Posted on 06/23/2003 7:00:29 AM PDT by NativeNewYorker
NOW WE UNDERSTAND how Henny-Penny must have felt when she realized that the sky wasn't falling. Our 20 years of warning that Social Security's sky is falling came to almost nothing last week when our colleague Jim McTague pointed out1 that actuarial estimates of a long-run deficit in Social Security may be balanced by a long-run surplus of tax revenue collected from Americans' tax-deferred savings plans. Even since we sat through endless hearings of the Alan Greenspan's Social Security Reform Commission, we have inflicted our worries about the impending fiscal and demographic doom of Social Security and Medicare on any audience that would read or listen. There are just too many people who will be collecting benefits; existing payroll taxes on the work force and employers won't pay the bills. Now it turns out that right alongside this enormous hidden liability is an enormous hidden asset. With a T Jim was attracted to the subject by the Bush administration's developing plan to phase out six tax-deferred savings plans and replace them with something designed like the Roth IRA -- using after-tax deposits, but permitting tax-free compounding of gains and tax-free distribution of retirement income. The administration would follow the path of the Roth IRA by permitting savers with money in the old 401(k) and similar retirement plans to pay income tax on their current savings and convert the remainder to the new plans forever free of any further tax. It looks like a windfall for the Treasury, a short-term bailout for an administration pressed by the prospect of record deficits, and Jim wondered how much was at stake. Nobody in the government seemed to have much of a clue. After a lot of reportorial digging, he found that the best answer was provided by Michael Boskin, a Stanford University economist who was chairman of the Council of Economic Advisers during the first Bush administration. Jim reported in his D.C. Current column last week on a paper to be published soon by the National Bureau of Economic Research, in which Boskin looked at the $11 trillion of wealth currently held in tax-deferred retirement accounts. Yes, $11 trillion, with a T. According to data provided by the Federal Reserve and by other scholars, which Boskin worked over, analyzed and adjusted, the largest nest egg is private pension assets, which were $3.7 trillion in 2002. (They were $4.5 trillion at the end of 2000, but what the heck? Easy come, easy go.) Assets in individual retirement accounts totalled about $2.5 trillion at the end of 2002 ($2.7 trillion at the end of 2000). Assets in state and local government pension plans were $2.0 trillion at the end of 2002 ($2.3 trillion at the end of 2000). Assets in pension funds managed by life-insurance companies were $1.5 trillion at the end of 2002 ($1.45 trillion at the end of 2000). Federal pension assets were $800 billion at the end of 2002 ($745 billion at the end of 2000). Tax deferrals amount to $3 trillion of the $11 trillion. That is, if the deposits in these accounts had been saved and invested without tax preferences, and the interest, dividends and capital gains earned and reinvested in these accounts had been subject to income tax, the federal government would have taken in an extra $3 trillion -- an amount that happens to be fairly close to the entire national debt held by the public. In almost every year since 1980, the annual addition to deferred taxes has exceeded the federal deficit. The whole thing can be seen as a form of arbitrage: The federal government borrows at the lowest interest rates available in the economy; the retirement savings plan assets are invested in higher-yielding securities. In an audacious thought experiment, Boskin says that the federal government could effectively wipe out the existing national debt by securitizing the future flow of revenues from tax on tax-deferred retirement accounts. Instruments like mortgage-backed securities or state tobacco-settlement bonds, could replace the existing bonds carrying the full faith and credit of the U.S. With the right securities offering, the government could relieve itself of the burden of its interest payments (assuming that investors would trust the government to keep the tax laws as they are). Moreover, the $3 trillion is just the current value of deferred taxes; the future of tax-deferred saving may be much bigger, big enough to solve big problems. Boskin calculates that the present value of future taxes to be paid on distributions from tax-deferred savings accounts is likely to amount to $5 trillion to $10 trillion, adjusted for inflation and expressed in 2003 dollars. The lesser amount is about equal to the actuarial deficit in Social Security; $10 trillion would cover the actuarial deficits in both Social Security and Medicare Hospital Insurance. "Withdrawals from tax-deferred accounts will increase so dramatically relative to wages and salaries in coming decades that government forecasts of projected deficits are seriously overstated," Boskin says in the introduction to his paper. Seriously overstated, indeed. In the dry language of academia, this is the equivalent of flashing lights and fireworks. Accumulated Balances Let us pause a moment to appreciate the accidental brilliance of the solons who created the 401(k) savings plan, the individual retirement account and similar retirement savings vehicles. Most of the creators were not particularly wise; they were just trying to cut taxes and goose the stock market in an era of low growth and high inflation. A few were also trying to increase individual savings and demonstrate the power of capitalism to citizens who never had any capital. Boskin, in fact, was one of these: In the 1970s, he served on a federal advisory commission that recommended creation of tax-deferred retirement-savings plans. Whatever their motivation, they succeeded, and even the federal government benefited in the long run, since much of the $3 trillion in deferred taxes is on investment income that might never have been earned if it were not for the tax advantages. Boskin ventures a prediction about what the accumulation of deferred taxes means for 21st century fiscal politics. He says the enormous size of the accumulated balances and the vast numbers of households holding tax-deferred assets will add a third side to the future political economy of budget policy. The first side is the huge weight of Social Security, Medicare and other spending programs benefiting baby boomers and requiring higher payroll and income taxes. The second side is the younger workers resisting those taxes. The new third side is the retirees also seeking lower tax rates in order to retain as much of their retirement savings as possible. Many people now contemplating a comfortable retirement will be shocked at the bite that federal taxation will take from their benefits and distributions. "This could manifest itself in greatly increased support for tax reform that lowers rates or retrospectively indexes the definition of income, as well as more narrowly focused relief from the taxes on the withdrawals," Boskin says. Future Imbalance This suggests, unfortunately, that the unsuspected balance between future federal income and outgo is as unstable as it has been invisible. The boomer beneficiaries of federal spending are going to be unwilling to pay the taxes that make the spending possible -- especially if the taxes don't seem fair. Despite currently low inflation, Boskin notes, much of the taxable gains in retirement accounts are merely nominal -- that is, they are the result of inflation rather than real investment returns. "Even the modest inflation of recent years accumulates to a potentially immense tax on purely inflationary income when compounded over decades," he says. The more that retired investors have to pay, the less likely they will think it's fair. Twenty-five years ago, inflation and the taxes on inflationary gains in housing sparked a taxpayer revolt. California's Proposition 13, limiting property-tax increases, was one manifestation of the anger. The Reagan Revolution, which included indexing income- tax brackets to reduce the effect of inflation on tax rates, was another. Long before Americans have paid those $12 trillion in taxes, there will be a tax revolt, there won't be any money for Social Security, after all, and we'll have to bring Henny-Penny out of retirement.
. . .
[But] the boomer beneficiaries of federal spending are going to be unwilling to pay the taxes that make the spending possible -- especially if the taxes don't seem fair. Despite currently low inflation, Boskin notes, much of the taxable gains in retirement accounts are merely nominal -- that is, they are the result of inflation rather than real investment returns.
. . .
Long before Americans have paid those $12 trillion in taxes, there will be a tax revolt, there won't be any money for Social Security, after all, and we'll have to bring Henny-Penny out of retirement.
IOW, after we've paid for our elders' social security and saved for our own retirement outside of Social Security, we're gonna pay for our own Social Security with taxes on our IRAs.To the extent, of course, that we don't stick our grandchildren with the bill! But at least it does show that the Social Security Trust Fund does have a funding source ace in the hole.
;-)
Withdrawls are taxed at the marginal tax rate while if you invest outside of the accounts the earnings from capital gains and dividends are taxed at a lower rate. Also, tax rates will likely go up in the future to pay for social security, medicare and the new drug benefits. Investments which are not tax deferred will be immune to those tax increases, while tax deferred investments will take the full brunt of them.
I agree. But not only is our government not scaling back these entitlement boondoggles for the rich Florida retiree crowd, they're adding more. Any tax cuts we're getting now are sure to eventually be eradicated when they pass this prescription drug monstrosity.
I guess that if the government can't afford for the DJI average not to be 36,000, it probably will be. Whatever THAT means . . .
Both major political parties perpetuate The Big Lie regarding Social Security. The Big Lie has existed since Social Security's inception. The debate over "privatization" is only the latest version of The Big Lie.
The Big Lie is that Social Security is some kind of retirement savings plan.
It is NOT.
Social Security is a socialist income redistribution scheme, nothing else.
Those who are working are taxed to provide a "safety net" for those who are less fortunate.
Originally, this meant retirees and surviving dependents.
Congress has, of course, complicated it far beyond this over the last 65 years.
But one fact remains: it is NOT a "savings plan", it is an income redistribution scheme.
A major facet of The Big Lie is that "we have to do something so that Social Security remains solvent in the future.
Poppycock!
In today's age of modern computerization, the computation for operating an income redistribution scheme that remains perpetually solvent is quite simple:
The only change necessary to the current system is that monthly payments to eligible recipients would be a variable amount, not fixed.
THERE IS ABSOLUTELY NO NEED FOR A MULTI-TRILLION DOLLAR "TRUST" FUND!!!
Congress should NEVER have been permitted to confiscate so much money from the American People in the name of The Big Lie. This fund is nothing but a slush fund that Congress raids to pay for other government expenditures. If private sector employers did the same thing with their companies' pension funds, they'd be placed in prison. The "privatization" plan proposed by Bush is merely an attempt by Wall Street brokerage firms and financial institutions to get in on the scam: grab a portion of a constant revenue stream (guaranteed by taxation) from which they can skim their commissions.
Daschle's "concern" over the Social Security system is a lie.
Bush's plan to Enronize the system is worse.
The American People need to wake up and put these liars and thieves in prison.
Good for him, it's a refreshing admission.
Congresscritters, presidents and political appointees have been lying about it for decades.
As repugnant as redistribution is, it would be much more efficient to recognize exactly what it is and operate it accordingly rather than perpetuating the Big Lie and allowing the thieves to continue to accumulate and misdirect a multi-trillion dollar "investment" scam.
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