Tag: Social Security

Senate Vote on Rand Paul’s Budget

Last week, a motion to proceed on a budget resolution introduced by Sen. Rand Paul (R-KY) was decisively defeated in the Senate (7 in favor, 90 opposed). Paul’s proposal would have balanced the budget in five years (fiscal year 2016) through spending cuts and no tax increases. Social Security and Medicare would not have been altered. Instead, the proposal merely instructed relevant congressional committees to enact reforms that would achieve “solvency” over a 75-year window.

That’s hardly radical.

Paul’s proposed spending cuts were certainly bold by Washington’s standards, but they weren’t radical either. For example, military spending would have been cut, in part, by reducing the government’s bootprint abroad. From the Paul proposal:

The ability to utilize our immense air and sea power, to be anywhere in the world in a relatively short amount of time, no longer justifies our expanded presence in the world. This budget would require the Department of Defense to begin realigning the over 750 confirmed military installations around the world. It would also require the countries that we assist to begin providing more funding to their own defense. European, Asian, and Middle Eastern countries have little incentive to increase their own military budgets, or take control of regional security, when the U.S. has consistently subsidized their protection.

Over 750 confirmed military installations around the world. That’s enough to make a Roman emperor blush. Isn’t continuing to go deeper into debt to subsidize the defense of rich allies the more “radical” position? (See these Cato essays for more on downsizing the Department of Defense.)

Other cuts included eliminating the Department of Housing & Urban Development, the Department of Energy, and most of the Department of Education. But unlike most Republicans, Paul didn’t apologize for the cuts or use the debt dilemma as a cop out. Instead, he explains in his plan why these federal activities are counterproductive and should be devolved to the states or left to the private sector.

It’s disappointing that Paul could only get seven Republicans and no Democrats to support his budget. For all the bluster about needing to cut spending, not raise taxes, and stop the Obama administration’s big government agenda, most Republican senators said “no dice” when given the chance to vote in favor of a plan that would accomplish all three objectives and balance the budget in five years.

Ron Paul on the General Welfare Clause

Now that Rep. Ron Paul is again a presidential candidate, his constitutional views will come under increasing scrutiny, as happened yesterday when he was interviewed by Chris Wallace on Fox News Sunday. Not surprisingly, critics immediately leapt on Paul’s “crankish view” that Social Security, Medicare, and other such programs are unconstitutional. Even Wallace seemed taken aback, citing the document’s General Welfare Clause:

The Congress shall have the Power to lay and collect Taxes … to pay the Debts and provide for the common Defence and general Welfare of the United States.

“Doesn’t Social Security come under promoting the general welfare of the United States?” Wallace asked, incredulously.

One does not have to agree with everything Paul has said or stood for over the years to grant that he has a point, and a very important one. It’s a mark of how widespread our constitutional misunderstanding is that so many Americans take it for granted, at least until the Tea Party came along, that most of what the federal government does today is constitutional.

In a nutshell, the Constitution was written and ratified to both authorize and limit the government created through it. It was designed to do the latter not through the Bill of Rights – that was an afterthought, added two years later – but through the doctrine of enumerated powers. Article I, section 8, grants the Congress only 18 powers. Nothing for education, or retirement security, or health care: Those responsibilities were left to the states or to the people, as the Tenth Amendment makes clear.

So what about the General Welfare Clause, the first of Congress’s 18 powers? To be sure, the clause was inartfully drafted, like several other provisions in the Constitution. But it was understood by nearly all as granting Congress the power simply to tax (in limited ways: see the full text). The terms “common Defence” and “general Welfare” were meant merely as general headings under which the 17 other specific powers or ends were subsumed.

In fact, the question came up almost immediately, during the ratification debates, and in early Congresses as well, so we have a rich record of just what the General Welfare Clause meant. Here, for example, in Federalist #41, is James Madison, the principal author of the Constitution:

Some, who have not denied the necessity of the power of taxation, have grounded a very fierce attack against the Constitution, on the language in which it is defined. It has been urged and echoed, that the power “to lay and collect taxes, duties, imposts, and excises, to pay the debts, and provide for the common defense and general welfare of the United States,” amounts to an unlimited commission to exercise every power which may be alleged to be necessary for the common defense or general welfare. No stronger proof could be given of the distress under which these writers labor for objections, than their stooping to such a misconstruction…. Had no other enumeration or definition of the powers of the Congress been found in the Constitution, than the general expressions just cited, the authors of the objection might have had some color for it…. But what color can the objection have, when a specification of the objects alluded to by these general terms immediately follows, and is not even separated by a longer pause than a semicolon?

Indeed, as was often asked: What was the point of enumerating the 17 other powers if Congress could do anything it wanted under this single power? The Framers could have stopped right there. They didn’t because they meant for Congress to have only certain limited powers, each one enumerated in Article I, section 8. And taxing for the general welfare limited Congress even further by precluding it from providing for special parties or interests.

Nor does it change anything to note, as Wallace did yesterday, that the Supreme Court upheld the Social Security Act in 1937 – as if that settled the question. As a practical matter it settled things, of course, just as Plessy v. Ferguson settled the “separate-but-equal” issue in 1896, only to be reversed in Brown v. Board of Education in 1954, and Bowers v. Hardwick settled the issue of homosexual sodomy in 1986, only to be reversed in Lawrence v. Texas in 2003. It’s well understood that the 1937 Court, cowed by Franklin Roosevelt’s infamous Court-packing threat, simply reversed 150 years of understanding and precedent concerning the doctrine of enumerated powers. And that removed the Constitution’s main restraint on federal power – not by constitutional amendment but by judicial fiat.

But it’s not been “extreme liberals” alone, Wallace went on to say, who’ve read the Constitution as the 1937 Court did, noting that conservative Justice Antonin Scalia recently told a congressional gathering: “It’s up to Congress how you want to appropriate, basically.” To be sure, from fear over “judicial activism,” many conservative judges have bought into the New Deal’s constitutional revolution. Perhaps the most that can be said on their side is that the Court cannot alone, this late in the day, reverse these mistakes.

In fact, this unconstitutionality cannot be undone overnight even by the Congress. Here again there are practical concerns, as Paul has recognized. Vast numbers of people have come to rely on these welfare schemes, however unsustainable they are in the long run, as has become increasingly clear. If constitutional fidelity can serve to spur fiscal discipline, however, we may yet slowly work our way out of our present and long-term fiscal dilemma. But that felicitous result will not happen until we admit both our infidelity and our indiscipline – the two are intimately connected.

By reading the General Welfare Clause in isolation, therefore, Wallace and others turn the Constitution on its head. Rather than a document aimed at limiting government, it becomes a document authorizing unlimited government. And let’s be clear: The basic issue here is nothing more – nor less – than legitimacy. Do we live under the Constitution, or don’t we? If Ron Paul’s views on this fundamental question are “cranky,” so too were those of Madison, Jefferson, Washington, and the rest of the Founders we revere.

The 2011 Social Security Trustees Report — Harbinger of Bad News

The just-released 2011 annual report of the Social Security Trustees shows a significant worsening of the program’s finances.

Last year we were told that we would see payroll tax surpluses over benefit expenditures for a few more years — until 2015. That won’t happen according to the 2011 report; the program will now add to federal deficits in every future year — and increasingly so, which will ramp-up financial pressure to downsize other federal programs, increase taxes, or create yet more debt.

Note that both Republicans and Democrats negotiating over how to reduce federal deficits and the national debt have resolved to leave Social Security untouched for now.  That leaves the program’s finances to fester and worsen — increasing the costs of future adjustments and burdens on future generations.

Many people, especially those who favor early reforms, say that the Social Security trust funds “don’t matter.”  Note, however, that they lock up future federal revenues for Social Security benefit payments — on par with future dedicated payroll taxes.

The lock-up effect of the Social Security trust funds  is demonstrated by the fact that the program’s cash flow deficits today are not forcing any benefit cuts or payroll tax increases.  This can continue until the year 2036 according to the 2011 report.

But if we allow the situation to continue for that long, fixing the program will require a permanent benefit cut of at least 25 percent or a payroll tax increase of at least 40 percent of payrolls in 2036 and beyond.

Most left-leaning politicians and analysts are unwilling to entertain any benefit cuts today.  They favor tax increases today.  But those will fall on today’s and future workers, destroying their incentives to work and ability to save for the future.

Retirees, on the other hand, can continue to enjoy Social Security benefits that are much more generous compared to what they paid in when working.  So to hold all, including well-off, retirees harmless from a “shared sacrifice” approach to fixing Social Security’s finances seems unfair.

The trust fund also “matters” because it provides fodder to the argument of left-leaning politicians that the program’s finances are sound, backed by $2.6 trillion in Trust Fund treasury securities.  That $2.6 trillion sounds like a lot of money to the average Joe on the street. But consider that past and current generations, who together contributed an extra $2.6 trillion to Social Security, are now owed much more under the program’s current laws — a whopping $18.8 trillion according to the 2011 report.

The program’s long-term actuarial deficit (over 75 years) is now 2.2 percentage points of payrolls.  That’s 30 basis points larger than was the case in last year’s report, by far the largest increase in recent memory . That’s surely because of poorer prospects today compared to last year of experiencing a rapid recovery of productivity, output, and payroll tax revenues.

Finally, Mark Warshawsky, my friend and colleague on the Social Security Advisory Board, notes that this year’s Trustees’ report has been released on a Friday during the afternoon — the right day to release bad news because policymakers and the public are usually busy planning or traveling for weekend activities.

Topics:

John Boehner’s Spending and Debt Promise

House Speaker John Boehner has promised to tie substantial spending cuts to upcoming debt-limit legislation. He said spending cuts will have to be at least as large as the dollar value of the allowed debt increase. Thus, if the legislation increased the legal debt limit by $2 trillion, then Congress would have to cut spending over time by at least $2 trillion.

How can we be sure that spending cuts are real?

There are only two types of solid and tough-to-reverse spending cuts—legislated changes to reduce entitlement benefit levels and complete termination of discretionary programs. Republicans will have to define what time period they are talking about, but let’s assume it’s the standard 10-year budget window.

  • Entitlements: The legislation, for example, could change the indexing formula for initial Social Security benefits from wages to prices. The Congressional Budget Office says that change would reduce spending by $137 billion over 10 years (2012-2021). Other options include raising the retirement age for Social Security and raising deductibles for Medicare.
  • Discretionary: Each session of Congress decides the following year’s discretionary spending. Promises of discretionary spending cuts beyond one year are meaningless. Thus, the various promises in Republican and Democratic budget plans to freeze various parts of discretionary spending through 2021 or reduce spending to 2008 levels over the long term have no weight. Those are not real cuts.

The only way to get real cuts in discretionary spending—cuts that would be tough to reverse out in later years—is complete program termination and repeal of the program’s authorization. That way, policymakers in future years would generally need at least 60 votes in the Senate to reinstate the spending.

Thus, if the GOP promises to save $50 billion over 10 years by reducing the levels of Title 1 grants to the states for K-12 schools, that is not a real and solid cut. However, if they pass a law to repeal Title 1 spending altogether, that cut may well be sustained over the long term.

To make spending cuts even more secure, the GOP should also insist on a statutory cap on overall outlays with a supermajority requirement to break, as I’ve outlined here. For program termination ideas, see www.DownsizingGovernment.org.

In sum, the GOP needs to ensure that spending cuts tied to the debt-limit vote are either:

  1. Changes to entitlement laws to reduce benefit levels, or
  2. Discretionary program terminations.

    Promises to hold down future discretionary spending levels and partial program trims are not real spending cuts.

    Monday Links

    • “Sadly, in Egypt’s case, a freely elected civilian government may prove powerless in the face of the deeply entrenched and well-organized military.”
    • “Washington politicians from both parties, and bureaucrats, have for decades successfully decreased our freedom and liberties as they have regulated more and more of our lives, including our retirement.”
    • “The Ryan proposal correctly focuses on achieving debt reduction through spending cuts, but this very gradual debt reduction schedule is a weakness that could lead to its downfall.”
    • “Nearly two years ago Sen. McCain, along with Senators Graham and Lieberman, was supping with Qaddafi in Tripoli, discussing the possibility of Washington providing military aid.”
    • Cato media fellow Radley Balko joined FOX Business Network’s Stossel recently to discuss your right to make video recordings of police, and why exercising that right frequently is vital to liberty:


    Taxing the Rich Is the Cure for Everything!

    Under current law, Social Security is supposed to be an “earned benefit,” where taxes are akin to insurance premiums that finance retirement benefits for workers. And because there is a cap on retirement benefits, this means there also is a “wage-base cap” on the amount of income that is hit by the payroll tax.

    For 2011, the maximum annual retirement benefit is about $28,400 and the maximum amount of income subject to the payroll tax is about $107,000.

    It appears that President Obama wants to radically change this system so that it is based on a class-warfare model. During the 2008 campaign, for instance, then-Senator Obama suggested that the program’s giant long-run deficit could be addressed by busting the wage-base cap and imposing the payroll tax on a larger amount of income.

    For the past two years, the White House (thankfully) has not followed through on this campaign rhetoric, but that’s now changing. His Fiscal Commission, as I noted last year, suggested a big hike in the payroll tax burden. And the President reiterated his support for a class-warfare approach earlier this week, leading the Wall Street Journal to opine:

    Speaking Tuesday in Annandale, Virginia, Mr. Obama came out for lifting the cap on income on which the Social Security payroll tax is applied. Currently, the employer and employee each pay 6.2% up to $106,800, a level that rises with inflation each year.

    …Mr. Obama didn’t hint at specifics, though he did run in 2008 on a plan to raise the “tax max” by somewhere between two to eight percentage points for the top 3% of earners.

    …[M]ost of the increase could be paid by the middle class or modestly affluent — i.e., those who merely make somewhat more than $106,800. A 6.2% additional hit on every extra dollar they make above that level is a huge reduction from their take-home pay. If the cap is removed entirely, it will also mean a huge increase in the marginal tax rates that affect decisions to work, invest and save. In a recent paper for the American Enterprise Institute, Andrew Biggs calculates that this and other tax increases Mr. Obama favors would bring the top marginal rate to somewhere between 57% and 68% when factoring in state taxes. Tax levels like these haven’t been seen since the 1970s.

    Obama is cleverly avoiding specifics, largely because the potential tax hike could be enormous. The excerpt above actually understates the potential damage since it mostly focuses on the “employee” side of the payroll tax. The “employer” share of the tax (which everyone agrees is paid for by workers in the form of reduced take-home wages) is also 6.2 percent, so the increase in marginal tax rates for affected workers could be as high as 12.4 percentage points.

    After the jump is a video from the Center for Freedom and Prosperity, narrated by yours truly, that elaborates on why this is the wrong approach.

    Thursday Links