Tuesday, August 30, 2005

Flogging a Dead Horse

The other day while I was doing yoga, after I ate a nice fritatta, fresh from unhealthily obsessing about a friend on the West Coast, I started to think about the GROW ACT (Growing Real Ownership for Workers Act of 2005 H.R. 3304) by Jim DeMint (R-SC) and Pual Ryan(R-WI). I am naturally inclined towards some form of Social Security reform that will keep social security revenues from becoming general fund expenditures, which they have been since the beginning of time(or 1969), and believe that the only way to ensure this is through some form of private ownership. Thus, I am soliciting the insight and explanation of anyone with a more expansive background in public finance than I have.
The Grow Act stipulates that the each individual's payroll taxes will be used to purchase marketable U.S. Securities (read: treasury bonds). Currently, payroll taxes are paid, a certain portion thereof goes back out to pay for Social Security obligations unencumbered in the present, the surplus is "borrowed" by the Treasury who in turn issues a security in its place (a T-Bill?), and the surplus revenues are spent covering holes in the budget and concealing the true size of the deficit. In fact, we only have a surplus on a cash basis but not when properly accounted for in an accrual. I guess my basic question, is what would change if an account were created, and a T-Bill was issued to said individual account, a lockbox if you will, as opposed to the Social Security Administration?
  1. Is it that the T-Bill is a marketable security whereas that debt issued by the Treasury to the Social Security Administration is not(I don't know if it is or isn't, this post is because I am too lazy to research this myself)? Though, this isn't necessarily all that different in so far as it puts payroll tax money in the Treasury, it just may mean that the publicly held debt is more secure in so far as the Government won't default (God forbid) on T-bills whereas it can write away the debt it issues itself (i.e. from the Treasury to the Social Security Administration) without having near the consequence on global capital markets.
  2. Would this cause the federal government to actually recognize its full deficit, i.e. the general fund deficit plus social security surplus revenues no long available to congressional plunder? If this were the case I believe this in of itself would be a worthy goal as the reported deficit would higher (and accurate) and we would be forced to actually question things like are the Bush tax cuts affordable, what are our spending priorities (Iraq War? Prescription Drug Plan?)?
  3. Or is it that this bill merely has the "virtue" of containing the word "ownership" in it?

Just some thoughts, obviously, as stated in the title, it is my view that social security reform is a dead horse, and this is not necessarily all bad. But any input on these issues would be much appreciated.

8 comments:

PiedPiper said...

Of course, I believe there are more pressing issues than Social Security reform right now, however, I'm not so naive to say that the system is perfect and isn't in for dire straits (what a band!). I also agree that - in the future - some amount of private accounts will be necessary. I think that there's an easier way to achieve the goal than Bush's plan (I'm unfamiliar with the GROW Act, Xtra.) What if, in a move to encourage more people to save in the US, optional accounts were made that people could pay into out of their paycheck, at the same time they were paying Social Security taxes. At the same time, over a very long period - say 75 years or more - the Social Security tax went incrementally down (I think we will always need to have a significant form of Social Security to protect the interests and livelihoods of our society's most vulnerable). In the meantime of those 75+ years, workers are allowed to option more and more into the private accounts.

I'm not economist, nor do I purport to be, but would this make sense? Would it even be possible?

Also, rather than focusing on Social Security reform, shouldn't we be instead focusing on the more pressing fidiciary problem of Medicare? What's your solution to that, X?

xtrachromosomeconservative said...

Medicare: cut benefits, raise taxes. We set to encumber 26 trillion plus in unfunded Medicare obligations. You can raise the age, do all types of goodies, but when there is that money that needs to materialize, there are two things you will have to do no matter what: cut benefits, raise taxes. We will eventually have to address how our system works and what cost control (not price control) mechanisms are available to us. I am interested in seeing what HSAs bear in the future, the big knock against them is that people won't get the preventative care. That seems like a testable hypothesis and I look forward to it being tested, I doubt it is correct. And I knew you would be unfamiliar with the Grow Act that's why I linked it. The idea with it is to have private accounts filled with government bonds as opposed to private securities and bonds. Social Security is just a low hanging fruit and politically less explosive. Messing with Medicare and Medicaid is going to require some serious momentume.

xtrachromosomeconservative said...

There are proposals along those lines. To sum things up, you would advocate reforms which made it easier to save outside of the social security system. However, over time, you would like to see payroll taxes draw down but for there to be a healthy guarenteed benefit at the lower end to create a floor but also to incrementally incorporate private savings within the social security system.

xtrachromosomeconservative said...

There have been proposals on a bipartisan basis to make things like a 401(k) or 403(b) on a voluntary opt out basis as opposed to a voluntary opt in, i.e., your employer would automatically set up the account and with each pay period would divert part of your salary (max employer contribution is 6% of salary, max employer/employee combined is 15% of your salary) to your 401(k). You would have to opt out or specify the level to put aside. People have also talked about creating optional private social security accounts. I don't see the point of this, it merely duplicates IRAs and 401(k)s. We could strengthen those, though, expand their contribution limits, things like that. But in response to whether or not your musings on SS reform make sense, yes. What you are gesturing towards is really not all that different from what the white house has advocated except you appear to want to approach it more gradually, which, frankly surprises me.

PiedPiper said...

I don't have a problem with agreeing in part with White House. I don't have a problem with adding private accounts to Social Security. I do have a problem with creating undue debt in the process. Unfortunately, our political system isn't set up for something like a 75-year plan calls for...commitment. I really think that if both sides could set aside the ever-changing politics of the moment and look at the long-term financial options, Social Security reform would not even be a contentious issue.

xtrachromosomeconservative said...

As to the question of debt, I think it is important to address this issue becasue it has been poorly articulated in the media (mainly because it is just so damn tedious) and it reveals a basic problem with both private and public pension financing. We constantly speak of social security surpluses. Those are surpluses on a cash basis. We take in so many receipts and have to pay for so many obligations in a given year. If the difference is positive we are inclined to call it a surplus. This is a basic in cash accounting-accounting for the money you have on hand. But, in the case of pensions, that money is not in fact free for spending, evenso, it is spent. That money is to be set aside to accrue interest so it can be spent on future obligations incurred in the present. This is called accrual accounting which is the proper method of accounting for pensions because it recognizes current obligations to be paid, and future one's that will need to be paid. A lot of private companies do not do this. Nor does our federal government. So the question of diverting money to private accounts is not one of debt, it is a question of financing that debt. Right now, because we have made a bipartisan pact of frittering away the built in savings of the social security system, we have a problem. So the question is do we start to assume that debt now, or later. With private accounts you are prefinancing future obligations, but under our present system, that would mean that we would have to address gaps in the system sooner rather than later. Those gaps exist either way. But if you address them later, they also come with accrued interest.

xtrachromosomeconservative said...

Oh and I was going to say how this relates to private pension plans. In the private sector there are two types of pension plans - defined-benefit and defined-contribution. Social Security is a defined-benefit pension. Traditionally pensions have been of the defined-benefit plan. In a defined benefit plan, once you have met certain thresholds, for instance years employed with a company (or in the case of social security, a certain number of quarters of paying fica or payroll taxes) you will receive a portion of your salary and typically health benefits till you die. Under a defined-contribution plan, a company will contribute money or in some cases stocks (if this is the case for you you should convert these stocks) to your 401(k). At that point that money is yours, but so is the risk associated with it. Defined-benefit plans are wonderful, except for the fact that employers often fail to honor them. Say you run a company, and every year you need to pay 20 million to the company that manages your pension fund. Maybe only 10 million goes to current retirees, but for there to be pensions for current workers you need to set aside 10 million dollars as well. A lot of corporations fail to set aside that money and then will have the gall to call it an asset, which it is not, it is at that point a debt. But the balance sheet looks better if it is called an asset. Or a corporation can get a whore, I mean, an accountant (think KPMG) who will build in absurd actuarial horizons into the company's pension planning. So maybe, it looks like the corporation is honoring their pension obligations, however, the structure of their pension financing is such that it will never actually be able to deliver the promised benefits to its current workers. But yet again, that balance sheet looks good. So who cares, becaus the quarterly earnigns statement will be good, and exececutive compensation will be peachy. This is fiscal chicanery and those least able to cope with it are the most likely to be affected with it and unfortunately it is being done by our biggest corporations and our federal government.

xtrachromosomeconservative said...

Just for your own reading pleasure:
http://www.prospect.org/web/page.ww?section=root&name=ViewWeb&articleId=9967.
And: http://www.prospect.org/web/page.ww?section=root&name=ViewWeb&articleId=9882. The first article is by robert reich on the underfunding of corporate pension funds. The second one, by paul starr, more broadly discusses what he calls the failure of the "private new deal", but basically gets at the same point, corporations aren't honoring their fiduciary responsibiltiies. Both are from the American Prospect.