Wednesday, January 05, 2005

Social Security

As has been pointed out elsewhere, Social Security is not in a crisis. There are many more serious problems to worry about than the possibility that the Social Security trust fund will be depleted in 40 years — and at that point, income will cover only 80% of the expected benefits for a while.

The graphic from the Congressional Budget Office tells that story. This Current Law graph shows that under the current plan, revenues will equal outlays (benefits) in 2019.

Between then and about 2053 outlays will be partially financed by the surplus built up in the Social Security Trust Fund. After 2053, outlays would be reduced to equal revenues.

[The CSSS Plan 2 graph projects what would happen under the anticipated Bush proposal. It excludes the funds invested in personal accounts. So that graphic is not the whole story of the Bush plan. See the report for details.]

If one really wanted to worry about the so-called crisis, here are two suggestions.
  1. Invest at least some of the current trust fund in index funds in the stock market. If, as Bush suggests, the stock market provides greater returns than US government bonds, then why do we have the Social Security Trust Fund invested entirely in US Government bonds? Put some of it in stock market index funds.

  2. As you probably know, social security is funded by the most regressive of all means to raise public funds. It is a fixed-rate tax on the first $90,000 of income earned as salary and wages. How about raising the limit, or even eliminating it entirely, as we do for Medicare. That would probably solve the problem right there. And if it didn't, how about taxing income from other sources than salary and wages?
I'm sure that between these two suggestions, the so-called crisis in Social Security would be eliminated.

1 comment:

Boonton said...

"Invest at least some of the current trust fund in index funds in the stock market. If, as Bush suggests, the stock market provides greater returns than US government bonds, then why do we have the Social Security Trust Fund invested entirely in US Government bonds? Put some of it in stock market index funds."

This historical feature has been called the 'Equity Premium'. Adjusted for risk all returns should be the same on average. This makes sense, if stock A is as risky as bond A why should someone be willing to buy bond A if it has a lower return? Wouldn't they buy stock A driving up its price and thereby reducing its return until it equaled bond A?

There's been a host of theories put forward about the Equity Premium. My pet theory is that it was caused by stocks getting a bad name after the 1929 crash and Great Depression. If that's the case then the premium is nothing more than a thing of the past.

No matter what the case, if the Equity Premium is real then economics has a real problem on its hands. Why should the gov't stop with the SS fund? If it can borrow for 30 yrs in the bond market at 6% and get 10% from index funds then what need is there for even general income taxes? the gov't will have a 'magical money machine'