Featuring Benjamin H. Friedman, Research Fellow in Defense and Homeland Security Studies, Cato Institute; Spencer Ackerman, Senior Writer, WIRED Magazine; and Julian Sanchez, Research Fellow, Cato Institute; moderated by Laura Odato, Director of Government Affairs, Cato Institute.
We are grateful to the Harry and Lynde Bradley Foundation and the Carthage Foundation whose support of the October 2012 Cato Conference “Europe’s Crisis and the Welfare State: Lessons for the United States” made possible this special issue of the Cato Journal.
The Cato Institute tops a new measure of think tank performance in the United States, according to a recent report. Cato bested all other U.S. think tanks in the main category of “Aggregate Profile per Dollar Spent.” “I’m grateful to the Center for Global Development for showing that Cato gives its sponsors something I wish government gave more of to taxpayers: bang for the buck,” said Cato CEO John Allison.
One of the first things I did upon joining Cato in 2004 was to develop a Social Security benefit calculator. That work would later contribute to my book on the outcomes of different Social Security reform proposals.
The Social Security Administration used to have a benefit calculator on its website, but it was cumbersome to use. Now the SSA has a portal that enables you to view your personalized earnings and benefits information. This is in lieu of the paper statement that was recently suspended for those younger than age 60.
For the SSA calculator, you can register here (after answering some identifying questions) and look at the benefits that the system is promising to give you (lots)—and then compare them to what you really can expect to receive (not so much, and even less the younger you are).
(This blog post first appeared at Cato@Liberty following the release of the 2006 Medicare and Social Security trustees’ reports. I repost it, with updated links and “exhaustion dates” because sadly nothing else has changed.)
Year after year, federal officials speak of the Social Security and Medicare trust funds as if they were real. Yesterday Today, the government announced that the Social Security trust fund will be exhausted in 2040 2033 and that the Medicare hospital insurance trust fund will be exhausted in 2018 2024— projections that the media dutifully reported.
But those dates are meaningless, because there are no assets for these “trust funds” to exhaust. The Bush administration wrote in its FY2007 budget proposal:
These balances are available to finance future benefit payments and other trust fund expenditures—but only in a bookkeeping sense. These funds…are not assets…that can be drawn down in the future to fund benefits…When trust fund holdings are redeemed to pay benefits, Treasury will have to finance the expenditure in the same way as any other Federal expenditure: out of current receipts, by borrowing from the public, or by reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, increase the Government’s ability to pay benefits.
This is similar to language in the Clinton administration’s FY2000 budget, which noted that the size of the trust fund “does not…have any impact on the Government’s ability to pay benefits” (emphasis added).
I offer 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.
If that’s the case, then these annual trustees reports constitute an institutionalized, ritualistic lie. Also ritualistic is the media’s uncritical repetition of the lie.
In his 2005 open letter to Karl Rove, Ed Crane defended Cato’s proposal for private retirement accounts thus: “You want to get people excited about personal accounts? Tell them about the 1960 Supreme Court case, Flemming v. Nestor, which explicitly says Americans have no ownership rights to the money they pay into Social Security. It is, the Court ruled, a social program of Congress with absolutely no contractual obligations. What you get back at retirement indeed, when you can retire and receive benefits is entirely up to the 535 members of Congress. Where is the dignity in such a system?”
President Bush’s reform of the Social Security went nowhere, but Ed Crane’s warning is no exaggeration. Yesterday, Dimitris Christoulas, a 77-year-old retired pharmacist killed himself in front of the Greek Parliament. “A suicide note found in his coat pocket blamed politicians and the country’s acute financial crisis for driving him to take his life, police said. The government had ‘annihilated any hope for my survival and I could not get any justice. I cannot find any other form of struggle except a dignified end before I have to start scrounging for food from rubbish bins,’ the note said.”
According to The Telegraph, “One in five Greeks are unemployed, depression is on the rise and there is a growing feeling of despair across the country. The [Greek] government said last year that suicides had increased 40 per cent over the previous two years. The high-profile suicide [of Dimitris Christoulas] came a day after a 78-year-old Italian woman threw herself from the balcony of her third-floor apartment in protest against a cut in her monthly pension from 800 euros to 600 euros.”
Those Americans, who rely on Social Security for their retirement, should remember that what the government gives, it can take away. The Social Security system is on an unsustainable path to bankruptcy. The only question is whether Social Security is reformed before it brings about national bankruptcy as well. Every day that our masters in Washington, D.C. dither and refuse to act, the Greek option [i.e.: national bankruptcy] becomes more realistic. The only way to ensure dignified retirement for millions of America’s pensioners is by reforming social security and cutting the size of the government’s future financial obligations.
Paul Krugman is the latest to suggest that advocates of personal Social Security accounts are guilty of hypocrisy in criticizing the constitutionality of Obamacare’s individual insurance mandate. After all, they contend, are not personal account supporters arguing in favor of a federal government mandate that individuals purchase a specific commercial product (i.e., stocks, bonds, mutual funds, or whatever)?
No doubt, there is a superficial similarity. But the analogy significantly misses what personal account proponents are calling for. If there was no current Social Security program and the government were simply to mandate that individuals purchase some form of commercial retirement savings product, that would indeed be analogous to the health insurance mandate, and would be unconstitutional for the same reasons. However, Americans are currently paying a Social Security payroll tax. What personal account advocates propose is simply a tax credit against that tax if individuals contribute to a personal account. That the credit would be equal to the size of the contribution is structurally irrelevant.
The government uses credits to incentivize behavior all the time. For example, it offers a tax credit for the purchase of the Chevy Volt. That may be bad policy, but it is generally agreed to be constitutionally permissible. It is, however, very different from a mandate that every American buy a Volt. Similarly, Congress would have been on much stronger constitutional ground if it had imposed a tax on all Americans to fund uncompensated care, and then offered a credit to anyone who obtained insurance. The same individuals would end up paying the penalty/tax as under Obamacare, but the structure would have been less offensive to the Constitution. The federal government clearly has the power to tax, and it can offer tax credits and deductions. Congress chose not to do it that way for political reasons—they didn’t want to be accused of raising taxes. But political expediency does not justify an unprecedented expansion of federal power.
And, while on the subject of Social Security, it should be noted that several individual mandate defenders—including Justice Ginsburg—have likened it to Social Security, saying that if the government can make us participate in Social Security, why can’t it make us buy health insurance? But in the case of Helvering v. Davis, the Supreme Court ruled that Social Security was constitutional precisely because it was not insurance and did not require citizens to buy a product. Rather, the Court held that the Social Security tax was simply a tax, authorized by the Constitution’s taxing power. Social Security benefits are simply a government spending program, authorized under the General Welfare clause, and unrelated to the tax itself. As the Court pointed out, “The proceeds of both the employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way.” One may disagree with the Court’s expansive interpretation of the General Welfare clause in this case, but it clearly distinguishes Social Security (and Medicare or even a single-payer health care system) from the individual mandate constitutionally.
Some might say that these distinctions are just quibbles or nit-picking. But how government does things matters. Constitutional limits are there for a reason. We are, after all, a government of laws, not of men.
Unfortunately, the political system rarely generates opportunities to enact big reforms that actually solve problems and increase freedom. Instead, we’re stuck with proposals that make things modestly better or modestly worse.
So you can imagine my sense of dissatisfaction that I’m getting peppered with questions about whether the one-year, two-percentage point payroll tax holiday should be extended.
But it’s more complicated than that. The Democrats in the Senate want to make the temporary tax cut even bigger and “offset” that tax cut with some soak-the-rich tax increases. Republicans, meanwhile, are frozen like deer in the headlights. They understandably don’t like the Democrat plan, but they seem reluctant to support anything else, not even a “clean” extension of the current policy.
Here are a handful of observations.
The Democrat’s proposal for a one-year payroll tax cut financed by a permanent income tax hike on investors, entrepreneurs, and small business owners would be a big net negative for U.S. job creation and competitiveness.
A “clean” extension of the payroll tax holiday would modestly improve incentives for work, but the temporary nature of the tax cut substantially weakens pro-growth effects.
Ideally, the extension of the tax holiday should be financed by reducing the growth of federal spending.
There are other tax cuts, such as permanent reductions in marginal income tax rates and/or permanent reductions in the double taxation of saving and investment, that would have a better impact on the economy.
There are other tax cuts, such as expanded credits, deductions, preferences, exemptions, and shelters, that have no positive impact on the economy.
A payroll tax holiday does not undermine Social Security since the Trust Fund is nothing but a big pile of IOUs.
The best incremental reform would be a permanent reduction in the payroll tax, with the money channeled to personal retirement accounts. This would lower the tax burden of work while reducing the long-run burden of entitlement spending.
So what does all this mean? Simply stated, there are many other fiscal reforms that are preferable, but a temporary extension of the payroll tax holiday is better than nothing—assuming, of course, it is not poisoned by accompanying class-warfare tax hikes.
Governor Rick Perry of Texas is being attacked by two rivals in the GOP presidential race. His sin, if you can believe it, is that he told the truth (as acknowledged by everyone from Paul Krugman to Milton Friedman) about Social Security being a Ponzi scheme.
Mitt Romney doubled down on his attack against Texas Gov. Rick Perry this afternoon, warning in an interview with Sean Hannity that his critique of Social Security amounted to “terrible politics” that would cost Republicans the election. Romney’s decision to pile on suggests that he’s willing to play the “granny card” against Perry if it will help him get elected, a tactic more becoming of the likes of DNC chairwoman Debbie Wasserman Schultz than a potential Republican nominee.
…another Republican rival, Michele Bachmann, is preparing to hit Perry on the same issue. “Bernie Madoff deals with Ponzi schemes, not the grandparents of America,” says a Bachmann adviser. “Clearly she feels differently about the value of Social Security than Gov. Perry does. She believes Social Security needs to be saved, that it’s an important safety net for Americans who have paid into it all their lives.” … “She strongly disagrees with his position on that…”
Shame on Romney and Bachmann. With an inflation-adjusted long-run shortfall of about $28 trillion, Social Security is a Ponzi scheme on steroids.
But as I explain in this video, that’s just part of the problem. The program also is a terrible deal for workers, particularly young people and minorities.
Here’s what’s so frustrating. Romney and Bachmann almost certainly understand that Social Security is actuarially bankrupt. And they probably realize that personal retirement accounts are the only long-run answer.
But they’re letting political ambition lure them into saying things that they know are not true. Why? Because they think Perry will lose votes and they can improve their respective chances of getting the GOP nomination.
Sounds like a smart approach, assuming truth and morality don’t matter.
But here’s what’s so ironic. The Romney and Bachmann strategy is only astute if Social Security is sacrosanct and personal accounts are political poison.
Consider what happened when I presented some considerably less pointed remarks at the conference at Washington and Lee University School of Law. One of Medicare’s most enthusiastic supporters responded by making an impassioned speech that it was improper to describe Medicare as a “Ponzi scheme,” and the program should not be judged by the standards that would apply to a private pension because it was actually a “sacred bond” between the generations. (Leave aside the fact that I never used the word “Ponzi” in my remarks. I did note that the Medicare program bore certain similarities to an inter-generational pyramid scheme, which is something quite different. Of course, it is possible that the use of this term by the commentator was a Freudian slip.) His words brought enthusiastic applause from those members of the audience who had heard enough bad news of the sort found in this book and were more than ready to ignore Medicare’s problems on the basis of empty political sloganeering.
Finally, my reply is titled “Cooling Out the Marks, Medicare Style.” This is a reference to a well-known article by a famous sociologist, on con games and the social process of adaptation to failure:
“Sometimes, however, a mark is not quite prepared to accept his loss as a gain in experience and to say and do nothing about his venture. He may feel moved to complain to the police or to chase after the operators. In the terminology of the trade, the mark may squawk, beef, or come through. From the operators’ point of view, this kind of behavior is bad for business. It gives the members of the mob a bad reputation with such police as have not yet been fixed and with marks who have not yet been taken. In order to avoid this adverse publicity, an additional phase is sometimes added at the end of the play. It is called cooling the mark out. After the blowoff has occurred, one of the operators stays with the mark and makes an effort to keep the anger of the mark within manageable and sensible proportions. The operator stays behind his team-mates in the capacity of what might be called a cooler and exercises upon the mark the art of consolation. An attempt is made to define the situation for the mark in a way that makes it easy for him to accept the inevitable and quietly go home. The mark is given instruction in the philosophy of taking a loss.” Erving Goffman, “On Cooling the Mark Out: Some Aspects of Adaptation to Failure,” 15 Psychiatry 451, 451-52 (1952).
The occupational hazard for Medicare’s defenders is the tendency to become coolers on the program’s behalf. Professor Horwitz largely avoids this temptation, although she is not (yet) willing to concede how hot things actually are in the place in which we find ourselves. The same cannot be said for Medicare’s more ardent defenders, who routinely justify and excuse Medicare’s pathologies on the grounds that it is a “sacred inter-generational trust,” and not just another mediocre government program. Yet, even these ardent defenders may eventually find themselves wondering, in the dark of night, how it came to pass that they became coolers, giving instruction to the poor and working classes on the philosophy of taking a loss at the hands of a program that was supposed to help them, but ended up treating them as marks. With friends like that, who needs enemies?