What DLS said.

1. “Of course [Social Security] does not really have any reserves so the government will just increase its deficit spending.”

Superdestroyer is, of course, correct about the “reserves.” They are no such thing. All they are, are future claims on revenues that must be satisfied in order to pay future benefits. As I have tried to remind the ignorant and the stubborn (and worse), once Social Security begins to run deficits (2017 is the most likely year as of now), additional revenues will have to be procured if benefits are needed to be paid in full. That means more, or new, taxes, or more borrowing. That is incontrovertible fact.

Or as the Trustees put it in the report it seems to be impossible to get people to read,

“The positive amounts that begin in 2017 for OASDI, and in 2008 for HI, initially represent payments the Treasury must make to the trust funds when assets are redeemed to help pay benefits in years prior to exhaustion of the funds. Note that neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.”

http://www.ssa.gov/OACT/TRSUM/trsummary.html

Note that increasing or eliminating the income caps for payroll taxes alone will not solve this problem. All it will do, whether or not benefits are adjusted for those who have to pay more in taxes (and we know their benefits should rise, unless we want to subject these people to outright theft), is postpone deficits for six or seven years. The Obama plan, which leaves open the “doughnut hole” where more aggregate income is left alone than that subjected to new taxes (because of income distribution), maybe postpones deficits for five years or so. That is, again, no salvation of Social Security.

(Note that deficits continue. Deficits, not trust fund exhaustion, are the real issue!)

http://www.centristpolicynetwork.org/legislative_updat...

2. One way to raise revenues a desperate federal government (or a greedy one) may impose someday is to abolish the tax-free status of income from current tax-free government bonds (federal, state, local). However, if this were done, current holders of existing bonds would have to be compensated, and future bond issues would have to pay higher interest rates (i.e., market rates rather than the lower rates enjoyed by “cheating” government because of tax-free status of the bonds).

http://www.businessweek.com/ap/financialnews/D9...

http://online.wsj.com/article/SB122169735309250...

http://online.wsj.com/article/SB122169845959750...

Also,

http://online.wsj.com/article/SB122164849424947...

* * *

Shaun is wrong again, but don't worry. The McCain “privatization” plan won't make any more progress than the Bush “privatization” plan. Plenty of us who know better object to both plans. Enriching Wall Street is the least of our worries. The real problem is that the two plans and anything like them are only _nominally_ “private” plans. The federal government obviously is involved, and such plans would make the federal government into the largest-by-far institutional shareholder in this country. Nobody sane wants the federal government to be such a shareholder, even indirectly (if they know where the money has been put, they can get at it, and they will); we don't want any associated enormous federal influence and control over business, which would substitute political for business objectives by the management of business, “social responsibility” and all that related kind of idiocy. Such plans (promoted now in two forms, attempted only once so far) are closer to left-wing federal-control dreams than even the goals of people like Ralph Nader with their desire for federal corporate charters (subject to left-wing political activism as the price of permitting corporations to remain in business), putting federal officials on the boards of directors (something Mussolini would have approved), actual CALPERS leftist activism (disgraceful!), and so on. (Restrictions on investments, be they arbitrary or political and scummy such as “Israel divestiture,” imposed on “private” “voluntary” programs would simply constitute additional annoyances-to-outrages.)

I suspect in our future there will be discontent with the low “replacement ratio” of the Social Security benefits and demands to increase them 20+ years from now. In the meantime, Obama, who is retaining Social Security as an openly government kind of program, should correct his mistakes in his current plan (which won't save Social Security, just keep it intact for perhaps five additional years before deficits begin), fill in his ridiculous “doughnut hole” sop to affluent “progressives,” and raise taxes even more (to truly save the program), perhaps changing the benefit calculation formula to boost replacement ratios the most for the lowest-income earners and taper the ratio more sharply than is the case today, for the higher-income earners. (Benefits for the people subject to additional taxes will have to be raised if Obama has any morality; they need not necessarily be raised to the same replacement ratio as those with lower incomes, is the point here.)

1. How high the taxes? From the Trustees' summary report, that I'm apparently the only one who reads regularly, we get the answer. See below. Obama should raise the tax to 15 per cent at least, and include all payroll income and other compensation, such as stock options (taxes on premiums on similar options on the open market or what they would be if there were similar options on the market). DO NOT IMPOSE MANDATORY APPROPRIATION OUT OF GENERAL REVENUES, NO TRUE SOLUTION AT ALL! (We've already seen this nonsense with Medicare; the participants' “premiums” are bogus; 75% of the money comes from general funds.)

[Trustees:]

“Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 14 percent in payroll tax revenues (from 12.4 percent to 14.1 percent) or an immediate reduction in benefits of 12 percent or some combination of the two. Ensuring that the system is solvent on a sustainable basis beyond the next 75 years would require larger changes, because an aging population and increasing longevity cause the projected current-law OASDI cash-flow deficits to be substantially larger after the 75-year projection period than they are on average during the period.”

2. Replacement ratio: Examine the benefit calculation formula for the Primary Insurance Amount and note the “bend points.” There's no reason why this cannot become a multi-bend-point function, with so many points so as to constitute in effect a smooth curve, and be oriented (as is now the case) to have the replacement ratio fall off with increasing income.

Here you are. Note the crude set of few bend points AND THE PERCENTAGES. Adding more bend points would produce a smoother curve that could be tweaked to favor lower-income earners, say with inverse exponential decline (”decay”) of ratio amounts as income goes upward interval by interval (bend point by bend point).

“The PIA is the sum of three separate percentages of portions of average indexed monthly earnings. … For 2008 these portions are the first $711, the amount between $711 and $4,288, and the amount over $4,288. These dollar amounts are the “bend points” of the 2008 PIA formula. … The dollar amounts in the formula are sometimes called “bend points” because a formula, when graphed, appears as a series of line segments joined at these amounts. … For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2008, or who dies in 2008 before becoming eligible for benefits, his/her PIA will be the sum of: (a) 90 percent of the first $711 of his/her average indexed monthly earnings, plus (b) 32 percent of his/her average indexed monthly earnings over $711 and through $4,288, plus (c) 15 percent of his/her average indexed monthly earnings over $4,288. … For the family of a worker who becomes age 62 or dies in 2008 before attaining age 62, the total amount of benefits payable will be computed so that it does not exceed: (a) 150 percent of the first $909 of the worker's PIA, plus (b) 272 percent of the worker's PIA over $909 through $1,312, plus (c) 134 percent of the worker's PIA over $1,312 through $1,711, plus (d) 175 percent of the worker's PIA over $1,711.'

http://www.ssa.gov/OACT/COLA/bendpoints.html

It's too ambitious at this time for Obama to want to expand this program into a universal program for all ages (absorbing state welfare and moving toward a guaranteed minimum income for everyone), but [sigh] when you consider how much the federal government is spending currently to bail out financial institutions, dump huge amounts of money into the economy (inflation alert! and don't forget the paradoxical example of Japan's deflationary spiral), and the talk now of one trillion or more dollars to be spent on bailing out bad real estate (disgraceful!), money seems to be no object in this end-of-the-Bush-years environment. So why not boost Social Security benefits?

** Food for Thought **

If people have for decades for retirement with a fully diversified portfolio, their retirements saving with what used to be Social security would be no different than their 401K, IRA, and other savings.

What Shaun is really arguing is that government income has to relationship to the health of the economy. Of course, writing that on an economcist 101 test would get you an “F” but a politician saying it gets you elected.

Does anyone really believe that funds generated by taxes is really indepedent of macroeconomics?