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The Dreaded Social Security Salvage Job

24 Friday Mar 2023

Posted by Nuetzel in Privatization, Social Security

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Angus King, Bernie Sanders, Bill Cassidy, COLAs, Discretionary Spending, Donald Trump, Entitlement State, Federal Asset Sales, FICA Tax, George W. Bush, Insolvency, Internal Rate of Return, Joe Manchin, John Kennedy, Lump-Sum Payouts, Medicare, Mike Pence, Non-Discretionary Spending, OASDI, Opt-Out, Paygo, Payroll Tax, Present Value, Private Accounts, Privatization, Redistribution, Robert Shiller, Seeking Alpha, Social Security, Social Security Trust Fund, Todd Henderson, Universal Basic Income

Government budget negotiations never fail to frustrate anyone of a small-government persuasion. We have a huge, ongoing federal budget deficit. Spending’s gone bat-shit out of control over the past several years and too few in Congress are willing to do anything about it. Democrats would rather see politically-targeted tax increases. While some Republicans advocate spending cuts, the focus is almost entirely on discretionary spending. Meanwhile, the entitlement state is off the table, including Social Security reform.

Fiscal Indiscretion

Sadly, non-discretionary outlays (entitlements) today make a much larger contribution to the deficit than discretionary spending. That includes the programs like Social Security (SS) and Medicare, in which spending levels are programmatic and not subject to annual appropriations by Congress. When these programs were instituted there were a large number of workers relative to retirees, so tax contributions exceeded benefit levels for many decades. The revenue excesses were placed into “trust funds” and invested in Treasury debt. In other words, surpluses under non-discretionary SS and Medicare programs were used to finance discretionary spending!

The aging of Baby Boomers ultimately led to a reversal in the condition of the trust funds. Fewer workers relative to retirees meant that annual payroll tax collections were not adequate to cover annual benefits, and that meant drawing down the trust funds. Current projections by the system trustees call for the SS Trust Fund to be exhausted by 2035. Once that occurs, benefits will automatically be reduced by roughly 20% unless Congress acts to shore up the system before then.

A Few Proposals

I’ve written about the need for SS reform on several occasions (though the first article at that link is not germane here). It seems imperative for Congress and the President to address these shortfalls. By all appearances, however, many Republicans have put the issue aside. For his part, Joe Biden has apparently accepted the prospect of an automatic reduction in benefits in 2035, or at least he’s willing to kick that can down the road. He has, however, endorsed taxes on high earners to fund Medicare. Senator John Kennedy (R-LA) suggests raising the retirement age, or at least raise the minimum age at which one may claim benefits (now 62). Senators Bill Cassidy (R-La.) and Angus King (I-Maine) were working on a compromise that would create an investment fund to fortify the system, but the specifics are unclear, as well as how much that would accomplish.

Meanwhile, Senator Bernie Sanders (S-VT) proposes to expand SS benefits by $2,400 a year and add funding by extending payroll taxes to earners above the current limit of $160,000. Senator Joe Manchin (D-WV) has endorsed the latter as a “quick fix”.

There is also at least one proposal in Congress to end the practice of taxing a portion of SS benefits as income. I have trouble believing it will gain wide support, despite the clear double-taxation involved.

Then there are always discussions of reducing benefits at higher income levels or even means-testing benefits. In fact, it would be interesting to know what proportion of current benefits actually function as social insurance, as opposed to a universal entitlement. The answer, at least, could serve as a baseline for more fundamental reforms, including changes in the structure of payroll taxes, voluntary lump-sum payouts, and private accounts.

More Radical Views

There are a few prominent voices who claim that SS is sustainable in its current form, but perhaps with a few “no big deal” tax increases. Oh, that’s only about a $1 trillion “deal”, at least for both Medicare and SS. More offensive still are the scare tactics used by opponents of SS reform any time the subject comes up. I’m not aware of any serious reform proposal made over the past two decades that would have affected the benefits of anyone over the age of 55, and certainly no one then-eligible for benefits. Yet that charge is always made: they want to cut your SS benefits! The Democrats made that claim against George W. Bush, torpedoing what might have been a great accomplishment for all. And now, apparently Donald Trump is willing to use such accusations to damage any rival who has ever mentioned reform, including Mike Pence. Will you please cut the crap?

The System

The thing to remember about SS is that it is currently structured as a pay-as-you-go (PAYGO) system, despite the fact that benefits are defined like many creaky private pensions of old. SS benefits in each period are paid out of current “contributions” (i.e., FICO payroll taxes) plus redemptions of government bonds held in the Trust Fund. Contributions today are not “invested” anywhere because they are not enough to pay for current benefits under PAYGO.

The Trust Fund was accumulated during the years when favorable demographics led to greater FICO contributions than benefit payouts. The excess revenue was “invested” in Treasury bonds, which meant it was used to fund deficits in the general budget. It’s been about 15 years since the Trust Fund entered a “draw-down” status, and again, it will be exhausted by 2035.

SSA Says It’s a Good Deal

A participant’s expected “rate of return” on lifetime payroll tax payments depends on several things: lifetime earnings, age at which benefits are first claimed, life expectancy at that time, marital status, relative earning levels within two-earner couples, and the “full retirement age” for the individual’s birth year. Payroll tax payments, by the way, include the employer’s share because that is one of the terms of a hire. A high rate of return is not the same as a high level of benefits, however. In fact, relative to career income, SS has a great deal of progressivity in terms of rates of return, but not much in terms of benefit levels.

The Social Security Administration (SSA) has calculated illustrative real internal rates of return (IRR) for many categories of earners given certain assumptions. (An IRR is a discount rate that equalizes the present value (PV) of a stream of payments and the PV of a stream of payoffs.) The SSA’s most recent update of this exercise was in April 2022. The report references Old Age, Survivors, and Disability Insurance (OASDI), but the focus is exclusively on seniors.

Three basic scenarios were considered: 1) current law, as scheduled, despite its unsustainability; 2) a payroll tax increase from 12.4% (not including the Medicare tax) to 15.96% starting in 2035, when the Trust Fund is exhausted; and 3) a reduction in benefits of 22% starting in 2035.

The authors of the report conclude that “… the real value of OASDI benefits is extraordinarily high.” This theme has been echoed by several other writers, such as here and here. This conclusion is based on a comparison to returns earned by investments that SSA judges to have comparably low risk.

I note here that I’ve made assertions in the past about relative SS returns based on nominal benefits, rather than inflation-adjusted values. Those comparisons to private returns might have seemed drastic because they were expressed in terms of hypothetical future nominal values at the point of retirement. The gaps are not as large in real terms or if we consider SS returns broadly to include those accruing to low career earners. Medium and high earners tend to earn lower hypothetical returns from SS.

A Mixed Bag

SSA’s calculated IRRs are highest for one-earner couples followed by two-earner couples. Single males do relatively poorly due to their higher mortality rates. Low earners do very well relative to higher earners. Earlier birth years are associated with higher IRRs, but these are not as impressive for cohorts who have not yet claimed benefits. The ranges of birth years provided in the report make this a little imprecise, but I’ll focus on those born in 1955 and later.

Of course the returns are highest under the current law hypothetical than for the scenarios involving a benefit reduction or a payroll tax hike. The current law IRRs can be viewed as baselines for other calculations, but otherwise they are irrelevant. The system is technically insolvent and the scheduled benefits under current law can’t be maintained beyond 2034 without steps to generate more revenue or cut benefits. Those steps will reduce IRRs earned by hypothetical SS “assets” whether they take the form of higher payroll taxes, lower benefits, a greater full retirement age, or other measures.

The tax hike doesn’t have much impact on the IRRs of near-term retirees. It falls instead on younger cohorts with some years of employment (and payroll tax payments) remaining. The effect of a cut in benefits is spread more evenly across age cohorts and the reductions in IRRs is somewhat larger.

With higher payroll taxes after 2034, the average IRRs for birth years of 1955+ range from about 0.5% up to about 6.25%. The returns for single females and two-earner couples are roughly similar and fall between those for single males on the low end and one-earner couples on the high end. In all cases, low earners have much higher IRRs than others.

The reduction in benefits produces returns for the 1955+ age cohorts averaging small, negative values for high-earning single men up to 5.5% to 6% for low-earning, one-earner couples.

But On the Whole…

The IRR values reported by SSA are quite variable across cohorts. Individuals or couples with low earnings can usually expect to “earn” real IRRs on their contributions of better than 3% (and above 5% in a few cases). Medium earners can expect real returns from 1% to 3% (and in some cases above 4%). Many of the returns are quite good for a safe “asset”, but not for high earners.

Again, SSA states that these are real returns, though they provide no detail on the ways in which they adjust the components used in their IRR formula to arrive at real returns. Granting the benefit of the doubt, we saw persistently negative real returns on a range of safe assets in the not-very-distant past, so the IRRs are respectable by comparison.

Qualifications

There are many assumptions in the SSA’s analysis that might be construed as drastic simplifications, such as no divorce and remarriage, uniform career duration, and no relationship between earnings and mortality. But it’s easy to be picky. Many of the assumptions discernible from the report seem to be reasonable simplifications in what could otherwise be an unruly analysis. Nonetheless, there are a few assumptions that I believe bias the IRRs upward (and perhaps a few in the other direction).

In fact, SSA is remarkably non-transparent in their explanation of the details. Repeated checking of SSA’s document for clear answers is mostly futile. Be that as it may, I’m forced to give SSA the benefit of the doubt in several respects. One is the reinvestment of cumulative remaining contributions at the IRR throughout the earning career and retirement. A detailed formula with all components and time subscripts would have been nice.

… And Major Doubts

As to my misgivings, first, the IRRs reported by SSA are based on earners who all reach the age of 65. However, roughly 14% – 15% of individuals who live to be of working age die before they reach the age of 65. Most of those deaths occur in the latter part of that range, after many years of contributions and hypothetical compounding. That means the dollar impact of contributions forfeited at death before age 65 is probably larger than the unweighted share of individuals. These individuals pay-in but receive no retirement benefit in SSA’s IRR framework, although some receive disability benefits for a period of time prior to death. It wouldn’t bother my conscience to knock off at least a tenth of the quoted returns for this consideration alone.

A second major concern surrounds the method of calculating benefits and discounted benefits. SSA assumes that benefits continue for the expected life of the claimant as of age 65. If life expectancy is 19 years at age 65, then “expected” benefits are a flat stream of benefit payments for 19 years. Discounting each payment back to age 65 at the IRR yields one side of the present value equality. This constant cash flow (CCF) treatment is likely to overstate the present value of benefits. Instead of CCFs, each payment should be weighted by the probability that the claimant will be alive to receive it with a limit at some advanced age like 100. CCF overcounts present values up to the expected life, but it undercounts present values beyond the expected life because the assumed CCF benefits then are zero!! Weighting benefit payments by the probability of survival to each age produces continuing additions to the PV, but increasing mortality and decaying discount factors become quite substantial beyond expected life, leading to relatively minor additions to PV over that range. The upshot is that the CCFs employed by SSA overstate PVs by front-loading all benefits earlier in retirement. For a given PV of contributions, an overstated PV of benefits requires a higher (and overstated) IRR to restore the PV equality, and this might be a substantial source of upward bias in SSA’s calculations.

Third, when comparing an SS “asset” to private returns, a big difference is that private balances remaining at death become assets of the earner’s estate. Meanwhile, a single beneficiary forfeits their SS benefits at death (except for a small death benefit), while a surviving spouse having lower benefits receives ongoing payments of the decedent’s benefits for life. This consideration, however, in and of itself, means that private plans have a substantial advantage: the “expected” residual at death can be “optimized” at zero or some higher balance, depending on the strength of the earner’s bequest motive.

Finally, in a footnote, the SSA report notes that their treatment of income taxes on Social Security benefits for claimants with higher incomes might bias some of the IRRs upward. That seems quite likely.

It would be difficult to recast SSA’s report based on adjustments for all of these qualifications. However, it’s likely that the IRRs in the SSA report are sharply overstated. That means many more beneficiaries with medium and higher earnings records would have returns in the 0% to 2% range, with more IRRs in the negative range for singles. Low earners, however, might still get returns in a range of 3% to 5%.

The SSA analysis attempts to demonstrate some limits to the risks faced by participants, given the scenarios involving a payroll tax increase or a benefits reduction in 2035. Nevertheless, there are additional political risks to the returns of certain classes of current and future retirees. For example, payroll taxes could be made much more progressive, benefits could be made subject to means testing, or indexing of benefits could be reduced. In fact, there are additional demographic risks that might confront retirees several decades ahead. Continued declines in fertility could further undermine the system’s solvency, requiring more drastic steps to shore up the system. As a hypothetical asset, by no means is SS “risk-free”.

Better Returns

Now let’s consider returns earned by private assets, which represent investments in productive capital. For stocks, these include the sum of all dividends and capital gains (growth in value). For compounding purposes, we assume that all returns are reinvested until retirement. Remember that private returns are much less variable over spans of decades than over durations of a few years. Over the course of 40 year spans (SSA’s career assumption), private returns have been fairly stable historically, and have been high enough to cushion investors from setbacks. Here is Seeking Alpha on annualized returns on the basket of stocks in the S&P 500:

“… the return on the S&P 500 since the beginning of valuation in 1928, is 10.22%, whereas the inflation-adjusted return on the market since that time is 7.01%…”

That real return would generate benefits far in excess of SS for most participants, but it’s not an adequate historical perspective on market performance. A more complete picture of real returns on the S&P, though one that is still potentially flawed, emerges from this calculator, which relies on data from Robert Shiller. The returns extend back to 1871, but the index as we know it today has existed only since 1957. The earlier returns tend to be lower, so these values may be biased:

Real stock market returns over rolling 40-year time spans varied considerably over this longer period. Still, those kind of stock returns would be superior to the IRRs in the SSA report going forward in all but a few cases (and then only for low and very low earners).

Most workers facing a choice between investing at these rates for 40 years, with market risk, and accepting standard SS benefits, uncertain as they are, couldn’t be blamed for choosing stocks. In fact, if we think of contributions to either type of plan as compounding to a hypothetical sum at retirement, the stock investments would produce a “pot of gold” several times greater in magnitude than SS.

However, we still don’t have a fair comparison because workers choosing a stock plan would essentially engage in a kind of dollar-cost averaging over 40 years, meaning that investments would be made in relatively small amounts over time, rather than investing a lump-sum at the beginning. This helps to smooth returns because purchases are made throughout the range of market prices over time, but it also means that returns tend to be lower than the 40-year rolling returns shown above. That’s because the average contribution is invested for only half the time.

To be very conservative, if we assume that real stock returns average between 5% and 6% annually, $1 invested every year would grow to between $131 – $155 after 40 years in constant dollars. At returns of 1% to 2% from SS, which I believe are typical of the IRRs for many medium earners, the cumulative “pot” would grow to $49 – $60. Assuming that the tax treatment of the stock plan was the same as contributions and benefits under SS, the stock plan almost triples your money.

Dealing With the Transition

Privatization covers a range of possible alternatives, all of which would require federal borrowing to pay transition costs. Unfortunately, the Achilles heel in all this is that now is a bad time to propose more federal borrowing, even if it has clear long-term benefits to future retirees.

Todd Henderson in the Wall Street Journal suggests a seeding of capital provided by government at birth along with an insurance program to smooth returns. Another idea is to offer an inducement to delay retirement claims by allowing at least a portion of future benefits to be taken as a lump sum. If retirees can privately invest at a more advantageous return, they might be willing to accept a substantial discount on the actuarial value of their benefits.

In fact, there is evidence that a majority of participants seem to prefer distributions of lump sums because they don’t value their future benefits at anything like that suggested by the SSA analysis. In fact, many participants would defer retirement by 1 – 2 years given a lump sum payment. Discounts and/or delayed claims would reduce the ultimate funding shortfall, but it would require substantial federal borrowing up front.

Additional federal borrowing would also be required under a private option for investing one’s own contributions for future dispersal. The impact of this change on the system’s long-term imbalances would depend on the share of earners willing to opt-out of the traditional SS program in whole or in part. More opt-outs would mean a smaller long-term obligations for the traditional system, but it would be hampered by a costly transition over a number of years. Starting from today’s PAYGO system, someone still has to pay the benefits of current retirees. This would almost certainly mean federal borrowing. Spreading the transition over a lengthy period of time would reduce the impact on credit markets, but the borrowing would still be substantial.

For example, perhaps earners under 35 years of age could begin opting out of a portion or all of the traditional program at their discretion, investing contributions for their own future use. Thus, only a small portion of contributions would be diverted in the beginning, and amounts diverted would contribute to the nation’s available pool of saving, helping to keep borrowing costs in check. By the time these younger earners reach retirement age, nearly all of today’s retirees will have passed on. Ultimately, the average retiree will benefit from higher returns than under the traditional program, but since they won’t be (fully) paying the benefits of current or near-term retirees, the public must come to grips with the bad promises of the past and fund those obligations in some other way: reduced benefits, taxes, or borrowing.

Another objection to privatization is financial risk, particularly for lower-income beneficiaries. Limiting opt-outs to younger earners with adequate time for growth would mitigate this risk, along with a reversion to the traditional program after age 45, for example. Some have proposed limiting opt-outs to higher earners. Bear in mind, however, that the financial risk of private accounts should be weighed against the political and demographic risk already inherent in the existing system.

One more possibility for bridging the transition to private, individually-controlled accounts is to sell federal assets. I have discussed this before in the context of funding a universal basic income (which I oppose). The proceeds of such sales could be used to pay the benefits of current and near-term retirees so as to allow the opt-out for younger workers. Or it could be used to pay off federal debt accumulated in the process. The asset sales would have to proceed at a careful and deliberate pace, perhaps stretching over several decades, but those sales could include everything from the huge number of unoccupied federal buildings to vast tracts of public lands in the west, student loans, oil and gas reserves, and airports and infrastructure such as interstate highways and bridges. Of course, these assets would be more productive in private hands anyway.

The Likely Outcome

Will any such privatization plan ever see the light of day? Probably not, and it’s hard to guess when anything will be done in Washington to address the insolvency we already face. Instead, we’ll see some combination of higher payroll taxes, higher payroll taxes on high earners through graduated payroll tax rates or by lifting the earnings cap, reduced benefits on further retirees, limits on COLAs to low career earners, and means-tested benefits. Some have mentioned funding Social Security shortfalls with income taxes. All of these proposals, with the exception of automatic benefit cuts in 2035, would require acts of Congress.

You’re Entitled To Better Returns Than Social Security

08 Monday Jan 2018

Posted by Nuetzel in Social Security

≈ 1 Comment

Tags

AARP, Baby Boom Retirement, Brenton Smith, CATO Institute, Disability Insurance Fund, Earnings Test, Entitlement Reform, Federal Asset Sales, FICA Payroll Taxes, Insolvency, Lance Robert, Longevity Indexing, Michael Tanner, OASDI, Private Accounts, Rep. Sam Johnson, Social Security, Social Security Trust Fund

It’s one thing for indignant seniors (or anyone nearing retirement) to defend the crappy returns they get on their lifetime Social Security payroll taxes … er, contributions, against the arguments of reformers. It’s another for younger individuals to rant about the threat to the crappy returns they will get while resisting an idea for reform that would almost certainly improve their eventual well-being: privatization. Both of the aforementioned reactions are marked by confusion over the use of the word “entitlement” in federal budgeting, though in another sense, entitlement is manifested in the very defensiveness of the reform critics. At its root, this self-righteous naiveté is a product of ignorance about the program, its insolvency, how its rewards compare to private savings, and longstanding media propaganda favoring big government as grubstaker… because it feels virtuous.

There’s really not much to like about Social Security, though the status quo will always appeal to some.

Insolvency: The trust fund held $2.7 trillion of reserves at the end of 2016, but benefit payments are growing faster than contributions (plus interest on the public bonds held by the fund). The wave of retiring baby boomers and increasing longevity (and a declining number of workers per retiree) are placing a strain on the system. According to the trustees, depletion of the fund will begin in earnest in 2022, and the Old Age Survivors and Disability Insurance (OASDI) fund will be exhausted by 2034. This might be delayed if the economy and employment grow faster than expected. The actuarial deficit through 2091 is $12.5 trillion, as Brenton Smith notes in this post.

The returns are lousy: Two years ago, I posted an examination of the returns earned on Social Security “contributions” in: “Stock Crash at Retirement? Still Better Than Social Security“. The title is an accurate summary of the conclusions.

“Suppose you are given an option to invest your FICA taxes (and your employer’s contributions) over your working life in a stock market index fund. After 40 years or so, based on historical returns, you’ll have stashed away about 12 – 18 times your total contributions (that range is conservative — 40 years through 2014 would have yielded 19x contributions). A horrible preretirement crash might leave you with half that much. At the low-end, you might have as little as 4.5 times contributions if the crash is as bad as the market decline of 1929-32. That would be very bad.

But you don’t have that option under current law. Instead, the return you can expect from Social Security will leave you with only 1 to 4 times your contributions — without further changes in the program — based on your current age, lifetime earnings, marital status and retirement age. The latter range is based on the Social Security Administration’s (SSA’s) own calculations, as quoted in ‘Social Security: Saving or Tax? Proceeds or Aid‘ on Sacred Cow Chips.”

Reforms? The prototypical reform proposals always involve cutting benefits or raising taxes in one way or another. No wonder there is so much suspicion among the public! For seniors and near-retirees, the lousy returns noted above are at least fairly certain: generally, reform proposals haven’t applied to those of age 55+. Nonetheless, those projected returns are not a promise. There is a risk that the benefits could be changed or eroded by Congress, as discussed here by Lance Robert. For youngsters, the returns are much more uncertain, and changing the structure of distant benefits is always more politically palatable.

Examples of typical reform proposals include delaying the age at which benefits can be claimed, increasing the income cap on payroll taxes, and changing the way in which benefits are indexed to inflation. Many of the “new ideas” shown at this link are variations on finding additional tax revenue or delaying benefits. Rep. Sam Johnson has proposed a set of fairly conventional reforms, including gradual increases in the retirement age and elimination of the earnings test, so that some income could be earned without reducing benefits. Also, Johnson’s plan would redistribute benefits toward low-income beneficiaries. AARP provides a summary of 12 proposals, one of which is to index benefits for life expectancy at each age: as expected longevity increases, annual benefits would decrease. There are other proposals with a strongly redistribution aspect, such as reducing benefits for those with high lifetime earnings or means-testing benefits.

Better ideas: There are currently some incentives in place for retirees to delay benefits for a few years, and some of the proposals at the “new ideas” link would attempt to strengthen those rewards. Another idea mentioned there is to offer an inducement to delay claims by allowing at least a portion of future benefits to be taken as a lump sum. This is more novel and has greater potential savings to the system in a world with increasing longevity. To the extent that retirees can privately invest at more advantageous returns, they might be willing to accept a substantial discount on the actuarial value of their benefits.

The interests of future beneficiaries would be served most effectively by allowing them to choose between contributing to the traditional program or setting a portion of their contributions aside in a private account. These accounts would give individual workers flexibility over investment direction. As discussed above, better returns than the traditional program can be had with near-certainty given sufficient time until retirement. Michael Tanner at CATO is correct in insisting that workers control their own accounts should they opt-out of the traditional program. And the government itself should stay out of private capital markets. 

It is this proposal that is always greeted with the most vitriol by opponents of reform. The very idea of private accounts seems to them an affront. One explanation is the fear of financial risk, but this would be mitigated by limiting the opt-out to younger workers with adequate time for growth. Another explanation is the fear that lower-income beneficiaries would not fare well under this reform. In fact, there is a strong semblance of redistribution in the system’s existing benefit formulas, but these features do not amount to much once adjusted for the differing life expectancies of income groups and the benefits paid to survivors. There is no reason, however, why the private account option would prevent redistribution through the traditional portion of contributions. Moreover, there is value in creating greater transparency when it comes to redistribution, as it promotes more effective scrutiny.

Funding: Unfortunately, the Social Security program has long relied on funding current benefits to retirees with dollars contributed by current workers. This is one of the biggest areas of misunderstanding on the part of the public. Allowing workers to opt-out would improve the long-term benefits received by those retirees, but it would also remove a portion of the funding for current retirees, thus accelerating a portion of the system’s unfunded obligations. A similar acceleration of the funding gap would accompany any reform to discount future benefits in exchange for payment of a lump sums in advance. The tradeoff is favorable over a time horizon lengthy enough to cover the retirement of today’s younger workers, but the near-term shortfall can only be met by reduced benefits, borrowing, or new sources of funds.

Asset Sales: The best option for bridging the funding needs of a transition to private, individually-controlled accounts is to sell federal assets. I have discussed this before in the context of funding a universal basic income, which I oppose. The proceeds of such sales, however, could be used to pay the benefits of current and near-term retirees so as to allow the opt-out for younger workers. The asset sales would have to proceed at a careful and deliberate pace, perhaps stretching over a decade or more, but those sales could include everything from unoccupied federal buildings to vast tracts of public lands in the west, student loans, oil and gas reserves, and airports and infrastructure such as interstate highways and bridges. In 2011, it was estimated that the federal government owned $1.6 trillion worth of liquid assets alone. The value of less liquid federal assets would be in the many trillions of dollars. (Read this eye-opening assessment of federal assets.) Of course, these assets would be more productive in private hands.

Sustainability: The outrage greeting ideas for entitlement reform largely denies the economic reality of inadequate funding. Social Security is just one example of an unsustainable entitlement program. Few participants in the system seem to realize that their benefits are paid out of contributions made by current workers, or that surpluses of the past were simply borrowed by the government and used to fund other spending. It was sustainable only with a sufficient number of contributing workers to support a stable class of retiree-beneficiaries. It cannot withstand an expanding class of longer-living beneficiaries relative to the labor force.

Ideally, reform would address the system’s insolvency as well as the weak returns to beneficiaries on their payments into the system. Self-direction and individual control over at least a portion of invested contributions should be viewed as a long-term fix for both. It will yield much better returns than the traditional system, but for workers this depends on the amount of time remaining until retirement. Young workers can elect to opt-out of the traditional system at little risk because they have the time to invest over several market cycles, but older workers must be circumspect. In any case, it is unlikely that politicians would take the chance of allowing older workers to opt-out, then face a potential backlash after a market downturn.

The insolvency problem, and the short-term funding shortfall created via the opt-out alternative, require hard decisions, but asset sales can bridge a large part of the gap, if not all of it. Lump-sum benefit payments might also be made at a savings, but they would worsen the short-term gap between benefit payments and contributions. In the long-run, the tradeoffs would become more favorable as today’s young workers age and retire with the more handsome returns available via individually-controlled and privately-invested accounts.

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  • Marginal REVOLUTION
  • Stlouis
  • Watts Up With That?
  • Aussie Nationalist Blog
  • American Elephants
  • The View from Alexandria
  • The Gymnasium
  • A Force for Good
  • Notes On Liberty
  • troymo
  • SUNDAY BLOG Stephanie Sievers
  • Miss Lou Acquiring Lore
  • Your Well Wisher Program
  • Objectivism In Depth
  • RobotEnomics
  • Orderstatistic
  • Paradigm Library

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Ominous The Spirit

Ominous The Spirit is an artist that makes music, paints, and creates photography. He donates 100% of profits to charity.

Passive Income Kickstart

OnlyFinance.net

TLC Cholesterol

Nintil

To estimate, compare, distinguish, discuss, and trace to its principal sources everything

kendunning.net

The Future is Ours to Create

DCWhispers.com

Hoong-Wai in the UK

A Commonwealth immigrant's perspective on the UK's public arena.

Marginal REVOLUTION

Small Steps Toward A Much Better World

Stlouis

Watts Up With That?

The world's most viewed site on global warming and climate change

Aussie Nationalist Blog

Commentary from a Paleoconservative and Nationalist perspective

American Elephants

Defending Life, Liberty and the Pursuit of Happiness

The View from Alexandria

In advanced civilizations the period loosely called Alexandrian is usually associated with flexible morals, perfunctory religion, populist standards and cosmopolitan tastes, feminism, exotic cults, and the rapid turnover of high and low fads---in short, a falling away (which is all that decadence means) from the strictness of traditional rules, embodied in character and inforced from within. -- Jacques Barzun

The Gymnasium

A place for reason, politics, economics, and faith steeped in the classical liberal tradition

A Force for Good

How economics, morality, and markets combine

Notes On Liberty

Spontaneous thoughts on a humble creed

troymo

SUNDAY BLOG Stephanie Sievers

Escaping the everyday life with photographs from my travels

Miss Lou Acquiring Lore

Gallery of Life...

Your Well Wisher Program

Attempt to solve commonly known problems…

Objectivism In Depth

Exploring Ayn Rand's revolutionary philosophy.

RobotEnomics

(A)n (I)ntelligent Future

Orderstatistic

Economics, chess and anything else on my mind.

Paradigm Library

OODA Looping

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