Tag: Social Security

Social Security Bloviate-fest

The annual bloviate-fest on Social Security has begun, even before the Social Security Trustees’ report has been released this year.  Apparently the report is to be released next week — after a three-month delay from its statutory release deadline of April 1. 

There’s concern from groups interested in preserving Social Security that President Obama’s National Commission on Deficit Reduction will propose changes to the program involving benefit cuts. These groups, which include the AFL-CIO, MoveOn.org, NOW, and the NAACP have issued and allegedly rebutted five “myths” about Social Security.  But their selection of myths and myth-busting arguments are weak and involves questionable arguments.

Below is a list of the twisted logic that these groups are using to convince voters that all’s well with Social Security’s finances and that we should not worry and just be happy. Also below are my reactions to the “faux-myth-busters” arguments.

Myth #1: Social Security is going broke.

Reality: There is no Social Security crisis.  By 2023, Social Security will have a $4.6 trillion surplus (yes, trillion with a ‘T’).  It can pay out all scheduled benefits for the next quarter-century with no changes whatsoever. After 2037, it’ll still be able to pay out 75% of scheduled benefits — and again, that’s without any changes. The program started preparing for the Baby Boomers’ retirement decades ago.  Anyone who insists Social Security is broke probably wants to break it themselves.

Real Reality: We’re in a vortex, and these folks refuse to extend help. Yes, I also don’t like the “crisis” terminology.  A better descriptor is “vortex,” the upper reaches of which can seem calm, for a time.  But eventually, we’ll realize that what we thought was a good place to be is really an inexorable path to the doom of being spun around super fast.

Yes, Social Security will have a surplus (of Treasury IOUs) of $4.6 trillion by 2023. But, notwithstanding the “T” attached to that sum, all’s not well.  By 2023, the program’s net liabilities (the shortfall of future revenues relative to future benefit commitments under existing laws) will exceed $20 trillion (note, also with a “T”).  Last I checked, 20 exceeds 4.6 by about four fold.

The fact that Social Security “will be able to pay” 75% of scheduled benefits after 2037 means we would have to impose a 25% benefit cut at that time if no adjustments are made earlier.  It’s said that the natural human instinct for justice emanates from a simple thought experiment — of placing oneself in the shoes of the victims. In this case, it’s those poor future souls who would have to acquiesce to a 25 percent benefit cut.  But they would be forced to do so only because the faux-myth-busting authors shrieked in horror when confronted with a much smaller benefit cut that would be required now to place the program’s finances on a sustainable course.

Myth #2: We have to raise the retirement age because people are living longer.

Reality: This is a red-herring to trick you into agreeing to benefit cuts. Retirees are living about the same amount of time as they were in the 1930s. The reason average life expectancy is higher is mostly because many fewer people die as children than they did 70 years ago. What’s more, what gains there have been are distributed very unevenly — since 1972, life expectancy increased by 6.5 years for workers in the top half of the income brackets, but by less than 2 years for those in the bottom half. But those intent on cutting Social Security love this argument because raising the retirement age is the same as an across-the-board benefit cut. 

Real Reality: Longer life spans, earlier retirement trends, a sharp decline in fertility that ended the baby-boom in the 1960s, and our failure to prepare for boomer retirements by saving adequately have all combined to expose Social Security (and our living standards) to a high risk of insolvency.

The “myth-busting” authors argue that infant mortality reductions caused most of the gains in longevity, but also that high earners benefitted more.  But the fact is that American longevity rates, as calculated by the National Center for Health Statistics, place life-expectancy at age 15 to be about 51 years in 1940 (through age 66).  Today (using 2006 life tables), it is 63.4 years (through age 78.4).  Combined with the fact that retirees beginning to collect Social Security benefits earlier (at age 62 rather than age 65), we have witnessed a very significant increase in retirement life spans.  

Skewed distributions of longevity gains by earning levels are not surprising. Higher earners are generally better educated, they know how to adopt healthy lifestyles, and have the incomes to do so.  The solution is not to take benefit cuts off the table, but to reform the system’s structure by eliminating statutory age eligibility rules AND providing stronger incentives to work longer — say, by gradually reducing payroll taxes with age and improving benefit replacement rates as incentives for working longer and beginning benefit collection later.  Incentives for such conservative choices on resource disposition (working longer and saving) would be especially enhanced the more “retirement benefits” are financed out of workers’ own resources compared to maintaining dependency on a regular government check.

Myth #3: Benefit cuts are the only way to fix Social Security. 

Reality: Social Security doesn’t need to be fixed. But if we want to strengthen it, here’s a better way: Make the rich pay their fair share.  If the very rich paid taxes on all of their income, Social Security would be sustainable for decades to come. Right now, high earners only pay Social Security taxes on the first $106,000 of their income.  But conservatives insist benefit cuts are the only way because they want to protect the super-rich from paying their fair share.

Real Reality: The system is badly in need of a structural fix.  Increasing taxes won’t strengthen Social Security, but only increase government spending as short-term Trust Fund surpluses increase.

The system was designed to be fair to everyone by not extending Social Security to the upper reaches of earnings for high earners. The program is intended to provide social insurance against the “loss of income due to old age,” not against the “loss of high income due to old age.”  High earners could self-insure against those losses if they wish by appropriately saving more for retirement. 

Under the current system, upper earners already pay more than their fair share for the appropriate level of social insurance. The Social Security benefit formula replaces only 15 cents to the dollar of their average wages above a certain threshold, whereas 90 cents are replaced for each dollar of average wages at the low end of the earnings scale. 

Moreover, increasing payroll taxes on high earners, many of whom are self employed small business owners, may push them into cutting back on business investments and hiring—precisely the activities needed to revive a sluggish economy.   

Myth #4: The Social Security Trust Fund has been raided and is full of IOUs

Reality: Not even close to true. The Social Security Trust Fund isn’t full of IOUs, it’s full of U.S. Treasury Bonds. And those bonds are backed by the full faith and credit of the United States.7 The reason Social Security holds only treasury bonds is the same reason many Americans do: The federal government has never missed a single interest payment on its debts. President Bush wanted to put Social Security funds in the stock market—which would have been disastrous—but luckily, he failed. So the trillions of dollars in the Social Security Trust Fund, which are separate from the regular budget, are as safe as can be.

Real Reality: We cannot really say one way or the other. 

We cannot observe how much the government would have spent if no Trust Fund surpluses had ever accrued. 

Two academic studies on the time trends of government spending and Trust Fund surpluses conclude that government spending increased more than dollar-for-dollar when Trust Fund surpluses increased compared to when those surpluses did not increase — suggesting (not proving) that exactly the opposite conclusion might be true.

But if we maintain that we truly don’t know whether Trust Fund surpluses are dissipated or saved — the likelihood that Trust Fund surpluses are spent must be placed at 50 percent: A very high gamble that we are dissipating Trust Fund surpluses — and odds that I would not recommend, especially for Social Security surpluses meant to be sequestered for future benefit payments. We need a better “lock box” than the Trust Funds provide in order to take Social Security fully and truly off budget.

Myth #5: Social Security adds to the deficit

Reality: It’s not just wrong—it’s impossible!  By law, Social Security’s funds are separate from the budget, and it must pay its own way. That means that Social Security can’t add one penny to the deficit.

Real Reality: By law, they are intended to be separate but, in fact, Social Security payroll-tax surpluses are no different from any other federal revenues.

Saying that Social Security must pay its own way does not preclude benefit cuts as a means of payment.  In reality, reforms to the program that are adopted eventually are likely to be pre-announced well in advance to allow affected participants to adjust their personal finances to the reality of smaller future benefits (through whatever channel) or higher taxes (of whatever kind).

But if people react by revising their expectations of smaller government retirement support and adjust their behaviors by working longer and saving more, then (a) they must be the rational, forward-looking types of individuals (whose existence is vehemently denied by defenders of Social Security), and (b) when it comes to direct changes to individuals’ resources via Social Security reforms, there’s really not much difference between tax increases and benefit cuts that are announced well in advance. To individuals, both approaches would appear as a reduction of future resources and would provoke a behavioral response. 

But a vast difference would arise in terms of the types of private behavioral response that the two alternatives would produce.  Pre-announced reductions in scheduled benefits would induce longer working lifetimes, more pre- and post-retirement saving, and larger transfers of human and physical capital to forthcoming generations of workers, which would increase their productivity. Tax increases, on the other hand, would provoke withdrawals from the work force, disincentives to saving, capital flight to low-tax countries, and reduced worker productivity. 

The faux-myth-busters need to be exposed for what they are: proponents of preserving their share of the national economic pie at the expense of our children and grandchildren. They are opponents of policies that would sustain faster economic growth and living standard improvements for successive generations.

Fiscal Commission Testimony

I testified to President Obama’s National Commission on Fiscal Responsibility and Reform today on Capitol Hill. The Commission is tasked with creating a package of specific budget reforms by December to be considered by the House and Senate.

I suggested that the Commission propose cuts to Social Security, Medicare, Medicaid, farm subsidies, transportation subsidies, education subsidies, aid to the states, and many other activities.

Fiscal responsibility is pretty easy really–you just need to cut programs. I advised Commission members to study the recommendations on www.downsizinggovernment.org.

And I said that other countries have ditched farm subsidies and privatized Social Security, so why the heck can’t we?

My written testimony is here. The hearings are on CSPAN and being streamed at the White House website.

Fiscal Imbalance and Global Power

Over at National Journal’s National Security Experts blog, this week’s question revolves around the health of the U.S. economy, and its relationship to U.S. power. 

The editors ask

How serious a threat is the mounting debt to the nation’s standing as the world’s only superpower? Can the U.S. continue to spend more than all other countries combined on its military forces given burdensome debt levels? In what other ways does the mounting debt undermine the country’s strategic position? […]

My response:

Our long-term fiscal imbalance, which increasingly amounts to a massive intergenerational wealth transfer, is clearly a sign of our decline. But it is a decline that has been a long time coming. (I first wrote about the insolvency of the Social Security system as a college sophomore, 23 years ago.) As such, it is tempting for people to assume that we’ll figure our way out of this mess before a complete collapse. Let’s call them, at the risk of a double negative, the declinist naysayers. And, even if they are willing to admit to the problem in the abstract, the naysayers can point to the more serious, and urgent, imbalances between pensioners and those who pay the pensions in Europe or Japan and say “At least we aren’t them.”

That is a pretty shoddy argument, but it seems to be ruling the day. We can talk about the obvious unsustainability of using taxes on current workers to pay benefits for retirees until we’re blue in the face. And my second grader can do the math on a system that was designed when workers outnumbered beneficiaries by 16.5 to 1, and in which, by 2030, that ratio will fall to 2 to 1. It simply doesn’t add up. (For more on this, much more, see my colleague Jagadeesh Gokhale’s latest.)

But this isn’t a math problem; this is a political problem. The incentive to kick the can down the road is overwhelming. The pain in attempting to deal with the problem in the here and now is, well, painful. It is hardly surprising, therefore, that members of Congress / Parliament / Bundestag / Diet, etc, have become very good at avoiding the issue altogether. And many of those who have chosen to tackle it are “spending more time with their families.”

What does all this mean for the United States’s standing as the world superpower? Less than you might think. Our difficulties in two medium-sized countries in SW/Central Asia have done more to puncture the illusion of American power than our political inability to deal with domestic problems. Our fiscal insolvency might convince other countries to play a larger role, if they genuinely feared for their safety. But other countries, especially our allies, are cutting military spending, while Uncle Sam continues to bear the weight of the world on his shoulders. In other words, our ability to maintain our global superpower status isn’t driven by our economic problems. But it is strategically stupid.

It is here that I take issue with Ron Marks’s contention that we spend less today than during the Cold War. While technically accurate, measuring military spending as a share of GDP is utterly misleading (as I’ve argued elsewhere.) If the point is to argue that we could spend more, I agree. But the measure doesn’t address whether we should do so.

We should think of military spending not as a share of the American economy, but rather relative to the threats we face. In real terms (constant current dollars), we spend today more than when we were facing down a nuclear-armed adversary with a massive army stationed in Eastern Europe and a navy that plied the seven seas from Cam Ranh Bay to Cuba. We spend more than during the height of the Vietnam or Korean Wars. Today, terrorist leaders are hunkered down in safe houses somewhere in, well, somewhere. In other words, what we spend is utterly disconnected from the threats we face, a point that is easily obscured when one focuses on military spending as a share of total output.

We spend so much today not because we are facing down one very scary adversary, but because we are facing down dozens or hundreds of small adversaries that should be confronted by others. After the Cold War ended, our strategy expanded to justify a massive military. Since 9/11, it has expanded further. Our fiscal crisis alone won’t force a reevaluation of our grand strategy. It will take sound strategic judgement, and a bit of political courage, to turn things around.

In the cover letter to his just-released National Security Strategy, President Obama acknowledged that it doesn’t make sense for any one country to attempt to police the entire planet, irrespective of the costs. Unfortunately, the document fails to outline a mechanism for transferring some of the burdens of global governance to others who benefit from a peaceful and prosperous world order. We should assume, therefore, that the U.S. military will continue to be the go-to force for cleaning up all manner of problems, and that the U.S. taxpayers will be stuck with the bill.

Heating Up the Covert Generational War

My latest book Social Security: A Fresh Look at Reform Alternatives (available here) argues that it’s not just labor quantity — the number of employees who are accruing future Social Security benefits — that will determine the size of Social Security’s future imbalances (and, incidentally, those of Medicare, and the size of deficits for all of government), but also the quality of that labor — the value of the work those employees are doing. 

Declining labor quality (as experienced baby boomers retire) will reduce taxable payrolls faster than is being projected by the Social Security Administration and the Congressional Budget Office.  The result is even more beneficiaries receiving Social Security checks, and lower-wage workers who will be funding those checks.

In the book, I construct a detailed simulation of U.S. demographic and economic forces over the coming decades to estimate how much of a drag declining labor quality will exert on labor productivity, countering the effects of capital accumulation and technological advance.

Now James Heckman has coauthored a study suggesting that the same thing is happening in Europe, traceable in part to public policies promoting less use and low maintenance of worker skills through the early retirement incentives of their public pension, welfare, and health systems. 

So it is quite clear how the developed world (Anglo-Saxon and mainland Europe) will spiral downward.  We’ll all vote to “strengthen” social insurance systems (the U.S. health care “reform” this year being the latest example), only to further weaken incentives for the young to acquire skills, further erode the tax base, which in turn will promote the further “strengthening” of social insurance protections … and so on. 

My old idea of a “covert generational war” is playing out before our very (but fully blind) eyes.

Two months ago, EU officials were even flirting with the idea of a cross-country crisis insurance institution — a European Monetary Fund. 

One ironic element in the ongoing European crisis: Remember how the EU’s erstwhile Stability and Growth Pact included penalties on nations who exceeded the 3 percent fiscal deficit rule?  Turns out, penalties must now be paid by the “successful” countries — mainly Germany and France — by coughing up the aid packages!

Thursday Links

  • Now that the health care bill is law, you should know exactly how it’s going to affect you, your premiums, and your coverage over the next few years. Here’s a helpful breakdown.
  • As the health care overhaul crosses home plate, global warming legislation steps up to bat.
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Social Security in the Red

Social Security is officially in the red.  The New York Times reports that the system will pay out more than it takes in this year.  Explains the Times:

The bursting of the real estate bubble and the ensuing recession have hurt jobs, home prices and now Social Security.

This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.

Stephen C. Goss, chief actuary of the Social Security Administration, said that while the Congressional projection would probably be borne out, the change would have no effect on benefits in 2010 and retirees would keep receiving their checks as usual.

The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.

Analysts have long tried to predict the year when Social Security would pay out more than it took in because they view it as a tipping point — the first step of a long, slow march to insolvency, unless Congress strengthens the program’s finances.

The crisis is now, since the vaunted “trust fund” is filled with non-recourse government bonds–essentially worthless pieces of paper.  There’s no there there when it comes to financing future benefits.  Either payments have to come down or taxes have to go up, unless we adopt real reform centered around personal accounts.  And the latter course seems ever more distant after Congress voted to expand federal control over every Americans’ health care.

Tuesday Links

  • Americans tuning out the State of the Union: “When Obama had to make way for ‘Lost,’ some lamented the fact that many Americans preferred trash TV over presidential enlightenment. But the public’s lack of interest in the SOTU is actually a sign of political health.”