Yikes. Memo to self - when I finally get around to commenting on a great paper by Smetters that goes to the heart of this topic as the way you put it, I have to comment on this post as well. Check over at Angrybear on Tuesday when I have promised Bruce Bartlett (who must have flunked Finance 101) that he'll be mentioned to. Like Kevin Drum, I may have to differ with you - albeit I suspect you passed Finance 101.

I look forward to it. And for the record, I did pass both finance courses I took in business school. Then again, they were pretty basic. ;)

Yuo hit the big time on the WM Andrew. Kudos!

Couldn't you just reduce benefits/increase payroll taxes to balance the Social Security and then just keep rolling the bonds into new bonds? We owe this money to ourselves, so it seems like it is completely within our realm to decide whehter we want to pay it back.

Chad,

Those are both legitimate options, albeit politically contentious ones. Social security is generally seen by the man on the street as something he has earned, despite the fact the average worker takes more out of social security than he puts in even with interest (although that will change over the next few decades). Since people see social security as a pension rather than a transfer tax, they're extremely touchy regarding benefit cuts. And since FICA already takes a big bite out of paychecks, workers are none too thrilled with the idea of increasing that pain. It's a difficult political challenge, which is why most politicians prefer to ignore it, since the problem won't become big enough to require a solution until 2017 (although the fix will have to be more radical the closer we get to that date, since we'll have more liabilities built up over the intervening years).

A note from a Canadian reader (here via Kevin's blog): the Canadian government faced a similar problem with the Canada Pension Plan, the Canadian equivalent of Social Security, and fixed it fairly easily back in 1997, by raising contribution rates. Details:
http://www.cppib.ca/info/articles/ap-07-01-2002.html

According to an economist friend (who knows economists in the Department of Finance), they thought about converting it from a pay-as-you-go system to an individual-account system, but decided against it: as Fierst says, you would then run the risk of individuals outliving their savings. Apparently the cost of an annuity from a private Canadian insurance company would be _three times_ the cost for the government to provide the same benefits.

I don't know how much we'd have to raise contribution rates to make up the difference, but I suspect that the amount will make it politically difficult. Still, ultimately those are the only choices: decrease benefits or increase contributions. We'll probably end up doing some combination of the two, but striking the right balance is going to involve a great deal of demagoguery (sp?).

That's the problem with politics: the solutions aren't necessarily hard in and of themselves, but getting the solutions through the political process is terribly painful.

"That's the problem with politics: the solutions aren't necessarily hard in and of themselves, but getting the solutions through the political process is terribly painful."

Agreed. It'll be interesting to see what happens.

Ikram Saeed comments on the Canadian outcome:
http://tinyurl.com/5jwvf

"Why have Canadians, especially lower income Canadians hit worst by the rise in premiums, not taken to the streets? Why haven't wealthier Canadians who have more lucrative retirement options not tried to get out of paying CPP? And why haven't younger Canadians, for whom the CPP is a low-return investment (in the single digits I think) not raised a stink?

"It could be because Canadians understand complex public policy challenges, and do not look for quick fixes. Maybe we recognize the CPP as a valuable part of the safety-net, and the necessary intergenerational transfers of wealth as the price to pay for keeping a promise. Or it could be because Canadians are the most docile, easily-led sheep the world has ever seen."

Or, perhaps, Canadians are not all that different than Americans: they just don't pay all that much attention to the details of public policy. But if it makes you feel better to think Canadians are somehow intrinsically superior to Americans, I'd go with that. It doesn't hurt anyone, and it's got to be good for your self-esteem. ;)

Actually, Canada has, in effect, a partially privatized system. Even the CPP is now an investment program.

What they have done is pretty clever. There are three components to it. The first is a negative income tax for the truly destitute. Next is the new CPP investment program:

http://www.sdc.gc.ca/asp/gateway.asp?hr=/en/isp/cpp/cppchanges.shtml&hs=cpr#highlights

Note that the contribution rates, and the amount of earnings subject to taxation are both lower than in the U.S.

Finally, the government actively encourages Canadians to have 401k style private savings.

It's amazing that people like Paul Krugman never talk about how Canada's system works.

So on the one hand you write: "I'm going to give Ms. Fierst the benefit of the doubt and assume that is an honest mistake on her part. Although if it is, it does explain why President Clinton got lousy advice on social security; his advisors weren't doing any research."

And then in comments on my site you write: "For the record, I did not say that Ms. Fierst was stupid."

Do you see a distinction between being stupid on the one hand, and making "honest mistakes" and giving "lousy advice" by not doing any research? If so, please set out what it is...

Yes, I do think there is a significant distinction between being stupid and making honest mistakes and giving lousy advice.

For the first, I wouldn't think there should be any question that a smart person can still make honest mistakes. Or do you subscribe to the notion that making a mistake makes a person stupid?

As for giving lousy advice, once again I think that you can be perfectly intelligent and still give lousy advice. An easy example would be the war in Iraq; there's plenty on conflicting advice regarding what we should or shouldn't do there, meaning that some of it has got to be lousy advice. Yet much of the contradictory advice is being offered by quite intelligent people.

Now the question of doing lousy research is somewhat different, as it does strike me as careless. But it still isn't necessarily indicative of stupidity. You might swing by and see my attempts to address the social security issue and consider my research inadequate (which it certainly would be if I were trying to submit anything for publication) or even nonexistent. You could translate that into the belief that I'm stupid, which is your right, but it would be inaccurate. By the same token, I see many people comment on military affairs who clearly get their understanding of the military from watching the movies. I could assume they're stupid, but I suspect that would be a foolish generalization.

In all seriousness, I'm curious if you really think that making mistakes and giving lousy advice really constitute stupidity. Are you suggesting that you have either a) never given bad advise or made a mistake or b) are stupid? I know for a fact that b isn't the case, and I'm willing to bet that a isn't either, so that would seem to indicate that stupidity and bad advice/mistakes can coexist quite well.

"But if it makes you feel better to think Canadians are somehow intrinsically superior to Americans, I'd go with that."

Oh, I wouldn't say that! That's why I included Ikram's suggestion that perhaps we're docile and sheep-like (the polite phrase is "deference to authority"). That certainly seems more likely than our having a good grasp of complex public policy problems.

Russil,

My apologies, that was intended as a joke. Although somebody in the world has the best-informed citizens; it may as well be Canada as anywhere else. The bottom line is, if Canada's system is working better than ours, I see no reason not to take a look at it and see if there are elements we can incorporate into our own system.

A different concern on the WPost oped piece by Ms Fierst

She suggests bringing public sector employees into social security. This actually makes the long-term problem worse since the new money that comes in before these folks start to draw doesn't earn real interest. and now I have additional mouths to feed in 2050.

It does seem as you say, "his advisors weren't doing any research"

...the fact remains that the trust fund is going to have to be made good one way or the other. He's absolutely right.

No he's not, and you knew it. If Congress simply legislates new, lower benefits before the trust fund starts redeeming bonds, the Soc Sec Administration will have no need (or legal basis) to redeem the bonds.

Politically difficult, certainly, and a huge bummer for the people who paid taxes for all those years. But there is no legal reason that a future Congress cannot avoid paymemt on the trust fund bonds simnply by reducing benefits - defaulting on the bonds is not necessary.

I don't think it's politically possible to cut benefits to that level. So while you may be technically correct, I don't think it's a feasible solution.