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Entries in "Phony social security crisis"
March 07, 2008
The phony Social Security crisis-4: What needs to be done
(For previous posts in this series, see here.)
While Social Security is not in a crisis, it does require periodic adjustments to make it work, as the economy and demographics of the population change. It can be made solvent with minor tinkering at the edges such as removing entirely the cap on payroll tax income or increasing the rate of taxation by small amounts or by lowering the annual cost-of-living increases in benefits or, in the worst case, by slightly reducing the benefits. We are not facing the catastrophe the doomsayers predict.
The major problem with Social Security is not with the retirement benefits part but with rapidly rising Medicare costs. Currently the Social Security tax (the part that goes towards retirement benefits) is 12.4% of income up to the cap, which is $102,000 for 2008. The tax rate for Medicare is 2.9% of your gross income. Your employer pays half of this 15.3% total, unless you are self-employed in which case you are responsible for the entire amount.
It is the Medicare costs that are already outstripping Medicare revenues and rising rapidly, and thus straining the government's finances. But this is largely a health care costs problem, caused by the hugely wasteful profit-making health system that currently exists in the US that has resulted in per capita costs that are at least twice as much as the costs in other developed countries and yet produces worse results. Introducing a single-payer system like that which exists in France or Canada would result in savings, greater ability to control costs, and better health care overall. (See the series of posts on health care where these arguments are presented in more detail.)
As far as Social Security is concerned, one thing that could and should be done immediately is to remove the cap on incomes that are taxed for Social Security. The existence of this cap means that people earning more than that pay no Social Security taxes at all on the extra income, and thus pay a smaller proportion of their total income into Social Security than those making less than the cap. Thus the richer you are, the smaller the fraction of your income that goes towards Social Security, making it a very regressive tax.
Social Security and Medicare are programs that can be made solvent for a long time. The 'problem', such as it is, is that the way to do so goes against the dreams of those ideologues who want to privatize Social Security funds and preserve the huge exploitative profits of the health care and health insurance industries. These people have sought to divert more and more wealth to a very few.
So how have their plans worked out? Very well, it turns out. The share of the income of the rich has been increasing at a rapid pace at the same time that their share of taxes has been decreasing. The March 5, 2008 issue of the Wall Street Journal reports:
The nation's top 400 taxpayers reported a total of $85.6 billion of income on their federal income-tax returns for 2005 -- an average of $213.9 million apiece, according to Internal Revenue Service data obtained by The Wall Street Journal.
Just to make the cutoff to join this exclusive club, you had to report income of at least $100.3 million, up sharply from $74.5 million the previous year. The average income among the top 400 in 2004 was $172.8 million.
. . .
Indeed, the top 400 taxpayers have greatly increased their share of individuals' income since the mid-1990s. The group accounted for 1.15% of total income in 2005, up from 1.02% the prior year -- and more than twice as large as its 0.49% share a decade earlier. It's the highest percentage since the early 1990s, which is as far back as the IRS data go.
. . .
The average federal income-tax rate for the group was 18.23% . . . well below the average income-tax rate of nearly 30% back in 1995,
As the article points out, the way the data was collected actually underestimates the wealth since it takes into only the adjusted gross income (AGI).
The assault on Social Security is part of the generalized rhetorical attacks on all public services, including public education, Medicare, Medicaid, and welfare by those who would seek to destroy them. A key strategy in this war is to portray all government as bureaucratic, wasteful, and incompetent. Bush's contribution to this war was to appoint to high positions people who were either actually incompetent (so that they would mess things up, feeding into perceptions of a useless government) or those who were ideologically committed to having the government avoid its obligations.
My worry is that the pro-war/pro-business interests and the Wall Street investment classes may think that they have got all the goodies that they are likely to get from Republican administrations and think that they need a Democratic administration and Congress to be able to overcome the grassroots opposition to attempts to subvert Social Security, Medicare, Medicaid, and all the other government services that try to provide a much needed social safety net.
This is why even greater vigilance will be needed if and when Democrats take control of government. Bill Clinton got away with a lot of things because he was able to talk populism while acting in the interests of Wall Street. That should not be allowed to happen again.
POST SCRIPT: Telephone opera
As readers of this blog know, I am not a big fan of television. But one of my favorite TV programs is Sesame Street. It can't be beaten for its unique combination of great music with clever lyrics, genuine humor, education, and positive messages, all without being preachy. I used to watch it almost every day when my children were younger and now, thanks to YouTube, I can watch again some of my favorite segments.
In this sketch, Placido Flamingo and other Muppets affectionately parody opera.
March 06, 2008
The phony Social Security crisis-3: More realistic views of the alleged 'crisis'
(For previous posts in this series, see here.)
In deciding whether Social Security is in trouble or not, it is important to bear in mind different measures. Let us start by assuming that no changes at all are made in the system and that current projections for future demographics hold for the next fifty years. This is a very big 'if' indeed, but a starting point for analysis. The alarmists look at the year in which projected Social Security benefits paid out in that year exceed the revenues from the payroll tax that same year. That is expected to occur around 2018. But that alone does not constitute a crisis. Social Security has been running a surplus all these years so by that time the trust fund will have about 3.7 trillion dollars in reserve. This fund earns interest and the interest can be used to supplement the payouts following the year when the expenditures start to exceed the revenues. At a 4.5% interest rate on the US treasury bonds, the accumulated trust fund can generate an annual growth of about $170 billion due to interest alone. Using this interest to pay benefits can be done for some time during which the size of the trust fund will remain the same or will still be increasing, though more slowly.
There will then come a year when the addition of the interest to the payroll tax revenues is not sufficient to cover the cost of the expenditures. The trust fund principal will then have to be used to pay benefits and will thus start to decrease. The worst-case scenario is having all the trust fund be used up, which is quite far into the future, somewhere around 2050. Actually, this scenario is actually the original Social Security model. It was designed as a pay-as-you-go system, with each year's payroll tax revenues going to meet that same year's benefits expenditures, without running up big surpluses or deficits.
But there is no reason to think that even this 'worst-case' scenario is inevitable. Dean Baker and Mark Weisbrot, co-directors for the Center for Economic and Policy Research, in their book Social Security: The Phony Crisis demolish the scaremonger arguments about Social Security by those who would love to turn over all that money to investors to speculate with. In an op-ed article, they write a detailed point-by-point rebuttal of all the myths propagated and conclude:
The latest Social Security trustees' report, whose numbers even the White House uses, predicts that the Social Security program can pay all promised benefits for the next 38 years—with no changes at all. The June 2004 estimate from the nonpartisan Congressional Budget Office projects that Social Security can pay all promised benefits without changes for even longer, until 2052. That's nearly half a century.
And we are supposed to be worried about this?
. . .
The bottom line is that Social Security is more financially sound today than it has been throughout most of its 69-year history, according to Social Security trustees' numbers.
. . .
The impending crisis of Social Security is a myth. Without it, however, Bush's initiative to slash benefits and partially privatize the program wouldn't have a prayer.
Economist Paul Krugman has also challenged the myth of a Social Security crisis, and his article is worth quoting extensively:
Inside the Beltway, doomsaying about Social Security — declaring that the program as we know it can't survive the onslaught of retiring baby boomers — is regarded as a sort of badge of seriousness, a way of showing how statesmanlike and tough-minded you are.
. . .
But the "everyone" who knows that Social Security is doomed doesn't include anyone who actually understands the numbers. In fact, the whole Beltway obsession with the fiscal burden of an aging population is misguided.As Peter Orszag, the director of the Congressional Budget Office, put it in a recent article co-authored with senior analyst Philip Ellis: "The long-term fiscal condition of the United States has been largely misdiagnosed. Despite all the attention paid to demographic challenges, such as the coming retirement of the baby-boom generation, our country's financial health will in fact be determined primarily by the growth rate of per capita health care costs."
How has conventional wisdom gotten this so wrong? Well, in large part it's the result of decades of scare-mongering about Social Security's future from conservative ideologues, whose ultimate goal is to undermine the program.
Thus, in 2005, the Bush administration tried to push through a combination of privatization and benefit cuts that would, over time, have reduced Social Security to nothing but a giant 401(k). The administration claimed that this was necessary to save the program, which officials insisted was "heading toward an iceberg."
But the administration's real motives were, in fact, ideological. The anti-tax activist Stephen Moore gave the game away when he described Social Security as "the soft underbelly of the welfare state," and hailed the Bush plan as a way to put a "spear" through that soft underbelly.
Fortunately, the scare tactics failed. Democrats in Congress stood their ground; progressive analysts debunked, one after another, the phony arguments of the privatizers; and the public made it clear that it wants to preserve a basic safety net for retired Americans.
. . .
Social Security isn't a big problem that demands a solution; it's a small problem, way down the list of major issues facing America, that has nonetheless become an obsession of Beltway insiders. And on Social Security, as on many other issues, what Washington means by bipartisanship is mainly that everyone should come together to give conservatives what they want.
Orszag, Krugman, Baker, and Weisbrot point their fingers at the real problem, which is the out-of-control rise in health care costs. Of the 15.3% of the income below the cap that goes as payroll taxes (half of which is paid by employers), 2.9% goes towards Medicare. It is these rapidly rising health care costs that will cause huge budgetary problems in the future, not paying Social Security retirement benefits.
Scaring us about Social Security serves the purpose of diverting out attention from the very real problem of high health care costs. After all, the administration and Congress are completely in the pockets of the health care industry (the insurance and pharmaceutical companies and the hospital and doctors lobbies) and they want to avoid for as long as possible the fact that a government-run single-payer system of financing health care is the only long-term solution to this problem.
Next: What needs to be done
POST SCRIPT: This woman is very upset
Before he started playing the doctor in the current TV series House, Hugh Laurie played goofy characters in comedies on British TV. Here he plays a hapless TV news reporter in a sketch from the BBC TV show A Bit of Fry and Laurie.
March 05, 2008
The phony Social Security crisis-2: Double talk on Social Security
(For previous posts in this series, see here.)
We currently see this curious double-talk taking place about the US bonds that form the assets of the Social Security trust fund. When trying to scare people about Social Security, people in this administration talk about the bonds in the trust fund being 'worthless' pieces of paper. But when trying to actually sell the bonds in international markets to finance its deficits, the government talks about how robust the US economy is. Like all double-talking politicians, the two different faces are presented to two different audiences, with the hope that the audiences will not overlap.
The scaremongering is aimed directly at the domestic audience because they are the ones who need to be frightened into allowing Social Security funds be released into the hands of private investors, thus enormously enriching Wall Street. The reassuring language about the strength of the US economy and its undoubted ability to honor its debts is addressed to the foreign entities that buy US treasury bonds to finance the deficits.
In April 2005, just after the 2004 presidential election and when he had high hopes of persuading people to privatize Social Security in his second term, George W. Bush made an extraordinary speech in which he sneered that the trust fund only contained IOUs.
I have just come from the Bureau of Public Debt. . . . I went there because I'm trying to make a point about the Social Security trust. You see, a lot of people in America think there's a trust, in this sense -- that we take your money through payroll taxes and then we hold it for you, and then when you retire, we give it back to you. But that's not the way it works.
There is no "trust fund," just IOUs that I saw firsthand.
. . .
The office here in Parkersburg stores those IOUs. They're stacked in a filing cabinet. Imagine -- the retirement security for future generations is sitting in a filing cabinet.
Yes, imagine that! He saw the IOUs first hand, otherwise he would never have believed that this was happening! Who knows, someday it might get even worse and be just an entry in a computer spreadsheet, so we wouldn't even have the sheets of paper to fall back on!
Former New York Times business reporter David Cay Johnson in his book Perfectly Legal: The covert system to rig our tax system to benefit the super rich – and cheat everybody else (2003) describes an even earlier effort to denigrate the Social Security trust fund.
[On June 19, 2001] Just 12 days after Bush signed his tax cut bill, Treasury Secretary Paul H. O'Neill gave a speech at the top of the World Trade Center. He spoke to the Coalition for American Financial Security, an organization of investment managers who want to replace part of Social Security with private investment accounts, from which they would collect fees costing many times the current costs of administering Social Security.
"I come to you as managing trustee of Social Security," O'Neill said. "Today we have no assets in the trust fund. We have promises of the good faith and credit of the United States government that benefits will flow."
All Americans had, he said again and again, was "someone else's promise" that the pieces of paper held by the Social Security Administration would be paid off with hard dollars by the United States government. And the implication was that the unsecured debt might not be paid. (p. 127)
This is quite an amazing thing: The highest officials in the US government saying that others should not depend on the government to honor its financial obligations. It is the equivalent of saying that the IRS may in the future no longer accept US currency as payment for taxes owed but would demand euros instead. Of course, only rubes like us were supposed to believe that message. If the international financial markets truly believed it might happen, they would immediately sell all their US bond holdings, the US could not longer finance its deficits by selling those very same bonds in the global markets, and the US would be facing a complete economic disaster.
So when talking to other governments and the financial markets, the government makes a complete about-face and talks about how strong the US economy is and how the 'full faith and credit of the US government' has never been more solid.
David Cay Johnson shows that manufacturing a Social Security scare to enrich already wealthy people is not a new phenomenon. The first version of Social Security was created in 1935 but it has been tinkered with ever since. In 1972, Congress passed legislation creating the Supplementary Security Income (SSI) program and significantly increasing Social Security benefits, such as introducing automatic Cost-of-Living-Adjustments (COLAs). In addition:
The bill creating the SSI program also contained important provisions for increasing Social Security benefits for certain categories of beneficiaries (primarily aged widows and widowers). It also provided: a minimum retirement benefit; [and] an adjustment to the benefit formula governing early retirement at age 62 for men, in order to make it consistent with that for women[.]
. . .
The separate bill creating automatic COLAs also provided for automatic increases in the earnings subject to Social Security taxes and an automatic adjustment in the wage-base used in calculating benefits.
Of course, the increase in benefits meant increased costs and created long term solvency problems. So new legislation was passed in 1977 that reduced benefits and raised the payroll tax to its current value. As a result of the formula that was used, this initially increased revenues by small amounts but eventually the surpluses became large enough that between 1983 and 2003, while the sum of the government deficits for those twenty years (i.e., the excess of expenditure over revenues for those years alone) was $5.4 trillion, the addition to the national debt (i.e., the total accumulated amount of all deficits over all time) was 'only' $3.6 trillion. The $1.8 trillion difference was due to the fact that the Social Security account was running up huge annual surpluses. (Johnson, p. 123)
This Social Security surplus was used to create a false sense of the country being flush with money and this enabled Ronald Reagan in 1981 to push through his tax cuts for the rich. The Social Security surplus was used to hide the true costs of the massive tax giveaway to wealthy people.
In 1983 there was glitch in that Social Security ran a small deficit due to the fact that 10 million people were then out of work and thus payroll tax revenues were down. While most people felt that this was a short-term problem that would go away when the economy revived, others like Wall Street favorite Alan Greenspan (then chairman of the Federal Reserve Board) tried to panic people into thinking that Social Security was in crisis and Congress again passed new rules reducing benefits again and raising the retirement age in the future. This resulted in Social Security starting to run up surpluses again.
The siphoning away of the Social Security surplus to benefit the rich was repeated during the George W. Bush administration. The federal government was running a total budget surplus at the time that he came into office in 2000, and again this was largely due to the Social Security surplus. In fact, between 1999 and 2002, Social Security revenues exceeded expenditures by $640 billion. Bush used this surplus to to hide the true cost of the huge 'temporary' tax cuts for the rich pushed through by him in 2001. More than half of the $1.3 trillion that those tax cuts cost the government went to the richest 1% of the population. (Johnson, p. 127)
Bush is now making a last ditch effort to make those tax cuts permanent as his parting gift to his wealthy base, before he ignominiously leaves office with the title of Worst President Ever. (That serial panderer John McCain supports this policy of making the tax cuts permanent although he originally opposed the tax cuts.) So again what we have is that they are taking advantage of the revenue surpluses produced by the Social Security payroll tax (which is mostly paid by poor and middle class people) to fund huge tax giveaways for the very wealthy. It is Robin Hood in reverse, a welfare state for the rich.
This Non Sequitur cartoon by Wiley says it all.
Next: More realistic views of Social Security's future.
POST SCRIPT: My radio interview
A podcast of my interview last Saturday on Blog Talk Radio can be heard here.
March 03, 2008
The phony Social Security crisis-1: Understanding the system
There are many who would have you believe that Social Security is in dire straits and that it will go broke soon, so that younger people who are paying into it now will not get any benefits when they retire. While Social Security regularly requires tinkering to remain solvent, this kind of rhetoric is misleading but has been systematically promoted to make young people think that they are being swindled by the old, and thus generate intergenerational warfare. It is the tried-and-true divide-and-rule strategy. The goal is to scare people into agreeing to give private investors access to the money in the Social Security trust fund. (For a fascinating history of how the various forms of social safety nets, including eventually the Social Security system, came about, see here.)
Social Security is designed as a 'pay as you go' system, with the money being taken in now in so-called payroll or employment taxes (officially called FICA taxes) going to pay the benefits of those currently retired. It is presently running a surplus (i.e., each year it takes in more money than it spends) so that there is an increasing accumulation of reserve funds in the account, which is called the 'trust fund'.
The confusing thing about understanding the government budget is that since Social Security is not an independent financial entity, the money that comes in as Social Security revenue is not kept separately from other government revenues, i.e., the 'trust fund' is not a separate vault of cash. What the government collects as revenue in any form (Social Security taxes, Medicare taxes, income taxes, import duties, etc.) can be used to fund general government expenditures.
But that does not mean that the trust fund is a fiction. How the government gains access to the money in the trust fund is by using that money to buy US government treasury bonds and what the Social Security trust fund holds is not cash but these government bonds. The trust fund reserves are thus in the form of government guarantees to honor its financial obligations, no different from the government's obligations to honor its treasury bills, currency, and other forms of IOUs.
What is required by law is that the trust fund be accounted for separately and it is thus said to be "off-budget". So the government is required by law to keep separate accounts for Social Security and the rest. But when government budgets are presented to the public, the government likes to mix the two budgets (Social Security and the rest) together (i.e., make Social Security "on budget") so that the annual Social Security budget surpluses that go into the trust fund can be used to hide the huge annual deficits that are being run up elsewhere, the latter caused by massive tax giveaways to the rich, spending huge amounts on needless wars (thus subsidizing the military-industrial complex), and the runaway health care costs that are endangering Medicare.
So the trust fund is being used (in terms of book-keeping sleight-of-hand) to hide the scale of the huge budget deficits being run up in the rest of the government. The real problem is not with Social Security but the way that the government has been fiscally irresponsible overall.
The future solvency of Social Security depends on projections of future revenues (which depends on the size of the workforce and its levels of income) and future payouts (which depends on the projected number of future retirees and their longevity).
One of the planks on which the scaremongering about Social Security is based is the indubitable fact that the percentage of retirees will increase shortly due to baby-boomer retirements, thus projecting increased payouts without comparable increases in revenue.
The other plank that people have used is the well-known fact that the trust fund consists, as I discussed above, not of actual cash but of US treasury bonds. They argue that the Social Security trust fund, although rich on paper, contains nothing more than 'worthless' government IOUs.
But this is absurd. The belief that the US can honor those and similar bonds that the government sells to other countries is what keeps the dollar as the world's reserve currency and is what makes foreign governments purchase those bonds, without which the US could not finance its deficits. The net foreign debt owed by the US to foreign entities and held by them in the form of such bonds has risen from $311 billion in 1994 (4.4% of GDP) to $2.4 trillion in 2004 (23% of GDP).
If these US government treasury bonds ever do become truly 'worthless', as alleged by the scaremongers, that would mean that the US government has become unable to honor its debt obligations. That would signal that the entire US economy has totally collapsed and that the US dollar has ceased to have any value. If such an unlikely scenario as the failure to honor to its government bonds were to ever come about, this would lead to global economic upheavals on an unprecedented scale, since all these foreign governments and other entities would also be holding worthless pieces of paper and we would then have far more serious matters to worry about than Social Security.
This does not mean that there should be complacency. A watchful eye needs to be kept on the solvency of Social Security and the rest of the government's budget. There are indeed reasons for concern. The continuing massive deficits and the decline in value of the dollar (last week saw it reach record low levels against the euro) are a source for global concern about the health of the US economy and have led to grumblings and some talk of switching to the euro as the world's reserve country. But those alarms have not reached major proportions as yet. The idea that the US government might default on its debt obligations (and thus leave the Social Security trust fund truly worthless) is not even being considered.
Next: Double talk on Social Security
POST SCRIPT: Why Obama’s message seems more effective than Clinton’s
Bob Harris has a perceptive take on a significant difference between the rhetoric coming from the Clinton and Obama camps.