We'll Need DeMint to Pay for This Proposal

I’ve done quite a bit of writing about Social Security at this site so it might surprise you to learn that I almost never go to SocialSecurityChoice.org. The reason is simple. On the few occasions I have ventured there, what I see posted irks me greatly, and then I feel compelled to rebut the misleading post du jour. Today, at the behest of PGL at Angry Bear I ventured over there. And just like the times I’ve visited in the past, I can’t help but rebut the top post by Andrew Roth. It concerns the DeMint Social Security reform proposal:

The DeMint Proposal - Stop the Raid on Social Security Act, by Andrew Roth:

How It Works:

  1. Saves the surplus in voluntary personal accounts – the only true lockbox
  2. Invests funds in government bonds initially
  3. Stops the raid on the surplus – no more secret spending
  4. Provides 100% current benefits
  5. No payroll tax increases

What It Accomplishes:

   * First step toward permanent solution
   * Ends Congress’ free lunch – forces government to recognize future obligations
   * Makes immediate down payment on long-term reform

Just The Facts:

   * Prevents Congress from raiding over $792 billion between 2006 and 2016
   * Rebates 2.2% of taxable earnings in 2006, allowing medium-earners ($35,000/year) to save over $770
   * Invests in government bonds initially; offers other options later
   * Combines account and traditional benefits to meet current promises
   * Reduces Social Security’s long-term liabilities by $2.4 trillion

My post yesterday on Samuelson began with “Where do I start?” Those words echo again as I read this. So I’ll follow the advice of the always intelligent Mary Poppins and start at the beginning.

How it works

1. The claim that personal accounts are a lockbox is misleading. I explain the reason in this post: Luskin is Wrong: Personal Accounts Do Not Protect Benefits. The post says "This is the standard lockbox argument for private accounts. Having had the solvency foundation crumble, this is their last resort, that the lockbox will prevent the government from spending your money. But it doesn’t, and closer inspection undermines this argument as well. Let’s take a numerical example..."
2. The personal accounts are to be invested in government bonds. Are these bonds the worthless promise Bush has been talking about? Why aren’t they proposing investing in private bonds? With government bonds, personal accounts are still financing the rest of government. In addition to the points in 1, what kind of lockbox is that?
3. What secret spending? Isn’t it public? Is congress spending money and not telling us? The real issue here is accountability and trust and what Roth's post tells us is that the GOP has neither – hence the call for a “lockbox” that isn’t.
4. 100% current benefits? There is no free lunch. Period. Quoting from this report on the proposal: “Another GOP staffer familiar with Tuesday's scheduled event said the participants will acknowledge that redirecting surplus Social Security funds will create budget problems elsewhere.” Something somewhere will have to be cut or taxes will need to be raised.
5. No payroll tax increase? That’s fine, I’m in agreement with that. But how will this be paid for? Will benefits be cut or will taxes be raised? Those are the choices. Which will it be? As the WP article notes: “The strategy is controversial because it would create new budget problems. Either the diverted money would have to be replaced with new taxes, or Congress would have to slash programs now funded by Social Security's excess payroll taxes.”

Then the post goes on to claims about how they end the free lunch and so on. I see no reason to continue. Unless one of you has a question about something at SocialSecurityChoice.Org in the future, I don’t see much point in going back. Friends don't let friends read propoganda.

Comments

[pgl]

Many thanks - and note I added to the discussion by taking on the latest from the National Review. At least, NRO tries to identify spending cuts but their cuts would only pay for ten cents on the dollar - assuming this GOP led Congress had the courage to implement them. I'm not holding my breathe.

[cl]

Brilliant. Friends don't let friends read propaganda.

Keep up the fight. Same trash, just a new barrel.

[pgl]

Uh oh - Le Club for Growth's blog is now whining that the press pays more attention to 400 protestors than 450 economists. Of course, Bush used to have one of the best Soc. Sec. economists (Kent Smetters) working in his Administration - and Bush never paid any attention to him.

[pgl]

One more thing. Roth says the Soc. Sec. cumulative surplus over a 10-year period is only $792 billion, which is in line with the $85 billion per year figure claimed by the NRO article I critiqued. Both ignore the interest owed to the Trust Fund over the period. Most estimates suggest that over this period, the Trust Fund assets will grow by about $5 trillion over this period - and yet these fellows claim they'll grow by less than $1 trillion. Bad math skills or just more dishonesty?

[Patrick R. Sullivan]

In fact, they aren't the worthless bonds everyone complains about. They are a very different animal. They are on a par with the bonds China holds that ARE backed by the full faith and credit of the US government. The idea is AEI's Andrew Pollock (and a take off on one of Milton Friedman's):

----------quote---------
The essential proposal is this: Social Security tax payments by individuals and employers and Social Security tax receipts by the government would remain the same as they are now. No cash would be diverted, and the Treasury would have the same cash receipts from Social Security taxes as it does now. But in exchange, Treasury would not issue bonds to the Social Security “trust fund.” Instead it would issue bonds--specifically, TIPS--directly to the personal accounts of the individual citizens themselves. Thus these accounts would not receive cash but would automatically receive the safest possible investment for retirement savings.

....This financial structure transparently shows the real transaction that is taking place between the two real principals involved: the American citizen and the U.S. Treasury Department. It cuts out the unnecessary and confusing “middle man” role of the Social Security “trust fund,” which in fact is simply a Treasury liability.

The government’s total obligations would not increase. Some Treasury debt would shift from being owned by the “trust fund” on behalf of the citizens to being owned by the citizens themselves in their personal accounts. The bonds in the personal accounts would represent an increase in Treasury debt owned by the public but would be issued, like bonds now sent to the “trust fund,” as automatic private placements.
-----------endquote---------

All it does is make what is going on more transparent. Is that why you don't like it?

[enronal]

So "there's no free lunch. Period."? Guess what? There is. It's called capitalism: private property and the rule of law. The 21st century is one long lesson in the devastation brought about by its alternatives, to varying degrees in different places. Socialist programs, such as Social Security in the U.S., suffer from the same problems of all socialized programs--perverse incentives. If you can't see that, you need to go back to review Econ 101, economist.

[enronal]

So "there's no free lunch. Period."? Guess what? There is. It's called capitalism: private property and the rule of law. The 20th century is one long lesson in the devastation brought about by its alternatives, to varying degrees in different places. Socialist programs, such as Social Security in the U.S., suffer from the same problems of all socialized programs--perverse incentives. If you can't figure that out, you need to go back to Econ 101.

[cl]

enronal:

Take me back to econ 101 and tell me how capitalism buys me a free lunch?

I have no idea what you are talking about.

[cl]

Patrick:

Here's why I don't like it:

If it ain't broke don't fix it. Under very plausable assumptions we don't have a solvency problem.

see Bruce Webb: http://bruceweb.blogspot.com/2004/11/social-security-is-not-broke-by.html
He is much more eloquent than me.

Social Security has been a highly successful program. It has low administrative costs.

I flat out do not trust the people trying to break it.

[Lee A. Arnold]

A brilliant rhettorical move by th3e Republicons, which preys upon a certain fear that's been pounded on by the sales-in-chief, and even old grannies with picket signs were chanting outside the cordons, what have you done with my surplus! This could bring over a threee-point spike in the telephony pollls, and the pikers'll be off, claiming a conclusion. it is important to realize that this wholle war is rhetorical, and to analyze whatt this deminted proposal is to it's explaining. Basically lockboxsing the surplus is simply a payroll tax cut. It is still the carve-out, but only the giblets. It knocks all the bad carve-out effects a nickel down the road, well beyoond the perspicacity of tthe George Willses of the world for a week or two. But it's a carve-out, and does all the same things: (1) it still requires "the transition cost" or what you call deficit spending; and this will finally be paid-off out of your other pocket in more taxes--in other words, it is a money-go-round; (2) the rest is stock gambling; (2) presumably they still do the clawback, PLUS the Posen-Bennett reindexing, to cut your benefits TWICE; and (3) it still doesn't an$wer for the 2-trillion prior missing trust fund (or special bond pay-back) that payroll taxes have been hiked all these years when only income taxes have been reduced. Bush iis hoping to call upon the young workers he enticed with tales of lucre, but heree, I thinkk, the Democrats would also be mistaken to give in . They should just take the political hit for this moment, and hope they can educate the little workers by autumn next after. Hell, just throw music, sex and violence into http://ecolanguage.net/ and you're halfway there.

[enronal]

OK, economist, here's how capitalism buys you a free lunch. Under capitalism (private property and the rules of law) individuals and firms use resources more efficiently than under alternative economic arrantements. More output is produced with the same or fewer inputs. Competition produces innovation rising productivity. Ring a bell? Socialized ownership produces perverse inventives, as history has shown. The social security system is just one of many examples. It reduces the incentive to work, save, and invest intelligently.

[Lee A. Arnold]

A brilliant rhettorical move by th3e Republicons, which preys upon a certain fear that's been pounded on by the sales-in-chief, and even old grannies with picket signs were chanting outside the cordons, what have you done with my surplus! This could bring over a threee-point spike in the telephony pollls, and the pikers'll be off, claiming a conclusion. it is important to realize that this wholle war is rhetorical, and to analyze whatt this deminted proposal is to it's explaining. Basically lockboxsing the surplus is simply a payroll tax cut. It is still the carve-out, but only the giblets. It knocks all the bad carve-out effects a nickel down the road, well beyoond the perspicacity of tthe George Willses of the world for a week or two. But it's a carve-out, and does all the same things: (1) it still requires "the transition cost" or what you call deficit spending; and this will finally be paid-off out of your other pocket in more taxes--in other words, it is a money-go-round; (2) the rest is stock gambling; (2) presumably they still do the clawback, PLUS the Posen-Bennett reindexing, to cut your benefits TWICE; and (3) it still doesn't an$wer for the 2-trillion prior missing trust fund (or special bond pay-back) that payroll taxes have been hiked all these years when only income taxes have been reduced. Bush iis hoping to call upon the young workers he enticed with tales of lucre, but heree, I thinkk, the Democrats would also be mistaken to give in . They should just take the political hit for this moment, and hope they can educate the little workers by autumn next after. Hell, just throw music, sex and violence into http://ecolanguage.net/ and you're halfway there.

[Jim Glass]

By 2030 income taxes will have to be raised 35% from today's levels (or other equivalent revenue raisers will be needed) just to finance the operation of the trust funds. So say the Social Security trustees.

Today's patrons of SS having done very little to prepare voters for this news, and 2030 being not so far away, when this surpising news reaches Congress it will of course be sorely tempted to reach a typical "split the difference" political compromise, as its usual wont with such things, and cut benefits by an amount that matches any tax increase it finally authorizes. Just as it did for SS in 1983. Precedent!

Only considering the size of the Medicare bill coming due at the same time (about another 30% tax increase, 60+% total) Congress may well cut SS benefits by more than that -- meaning that the bonds now in the trust fund bearing the "full faith and credit" of the US to finance future SS benefits will be able to happily do so *forever*, being unneeded for benefits that won't be paid.

Distributing the bonds instead to private accounts and making them tradable from there would of course have $0 effect on the liabilities of the US.

But it would have the *very real* effect of guaranteeing that the trust fund bonds are actually used, paid off to fund benefits as promised -- and of stopping Congress from closing its future budget gap by stiffing workers by cutting SS benefits, getting out of paying off the bonds.

A lot of those bonds will have been traded and be circulating in 2030 -- so the full faith and credit obligation behind them will become *real*, not mere cheap posturing as today.

This is what liberals want, isn't it? To assure that those bonds will be paid off? And that no future Congress takes the easy out of cutting benefits -- means testing the rich out of benefits and all -- to dodge the cost of paying on them, right? To make Congress find some other way to close that budget gap, rather than on workers' backs.

Well, this proposal does that when the status quo sure *doesn't*. So liberals should be *happy* with it, I'd guess. With guaranteeing that the SS bonds are acutally *used* for SS. Right??

If you're not, I dunno, are you, like Orszag, looking to preserve the option of benefit cuts to *get out* of paying on some of those bonds?

[Lee A. Arnold]

Jim Glass, since Social security is really only another government account, you can rip the bonds up, for all anyone cares, so long as you honor the commitment. If the politicians are posturing cheaply that they won't honor the word, then vote them out!

And I agree with you that we should expire the Bush tax cuts. They haven't caused any extra growth over what we would've had anyway, and we all know, except for those who have supplanted reality with bookish theoric, that it won't hurt "innovation" one bit.

[Lee A. Arnold]

Jim Glass, since Social security is really only another government account, you can rip the bonds up, for all anyone cares, so long as you honor the commitment. If the politicians are posturing cheaply that they won't honor the word, then vote them out!

And I agree with you that we should expire the Bush tax cuts. They haven't caused any extra growth over what we would've had anyway, and we all know, except for those who have supplanted reality with bookish theoric, that it won't hurt "innovation" one bit.

[Jim Glass]

"If it ain't broke don't fix it. Under very plausable assumptions we don't have a solvency problem."

There in no plausible scenario in which *major* tax increases aren't needed in 20 years just to finance the trust funds. Nobody has prepared the voters for this. The Democrats sure haven't.

When those tax bills start coming in, Congress will have every incentive to go the route of means testing and benefit cuts to reduce the tax hikes needed -- just as it did last time, in 1983. Only this time much more so.

All the 75-year solvency projections will then be shown to have as much relevance to the real world as counts of angels dancing on heads of pins.

Of course, distributing the bonds and making them tradable can at least keep Congress from cutting benefits to get out of paying them off. Make Congress go gouge somebody else.

"Social Security has been a highly successful program."

Ha! You're navigating through the rear view mirror there, which is great as long as you are flying over water and plains but not so good when you hit the mountains.

Yes, back when Paul Samuelson was using the word "Ponzi" to describe it as praise...

"The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times...!"

... it was very popular and deemed quite successful.

Of course, during that period it was giving participants $10 trillion more than they paid into it.

A thought experiment: If SS had back then paid participants $20 trillion less than it actually did, $10 trillion less than they paid in, would the people of the time remember it just as fondly as just the same success? ;-)

Because that's the future, as a matter of arithmetic, if SS stays paygo retirees after 2000 have to get back $10 trillion less than they pay in, to cover the backward transfer to those who got that much more before. Which is indeed what the Trustees project.

That's a $20 trillion swing. With that -- people getting negative returns from it, compared to Samuelson's "ten times" more -- do you really think participants are going to consider it equally "highly successful" in the future as in the past?

[Jim Glass]

"Jim Glass, since Social security is really only another government account..."

Really? FDR explicity created it as program segregated from all other government accounts, famously calling it "out of the Treasury forever".

It's remarkable how little respect his views on the subject get these days from people who claim to be defending FDR's Social Security. Wherever he is these days, I suspect he's popping wheelies about it.

"... you can rip the bonds up, for all anyone cares, so long as you honor the commitment."

The problem with this is that while everyone remembers politicians committing to pay retirement and medical benefits, nobody remembers those politicians committing to increase the nation's income taxes 60% by 2030 to do so, rising from there.

Used car salesmen who commit to deliver cars without mentioning the price that the buyer is committing to end up in jail. The working taxpayers of the future may have a similar point of view towards the politicians of today.

A 30-year old worker of today hears Nancy Pelosi say "Social Security is fine until 2040-odd even if we do *nothing at all* about it, because of the trust fund behind it" ... and maybe he buys it.

Then when he's 50 he finds that "nothing at all" meant his income taxes going up 35% just to reimburse the trust funds for the payroll taxes he already paid.

If he then asks a dumb question like, "Hey, why do I have to pay twice for the same benefits?", and gets an answer like, "Look guy, you committed to finance the trust funds to pay for your benefits like this, way back when...", what's he likely to think? "Thanks, Nancy, for the full disclosure"?

[Movie Guy]

Dean Baker, Co-Director, Center for Economic and Policy Research, sums up the matter of private accounts quite well.

Note his 16 June testimony before the Subcommittee on Social Security, House Committee on Ways and Means.

Here's the link:

Dean Baker 16 June testimony before the Subcommittee on Social Security, House Committee on Ways and Means

[Bruce Webb]

To echo our host "Where to start"

"There in no plausible scenario in which *major* tax increases aren't needed in 20 years just to finance the trust funds."

Depends on your definition of "trust funds". If you are including Medicare you might have a point. Totally irrelevent to DeMint, but a point. But if you are simply referring to OASI and DI (the two Trust Funds that together make up OASDI), then you are simply pulling that right out of your, your, your hat. Yeah 'hat'.

The Trustees have presented a "plausible scenario" which preserves Social Security with no changes in taxes, benefits or retirement age. It is hidden in plain sight in the very same tables and figures that produce 2013, 2017, and 2041. That scenario is called "Low Cost" and each and every year for more than a decade has returned the same result: fully funded Trust Fund with a flat Trust Fund ratio.
What is the Low Cost alternative?

Now ten years ago Low Cost required some really good economic numbers going forward. The 1997 Report required numbers that equalled 1996's pretty good ones in each and every future year. But for the most part we hit or exceeded those numbers in the years since and the result has been striking: the numbers needed in future years have been ground down to nothing. Per the 2005 Report we need only 2.1% productivity growth this year and no more than 2.2% in any future year to fully fund Social Security. Sure there are some other columns in the tables, but this is the key one that drives Solvency.
2005 Trustees Report: Economic Assumptions

Well I don't know about you but 2.1% productivity in the face of the newspapers reporting growth at a 3.3% annual rate to date sounds like a "plausible scenario" to me.
Social Security is not broke: by the numbers
It all starts and ends with the numbers. The Trustees offer them to you freely. You can download the PDFs, you can read the HTML version, or they will send a paper copy to you free, first-class postage paid. In most quarters Table V.B1 and Figure II.D7, still less tables VI.F7 and VI.F8 are numeric gobblygoop. But they are going to rock privatizers' worlds. Better gear up for the attack on the Trustees of Social Security (including three Bush Cabinet secretaries), because they are openly claiming that ordinary economic growth going forward fully funds the Trust Fund.

You don't have to believe me, ignore the links to my site. Do your own original research, the Office of the Chief Actuary has given you easy access to every Report from 1942 to 2005. http://www.ssa.gov/OACT/TR/index.html

(And by the way the current payroll gap, the amount of tax increase needed today to fully fund Social Security even given the massively pessimistic economic numbers of Intermediate Cost is 1.92%. I can concede every economic number and still that would not represent "major". $768/year for someone making $40k is not "major". The numbers have moved, yet privatizers' rhetoric remains stuck in a 1993 ditch).

[Bruce Webb]

"Then when he's 50 he finds that "nothing at all" meant his income taxes going up 35% just to reimburse the trust funds for the payroll taxes he already paid."

You might want to source that, put up the productivity numbers that back it, and then explain why simply cutting back future benefits to the level payable by then current income in 2041 (which is current law) somehow is an impossible task, but slashing them now is a great idea.

76% of a better check than retirees get today is the baseline. That is the disasterous "crisis" which drives the demand for immediate action. Explain to me in short words why we should not just leave things alone and explain to people that their checks risk a modest cut in 2041. There is nothing at all that requires future taxpayers to make up the difference.

Privatizers live in an odd political world where politicians in the next decade can simply abrogate the Trust Fund with no protest and yet where retirees have such clout in 2041 that we have no choice but to make up the gap from other sources.

Social Security "crisis" requires young people continuing to believe in large numbers that Trust Fund depletion means zero, nothing, nada in the way of a check for them. And large numbers do.

But the readers on this site know better. Even the privatizers admit the basic numbers underlying Intermediate Cost, they understand that they are working against that 76% baseline. Folks your task is to present a better result. Using real numbers.

[cl]

Jim Glass:

"There in no plausible scenario in which *major* tax increases aren't needed in 20 years just to finance the trust funds. "

*Yes* there is. Read about the low cost scenario put out by the Trustees. From Bruce Webb's Site,
http://bruceweb.blogspot.com/2004/11/what-is-low-cost-alternative-what-does.html
the following are the productivity growth percentages assumed by the low cost alternative.

1996- 1997- 1998- 1999-- 2000-- 2001- 2002- 2003- 2004- 2005- Report Year

2.1% 2.2% 2.2% 2.1-2.2% 2.2-2.4% 1.8% 1.9% 1.9% 1.9% 1.9% Productivity Growth in out years to fix (Low Cost)

The important thing to take away, is under the low cost alternative, Social Sceurity IS FULLY FUNDED. AND the productivity growth required is being surpassed at this point in time, and is quite likely to be surpassed in the future.

[Bruce Webb]

In rereading Jim's post I realize he is referring to the need to start redeeming the bonds in the 2020s. Well, one you borrowed the money, two if you wouldn't have blown it on tax cuts you could easily afford it, and three given ordinary economic growth you won't need to redeem more than a fraction of those bonds anyway.

Spending all your money at the track and then telling your landlord you can't make rent may make sense in the bizarro world of privatization, but it isn't cutting much ice with me.

[Patrick R. Sullivan]

"In rereading Jim's post I realize he is referring to the need to start redeeming the bonds in the 2020s."

Congratulations. And, at a time when Medicare and Medicaid costs will be skyrocketing also.

Tell us, Bruce, what do you think the Federal government will be spending as a percentage of GDP in, say 2040; 20%, 25%, 30%?

[Patrick R. Sullivan]

"Spending all your money at the track and then telling your landlord you can't make rent may make sense in the bizarro world of privatization, but it isn't cutting much ice with me."

People seek protection in bankruptcy all the time is such scenarios. Congress will do the functional equivilant when the time comes, just as it did in 1983.

[Bruce Webb]

Republicans claim they will be the "Permanent Majority". Patrick just claimed that that makes them a bunch of thieves and bankrupts.

You can openly claim you will be in permanent power. Or you can blame future Congresses for being feckless liars and thieves. But doing both? That will put the dissonance back in that old cogito.

[cl]

Patrick:
"Tell us, Bruce, what do you think the Federal government will be spending as a percentage of GDP in, say 2040; 20%, 25%, 30%?"

Who knows? Without an exit strategy in Iraq, having an unending "war" on terror, and being hellbent to spend a great deal more than the $320B they've already thrown down the toilet, it might well reach the 30% 40% figure.

[Jim Glass]

"In rereading Jim's post I realize he is referring to the need to start redeeming the bonds in the 2020s. Well, one you borrowed the money, two if you wouldn't have blown it on tax cuts you could easily afford it, and three given ordinary economic growth you won't need to redeem more than a fraction of those bonds anyway."
~~~~~~~~~

This is laughable.

Back in 2001 GAO projected that on the basis of year 2000 law and economic forecasts -- that is, with *no* Bush tax cuts and assuming a *continuing boom surplus for years* -- the gov't would collapse around 2045 as the annual national debt surpassed 20% of GDP, greater than the size of the entire federal gov't today.

http://www.gao.gov/new.items/d01385t.pdf

See for example figures #2 and #3 in that.

You folk are in denial about this, plain and simple. What reality does the "reality based community" think it is living in?

Why aren't Democrats today educating and preparing voters for the BIG tax hikes/benefit cuts that are coming in 20 years or so due to these entitlement programs -- as a matter of simple arithmetic -- to save the nation from the bankruptcy GAO describes above? After all, aren't these big tax hikes part of the fundamental "commitment" to pay entitlements that people should understand?

E.g.: When workers in 2030 find they have to pay a 35% income tax hike just to reimburse themselves for the payroll taxes they already paid, shouldn't they already understand that since they borrowed that money they of course have to pay it back?

If they don't understand, and it comes as some kind of unpleasant surprise to them, isn't there a risk they might get annoyed at the Democrats who told them their whole lives that the trust fund would be there for them until 2042 (without telling them it would be there for them to have to pay into twice)? Shouldn't Democrats want to avert that? To avoid going the way of the Whigs?

I'd think so. As a matter of political common sense. Unless Democrats fear that admitting the size of the tax hikes and benefit cuts that will be needed to avert national bankruptcy, as per GAO's year 2000 analysis, might get voters rather annoyed with them today.