Making Paper Assets Worth Something

In my last post, I commented on M.P. Dunleavey's page-B6 "Basic Instincts" column in yesterday's NYT Business section (entitled "Plan to Retire But Leave Out Social Security"). That post concerned the Chicken-Little silliness of her column's main point ("Omigosh! My Social Security Statement says the trust fund will run out in 2040! Better assume I'll get Zero!!")

In reading Dunleavey's column, I had a couple thoughts that I hadn't had before. A key part of the political attack on Social Security last year was the canard that the bonds it has accrued since the 1983 Greenspan Commission's Report (filled with raving leftists, as you can tell by its having been chaired by Alan Greenspan) recommended that the system "save" for the purposes of dealing with the future costs of the Baby Boomers' retirement. Congress enacted and President Reagan signed legislation that implemented key elements of this report. Most relevantly for this post, the payroll tax was increased so that the system could accrue assets meant to be sufficient to defray the costs of the Boomers' retirement at a time when there would be fewer workers per retiree, and so on. In other words, the Greenspan Commission contemplated exactly the challenges we faced. We find ourselves in our current situation because the total value of bonds that will have accrued from the tax increases recommended by the Commission turned out to be insufficient to meet the program's shortfall through 2056 (which was the long run horizon that the Commission was charged with addressing). As I understand things, this inadequacy is primarily due to an unexpected slowdown in wage growth (benefit levels for current retirees are insensitive to current tax revenues, which are themselves determined by total earnings up to a per-individual cap, which was $90,000 last year).

There is no question that the Social Security system faces a shortfall and that something should be done about it (I tend to favor some version of the Diamond-Orszag plan, about which I will perhaps write in the future). But the sky-is-falling crowd has made an especially large bale of hay out of the supposed vulnerability of the special bonds that the Social Security Trust Funds have been accruing since the Greenspan Commission-induced surpluses commenced. Simply put, here are the basic facts:

• At present, the Social Security system takes in more in revenues than it pays out in benefits. (This situation has gone on for 2 decades and will continue for the next 11 or so years, even if no changes are made.)
  
• By law, the resulting surpluses must be invested in special Treasury bonds. Thus, the Social Security Trust Funds are required to invest in low-yield assets (perhaps I'll discuss the bonds-versus-stocks issue, and its general irrelevance, another time).
  
• Those bonds are backed by the usual "full faith and credit of the United States government" promise.
  
• Nonetheless, some proponents of structural changes---i.e., partial or full privatization---of Social Security have tried hard to convince the public that "There is no 'trust fund,' just IOUs that I saw firsthand," as President Bush said during a visit to the Bureau of the Public Debt in April 2005.

The worthless-pieces-of-paper PR strategy has probably made headway with some people. And, as Olivia Mitchell of Wharton is rightly quoted as saying in Dunleavey's column, "the Treasury goes ahead and spends that money, so although there is a promise, nobody knows where the money will come from to pay them back."

Mitchell's point is commonly made, and it is certainly correct. Which brings me to the couple of thoughts I had reading Dunleavey's column yesterday:

1. Suppose we accept, as President Bush and some of his backers claim, that the Social Security Trust Funds' assets are particularly worthless since they are simply promises by one part of the government to pay another. Then, the system can pay promised benefits only if Congress and the President are willing, as the President also said in his visit to the Bureau of the Public Debt, to enact policies so that "future generations will pay [for these IOUs]...either in higher taxes, or reduced benefits, or cuts to other critical government programs." So we are accepting that the system's assets are not really assets at all---not in the sense that a government or corporate bond you or I might own is an asset. With such an asset, we simply sell or cash it in and receive its value. Barring bankruptcy of the issuing entity, we will certainly be paid. By contrast, on the accepted line of reasoning, when the Social Security Trust Fund tries to redeem its "assets" from the U.S. Treasury, the Treasury can simply say, "Ix-nay on the Asset Pay", since presumably the "higher taxes, or reduced benefits, or cuts to other criticial government programs" may simply be too politically unpopular. Thus these assets are more hope than plan.
   
   But if that is true, then there is not really any Social Security system at all! Social Security is then just another line item in the government's budget. There happens to be a tax "dedicated" to it, but benefits continue regardless of that tax's revenue, anyway. So why shouldn't we equally doubt, say, the Pentagon's ability to get its budget, or the department of transportation, and so on? Hey, why assume that the wealthiest Americans can continue to count on the reduced taxes Congress and the President have bestowed on them? No particular reason, none at all. Social Security's political defenders should start making the case that if there is no Trust Fund as such---if the Greenspan Commission was just a con---then there is no reason to treat Social Security as a special program. If those assets aren't really assets at all, then there really isn't a relevantly separate Social Security program, either. Of course this is really quite silly---of course there is a program, one in whose name quite a bit has been promised. That is why we need a way to enforce the legally binding nature of those bonds. So how to do that?
   
   
2. Quite simply.
   1. First, change the legal status of the Social Security Administration to a private, non-profit corporation that is legally charged with meeting benefits under current policy (including the provision about automatic cuts should full benefit payment make the system insolvent).
      
   2. Second, require the federal government to direct all relevant payroll tax revenues (i.e., the 12.4 percent part, for you wonks) into the coffers of this private corporation.
      
   3. Third, have Congress convert all those special bonds into bonds that are legally indistinguishable from ones purchased at public auctions.
   
   If we took this step, there would no longer be any way to default specifically on bonds held by the Social Security system without defaulting on all sorts of bonds. Those worthless pieces of paper would be indistinguishable from all the other full-faith-and-credit ones held by private individuals and corporations (and foreign governments). I'm not an expert on these details, but I'm betting this plan would pass constitutional muster (see "Reserve System, Federal" for a similar case). It would also have the substantial virtue of (a) making good on the Greenspan Commission's, Congress's, and President Reagan's promises, and (b) forcing politicians to focus on the real issue, which is about benefits and tax revenues, and eliminating the legalistic debate over the status of duly lent money.

Plan on Fixing SS, But Leave Out Dunleavey

During last year's debate, a lot was written about Social Security's future and the problems the system faces. So it's unsurprising that there's little (nothing?) new in M.P. Dunleavey's page-B6 "Basic Instincts" column in yesterday's NYT Business section (entitled "Plan to Retire But Leave Out Social Security"). But in reading Dunleavey's column, I had a couple thoughts that I hadn't had before. I'll put those thoughts in my next post; before I get to them, let me dispense with a point of confusion that Dunleavey causes in building her column around the Social Security statement she recently received.

Early in the column, she quotes her statement and then comments thusly:

"Unless action is taken soon to strengthen Social Security, in just 11 years we will begin paying more in benefits than we collect in taxes," the letter said. "Without changes, by 2040 the Social Security Trust Fund will be exhausted.

Exhausted? I've been fairly pessimistic about the future of Social Security and tend to side with those who recommend not counting on those benefits when calculating one's retirement. But I thought the Social Security Administration itself might hold out more hope for its own future---let alone yours and mine.

This quotation is silly. First of all, there's no news in the supposed news, and it's hard to imagine that after last year's extended discussions on Social Security, anyone reading the inside pages of the NYT Business section on a Saturday could be unaware of the general fact that the Social Security system faces a shortfall years from now. Worse, though, is Dunleavey's apparent suggestion that without policy changes, Social Security will simply disappear ("tend to side with those who recommend not counting on those benefits when calculating one's retirement").

As I understand current law, if the trust fund cannot pay all benefits promised-by-formula, everyone's benefit will simply be scaled down to an amount such that the system remains solvent. Thus the relevant question is not when the trust fund will be "exhausted", but the fraction of promised benefits that the system will be able to pay when it is no longer able to pay all promised benefits. According to a May 2005 Social Security Statement, when the trust fund is exhausted "there will be enough money to pay only about 74 cents for each dollar of scheduled benefits." This is not good, but it's a lot closer to 100 cents than it is to 0.

Dunleavey does cite this fact much later in her column, but even then only to criticize the way promised benefits are presented. Her beef is that "the dollar amounts of the individual benefits printed in your statement and mine are still the full amounts." But if the statement reported the 74 percent figure, then there wouldn't be any exhaustion problem. Either there's a terrible problem or there isn't.

Dunleavey concludes as follows:

Many people stopped counting on Social Security as part of their planning long ago. But many others who still have their fingers crossed need to let go of the fantasy and make better financial plans. Trust me, I read it in my Social Security statement.

This conclusion seeks so to substitute dramatic effect for empirical relevance. I'm unsurprised to see someone make such claims. But I'm seriously bothered that it somehow wound up published in the NYT Business section. Shame on the editors.

Nick Kristof's Column Today

I really respect Nicholas Kristof. He's done a ton to keep the tragic genocide in Darfur in the news, and he usually brings an interesting take on the more-frequently covered topics about which he writes. His writing on aid and Africa has made me more aware of the good work that some evangelical groups do there. More than once, such columns of his have reminded me that not all---perhaps few---evangelicals fit into the box of rabid, loud hate that has become so typical of the Axis of Intolerance that seems to have had such a strong grip on the Republican Party lo these last years.

One thing about such columns is they make you realize that intolerance for those whose leaders are loudly intolerant isn't a virtue. To that effect, I think Kristof has a point about the tone of recent secular attacks on religiosity as such. Kristof's column today focuses on and cricitizes Richard Dawkins's website Why Won't God Heal Amputees?:

That’s a snarky site that notes that while people regularly credit God for curing cancer or other ailments, amputees never seem to enjoy divine intervention.

“If God were answering the prayers of amputees to regenerate their lost limbs, we would be seeing amputated legs growing back every day,” the Web site declares, adding: “It would appear, to an unbiased observer, that God is singling out amputees and purposefully ignoring them.”

That site is part of an increasingly assertive, often obnoxious atheist offensive led in part by Professor Dawkins — the Oxford scientist who is author of the new best seller “The God Delusion.” It’s a militant, in-your-face brand of atheism that he and others are proselytizing for.

I confess to more than my share of off-the-cuff remarks that aren't entirely charitable to true-believers. Nonetheless, I strive to be more tolerant of people who are devoted to their faiths. Personally I think it's up to individuals to decide the ultimate truths to which they want to subscribe. I make this point because, while I haven't read Dawkins's book, I understand (from both Kristof's article and a friend who has read it) that much of his goal is to convince the faithful that they are wrong on empirical matters and thus should abandon faith. Hence Dawkins's website on amputees---which, based on a couple minutes of perusal, I think is considerably more thoughtful and earnest in its engaging of believers than Kristof gives him.

Personally I think Dawkins's point---that faith cannot be justified on empirical grounds---is neither surprising (I think that statement is either tautological or self-evident, in case there's a distinction between these two concepts) nor likely to convince many reflective theists. The fact that Dawkins has cleverly found an example that challenges---indeed, appears to negate---the literal text of the Bible doesn't really change this fact. There's such a thing as artistic license, and I'm guessing that many sincere theists see the literal quotes that Dawkins cites in that light.

Nonetheless, I'm glad that Dawkins is lodging this particular challenge. Worldwide, we're in the midst of ongoing attempts by religious fundamentalists to turn back the clock on liberal (that's "liberal" in the classical sense) rights. Here in the US, we've suffered through years of an ascendant religious right filled with intolerant, uncivil and---in at least some high-profile cases---hypocritical mullahs who think it's their business to tell the rest of us how to live. Inevitably their reasoning seems to come down to religious principles in general, with the Bible in particular often cited. If Dawkins's challenge forces at least some people to confront evident contradictions in the Bible's text, then so much the better.

Now, I haven't followed Dawkins's recent efforts, or those of his allies, enough to know whether Kristof is justified in referring to their tone and wording as constituting "irreligious intolerance". If so, I wish they'd not take that approach---both because it's intolerant and because it's unlikely to be very helpful.

But they have every right to make the arguments they're making, arguments that apparently need to be joined in a society where a Jew chosen to be the Democratic nominee for Vice President can earnestly and publicly say

As a people we need to reaffirm our faith and renew the dedication of our nation and ourselves to God and God's purpose.

He also questioned the idea "that morality can be maintained without religion". (Kudos to the ADL for calling him out on this one; if memory serves, Lieberman later said he didn't mean to suggest he believed what he'd said.) And let's not forget Jerry Falwell's tour-de-force, so heartily joined by Pat Robertson.

Having said all that, I plead dumbfoundedness to this statement by Kristof:

Now that the Christian Right has largely retreated from the culture wars, let’s hope that the Atheist Left doesn’t revive them.

Huh? The Christian Right has largely retreated from the culture wars?

With anti-gay-marriage referenda passing in something like 7 states (though not in Arizona) this past election, with the attempts by the White House to direct federal funding to religious groups, with all the noxious stuff that the political representatives of the religious right say these days, where does Kristof get this idea? I know that there are some fringe folk on the "Christian Right" (Paul Weyrich is one, if memory serves) who have decided to drop the partisan-politics approach to the "culture war". But I don't think that means he/they are eschewing the "culture wars" in general.

Perhaps Kristof means that, since the Democrats took both houses of Congress, voters are currently less in the thrall of the "Christian Right". Well, if so, then he should recognize that the "retreat" isn't due to some self-reflective decision to stop with the intolerance. No, it's due to the fact that their ideas aren't all that popular.