Privatizing Social Security: How would it work in practice?

[Econ4every1]

US sovereign debt has to be serviced meaning tax dollars that could be used for current needs are diverted to pay for past excesses.

Fact. US tax dollars are not used to service debt.

How do I know that?

If you have $5T in spending and $3T in revenue then there's a $2T deficit. We don't know what the shortfall is until we've added up those numbers. From there, the government must sell $2T in bonds to offset the defict, part of which is bond redemptions.

From today's US daily Treasury Statement


To date, that's $1.716 trillion dollars in bond sales in excess of bond redemptions.

What if people stop buying US bonds? That's the real question you should come to understand.

Selling bonds repatriats US dollars back to the government that created them.

Sure, US consumers buy foreign goods and pay with US dollars. Foreign purchases of US bonds are done with US dollars, may earned though transactions with US consumers. In the end foreign interests can hold those dollars by investing in assets purchasable with US dollars or they can try to exchange them for domestic currency.

Of course, today, roughly $8 out of every $10 in bond sales are American interests simply wanting to save dollars in the form of bonds.

As I explained already, repaying bonds, does not reduce the amount of US dollar denominated assets in the US, it merely changes the makeup from bonds to cash. In other words, lets say I hold $10,000 bond. If I redeem it I loose the asset value of the bond and gain the asset value of the cash.

If that were to happen, there would be a HUGE surge of cash in the US which would almost certainly drive consumer inflation, but even more so, investment inflation. The stock market would sore as people looked for alternatives to bonds to save their cash.

In the end the problem isn't paying the debt, the problem is, as I've already stated, that the real goods and services that people want to consume are available when people go to spend. Ironically tariffs are going to make this situation worse, because the US cannot make all the goods that US consumers demand, the result will be higher prices, resource shortages and the potential collapse of the US economy and it will have nothing to do with debt, but the availability of goods in the free market.

Please detail the real assets purchased with SS trust fund bonds.

You misunderstood.

When Social Security is paid, however it's paid, what matters is that the real goods and services that the cash, given to SS recipients, can find real goods and services needed at the time the cash is available. This is exactly why being a member of the global economy is so important. Greenspan understood this, Friedman understood this, Austrians, who might not like fiat money, understand the importance of free trade.

Nonsense. SS trust fund bonds are unsecured liabilities.

They are secured with future productivity, that's what I'm trying to explain. If I'm promised $100,000 in SS revenue in 20 years, the amount is, by itself irrelevant, what matters is how much stuff I can buy with it when the time comes.

Every dollar the government spends has to be extracted from the private economy, now or in the future. The money siphoned off the SS trust fund bond sales is long gone while the liability remains.

This is a fundamental misunderstanding of government money.

Tell us where the $37 trillion dollars the government owes in bond sales if the money to to repay $37 trillion US dollars didn't exist 50 years ago?

The gibberish about debt asset pairs is irrelevant to SS bonds.

The US government, when it taxes for social security does not have more dollars, it owes less money. It would be like you borrowing $100k from a bank, spending all of it, such that you are now nothing, earning back $1000 and claiming you have a net worth of $1000, wrong, you'd be -$99,000 in debt. Similarly, if the government owes $37 trillion and it collects $500 billion in Social Security, it makes zero sense to say that the government has $500 billion. No, the government is now $$36.5 trillion in debt.

Why don't we pay a US defense fund tax? Or US infrastructure tax?

Remember that every unfunded liability can really be thought of as future earning opportunities. If there isn't enough labor to do the work that future liabilities require, that's the problem.

You see it as a money problem, I see it as a productivity problem. You want to eliminate money, I want to increase productivity.

 

[JohnfrmClevelan]

Every dollar the government spends has to be extracted from the private economy, now or in the future. The money siphoned off the SS trust fund bond sales is long gone while the liability remains.

Tell me where you think dollars come from.

 

[Sooner or Later]

The debt is not due to Social Security. The debt is due to Congressional overspending.

 

[Sooner or Later]

In years when Social Security had excess cash, say 100 billion, they bought bonds from Treasury with that 100 billiin in excess cash. 100 billion less in bonds were then sold to the general public.

If Social Security never existed that 100 billion from Social Security would never had made it to the General Fund. The General Fund would need to offer an additional 100 billion to cover the missing Social Security investment.

The same mount of debt issued with or without Social Security. A similar amount of annual interest payments made with or without Social Security. (Unless you want higher taxes to cover the spending)

Spending is the problem.

 

[Sooner or Later]

Let me take this one step further.

With Social Security
Congress passes a budget where they spend 1 trillion dollars.
Income and other non SS revenue supply 600 billion.
400 billion in debt needs to be issued to cover the shortfall.
If SS has 100 billion in excess payroll revenue that year the General Fund receives the 100 billion. In exchange SS receives 100 billion in bonds. An additional 300 billion in bonds is issued to the public. A total of 400 billion of debt for the year.

Without Social Security
Congress passes a budget where they spend the same 1 trillion dollars.
Income and other non SS revenue supply the same 600 bullion.
400 billion in debt needs to be issued to cover the shortfall. There is no SS revenue.
A Total of 400 billion in bonds is issued to the public. A total of 400 billion of debt for the year.

With or without SS the amount of debt issues is the same, 400 billion.

Now, what happens when bonds, say that same 100 billion, are cashed in? It is the same for both scenarios.

100 billion in new bonds are issued to raise the cash to buy back the bonds being cashed in. The bonds being cashed in are now off the books since the are paid off. A 100 billion in debt eliminated. A 100 billion in new bonds issued. No net increase in overall debt.

It is very simple.

 

[JohnfrmClevelan]

Let me take this one step further.

With Social Security
Congress passes a budget where they spend 1 trillion dollars.
Income and other non SS revenue supply 600 billion.
400 billion in debt needs to be issued to cover the shortfall.
If SS has 100 billion in excess payroll revenue that year the General Fund receives the 100 billion. In exchange SS receives 100 billion in bonds. An additional 300 billion in bonds is issued to the public. A total of 400 billion of debt for the year.

Without Social Security
Congress passes a budget where they spend the same 1 trillion dollars.
Income and other non SS revenue supply the same 600 bullion.
400 billion in debt needs to be issued to cover the shortfall. There is no SS revenue.
A Total of 400 billion in bonds is issued to the public. A total of 400 billion of debt for the year.

With or without SS the amount of debt issues is the same, 400 billion.

Now, what happens when bonds, say that same 100 billion, are cashed in? It is the same for both scenarios.

100 billion in new bonds are issued to raise the cash to buy back the bonds being cashed in. The bonds being cashed in are now off the books since the are paid off. A 100 billion in debt eliminated. A 100 billion in new bonds issued. No net increase in overall debt.

It is very simple.

What does any of this have to do with the feasibility of privatizing Social Security?

 

[tharock220]

Taxes (which pensioners don't pay much of) and deficit spending.

Social Security is subject to income tax. Recipients have to pay the interest on money they loaned to government.

I wouldn't. That would just be tossing money into the wild, where anybody could get it.

It was brought up by you. Who would get it, and how?

It's my thread.

Great. You still don't seem to understand what's being discussed.

You are arguing a straw man, I didn't claim Social Security was an investment, in fact, I wrote it is not an investment. At any rate, when there is more revenue than outlays, the surplus revenues have to be parked somewhere. Treasuries are the safest place to park them. Social Security is a safety-net. Its a way to ensure that my mother-in-law, despite not saving and investing for her retirement to the extent she should have, does not end up living with me. So far, it has lasted for nearly 90 years, and thus far always met its obligations. The problem with it is a demographic problem, not a problem with government. The one thing our government actually does well is taking in taxes from one group (workers), and writing checks to another (the elderly and disabled).

It's not a strawman. From your own mouth.

Social Security surpluses are not an investment and even if they were, they are an investment with zero tolerance for losses. That is why they are put into treasuries. Regardless of what the financial markets are doing, Social Security benefits must be paid out.

Which is not something I said, but rather the surpluses are invested. However, you've clearly demonstrated you understand this with the rest of your post.

The implication of US treasuries being safe is that they return almost nothing, hence the term "risk free rate". Clearly that isn't sufficient given current projections, which is why riskier investments are necessary. That usually means a combination of US treasuries and riskier assets. The retirement funds of Japan, Norway, and Canada do this. The public employee retirement funds for Texas and California do this. Nearly every 401k and retirement fund manager in the world does this. The US Social Security Trust Fund is probably the only one that doesn't, and it receives the lowest rate of return. So in spite of Norway's lower retirement age and bigger demographic problem, retirement insurance is on much better financial footing.

It's water under the bridge now, but just looking at the market return over the past 50 years can you honestly say a 50/50 mix wouldn't lead to the Social Security Trust Fund have greater AUM?

 

[JohnfrmClevelan]

Social Security is subject to income tax. Recipients have to pay the interest on money they loaned to government.

FICA is (income) tax-deferred. Paying taxes (I assume that's what you meant?) when you cash out later is pretty standard. But my point was that most of those retirees on SS have low incomes, and aren't going to be paying much, if any, tax.

It was brought up by you. Who would get it, and how?

Any other investors in the market, who are free to sell anytime. You put money in and hold stocks instead. Meanwhile, somebody else just sold you those stocks, and they now hold your money.

We did the same thing with the government, gave them money now for a promise of SS checks later on, but Republicans seem dead set on allowing that promise to expire.

Great. You still don't seem to understand what's being discussed.

I'm following the various discussions and sub-discussions just fine. Many aren't worth responding to. The main purpose of the thread was to discuss possibilities and try to understand where the dollars come from, especially in a macro sense. That's the part where I think people are underinformed.

 

[aociswundumho]

Privatizing Social Security: How would it work in practice?​

Each person would be responsible for their own retirement. If it's under state control, then it's not private. Private means you decide what to do with your own money.

 

[Sooner or Later]

What does any of this have to do with the feasibility of privatizing Social Security?

If you want to privatize it could cost trillions of dollars. Either trillions in far higher payroll taxes or government funding those private accounts for decades.

Every penny of future payroll taxes, and cash from Trust bond sales, goes to current recipients. There is nothing left to fund those individual private accounts.

Ain't
Gonna
Happen

 

[aociswundumho]

You are arguing a straw man, I didn't claim Social Security was an investment, in fact, I wrote it is not an investment. At any rate, when there is more revenue than outlays, the surplus revenues have to be parked somewhere. Treasuries are the safest place to park them. Social Security is a safety-net. Its a way to ensure that my mother-in-law, despite not saving and investing for her retirement to the extent she should have, does not end up living with me. So far, it has lasted for nearly 90 years, and thus far always met its obligations. The problem with it is a demographic problem, not a problem with government. The one thing our government actually does well is taking in taxes from one group (workers), and writing checks to another (the elderly and disabled).

Yep, social security takes money from the poorest age groups and funnels it to the richest age groups. Each generation gets fleeced by the one that came before it. How can this possibly be considered moral.

 

[JohnfrmClevelan]

Each person would be responsible for their own retirement. If it's under state control, then it's not private. Private means you decide what to do with your own money.

That's great, but I'm trying to get people to think about where the money will come from, aside from what people put in from forced savings. If the assets you bought don't appreciate enough, saving enough for retirement is difficult. And I don't think stock funds would cut it, for reasons I already mentioned.

 

[JohnfrmClevelan]

If you want to privatize it could cost trillions of dollars. Either trillions in far higher payroll taxes or government funding those private accounts for decades.

Every penny of future payroll taxes, and cash from Trust bond sales, goes to current recipients. There is nothing left to fund those individual private accounts.

Ain't
Gonna
Happen

Anything could happen if the political will was there. The government has its own money, and they could fund anything they wanted to.

Any transition will come with problems. I'm more interested in the question of whether privatized retirement funds would even work on such a large scale. And I think it's a question worth pursuing, because taxing the first 15-16% of income to fund SS payments is a big burden for people and companies, even when SS was in the black.

 

[Sooner or Later]

Yep, social security takes money from the poorest age groups and funnels it to the richest age groups. Each generation gets fleeced by the one that came before it. How can this possibly be considered moral.

That is incorrect.

The lower wage earners receive a higher rate of return on their investment than higher wage earners.

A person born on 6/15/1960 and starts benefits on 9/2027 will recieve if current earners are:

$20, 000 will get $1053 a month
$40,000 will get $1445
$80,000 will get $2195

Calculations from SS benefits calculator.

Quick Calculator https://share.google/QWg2Q6cTkmtOyu52S

 

[aociswundumho]

The lower wage earners receive a higher rate of return on their investment than higher wage earners.

I think "investment" is a laughably inaccurate description.

 

[aociswundumho]

The government has its own money, and they could fund anything they wanted to.

But not without consequences. Why do you always leave that part out?

 

[JohnfrmClevelan]

I think "investment" is a laughably inaccurate description.

No, there is no true investment in SS. It has worked because the demographics allowed for it, until recently.

But not without consequences. Why do you always leave that part out?

Because the "consequences" you imagine are just that - imagined.

 

[rahl]

Tell me where you think dollars come from.

The magic MMT factory of course

 

[JohnfrmClevelan]

The magic MMT factory of course

Let him answer on his own. Maybe you'll learn something.

 

[rahl]

Let him answer on his own. Maybe you'll learn something.

I’m not the one that believes in magical and hilariously false MMT stupidity

 

[JohnfrmClevelan]

I’m not the one that believes in magical and hilariously false MMT stupidity

You also don't know where dollars come from.

 

[rahl]

You also don't know where dollars come from.

Of course I do. It’s why I keep laughing at the hilarious and demonstrably false stupidity that is MMT.

 

[aociswundumho]

Because the "consequences" you imagine are just that - imagined.

Today I learned there are no consequences for increasing the money supply.

 

[Sooner or Later]

I think "investment" is a laughably inaccurate description.

Call it what you want.

Facts are the lower wage earner receives a higher payout for the money they have paid it.

Money is not "funneled to the richest age groups".

 

[aociswundumho]

Call it what you want.

It's a welfare program for old people.