The Social Security Non-Crisis

Is there a Social Security crisis? Smart, progressive economists like New York Times columnist Paul Krugman and Dean Baker of the Center for Economic Policy and Research say no. The inside-the-beltway conventional wisdom, represented today by this Washington Post column attacking Krugman by Ruth Marcus, says yes. Who's right?

I'm definitely in the former camp. Here's why.

Since 1983, when the Greenspan commission under (Saint) President Reagan raised the Social Security payroll tax and postponed the retirement for aging baby boomers like me (I can't get full benefits until I'm 66 3/4 in, gulp, less than 10 years), the Social Security system has been running huge surpluses. All of that money has been spent by our government in lieu of raising other taxes. Indeed, under President George W. Bush (future generations, get out your groggers, like Jews do on Purim to drown out memories of Haman), the government gave it away to the rich.

The government then took IOUs and stuck them in the Social Security fund. Beginning around 2017 (and in recent years, that date has been receding), the Social Security fund will have to begin redeeming those IOUs to make all its scheduled payments to a growing number of retirees (yup, you can do the math; that is exactly when I am due to retire). The Social Security fund won't run out of those IOUs until, at last estimate, 2041.

So, if nothing is changed, what will happen after 2017? In addition to financing its routine expenditures without relying on excess Social Security taxes, the government is going to have to begin paying off its Social Security debt. That will require either a) raising non-Social Security taxes (the payroll tax will then all have to go to retirees); or b) selling bonds in the open market, and substituting IOUs to foreigners and rich U.S. investors for IOUs to America's senior citizens. Or a combination of the two.

It could also look at areas of the budget where it could save money. Take the war in Iraq, for instance. There's a couple hundred billion a year that could be socked away for retiring Social Security debt. Or the annual maintenance of the nuclear arms arsenal, whose size, in the absence of the former Soviet threat, only serves to destabilize global politics. Add a few tens of billions there. Or the huge waste in the Homeland Security department, that gives billions of dollars in contracts for electronic eavesdropping but can't seem to find the money or will to require chemical facilities to harden themselves.

Add to this the fact that we have the lowest tax rate in the industrialized world -- taking about 16 percent of gross domestic product while most of the countries of western Europe and Japan -- whose currencies by the way are soaring against our beleaguered dollar -- are five or six percentage points higher (when you take out the differentials for national payments that are picked up by state and local taxes here). The bottom line is that being a "responsible adult," to use Marcus' phrase, means admitting the crisis the U.S. faces isn't in Social Security, it's in government finance, which has been handled in the most irresponsible fashion by a succession of Republican presidents going back to (Saint) Ronald Reagan.

For proof of that, you need only consult these two charts, which document the spectacular rise of debt both in absolute terms and as a proportion of GDP under this president (and Reagan). The only time in the past 30 years when government finances have been handled responsibly was under Bill Clinton.

Source: Boeing engineer Steve McGourty's website.

My Grandchildren

Here's my Social Security:

This is my granddaughter Rachel. She's 5!

And this is Sarah. She just turned 2!

Love you kids!

Granddad

Saving for Retirement When You Have Nothing to Save

The New York Times lead editorial this morning highlights a new study from the Retirement Security Project, whose luminaries include former Treasury Secretary Robert Rubin. Researchers collaborated with H&R Block in a controlled experiment to see how much of a tax refund a typical H&R Block client would put in an individual retirement account if given matching funds.

The results were disheartening. Only 17 percent of the group given the highest amount -- a 50 percent match -- put money in IRAs with their refunds and matching funds. That's better than the three percent in the "no match" group and 10 percent in the "20 percent match" group. But the bottom line is that more than four out of every five low- and moderate-income persons will not save for retirement, even when given a fairly generous match from either their employer or the government.

That just a small fraction participated in the program isn't surprising. Most people in the bottom half of the income distribution live from paycheck to paycheck. Most carry large credit card balances. Most of the medically uninsured fall into this group. And as Elizabeth Warren of Harvard University has pointed out, medical emergencies among the uninsured are a primary cause of the rising tide of bankruptcy in the U.S.

So when tax time rolls around and these steadily employed get an extra paycheck, they don't have the luxury of saving for retirement. They pay those bills that are mounting at an 18 percent annual rate on their credit cards. Or they pay off that hospital bill. From a financial planning standpoint, it's the absolutely right thing to do.

Unfortunately, neither the the Times editorial nor the authors of the original study pointed out these negative findings. They preferred to look on the bright side -- that some low- and moderate-income people will save in private retirement accounts if given matching grants.

The point is well taken. The government has a responsibility to target some of its generous incentives for retirement savings to our poorer citizens. Right now, the value of the tax breaks for IRA contributions is lower for the poor because they're in lower tax brackets. Moreover, the cost of such a program -- even with universal participation -- would be just a fraction of what President Bush handed out in tax cuts for the wealthy.

For over 40 percent of Americans, though, the only retirement program they have -- or are likely to have -- is Social Security. Encouraging these folks to save in retirement accounts outside the government program (liberal opponents of Social Security privatization call them "add-on accounts") is a great idea. But the lesson of this latest study is that unless the add-on accounts are mandatory with a very generous match, most low- and moderate-income folks will not sign on. They just have too many other demands on their money.

More bad math on Social Security

The Sunday business section of the New York Times contained an "economic view" whose math was so transparently inaccurate that it's a wonder the copyeditors didn't pull the plug on the piece. The paper even included a graphic illustrating the economic nonsense.

The author was Ann Bernasak, whose byline I'm not familiar with and who otherwise was unidentified. She wanted to highlight the risk of the government borrowing to privatize Social Security -- something I also oppose. But it does no one any good when specious arguments are used to advance a worthy cause.

The article, "The Outer Limits of National Debt," argued that the "sound limit" for a nation is 150 percent of gross domestic product. She arrived at this benchmark by looking at Great Britain right after World War II, a questionable choice since it marked the departure point for the British empire from the global stage.

No matter. The real problem was in her calculations of current U.S. debt for her comparison to our current $12 trillion GDP. She first added up debt held by the "public," (read Chinese, Japanese and all other holders of U.S. T-bills) and debt held by the Social Security and other government trust funds. That came to $6.6 trillion -- well below the $18 trillion that would mark 150 percent of current GDP.

But then she added in $4 trillion in unfunded Social Security obligations over the next 75 years and $30 trillion in unfunded Medicare obligations over the same time period. She added this to the $6.6 trillion and concluded this $40.6 trillion was "well over the prudent limit of $18 trillion."

Wait a minute. This wasn't an apples to apples comparison. What will the size of the U.S. economy be in 75 years? It won't be $12 trillion. If it grows at only 3 percent per year (slightly less than its historic average), the U.S. economy will be at least three times its current size or about $36 trillion in 75 years. That doesn't make the projected shortfalls less of a problem, but it certainly makes them seem more manageable.

This is just a minor point on the overall Social Security debate. But as Dean Baker of the Center for Economic Policy Research has pointed out, all projections about the 75-year-future of Social Security -- whether you're talking about the projected returns from privatized accounts invested in the stock market or the magnitude of the unfunded liability of Social Security -- must take into account the size of the economy in those out years.

Politicians like the President who are hell bent on destroying Social Security routinely distort the economics of the nation's retirement system. One would hope for better from the Times' business pages.

The Bush photo-op

President Bush two days ago posed before a file cabinet filled with Social Security Treasury bonds suggesting they were nothing but worthless paper. The New York Times this morning properly took him to task. Where's the next stop? Will he go to Beijing and tell the Community Party leaders that the $700 billion they've invested in U.S. T-bills are worthless?

But let's not put all the blame on Bush. He took his cue from none other than Alan Greenspan, who spoke at length last August at the Fed's annual retreat in Jackson Hole, Wyoming about Social Security as if the trust fund didn't exist (see Gooznews, Aug. 29, 2004, "Greenspan/Bush: Repudiate the National Debt!").

Yet paying off the national debt -- to the future retirees, the Chinese and all the other T-bill holders -- is a major, looming problem. The share of national income going to taxes (general revenue from income and corporate taxes, not Social Security revenue from the payroll tax) will have to rise from its historically low levels. The tax cuts of recent years have eviscerated the government's ability to pay its bills.

In that regard, it was interesting to note the op-ed in yesterday's Times by Bruce Bartlett, one of the right-wing intellectuals behind the anti-tax movement of Grover Norquist and Stephen Moore's Club for Growth. He called for a value-added tax so the government can pay its bills. While he dressed it up on the rhetoric of the Republican's inability to shrink government, I suspect all but the most ideologically committed anti-taxers (put the president in that category) are beginning to realize that protecting the full faith and credit of the United States isn't such a bad idea.

Don't Mess With Success

The following item appeared in the January 2005 AARP Bulletin:

There’s nothing wrong with Social Security that a few changes can’t fix

By Merrill Goozner

After 65 years Social Security is, like America, facing the challenges of aging. Fewer workers will be paying into the system to support those who receive benefits. By 2040 there will be just two workers for each retiree, compared with more than three today, seriously affecting the solvency of the system. But just how dire is the financial picture? Will Social Security be there for our grandchildren?

Designed to provide a basic income for retirees and their families, Social Security has done remarkably well in achieving that goal and is considered the most successful government program in the nation’s history.

Despite some problems, many analysts maintain there is no crisis and that moderate adjustments can keep the system sound. The most recent Social Security trustees’ report shows that the system can pay all scheduled benefits until 2042. That year, if no changes have been made, benefits would have to be cut about 30 percent to bring payments in line with incoming payroll taxes.

While 2042 may seem far off, experts agree that it’s better to make moderate changes earlier rather than later to avoid the "cliff" of a drastic benefit reduction or a hefty tax increase. Here are some ideas being discussed:

TAXES
The simplest adjustment would be a slight increase in the payroll, or FICA, tax. According to the Social Security trustees, if the tax on wages today were raised by less than 1 percent each for employee and employer (from the current rate of 6.2 percent each), Social Security would be solvent through 2077.

Another proposal is to "pop the cap"—to raise the point at which wages are no longer subject to Social Security taxes. Congress set the level in 1983 to cover 90 percent of all wages. The wage cap today is $90,000. But top earners today have a larger share of the income pie, and the portion subject to tax for Social Security has fallen to 84 percent. Using the projections of the Social Security trustees, raising the wage cap to about $140,000 would provide almost one-third of the requirement for solvency for 75 years.

It’s worth noting that a recent report by the Center on Budget and Policy Priorities, a Washington-based research group, concludes: "If the 2001 and 2003 tax cuts are made permanent, as the Administration has proposed, their cost over the next 75 years [using Congressional Budget Office projections] will be more than five times the Social Security shortfall over this period."

Another source of payroll taxes could be newly hired public employees. Edith Fierst, a lawyer who was a member of President Clinton’s Social Security Advisory Council, says that currently nearly 7 million local and state employees are not covered by Social Security but rather by employer-operated retirement funds. Bringing new workers into Social Security would help fund the system.

BENEFIT CHANGES
Some adjustments have been made, and more are likely. The rise in the normal retirement age from 65 to 67 already constitutes a benefit cut. And more people are paying taxes on their Social Security benefits. Other changes to benefits could include modifying the cost-of-living adjustment, raising the normal retirement age even higher and calculating a person’s initial benefits using price increases rather than wage increases.

PRIVATE ACCOUNTS
President Bush has declared that he intends to make Social Security reform a priority of his administration, because "the system is not going to be whole for our children or our grandchildren." His solution is to let workers create private accounts using part of their Social Security payroll taxes. Though few specifics have been released, the hope is that private plans invested in the market will generate equal or greater benefits than the traditional Social Security benefits. The risk is that they won’t.

At a time when fewer people have pensions and most individual retirement accounts are already subject to stock market risk, many question if private accounts are a good idea.

"All private accounts do is transform the nature of the benefit," says Robert D. Reischauer, president of the Urban Institute, a nonpartisan research group. If taxes and benefits stay the same, he says, "there’s still a problem." In fact, he and others say that private accounts will only make things worse because they would require benefit cuts and run up huge federal deficits in order to finance the transition.

Proponents of private accounts point to 2018 as the year when Social Security benefits will exceed revenue from FICA taxes and taxes on benefits. That’s when the system will have to use interest earned on its Treasury bonds to pay benefits.

To prepare for this, Congress passed legislation in 1983 that would create a surplus in the Social Security trust fund to help pay for the boomers. As a result, by 2018 the trust fund’s holdings will balloon to $3.7 trillion, up from $1.5 trillion today. This is the boomers’ nest egg.

Backers of private accounts say these trillions aren’t a real asset, since future taxpayers will have to repay the Social Security trust fund . "We don’t pay any attention to the trust fund," says Michael Tanner of the Cato Institute, a libertarian group in Washington. "We only care about the actual cash flows from the government."

Others disagree. They maintain that the Treasury bonds owned by the trust fund are assets. Says Reischauer, "If Social Security were run like other quasi-governmental agencies like Fannie Mae, which also buy Treasury bonds, there would be no question about repaying the loans."

John Rother, AARP’s director of policy, adds: "Redeeming the trust funds is a sacred commitment, since they represent prior contributions from workers to fund their own benefits. Failing to do so would break the intergenerational compact that’s the foundation of Social Security."

Indeed, if current workers divert some of their Social Security payroll taxes into private accounts, the government would have to make up the difference to cover benefits. Estimates for such transition costs range between $1 trillion and $2 trillion over 10 years.

At a time when the government is already running record deficits, many economists worry what the transition costs could do to the overall economy. Says Christian Weller, senior economist at the Center for American Progress, a nonpartisan research institute based in Washington: "It will lead to higher interest rates that hurt households directly—not abstractly in the future but immediately. You are hurting people today and cutting benefits in the future."

Eugene Steuerle, a senior fellow at the Urban Institute, says private accounts may have a role to play. But, he adds, they’re getting too much attention and detracting from other Social Security issues.

"Social Security could do a much better job," he says. "With or without private accounts, it needs to be better targeted to those who are most elderly and truly needy."

Barbara B. Kennelly, head of the National Committee to Preserve Social Security and Medicare, says private accounts change the intent of Social Security. "What the president’s plan does is take Americans out of the community pool, where we share the risk, and put each of us into our own pool of one to fend for ourselves," she says. "That’s fine if you’re rich.

"Of course, we have to make changes in years to come. What we don’t have to do is dismantle the current program to do it."

Merrill Goozner, a Washington-based writer, covered economics for the Chicago Tribune. He wrote The $800 Million Pill: The Truth Behind the Cost of New Drugs. Carol Simons and Susan Crowley contributed to this article.

Saving Your Cake and Eating It, Too

The Social Security debate is in full throttle with President Bush’s comment yesterday that he won’t raise taxes to balance the retirement fund’s long-term budget problems.

Instead, he will press ahead with his plan to make those problems worse.

The administration’s blatantly pro-Wall Street agenda (Increase government borrowing to invest in stocks? Would you take a second mortgage to do that?) drew Paul Krugman out of his den, where he had repaired a few months back to finish a book. In two op-eds in the New York Times this week, he attacked the underlying economics and trillion dollar costs of the Bush plan, whose centerpiece is creating private accounts for younger workers by diverting some of their Social Security taxes. That money now goes to current retirees, whose benefits would depend on the increased borrowing.

As a former economics correspondent who is fairly familiar with Social Security finances, I found Krugman's analysis (it's rob-Peter-to-pay-Paul with a juicy slice going to stock brokers) compelling. But economic logic is not going to win this debate. This country is run by people who have no respect for facts or logic and are perfectly willing to manipulate the “he said, she said” ethos of daily journalists to totally confuse the general public about what’s at stake in Social Security privatization.

We’re already getting a sense of how the press will operate in this debate. The Times early this week ran an intriguing story out of London about the failures of that country’s attempt at setting up private retirement accounts. People are getting less money than anticipated and poverty among the elderly is growing. You’d think that would be front page news, given the emphasis this administration is putting on moving forward with its privatization agenda. Nope. It ran in the Business section, and not on its front page, either.

The short-hand being adopted by some reporters shows that inconsistent language and inaccurate summaries will plague most accounts. Today’s Wall Street Journal favorably quotes Bush economics advisor Gregory Mankiw, a former Harvard prof, claiming their proposed change in the formula for computing workers' future benefits “would save huge sums over time, while still keeping pace with inflation.”

Save money and still keep up with inflation? That sounds like saving your cake and eating it, too. How can that be?

What that quote and the rest of the story fails to mention is that Bush’s proposed change would eliminate consideration of what you earned over the years when calculating your initial benefit. If Bush gets his way, all future Social Security recipients will get the same benefits as today’s beneficiaries. The only adjustment will be for inflation.

Here’s what that means in practice. Every year of your working life that your wages increase faster than inflation, the Bush administration will cut your Social Security benefit. So instead of getting 20 or 30 percent of your final wage as current retirees get, it will be down to 10 or 15 percent by the time you retire. How’s that for a deal?

It’s time for some honest reporting about what this administration is saying. Alas, that would require thought, analysis and a willingness to challenge falsehoods. Among the press, these skills that have been in short supply in recent years.

Greenspan/Bush: Repudiate the National Debt!

Here’s a headline you didn’t read over the weekend: Chairman of Federal Reserve Board Calls for Repudiating the National Debt.

You didn’t read it, but it happened nonetheless. Alan Greenspan on Friday repeated his mantra that Social Security simply isn’t sustainable through the Baby Boom’s retirement. Speaking at the Fed’s annual soirée in Jackson Hole, Wyoming, Greenspan called for cutting benefits and raising the retirement age.

Most Boomers still don’t know that their retirement has been postponed from 65 to 67. The Maestro – Bob Woodward gave Greenspan that honorific in his fawning biography – now wants to move it to 70.

If the public (or the media) understood government accounting, it would accuse the 78-year-old Greenspan of bait-and-switch. In 1983 the Ayn Rand enthusiast ran a commission that endorsed a hike in Social Security payroll taxes precisely to avoid the bankruptcy he now predicts is inevitable. At the time, the Social Security system had no reserves and its payouts were rising dangerously close to its receipts from the payroll tax.

Sublimating his libertarian instincts to his pragmatic quest for his current position (which he got in 1986), he called for a sharp payroll tax increase, which falls most heavily on wage earners. It worked. Over the next two decades, Social Security racked up nearly $3 trillion in surpluses.

Where did the money go? It helped cover the massive deficits that the Reagan, Bush I and Bush II administrations compiled while financing huge military build-ups and tax breaks, mostly to those already well off. Money owed the Social Security trust fund now accounts for more than 40 percent of the national debt.

This year, like junkies desperate for a fix, the Republican administration and Congress are once again using everyone’s retirement cash to help balance its books. In case you haven’t been paying attention, the government is projected to run a $445 billion budget deficit this year. It’s tough to balance the budget when the administration in power’s concept of sacrifice during wartime is to have the IRS write checks to the richest Americans.

But average Americans’ retirement accounts continue to do their part (there’s a poster – Uncle Sam Wants Your Nest Egg!). The Social Security trust fund’s contribution to the war effort last year came to $162 billion. That’s right, the most recent audit of the supposedly collapsing Social Security system reported that it ran $162 billion in the black last year. In fact, the system isn’t due to run in the red until 2018 and the trust fund isn’t scheduled to exhaust itself (and thus require a tax increase to finance Social Security benefits) until 2042.

None of this matters to Greenspan, of course, whose stalking horse comments helped set the stage for this week’s Republican convention. Part of the president’s moderate makeover will include his touting private accounts for Social Security. Put a 401(k) in every pot. Call it the ownership society.

This is precisely what one would propose if the goal were to bankrupt Social Security, since it would take over one trillion dollars to finance the transition. As Business Week pointed out in its editorial attacking the plan, even at today’s relatively sluggish economic growth rates, there are sufficient reserves in Social Security to pay for the retirement of the boomers and their kids.

So why are Republicans so desperate to restructure the system in such a way as to ensure its demise? In part it’s philosophical. If your goal is to make government so small that you can, in Bush stalwart Grover Norquist’s words, drown it in a bathtub, then the last thing you want around is a successful taxpayer-financed program that has done more to reduce poverty than any other social program in American history.

But the tax issue is also at work. In 2018, the Social Security system will begin running deficits. Each year, it will start paying out more than it collects in taxes. When that happens, the government (its general fund; not its Social Security fund) will have to begin paying off what will by then be in excess of $4 trillion in IOUs. The only way to do that is to raise taxes. And income taxes, even with the regressive tax breaks introduced by this administration, are a heck of a lot fairer than payroll taxes.

Bottom line? It’s simply not possible for the government to pay off its debts without raising taxes on the well off. Not unless, of course, you’re willing to repudiate the national debt to Social Security. And cut benefits. And raise the regressive payroll tax again. Call it the Greenspan plan.