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"So which is better for newcomers; private pensions (paying r) or public (paying g)?"

I wonder if this varies by social economic position? It would not surprise me to learn that wealth managers can push the value of r, especially with the right compensation scheme (think of the classic incentive scheme of Warren Buffet). On the other hand, low SEP individuals will have a sub-par r due to the fees required to do investments ($30 transaction fees are nothing on $2 million, a lot on $50 a month of investing).

Which would frame this right back into the classic struggle between social classes in the United States.

Is there really such a dichotomy? First lets break down private pensions into defined-benefit and defined contribution plans.

DB plans promise life annuities calculated on years of contribution. An annuity, actually a perpetuity means that A = P/i, the size of the pension fund A required is the total payment liabilities P divided by the rate of return. Pensions use life insurance techniques to reduce the assumption from a perpetuity to a life annuity, these are mortality credits. Those who live longer are subsidized by those die young.

Almost all DB pensions plans are never fully funded, so they meet the first Ponzi criteria. They stay afloat by counting first on contributor wage growth, either in numbers or in wage rate increases, and second by recourse to their sponsor to make up the difference, which is known as sponsorship risk.

So DB pensions are Ponzi Schemes. However they are stable Ponzis and therefore a good deal for the sponsor if the rate of sponsor growth is greater than the rate of return promised on the pension. It means that a DB sponsor implicitly bets that it will grow at a faster rate than the DB return rate.

However if the sponsor believes that their business cannot grow faster than the DB rate, the market rate if you will, then DC pensions are a better deal for the sponsor. In this case under a DB plan a sponsor will have to make recourse payments to the pension.

You can also look at it time-wise. If sponsors believe that their businesses rate of growth will be lower in the future than it was in the past than DC pensions are a better choice. This explains the private sector's negative view of defined benefit pensions and it's a telling economic choice.

I never heard of such a definition. So nearly all businesses are Ponzi schemes by this definition. Makes it rather irrelevant then. Non-economists have better ones.

Everyone is quoting Paul Samuelson (1967, Newsweek magazine) on this.

The beauty of social insurance is that it is actuarially unsound. Everyone who
reaches retirement age is given benefit privileges that far exceed anything he has
paid in. . . . How is this possible? It stems from the fact that the national product
is growing at compound interest and can be expected to do so for as far ahead
as the eye can see. Always there are more youths than old folks in a growing
population. More important, with real incomes growing at some three percent a
year, the taxable base upon which benefits rest in any period are much greater
than the taxes paid historically by the generation now retired. . . . A growing
nation is the greatest Ponzi game ever contrived.

My worry, as I wrote inthis post is that there will be jam tomorrow and jam yesterday, but never jam today. In other words - there was jam yesterday- for the first CPP beneficiaries. There might be jam tomorrow - for some people who live through a more stable demographic time. But I'm very doubtful about the existence of "jam today", by which I mean a functional CPP system for me when I retire. On the other hand, as I explained in my last post, investing on your own is a highly hazardous business, so it's tempting to just give up.

It's depressing to me that actual economists feel the need to comment on Rick Perry's claim that Social Security is a Ponzi scheme, or even use his claim as motivation to talk about an actual issue such as the difference between defined-contribution and defined-benefit pensions. Perry isn't confused about economic definitions, or about the difficulty of sustainably paying g vs. r, or anything else to do with economics--he's not even thinking about any of that. He said that Social Security is a Ponzi scheme because that's what he thinks Republican primary voters want to hear (he may be wrong about that, but that's beside the point here). Conversely, even economists who question the sustainability of Social Security don't actually think that Social Security is a Ponzi scheme in the sense Perry means--that it literally is a criminal scam, full stop.

Actual economics--even the views of conservative economists--is pretty much irrelevant to Perry; conservative Republicans these days no longer see much need to find any cover from economists. Conversely, Perry's views are pretty much irrelevant to economics. I really enjoy WCI, but I hope that commenting on the views of Republican Presidential candidates isn't going to become a regular feature here.

Jeremy: I think debunking current political debates is useful and important. I also think that you're dead wrong in saying that conservative Republicans don't worry about having cover from economists; I think Perry's remarks on Social Security are a great illustration of how you're wrong. He can defend the claim that SS is a Ponzi scheme using a technical economic definition, knowing that most people will confuse that term with a Madoff-style scam.

"He can defend the claim that SS is a Ponzi scheme using a technical economic definition, knowing that most people will confuse that term with a Madoff-style scam."

True, but he would defend the claim whether or not that technical economic definition existed. His target audience is ignorant of the technical economic definition, and will not change their minds if informed of it, but they do know what a Madoff-style scam is.

As for whether conservative Republicans care any more about having cover from economists, see http://www.washingtonpost.com/the-magical-world-of-voodoo-economists/2011/09/07/gIQARBiEIK_story.html. Is there any conservative economist who would state, or even strongly imply, that he or she is in favor of repealing the 16th Amendment (allowing Federal income taxes), abolishing the Federal Reserve, returning to the gold standard, or other positions this editorial neglects to catalog, such as a constitutional balanced budget amendment or opposition to any and all tax increases, no matter what the purpose or circumstances? Mitt Romney may care a bit about having cover from economists, but Rick Perry, Michele Bachmann, and their ilk? Not so much.

Look, I actually agree that debunking this sorts of claims is necessary and important work, and I'm really glad there are people like Paul Krugman out there doing it. But it just doesn't seem to me like WCI's bread and butter. On WCI, I would think a post pointing out "Social Security is really nothing like a Ponzi scheme, except in an irrelevant technical sense" is just preaching to the converted. I just don't see a lot of point in a blog like WCI dabbling in debunking--I would think if you're going to do it, you'd want to go all-in, and probably also do it from an openly political or political-economic point of view, like Paul Krugman, Brad DeLong, Mark Thoma, or whatever conservative economists do this sort of thing. Anything less seems unlikely to have any impact, like if I were to do the occasional creationist-debunking post on my biology blog.

I don't know, maybe the above says more about me than it does about WCI. I tend to read WCI for the conceptual posts, the curiosity-driven "Hey, have you ever noticed X, I wonder why that is?" posts, and the analysis of Canadian economics. I really learn a lot from those posts, and they really make me think, and they fill a unique niche for me. In contrast, I feel like there's lots of places I can go to read a debunking of the latest crazy claim some US Tea Partier has made about economics.

Instead of using the word ponzi, let's consider how Social Security benefits are paid.
They are paid on a pay-as-you-go basis, by the current year's contributions.
What about the trust fund, you may ask?
Certainly, there is $2.6 trillion in there to make up any shortfall between current contributions and current payments.
Well, this has actually occurred for a few years.
The interest was not simply liquidated, as in a typical defined benefit plan, which is properly funded.
Instead, this interest is liquidated by raising new revenues, as if the trust fund did not exist.
The disconnect here is between people who think that the trust fund is flush with cash or investments which can be easily liquidated to cash.
That is not true, for the excess taxes and "interest" were loaned to the Treasury over the years. That money cannot be in the trust fund and in the Treasury (and spent) at the same time.
The proof of my statement is that when the interest was "redeemed," due to the shortfall, debt held by the public increased, as if the trust fund did not exist.
I can provide governmental links to support my statements for anyone who is interested.
Don Levit

"A growing nation is the greatest Ponzi game ever contrived"

I know economists like to point out that growth doesn't literally mean turning ever more natural resources into cars or iPhones or whatever - I think it was Nick who once pointed out we could all be singing songs to each other, if that's what people wanted. Of course, people want iPhones and cars and big houses, and in North America, they tend to get upset when told they can't have them. Anyway, the foregoing caveat notwithstanding, I have a hard time believing that the advanced economies are going to continue growing. Between scarce/expensive energy, an ageing population, and the effects of climate change, the challenge for the foreseeable future is going to be managing contraction. As boomers retire, who is going to buy their assets as they turn them into health care, assisted living arrangements, etc etc ?

"no jam today"

People forget that programs like CPP and SS were created because in the bad old days old people often lived in squalor and starved. It seems like we doomed to relearn this the hard way.

"investing on your own is a highly hazardous business"

That's an understatement. It dumps all the risk on the individual, and pits the individual with no market power against behemoth financial firms who *are* the market (and have the money to buy politicians and thus rig the rules of the game).

Patrick -

"People forget that programs like CPP and SS were created because in the bad old days old people often lived in squalor and starved. It seems like we doomed to relearn this the hard way."

Yup, when I was little I used to be scared by media stories about little old ladies eating cat food. Indeed, that was the archetypical image of a poor person: an old woman. (I still have a bit of a thing about cat food).

Nowadays, if you ask someone to picture someone who's poor, they're as likely to conjure up a mental image of a street kid. There are some poor elderly - single women, recent immigrants - but a married couple over 65 who has lived for a long-ish time in Canada is highly unlikely to be poor.

"It dumps all the risk on the individual, and pits the individual with no market power against behemoth financial firms who *are* the market (and have the money to buy politicians and thus rig the rules of the game)."

And that doesn't happen with government pension plans? We'll see, but I suspect that over the next decade, as the dependence ratio increases, European pensioners are going to find their public pension plans far more risky than they anticipated ("Gee, we're broke and can't pursuade the Germans to lend as any more money - guess we're going to have to cut our Greece Pension Plan payments"). In fact, we've seen that already, with governments pushing up retirement ages, often dramatically

A government pension plan may be more financially secure than, say, the Nortel Pension Plan (because, unlike Nortel, the government can take other people's money or print its own - well, not our European friends), but on the other hand, outside of Bankruptcy, Nortel can't unilaterally rewrite its pension plan - the government can. At some point along the line, either the European young are going to get tired of paying for their (often wealthier) elders and will either stop, or leave, which amounts to the same thing.

I believe all "defined benefit" plans, whether public or private, should be done away with.

If the economy grew with perfect predictability then perhaps it would be feasible. But manifestly it does not, and this creates risk. Defined benefit plans divorce a large segment of the population from financial risk, but this doesn't make the risk go away - instead that risk moves to the working segment of the population, who already bear most financial risk (e.g., when the economy tanks they can get fired.)

More concisely, by bubble-wrapping the elderly from any risk, we burden the working segment with even more risk than they normally have. This is not a recipe for social stability, or even fairness.

In fairness, there's nothing inherently wrong with "defined benefit" plans. Parties should be entitled to enter into contracts to allocate risk between them however they want. After all, anyone can buy a "defined benefit" plan, it's called an anuity.

The problem is that people offering defined benefit plans have to properly price the assumption of that risk, the way insurance companies do when the offer annuities. A defined benefit plan should be less generous (or at least, it should be expected to be less generous) than a similarly financed defined contribution plan. I would suggest to you that that is generally not (or has not been) the case (i.e., defined benefit plans, in practice, are both less risky and more generous than defined contribution plans). Alternatively, employers who offer relatively generous defined benefit plans (think the public sector) should be offsetting that benefit with significantly lower wages than employers who don't offer such benefits. Again, I'd suggest that doesn't happen.

Mind you, in the case of the CPP or the QPP, they aren't defined benefit plans. They aren't defined contribution plans either. You pay whatever the government tells you to pay, and get whatever the government decides to pay you. Anyone who thinks that public pensions are "risk free" are kidding themselves.

Defined benefit plan: an annuity, underwritten by the same company you work for. All your eggs in one basket. Nortel.

Excellent point Nick. Corollary: Asking a business to turn itself into an insurance company in order to run a DB pension is a bad idea.

It is also bad business. Life Annuities should be underwritten by businesses who specialize in that risk, that is life insurance companies.

Sure it may be more expensive but that is the cost of honestly pricing pension benefits.

Bob Smith:

You bring up a couple of good criticisms of my post. I should have said I didn't like defined benefits rather than we should do away with them. What two people agree to in the private sector is not my business. And I accept that government programs are often not really "defined benefit" (although some might be surprized to learn that).

But I do contend that defined benefits -- whether public or private -- have a destabilizing effect on the economy on the whole. It removes the give to the economy, and can make a difficult situation disastrous. And on either side of the coin, it fails to share the wealth when the economy does better than expected.


"A) A Ponzi scheme is any scheme which always has negative equity: i.e. money owed always exceeds money paid in."

That is either a non-sensical definition, or a poorly stated version of a more sensible definition.

A ponzi scheme is one in which you always *need* to borrow to pay interest on debt outstanding. You can't tell by looking at whether you borrow, since it depends on the need.

But with debt and equity being roughly substitutable, we can say that a ponzi scheme is really any firm in which the enterprise value of the firm needs to keep growing or else the firm will not be able to meet its obligations (both cost of equity or cost of debt).

A non-ponzi firm can meet its obligations without the enterprise value increasing, even if it chooses to keep borrowing more (because more investment opportunities become available).

Similarly, we expect nations to have growing productivity and to generate more income per worker over time. A system that relies on this is not ponzi.

If we apply this analogy to a transfer system such as social security, then it would be ponzi if in each period a greater proportion of national income were allocated to benefit payments in each generation. That is clearly unsustainable. But variations of the transfers are not unsustainable.

For example, if X[n] is the proportion of national income paid out to social security beneficiaries, then X(n) = .01*n is ponzi, but X(n) = .3 - .1/n is not ponzi.

Obviously if the population distribution is flattening out, as it is around the world, you will see the proportion of income paid to retirees increasing, but only asymptotically and it is bounded from above.

Social security is not a ponzi scheme -- not anywhere near it. It will approach a stable ratio, which is how much we want to transfer from the current working population to those who are presently retired.

rsj: It's not my definition. It's the way the academic literature mathematically defines Ponzi games. Not sure why it doesn't make sense to you.

But note that Ponzi pension schemes *don't* require rising proportions of national income paid to pensioners. Rather, a Ponzi scheme can generate a stable fraction of national income paid to pensioners....provided that economic growth is stable. You might find the intuition easier if you think about govt. deficits. With a growing economy, a government can run deficits forever, yet still have a stable debt/GDP ratio. Under my definition, that's a Ponzi scheme.


OK, then we disagree about a useful definition of "ponzi".

Generally speaking, the business sector as a whole is a net borrower from the household sector, and it is a net borrower each and every year.

It never pays back (in aggregate) the amounts that it borrows. The enterprise value of firms continues to grow every single year. So if you were to aggregate all firms into a single firm, you would conclude (by your definition) that it was a ponzi firm, because every year it is a net borrower from the household sector.

But an investor would care about the return on investment of each individual project. If that was in excess of the interest rate charged, then the firm as a whole would not be considered a ponzi firm even if the firm was a net borrower in every period.

The definition of ponzi, in order to be useful, must look at specific returns, rather than looking at aggregate income flows.

And I should add, when I emphasize "useful", I mean useful to the economists.

Ponzi financing is understood to be unstable because it cannot continue forever. Not because the income flows cannot continue forever, but because ultimately the enterprise value of the firm as determined by the market would permanently diverge from the discounted flow of earnings under any positive interest regime. So the definition of ponzi has to be one of return on investment, not one of net income flows across sectors.

If you use the other definition of ponzi -- that of income flows -- then your no-ponzi condition will end up ruling out perfectly stable and observed equilibria for no good reason. In this sense its not a useful definition.

"But I do contend that defined benefits -- whether public or private -- have a destabilizing effect on the economy on the whole. It removes the give to the economy, and can make a difficult situation disastrous. And on either side of the coin, it fails to share the wealth when the economy does better than expected."

Well, I agree that defined benefit plans can make a difficult situation disastrous. But the same could be said of a lot of financial instruments (debt, for example, as our Greek friends are learning). Similarly, the same is true of with respect to the upside of such investments. And at the end of the day, defined benefit plans are no more restricting on the economy as a whole than any other unsecured debt obligation (i.e., when the company or country goes bankrupt, the creditors, be they bondholders or retirees, take hefty haircuts).

The failure of defined benefit plan are only more "disastrous" than, say, a default on a convention corporate debt, because defined benefit plans are sold to employees (and treated by such employees) as being risk-free. They aren't.

Bob Smith:

Defined benefits are worse than many other instruments (such as, for example, 30 year bonds) because of their longevity. A worker in his or her 20's can rack up defined benefit obligations that can last until they die in their 90's. This gives defined benefit obligations a massive amount of leverage.

"I have a hard time believing that the advanced economies are going to continue growing."

Well, we have at least two historical examples of economic growth in countries that are resource constrained: ancient Egypt and Tokugawa Japan. There is hope. :)

RSJ: You're confused by the "equity" in the definition. A simple example might help

You borrow $100 from me to buy $100 of gold. You now have $100 of assets (gold) and debts (your IOU.) Now suppose gold prices rise to $150. Now you have $150 of assets and only $100 of debt. The difference we can call "equity". You started out with zero equity. If gold prices went down rather than up, we'd say you'd have negative equity. When people talk about the equity they have in their homes, this is just what they mean; the value of the asset minus the value of the associated debts.

Now suppose you borrow $100 from me to buy food for a poor old lady called Frances. After you do that, you've got $100 in debt and no assets; you have negative equity. (As John Cleese might say, you're in the hole, underwater, out of the money, up the creek, etc., etc.)

Obviously, the business sector as a whole (even in the worst of the financial crisis) had positive equity. Most businesses individually have positive equity (and you can look up an estimate of it on their balance sheets if they're publicly traded.) One of the main objectives in running a business is to build its equity; economists think of this as value-creation.

Ponzi games always have negative equity. Always, everywhere, in good times and bad. They do not attempt to create positive equity.

Think of a PAYG pension. The fund takes $1 billion in contributions from the young and gives it to old people. They now owe the young $1 billion in future pensions and have no assets to show for it. That's negative equity. All that they aim to do from then on is to transfer money from young generations to the old. None of those transactions is profitable for the pension fund, so that doesn't change their equity.

So in a simple perfect world with only very smart investors (rational ones with perfect foresight), can such a scheme work? Yes it can, so long as the interest rate used to calculate the pensions owed the young is not too high relative to the growth rate of the population. Are those young smart investors better off with private or Ponzi pensions? In this simple world, the answer only depends on whether the interest rate on private pension plans is higher or lower than that offered by the Ponzi scheme.

"Defined benefits are worse than many other instruments (such as, for example, 30 year bonds) because of their longevity."

I'm not sure that's true. I can think of financial instruments with terms well in excess of any realistic pension liability. Although not common, extremely long-term bond issues are not uncommon (though, in fairness, they tend to be callable by the issuer, which is a heck of a lot easier than bankcruptcy). As of today, there are about 80 US companies with bonds which don't mature for 60+ years (including a number of recently issued 100-year bonds - I guess today's interest rates really are once-in-a-century rates). Then there are perpetual bonds (Consol bonds still make up a small portion of the UK government's liabities).

Morover, the longevity of the liabilities (and the inability to escape them) for defined benefits plan is not inherently more problematic than the longevity of liabilities for disability insurance, health insurance, annuities or long-term care insurance (though I gather that US insurers have been kicked in the teeth in respect of the latter as a result of poor pricing decisions made decades ago). I'm not sure any of those products are "bad" (and certainly, no one would propose getting rid of these products, provided that there is a market for them).

In any event, there isn't a problem with defined benefits plans per se. The problem is that the people offering them don't (or didn't) appreciate the risks they were taking on and the people investing in them didn't appreciate the potentially catastrophic risks embedded in them ("whaddaya mean my Nortel pension isn't worth squat"). As others have pointed out, people have run defacto defined benefits plans, namely annuities, for centuries. It's not a problem with the product, it's a problem with what people have made of them.

Simon,

"Think of a PAYG pension. The fund takes $1 billion in contributions from the young and gives it to old people. They now owe the young $1 billion in future pensions and have no assets to show for it. That's negative equity. All that they aim to do from then on is to transfer money from young generations to the old. None of those transactions is profitable for the pension fund, so that doesn't change their equity."

I think you are using a funny definition of equity and debt for a social benefit program.

When a transfer occurs from cohort A to cohort B, person A is not "owed" anything at all. That is not a debt.

The government imposes taxes and transfers on all sorts of activities, and none of the taxed cohorts are owed anything. Rather, previously they owed a tax, and when they paid the tax, their debt was extinguished.

Rather, the cohort that is owed is B -- given that it is a defined benefit transfer.

Now in the situation in which A eventually becomes B (by virtue of aging), then A, knowing that he will become B, also has a reason to support the transfer, but there are many other reasons, for example, A is no longer required to care for his own elderly, etc., so his own burdens of transferring to them are lessened.

Similarly, if we have a program in which the government pays for children's education by providing them with free schooling, we do not call that a ponzi program, even though there are on-going transfers from the old to the young. We do not say that those who are too old to go to school are "owed" anything at all, right? They still benefit in that they don't need to pay for their own children's education, and of course they benefit by living in a society in which children are educated in general.

When the transfer occurs from young to old, you infer that some form of debt is involved. Whereas when the transfer occurs from the old to the young, then you do not see any debt because the old do not look forward to being young.

I *think* what is tripping you up here, is a psychotic and autistic denial of the social relations and obligations that exist.

In neither case is there a debt in the accounting or legal sense. But there is a social debt, which the benefit program helps extinguish. The real debt is the debt that the working age people owe their retired parents, and the obligation they have to educate their children. We do live in a society in which these social obligations exist.

The transfers known as education funding and retirement funding remove these debts, to a large part, from the working age population by taxing a portion of their wage income. The paygo program itself does not incur any debt by doing this. Rather, it is the debts of the contributors that are extinguished with their contributions to the paygo program.

We agreed, collectively, to impose these debts upon ourselves as a society long ago, and we decided, collectively, to extinguish these debts via transfers long ago as well, because doing so is much more efficient as well as fair, in that it removes a lot of idiosyncratic risk.

Now there is a sense in which the program itself can incur a debt, for example if it pays out more in a year than it takes in. Then the program will need to borrow. And if it borrows, it will need to pay interest. At some point, it's conceivable that it would need to keep borrowing in order to keep making interest payments.

That would be a ponzi program.

But social security is not a ponzi program. In fact, it still has a surplus, because historically it has been a creditor rather than a debtor. At some point it will be a debtor, due to demographic shifts, just as it was a creditor due to demographic shifts.

But unless the economy is perfectly static, the fact that revenues do not always equal receipts does not mean that the program is ponzi.

RSJ;
You wrote that the Social Security program still has a surplus.
Do you agree that when the interest of the Trust fund was redeemed the last 2 years, it took general revenues to do so?
Do you agree the same thing will happen with the trust fund principal?
Do you understand this is the way that government pays all its expenses - pay-as-you-go, with new monies.

Let's take Medicare Part D.
It is funded 75% by general revenues, a current budget expenses, and 25% by the beneficiaries.
Do you consider Medicare Part D to be fully funded?
Don Levit

It depends on how you treat the Social Security Trust Fund. The fund is invested in US Bonds, though Series EE which aren't tradeable. However they are securities and obligations of the US Government. So to not honour the Social Security Trust Fund is to renege on the US Government's debt obligations. There is, in principle, no difference between the Social Security Trust Fund and you personally if you hold a US Treasury Bond. The Social Security bonds means that the Fund is pledged to be honoured as a general debt obligation of the US Government, a first-priority payment according to the US Constitution and government practice worldwide. It means SS Bonds aren't another line-item that can be increased or cut like Defence spending or even Medicare payments.

The debate about "funding" and the status of the Social Security Trust Fund is unedifying. Any business or government can default on its future-dated debt obligations. Look at Nortel.

Further, the debate about the difference between the Trust Fund and SS payment obligations is sponsorship risk, pure and simple. All DB pension funds run sponsorship risk where the sponsor is liable to make up the gap between assets and obligations to pay. Businesses hate sponsorship risk and hate having to honour it even more (see Nortel, Air Canada or General Motors) but it exists. The US Government is on the hook morally (possibly legally) for a gap between SS Trust Fund assets and SS obligations.

There is nothing exotic or Ponzi-like about that.

Secondly the Public Service Superannuation Plan, the pension plan for federal Public Servants in Canada is funded just like Social Security. Public Servant pension contributions are paid into the Superannuation Account and given notional credit for interest as an accounting item. Benefits are then drawn against the Superannuation Account in the same way tax funds are drawn general Consolidated Revenue Fund to honour Government of Canada Bonds.

In the cases of Social Security, the Public Service Superannuation Plan and DB Pensions generally, if the contribution base grows faster than the obligation does then the defined-benefit nature means that there is no sponsorship cost and the plan is self-financing and essentially free. However if wages and tax revenues grow more slowly than the rate of return implied by the DB formula then the sponsor will bear an actual net sunk cost to honour the pension.

Failing to pay that cost constitutes default on debt obligations in all the cases I have discussed without any reservation.

Don,

As an accounting matter, social security ran a surplus, which means that redemption of either principle or interest requires general revenues -- i.e. revenues coming from outside the program, which are being used to repay the program for past surpluses.

Medicare Part D, as a program, was never funded with any dedicated revenue stream at all. Not being funded, it is not fully funded. It is zero funded.

That doesn't mean that we shouldn't do it.

We do not have dedicated funded streams for many things that government does. Medicare Part D is as unfunded, in the sense you use, as the Department of Defense.

rsj:
All right. WE agree that Medicare Part D is unfunded.
From a financing perspective, the paying of general revenues (75% by the Treasury) is the same way that the SS trust fund principal and interest is redeemed.
So, would you say the SS trust fund is unfunded?
Determinant:
There is a difference between obligations owed to the trust fund and obligations owed to individuals, etc.
Obligations owed to the trust fund are considered by the federal government as implicit promises, known as intragovernmental debt (debt the Treasury owes the SS trust fund, debt the government owes to itself).
On the 4 levels of obligationbs, this is the weakest level to fulfill.
The FASAB, who is the accounting advisor for the federal government, does not even consider benefits payable beyond the current year as a liability.
Debt owed to individuals is known as debt held by the public, an explicit liability, the strongest obligation to fulfill.
I can provide credible governmental excerpts and links to support my statements for any one who is interested.
By the way, Determinant, do you consider Medicare Part D Fully funded?
Don Levit

I'm not an American and I stay away from US Medicare debates. From what I understand it is program paid for out of current revenues as all Medicare benefits are. So is Old Age Security in Canada and so are provincial drug benefits for seniors. It is a government program paid for with taxes and it's expenses are charged directly to the Consolidated Revenue Fund.

Second, you have to distinguish between benefits owed and the debts used to cover them. The benefit formula used to distribute Social Security is under legislative control and can be changed at any time, this is a political point. It is no different to private DB pensions except most jurisdictions have enacted laws that DB sponsors cannot reduce benefits outside of bankruptcy, they have to accept sponsorship risk.

The actual bonds in the SS Trust Fund are US Government obligations. They have higher payment priority than does the Department of Defence or general program revenues.

The fact that accountants feel that debt owed to the public has higher legal priority than debt owed to the government has no basis in law. It wouldn't be the first time accountants have made grievous mistakes with pension and benefit analysis, just ask them their opinion of DB pensions vs. life annuities.

With any security with future the entity who issues the security with payments has to come up with the regular payments. It is no different if it is a bank, General Electric or the US Government. Money has to come it to the entity and go out to service the obligation.

"So, would you say the SS trust fund is unfunded?"

That is a nonsensical question. FInancial Assets are not funded or unfunded. The programs are funded or unfunded.

And again, the only reason to care about whether a program is funded or not is to measure the drain or benefit to general revenues arising from the program. Social security was historically a benefit, and it will be a drag for a period of time. No problem there.

Medicare Part D is always a drag -- it costs money. That does not mean that it is not worthwhile, or worth paying for. Only that it must be paid for.

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