We should be clear on this

Well put:

Our pension system (Social Security, for those following along at home) isn't underfunded--it's unfunded. And there isn't any way to fund it, in the sense of storing up assets to cover the liabilities, unless we change the law so that the government can hold stocks or other assets. As P.J. O'Rourke has said, "the people of Eastern Europe had some very pungent names" for government ownership of economic assets.

Given the current legal structure under which our government operates, then, either big tax increases, or big benefit cuts, will be needed to make inflows and outflows balance in the future. Congress hasn't failed its fiduciary duty; the crime is that it has allowed people to think that there is a pension system in the first place.

That is why anyone using the phrase "trust fund" is a lying sack of you-know-what and it should be legal, indeed compulsory, to whack such individuals upside the head.  Hard.

Comments

[Rob Salkowitz]

Social Security is funded by US Treasury Bonds, backed by the "full faith and credit" of the US government - the same ones that are held by millions of people around the world who believe they represent a stable financial asset. If those are no good, then this country has a lot bigger problems that the Social Security fund.

As to the question of how we will pay those obligations coming due in 2018 and beyond, when money going out of the SS system starts to exceed money coming into the system from the wage tax - we will do exactly what we always do. We will borrow it. Adding $2 trillion to the national debt over the period of 2018-2052 is not excessive - it's actually fairly modest by today's standards. Meanwhile, if productivity grows by 2.2% instead of the 1.8% projection that the SS actuaries are using (it's been growing by about 3% since 2000), then there will be no funding problem at all.

Seems to me that boosting that productivity number (by means of technology and better management) is the easiest and most painless way out of this fix, and it's something both sides can agree on. Among other things, it will increase the profitability of US businesses, meaning better returns on private investment, so that those who use existing government-sponsored private investments (e.g., tax-advantaged accounts like 401(k) and Roth-IRAs) will benefit as well. I am confident we can make progress if this issue is actually about results, not ideology.

[pedro]

Hi Rob, thanks for stopping by.
As to the "full faith & credit" and the "if that's no good then we've got much bigger problem" arguments, I look at it like this. Suppose a corporation, let's say General Electric, has on its books a large number or corporate bonds, which are simply an promise from a corporation to pay out a certain amount of money on a certain future date. And suppose GE holds bonds from Shell Oil, Lockeed, Mitsubishi, and Daimler-Chrysler. No problem. Then there's another corporation, let's say Enron, that also has a large portfolio of corporate bonds, only in Enron's case its portfolio is composed of bonds from just one corporation -- Enron. See the difference? GE's ownership of other corporation's bonds is a legitimate investment. Enron's ownership of its own paper is a fraud. Social Security's pile of IOU's from the US government is much more analagous to Enron than to GE. And to make matters much, much worse, SS is a compulsory system returning one of the lowest long term investment rates of any investment vehicle.
Fraudulent, compulsory, bad investment. Let's fix it because it stinks, rather than quibble over projections of productivity gains over decades.
I suppose the idea of personal ownership and choice is an ideological issue compared to collective ownership and compulsion. The ideological argument is unavoidable. Let's be honest about that. That's what elections are about, and that's why the fight is so bitter, as it ought to be.

[Rob Salkowitz]

OK - I see. Pardon for intruding on the separate reality down here. You should take a basic economics class before trying to have a serious discussion about this stuff.

[pedro]

Actually, I have taken basic economics classes. They were huge classes at the University of Florida, with literally thousands of students taking them simultaneously from Prefessor Denzlo. Most of the students had to settle for video taped classes, but I was fortunate enough to have Denzlo live and in person in the business school's large auditorium. And out of the thousands, I set the curve. I used to read economic books for fun, but I suspect we prefer different authors. Marx was never one of my favorites.
That's pretty snotty for you, Rob. Tsk, tsk.
There's a difference between holding a note from some one else and a note from/to yourself. Talk about basic economics.
And are you dissing the Sunshine State with that "down here"?