Some minor quibbles:

1) Intelligent, respectable proponents of SS freely admit that it is a Ponzi scheme, just a very good one that is worth keeping. In fact, I try only to listen to such people, like Robert Samuelson, for pro-SS arguments.

2) While “Big Retirement” (?) aka TIAA-CREF, Vanguard, Fidelity, etc. might overestimate your expenses they are probably *under*-esimating the tax-ravaging you will suffer in the future due to the out-of-control entitlement programs and national debt that will be around. So, their estimates are probably accurate.

Whoa, Brad. I read Michael’s remarks as “hilarious, because it’s true” not “hilarious because it is ridiculous.” I can see the ambiguity though.

An interesting aside is whether in times past when people couldn’t expect to live long heathly lives, did these people live more productive, perhap even, exciting lives? After all, if people are putting money into retirement instead having fun with their money here and now then they are, perhaps, living boringly and safely such that they are hoping to live long enough to see their money come back to them. Just wondering?

Brad, my apologies for being unclear. As Scott suggested, I meant that the quoted statements are hilarious because they are true. The second sentence of that post was meant to suggest that those statements would be ineffective on “outsiders” who do not already share the libertarian view (i.e. the logical view) on Social Security.

Joe_V., it’s pretty obvious the rate of return given, was for the old-age entitlement part of the program. If you wanted to know the value of that aspect, all you have to do is compare to privately-run disability insurance, figure out what it would cost, and what SS charges you. Again, they’re not doing anything that isn’t already being done in the private sector, so even there you’re wrong.

Oh, and could you please not refer to SS payments as “checks” … it looks a little quaint, is all. Some people have moved on to direct deposit. “Check” it out some time, if you would.

One thing is certain, if, in the future, some elderly with the foresight and means to fund their own way through retirement exist while others are eating catfood on SS funds, the shearing will begin.

I think it was Stossel who found that in Chile, even though everyone was richer, people who didn’t make as much complained that some people had more. It’s like when I was a child and I would purchase something like a video game system for myself, after saving money from birthdays, Christmas, and allowance. My sister would complain that it was unfair that I had more money. Of course, she received the same, but spent it every week. She is smarter now, but many Americans and their represententatives have not evolved past the thinking of an 8 year old.

Michael_A._Clem: Doesn’t that reasoning also imply that the low interest rates can’t last forever? So when will they get to the point where it will be worthwhile to save (at least in bonds)?

If Collectivists were really concerned about the low savings rate, they would just reduce taxes or reduce regulation to lower the cost of consumption:

Out of our $13.25 trillion-dollar GDP, a combined $4 trillion goes to taxes — federal, state, and local (an additional $150 billion is borrowed by govt).

That leaves us with $9.25 trillion after the tax man cometh. Each year, we consume about that much ($9.27T in 2006), leaving nothing to save.

So that leaves us with two options on how to save more money: (1) cut taxes, (2) reduce consumption, or (3) reduce the cost of consumption through deregulation or higher productivity.

There is no magic formula that the government can implement to change these numbers, other than the methods listed above.

Even cutting the defense budget a quarter of a trillion dollars, which is the only part of the budget that the Federal Gov’t has ever cut (“peace dividends”), we would still have a minuscule savings rate: about 2% of personal income. Even if you cut the four departments seen by a sizable chunk of the public as “expendable” (Agriculture, Commerce, Education, and Energy), that’ll bring you up to about $500 billion in savings. That’s still a savings rate of only 4.5% of personal income.

It just goes to show how far we have to go to get back to normalcy. To get back to the last year before the explosion of combined govt spending (fed/state/local), which was 1960, we’d have to cut $900 billion in spending from all three levels of government. To get back to 1950, we’d gave to cut $1.3 trillion from spending. To get back to where we were before the new deal, we’d have to cut $2 trillion from total government spending.

The US economy had NEGATIVE 1% left over after government expenditures and private consumption in 2006, 2% left over in 2000, 1.5% left over in 1990, 6% left over in 1975, 13% left over in 1960, 15% left over in 1950, and 17.5% left over in 1929.

If you see where the trend is, we will surely be broke within a couple of decades.

Its worth at least mentioning that “avoiding poverty” is hardly a high target for savings. It undermines the value of that statistic.

Its also worth investigating why people fail to save sufficiently for retirement. I’m sure some percent have planned improperly. I’m sure theres another percent that have had failures of opportunity, or unexpected expenses (sickness, etc). What are these numbers? Your article takes this for granted as an intellectual or moral issue.

I find this article very ineffective for people that do not go into it already believing what you are trying to say.

pg said:

“Its also worth investigating why people fail to save sufficiently for retirement. I’m sure some percent have planned improperly.”

IMHO, it’s because the government lowered interest rates so low that it was a waste of time to save money. I remember back n 2002-2003 that pass book savings accounts paid only 0.25% interest. Nobody is gonna set aside money to get those returns.
Also why save money when inflation is going to erode the return?

Then in the 100 years before SS when the country was on the gold standard you all love the USofA had a large middle class and very few old people lived in poverty?

PG, I cite several studies that show that the vast majority of people do save enough. As for those who do not save much, there is a new study, unmentioned that shows that very smart people save little- they bank on future income increases. Also, some people do not expect to retire. I know someone whose family history indicated that he will never retire. He saves nothing and rightly so. You are not in a position to judge the action of so many others. In any case, the problems of SS are quite real, though often denied. I suspect that you (PG) would not be persuaded by any amount of evidence.

D

“For the left, kindergarten never ends.”

I guess this one of my points, this is the type of normative argument that brings the discussion away from economics and into philosophy or religion. While most (such as the MacKenzie) are careful not to be so obvious about it, I am a little uncomfortable intellectually with this idea permeating a social science like economics. And this idea, while not written so clearly by MacKenzie, comes through loud and clear nonetheless.

Who cares about the left and the right? Is this not a social science?

The normative statements come in places like this: is 88% a “vast majority”? 9 out of 10? Highly controversial at best, dogmatic at worst.

“You are not in a position to judge the action of so many others.” Its not about moral judgment, again, this is not religion or philosophy. You claim that the 88% “appear to be acting in a personally responsible manner”. The data shows that they are saving for retirement at a certain rate. Words like responsibility do not belong, to say nothing about rhetoric like “alarmist”.

To distill to my point, I don’t mean to pick a fight with one particular author. I am very warm to some of the ideas on this site, but very turned off by how many of the articles (such as this one) are clearly written for a friendly audience that share certain moral stances.

pg

Mises.org daily articles are interdisciplinary polemics. They tend to be hard hitting, but this is an organization for hardline libertarians. In fact, there are a few Rothbardians who see me as a commie (their words, not mine). I think that my posts are, on average, orientated less towards moral philosophy and are less hard hitting than much of what is posted here. I see no reason not to write on moral-philosophical issues, in addition to matters of social science, provided that the two are not confused for each other. I also see no problem with hitting hard, selectively. I show respect for lefties who try to deal with issues seriously. In fact, my first journal article pub played up the contributions of the socialist Oscar Lange. Many on the left put more effort into demonizing their opponents than in trying to sort out real issues. Such persons open themselves up to harsh criticism.

D

It’s difficult for most people to save for retirement because inflation eats away at savings. Inflation in healthcare is the most egregious. Many people have saved adequately for retirement, only to get hit with large medical bills when they reach retirement age. They spend all of their savings on medical bills and then declare bankruptcy. Half of all bankruptcies are caused by medical expenses.

For people to save adequately, we would have to eliminate the Federal Reserve and fractional reserve banking because those are the only ways we’ll stop inflation. Plus, we’ll have to get rid of the monopoly the AMA has on healthcare. Under a 100% reserve banking system with gold as money, prices would not increase and possibly fall, making savings worth more each year.

Keep in mind that when people invented SS, inflation wasn’t a problem; prices has remained fairly constant for over a century. Under the current system (AMA monopoly, insurance and government policies that encourage overconsumption of health care, and “moderate” inflation), it would be cruel to eliminate SS.

Niccolo: “just the tone should be less aggressive…”

Your opinions on the piece are very interesting in that I didn’t find it even mildly aggressive. Confident, maybe, but not aggressive at all. Could it seem aggressive because you’re not convinced of the basic Austrian argument? Articles on this site assume the truth of Austrian econ and that socialism is not only false, but destructive.

pg:”Its not that its offensive, which its not, its that doing so makes this site an irrelevant mutual adoration society.”

All articles on this site come from the perspective that Austrian economics is true and socialism is false. True things usually equate with good things, and false ones with bad things, so there is automatically some moral assumptions involved in any discussion. It would be ridiculous for every author to have to revisit the socialist/capitalist debate in every article. So yes, this site is a “mutual admiration” society in that it strives to promote Austrian economics which is adamantly opposed to socialism.

To require the site to offer arguments against Austrian econ would be kind of silly. If you aren’t convinced of the Austrian position, try reading some of the basic material on Austrian econ. If you become convinced that Austrian econ is wrong, and neo-Keynesian socialism or neo-classical econ is correct, then you won’t have any reason to visit the site again. But if you find that Austrianism is the correct economics, then you won’t find the articles here to be so objectional.

TLWP:”Fair go RogerM what do you mean by ‘saving for retirement’?”

What is “Fair go”? Sounds like pirate talk!

You’re right that stocks outperform inflation overall and in the long run. But correctly investing in stocks takes skill and knowledge that many don’t have. Plus, the boom/bust cycle caused by fractional reserve banking guarantees that the savings of some will get wiped out if they invest at the wrong time. I’m not saying it’s impossible; obviously many people do. But for those on the margins of society who lack the knowledge and skills needed for proper investing, as well as the earning power to overcome set backs, an inflationary environment makes it especially difficult for them to save enough for retirement. Removing SS in such an environment would only make matters worse for those people.

If you pretend that government bonds (say) are an investment rather than just throwing a new burden onto the tax base, then – with this accounting dodge – it isn’t a pyramid (Ponzi) scheme. The government has aloready tricked people this way, so it isn’t hard to extend the deception.

There is a learned helplessness thing, too (see http://en.wikipedia.org/wiki/Learned_helplessness). That is, individuals really do need government support in old age. Yes, the government manufactured this by taking from them when young and thwarting their efforts at providing for themselves, e.g. by withholding benefits until private capital is all gone and with progressive income taxes. Nevertheless, the elderly at any given calendar date usually really do not have resources or mindset to be able to cope. In each individual life, the wealth and the soul have already been stealthily taken away by instalments, and it’s too late by then.

For this reason simply abolishing Social Security really would drop a whole load of people in a mess, just as the accusers say. Either this point must be addressed, or it must be dismissed as a necessary price – which immediately puts you on the same low moral plane. It’s like abolitionists who refused to believe there was any transitional way, even though every country but the USA had found one or another better transition.

I have looked into the issue in an Australian context, and I have even written some articles in the area. One is at http://member.netlink.com.au/~peterl/publicns.htm#NWKART4 – maybe people should see how well it fits the US situation and if it offers them any other possibilities.

The US usage “Social Security” is narrower than in most countries. It usually covers unemployment schemes and such as well. I have also written on these at my site.

It was people like Bismark who introduced schemes in this area. They were creating government externalities and rip-offs, yes, but they were not fools. Thet were buying – for their own interests – a measure of stability, and they were replacing savage “natural” externalities like Vagrancy Costs with Social Security costs. They weren’t actually making things worse, rather they were locking in previous failures. Vagrancy Costs had only come in because of previous failures, and through ignorance more than malice the wrong fixes had always been put in, real tar baby stuff. But space is too short to go into all this.

Social Security has numerous problems and is in need of reform. However, MacKenzie’s article is deeply flawed as well. He refers to a number of studies that purport to show that most Americans are saving enough for their retirement but fails to mention that these studies are including Social Security benefits as a part of those savings. He points to the fact that life expectancy is a factor in the return received from Social Security and states that this proves that “consequently, Social Security tends to transfer income from poor to rich”. However, he fails to mention that this is more than offset by the fact that lower-wage earners receive a higher percentage of their AIME (Average Indexed Monthly Earnings) in benefits. Finally, the low returns that he quotes differ from the quotes from the Social Security Administration and every other serious study that I have seen. You can read a full response to the article at http://home.att.net/~rdavis2/scrapss.html.

In the first four paragraphs of Mr. MacKenzie’s response, he addresses my point that the studies he cites includes Social Security benefits. In fact, I agree with his contention that people would generally save more privately if Social Security did not exist. I was simply addressing Mr. MacKenzie’s statement that “Several recent studies indicate that most people make adequate provisions for their retirements, and some supposedly save too much”. It is not clear from this statement whether he is saying that the studies indicate that most people save enough for their retirements without Social Security (in which case it could be immediately scrapped) or that they save enough given the current reality which includes Social Security. Mr. MacKenzie admits this lack of clarity in the last sentence.

While I agree that people would generally save more, it’s not clear that all people would. One of the studies that he cites states that “combined Social Security and DB [Defined Benefit] wealth account for about 30 percent of comprehensive wealth, on average, and about 60 percent among the least-wealthy households”. It’s not clear that these “least-wealthy households” would or even could save enough to counter the loss of Social Security.

In fact, it should be remembered that additional savings by themselves would not closely replace the loss of Social Security. If Social Security simply paid a lump sum on retirement, this could possibly be the case. But the current program pays retirees a monthly check for the rest of their lives and provides survivor and disability benefits. This could only be closely duplicated by annuities and/or insurance.

In any event, Mr. MacKenzie goes on to address the tables and graphs of the OASDI Internal Rate of Return that I have posted at http://home.att.net/~rdavis2/rrroasdi.html in the next three paragraphs. Following is the last of these paragraphs:

If SS is not a transfer program, then I want to know how it involves real investment. If SS can generate real positive return for some, WITHOUT imposing negative returns on others, then I would be fascinated to find out how such alchemy works. Otherwise, there must be something wrong with the numbers that Mr Davis cites. His graphs make it seem that most people get a positive return, and many get a high return, while only a few get around zero or a slightly negative return. How can a transfer program do this? The numbers I cite pose no such problems. From what I can see these numbers are his own, or come from the AARP. The AARP is obviously biased. I, on the otherhand, have a personal interest in preserving this program- I have a high life expectancy (due to family history) and relatively low ability to save (on a college professors income).

At the bottom of the aforementioned page, I have clearly noted that numbers come from a Social Security Administration publication, not the AARP. In any case, the “alchemy” by which a transfer program can “generate real positive return for some, WITHOUT imposing negative returns on others” can be explained in the following simplified example.

Suppose that a population consists of eighty people, all born on January 1st and consisting of exactly one person of each age from zero to 79. Now suppose that all of these people live “average lives” whereby they begin working for an average wage on their 20th birthday, retire on their 60th birthday, and die on their 80th birthday. Furthermore, suppose that a baby is born each January 1st such that the population continues to have 80 members, evenly distributed in age. Finally suppose that they have a sustainable transfer program by which each working person pays 15 percent of their income into a pool which is split up evenly between the retirees. Since there will always be 2 workers per retiree (40 workers and 20 retirees), each retiree will receive 30 percent of the average wage.

Now, if wages never change then the amount that a person will pay into the transfer program over their lifetime will be

(Wage per year) * (40 years) * (15 percent) = (Wage per year) * 6

and the amount that they will receive in retirement will be

(Wage per year) * (20 years) * (30 percent) = (Wage per year) * 6

Hence, this would be the case that Mr. MacKenzie seems to expect of a transfer program, where the total return is zero. However, suppose that there was a constant rate of inflation of 3 percent per year and that wages also increased at that rate. Then all of the wages per year in the second “benefit formula” would be greater than all of the wages per year in the first “contribution formula”, meaning that each retiree would get a positive return. In fact, since wages rose at the exact same rate as inflation, one could say that they remained constant in real, inflation-adjusted dollars. Hence, if the unit of measurement is real dollars then, once again, the contributions and benefits would be equal and each retiree would receive a “real return” of zero.

Now, suppose that wages rise faster than inflation. According to numbers from the numbers from the U.S. Census Bureau, this has been the case since at least 1955. Then, even if the unit of measurement is real dollars, all of the wages in the second benefit formula would be greater than the wages in the first contribution formula. This would mean that all retirees would be receiving a positive real return.

Of course, this does not prove that current retirees are receiving a positive real return under the actual system. But it does show that a sustainable transfer program can provide positive real returns to its participants. In a sense, one could look at this as a sustainable pyramid scheme, driven by increasing real wages which, in turn, are driven by increases in technology and productivity. Of course, Social Security has also benefited from some unsustainable “pyramid schemes” such as the increase in the Social Security tax rate (it rose from 1 percent in 1940 to 6.2 percent today). However, increases in technology and other sources of prosperity do provide a sustainable source of positive returns that can be tapped into.

Regarding the effect of life expectancy on the rate of return, Mr. MacKenzie continues:

The proposition that SS transfers from poor to wealthy, based on life expectancies, has been around for a long time. I first heard it is grad school, from a competent econometrician. I have not perfomed calculations on this personally, but have relied on others. Mr Davis claims that SS is structered to counteract these affects. I am not presently in a position to dispute his numbers on SS payments, but even if his numbers are accurate, they do not address the life expectancy issue (at least I did not see any way that SS payments address this), and this point does not address the capital accumulation issue. The bottom line is that SS penalizes people with short life expecancies, which is due partially to life style choices, but largely to family genetics and personal circumstances (i.e. poverty).

The proposition that Social Security transfers from poor to wealthy, based on life expectancies, may have been around for a long time but I have never seen a serious study that purports to give evidence of it. As I mentioned, the rates of return that I posted came from a Social Security Administration publication. This publication did say the following regarding the this question:

For each sex, family grouping, and year-of-birth cohort the internal rates of return decrease as earnings increase. This is because the benefit formula is weighted toward beneficiaries with lower earnings. The advantage for lower earners is partially offset by their lower life expectancy.

An economic letter from the Federal Reserve Bank of San Francisco gives the approximate rates of return by income in the following excerpt:

By design, Social Security redistributes income by means of a progressive benefit formula. Low-paid workers are awarded a greater fraction of their pre-retirement income than high-paid workers. This progressive benefit structure is more than enough to offset the regressive nature of the OASI payroll tax whereby income above a specified maximum level (currently $72,600) is not subject to the tax. Caldwell, et al. (1998) compute internal rates of return on contributions for several categories of OASI participants (see Figure 1, Panels A-D). The authors find that, under current OASI rules, today’s lowest paid workers (those in the bottom 20% of the income distribution based on lifetime earnings) can expect internal rates of return between 4% and 5% after adjusting for inflation (Panel A). Today’s middle income workers can expect real rates of return between 1% and 2%. Today’s highest paid workers can expect real rates of return below 1% and may even face negative rates of return if born after 1975.

If Mr. MacKenzie can provide a link to a credible study that purports to show that Social Security transfers from poor to wealthy or that the return for average people fall into the 2.5 to minus 2.5 range, I’ll be more than happy to look at it. Until then, I’ll just have to stick with the sources that I have. In any case, an updated version of this response can be found at http://home.att.net/~rdavis2/scrapss2.html.

Of course SS is a transfer program. Every govt program is a transfer program except maybe the Armed Forces if the civillian contract corruption could be eliminated.

Some of you remind be of the good Christian who told me that God keeps people poor so that Christians can give them charity.

Sorry about the formatting on the prior message, I forgot to remove the hard returns. Following is the message formatted properly (hopefully, the admin can remove the badly formatted version):

Mr. MacKenzie states in his response of July 24th:

1. Mr Davis has conceeded the essential point. If SS reduces total savings, then it is impossible to argue that it is an investment progam. This program reduces the total amount of available loanable funds, and with it investment and capital accumulation. This reduces the long run rate of economic growth. We are poorer than would otherwise would be the case because of this pernisious program. SS is an impediment to greater prosperity.

2. Mr Davis claims that we can realize a positive rate of return on SS by drawing upon wage increases. this only makes sense if one fails to count the cost of higher gross taxes drawn out of wage increases. Once these costs are subtracted SS must deliver a negative return overall, given that it is a transfer program with administrative costs, and given that it reduces economic growth. Social security can only deliver a positive rate of return to the average recipient by INCREASING economic growth. Mr Davis has admitted that SS REDUCES savings, and therefore growth. Game, set, and match.

What I said was “I agree with his contention that people would generally save more privately if Social Security did not exist”. I was speaking, of course, about future Social Security recipients. I said nothing about “total savings”. On that matter, the following excerpt is from page 41 of a 1999 General Accounting Office (GAO) report titled “Issues in Comparing Rates of Return With Market Investments”:

Some proponents of individual accounts point out that making the transition to increased advanced funding is critical and has implications for comparing rates of return. They observe that rates of return from the individual accounts in an advance-funded system fundamentally differ from Social Security’s implicit rates of return because individual accounts would provide a new source of investment funds and would increase national saving. This increased pool of investment would produce real increases in economic activity that would make society better off. In contrast, they assert that Social Security only transfers income from taxpayers to beneficiaries, detracts from saving and long-term economic growth, and produces no real economic returns.

Other analysts contend that workers paying the transition costs must receive lower returns than they would otherwise in order to improve returns for future generations. Moreover, some observe that increasing the advance funding of Social Security would not necessarily increase national saving. Consumers might compensate for their increased savings in their individual accounts by saving less elsewhere or borrowing more. National saving also depends on federal budgets and surpluses, which could be affected by the specific aspects of any changes enacted. For example, any federal borrowing that helps pay for transition costs would offset any corresponding increases in individual account balances to some degree.

I wanted to mention that before Mr. MacKenzie puts away his tennis racket! In any case, he continues:

3. I didnt think that I needed to mention this, but the social security adminiistrastion is, if anything, less reliable than the AARP. There is an obvious conflict of interest at work here, and I do not trust their numners. the SanFransisco Fed is obviously a more credible source, but I have not seen how these numbers were calculated. given the life expectancies of poor black men, it is hard to see how they get a positive return on SS retirement payments (more on this below).

That the Social Security Administration’s numbers are not reliable is Mr. MacKenzie’s personal opinion. It does not appear to be the opinion of everyone at the Heritage Foundation which he lists as a source below. A recent issue memo on their site states the following in answer to the question “Did politics influence the trustees report?”:

No. Social Security Administration Chief Actuary Stephen Goss and his staff of non-partisan experts produce the numbers in the Trustees Report. They are respected professionals who never have been, and are not, subject to political pressure. Goss has been at SSA since 1973 and is internationally respected. Although members of the President’s cabinet serve as trustees, they have little influence over the numbers. The 2007 numbers are substantially similar to those in the Trustees Reports issued during the Clinton Administration.

In any case, Figure 1 on page 6 of the GAO report shows a graph of Social Security’s Implicit Rates of Return. The returns are inflation-adjusted and are all positive, same as the SSA numbers.

Mr. MacKenzie concludes his response as follows:

5. For a quick source on how SS transfers to rich white women from poor black men, look at the SS calculators from Heritage and other organizations. You can see the rates of return for the afformetnioned groups by plugging in the right zip code and other data. For the long answer, start reading Feldstein. If he has not done these calculations he surely cites someone who does. I have moved on to othe projects at the moment and cannot justify a special trip to the campus library to look this up. Perhaps I can take another look after the semester starts, but for now I will leave it as is. In any case, alleged rates of return of 4-5% are not too bad, but the less than one percent that high wage worker get (according to the source cited by Mr Davis) is unacceptably low.

The phrase “SS transfers to rich white women from poor black men” is highly misleading. As Table 1 in an Urban Institute paper suggests, women generally receive a better return than men. Hence, Mr. MacKenzie could have just as well said “SS transfers to rich black women from poor white men”. Of course, simply saying that it generally transfers from women to men would have been the most accurate. In any case, the table does suggest that black men do receive a positive real return from Social Security and receive slightly more than white men, at least for those born between 1931 and 1964.

I have now provided links to several studies that support my numbers. If Mr. MacKenzie can provide a link to a credible study that purports to show that Social Security transfers from poor to wealthy or that the return for average people fall into the 2.5 to minus 2.5 range, I’ll be more than happy to look at it. Until then, I’ll just have to stick with the sources that I have. In any case, an updated version of this response can be found at http://home.att.net/~rdavis2/scrapss3.html.

Mr. MacKenzie states in his response of July 26th:

The libraries journal data base is back online, so I can check some figures wihout driving in

I found this, among other articles

Social Security Outcomes by Racial and Education Groups Liqun Liu; Andrew J. Rettenmaier,
Southern Economic Journal, Vol. 69, No. 4. (Apr., 2003), pp. 842-864.

some snippets-

“Single women do better than single men, and net present values decline for each birth year”

“Single black women have a lower rate of return than single white women”

“Single black men receive 0.47$ for every dollar of taxes, and single white men receive 0.59$. Married men in both racial groups receive 1.10$ for each dollar paid in taxes” (figures for those born in 1935)

“Married black men receive 0.77$ for every dollar in taxes. Married white men receive 0.84$” (born in 1980)

This confirms what I said, women do better than men, blacks do worse than whites, and white women are being screwed the least, while black men are being screwed the worst.

What you said in your response of July 24th was “SS transfers to rich white women from poor black men”. None of your snippets even mention “rich” or “poor”. I cannot actually check your source for these or any other quotes since the online reference that I found to it states that the material is “included in JSTOR, an online journal archive made available to researchers through participating libraries and institutions”. Others must purchase it for $10. In fact, all of your other sources (except for the one to the Cybercast News Service) appear to be in JSTR here, here, here, here, and here and must be bought by the general public. They may be useful for discussions with other members of JSTR but are of little use to me or most other readers of this blog.

Mr. MacKenzie continues:

2. As for those who pay transition costs- people who will live long and not pay in too much lose the low rate of return they get on SS- even white women get returns in the low single digits. Private investments offer higher returns, so nearly everyone benefits. Also overall transition costs do not exist- See http://www.cnsnews.com/ViewSpecialReports.asp?Page=/SpecialReports/archive/200502/SPE20050221a.html

The contention that transition costs do not exist is largely a word game based on the idea that these costs are simply a bringing forward of future liabilities. In fact, page 25 of a paper by the same authors as Mr. MacKenzie’s first source which appears to be closely related to that source (their introductions are nearly identical) states the following:

One implication of the sizable difference between Social Security returns and the capital market return, of course, is that those groups who receive a lower return from Social Security than from private investments would be better off if the Social Security system were never instituted. However, this does not necessarily mean a privatization of Social Security — creation of individual accounts invested in private capital markets — will automatically produce better returns than will Social Security. At a fundamental level the accrued benefits in the old pay-as-you-go system remain a real burden after privatization. In fact, the difference between the lower return paid by the pay-as-you-go system and the higher return from the private capital market does not matter per se. If, upon privatization, the government honors its promise to old generations and issues them recognition bonds for their accrued benefits in the old system, the debtservicing taxes have to be raised on the younger generations. When these new debt-servicing taxes are taken into account, the higher return on workers’ private retirement accounts is exactly compensated for by the taxes required to service the liabilities-turned debts, resulting in the same low return as in the old system.

Hence, even the authors of Mr. MacKenzie’s first source seem to understand that this conversion of future liabilities into current debt is a cost that counters the apparently higher returns of a privatized system. In any event, Mr. MacKenzie continues:

3. You mention Clinton as a source. My recollection is that when CLinton received his first SS trustees report, he their results polled, and then had the trustees redo their math- because their first report did not poll well. Clinton has zero credibility, less than AARP or the SSA. I do not respect your sources, I only respect peer reviewed academic publications. your sources are not independant or scientific, but are instead politicized and biased.

Of course, I did not give Clinton as a source. I quoted a Heritage Foundation source which stated that “the 2007 numbers are substantially similar to those in the Trustees Reports issued during the Clinton Administration”. They gave this as evidence that the 2007 Trustees Report was not not influenced by politics. If Mr. MacKenzie has a problem with even this sort of reference to Clinton, he needs to take it up with the Heritage Foundation.

Just to be clear, I do think that Social Security faces future funding problems and needs to be reformed. One approach would be to modify the current formulas by which benefits are calculated as in the proposals made by Pete Peterson on page 200 of his book “Running on Empty”. For example, he suggests indexing new benefits to prices instead of wages. Most people are not even aware that current law mandates that new benefits grow faster than inflation (assuming that wages continue to outpace inflation over the long run). Hence, it may be possible to reach a consensus on such a reform.

Another approach would be to make the system as transparent as possible. On that count, I’ve long thought that it would be useful to split Social Security up into its component parts, at least in its accounting. Those component parts are insurance, retirement, and safety-net. The insurance and retirement portions could be funded by each individual but the safety-net should likely be funded by progressive taxes. Implementing such transparency may cause some difficulties. But it would likely be much better than the current situation in which one group treats Social Security chiefly as a retirement system, one treats it chiefly as insurance, and one treats it chiefly as a safety-net. This current situation reminds me of the old fable of The Blind Men and the Elephant.

This latter approach might be less politically achievable and have a less immediate effect than the first proposal but it might help facilitate future reforms. It would likely be easier to deal with Social Security’s component parts, even possibly ending the retirement portion (at least beyond some minimal plan). However, scrapping the entire program without any plan of how to deal with the insurance or safety-net portions or the benefits of those at or close to retirement is simply not workable. In any case, an updated version of this response can be found at http://home.att.net/~rdavis2/scrapss4.html.