, look at another countries…

Whenever I’m on the Indian subcontinent, I’m grateful my parents and I live in countries with “social security” systems. I love my job passionately, but I’m looking forward to having time for other passions. And besides, dying in front of a bunch of sophomores would be so… rude. So embarrasing.

My parents are nice, but I really don’t want to have to live with them. For one thing, they think “libertarians are a bit crazy”. One year I gave them a subscription to Reason, and my Mother told me thanks, but that’s not the sort of thing we’re interested in. I mean. Who could live with people like that? And the idea of having them roam the countryside dressed in saffron loin cloths carrying only a stick and a begging bowl is even less appealing.

Social security is liberating. It’s probably the most liberating social programme ever devised.

Here (where I live) we have the system of “3 pillars”:

1. AVS, which is the government “old-age insurance”. Obligatory by law.
2. “Caisse de retraite”, which is an employer/employee-financed “retirement/pension fund”. Obligatory by law.
3. “3rd pillar”, which is an employee-financed tax-free savings fund. Not obligatory.

While there’s always talk of how “sick” AVS is (we keep living), the real pain in the past few years has come from what the stock market has done to the “caisses” and to investments in the 3rd pillar.

I suspect that if payroll “taxes” were abolished outright, net salaries would NOT go up. Employers would “cut costs”. Precisely the way they have cut costs with health insurance.

Once you realize that privatization really means government borrowing to speculate on stocks, it doesn’t sound too responsible, does it?

This doesn’t seem to me to be that illogical a statement.

If I’ve understood correctly, the US gvt may have to “borrow” $1-2 trillion to privatise Social Security. This $1-2 trillion would make up for the $1-2 trillion which the system would lose because it’s making that much available for… investment by private individuals.

I put “borrow” in quotes because what the government would really be doing is creating more money. The dollar is already dropping in value. The only thing keeping the whole US financial system from collapsing is lending (primarily) by Asian countries. But lenders require interest payments to keep them interested, interest rates must rise, the American tax-payer pays higher interest, the casino of the stock market pays out bigger returns… And on and on. Tulips.

Here’s my proposal:

1. Set up 3 or 4 competing semi-private Social Security (ie, insurance) Systems. End the monopoly.

2. Introduce the “3 pillars” system.

3. Introduce exceedingly high inheritance taxes, the proceeds of which go exclusively to cushion the SSSs and “caisses de retraite”.
– a. “loopholes” for widows and orphans and handicapped offspring
– b. “loopholes” for small family farms and small businesses
– c. When you’re dead, you don’t have property rights.

As you may have guessed, I’m not an economist. (I think, for example, that MONEY should be privatised.) But I do believe my system would maximise liberty at an acceptable cost.

[Adam]

Gilbert – c’mon, let’s be fair. Stalin had a better Ponzi scheme than social security.

[Adam]

Gilbert – c’mon, let’s be fair. Stalin had a better Ponzi scheme than social security.

[Adam]

Gilbert – c’mon, let’s be fair. Stalin had a better Ponzi scheme than social security.

[Nicholas Weininger]

Anthony Gregory nails it. Both sides of the current Social Security debate are fundamentally dishonest. Telling people that there is a way to make the system more solvent without some combination of tax hikes and benefit cuts is like telling people that there is a way to lose weight without some combination of eating less and exercising.

Raise the eligibility age to 70, index benefits to inflation instead of wage growth, and stop paying higher benefits to people who need them less– cut everybody’s benefit down to the level of that received by someone who worked, say, a $10/hr job his whole life. You could then fund that remaining safety net on a completely pay-as-you-go basis with a significantly lower payroll tax, and then people would have more of their own money left to:

–increase contributions to their own IRAs or 401k’s (no need to create yet another government-sponsored savings vehicle; why not stick with the ones we have?)

–spend on training and education which would increase their future earning potential and thus their future ability to save for retirement

–or whatever else they damn well pleased.

That’s the moderate-libertarian approach, not creating a whole new bureaucratic monster to handle everybody’s forced savings accounts. The hard-core libertarian approach is of course immediate and total abolition, but unfortunately that will not fly in our lifetimes.

[Bill]

Why don’t we just get to the root of the problem: Most people are cowardly thieves. They don’t have the guts to steal from people directly, so they have the government do it. I used to think that government was the problem. It’s not the problem, it’s the side-effect of the real problem: people. You might think that saying these things is harsh or counterproductive, but you might be wrong. Saying things like “income taxes are slavery” and “Social Security is inheritance insurance” to San Francisco liberals has actually gained me a lot of ground with them. I’ve been pleasantly surprised to find that many intelligent liberals get what I mean very quickly. Most would be happy to eliminate income taxes and Social Security as long as basic government functions and welfare for the poor were still funded. (I suggest a sales tax, with a negative income tax to make up for the regressiveness.) So, let me rephase: The real problem is stupid and/or evil people. I believe that libertarians can find common ground with smart liberals and conservatives, as long as our arguments are sound. I just don’t know what to do with the mass of voters that are total morons. How to deal with them?

[Ruthless]

Jennifer,
It’s the blind leading the blind here, but another thing I should add as a way to avoid another Enron is index funds. Surely they would be an option.

You are correct in your general thrust that the Wall Street crowd has sold the country snake oil.

At the same time, I join those who would opt out of Social Security.
Imagine how much that would “cost”?
Talk about a “third rail.”