Wednesday, January 12, 2005

What is Fair?

Could someone explain how using Treasury bonds to fund the Social Security trust fund differs from a case were a company issues bonds to a defined benefit plan that it sponsors?

In other words, General Motors (for example) is prohibited by ERISA from issuing corprate debt to its pension plan in order to fund that plan. The assumption by lawmakers being that you cannot replace an IOU (the pension promise) with another IOU (the bond) from the same party and still have a funded plan. Is the corporate situation analagous to the Social Security Trust where the SS payment promise (made by the Treasury) is being funded by a non-marketable Treasury bond (issued by the Treasury)?

If it is not the same, then what is the difference? Why would the GM plan be considered unfunded by the PBGC when the Social Security system is considered to be funded?

To extend the analogy further, corporate pension plans -- such as that run by GM -- must calculate their liabilities annually. Those liabilities include all promises made to future workers. Once a worker accrues a benefit under an ERISA plan the earned benefit cannot by law be reduced -- a promise once made must be kept (and funded). Considering this, it seems that people are treating the promises now being made under Social Security somewhat cavalierly. Every worker born after 1975 (those up to 30 years old) is now being promised benefits that will be delivered after 2042, yet many commentators seem to be arguing that it does not matter today that a predicted shortfall will be reached in 2042 as that date is too distant to matter. Does this make sense considering that there must be millions of Americans under 30 now in the work force?

Shouldn't we be making sure that we are properly calculating the earned benefits of those in their twenties so they have some idea of what they need to save to supplement their Social Security benefit?

Lastly, those in their twenties are now making a larger contribution than needed to pay current benefits (only about 74 percent of last year's employer and employee payroll tax was used to pay for current benefits). So, that cohort is floating a loan (in effect) to today's retirees. Yet it is this cohorts' benefits that may have to be cut. Those paying extra today to fund the trust will have to pay extra again (in the form of reduced benefits) when they retire.

Is the building of the trust fund a fair treatment of those now in their twenties? Is intergenerational fairness something that should be taken into account.


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