Tuesday, April 7, 2009

Dean Baker in USA Today: Hands off Social Security

Dean Baker of the Center for Economic and Policy Research provides the opposing view to today's USA Today editorial. One quote is worth highlighting:

The Congressional Budget Office projects that Social Security, by drawing down its trust fund, will be able to pay benefits until the year 2049 with no changes whatsoever.

Dean helpfully includes a link to the CBO report that, as of last year, projected trust fund solvency through 2049. A friend points out that, leaving aside how much Social Security's finances seem to have declined in the last year, the CBO report includes an important footnote regarding the trust funds:

The Social Security trust funds (the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund) serve mainly as an accounting mechanism to track revenues and outlays for Social Security. The trust funds' balance summarizes the cumulative accounting history of the Social Security program in a single number, because the balance equals the present value of all past revenues minus the present value of all past outlays. The funds' balance also represents the total amount that the government is legally authorized to spend on Social Security. See Congressional Budget Office, Federal Debt and the Commitments of Federal Trust Funds, Issue Brief (October 24, 2002; revised May 6, 2003).

In other words, the trust fund balance is pretty much like a credit card statement: it shows how much we have borrowed from Social Security over the years, plus interest. But since we're the ones who borrowed the money, we're the ones who'll have to pay it back: there's no bars of gold in some vault that constitutes the trust fund. Rather, the fund is simply an obligation by the government to raise taxes beginning in a few years – and fewer years than we'd thought a year ago. Lacking the trust fund, we'd face a choice between raising taxes and cutting benefits; with the trust fund, the choice is biased toward raising taxes, at least until the fund is exhausted. But we shouldn't pretend the choices are something other than what they are.

A second point. Dean says:

It is truly incredible, and unbelievably galling, that anyone in a position of responsibility would suggest defaulting on the government bonds held by the Social Security trust fund at the precise moment that the government is honoring trillions of dollars of bonds issued by private banks. While the government has no legal or moral obligations to pay off the banks' debts to wealthy investors (who presumably understood the risks they were taking), the Social Security bonds carry the full faith and credit of the U.S. government.

Dean continually – and, one has to assume, deliberately – confuses the relationship between the trust fund's bonds and benefits owed to individuals. He says there's a relationship between the two, while the law says there isn't. In other words, if Congress chooses to alter Social Security benefits so that bonds need not be redeemed that's NOT a default on the trust fund, as much as Dean would like to says that it is. To claim that reducing benefits constitutes a default on the trust fund is simply incorrect, which Dean surely knows.

Moreover, this is all a bit ironic given that Dean has been one of the leading opponents of personal accounts, in which individuals would have an ownership right in their assets. That is, if an account holder purchased a government bond, the government could no more default on that bond than it could on a bond owed to Wall Street or to the Chinese. Those are some pretty big friends to have. But under the current Social Security set-up – which is the one Dean supports, and is designed in pretty much the way he and others on the left would design it – the government can alter the deal any time it sees fit. If your political worldview says that people should be highly dependent on the government for their retirement income that's fine, but you can't complain later if the government chooses to alter the deal. That's the downside of dependency, folks. The Supreme Court has ruled that there's no contractual obligation involved with Social Security taxes and benefits. That may well be the best way to run the program policy-wise, but it seems rich to then claim that any change to benefits violates a contract.

17 comments:

WilliamLarsen said...

At least he acknowledges that SS-OASI has only legal authority to spend the amounts in the trust fund and no more. So this leaves us with a combination of two choices; raise revenues or decrease expenses.

Social Security Benefits are guaranteed
“There has been a temptation throughout the program's history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. That is to say, if a person makes FICA contributions over a number of years, Congress cannot, according to this reasoning, change the rules in such a way that deprives a contributor of a promised future benefit. Under this reasoning, benefits under Social Security could probably only be increased, never decreased, if the Act could be amended at all. Congress clearly had no such limitation in mind when crafting the law. Section 1104 of the 1935 Act, entitled "RESERVATION OF POWER," specifically said: "The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress." Even so, some have thought that this reservation was in some way unconstitutional. This is the issue finally settled by Flemming v. Nestor.”

“Workers and beneficiaries have no legal ownership over their Social Security benefits. Instead, what they have is a political promise that can be changed at any time, by any amount, for any reason. In any retirement system a lack of legal ownership is a source of insecurity. In one that is under-financed in the long run by 25 percent, it is a serious problem.”


Social Security Administration’s Web Site, http://www.ssa.gov/history/nestor.html
President’s Commission to Strengthen Social Security, Interim Report August, 2001, Page 3, http://www.csss.gov/reports/Report-Interim.pdf

Bruce Webb said...

But since we're the ones who borrowed the money, we're the ones who'll have to pay it back:
Oh boy.

Andrew 'we' didn't borrow anything. That was a political decision by a series of Administrations and Congresses that used those surpluses paid entirely by wage workers to partially pay for expenditures that would normally have been paid by all income earners including those people who gained most or all of their income on returns on capital. Certainly if we represented both groups in a Venn diagram we would see a big overlap but the net effect of cutting Social Security benefits in the name of 'sustainable solvency' is a transfer from wage workers to controllers of capital. This is the same bogosity that underlies the RE argument for Free Trade. Certainly you can make a case that Free Trade increases national wealth overall but distribution of that wealth matters. The same with Social Security, changing the benefit formula equates to a tax cut for billionaires paid for by workers who in many cases are not liable for income tax. Certainly there are a lot of people in the middle who both contributed in and will be called upon to pay out but this shouldn't be allowed to disguise that the net effect of Social Security 'reform' is to transfer a share of future productivity up the income ladder and from labor to capital.

Rather, the fund is simply an obligation by the government to raise taxes beginning in a few years – and fewer years than we'd thought a year ago.

Years? How many years? And what if you isolated OAS from DI? I could figure this out but no one ever seems to actually link to the CBO Feb update (which doesn't readily show up on searching the CBO website). From the sketchy information available I would say that the date of OAS TF depletion has probably moved up a matter of months and not years. It seems that some are willing to let the DI tail wag the whole OASDI dog. The reporting on this has been at a minimum misleading to the general public.

Moreover, this is all a bit ironic given that Dean has been one of the leading opponents of personal accounts, in which individuals would have an ownership right in their assets.. This is simply to fetishize the concept of 'private'. I have yet to see a PRA plan that actually gives people real 'ownership'. Instead there are so many limitations on investment options, restrictions on withdrawal, inclusions of clawback provisions and requirements to annuatize to make a mockery of the concept 'ownership'. Moreover Congress has just as much power to change the terms on government controlled PRAs as it does to change the benefit formula for Social Security. Current law requires the Treasury to honor the interest and principal in the Trust Fund to pay scheduled benefits in full for as long as there is a positive balance in the TF. Changing current law in a way that delays or avoids that timely payment is in effect to default on the bonds. I don't believe the Supreme Court ruling you reference with 'the law' really has the meaning you suggest. That individuals have no ownership of the bonds doesn't mean they don't have a valid claim to them. For example I have no actual ownership of a bank's assets or that of my insurance company, instead I am just a beneficiary of an insurance policy. Which is basically what I am in respect to the Trust Funds. In the case of Social Security sovereign immunity makes it true that I have no immediate remedy, I can't sue the Congress or the President. But then I equally would have no recourse if the government hyper-inflated the currency in a way that wiped out the real value of my PRA. Distinctions are being drawn that in reality don't exist, both Social Security and proposed PRAs are in the final analysis equally dependent on the government's good faith.

Larsen So this leaves us with a combination of two choices; raise revenues or decrease expenses.
Well no there are other possibilities. For example while the 2007 Report showed a 25% gap between total income and total cost come 2041 the 2008 Report showed that decreasing to 22%. There are reasons why that projected gap changed, it turns out to be a one-time change in assumptions about immigration that won't happen again. But other assumptions and projections are subject to change. There are scenarios under which Social Security requires no revenue increases or decreases in expenses. And others that suggest outcomes showing a much smaller gap. For example in CBO's last projection the date for TF depletion was set for 2049 and the projected gap at 16%. Most of the argument around Social Security implicitly includes the premise that the outlook is static when instead it is dynamic, subject not only to fluctuations in the economy and also to direct government action. For example the government could chose to change minimum wage laws in ways that directly increased real wages or equally do that via changes in the lower marginal rates. That is while the Low Cost alternative (which gives us fully funded Social Social Security with no changes in taxes, retirement age or benefits) is currently seen by Social Security to be at the confidence interval, that is the result of a stochastic projections that assumes no direct effort to target that result. We are not in fact helpless victims of the Infinite Future being swept towards a $17 trillion gap, instead that number not only has changed over time it can BE changed by policy actions going forward. It just isn't as simple as the reduction to 'raise revenues or decrease expenses' not at least if you are restricting 'raise revenues' to mean 'increase taxes'.

Andrew G. Biggs said...

Bruce,

"We" borrowed the money in the sense that we were the beneficiaries of it. The econometric evidence suggests that this off-the-books borrowing encouraged the government to spend more or tax less than it otherwise would have. We don't know the distribution of tax cuts vs spending increases, but it's likely that people of all income levels benefited to some degree. That's why I don't see cutting benefits prior to trust fund exhaustion as a 'default'; payroll tax surpluses were immediately recycled to benefit people at the time, so the idea that those people truly pre-paid for their future benefits seems dubious to me.

Your answer on the ownership element is weak. Yes, the government could default on bonds held in PRAs, etc. But that's a bigger step than changing the Social Security tax or benefit rules, and would have repercussions far beyond Social Security. If you think the government would default on its bonds before cutting Social Security benefits that's ok, but I don't think that's too likely.

P.S. "A transfer from wage workers to controllers of capital"? Good grief, have you been reading Socialist Worker too much lately? In any case, income taxes aren't on capital.

Jim Glass said...

Social Security, by drawing down its trust fund, will be able to pay benefits until the year 2049 with no changes whatsoever.

That's assuming a 15% across-the-board income tax hike from today's levels to service the trust fund bonds will be considered by taxpaying voters to be "no change whatsoever".

Likely, eh? ;-)
~~~~~
"But since we're the ones who borrowed the money, we're the ones who'll have to pay it back"

Oh boy. Andrew 'we' didn't borrow anything...


Well, *I* for one sure as heck didn't!

And any dang politician who wants me to pay a *tax increase* to pay back back to myself money I never borrowed from myself is going to get to experience my old fully weatherized army boot, one way or another.

(When that day comes, I suspect I won't be feeling lonely and forlorn as the sole taxpayer who feels that way.)

Bruce Webb said...

Jim that is insanity. The shortfall starting in 2017 is projected to be $24 billion. The gap in 2040 in constant dollars is $$335 billion. How do you get from those numbers to "15% increase across the board"? Per the Trustees if we do nothing until 2041 the cost of paying for fully scheduled benefits would be 3.54% of PAYROLL which of course is only a part of total taxable INCOME. There is no way to go from 3.54% of the former and end up with 15% of the latter.

Andrew G. Biggs said...

Bruce,
I don't know Jim's numbers offhand, buyt you can't equate 3.54% of payroll to 15% of income taxes since they're different animals. If we took 3.54% of payroll and taxes 100% of it then we'd have enough money. Income taxes have a much broader base, obviously, but are taxed at a lower rate. So I don't see why this number is impossible.

Let's say that 3.5% of payroll is 1.75% of GDP (roughly). Today income taxes equal around 9% of GDP or thereabouts, so 15% of income taxes seems possible to me.

Bruce Webb said...

Speaking of weak arguments.

We don't know the distribution of tax cuts vs spending increases, but it's likely that people of all income levels benefited to some degree.

Even if we granted the assumption that every American got the same amount of utility from every dollar of defense spending and that not a single dollar was wasted (which would require totally blinkering yourself to reality) the idea that I benefited from it in the same way someone who owned 10.000 shares of stock in Boeing is itself absurd. Some of my payroll tax dollars ended up in the pockets of billionaires who own stocks in defense contractors. Any attempts to cut the benefits I thought I was paying for results in a net transfer from labor to capital.

I don't care if that sounds like the Socialist Worker in large part because I am not afraid of the word socialist. And I can follow the dollar in question.

Social Security cash surpluses were spent on programs that in large part rely on private sector contractors. Those contractors in turn extracted many billions in profits for their stockholders. And many of those profit dollars ended up in the pockets of billionaires, in fact many of those billionaires would have been only millionaires without those profits funded in part by a direct levy on labor.

For those billionaires to turn around and insist they have no responsibility to pay back money the federal government borrowed to fund the contracts that in large part made them rich is a straight out subsidy for capital funded by labor.

If that sounds like Pravda that is because it is 'pravda'.

The econometric evidence suggests that this off-the-books borrowing encouraged the government to spend more or tax less than it otherwise would have..

Yep just paid for by labor and not by capital. (Which doesn't stop people on the right whining that poor people don't pay taxes.) Once again your argument reduces itself to a blinkered reality that utility created by tax dollars are distributed evenly. That is just ridiculous. For example generally the only time the poor utilize the federal civil justice system is to declare bankruptcy. Whereas corporations and by extension the people who own them are hundreds of times more likely to using those services (and then complain about corporate tax as somehow being double taxation).

Bruce Webb said...

Well I took Jim to be talking rates, mainly because 'across the board' suggests as much. If he was talking total taxes collected he is still a little high. That total in 2006 is reported by WIki to be $2.647 trilllion, 15% of that is $401 billion which is substantially above the peak amount of the SS gap and way above the average annual gaps between 2017 and 2041. For example the Constant Dollar gap in 2025 is $177 billion.

In any case a 15% increase in the top rate just gets us back to Clinton era rates, hardly a tragedy in my view. Gradually increasing that rate to cover a constant dollar cost-income gap that starts at $17 billion and over 24 years may or may not grow to $335 billion is not going to cripple this country. It is not like no one got rich under Reagan.

Jim Glass said...

Jim that is insanity. The shortfall starting in 2017 is projected to be $24 billion. The gap in 2040 in constant dollars is $$335 billion. How do you get from those numbers to "15% increase across the board"?

Bruce, call 'em insane, but the Trustees project OASDI's cash flow contribution to the unified budget as moving from +0.55% today to to -1.29 during the 2030s, then basically stabilizing.

That's a net cost from today's level of 1.85% of GDP.

In 2007 (the last year that the recession didn't depress revenue) total income tax revenue, both corporate and personal, was 11.2% of GDP.

Now call my calculator crazy, but it insists that 1.84/11.2 = 16.4% ... so for general revenue to stay even with this SS spending increase cash-flow wise (and enable the trust fund to do its job) income taxes will have to rise by >15% as a portion of GDP from the current level to pay all benefits. (In lieu of another new source of general revenue, like a national VAT.) Say, by 16.5%!

And "cash flow is king" to voting taxpayers and politicians.

Of course, one could say the trust fund's operation in paying down bonds itself directly accounts for only 11.5 points of the 16.5% tax increase -- so when the debate about means-testing "the rich" out of benefits (to avert the need for tax increases to pay off the SS bonds) becomes serious, benefit cuts corresponding to only that smaller amount will be proposed.

Which will make the proposal that much more credible. The smaller the cut, with only the richer rich feeling it, the more likely it is to come true.

But the pressure for this tax/benefit cut then will most assuredly be felt in the context of the other 5% income tax increase for SS, plus the other 35% or so beyond that from today's levels, required for Medicare, etc.

That's an awful lot of cash flow for the politicians to cover year-to-year in the 2030s. (A 50+% income tax increase as a portion of GDP relative to today!)

Remember, you read about it here first! (Though you didn't really.)

Per the Trustees if we do nothing until 2041...

When calculating the cash flow cost of SS to the government one does not count the SS trust fund bonds as an asset available to finance benefits that reduces cost to the government, but as a liability that increases the cost to the govt -- the govt has to increase taxes to pay off the bonds. Bonds are debt to the issuer, liabilities, not assets.

Also, projections of overall cost over 75-years or whatever such time frame, are totally irrelevant to cash flow & tax cost in given years such as 2029, 2030, 2031 ... unless one thinks revenue already spent in the past or projected to be received later in the future can be transported thru time to cover cash flow cost in 2030, in lieu of current revenue ... which would be, you know, insane.

So "doing nothing until 2041" is not an option, unless one considers an 11.5% to 16.5% (take your pick) income tax increase from today's levels during that period (while other, even larger increases are being imposed for Medicare etc.) to be "nothing".

Jim Glass said...

In any case a 15% increase in the top rate just gets us back to Clinton era rates, hardly a tragedy in my view.

Although it's not the top rate but all rates that would have to go up by 16.5%. On low earners, businesses, everybody.

(And considering losses to the deadweight cost of taxes, tax avoidance, and other revenue-losers that increase with rates, the actual rate increase needed to increase revenue by that much would be more than 16.5% -- but let's stick with 16.5% for argument's sake).

That might be easy to enact. It's only 1.84% of GDP.

Now Clinton, speak of the Devil, pushed through a tax increase in 1993 with a Democratic House and Senate. And with all that help going for it, it passed by one single vote in the House and only with an Al Gore tie-breaker in the Senate ... to increase taxes by 0.83% of GDP.

Hmm, maybe increasing taxes by 2.2times as much won't be entirely soooo easy.

But there is a larger perspective, of course. At the same time, income taxes are going to be increasing by twice as much to pay for Medicare and all. Now seniors are going to have to have their medical care, so they are going to be stuck paying that.

Maybe in the larger context of seniors paying a 50% income tax increase from today's levels (a World War II-level increase, except permanent and rising) on all their fixed retirement income -- pensions, IRAs, and Social Security benefits of course -- they'll think...

"What the heck. When we are paying so much more in taxes, what's the point of getting upset about the mere one-third of it that's for Social Security ... to repay to ourselves the money that we'd borrowed from ourselves without ever realizing it ... so we can pay again through income tax to get all the same benefits that we already paid for once through 12.4% payroll tax, ever since we started working in the 1980s ... Ah, be happy and go with the flow!"

What retiree could possibly have a political gripe about any of that?

WilliamLarsen said...

Why the low cost scenario is wrong. First it is based off GDP and is a linear projection. What do you think would happen if you used a linear projection on compound interest? You would drift from reality in a short period of time. Using GDP is not a good indication of revenue nor expenses since SS-OASI is part of GDP. This is a circular loop. Three, with a birth rate of 2.1 babies per woman it is mathematically unlikely that life expectancy at age 67 will drop to pre 1900 levels. Four, the low cost option assumes a higher immigration rate. A higher immigration rate does help short term, but with Social Security we are looking for a long term solution. The critical worker to beneficiary ratio is 3.3 workers for every beneficiary, no ifs ands or buts about it. This is just math, easy to prove.

With a birth rate of 2.1 babies per woman, we replace the couple that created the baby. Assuming a person goes to work at age 20, the person who gave birth will be about 40. When the child is 22 they have a baby making the grandparent 62. In essence from the two parents, there is a potential of creating two offspring who in turn create two off spring who will be 20 by the time the parent retires. This results in a potential of 4 working adults for every two parents. However, not everyone works. The best ratio you can get is 2. Therefore immigration needs to make up 1.3 workers.

For every immigrant how many dependents come along? In forty years these immigrants will be U.S. Citizens eligible for SS. This means the number of immigrants has to double. Do you have any idea how large this number is? We are short nearly 35% to 40% of the workers we need to maintain critical ratio of 3.3. With 80 million in retirement, we need another 264 million workers, but we will have fewer than 185 million. We are short 79 million workers. The next generation will have to support not 80 million, but 159 million requiring over 500 million workers. When does it end?

Paul Lawin said...

"The econometric evidence suggests that this off-the-books borrowing encouraged the government to spend more or tax less than it otherwise would have. We don't know the distribution of tax cuts vs spending increases, but it's likely that people of all income levels benefited to some degree."

Although it is certainly impossible to know exactly which tax would have been higher or which spending lower, I think we can easily make some observations. SS is primarily funded by a regressive tax on labor income. The General Fund is primarily funded by progressive taxes on labor and capital income. I'm quite confident that "we" didn't borrow from "ourselves". "High income people, especially those with capital income" borrowed from "middle income people with labor income". The precise amounts, and the names of the winners/losers, will never be known, but the direction seems clear.

It's harder to figure out the winners/losers if the impact had been on spending. Since neither political party seemed to have been able to spend less when they had power, it's hard to figure which spending would have disappeared.

Andrew G. Biggs said...

Paul,
The question seems to be, given a dollar of 'free money' to the budget, where is it likely to go: to lower taxes or to higher spending? Moreover, if to spending, what is the distribution of benefits? (E.g., it could be to EITC or it could be to farm subsidies.) I don't know the answers to those questions, but I do know the government has a pretty strong propensity to spend more when given the opportunity.

Arne said...

"The critical worker to beneficiary ratio is 3.3 workers for every beneficiary, no ifs ands or buts about it. This is just math, easy to prove."

Actually, it is somewhere between 2.6 and 2.8 and it is dropping every year as the economy becomes more productive. The ratio is 3.3 right now and we are running a surplus.

WilliamLarsen said...

Between 1970 and 1983, SS-OASI spent more each year in benefits and administration of the program than SS-OASI collected in payroll taxes. How did the treasury fund SS-OASI? keep in mind the last general budget surplus was in 1957.

Each year the SS-OASI revenues were negative, the US Treasury simply sold those bonds to someone else. the refinanced with a different entity. The notes held by SS are payable on demand and non negotiable. SS simply informs the treasury that they will need $X billions by a particular date and the treasury increases borrowing to cover the amount they are redeeming.

This method does not increase the national debt, but simply changes who holds the debt. Interest rates may be higher or lower depending on the notes being redeemed by SS.

Will the treasury have difficulty refinancing the SS-OASI notes?

Today the SS-OASI worker to beneficiary ratio is 3.95 to 1. The SS-DI ratio is ~23 to 1. The combined ratio is immaterial since these are two separate programs with two different tax rates with two different sets of criteria. The ratio of workers to beneficiary required to pay a 42% targeted life time indexed benefit is about 3.3 to 1. The worker to beneficiary ratio is expected to drop 2.4 to 2.5 for SS-OASI and a combined is 2 to 1.

Workers total about 160 million while OASI beneficiaries total about 40 million. DI beneficiaries number about 15 million.

Jim Glass said...

"The notes held by SS are payable on demand and non negotiable. SS simply informs the treasury that they will need $X billions by a particular date and the treasury increases borrowing to cover the amount they are redeeming.

"This method does not increase the national debt..."

Except that it increases the government's debt liabilities on the consolidated balance sheet of the US, requires the government to auction off more bonds to the public (crowding other investment out of the market), and to raise tax revenue to cover the cost of servicing the newly issued bonds.

If all that comes from not increasing the debt then the debt isn't increased.

"but simply changes who holds the debt"

In exactly the same way that writing out a note reflecting a debt liability of $X, that you initially issued to yourself and held against yourself, upon being transferred to a third party who thus becomes a new creditor of yours in the amount of $X, merely changes who owns it.

WilliamLarsen said...

Jim you wrote "In exactly the same way that writing out a note reflecting a debt liability of $X, that you initially issued to yourself and held against yourself, upon being transferred to a third party who thus becomes a new creditor of yours in the amount of $X, merely changes who owns it.Some say the SS-OASI trust fund is worthless. They way you present it above would indicate you believe this to be true. In which case you believe the National debt is not $11.5 Trillion, but ~$8 Trillion. I would expect this interpretation of the national debt would also mean that we would not have to pay the SS-OASI trust fund back and it would have no affect on the credit worthiness of the US.

I myself can see it both ways. i believe it will become extremely difficult to borrow more money. At this point something will have to give: higher taxes or lower benefits at the minimum. What I would expect will happen is that they will attempt means testing. This will kill any support for SS-OASI. At this point workers will demand to be let out of SS-OASI. Either way, those who are in their mid 40's and younger had better be prepared. I would even bet 50/50 that we could see those with incomes over $100K in retirement loose 100% of SS-OASI benefits.

THE END IS NEAR FOR SS-OASI