Tag: Social Security

The Something-for-nothing Quandary

Most of the debate over extending the Bush tax cuts has focused on whether to extend slightly lower marginal rates for higher earners who already bear a huge burden. But at the other end of the income spectrum, a growing share of Americans don’t pay income taxes. Indeed, the Bush tax cuts increased the share of U.S. households that pay no income taxes.

From the Wall Street Journal:

Efforts to tame America’s ballooning budget deficit could soon confront a daunting reality: Nearly half of all Americans live in a household in which someone receives government benefits, more than at any time in history.

At the same time, the fraction of American households not paying federal income taxes has also grown—to an estimated 45% in 2010, from 39% five years ago, according to the Tax Policy Center, a nonpartisan research organization.

A little more than half don’t earn enough to be taxed; the rest take so many credits and deductions they don’t owe anything. Most still get hit with Medicare and Social Security payroll taxes, but 13% of all U.S. households pay neither federal income nor payroll taxes.

As the price of something drops, the demand increases. For a growing share of Americans, government services are effectively “free,” so they are demanding even more and policymakers are giving it to them.

As the following chart shows, federal payments to individuals as a share of the economy have reached an all-time high after seventy years of steady growth:

George Bernard Shaw said that “A government which robs Peter to pay Paul can always depend on the support of Paul.” In order to head off the coming fiscal train wreck, Paul is going to need to be convinced that robbing Peter is no longer in his best interests. However, by foisting a larger share of the burden of government onto a smaller and smaller group of taxpayers, policymakers will make it more and more difficult for Paul to see the error of his ways.

A Fannie Mae for Intrastructure?

Like President Bush before him, Obama has a knack for taking the worst ideas of his opponents and making them his own.  It is truly bipartisanship in the worst of ways (think Sarbanes-Oxley, the TARP or No Child Left Behind).  The newest example is the President’s proposed “infrastructure bank.”  A bill along those lines was introduced a few years ago by then Senator Hagel, although the idea is far from new.

First, let’s get out of the way the myth that we have been “under-funding” intrastructure.  Take the largest, and usually most popular, piece:  transportation.  Over the last decade, transportation spending at all levels of government has increased over 70 percent.  One can debate if that money has been spent wisely, but there’s no doubt we’ve been spending an ever-increasing amount on infrastructure - so there goes one rationale for an infrastructure bank.

The real rationale for an infrastructure bank is to transfer the risk of default away from investors, bankers and local/state governments onto the federal taxpayer, but to do so in such a manner that the taxpayer has no idea what they are on the hook for.

If there are truly great projects out there that will pay their own way, then they should have no trouble getting private funding.

Of course, we will be told that the bank will charge an interest rate sufficient to cover losses and that the taxpayer won’t be on the hook.  Again, if it is charging an appropriate rate, then why does the bank need to be chartered (and backed) by the taxpayer?  We’ve heard this story before…with Social Security, flood insurance, FHA, Fannie/Freddie…the list goes on, that all of these programs would pay their own way and never cost the taxpayer a dime.  If there are truly outstanding infrastructure needs, then appropriate the money and pay for them.  An infrastructure bank is just another way to allow Wall Street to line its pockets while leaving the risk with the taxpayer.  If bankers aren’t willing to actually take the risks, then why exactly do we need them?

A Birthday Gift from Paul Krugman

I turn 41 this summer (thank you for the condolences). Along with the well wishes of family and friends, I received an unexpected gift from NY Times writer Paul Krugman: this column in which he bashes people who are critical of Social Security in its current form or who worry about its ability to deliver expected benefits.

At first glance, the column hardly seems like a gift: it’s long on pointless insults, short on thoughtful discussion, and misleading. But it offers such a poor defense of the Social Security status quo that I suspect readers will be more skeptical of the program after seeing the column, not less. Hence, Krugman’s gift.

He writes:

Social Security has been running surpluses for the last quarter-century, banking those surpluses in a special account, the so-called trust fund. The program won’t have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted, which the program’s actuaries don’t expect to happen until 2037 — and there’s a significant chance, according to their estimates, that that day will never come.

OK, 2037 — no worries. Except that, as I said, I turn 41 this summer, which means I’ll turn 67 and qualify for full Social Security benefits in mid-2036. The very next year, the Social Security trust fund will be exhausted, according to the “intermediate” scenario contained in the most recent Social Security Trustees Report, available here (see Section IV-B and Appendix E). The program will still pay out some benefits — but less than 3/4s of what it now promises. So what happens then? That’s not a good question if you’re my age or younger.

But suppose you’re not my age or younger. Suppose you’re 10 years older than me, and will have collected 10 years of benefits by 2037. Don’t feel smug — you’ll be asking “So what happens next?” when you’re 77. That’s not a good question at your age, either. 

In fairness to Krugman, the Trustees Report considers different Social Security cost scenarios, the most optimistic of which projects that the trust fund will not be fully exhausted over the 75-year period the report considers. Krugman says there’s “a significant chance” this will be the case, but my (admittedly quick) skim of the report suggests it’s more just “a chance.”

One quick aside about the 2037 exhaustion date: when Krugman wrote this column in 2005, the Trustees’ intermediate scenario projected that the trust fund would last until 2042. In five years’ time, that date has grown 10 years closer. Not good.

Krugman writes that, if the trust fund does run out, Social Security can maintain its benefits using money transferred into the program by Congress from elsewhere in the federal budget. In fact, Congress will have to direct money from elsewhere to Social Security much earlier than 2037. Under the Trustees’ intermediate scenario, beginning in 2018 the amount of money Social Security pays out in old-age benefits each year will be greater than what the public pension program takes in in payroll taxes. (The Disability Insurance component of Social Security is in even worse shape, according to the Trustees, such that the program overall will go in the red in 2015.) To cover the difference, Congress will have to begin paying off the treasury bonds that currently comprise Social Security’s trust fund in order to provide the promised benefits. (In fact, Congress will have to do that this year because, as a product of the recession, Social Security obligations are greater than revenues. Hopefully, the economy will rebound and give the program a few years’ respite before transfers become an annual necessity, though the pessimistic scenario predicts no such respite.)

Krugman is unconcerned by these transfers, dismissing those who worry about them as engaging in “three-card monte.” His column doesn’t acknowledge that these transfers would need to occur at a time when Congress will be scrambling to cover other growing costs: similar deficits in Medicare, obligations to the ever-growing federal debt, and Medicaid’s increasing burden on federal and state governments. I worry that future taxpayers will not be amenable to having so much of their tax money directed to retirees (who refused to reform Social Security when they could have done so at relatively lower cost) rather than to government services for current taxpayers.

Krugman ends the column criticizing the proposal to reduce Social Security’s cost by raising the age at which retirees become eligible for full benefits. As part of an adjustment that began in 2002, retirees must now wait until age 66 to receive full benefits; beginning in 2021, the age requirement will slowly be raised until it reaches 67 in 2027. (Retirees will still be able to take reduced benefits at 62.) Some have suggested raising the full-benefit age to 70. Krugman says that would be unfair:

America is becoming an increasingly unequal society — and the growing disparities extend to matters of life and death. Life expectancy at age 65 has risen a lot at the top of the income distribution, but much less for lower-income workers. And remember, the retirement age is already scheduled to rise under current law. So let’s beat back this unnecessary, unfair and — let’s not mince words — cruel attack on working Americans.

There is something to what Krugman says. From 1980 to 2000, life expectancy at birth for the poorest decile (i.e., 10%) of the U.S. population increased from 73.0 years to 74.7 years, while life expectancy for the wealthiest decile increased from 75.8 years to 79.2 years. (The disparity in life expectancy between the top and bottom decile groups does decline to 1.6 years at age 65, which is up from 0.3 years in 1980. H/T to Dr. Daniel Coyne at the Washington University in St. Louis School of Medicine.)

But inequality in Social Security benefits would exist whether the eligibility age is 65, 66, or 70. Because Americans are required to participate in Social Security, and because all Americans become eligible for full retirement benefits for the rest of their lives at a single threshold age, then the longer-lived wealthy will receive more in benefits than the shorter-lived poor no matter what that threshold is. This is the product of having a one-size-for-all public pension plan (with lousy benefits). The way to address this inequality problem is through Social Security choice.

As I wrote at the beginning, Krugman’s column should leave thoughtful and informed readers more concerned about Social Security, not less. He couldn’t have given me a better present.

The Washington Post Misleads Readers about Medicare & Social Security Funding

Here’s a poor, unsuccessful letter I submitted to the editor of The Washington Post:

The Post’s economic reporters need to convey to readers that the Medicare and Social Security “trust funds” contain zero funds [“Medicare Funds to Last 12 Years Longer than Earlier Forecast, Report Says,” August 6].

This is not up for dispute.  When those programs’ revenues exceed outlays, Congress puts the excess in general revenues and spends it.  Congress marks the event by leaving an IOU to itself in these “trust funds.”  Those IOUs are not “funds,” any more than an IOU that you write to yourself is money.  These so-called “trust funds” therefore have no bearing on the (in)solvency of Medicare and Social Security.

Yet every year, the trustees for these programs claim that they do, making the Medicare and Social Security trustees reports an annual, ritualized lie that the U.S. government broadcasts to the American people.

Properly educating reporters, editors, and politicians about the Medicare and Social Security “trust funds” is a decades-long project.

The Social Security and Medicare ‘Trust Funds’ Are a … What’s the Word?

Yesterday’s New York Times editorialized:

It’s the time of year when the trustees of Medicare and Social Security release their annual reports on the programs’ financial health. And that means Americans are likely to be bathed in a fog of political rhetoric that makes it hard to sort out fact from fiction.

Here’s the bottom line…

The Times then proceeded to bathe its readers in fog:

According to the reports, the date of insolvency for Medicare’s hospital fund was pushed back, from 2017 to 2029, because of cost-saving measures in health reform. As for Social Security, without any changes, it will be able to pay full benefits until 2037 and partial benefits after that, the same estimate as in last year’s report, despite temporary setbacks from the recession…

A lot of attention will be paid to the finding in the Social Security report that payouts will exceed revenues in 2010 and 2011…That doesn’t endanger benefits, because any shortfall can be covered by the trust fund.

No.  It.  Can’t.  Because there are no funds in the Social Security “trust fund.”  There are no funds in the Medicare “trust fund.”  As Fortune magazine’s senior editor-at-large Allan Sloan explains in today’s Washington Post, those “trust funds” contain nothing but “funny money.”

In a 2006 blog post titled, “Sometimes, Governments Lie,” I offered the following proposition:

If the government knows that there are no assets in the Social Security and Medicare “trust funds,” and yet projects the interest earned on those non-assets and the date on which those non-assets will be exhausted, then the government is lying.

That still seems correct to me: the whole idea of the Social Security and Medicare “trust funds” is a lie.  An institutionalized, ritualized lie that the U.S. government tells the American people. Perpetuated by both political parties, and others with an interest in hiding the reality of these programs’ unfunded liabilities from voters.  One that many journalists uncritically repeat.

The State of Social Security: Maybe a Little Better, Maybe a Little Worse?

The Social Security Trustees released their annual report yesterday, showing a small improvement in the system’s finances over the long-term.  That’s rather surprising given that the recent recession has reduced the program’s revenues and brought forward the date when the program begins to drain money from the general budget — from 2016 last year to 2015 in the new report.  The Trust Fund exhaustion date is 2037, the same as it was in last year’s report. 

The new health care law is likely to increase the program’s revenues as employers reduce payroll-tax-free health insurance coverage and offset the reduction in employee compensation through higher wages that would be subject to payroll taxes.  This sets up a competition between the health care law–induced increase in Social Security revenues and declines in revenues and increases in outlays for other reasons — a sluggish economy, improving longevity, the addition of another year at the end of the 75-year projection horizon, and changes in economic and demographic data, assumptions, and methods.

The positive revenue effect of the health care law (14 basis points) more than offsets the negative effects of all of the other factors (6 basis points) on the system’s long-range actuarial balance. That yields a total improvement of the program’s actuarial balance from –2.00 percent of taxable payroll to –1.92 percent.  In next year’s report, however, this year’s “legislative” effects may be folded into changes from technical adjustments and incoming data. We may never know whether today’s assumptions on the revenue effects of the health care law are correct or not. 

It could be that those assumptions are too large, especially if Congress postpones the tax on Cadillac health care plans because of pressure from unions. It could also be too small if many employers decide to eliminate health insurance coverage and opt to pay the less costly penalty.  On balance, I’ve concluded that, faced with such wide uncertainty about future outcomes, the Social Security trustees have chosen to be relatively conservative in their estimates of the health care law’s revenue effect. 

Another curious item is that the program’s long-range imbalance increased from $15.1 trillion to $16.1 trillion. However, the report states that “the near-term negative effects on employment of the slightly deeper recession than assumed last year are offset by higher than expected real growth in the average earnings level” (Section D: Projections of Future Financial Status).  As a result, the program’s total (infinite-horizon) imbalance ratio declines from 3.4 percent in 2009 to 3.3 percent today.

Note that a deeper recession and higher unemployment than was assumed last year does not necessarily justify a correspondingly faster recovery, with unchanged long-term equilibrium unemployment and earnings growth rates.  The trustees are discounting the possibility that the unemployment rate may remain higher than was assumed last year and that, therefore, earnings may not rebound any faster compared to last year’s assumptions.  It appears that that incoming data on unemployment and GDP growth played little if any role in informing assumptions about future earnings growth rates. 

Finally, it should be noted that this year there were no public trustees to oversee and modulate the report as it was being produced.

Topics:

The Two GOPs

As the fall elections approach, two factions within the congressional GOP have emerged. The first faction, which generally controls the Republican leadership, is short-term oriented and just wants to return the GOP to power in Congress. Riding the wave of voter discontent over the government’s finances is a means to an end – the end being power.

The second, and considerably smaller faction, is more ideas driven and views the upcoming election as an opportunity to push for substantive governmental reforms. Whereas the “power first faction” offers platitudes about smaller government, the “ideas first faction” isn’t afraid to offer relatively bold suggestions for confronting the federal government’s unsustainable spending.

The ideas first faction is willing to publicly recognize that runaway entitlement spending must be reigned in and offer solutions to address the problem. Representatives Ron Paul, Michelle Bachmann, and Paul Ryan, for example, aren’t shying away from advocating a phase-out of the current Social Security system, which is headed for bankruptcy. In contrast, the power first faction lambasted Democrats for wanting to “cut Medicare” during the recent legislative battle over Obamacare.

In Ryan’s case, he has given the power first faction heartburn by pushing his “Roadmap for America’s Future,” which confronts the entitlement crisis head-on. Although Ryan’s Roadmap is not the ideal from a limited government standpoint, it’s a credible offering with ideas worth discussing. Even though the Ryan plan has received some favorable notice by the mainstream media, the power first faction would probably prefer Paul and his Roadmap went away.

From the Washington Post:

Of the 178 Republicans in the House, 13 have signed on with Ryan as co-sponsors.

Ryan’s proposals have created a bind for GOP leaders, who spent much of last year attacking the Democrats’ health-care legislation for its measures to trim Medicare costs. House Minority Leader John A. Boehner (R-Ohio) has alternately praised Ryan and emphasized that his ideas are not those of the party.

Ryan has not helped to make it easy for his leaders. He is a loyal Republican, but he is also perhaps the GOP’s leading intellectual in Congress and occasionally seems to forget that he is a politician himself.

At a recent appearance touting the Roadmap at the left-leaning Brookings Institution, someone asked Ryan why more conservatives weren’t behind his budget plan. “They’re talking to their pollsters,” Ryan answered, “and their pollsters are saying, ‘Stay away from this. We’re going to win an election.’”

His remarks illustrate the tension among Republicans over their fall agenda. Some strategists say the GOP should focus on attacking the Democrats; others want the party to offer a detailed governing plan.

Ryan’s ideas can be contrasted with those of the House Republican Conference Committee, which is a key power first organization. The HRCC just released a platitude-filled August recess packet for Republican House members to recite in talking to their constituents. Entitled “Treading Boldly,” the cover prominently features Teddy Roosevelt, which should immediately send chills down the spines of anyone believing in limited government.

The document is not “bold.” Take for example the five proposals to “Reduce the Size of Government”:

  • Freeze Congress’ Budget. This has populist appeal but does virtually nothing to reduce the size of government. The legislative branch will spend approximately $5.4 billion this year. That’s less than the federal government spends in a day.
  • Eliminate Unnecessary or Duplicative Programs. This proposal is so vacuous that even House Speaker Nancy Pelosi supports it. If the GOP isn’t willing to name a dozen or so substantial “unnecessary” programs to eliminate, then this promise can’t be taken seriously.
  • Audit the Government for Ways to Save. Yawn. Isn’t that what the $600 million Government Accountability Office does? The document says “Congress should initiate a review of every federal program and provide strict oversight to uncover and eliminate waste and duplication.” Nothing says “not serious” like calling for the federal government to eliminate “waste.” Waste comes part and parcel with a nearly $4 trillion government that can spend other’s people money on pretty much anything it wants to.

To be fair, there are sound proposals contained in the document such as privatizing Fannie Mae and Freddie Mac. But on the issue of entitlements, the HRCC punts:

The current budget process focuses only on about 40 percent of the budget and just the near-term – usually the next twelve months. We know that we have significant medium and long-term fiscal challenges fueled by the demographic changes in our country. The Government Accountability Office estimates that we have $76 trillion in unfunded liabilities. Rather than simply ignoring these challenges, Congress should reform its budget process to ensure that Congress begins making the decisions that are necessary to update our entitlement programs to secure them for today’s seniors and save them for future generations.

Had the Republicans not swept into office in 1994 on a promise to reduce government only to make it bigger, the power first faction’s “trust us” argument might be more credible. However, given that it already views the GOP’s ideas first faction as skunks at the party, voters who are expecting a new Republican congressional majority to downsize government might not want to hold their breath.