Economist's View

Why are Republicans Suddenly So Worried about the Elderly and the Working Class?

When conservatives face a choice of cutting Social Security -- something they have long sought -- in return for an increase in taxes, they suddenly become friends of the elderly and the working class. But what is really behind their newfound fondness for the vulnerable?

This is from an article from Andrew Biggs, "resident scholar at the American Enterprise Institute and former principal deputy commissioner of the Social Security Administration," appearing at the NRO:

The Chained CPI: A Bad Deal All Around, by Andrew Biggs, NRO: The Chain-Weighted Consumer Price Index (or chained CPI, for short), which President Obama included as part of his formal budget proposal, seems like a no-brainer for any White House–GOP grand bargain on the budget deficit. After all, the chained CPI ... would reduce entitlement spending and increase tax revenues by a combined $340 billion over ten years, providing something for both sides to like and dislike. Yet ... the chained CPI is bad policy that both liberals and conservatives may come to regret. ...

In Social Security, the chained CPI would replace the CPI-W (intended for urban wage-earners and clerical workers) in calculating annual cost-of-living adjustments (COLAs). Once fully implemented, lower COLAs would reduce a retiree’s average lifetime benefits by around 4 percent, cutting Social Security’s long-term shortfall by around one quarter.

Yet while Social Security does need to be fixed, and lower benefits for middle and high earners should be a part of the equation, smaller COLAs weaken a feature of Social Security that actually works: The program’s generous inflation adjustment counteracts the absence of inflation adjustment in private pensions. And unlike most reforms, which reduce benefits progressively ... COLA reductions fall hardest on the oldest beneficiaries, who are most at risk of poverty. An 85-year-old is 66 percent more likely to be in poverty than a 65-year-old, but the chained CPI will cut the 65-year-old’s by only 1 percent and the 85-year-old’s benefits by 8 percent... Moreover, the chained CPI, like CPI-W, doesn’t account for the fact that older retirees spend disproportionately on health care, a sector in which inflation is particularly high.

[Note: The article and supporters of this policy say the chained CPI is a better measure of inflation, and that may be true for some groups, but the last sentence shows that it is not a better measure of inflation for the elderly.] I don't disagree with the arguments above about who would be hurt, and that we should protect the most vulnerable -- I think we should raise the payroll tax cap rather than cutting benefits -- it's just strange to see them made at the NRO (the Obama administration's proposal includes a call to protect older retirees from the changes noted above, and it's not surprising to see this omitted from the discussion -- it undercuts the GOP's attempt to position itself as defending older retirees against a Democratic proposal). Continuing:

A better policy would peg COLAs to wage growth, which is around 1 percentage point faster than inflation, coupled with a lower initial retirement-benefit level to keep lifetime receipts the same. The lower starting benefit would dissuade workers from retiring too early. Higher benefits later in life would focus resources where the danger of poverty is greatest, as well as compensating for the fact that most non–Social Security sources of retirement income aren’t inflation-indexed at all. ...

Again, I'd raise the payroll tax cap first, but let's move on to the tax argument. As you read this, remember all the complaints from Republicans during the presidential election about middle and lower income households not paying their share of federal taxes, about how they take too much and give too little relative to the "burdens" on the wealthy:

If adopting the chained CPI for Social Security would be misguided, applying it to the income-tax code would be even worse. ...

Republicans would surely oppose such an increase if they understood it. Making matters worse, the largest rate increases will be on low- and middle-income households. The Congressional Joint Committee on Taxation projects that in 2021, 69 percent of the gains in revenue would come from taxpayers with incomes below $100,000, though they pay only 28 percent of total income taxes. Individuals in the highest income brackets would be left essentially untouched... Conservative reformers such as National Review’s Ramesh Ponnuru are pushing for a tax code that’s friendlier to families and middle-income earners. The chained CPI is hard to fit into that narrative. ...

It’s hard to see how chained CPI can be a win for conservatives..., why should Republicans take the rap for a measure that weakens Social Security for the least well-off and institutes a large and regressive tax increase? ...

I don't find it hard at all to imagine Republicans supporting regressive tax changes (see their past policies) and weakening Social Security (ditto). The real goal for Republicans, of course, is to prevent tax increases of any type. If they give in anywhere, it might help with arguments that taxes on the wealthy must go up, and that cannot happen. The puzzle is why Obama would put forth a measure that allows Republicans to position themselves as defending the elderly and the working class as they pursue their real goal of keeping taxes from increasing. I guess he thought it wouldn't really happen, that Republicans would end up looking like unreasonable obstructionists on the tax issue, and that the press would all of a sudden turn on them as a result of their intransigence, but it wasn't hard to see this coming:

So what’s this about? The answer, I fear, is that Obama is still trying to win over the Serious People, by showing that he’s willing to do what they consider Serious — which just about always means sticking it to the poor and the middle class. The idea is that they will finally drop the false equivalence, and admit that he’s reasonable while the GOP is mean-spirited and crazy.

But it won’t happen. ... Oh, and wanna bet that Republicans soon start running ads saying that Obama wants to cut your Social Security?

Anyone else getting tired of relying upon Republican intransigence to defend Social Security and Medicare from Obama's Grand Bargains that are intended to appease the "Serious People" that cannot be appeased?

'Scrap the Cap'

Nancy Folbre:

The People’s Choice for the People’s Pension, by Nancy Folbre: Social Security, the most transparently self-financed program of the federal government, is not increasing our budget deficit. The most recent trustees’ report shows sufficient funds to pay full benefits until 2033.

No one is making out like a bandit: Social Security beneficiaries who retired in 2010 are expected to get back approximately what they paid in.

If we wanted to adopt a cautious policy measure that would eliminate the shortfalls predicted 20 years down the road, we could eliminate the cap on earned income subject to Social Security taxes, currently set at $113,700. Such a measure would lead to increased payments by about the top 5.2 percent of wage earners.

Legislation designed to “scrap the cap” has been introduced in Congress. ... But as Thomas B. Edsall pointed out in a recent commentary, “scrap the cap” has apparently been taken off the table, despite evidence of considerable public support for it. ...

It's not hard to guess why, but as she goes on to explain, "lobbying efforts and misinformation campaigns aimed at bringing the program down" are a big part of the "history of class warfare over social insurance."

'Declining Wealth Brings a Rising Retirement Risk'

The "news isn’t good" about the shift from defined-benefit to defined-contribution pension plans:

Declining Wealth Brings a Rising Retirement Risk, by Bruce Bartlett, Commentary, NY Times: ...[In] defined-benefit ... pension plans..., workers are promised a specific income at retirement, which the employer provides. The employer bears all the risk of market fluctuations. Under a defined contribution scheme, such as a 401(k) plan, the worker and the employer jointly contribute to a tax-deductible and tax-deferred account from which the worker will finance retirement. ...

Now the first generation of workers who have virtually all their pension saving in defined-contribution plans is nearing retirement, and the news isn’t good. According to a March 19 report from the Employee Benefit Research Institute, only about half of workers nearing retirement have confidence that they have enough money saved for an adequate retirement.

Not surprisingly, retirement saving has taken a back seat to more pressing concerns – coping with unemployment, maintaining standards of living during an era of slow wage growth, putting children through increasingly expensive colleges and so on. ...

This problem is much more severe for black Americans. ... The wealth gap isn’t only racial, it’s generational...

What’s really depressing about these studies is the lack of solutions and the likelihood that the problem will only get worse.

Republicans in Congress have pressed for years to convert Social Security, a classic defined-benefit pension, into a defined contribution plan, and also to convert Medicare into a voucher program. These changes would shift even more of the financial risk in retirement onto families that have yet to adapt to fundamental changes in employer pensions and the economy over the last 30 years. The future doesn’t look pretty.

Members of Congress appear to be eager to cut retirement benefits even further to show they can make the hard choices (and the president seems to be on board). They should raise the payroll cap instead, but the "hard choice" that would hit the people who can afford it isn't under consideration. It's not hard to imagine why.

'Fix the Economy, Not the Deficit'

Dean Baker:

Fix the Economy, Not the Deficit, by Dean Baker, The American Prospect: It’s hard to be happy about the prospect of the sequester ... going into effect at the end of the week. Not only will it will mean substantial cuts to important programs; it will be a further drag on an already weak economy, shaving 0.6 percentage points off our growth rate. ...

Of course, it could be worse. Half of the cuts are on the military side. This will help to bring our bloated military sector closer to its pre-September 11 share of the economy, and going forward, the principle that domestic cuts be matched by cuts in defense spending is certainly better than the idea of attacking domestic spending alone. In addition, the most important programs in the budget—Social Security, Medicare, and Medicaid—have been largely spared the ax—an important victory in the 2011 negotiations. ...

The next step at that point is unclear. President Obama has explicitly offered cuts in Social Security and Medicare if the Republicans will go along with higher taxes. For those who oppose cuts to these programs, the generous view of this maneuver is that he knows that the Republicans won’t budge on taxes; by offering a compromise, he is simply making them look unreasonable. The less  generous view is that he is actually willing to make cuts in these programs, sharing the view of Washington Post-centrist types that seniors are living too high on the hog. 

While the odds are against a “grand bargain” that couples tax increases with cuts to Medicare, Medicaid, and Social Security, it remains a possibility. However, it’s more likely that President Obama and Congress will agree to some scaled-down version of the sequester... This will have the deficit hawks yelling and screaming, but that would be the best plausible outcome from the standpoint of the economy. ...

My view is of the less generous variety. I think Obama is quite willing to make these cuts.

'Brave, Honest Conservatives' and Social Insurance

Brad DeLong:

... How long will it be before the likes of Veronique de Rugy stop denouncing Social Security, Medicare, Unemployment Insurance, etc. as programs that have turned us into "a nation of takers", and stop denouncing these programs beneficiaries as "moochers"?

It is in some ways very odd. It used to be that critics of the welfare state pointed to high net marginal tax rates and argued that they had high deadweight losses. Sometimes they had a point. Then, after bipartisan reforms, we got to a point where there were few high net marginal tax rates large enough to induce large deadweight losses.

And then, in the blink of an eye, the problem became not public-finance deadweight losses but, rather, the moocher class, the nation of takers, etc. ...

Paul Krugman on Paul Ryan's (ahem) defense of Social Security and Medicare:

...everyone has noted Ryan’s raw dishonesty here, let’s not let the cowardice pass unmentioned. If you’re a Randian conservative, as Ryan claims to be, then you should consider Social Security and Medicare every bit as much a part of the moocher conspiracy as Medicaid and food stamps. And don’t say that you pay for what you get: Social Security benefits aren’t proportional to payment, so that the system is somewhat redistributionist, and Medicare benefits don’t depend at all on how much you pay in, so that the system is strongly redistributionist. (You might even say that Medicare takes from each according to his ability, and gives to each according to his needs).

All of this is fine with me, but it should be anathema to Ryan. But he knows that Social Security and Medicare are popular, so he pretends that his radical philosophy has nothing bad to say about these programs, and that we can massively downsize government on the backs of the undeserving poor.

But remember, he’s a Brave, Honest Conservative. Everyone says so.

Speaking of social insurance, here's James Kwak:

...Unsurprisingly, most Americans are split between various misconceptions of what Social Security and Medicare are. Many, particularly right-wing politicians and their media mouthpieces, see them as pure tax-and-transfer programs: they gather money from one set of people and give it to another set of people. This feeds easily into the makers-vs.-takers line, with payroll taxes on workers going to fund benefits for non-workers. From this point of view, they are bad bad bad bad bad and should be cut.

Many others, particularly beneficiaries and people who hope to see beneficiaries, see them as earned benefits. The common conception is that you pay in while you’re working, so you earned the benefits you get in retirement..., you’re just getting back “your” money that you set aside during your career.

Both of these perspectives are wrong, the latter more obviously so. Most people, during their working careers, do not pay nearly enough in payroll taxes to pay for their expected benefits. This is most obvious for Medicare...

The problem with the tax-and-transfer argument is only slightly more subtle. Sure, at any given moment some people pay taxes and others collect benefits (and many do both, since Medicare is funded by general revenues). But most of us will both pay and receive at different points in our lives. So both programs are really more like income-shifting arrangements...

In the inaugural address, I think the president got it basically right. They are risk-spreading programs. You don’t get back exactly what you put in: they have a certain degree of progressivity (although less for Social Security than is commonly imagined). Their main function is to protect people against extreme outcomes by pooling a limited share of our resources.

Yes, rich people end up paying payroll taxes for insurance they end up not needing. But that’s how insurance always works: you pay the premiums hoping you won’t need it. And the key fact is that most young people, whey they start paying payroll taxes, don’t know what their own personal outcomes will be. ... Like any insurance scheme, you can make everyone better off simply by moving money around between different states of the world.

These particular insurance schemes, as the president said, have a moral element to them. They are a way of expressing out solidarity with each other as Americans, people united, however loosely, in a common endeavor. They also have an economic element to them. People protected against bad outcomes are more willing to take the risks needed for a vibrant and prosperous society. They are something to celebrate, not something to be embarrassed about whenever the Republicans come after them.

I've written quite a bit about the insurance aspect as well, e.g. see The Need for Social Insurance:

Economic systems differ in their ability to provide goods and services and in the level of economic risk faced by a typical household. Socialism is a low mean, low variance economic system. With a planned economy, cycles in unemployment do not occur unless mandated by planners. Worker income, though low, is not subject to substantial variation over time. Other economic risks, such as access to housing and risks related to healthcare are also very low since these services are provided by the state. Economic risks for workers are low in such a system, but so is average income.

Under capitalism the average level of income is much higher, but economic risk is higher as well. In a capitalist system, workers can be involuntarily displaced as new products are invented, new production techniques are implemented, production moves outside the country, or inevitable business cycle variation occurs. These are shocks that affect workers independent of their own behavior. A worker who has shown up to work every day and worked hard to support a family can be suddenly unemployed for reasons unrelated to anything connected to his or her own behavior.

As the U.S. entered the 20th century, important social changes arising from industrialization were becoming increasingly evident, and these changes exposed the high degree of economic risk under a capitalist system. Migration to cities and the resulting breakup of the extended family, reliance on wage income as a primary means of support, and increasing life expectancy resulted in increased economic risk for the typical worker relative to the more agrarian economy that existed prior to industrialization.

In an agrarian economy, economic security is provided by extended family relationships coupled with the largely self-sufficient nature of farms. On a farm, a recession is a bad harvest, but it generally does not mean a total lack of income. Times can be tough, food can be very scarce and there can be hunger, but generating a subsistence level of income from the farm is usually possible even in the worst of years. For a worker dependent solely upon wage income, the consequences of a recession are much more severe. A recession means a total lack of income, not just hard times. Without the help of others or the existence of some type of social insurance program, abject poverty is a real possibility (see Life After the Great Depression for descriptions of the misery that followed the Great Depression).

Retirement also takes on a different character. On the farm, retirement meant gradually, if often reluctantly, letting the children take over responsibility for the farm, but it did not mean a total loss of income. Children provided for parents. But an aging worker in a city, perhaps disconnected geographically from their children, faces a different circumstance upon retirement. Such a worker may face a complete loss of income, and disability from age is not always an event that occurs according to plan. Even a worker who has diligently saved for retirement can suddenly become impoverished due to events such unexpected health costs, or even a much longer life than expected.

As industrialization progressed, 1920 marks a benchmark year where, for the first time, more than half of the population lived in cities. When the Great Depression hit around a decade later, the social changes the U.S. was experiencing and the need for new ideas regarding the government’s responsibility for the economic security of its citizens became clear. The Great Depression made it evident that in a capitalist system, where the whimsies of the marketplace can wreak havoc on people’s lives, the government has an obligation to provide economic security. It was also evident that the private sector did not provide the needed level of insurance and that government intervention was required to overcome this problem (due to both moral hazard and asymmetric information problems in the private insurance market).

It is important that the economy be allowed to change with new technology and changing preferences, but the consequences for innocent workers affected by such changes is a social responsibility that needs to be addressed. In addition, as extended family relationships are hindered by geography and the social contract between parents and children breaks down, the elderly need a way to avoid poverty. Programs such as Unemployment Compensation, Medicare, and Social Security arose as a means to mitigate these economic risks under capitalism using the least amount of society’s valuable resources.

Drawing a rough analogy, socialism is like investing in T-Bills. Low risk, but low return. Capitalism is like the stock market. There is a higher average return accompanied by higher risk. Financial theory tells how to insure against such risks and there is no reason why this cannot be applied in the social insurance arena to smooth variations in income.

There is a need for social insurance under capitalism.

'Why the Social Security Trust Fund is Real'

pgl at Econospeak:

Kevin Drum on Why the Social Security Trust Fund is Real, by pgl: Kevin Drum has a short and sweet analogy for the position that the assets in the Social Security Trust Fund are real:

Now, suppose this surplus had been invested in corporate bonds. What exactly would that mean? It means that workers would be giving money to corporations, who would turn around and spend it. In return, the Social Security trust fund would receive bonds that represent promises to repay the money later out of the company's cash flow. In effect, it gives workers a claim on the cash flows of the company at a later date in time. When that time comes, the company would have to pay up, which would make it less profitable. If the company was already unprofitable, it would make their deficit even worse. If that's what had happened, there would be no confusion about the trust fund. Everyone agrees that corporate bonds are real things, and that the corporations who sell them have an obligation to pay them back, even though it means less money for shareholder dividends.

He then substitutes treasury bonds for corporate bonds and draws the same conclusion. QED! While I agree, let me try to offer the rightwing rebuttal, which begins with the proposition that the general fund is essentially bankrupt. Is it and why? Well – it is true that the Reagan years cut taxes on the very rich just as it raised payroll taxes. It is also true that President Reagan increased defense spending. Although we had the peace dividend and some reversals of those tax cuts during the 1990’s, George W. Bush put us back on the path of high defense spending and low taxes on the rich in 2001. The Republican Party seems to believe that we must forever have high defense spending and low taxes on the rich. Well if that is true, it is analogous to paying high dividends to corporate shareholders even as corporate profits are well below the dividend policy. But do we really have to accept this Republican belief system? No we can honor these promises to pay Social Security benefits if we as a nation are willing to tell the rich to pay higher taxes and tell the military industrial complex that it gets less largesse. But I guess some Republicans see the promises of low tax rates for the rich and continuing largesse for the military industrial complex as sacrosanct, which of course leads them to conclude that the problem is those promises to Social Security beneficiaries.

The tax cuts can also be viewed as a loan from the Social Security Trust Fund that didn't pay off as promised.

Should We Extend the Payroll Tax Cut?

Jared Bernstein says we should renew the payroll tax cut:

When You’re Trying to Decide if We Need to Renew the Payroll Tax Break, Picture This. by Jared Bernstein: It’s just a slide…in both senses of the word…of the real earnings—pretax, which is important—of middle-wage workers: blue collar workers in manufacturing and non-managers in services, adjusted for inflation. And it’s not inflation holding back these wage rates—it’s the weak economy. This series starts in 1964, and in nominal terms, it’s never grown more slowly than it has this year.

Source: BLS

So it is to his great credit that the President proposed another round of the payroll tax break, or something like it, as part of his opening bid for the cliff negotiations... With unemployment still way too high, we need to continue to support workers’ paychecks and temporarily offset some of the fiscal contraction from the tax increases and spending cuts that are likely to come out of the cliff negotiations.

I know that adding a spending program to a deficit reduction package may sound counterintuitive, but it’s really countercyclical. And by dint of being temporary—we could even write in the legislation that it expires when unemployment goes (and stays) below 7%–it won’t affect the medium-term deficit. ...

I think the payroll tax should be extended, but as I noted when this first came up, I'd prefer the "optics" to be different:

I see the payroll tax reduction as potentially troublesome... Though the revenue the Social Security system loses due to the tax cut will be backfilled from general revenues, the worry is that the tax cut will not expire as scheduled -- temporary tax cuts have a way of turning permanent. That's especially true in this case since labor markets are very unlikely to recover within the next year and it will be easy to argue against the scheduled "tax increase" for workers. In fact, it will never be a good time to increase taxes on workers and if the tax cut is extended once, as it's likely to be, it will be hard to ever increase it back to where it was. That endangers Social Security funding -- relying on general revenue transfers sets the system up for cuts down the road -- and for that reason I would have preferred that this be enacted in a way that produces the same outcome, but has different political optics. That is, leave the payroll tax at 6% on the books and keep sending the money to Social Security, and fund a 2% tax "rebate" out of general revenues. The rebate would come, technically, as a payment from general revenues rather than through a cut in the payroll tax, but in the end the effect would be identical. But the technicality is important since it preserves the existing funding mechanism for Social Security even if the taxes are permanently extended.

[On the connection between the payroll tax and support for Social Security, see here. As Bruce Bartlett notes while expressing similar worries, "Arch Social Security hater Peter Ferrara once told me that funding it with general revenues was part of his plan to destroy it by converting Social Security into a welfare program, rather than an earned benefit. He was right."]

The Real Trust Fund Fiction

Kevin Drum explains that the surplus in the Social Security Trust fund allowed taxes on the wealthy to be cut, and that it's only fair that taxes on the wealthy should go back up to repay the money in the Trust Fund that was used to finance lower taxes. If it's not paid back, then it is, plainly and simply, a raid by the wealthy (through tax cuts) on the funds working class households are relying upon, and are counting on -- they held their end of the bargain and paid more into the system that it needed for decades -- for their retirements:

No, the Social Security Trust Fund Isn't a Fiction, by Kevin Drum: Charles Krauthammer is upset that Dick Durbin says Social Security is off the table in the fiscal cliff negotiations because it doesn't add to the deficit...

What Krauthammer means is that as Social Security draws down its trust fund, it sells bonds back to the Treasury. The money it gets for those bonds comes from the general fund, which means that it does indeed have an effect on the deficit. That much is true. But the idea that the trust fund is a "fiction" is absolutely wrong. ...

Starting in 1983, the payroll tax was deliberately set higher than it needed to be to cover payments to retirees. For the next 30 years, this extra money was sent to the Treasury, and this windfall allowed income tax rates to be lower than they otherwise would have been. During this period, people who paid payroll taxes suffered from this arrangement, while people who paid income taxes benefited.

Now things have turned around. As the baby boomers have started to retire, payroll taxes are less than they need to be to cover payments to retirees. To make up this shortfall, the Treasury is paying back the money it got over the past 30 years, and this means that income taxes need to be higher than they otherwise would be. For the next few decades, people who pay payroll taxes will benefit from this arrangement, while people who pay income taxes will suffer.

If payroll taxpayers and income taxpayers were the same people, none of this would matter. The trust fund really would be a fiction. But they aren't. Payroll taxpayers tend to be the poor and the middle class. Income taxpayers tend to be the upper middle class and the rich. ... When wealthy pundits like Krauthammer claim that the trust fund is a fiction, they're trying to renege on a deal halfway through because they don't want to pay back the loans they got.

As it happens, I think this was a dumb deal. But that doesn't matter. It's the deal we made, and the poor and the middle class kept up their end of it for 30 years. Now it's time for the rich to keep up their end of the deal. Unless you think that promises are just so much wastepaper, this is the farthest thing imaginable from fiction. It's as real as taxes.

Don't Eliminate the Link between Social Security Contributions and Benefits

Because of the way the Social Security program is funded -- through a payroll tax on workers along with an employer contribution -- many people believe there is an account for them at some government agency holding those contributions, or at least giving them credit for them, and that they will be able to collect their contributions when they retire. It's their money, collected from them monthly, and no matter their income level they have a right to get that money back when they retire. Try telling them that they don't. Even those people who understand that if their income is high enough they may not receive payments equal to all they put in get something back -- it's there for them no matter what -- and this increases support for the program.

But if we change the funding so that payments for Social Security come out of the general fund -- the money the government collects through taxes for all purposes -- and impose means testing (i.e. phase out the payments once income is high enough), the link between contributions and benefits would be broken and I fear support for the program would be broken as well. It would become another welfare program, and attacked. When programs are supported through the general fund there is competition for funding, there is never enough money to go around, and it wouldn't be long before the people in power, or with lots of influence over those in power (who don't really need Social Security in most cases) would argue that the money is best used elsewhere.

I am far from the first person to make this point:

Ross Douthat Argues that Social Security Would be Easier to Cut If It Were Changed from a Social Insurance Program to a Welfare Program, by Dean Baker: Ross Douthat argues convincingly that if we eliminated the link between contributions and benefits it would be much easier politically to cut Social Security. Of course he thinks ending the link would be a good idea for that reason, but his logic is certainly on the mark, people will more strongly protect benefits that they feel they have earned. ...

The payroll tax certainly can cover the program's expenses. In fact, had it not been for the upward redistribution of income over the last three decades, which nearly doubled the share of wage income going over the cap on taxable income, the projected 75-year shortfall would be about half of its current level.

Even with the current projected shortfall, if ordinary workers shared in projected productivity growth over the next three decades, a tax increase equal to 6 percent of their wage growth over this period would be sufficient to make the program fully solvent. The problem is clearly the policies that led to the upward redistribution of income..., not Social Security.

It is worth pointing out that when Douthat proposes "means-testing for wealthier beneficiaries," his notion of wealthy means school teachers and firefighters, not Bill Gates and Mitt Romney. ...

Peggy Noonan said today that Republicans will accept tax increases if there is significant entitlement reform. Assuming she can be believed (a rather heroic assumption), and that she speaks for a significant portion of the Republican Party in saying this (which is probably true, so I'm a bit less embarrassed about quoting her), it's clear that Republicans are going to demand cuts to programs like Social Security as a condition of raising taxes.

Democrats need to remember who won the election, and that despite their act to the contrary, the Republicans are not the ones calling the shots at this point. Democrats have considerable leverage, and they need to use it to protect programs their core constituency values highly. Social Security is at the top of the list.

Paul Krugman: Life, Death and Deficits

 Raising the eligibility age for Social Security and Medicare is *not* the answer:

Life, Death and Deficits, by Paul Krugman, Commentary, NY Times: America’s political landscape is infested with many zombie ideas... And right now the most dangerous zombie is probably the claim that rising life expectancy justifies a rise in both the Social Security retirement age and the age of eligibility for Medicare... — and we shouldn’t let it eat our brains. ...

Now, life expectancy at age 65 has risen... But the rise has been very uneven..., any further rise in the retirement age would be a harsh blow to Americans in the bottom half of the income distribution, who aren’t living much longer, and who, in many cases, have jobs requiring physical effort that’s difficult even for healthy seniors. And these are precisely the people who depend most on Social Security. ...

While the United States does have a long-run budget problem, Social Security is not a major factor... Medicare, on the other hand, is a big budget problem. But raising the eligibility age, which means forcing seniors to seek private insurance, is no way to deal with that problem. ...

What would happen if we raised the Medicare eligibility age? The federal government would save only a small amount of money, because younger seniors are relatively healthy... Meanwhile, however, those seniors would face sharply higher out-of-pocket costs. How could this trade-off be considered good policy?

The bottom line is that raising the age of eligibility for either Social Security benefits or Medicare would be destructive, making Americans’ lives worse without contributing in any significant way to deficit reduction. Democrats ... who even consider either alternative need to ask themselves what on earth they think they’re doing.

But what, ask the deficit scolds, do people like me propose doing about rising spending? The answer is to do what every other advanced country does, and make a serious effort to rein in health care costs. Give Medicare the ability to bargain over drug prices. Let the Independent Payment Advisory Board, created as part of Obamacare to help Medicare control costs, do its job instead of crying “death panels.” (And isn’t it odd that the same people who demagogue attempts to help Medicare save money are eager to throw millions of people out of the program altogether?) ...

What we know for sure is that there is no good case for denying older Americans access to the programs they count on. This should be a red line in any budget negotiations, and we can only hope that Mr. Obama doesn’t betray his supporters by crossing it.

The Costs and Benefits of Raising the Retirement Age

The proposal to raise the retirement age for Social Security (as opposed to, say, raising the payroll cap) is sure to come up during budget negotiations. It always does, and already has. Here's a very old post (from 2005, with a few minor changes) on that topic:

A recent article claims that raising the retirement age is the most obvious solution to solvency problems for Social Security. While I don’t agree with the doomsayers on the solvency issue, it is still worthwhile to look at the costs and benefits of such a proposal. ...

Is raising the retirement the most obvious solution? There are two benefits with respect to solvency. Because people work longer, raising the retirement age increases revenues coming into the Social Security system. Second, because people retire later, the payout to retirees falls.   

But what are the costs?

1. An increase in life expectancy does not necessarily imply that people are healthier at age 65 or 70 than before. Suppose, for example, that medical advances are discovered that extend the end of life by several years, but have no effect on health prior to the last few years of life. In such a case there would be an increase in life expectancy, but no increase in the health of workers at the age of retirement. If people aren’t healthier, then increasing the retirement age imposes a hardship over and above that faced by current retirees.

2. It’s already difficult for elderly workers to find employment, and when they do they are often underemployed relative to their skill levels. Raising the retirement age will make this worse.

3. What about workers employed in physically demanding occupations? Is it reasonable to ask them to work until, say, age 72? If not, how equitable is it to have some workers work until 72, and others allowed to retire at a younger age depending on their occupation?

4. Will this distort occupational choice decisions? Will workers, especially those who are seeking work in the years close to retirement, choose strenuous jobs in order to be allowed to retire earlier? How will we decide when a worker is unable to work due to reasons associated with age?

5. The life expectancy of some groups of workers is lower than for others. If poorer workers die younger than richer workers on average, and they do, then raising the retirement age will have a larger impact on low income workers and thus, in essence, be regressive.

Do the benefits exceed the costs? I don't think so. ...

A comparison of the costs and benefits or raising the payroll cap -- which mostly affects the well-off (hence their continued push of other alternatives that shift the costs elsewhere) -- leads to a different conclusion, at least for me.

[Update: I don't get it either when looking just at the numbers, but looking at it through an ideological lens explains the desire to make people believe that Social Security is in serious trouble, and hence in need of serious cuts. Starve the Beast through tax cuts or deception, it doesn't matter, the point is to reduce the government's provision of social insurance by whatever means gets the job done.]

Romney's Regressive Plan for Social Security

Via email:

The Best Political Case Against Romney (Which Obama Hasn't Made): Probably the election's biggest shocker is the Obama campaign's virtual silence on what is Democrats' single best issue and, as this Bloomberg piece explains, the clearest proof that Romney's agenda puts the wealthy over the middle class.

Bloomberg explains that Romney's Social Security plan puts 10 times the burden on the middle class than it does on the rich. While all the focus has been on explicit tax bills, Romney's Social Security plan is like a $1,000 tax hike for a $45k/year worker, or 2.3% of wages. That's 10 times the implicit 0.23% tax hike for a $1 million earner.

This goes a long way to explaining why Romney is leading on the economy; Obama has been so focused on the invisible parts of Romney's agenda, he has never pointed out the smoking guns that would have -- and still can -- destroy Romney's credibility as an advocate for the middle class.

Without the wealthy paying their fare share of a Social Security fix, it would be quite forceful to hit Romney's plan to raise the retirement age to nearly 70, which is OK for Mitt's banker friends, but not so much for police officers, miners and those who do physical work.

The kicker is that Ryan said at the VP debate the Romney's Social Security cuts hit the "wealthy" and Romney says they target higher income workers. This is simply false. The attached Bloomberg piece linked to above shows that the cuts would almost certainly hit the top 70% of earners -- as low as $30k/yr. Ryan made the same "wealthy" claim about his 2010 plan -- here at the 1:15 mark.

Romney's Social Security plan provides the substantive evidence that makes the rest of his agenda look suspect. Romney's carried interest loophole does the same thing in a way that is quite powerful: Instead of analyzing his plans, we can see his actions since he started running for president.

You may recall that when Romney started running in 2007, Democrats began trying to close this loophole that lets investment managers pay less than half the regular income tax rate on a big part of their compensation.

Keep in mind that Romney's top economist Greg Mankiw wrote back in 2007 that preferential tax treatment of carried interest was unjustified. Further, even 3 out 4 on Wall Street say it is welfare for millionaires (Investment pros see Romney's tax break as welfare for the Mitt ).

So we know that Romney has netted millions from this loophole since he started running for president, while his rich donors have netted billions and it has cost the government about $15 bil.

Bottom line: Romney calls this deficit a "moral issue" yet he's been receiving millions in welfare for millionaires while calling for healthcare cuts for the poor and uninsured and calling for retirement age hikes for Social Security and Medicare. Though he is personally generous, it is mind-boggling that his moral compass has been pointing at everyone but himself and his donors.

Next, Romney must be the first presidential candidate in history running on plan to increase the number of uninsured -- by 45 million, according to a Commonwealth study. Getting rid of ObamaCare's backstop and hiking Medicare's retirement age will leave a gaping hole in the safety net that millions in the middle class will fall through.

When you add this all up and consider that Romney has been running for president for 6 years but won't reveal details of his tax, deficit, healthcare & immigration plans, it is clear that his assurances don't count for much.

[Let me add this from pgl at Econospeak: Social Security: Romney Rehashes Robert Bennett’s Regressive Plan.]

Paul Krugman: The Real Referendum

If Obama wins, will he betray the "clear mandate for preserving and extending" the social insurance system that voters will have given to him?:

The Real Referendum, by Paul Krugman, Commentary, NY Times: Republicans came into this campaign believing that it would be a referendum on President Obama, and that still-high unemployment would hand them victory on a silver platter. But given the usual caveats — a month can be a long time in politics... — it doesn’t seem to be turning out that way.

Yet there is a sense in which the election is indeed a referendum... Voters are, in effect, being asked to deliver a verdict on the legacy of the New Deal and the Great Society, on Social Security, Medicare and, yes, Obamacare...

If the polls are any indication, the result of that referendum will be a clear reassertion of support for the safety net, and a clear rejection of politicians who want to return us to the Gilded Age. But here’s the question: Will that election result be honored?

I ask that question because we already know what Mr. Obama will face if re-elected: a clamor from Beltway insiders demanding that he immediately return to his failed political strategy of 2011, in which he made a Grand Bargain over the budget deficit his overriding priority. Now is the time, he’ll be told, to fix America’s entitlement problem once and for all. There will be calls ... for him to officially endorse Simpson-Bowles...

And Mr. Obama should just say no,... the fact is that Simpson-Bowles is a really bad plan, one that would undermine some key pieces of our safety net. And if a re-elected president were to endorse it, he would be betraying the trust of the voters who returned him to office. ...

Now, there’s no mystery about why Simpson-Bowles looks the way it does. It was put together in a political environment in which progressives, and even supporters of the safety net as we know it, were very much on the defensive — an environment in which conservatives were presumed to be in the ascendant, and in which bipartisanship was effectively defined as the effort to broker deals between the center-right and the hard right.

Barring an upset, however, that environment will come to an end on Nov. 6. This election is, as I said, shaping up as a referendum on our social insurance system, and it looks as if Mr. Obama will emerge with a clear mandate for preserving and extending that system. It would be a terrible mistake, both politically and for the nation’s future, for him to let himself be talked into snatching defeat from the jaws of victory.

'No Changes in Social Security'

I wish I could believe this:

Biden guarantees: 'There will be no changes in Social Security', by Michael O'Brien, NBC News: ..."Hey, by the way, let's talk about Social Security," Biden said..."Number one, I guarantee you, flat guarantee you, there will be no changes in Social Security," ... "I flat guarantee you." ...

But the first time Republicans offer a trade ("tell you what, if you cut Social Security, we'll stop cutting taxes"), will the administration take it? I'm afraid they will.

Many Americans Die with ‘Virtually No Financial Assets'

The importance of Social Security:

Study: Many Americans die with ‘virtually no financial assets’, by Peter Dizikes, MIT News Office: It is a central worry of many Americans: not having enough money to live comfortably in old age. Now an innovative paper co-authored by an MIT economist shows that a large portion of America’s older population has very little savings in bank accounts, stocks and bonds, and dies “with virtually no financial assets” to their names.

Indeed, about 46 percent of senior citizens in the United States have less than $10,000 in financial assets when they die. Most of these people rely almost totally on Social Security payments as their only formal means of support, according to the newly published study, co-authored by James Poterba of MIT, Steven Venti of Dartmouth College, and David A. Wise of Harvard University.

That means many seniors have almost no independent ability to withstand financial shocks, such as expensive medical treatments that may not be covered by Medicare or Medicaid, or other unexpected, costly events.

“There are substantial groups that have basically no financial cushion as they are reaching their latest years,” says Poterba, the Mitsui Professor of Economics at MIT.

However, the study — one of the first to examine Americans’ end-of-life finances — also reveals a diversity of outcomes among senior citizens. Between 1993 and 2008, it found, unmarried older individuals had median wealth of about $165,000 roughly a year before they died — a figure that includes current and future Social Security income, job-related pension benefits, home equity and financial assets. In the same period, the median wealth for continuously married senior citizens, roughly a year before they died, was more than $600,000.

“There is a lot of divergence in how people are doing,” Poterba says. Those disparities also complicate the public-policy issues relating to the new findings.

“One of the clear messages is that it is very hard to do a one-size-fits-all retirement policy,” Poterba says. “We need to recognize that, for example, if we were to substantially reduce Social Security benefits for those later in life, that there is a share of the elderly households for whom that would translate very directly into reduced income, because they seem to have accumulated little in the way of financial resources.” ...[continue reading]...

Republicans would likely respond that people have so few assets because they rely upon the government to take care of them -- cut Social Security and they'd save more -- but history suggests otherwise. There's a reason we have a Social Security program (and other programs such as Medicare), and reducing benefits would make it even harder than it already is for a substantial number of the elderly.

The Social Security Shortfall and the Cost of the Bush Tax Cuts

[source]

Health Care Costs are the Problem

Another reminder that the long-run budget problem is a health care cost problem, a problem that exists in both the private sector and in government. This is Nancy Folbre:

...Spending on Social Security, often treated as the greatest bugaboo of our aging society, has remained at 4.5 to 5 percent of G.D.P. since 1985. The already carried out transition to a higher retirement age is contributing to cost containment.

The scary increases in government spending have come in Medicaid and Medicare. These two programs, which consumed 1.2 percent of G.D.P. in 1975, reached 4.1 percent of G.D.P. in 2008.

These increases have less to do with government spending than with the increased costs of health care, regardless of who is paying the bill. ...

All government programs deserve critical scrutiny, and there is plenty of room for meaningful debate over the relative efficiency of public versus private provision. But there is no evidence that social spending in the United States is approaching some upper limit of feasibility.

What is unsustainable (or should be) is the current level of confusion, misinformation and paranoia about the future of the so-called welfare state.

"Let's Beef up Social Security Benefits"

More on Social Security:

Let's beef up Social Security benefits instead of cutting them, by Michael Hiltzik: Advocates for strengthening Social Security have come to dread the release of the annual report of the program's trustees. That's because the event has become the basis for more hand-wringing about Social Security's fiscal condition and calls to cut benefits for current and future retirees. This week's release of the 2012 report is no exception. ...

What won't be adequately explained is that the program isn't "insolvent" or "bankrupt." ... Economic recovery alone will improve the program's fiscal condition, and the trustees say that even if Congress does absolutely nothing, in 2033 there still will be money to pay about 75% of currently scheduled benefits.

And by the way, despite facing the worst economic conditions in its history, the program ran a surplus of $69 billion last year, increasing the trust fund to nearly $2.7 trillion. ...

It's time to shut down the talk of cutting benefits, which serves nobody, and pump up the volume on making them better. ... Of the customary three legs of the retirement stool, two — personal savings and employer-paid pensions — have been shattered into smithereens by the markets, high unemployment and changes in workplace benefits. Social Security is the third leg. ...

Modernizing Social Security is crucial today because the actions of government and industry have increased Americans' dependence on the program. ...

Undoubtedly you're going to hear that improving Social Security will bankrupt America. This is the mating cry of the haves-and-want-mores, and it's malarkey. Federal taxes ... amounted to about 15.4% of our gross national product last year... That's lower than the level of every other industrialized country...

Isn't it curious that the same people who insist that America is the greatest, richest country in the world, ever, are those who insist that there's no way we can afford to provide for our elderly, our disabled and the survivors of our deceased workers to the same degree as the rest of the industrialized world? ...

We can afford to give people a decent retirement. People who benefitted from the hard work of others -- those who reaped the gains of increasing inequality and have more than enough -- can do more to help provide a decent retirement to the people who toiled day in and day out to help create that wealth. And as I've said again and again, the income distribution mechanism has gone awry in recent decades. People at the lower income are not getting what they have earned, and people at the top are getting more than what they contribute. So I view this as simply returning income to its rightful owners.

Raise the Cap and Close the Gap

Dean Baker:

The Primary Cause of Social Security's Bleak Outlook Is Upward Redistribution, by Dean Baker: In an article on the release of the 2012 Social Security trustees report the Washington Post told readers that:

"Social Security’s bleak outlook is primarily driven by the ever-larger numbers of people in the baby boom generation entering retirement."

Actually the fact that baby boomers would enter retirement is not news. Back in 1983, the Greenspan Commission knew that the baby boomers would retire, yet they still projected that the program would be able to pay all promised benefits into the 2050s.

The main reason that the program's finances have deteriorated relative to the projected path is that wage growth has not kept pace with the path projected. This is in part due to the fact that productivity growth slowed in the 80s, before accelerating again in the mid-90s and in part due to the fact that much more wage income now goes to people earning above the taxable cap.

In 1983 only 10 percent of wage income fell above the cap and escaped taxation. Now more than 18 percent of wage income is above the cap.

Raising the cap is my favored solution, but (surprise) somehow raising taxes of those with the most political power is not on the agenda. Instead, the proposed solutions always seem to hit those who are the most politically and economically vulnerable.

Peter Dorman also weighs in:

For the past thirty years we have seen repeated campaigns to eviscerate Social Security—to privatize it, siphon off its finances, drain it of its essential social insurance character.  These have failed, not because of the brilliance or commitment of its defenders, but simply because it fulfills a vital social function and is wildly popular.  Even those who, in their heart of hearts, want to crush it to bits, claim to be in favor of “saving” it.  So what’s the strategy of the anti-SS minions?

Cynicism.  Convince younger voters, whose benefits are still decades away, that the program is dying a slow but certain death, and that politicians are too myopic or pandering or just stupid to do anything about it.  From time to time I poll my students, and by a big majority they always tell me that SS will not be around to support them in their retirement.  (Not that this has provoked a big Feldsteinesque spike in their personal savings....)  As this mindset takes hold, it becomes easier to simply tune out the debate over SS.  After all, it’s not like it’s actually going to be there when I’m old, no matter what they say, right?  At some point, it goes from being a third rail to a footnote to just background noise, to mangle a bunch of metaphors.

What I’d like to see are news stories that say something like, “Social Security has had its ups and downs, but it’s in better financial shape now than it was a generation ago, and unless its enemies prevail, it will be there for you when you need it.”

People also need to realize that "Social Security faces a shortfall — NOT bankruptcy — a quarter of a century from now. OK, I guess that’s a real concern. But compared to other concerns, it’s really pretty minor, and doesn’t deserve a tenth the attention it gets. It’s also worth noting that even if the trust fund is exhausted and no other financing provided, Social Security will be able to pay about three-quarters of scheduled benefits, which would mean real benefits higher than it pays now."

Notice that even under the worse case scenario, real benefits would be higher than they are now. The benefits would not keep up with increases in productivity as they do presently -- payments rise as the standard of living rises -- but the benefits would still rise as much or more than inflation. So today's standard of living would still be available even in the worst possible case. But there is the problem of how to cover the productivity increases over the next quarter century. What to do?

Raise the cap and close the gap.

"How Occupy Stopped the Supercommittee"

Dean Baker:

How Occupy stopped the supercommittee, by Dean Baker, CIF: Congress gave us a wonderful Thanksgiving present when we got word that the supercommittee "superheroes" were hanging up their capes. ...

It is important to remember ... (by looking at the website of the Congressional Budget Office) that we do not have a chronic deficit problem. In 2007, prior to the collapse of the housing bubble and the resulting economic downturn, the deficit was just 1.2% of GDP. The deficit was projected to remain near this level for the immediate future... All this changed when the collapse of the housing bubble wrecked the economy. The story is simple... This is what created the large deficits that we are now seeing.

The $1tn-plus deficits are replacing lost private-sector demand. Those who want lower deficits now also want higher unemployment. They may not know this, but that is the reality...

While this is the reality, the supercommittee was about turning reality on its head. Instead of the problem being a Congress that is too corrupt and/or incompetent to rein in the sort of Wall Street excesses that wrecked the economy, we were told that the problem was a Congress that could not deal with the budget deficit.

To address this invented problem, the supercommittee created an end-run around the normal congressional process. ... Their strategy was derived from the conclusion that it would not be possible to make major cuts to social security and Medicare through the normal congressional process because these programs are too popular. ... The hope was that both parties would sign on to cuts in these programs, so that voters would have nowhere to go.

However, this effort went down in flames this week. Much of the credit goes to the Occupy Wall Street (OWS) movement... It has put inequality and the incredible upward redistribution of income over the last three decades at the center of the national debate. In this context, it became impossible for Congress to back a package that had cuts to social security and Medicare at its center, while actually lowering taxes for the richest 1%, as the Republican members of the supercommittee were demanding.

Now that the supercommittee is dead, Congress must be forced to address the real crisis facing the country: the 26 million people who are unemployed, underemployed, or out of the labor force altogether. This would not be difficult if we had a functional Congress...

There is a long-term issue with the deficit, but as every budget analyst knows, this is a healthcare story. If the United States fixes its healthcare system, then the deficit will not be a major problem. If we don't, then our broken healthcare system will wreck the economy regardless of what we do with Medicare, Medicaid and other public sector healthcare programs. ...

[I made many of the same points here.]

Contractionary Fiscal Policy is Contractionary

Robert Kuttner is unhappy with the Washington Post:

Post Hoc Fallacy, by Robert Kuttner, Prospect: Wednesday’s Washington Post deserves some kind of perverse award for advocacy journalism—in this case, for advocating the proposition that dire economic consequences will ensue if the congressional Super Committee fails to cut a deal for drastic deficit reduction. This is, of course, one side of an argument.

Those on the other side, including myself, have argued that austerity in a deep recession makes no economic sense...

Moreover, Social Security does not belong in this conversation, and Democrats are better off, substantively and politically, defending it against Republican proposed cuts rather than lumping it in with budget talks....

The Post has been an editorial champion of the Super Committee and austerity politics, and of the bogus claim that Social Security is partly responsible for the current deficit...

A companion piece, by Ann Kornblut, was headlined, “White House Girds for Failure.” ... OMB Director Jack Lew is quoted, “I think it’s important that they succeed.” Again, the subtext of the piece is that the economy really needs this deal.

But the absolute corker is a companion piece by Neil Irwin and Ylan Q. Mui, with the economically absurd headline and premise, “Supercommittee could add uncertainty to holiday shopping.”

The writers quote leaders of trade associations saying that the committee needs to act to restore confidence. This is Paul Krugman’s famous "confidence fairy." ...

So let’s get this straight. If the committee does agree to cut the budget by some $1.2 trillion, including people’s Medicare, Medicaid, and Social Security, that will make them more likely to go out and shop. But if the committee fails to extract cuts—putting off budget austerity until 2013—that will make people more hesitant to spend? Where do these people study their economics? ...

The Super-Duper Job Creation Committee is, of course, nowhere to be found.

"The Myth of the Wealthy Elderly"

Dean Baker:

The Myth of the Wealthy Elderly, by Dean Baker: The austerity gang seeking cuts to Social Security and Medicare has been vigorously promoting the myth that the elderly are an especially affluent and privileged group. Their argument is that because of their relative affluence, cuts to the programs upon which they depend is a simple matter of fairness. There were two reports released last week that call this view into question.

The first was a report from the Census Bureau that used a new experimental poverty index. This index differed from the official measure in several ways; most importantly it includes the value of government non-cash benefits, like food stamps. It also adjusts for differences in costs by area and takes account of differences in health spending by age.

While this new measures showed a slightly higher overall poverty rate the most striking difference between the new measure and the official measure was the rise in the poverty rate among the elderly. Using the official measure, the poverty rate for the elderly is somewhat lower than for the adult population as a whole, 9 percent for the elderly compared with 14 percent for the non-elderly adult population. However with the new measure, the poverty rate for the elderly jumps to 14 percent, compared with 13 percent for non-elderly adults.

By this higher measure, we have not been nearly as successful in reducing poverty among the elderly as we had believed. While Social Security has done much to ensure retirees an income above the poverty line, the rising cost of health care expenses not covered by Medicare has been an important force operating in the opposite direction. ...

It is also worth remembering that the Medicare premium is projected to rise considerably more than the cost of living each year. This means that as retirees age, rising Medicare premiums will be reducing the buying power of their Social Security check each year.  And this is the median; half of all seniors will have less income than this to support themselves.

This is the group that the Very Serious People in Washington want to target for their deficit reduction. While the Very Serious People debate whether people who earn $250,000 a year are actually rich when it comes to restoring the tax rates of the 1990s, they somehow think that seniors with incomes under $30,000 a year must sacrifice to balance the budget. There is a logic here, but it ain’t pretty.

Raising the payroll tax limit for Social Security would provide needed revenues in a way that is skewed heavily toward the wealthy. However, it would also be a tax increase and we can't have that. But cutting benefits and putting more of the elderly in jeopardy of living in poverty? Apparently that's not a problem.

SSA Historical Research Note #25: Ponzi Schemes vs. Social Security

As a follow-up to this:

Ponzi Schemes vs. Social Security, SSA, January 2009: ...The Logic of Pay-As-You-Go Systems In contrast to a Ponzi scheme, dependent upon an unsustainable progression, a common financial arrangement is the so-called "pay-as-you-go" system. Some private pension systems, as well as Social Security, have used this design. A pay-as-you-go system can be visualized as a pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end.

There is a superficial analogy between pyramid or Ponzi schemes and pay-as-you-go programs in that in both money from later participants goes to pay the benefits of earlier participants. But that is where the similarity ends. A pay-as-you-go system can be visualized as a simple pipeline, with money from current contributors coming in the front end and money to current beneficiaries paid out the back end.

So we could image that at any given time there might be, say, 40 million people receiving benefits at the back end of the pipeline; and as long as we had 40 million people paying taxes in the front end of the pipe, the program could be sustained forever. It does not require a doubling of participants every time a payment is made to a current beneficiary, or a geometric increase in the number of participants. (There does not have to be precisely the same number of workers and beneficiaries at a given time--there just needs to be a fairly stable relationship between the two.) As long as the amount of money coming in the front end of the pipe maintains a rough balance with the money paid out, the system can continue forever. There is no unsustainable progression driving the mechanism of a pay-as-you-go pension system and so it is not a pyramid or Ponzi scheme.

In this context, it would be most accurate to describe Social Security as a transfer payment--transferring income from the generation of workers to the generation of retirees--with the promise that when current workers retiree, there will be another generation of workers behind them who will be the source of their Social Security retirement payments. So you could say that Social Security is a transfer payment, but it is not a pyramid scheme. There is a huge difference between the two, and only a superficial similarity.

If the demographics of the population were stable, then a pay-as-you-go system would not have demographically-driven financing ups and downs and no thoughtful person would be tempted to compare it to a Ponzi arrangement. However, since population demographics tend to rise and fall, the balance in pay-as-you-go systems tends to rise and fall as well. During periods when more new participants are entering the system than are receiving benefits there tends to be a surplus in funding (as in the early years of Social Security). During periods when beneficiaries are growing faster than new entrants (as will happen when the baby boomers retire), there tends to be a deficit. This vulnerability to demographic ups and downs is one of the problems with pay-as-you-go financing. But this problem has nothing to do with Ponzi schemes, or any other fraudulent form of financing, it is simply the nature of pay-as-you-go systems. ...

Obama Offers to Cut Social Security

This is beyond disappointing:

President Looks for Broader Deal on Deficit Cuts, by Carl Hulse, adn Mark Landler, NYTimes: Heading into a crucial negotiating session on a budget deal on Thursday, President Obama has raised his sights and wants to strike a far-reaching agreement on cutting the federal deficit as Speaker John A. Boehner has signaled new willingness to bargain on revenues. ...

The president’s renewed efforts follow what knowledgeable officials said was an overture from Mr. Boehner, who met secretly with Mr. Obama last weekend, to consider as much as $1 trillion in unspecified new revenues as part of an overhaul of tax laws in exchange for an agreement that made substantial spending cuts, including in such social programs as Medicare and Medicaid.

The intensifying negotiations between the president and the speaker have Congressional Democrats growing anxious, worried they will be asked to accept a deal that is too heavily tilted toward Republican efforts and produces too little new revenue relative to the magnitude of the cuts. Congressional Democrats said they were caught off guard by the weekend White House visit of Mr. Boehner...

Officials said Mr. Boehner suggested that he was open to the possibility of $1 trillion or more in new revenue that would be generated by addressing tax issues already raised in the talks...

One source familiar with the talks said the speaker had put forward options on how to proceed, including making a commitment to a tax code overhaul that would lower rates while closing loopholes, ending deductions and instituting other changes to generate substantial new revenue. ...

I can't imagine why they're worried (and this doesn't even mention the increased risk to the recovery posed by larger budget cuts):

In debt talks, Obama offers Social Security cuts, by Lori Montgomery, Washington Post: President Obama is pressing congressional leaders to consider a far-reaching debt-reduction plan that would force Democrats to accept major changes to Social Security and Medicare in exchange for Republican support for fresh tax revenue.

At a meeting with top House and Senate leaders set for Thursday morning, Obama plans to argue that a rare consensus has emerged about the size and scope of the nation’s budget problems and that policymakers should seize the moment to take dramatic action.

As part of his pitch, Obama is proposing significant reductions in Medicare spending and for the first time is offering to tackle the rising cost of Social Security, according to people in both parties with knowledge of the proposal. The move marks a major shift for the White House and could present a direct challenge to Democratic lawmakers who have vowed to protect health and retirement benefits from the assault on government spending. ...

Rather than roughly $2 trillion in savings, the White House is now seeking a plan that would slash more than $4 trillion from annual budget deficits over the next decade...

That would ... put Obama and GOP leaders at odds with major factions of their own parties. ... It is not clear whether that argument can prevail on Capitol Hill. ...

Asked to comment, Boehner spokesman Michael Steel would say only that “there are no tax increases on the table.”

And:

Meanwhile, another senior Republican on Wednesday signaled a new openness to raising taxes..., so long as the final deal does not raise tax rates or overall federal tax collections.

How absurd is that? What they mean is that they are open to redistributing taxes, but not raising them (and even for those who are willing to give a little on the revenue issue, redistribution still appears to be the larger goal -- and note that there is further redistribution through the reduction of government programs that serve those in need). Close loopholes in return for cutting taxes on the wealthy, that kind of thing. I wonder who the winners would be when all is said and done?

“If the president wants to talk loopholes, we’ll be glad to talk loopholes,” Cantor said... Even as Cantor cracked the door open, however, Senate Minority Leader Mitch McConnell (Ky.) slammed it shut, reiterating the long-standing Republican position that policymakers should consider eliminating tax breaks only as part of a comprehensive effort to rewrite the code and lower income tax rates. ...

Revenue enhancements are supposed to support key social programs. Instead, they are put on the chopping block in trade for more revenue (which means no new revenue according to many Republicans). Yes, we have issues to address with the growth of health care costs, but I hope people realize that the hole in the budget caused by the Bush tax cuts alone is larger than the projected Social Security shortfall.

Defense cuts are not mentioned in either story.

"Eight Facts about Social Security"

Ezra Klein on Social Security:

1) Over the next 75 years, Social Security’s shortfall is equal to about 0.7 percent of GDP. Source (PDF).

2) For the average 65-year-old retiring in 2010, Social Security replaced about 40 percent of working-age earnings. That “replacement rate” is scheduled to fall to 31 percent in the coming decades. Source.

3) Social Security’s replacement rate puts it 26th among 30 Organization for Economic Cooperation and Development nations for workers with average earnings. Source.

4) Without Social Security, 45 percent of seniors would be under the poverty line. With Social Security, 10 percent of seniors are under the poverty line. Source.

5) People can start receiving Social Security benefits at age 62. But the longer they wait, up until age 70, the larger their checks. Waiting to 66 means checks that are 33 percent larger. Waiting to 70 means checks that are 76 percent larger. But most people start claiming benefits at 62, and 95 percent start by 66. Source.

6) Raising the retirement age by one year amounts to roughly a 6.66 percent cut in benefits. Source.

7) In 1935, a white male at age 60 could expect to live to 75. Today, a white male at age 60 can expect to live to 80. Source.

8) In 1972, a 60-year-old male worker in the bottom half of the income distribution had a life expectancy of 78 years. Today, it’s around 80 years. Male workers in the top half of the income distribution, by contrast, have gone from 79 years to 85 years. Source.

Among his comments, my preferred solution:

Social Security’s 75-year shortfall is manageable. In fact, it’d be almost completely erased by applying the payroll tax to income over $106,000. Source (PDF).

Will They Feel Betrayed?

I wonder what will happen politically when, after having a huge fight over Social Security and finally "saving" the program through some ill-advised bipartisan compromise, people realize that they've given up quite a bit, but the budget picture has hardly changed at all.

"Cockroach Ideas"

Paul Krugman is frustrated by cockroaches:

Way back, when I spent a year in the government, an old hand told me that fighting bad ideas is like flushing cockroaches down the toilet; they just come right back. I’m having that feeling a lot lately

What are his frustrations?:

One is ... “the Social Security trust fund doesn’t exist” thing. I’ll just repeat what I said back when Bush was trying to push through privatization:

Social Security is a government program supported by a dedicated tax, like highway maintenance. Now you can say that assigning a particular tax to a particular program is merely a fiction, but in fact such assignments have both legal and political force. ...

The date at which the trust fund will run out, according to Social Security Administration projections, has receded steadily into the future: 10 years ago it was 2029, now it’s 2042. As Kevin Drum, Brad DeLong, and others have pointed out, the SSA estimates are very conservative, and quite moderate projections of economic growth push the exhaustion date into the indefinite future.

But the privatizers won’t take yes for an answer when it comes to the sustainability of Social Security. Their answer to the pretty good numbers is to say that the trust fund is meaningless because ... the whole notion of a separate budget for Social Security is a fiction. And if that’s true, the idea that one part of the government can have a positive trust fund while the government as a whole is in debt does become strange.

But there are two problems with their position.

The lesser problem is that if you say that there is no link between the payroll tax and future Social Security benefits – which is what denying the reality of the trust fund amounts to – then Greenspan and company pulled a fast one back in the 1980s: they sold a regressive tax switch, raising taxes on workers while cutting them on the wealthy, on false pretenses. More broadly, we’re breaking a major promise if we now, after 20 years of high payroll taxes to pay for Social Security’s future, declare that it was all a little joke on the public.

The bigger problem for those who want to see a crisis in Social Security’s future is this: if Social Security is just part of the federal budget, with no budget or trust fund of its own, then, well, it’s just part of the federal budget: there can’t be a Social Security crisis. All you can have is a general budget crisis. Rising Social Security benefit payments might be one reason for that crisis, but it’s hard to make the case that it will be central.

But those who insist that we face a Social Security crisis want to have it both ways. Having invoked the concept of a unified budget to reject the existence of a trust fund, they refuse to accept the implications of that unified budget going forward. Instead, having changed the rules to make the trust fund meaningless, they want to change the rules back around 15 years from now: today, when the payroll tax takes in more revenue than SS benefits, they say that’s meaningless, but when – in 2018 or later – benefits start to exceed the payroll tax, why, that’s a crisis. Huh?

I don’t know why this contradiction is so hard to understand, except to echo Upton Sinclair: it’s hard to get a man to understand something when his salary (or, in the current situation, his membership in the political club) depends on his not understanding it. But let me try this one more time, by asking the following: What happens in 2018 or whenever, when benefits payments exceed payroll tax revenues?

The answer, very clearly, is nothing.

The Social Security system won’t be in trouble: it will, in fact, still have a growing trust fund, because of the interest that the trust earns on its accumulated surplus. The only way Social Security gets in trouble is if Congress votes not to honor U.S. government bonds held by Social Security. That’s not going to happen. So legally, mechanically, 2018 has no meaning.

Now it’s true that rising benefit costs will be a drag on the federal budget. So will rising Medicare costs. So will the ongoing drain from tax cuts. So will whatever wars we get into. I can’t find a story under which Social Security payments, as opposed to other things, become a crucial budgetary problem in 2018.

What we really have is a looming crisis in the General Fund. Social Security, with its own dedicated tax, has been run responsibly; the rest of the government has not. So why are we talking about a Social Security crisis?

Oh well. I guess we just have to keep fighting these fights, over and over.

One cockroach I thought had been wiped out by "facticide" is that tax cuts pay for themselves. But that turned out to be wrong. Prior to the recent Congressional elections this claim was still made by many politicians on the right, and it was largely unchallenged by the press (making me think I should have called the insecticide used to battle bad ideas "facts aside" instead of "facticide"). It wasn't claimed as widely as in the past, so that is progress I guess, but even those who know better began making artful statements that made it sound like tax cuts would still bring more revenue to the Treasury (e.g. statements like tax cuts increase growth, and more growth means more revenue for the government -- essentially, the cockroach mutated in a way that neutralized the attempt to kill it off).

How do you kill a zombie cockroach?

Pre-Payment for Services and Social Security

I keep seeing the argument that the way Social Security is funded -- the young provide the funds needed for the retirement of the elderly -- and the fact that tax collections can be viewed as one big pot of money imply that the government is not providing a service (insurance in this case) as you might see in the private sector:

The confounding problem is that many people believe the payroll taxes they pay go to fund the benefits they will receive, which is completely untrue. The payroll taxes go to pay current expenses of the US government. They are just a tax on labor. The government is spending every penny of those payroll taxes to pay for current expenditures. ... the [government] is free to use your premia to buy fighter jets and space shuttles!!

Some go so far as to argue this means it must be welfare. I disagree.

Consider (and apologies for the example) a firm that provides funeral services. This firm sells burial plots to the young, those still working, and it issues a promise. When the time comes, you have a place to be buried, and your payment will cover the following services (which are listed explicitly).

However, the firm does not take your money and put it into savings for the next however many years. Instead, it uses the money to cover the expenses of current funerals. Your money is used to pay for the services of the old, those who have passed away.

So, the  money of the young is used to provide services for the old, just like Social Security. Does this mean that the people whose funerals were paid for when they were younger received welfare? Of course not. Does it mean they received no services from the firm? Again, no. It's even possible that when your turn comes (and hopefully it's far away), the funeral will cost more than you paid in advance -- the firm may have not anticipated future costs correctly. In that case, there will be an income transfer from the young to the old (the young will be charged higher prices to reserve a plot in the future), but that still doesn't mean it is welfare. Fundamentally, this is an advance purchase of a service.

Just because the payment for retirement insurance, i.e. Social Security, comes in advance of the consumption of the services does not mean that it is welfare. It doesn't matter if your money is used "to buy fighter jets and space shuttles!!" anymore than it matters if the firm providing the burial services uses some of your prepayment to pay for electricity of security guards (and which particular tax dollar is used to make the payments doesn't matter either since these monies are fungible). What matters is the promise of future services, and that the promise is honored. The payroll tax comes with a promise of future insurance services, it is no different than advance payment for services in the private sector, and people expect those services to be delivered (if you don't think people believe the promise is there, try telling them they won't get anything from Social Security when their turn comes).

I am not arguing that there is not transfer component to the Social Security program, there is. But, as I kept saying here, it is "mainly" an insurance program, not welfare (just like the transfers in the example above do not change that it is fundamentally a payment for a future service). When you pay the government each month, it comes in return for the promise of future services. When the government makes good on that promise and delivers the services you paid for, there is no welfare involved. It's not welfare when you consume private sector services that have been paid for in advance, and the government is no different.

Social Security is *Not* Welfare

Robert Samuelson is making the same wrong argument about Social Security being welfare that he's been making for years:

Why Social Security is welfare, by Robert J. Samuelson: ...Here is how I define a welfare program: First, it taxes one group to support another group, meaning it's pay-as-you-go and not a contributory scheme where people's own savings pay their later benefits. And second, Congress can constantly alter benefits, reflecting changing needs, economic conditions and politics. Social Security qualifies on both counts.

Since he is rolling out the same old column (and apparently getting paid for it), I'll just roll out the same old response. This is from March, 2005, just a few weeks after I started this blog:

Fire Insurance is not Welfare and Neither is Social Security: Robert Samuelson, and many others, appear to believe that any time there is a transfer of income between individuals or groups it is welfare. This is wrong. According to Samuelson:

Welfare is a governmental transfer from one group to another for the benefit of those receiving. The transfer involves cash or services (health care, education). We have welfare for the poor, the old, the disabled, farmers and corporations. Social Security is mainly welfare...

Not it isn’t. Social Security is mainly a means of insuring against economic risk. It is fundamentally an insurance program, not a saving program, and as such it is not "mainly welfare."

Just because an economic activity transfers income from one person or group to another does not make it welfare. Fire insurance transfers income. Some people pay premiums for their whole lives and collect nothing. Others, the unlucky few who suffer a fire, collect far more than they contribute. Does that make it welfare? Of course not.

Social Security is no different, it is an insurance program against economic risk as I explain in this Op-Ed piece. Some people will live long lives and collect more than they contribute in premiums, some will die young and collect less. Some children will lose their parents and collect more than their parents paid into the system, others will not. But this does not make it welfare.

Is gambling welfare? Gambling transfers income from one person to another. Does that make it welfare? Loaning money transfers income when the loan is paid back with interest. Are people who receive interest income on welfare?

There is an important distinction between needing insurance ex-ante and needing it ex-post. Insurance does redistribute income ex-post, but that doesn't imply that it was a bad deal ex-ante (i.e., when people start their work lives). ...

Angry Bear agrees with me on this and the two of us have been independently saying the same thing (in fact, I first encountered AB in a Google search on Social Security, insurance, and risk). As AB said (the full text is well worth reading):

What does all of this have to do with Social Security? Those who are hard-working, fortunate, and not too profligate will have a large nest egg at retirement and Social Security will account for only a small portion of their retirement portfolio. This is tantamount to paying for insurance and then not needing it. This happens all the time -- every year someone fails to get sick or injured and, while surely happy in their good health, would have been better off not buying insurance. That's the nature of insurance: if you don't need it, then you'll always wish you hadn't purchased it. Only in the context of retirement insurance is this considered a crisis.

On the other hand, those with bad luck or insufficient income will not have a nest egg at retirement. Because of Social Security, instead of facing the risk of zero income at retirement, they are guaranteed income sufficient to subsist.

This is precisely like the insurance example I worked through above: people with good outcomes will wish they hadn't paid into the insurance fund; those with bad outcomes will be glad they did. Ex-ante, everyone benefits from the insurance. Overall, society is better off because risk is reduced; because people are risk-averse, the gains are quite large.

When I think of welfare, I think of pure money transfers from one group to another without any economic basis for the transfer. In such cases, one person’s gain arises from another’s loss. But economic activity that results in the exchange of goods and services is different. It is not a zero sum game. One person’s gain does not come at the expense of someone else.

The main feature of Social Security is not welfare as Samuelson asserts. The main feature is insurance against economic risks and as such it makes us collectively better off. Calling it welfare when it isn’t is misleading and causes unnecessary class distinctions and resentments from the losers ex-post. More importantly, it ignores and obscures the important role Social Security plays in society as insurance against the economic risks we all face.

If you think you are so rich and powerful that you don’t need such insurance, consider this. The stock market collapse of 1929 at the onset of the Great Depression wiped out substantial quantities of wealth. The typical stock was worth only one sixth its pre-crash value once the bottom was reached. Whatever insurance existed in the stock market evaporated as the crash unfolded.

It wasn’t the poor jumping out of windows on Wall street. If you think it can’t happen to you, think again.

Paul Krugman: Willie Sutton Wept

Paul Krugman says this much better than I did:

Willie Sutton Wept, by Paul Krugman, Commentary, NY Times: There are three things you need to know about the current budget debate. First, it’s essentially fraudulent. Second, most people posing as deficit hawks are faking it. Third, while President Obama hasn’t fully avoided the fraudulence,... he deserves much more credit for fiscal responsibility than he’s getting.

About the fraudulence: Last month, Howard Gleckman of the Tax Policy Center described the president as the “anti-Willie Sutton” ... because ... Mr. Obama has lately been going where the money isn’t, making a big deal out of a freeze on nonsecurity discretionary spending, which accounts for only 12 percent of the budget.

But that’s what everyone does. House Republicans ... focus solely on that same small budget sliver. ...

The whole budget debate, then, is a sham. House Republicans, in particular, are literally stealing food from the mouths of babes — nutritional aid to pregnant women and very young children is one of the items on their cutting block — so they can pose, falsely, as deficit hawks.

What would a serious approach to our fiscal problems involve? I can summarize it in seven words: health care, health care, health care, revenue.

Notice that I said “health care,” not “entitlements.” People in Washington often talk as if there were a program called Socialsecuritymedicareandmedicaid, then focus on things like raising the retirement age. But that’s more anti-Willie Suttonism. Long-run projections suggest that spending ... will rise sharply over the decades ahead, but the great bulk of that rise will come from the health insurance programs, not Social Security. So anyone who is really serious about the budget should be focusing mainly on health care. ...

What would real action on health look like? Well, it might include things like giving an independent commission the power to ensure that Medicare only pays for procedures with real medical value; rewarding health care providers for delivering quality care rather than simply paying a fixed sum for every procedure; limiting the tax deductibility of private insurance plans; and so on.

And what do these things have in common? They’re all in last year’s health reform bill.

That’s why I say that Mr. Obama gets too little credit. He has done more to rein in long-run deficits than any previous president. And if his opponents were serious about those deficits, they’d be backing his actions and calling for more; instead, they’ve been screaming about death panels.

Now, even if we manage to rein in health costs, we’ll still have a long-run deficit problem... So what should be done?

This brings me to the seventh word of my summary of the real fiscal issues: if you’re serious about the deficit, you should be willing to consider ... higher taxes. True, higher taxes aren’t popular, but neither are cuts in government programs. So we should add to the roster of fundamentally unserious people anyone who talks about the deficit — as most of our prominent deficit scolds do — as if it were purely a spending issue.

The bottom line, then, is that while the budget is all over the news, we’re not having a real debate; it’s all sound, fury, and posturing... And we shouldn’t indulge ... politicians by pretending otherwise.

Social Security and Longevity

Those who want to cut Social Security benefits because people are living longer, e.g. through raising the retirement age, assume longevity is independent of the Social Security system. That assumption may be false:

Study links social security improvements to longer life span, EurekAlert: ...According to a new study published in the Journal of Public Health Policy, Americans over the age of 65 experienced steep declines in the rate of mortality in the periods that followed the founding of and subsequent improvements to Social Security. The authors urge that as Congress and the President discuss changes to Social Security they consider the benefit of reduced mortality and improved health among older Americans. ...

Peter Arno, Ph.D., the study's lead author and professor and director of the doctoral program in the Department of Health Policy and Management of the School of Health Sciences and Practice at New York Medical College ... and his colleagues analyzed the effect of Social Security on mortality over the course of the 20th century. After controlling for factors such as changes in the economy, access to medical care, and Medicare, they found that although mortality rates for all adults fell during the 20th century, rates of decline for those 65 and older changed more than 50 percent in the decades following the introduction of Social Security in 1940. Rates of decline for the younger age groups remained virtually the same during this period. The trend was particularly pronounced following marked improvements in Social Security benefits between the mid-1960s and the early 1970s.

This finding supports earlier studies that have demonstrated that beneficiaries with higher lifetime earnings experienced lower mortality rates, and that higher supplemental security income benefit levels reduced mortality and disability for those recipients. Improved health status among elders could have other fiscal impacts, including lower Medicare costs.

Many policy-makers are proposing cuts to Social Security benefits as a way of addressing long-term federal budget deficits. "If policy-makers are going to have a well-informed discussion on Social Security, it is critical that they fully appreciate the program's role in improving the health and well-being of our nation's elderly," says Arno. "By not considering the benefits of reduced mortality and poverty reduction, policy-makers are grossly underestimating Social Security's benefits to society."

Cutting the lifespans of people who depend upon Social Security is one way to move the system back toward balance.

"Why Social Security Isn’t a Problem"

This is my preferred method of bringing the Social Security system back into balance:

Why Social Security Isn’t a Problem for 26 Years, and the Best Way to Fix It Permanently, by Robert Reich: ...Back in 1983, Alan Greenspan’s Social Security commission was supposed to have fixed the system for good – by gradually increasing payroll taxes and raising the retirement age. (Early boomers like me can start collecting full benefits at age 66; late boomers born after 1960 will have to wait until they’re 67.)

Greenspan’s commission must have failed to predict something. But what? It fairly accurately predicted how quickly the boomers would age. It had a pretty good idea of how fast the US economy would grow. ... So what did Greenspan’s commission fail to see coming? Inequality.

Remember, the Social Security payroll tax applies only to earnings up to a certain ceiling. (That ceiling is now $106,800.) The ceiling rises every year according to a formula roughly matching inflation.

Back in 1983, the ceiling was set so the Social Security payroll tax would hit 90 percent of all wages covered by Social Security. That ... Greenspan Commission’s fixes ... assumed that ... the Social Security payroll tax would continue to hit 90 percent of total income.

Today, though, the Social Security payroll tax hits only about 84 percent of total income. It went from 90 percent to 84 percent because a larger and larger portion of total income has gone to the top. ...

If we want to go back to 90 percent, the ceiling on income subject to the Social Security tax would need to be raised to $180,000. Presto. Social Security’s long-term ... problem would be solved.

So there’s no reason even to consider reducing Social Security benefits or raising the age of eligibility. The logical response to the increasing concentration of income at the top is simply to raise the ceiling.

Not incidentally, several months ago the White House considered proposing that the ceiling be lifted to $180,000. Somehow, though, that proposal didn’t make it into the President’s budget.

Even though "Social Security isn’t responsible for the federal deficit," the centrist hawkish types in Congress that will make a difference in votes on the budget seem determined to either cut benefits or raise the retirement age to show they are serious about the deficit. They've convinced the public that Social Security is a big part of the budget problem, even though it isn't, and now they're going to show how serious they are by creating real pain.

Why not raise the ceiling? Why doesn't that ever seem to be part of the discussion? For some, it's ideological. Anything that reduces the size of the Social Security program is agreeable. Cutting benefits or raising the retirement age scales things back while raising the ceiling maintains the current size of the program. For others, "fix Social Security" means quit making me (or my kids) pay for other people's benefits. Raising the payroll cap doesn't solve the problem this group has with the Social Security system. In fact, it makes it worse. Finally, it's probably no accident that the solutions being considered fall on the politically less powerful while raising the cap hits the politically well-connected.

But getting reelected is the primary reason politicians shy away from this solution. Obama is thinking ahead to the election in 2012, as are members of Congress. Raising the cap is a tax increase, and they are afraid of the politics associated with tax increases -- the courage to take on the political heat is missing. So even though raising the ceiling is the best way to go, it's just not going to happen.

Barking Up the Wrong Tree: Social Security is *Not* the Problem

[Source: CBO]

Though there seems to be a concerted effort to get people to believe otherwise, Social Security has very little to do with our long-run budget problem.

SOTU: Obama Won't Endorse Raising Retirement Age or Reducing Social Security Benefits

Some news on the State of the Union address:

Obama won't endorse raising retirement age or reducing Social Security benefits, by Lori Montgomery, Washington Post: President Obama has decided not to endorse his deficit commission's recommendation to raise the retirement age, and otherwise reduce Social Security benefits, in Tuesday's State of the Union address, cheering liberals and drawing a stark line between the White House and key Republicans in Congress. ...

Administration officials said Obama is unlikely to specifically endorse any of the deficit commission's recommendations in the speech, but cautioned that he is unlikely to rule them off the table, either. On Social Security, for example, he is likely to urge lawmakers to work together to make the program solvent, without going into details, according to congressional sources. ...

That Obama won't be endorsing these suggestions from the deficit commission is good news, but now the question is whether he'll steadfastly oppose these changes if they are part of the deal that arises when "lawmakers to work together to make the program solvent." The caution that nothing is off the table is not very reassuring. It sounds like he has no desire to lead the charge, but may jump aboard if he can say the other side gave him no other choice. I hope I'm wrong about that.

Cutting Social Security to Prevent Cuts in Social Security?

There is a report that Obama is considering featuring Social Security reform, including benefit cuts, in his State of the Union address:

... The tax deal negotiated by President Barack Obama and Senate Republican leader Mitch McConnell of Kentucky is just the first part of a multistage drama that is likely to further divide and weaken Democrats.

The second part, now being teed up by the White House and key Senate Democrats, is a scheme for the president to embrace much of the Bowles-Simpson plan — including cuts in Social Security. This is to be unveiled, according to well-placed sources, in the president’s State of the Union address.

The idea is to pre-empt an even more draconian set of budget cuts likely to be proposed by the incoming House Budget Committee chairman, Rep. Paul Ryan (R-Wis.), as a condition of extending the debt ceiling. This is expected to hit in April.

White House strategists believe this can also give Obama “credit” for getting serious about deficit reduction — now more urgent with the nearly $900 billion increase in the deficit via the tax cut deal. ...

Bad idea. Dean Baker suggests another route:

...supporters of Social Security and Medicare have to ... push President Obama to announce in advance that he will never sign a debt ceiling bill that includes cuts to Social Security and Medicare, the countries two most important social programs.

These programs are crucial to the financial security and health of tens of millions of people. If there are to be changes in these programs then they should occur after a full public debate in the light of day, not as the result of Republican trickery and parliamentary game playing.

This would be a hugely popular position since not only Democrats, but also independents and even Tea Party Republicans overwhelming support Social Security and Medicare. ...

Why not propose raising the ceiling on payroll taxes instead? The rich and powerful are used to getting their way, the recent tax cuts are an example of this, so they see no downside to pushing for deficit reduction and reductions in social programs they don't need. They believe they have no reason to fear a tax incrase of any kind, an increase in the ceiling on payroll taxes included, and the recent tax deal lends support to that notion. But if it's clear that they will be asked to shoulder a large chunk of the costs of deficit reduction (I can dream), the powerful interests pushing for cuts may suddenly find that Social Security is in much better shape than they realized.

Update: Brad DeLong:

When people in the White House ask me whether I think Obama's SOTU address should be about tax reform or Social Security reform (i.e., 2/3 Social Security benefit cuts, 1/3 tax increases offered by the administration--and God alone knows what happens after that), I want to say: Why not make the SOTU address about jobs and economic recovery?

"I want to say..." Wonder why he doesn't actually say it? The "people in the White House" asking him about this sure need to hear it.

Update: Tyler Cowen:

Here is a related Paul Krugman post.  In my view, Obama may propose slowing the rate of benefit increase, but he won't propose an actual cut in Social Security benefits.  Use of the word "cuts" is thus likely to prove misleading.  I've already argued it is better to cut Medicare than Social Security (in-kind vs. cash), but it shouldn't come as a shock if reindexing benefits is part of a bipartisan budget deal.  It's an easier policy "to do" than fixing Medicare, though again I prefer the latter. ...

Deal Reached to Extend All the Bush Tax Cuts

Here are the details of the agreement on the Bush tax cuts:

1) The Bush tax cuts get extended for two years -- with one ugly surprise: For the next two years, estates up to $5,000,000 will be protected from the estate tax, and the tax rate for the few estates that are taxed will be 35 percent. ... The difference in expected revenue between the 2009 levels and the compromise levels is $10 billion or so.

2) The refundable tax credits are extended: The Earned Income Tax Credit, the Child Tax Credit and the American Opportunity Tax Credit were all pumped up in the stimulus, but set to expire this year. All of them will be extended. Price tag? $40 billion or so.

3) Unemployment insurance gets extended for 13 months: ... In perhaps the most important part of the deal, there's going to be a 13-month extension at a cost of $56 billion.

4) A 2 percent cut in the payroll taxes paid by employees: This is perhaps the most unexpected part of the compromise. Rather than extending the administration's Making Work Pay tax credit for two years, which would've been worth about $60 billion a year, they've agreed to a one-year cut in the payroll taxes paid by employees, which'll raise $120 billion in 2011. ...

5) Business expensing: Remember back in September, when the White House announced a proposal to give businesses two years in which they could deduct 100 percent of the cost of new investments? That's in the deal, too. The cost of this is a bit complicated -- it's $30 billion over 10 years, but it works by offering huge tax cuts in the next two years and then paying that back over the next eight. ...

On net, the package probably adds around $200 billion in new stimulus for the economy, maybe a bit more. Notice, however, that it is entirely tax cuts.

The estate tax and the extension of high end tax cuts are causing the most heated reactions, and the payroll tax cut is generally being applauded. But I see the payroll tax reduction as potentially troublesome as well. Though the revenue the Social Security system loses due to the tax cut will be backfilled from general revenues, the worry is that the tax cut will not expire as scheduled -- temporary tax cuts have a way of turning permanent. That's especially true in this case since labor markets are very unlikely to recover within the next year and it will be easy to argue against the scheduled "tax increase" for workers. In fact, it will never be a good time to increase taxes on workers and if the tax cut is extended once, as it's likely to be, it will be hard to ever increase it back to where it was. That endangers Social Security funding -- relying on general revenue transfers sets the system up for cuts down the road -- and for that reason I would have preferred that this be enacted in a way that produces the same outcome, but has different political optics. That is, leave the payroll tax at 6% on the books and keep sending the money to Social Security, and fund a 2% tax "rebate" out of general revenues. The rebate would come, technically, as a payment from general revenues rather than through a cut in the payroll tax, but in the end the effect would be identical. But the technicality is important since it preserves the existing funding mechanism for Social Security even if the taxes are permanently extended.

"Workers Must Work Longer for Less Because the Rich are Living Longer"

It's nice to see the local paper highlighting this side of the Social Security debate:

Washington elites making their move on Social Security, by Nancy Altman and Eric Kingson, Commentary, Register Guard: Alan Simpson and Erskine Bowles, the co-chairs of President Obama’s deficit commission ... released their proposal to reduce the federal deficit... In releasing their plan, the co-chairs went out of their way to make clear that they were proposing changes to Social Security “for its own sake, not for deficit reduction.” ... Simpson and Bowles just couldn’t keep their hands off the program.

One thing they propose is increasing Social Security’s retirement age to 69. ... Increasing the age to 69 would cut benefits by one-quarter from a decade ago, when the retirement age was 65. The co-chairs also want to increase the early retirement age to 64. ... As a new General Accountability Office report concluded,... Raising the early retirement age will shut out workers who are disproportionately low income and minority,... potentially forcing them to seek disability benefits or welfare. ...

Over the last quarter-century, life expectancy of lower-income men increased by one year, compared to five for upper-income men. And lower-income women have experienced declines in longevity. ... In effect, the Bowles-Simpson plan says to America’s workers that they must work longer for less because the rich are living longer.

In addition to raising the retirement age, the Bowles-Simpson plan would reduce benefits to ... future recipients ... by as much as 36 percent... Bowles and Simpson ... also propose cutting the cost-of-living adjustment for those now receiving Social Security. ...

For all the talk of polarization, the American people are clear... A recent poll ... found that 67 percent ... opposed cuts in benefits; 69 percent opposed raising the Social Security retirement age to 69. ... Some 66 percent ... favored doing away with the current cap on payroll taxes to fund Social Security. Currently, taxpayers are taxed only on their first $106,800... Simply requiring ... taxpayers to pay the tax on all their income would bring in enough revenue to allow benefits to be raised across the board and still have the program in balance for at least the next 75 years. ...

 Despite the clear view of the American people, the elites in Washington seem to think it would be better to reduce benefits than to require the wealthy to pay the same percentage of their salaries into Social Security as everyone else does.

If politicians choose to cut Social Security benefits, when they could simply scrap the cap, we predict that this midterm will seem like a walk in the park compared to what awaits them in 2012.

[It's not even clear that all of the proposed changes are for Social Security's "own sake" rather than deficit reduction. The Government Accountability Office report referenced above indicates that increasing the early retirement age will actually have a negative impact on Social Security solvency.]

"Raise Retirement Age and More Become Disabled"

Raising the retirement age also raises disability applications, so this won't save as much money as many people think, and could even make things worse if the early retirement age is changed (the early retirement age is currently 62):

Raise Retirement Age and More Become Disabled, by Merrill Goozner: Most people are working and living longer, so it seems like a no-brainer to raise the retirement age to help close the long-term Social Security funding gap. But the move could backfire and not save as much as predicted. Why? Not all groups are able to work longer, a new report from the Government Accountability Office says.

“Raising the retirement ages would likely increase the number of workers applying for and receiving disability insurance benefits,” which also comes out of Social Security, said the report...

The report presented a sobering view of the health status of near-retirement age population. About a quarter of Americans aged 60-61 have a work-limiting health conditions, according to the report, and about two-thirds the ones who are still on the job report working in occupations that are “physically demanding.” Raising either the early or full retirement ages above where they are now would incentivize many more of those workers to seek disability coverage...

The report took a snapshot of those on the cusp of retirement, and found those reporting good or excellent health were twice as likely to have some college education, twice as likely to be working full-time, had twice the income and four times the wealth of those reporting poor or fair health. In other words, people who are the most dependent on Social Security for retirement income are the ones most likely to go on disability if denied early retirement benefits.

While raising the full retirement age would still save the system money, “raising the early retirement age would have a negative impact on (Social Security) solvency because disability costs would rise and expected total lifetime retirement benefits would not change,” the report concluded.

I'd prefer that we raise or eliminate the cap on Social Security taxes.

"Questioning a Payroll Tax Holiday"

Bruce Bartlett says a payroll tax holiday is a bad idea:

Questioning a Payroll Tax Holiday, by Bruce Bartlett: Pete Domenici and Alice Rivlin have proposed a one-year payroll tax holiday to stimulate the economy. I have previously explained why I think monkeying around with the payroll tax is a dreadful idea and won't repeat my argument here. Today, I just want to ask one question: What are the odds that Republicans will ever allow this one-year tax holiday to expire? They wrote the Bush tax cuts with explicit expiration dates and then when it came time for the law they wrote to take effect exactly as they wrote it, they said any failure to extend them permanently would constitute the biggest tax increase in history. Sadly, Obama allowed himself to fall into the Republican trap, but that's another story. My point is that if allowing the Bush tax cuts to expire is the biggest tax increase in history, one that Republicans claim would decimate a still-fragile economy, then surely expiration of a payroll tax holiday would also constitute a massive tax increase on the working people of America. And what are the odds that the economy won't still be fragile a year from now? Zero, I would say.

I respect Pete and Alice and know they are just trying, as are we all, to find something that will stimulate the economy that the Republicans will allow to take effect. But a payroll tax holiday is Pandora's Box and best left unopened. Republicans would prefer to destroy Social Security's finances or permanently fund it with general revenues than allow a once-suspended payroll tax to be reimposed. Arch Social Security hater Peter Ferrara once told me that funding it with general revenues was part of his plan to destroy it by converting Social Security into a welfare program, rather than an earned benefit. He was right.

In conclusion, the payroll tax holiday is misguided. The potential benefits are uncertain, but the dangers are not.

I agree with the worries about Social Security financing -- for those who want to scale back or eliminate Social Security, this would be seen as an opportunity to starve Social Security of finances, create a crisis, then argue for cutbacks. But there are ways to do this that don't involve cutting the payroll tax per se, so the political optics are different, yet amount to the same thing. For example, continue collecting Social Security taxes as before, but give workers a temporary rebate that is clearly designated as independent of Social Security taxes. I'm sure there are better ways to do it, but the point is that we can help workers without putting Social Security at risk.

Making Social Security Less Generous Isn't the Answer

Ezra Klein:

Making Social Security less generous isn't the answer, by Ezra Klein, Commentary, Washington Post: ...Raising the Social Security retirement age has become as close to a consensus position as exists in American politics. ... And for a while, I agreed... People live longer today, and so they should work later into life. But as I've looked at the issue, I've decided that I was wrong. ... We should leave the retirement age alone. In fact, we should leave Social Security alone...

Start with the basic rationale for raising the retirement age. As Rep. Paul D. Ryan (R-Wis.) has argued, when Social Security was signed into law, the retirement age was 65 and life expectancy was 63. "The numbers added up pretty well back then," he said on Fox News. But that's misleading. That figure was driven by high infant mortality. ...

Moreover,... averages conceal a lot of inequality. In 1972, a 60-year-old male worker who made less than the median income had a life expectancy of 78 years. By 2001, he had a life expectancy of 80 years. Meanwhile, workers in the top half of the income distribution shot to 85 years from 79. ...

Lurking beneath this conversation is an unquestioned assumption: We live longer, so we should work longer. That's pretty intuitive to members of Congress, who seem to like their jobs and don't seem to like the idea of retiring. It's also pretty intuitive to blogger/columnists, who spend their time in air-conditioned rooms opining about pension programs. But most people don't work in Congress or in the media. They work on their feet. They strain their backs. They're bored silly at the end of the day. By the time they're in their 60s, they want to retire.

You see that reflected in Social Security. Age 66 is when you get full benefits. But most people begin taking Social Security at age 62. They get less, but they can retire earlier. To them, the trade-off is worth it. ...

An August survey ... tested reactions to a variety of Social Security fixes. One of the options was raising the retirement age to 70. Two-thirds of respondents opposed it. Another option was eliminating the cap on payroll taxes so that well-off workers pay the tax on their full income, just as middle-income workers do now. A solid 61 percent supported it.

That's almost the reverse of the conversation in Washington, where affluent people who like their jobs propose cutting benefits for the poor (which is, after all, what raising the retirement age would do) rather than lowering benefits or increasing the payroll tax on, well, themselves. ...

The universally unpleasant options for reform are a testament to Social Security's efficiency. It's a simple transfer program, with administrative costs that amount to less than 0.9 percent of total spending. There's not much fat to cut.

That can't be said for much else in American public policy. Our health-care system costs twice as much as the German system and doesn't deliver better results. Our defense sector is wasteful and bloated. Our tax code could raise more money and do less to harm growth if we cleaned it out. Our home prices are driven upward by the mortgage interest tax deduction. Our health insurance premiums are goosed by the exclusion of employer-sponsored insurance from taxable income.

Reforming any of those sectors ... would be politically difficult, but would mean better policy. Reforming Social Security will be politically difficult and result in worse policy. ...

Here's what I argued in May of 2005:

1. An increase in life expectancy does not necessarily imply that people are healthier at age 65 or 70 than before. Suppose, for example, that medical advances are discovered that extend the end of life by several years, but have no effect on health prior to the last few years of life. In such a case there would be an increase in life expectancy, but no increase in the health of workers at the age of retirement. If people aren’t healthier, then increasing the retirement age imposes a hardship over and above that faced by current retirees.

2. It’s already difficult for elderly workers to find employment, and when they do they are often underemployed relative to their skill levels. Raising the retirement age will make this worse.

3. What about workers employed in physically demanding occupations? Is it reasonable to ask them to work until, say, age 72? If not, how equitable is it to have some workers work until 72, and others allowed to retire at a younger age depending on their occupation?

4. Will this distort occupational choice decisions? ... How will we decide when a worker is unable to work due to reasons associated with age?

5. The life expectancy of some groups of workers is lower than for others. If poorer workers die younger than richer workers on average, then raising the retirement age will have a larger impact on low income workers and thus, in essence, be regressive.

How Illegal Immigrants are Helping Social Security

Illegal immigrants are helping to finance your retirement:

The contributions by unauthorized immigrants to Social Security ... are much larger than previously known... Stephen C. Goss, the chief actuary of the Social Security Administration and someone who enjoys bipartisan support for his straightforwardness, said that by 2007, the Social Security trust fund had received a net benefit of somewhere between $120 billion and $240 billion from unauthorized immigrants.  The cumulative contribution is surely higher now. Unauthorized immigrants paid a net contribution of $12 billion in 2007 alone... Somebody ought to say thank you.

Paul Krugman: Attacking Social Security

The unnecessary and misguided war over Social Security is heating up once again:

Attacking Social Security, by Paul Krugman, Commentary, NY Times: Social Security turned 75 last week. It should have been a joyous occasion, a time to celebrate a program that has brought dignity and decency to the lives of older Americans.

But the program is under attack, with some Democrats as well as nearly all Republicans joining the assault. Rumor has it that President Obama’s deficit commission may call for deep benefit cuts, in particular a sharp rise in the retirement age.

Social Security’s attackers claim that they’re concerned about the program’s financial future. But their math doesn’t add up, and their hostility isn’t really about dollars and cents. Instead, it’s about ideology and posturing. And underneath it all is ignorance of or indifference to the realities of life for many Americans.

About that math: ...The program won’t have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted, which the program’s actuaries don’t expect to happen until 2037 — and there’s a significant chance, according to their estimates, that that day will never come.

Meanwhile, an aging population will eventually (over the ... next 20 years) cause the cost of paying Social Security benefits to rise from its current 4.8 percent of G.D.P. to about 6 percent of G.D.P. To give you some perspective, that’s a significantly smaller increase than the rise in defense spending since 2001, which Washington certainly didn’t consider a crisis, or even a reason to rethink some of the Bush tax cuts.

So where do claims of crisis come from? To a large extent they ... rely on an exercise in three-card monte in which the surpluses Social Security has been running for a quarter-century don’t count — because hey, the program doesn’t have any independent existence; it’s just part of the general federal budget — while future Social Security deficits are unacceptable — because hey, the program has to stand on its own.

It would be easy to dismiss this..., except ... many influential people — including Alan Simpson, co-chairman of the president’s deficit commission — are peddling this nonsense.

And having invented a crisis,... Social Security’s attackers ... don’t propose cutting benefits to current retirees; invariably the plan is, instead, to cut benefits many years in the future. ... In order to avoid the possibility of future benefit cuts, we must cut future benefits. O.K.

What’s really going on here? Conservatives hate Social Security for ideological reasons: its success undermines their claim that government is always the problem, never the solution. But they receive crucial support from Washington insiders, for whom a declared willingness to cut Social Security has long served as a badge of fiscal seriousness, never mind the arithmetic.

And neither wing of the anti-Social-Security coalition seems to know or care about the hardship its favorite proposals would cause.

The currently fashionable idea of raising the retirement age even more... — it has already gone from 65 to 66, it’s scheduled to rise to 67, but now some are proposing that it go to 70 — is usually justified with assertions that life expectancy has risen... But that’s only true for affluent...— the people who need Social Security least. ...

America is becoming an increasingly unequal society — and the growing disparities extend to matters of life and death. Life expectancy at age 65 has risen a lot at the top of the income distribution, but much less for lower-income workers. And remember, the retirement age is already scheduled to rise under current law.

So let’s beat back this unnecessary, unfair and — let’s not mince words — cruel attack on working Americans. Big cuts in Social Security should not be on the table.

"The Myth of the Social Security Shortfall"

This is from Michael Hiltzik at the LA Times:

The myth of the Social Security system's financial shortfall, by Michael Hiltzik, Commentary, LA Times: The annual report of the Social Security Trustees ... has become an occasion for hand-wringing and crocodile tears over the (supposedly) parlous state of the system's finances. ... Within minutes of its release, some analysts were claiming that it projected a "shortfall" for Social Security this year of $41 billion.

Before we get to the bogus math behind that statement ... let's look at the encouraging findings... The trustees indicated that the program has made it through the worst economic downturn in its life span essentially unscathed. In fact, by at least one measure it's fiscally stronger than a year ago...

That brings us back to this supposed $41-billion "shortfall," which exists only if you decide not to count interest due of about $118 billion. And that, in turn, leads us to the convoluted subject of the trust fund, which for some two decades has been the prime target of the crowd trying to bamboozle Americans into thinking Social Security is insolvent, bankrupt, broke — pick any term you wish, because they're all wrong. ... Despite what Social Security's enemies love to claim, the trust fund is not a myth... It's real money, and it represents the savings of every worker paying into the system today. So I'm going to train a microscope on it. ...

The truth is that there are two separate tax programs at work here — the payroll tax and the income tax... The first pays for Social Security and the second for the rest of the federal budget. Most Americans pay more payroll tax than income tax. Not until you pull in $200,000 or more ... are you likely to pay more in income tax than payroll tax. ...

Since 1983, the money from all payroll taxpayers has been building up the Social Security surplus, swelling the trust fund. What's happened to the money? It's been borrowed by the federal government and spent on federal programs — housing, stimulus, war and a big income tax cut for the richest Americans, enacted under President George W. Bush in 2001. In other words, money from the taxpayers at the lower end of the income scale has been spent to help out those at the higher end. That transfer — that loan, to characterize it accurately — is represented by the Treasury bonds held by the trust fund.

The interest on those bonds, and the eventual redemption of the principal, should have to be paid for by income taxpayers, who reaped the direct benefits from borrowing the money. So all the whining you hear about how redeeming the trust fund will require a tax hike we can't afford is simply the sound of wealthy taxpayers trying to skip out on a bill about to come due. The next time someone tells you the trust fund is full of worthless IOUs, try to guess what tax bracket he's in. ...

The trust fund may not last forever, but reports of its demise are certainly premature. The trustees say it will be drawn down to zero in 2037, at which point the program will only have enough money coming in from taxes to pay 78% of the benefits... So sometime in the next quarter-century — but by no means right now — does anything have to be fixed...?

That 2037 deadline ... is a moving target. It's based on long-term projections, which become more uncertain the further out you look. ... It has held steady at 2037 for two years despite the downturn, but that's still better than the projection in 1998, which was for exhaustion in 2032.

In short, if the new trustees report gets examined wisely and responsibly, it should put an end to all the current talk about raising the retirement age or cutting benefits. Social Security doesn't contribute a dime to the federal deficit, and in these days of market stagnation and cutbacks in pensions, it has never been more important to millions of Americans. The Pete Petersons of the world should find themselves a different target.

DeLong: Listening to Arsonists

Brad DeLong seems pessimistic about our political system:

Listening to Arsonists, by J. Bradford DeLong, Commentary, Project Syndicate: I had always thought that Barack Obama made a significant mistake in naming the Republican ex-senator Alan Simpson to co-chair the president’s deficit-reduction commission. Simpson was a noted budget arsonist when he was in the Senate. Indeed, he never met a budget-busting, deficit-increasing initiative from a Republican president that he would not lead the charge to pass. Nor did he ever meet a sober deficit-reducing initiative from a Democratic president that he did not oppose with every fiber of his being.

You don’t pick an arsonist to head the fire department... But perhaps I am ungenerous. Perhaps Simpson has had a change of heart. ... Even in that case, however, naming those who misbehave to important positions of high trust and acclaiming them as bipartisan statesmen gives the next generation really lousy incentives. And it’s not as though Congressional Republicans think they owe enough to Simpson for him to swing a single vote in either chamber of the legislature.

Obama officials assured me that Simpson had, indeed, had a change of heart; that he was a smart man with a sophisticated understanding of the issues; that he could sway reporters and get them to describe the commission’s advice as “bipartisan” (even though he could not sway actual legislators); and that he would be a genuine asset to the substantive work of the commission.

John Berry recently wrote in the online journal The Fiscal Times that not even that is true. Simpson is “condescending and derisive – and wildly wrong about important parts of the Social Security system's past.” ...

Four centuries ago, the consensus, in Western Europe at least, was that good and even adequate government in this fallen world was inevitably a rarity. Democracy always degenerated into mob rule, monarchy into tyranny, and aristocracy into oligarchy. Even when well run, democracy took little interest in the distant future, aristocracy took little interest in the well-being of those whom Simpson calls the “little people,” and monarchy took little interest in anything other than legitimate succession.

Then, at the end of the eighteenth century, the founders of the United States of America and their intellectual successors claimed that this pessimism about government was unwarranted. “The science of politics...like most other sciences,” claimed Alexander Hamilton, “has received great improvement....The regular distribution of power into distinct departments...legislative balances and checks...judges holding their offices during good behavior; the representation of the people in the legislature by deputies of their own election...are means, and powerful means, by which the excellences of republican government may be retained and its imperfections lessened or avoided...”

Perhaps Hamilton was too much the optimist. When I look at Barack Obama’s deficit commission – indeed, look at governance worldwide – I see many imperfections, but few or no examples of excellence.

I get pessimistic too, especially when I see Simpson types put in charge of things they have no business overseeing. But when I step back and look at the U.S., I see progress over time on important economic and social issues. The progress is not linear, or even always positive, it's excruciatingly slow, and that can be pretty frustrating when you are fighting the battle of the moment. But things are better now than they once were, and we continue to make progress on important social issues (though, again, it is frustratingly slow). Don't get me wrong, we are far from the end of the process, there is much, much more to do before our job is complete, but if you are a anything but a wealthy white male, things are relatively better now than they once were.

Will things continue to get better? I think so, but the system must continue to evolve over time so it can match the rise of economic and political power with institutions and mechanisms that will blunt their influence and reassert core principles. People with power will find a way to capture the system for themselves, and as their economic and political power increases as a result of their efforts, they will be increasingly successful at this task. I believe that we have allowed far too much capture of government by the powerful in recent decades -- the current state of campaign finance is one reflection of this -- and that this is the biggest danger we face going forward.

Political power is derived in large part from economic power, and a good place to start would be to begin asking harder questions about the costs and benefits of having businesses as big and influential as they are presently. If the economic efficiencies from size do not justify the costs from having such large and powerful firms, and I suspect in most cases they will not, then we need to reduce the power that these firms have (by breaking them if that is the best way to accomplish this). And even when size is justified by efficiency considerations, we need to do a much better job of regulating these firms so that they cannot exert undue influence on politics and the economy. If we don't, if we continue to allow the biggest among us to have the most say as has happened more and more in recent decades, if being big means you will mostly get your way, then we should worry about the future of our political system. I've been optimistic that we'll see the light, but that optimism has been shaken a bit by the outcome of legislation to reform the financial system. This legislation did very little to blunt the power that large firms can exert on our political system. That must change.

"How to Impress the Bond Markets"

Dean Baker says there's more than one way to reassure bond markets, and cutting benefits for retirees in need of the money is one of the worst options available:

How to impress the bond markets, by Dean Baker, Commentary, CIF: The deficit hawks have been pushing the line in recent months that we have to make cuts in social security, along with some revenue increases, in order to reassure the bond markets about the creditworthiness of the US government. According to this argument, by taking tough steps (i.e. cutting social security benefits) we will have shown the bond markets that we are prepared to do what is necessary to keep our budget deficits within manageable levels.

There is some reason to question the merits of this argument. First off, the deficit hawks don't have an especially good track record in the insight category. Not one person among the leading crusaders was able to see the $8tn housing bubble that wrecked the economy. ...

Furthermore, the fixation on social security is peculiar. The Congressional Budget Office shows the program can pay all future benefits through the year 2044 with no changes whatsoever. Even after that date the shortfalls are relatively minor. ...

Furthermore, cutting benefits for near-retirees (workers in their late 40s and 50s) seems cruel and unwarranted. These people paid for their benefits through decades of work. Also, this cohort has seen most of the wealth that they did manage to accumulate destroyed with the collapse of the housing bubble and the plunge in the stock market. The bulk of this cohort will therefore be relying on social security for the overwhelming majority of their retirement income.

For these reasons, the determination to cut social security has the feeling of the class bullies telling the rest of us that we have beat up the weakest kid in the class in order to be admitted to the club. That may be the way things work in Washington, but this doesn't mean it is right.

If the issue is assuaging the bond markets by convincing them that we are prepared to take tough choices to limit long-term deficits, let's put a few other items on the table. For item number 1: how about a financial speculation tax? Wouldn't the bond markets be impressed by seeing Congress crack down on the Wall Street hot shots whose recklessness helped fueled the housing bubble? That one would show real courage given the power of Goldman Sachs-Citigroup gang.

As a second item, Congress could go after the pharmaceutical industry. By 2020 we are projected to be spending almost $500bn a year on prescription drugs. We pay close to twice as much for our drugs as people in other wealthy countries and about 10 times as much as the drugs would cost if they could be sold in competitive market without government patent monopolies.

Suppose Congress decided to pay for the clinical testing of drugs directly and then allowed all new drugs to be sold as generics. This could save taxpayers hundreds of billions of dollars a year. Wouldn't the bond markets be impressed by seeing Congress stand up to the pharmaceutical industry?

As a third item, suppose Congress revisited plans for a public insurance option. The Congressional Budget Office projected that this would save over $100bn by 2020 and certainly much more in future decades. Wouldn't the bond markets be impressed if Congress stood up to the insurance industry?

These are three clear ways in which Congress can take big steps towards reducing long-term budget deficits by standing up to powerful interest groups. In each case Congress would be reducing the deficit in ways that would likely make most people better off, not worse off. If bringing the long-term deficit into line is the issue, all three of these measures should be at the top of everyone's list.

Remarkably, the leading budget hawks never discuss these measures when they push their deficit-cutting agenda. Somehow we are supposed to believe that cutting social security will do the trick with the markets, even though this will hurt tens of millions of people who actually need the money. ...[W]e should just view them as people who want to cut social security and are putting out some nonsense to rationalize beating up on retirees.

The good news is that Alan Simpson appears to have neutered the Deficit Commission:

It must have sounded like a good idea (although not to me): establish a bipartisan commission of Serious People to develop plans to bring the federal budget under control. But the commission is already dead — and zombies did it.

OK, the immediate problem is the statements of Alan Simpson, the commission’s co-chairman. And what got reporters’ attention was the combination of incredible insensitivity – the “lesser people”??? — and flat errors of fact.

But it’s actually much worse than that. On Social Security, Simpson is repeating a zombie lie — that is, one of those misstatements that keeps being debunked, but keeps coming back.

Specifically, Simpson has resurrected the old nonsense about how Social Security will be bankrupt as soon as payroll tax revenues fall short of benefit payments, never mind the quarter century of surpluses that came first.

We went through all this at length back in 2005, but let me do this yet again.

Social Security is a government program funded by a dedicated tax. There are two ways to look at this. First, you can simply view the program as part of the general federal budget, with the the dedicated tax bit just a formality. And there’s a lot to be said for that point of view; if you take it, benefits are a federal cost, payroll taxes a source of revenue, and they don’t really have anything to do with each other.

Alternatively, you can look at Social Security on its own. And as a practical matter, this has considerable significance too; as long as Social Security still has funds in its trust fund, it doesn’t need new legislation to keep paying promised benefits.

OK, so two views, both of some use. But here’s what you can’t do: you can’t have it both ways. You can’t say that for the last 25 years, when Social Security ran surpluses, well, that didn’t mean anything, because it’s just part of the federal government — but when payroll taxes fall short of benefits, even though there’s lots of money in the trust fund, Social Security is broke.

And bear in mind what happens when payroll receipts fall short of benefits: NOTHING. No new action is required; the checks just keep going out.

So what does it mean that the co-chair of the commission is resurrecting this zombie lie? It means that at even the most basic level of discussion, either (a) he isn’t willing to deal in good faith or (b) the zombies have eaten his brain. And in either case, there’s no point going on with this farce.

Speaking of zombies, on Facebook, John Quiggin, author of the forthcoming Zombie Economics (i.e., dead ideas finding new life), says:

Would have been great to have a section on the revival of balanced budget ideology in the European crisis, but that's bookbiz.

It's not just Europe. But in any case, how the words "Deficit Commission" and "cuts to Social Security" became roughly equivalent is a bit of a mystery since the rising cost of health care not Social Security, is the primary problem. The focus on Social Security does speak to the ability of those with power and influence to affect the public debate on these issues, but the simple truth is that if we fix the health cost problem then almost all of the long-run deficit problem goes away. But as others have pointed out, the deficit hawks block any attempts in this direction with charges like "death panels," and that raises questions about the true agenda behind these efforts.

"Deficit Reduction: Argument by Authority"

I don't agree with every word of this argument by Dean Baker, particularly some of the parts about the bias in the CPI, but I do agree with the main thrust:

Deficit reduction: argument by authority, by Dean Baker, CIF: The deficit hawks are going into high gear with their drive to cut social security and Medicare. President Obama's deficit commission is having a big public event on Tuesday in which many of the country's most prominent deficit hawks will tout the need to reduce the budget deficit. The next day, Wall Street investment banker Peter Peterson will be hosting a "summit on fiscal responsibility", which will feature more luminaries touting the need to get deficits under control.

What will be missing from both of these events is any serious debate on the extent of the deficit problem and its causes. These affairs are not about promoting a real exchange of views on issues like the future of social security, Medicare, and public support for education, research and infrastructure, the purpose of these events is to tell the public that everyone agrees, we have to cut the deficit. And, this means cutting social security and Medicare. This is argument by authority.

Many public debates in the United States take this form. The issue is not what is said, but rather who says it. A few years ago all the authorities said that there was no housing bubble. The large body of evidence showing that house prices had hugely diverged from the fundamentals did not matter...

Going further back to the mid-90s, many of this same group of deficit hawk luminaries tried to use argument by authority to cut social security. They came up with the story that the consumer price index (CPI) overstated the true rate of inflation. ... This crew (which included then Senator Alan Simpson, a co-chair of President Obama's commission, and Peter Peterson) argued that social security benefits should lag the CPI by one percentage point a year. In other words, if the CPI shows 3% inflation, then social security benefits will only rise by 2%.

That may seem a small cut, but it adds up over time. A worker retired for 10 years would have their benefits reduced by approximately 10%. A worker retired for 20 years would have their benefits cut by almost 20%.

To push this agenda, they put together a panel of the country's most prominent economists, all of whom blessed the claim that the CPI overstated the true rate of inflation... In addition to this panel, the social security cutters also pulled in other prominent economists, including Martin Feldstein...

The social security cutters were so successful in rounding up the big names that virtually no economists were prepared to publicly stand up and question their claims about the CPI. They had near free rein, running around the country with the "all the experts agree" line.

As events unfolded they were not able to get their cut in social security benefits. (Ted Kennedy and Dick Gephardt deserve big credit on this.) But what is really interesting for the current debate is what happened to the experts' claim on the CPI. There were some changes made to the CPI, but in the view of the expert panel, the major causes of the biases in the CPI were not fixed. They concluded that even after the changes the CPI still overstated the true rate of inflation by 0.8 percentage points annually.

If this claim is really true then it has enormous ramifications for our assessment of the economy. It means, for example, that incomes and wages are rising far more rapidly than the official data show. It means that people in the recent past were far poorer than is indicated by official statistics. If the claim about the CPI being overstated is true, then we would have to re-examine a vast amount of economic research that starts from the premise that the CPI is an accurate measure of inflation.

However, almost no economists have adjusted their research for a CPI's overstatement of inflation. In fact, even the members of the expert panel don't generally use a measure of inflation that adjusts for the alleged bias in the CPI. In other words, when they are not pushing cuts to social security, these economists act as though the CPI is an accurate measure of the rate of inflation. This could lead one to question these experts' integrity.

This history should give the public serious grounds for being suspicious about the latest efforts to cut social security and Medicare. A serious discussion of the deficit will show that in the short-term the deficit is not a problem and that the longer-term deficit problem is really a problem of a broken US healthcare system. The public should not allow the deficit hawks to derail a more serious discussion with their argument by authority.

I suppose I should explain what it is I disagree with. First, the second to last paragraph doesn't make the case Dean Baker claims it makes. If the bias in the CPI is a constant .8 percent, then regressions involving this variable will still have unbiased slope coefficients -- the bias will be picked up by the constant term. (That is, suppose that a thermometer is off by four degrees. It will still tell you how many degrees the temperature has changed, e.g. that the temperature went up by ten degrees, and it will do so accurately, but it won't get the actual temperature right. Since the change in temperature determines the slope coefficient in a regression, and the change in temperature is correct, the slope coefficient will be measured accurately.) Since we are almost always interested in the slope term which is unbiased, and only rarely care about the estimates of the constant, the bias in the slope coefficient is is not generally a problem. The main point is that the use of a biased inflation measure in empirical work does not necessarily lead to questions about the integrity of the researchers. (If the bias varies with the "temperature", then the slope coefficient will also be biased, but the claim is a constant bias of .8%).

Second, on the more general question of whether a bias exists at all, I'll refer you to this post by Brad DeLong, "The Meaning of CPI Bias."

Finally, I am not taking issue with the basic claim that the deficit hawks are trying to take control of the debate and push it in a particular direction, a direction that has social programs in its sights. So let me repeat that "A serious discussion of the deficit will show that in the short-term the deficit is not a problem and that the longer-term deficit problem is really a problem of a broken US healthcare system. The public should not allow the deficit hawks to derail a more serious discussion..."

"Public Education Worth More than Social Security and Medicare"

Is the older generation exploiting the younger generation when it comes to intergenerational entitlement programs such as Social Security and Medicare?:

For post-boomers, public education worth more than Social Security and Medicare, EurekAlert: It's popular to assume retiring baby boomers will benefit from Social Security and Medicare at the expense of younger generations, as analysts estimate that these government-run programs will pay out more than they collect in payroll taxes by 2017.

But a far-reaching new study from the University of California, Berkeley, concludes that younger Americans – specifically those born between 1972 and 2060 – are actually getting the better deal when the value of public education is factored in as an intergenerational entitlement program on a par with Social Security and Medicare.

"Receiving public education is a really big benefit, and the fact that kids get it at the start of their lives rather than at the end makes it even more valuable," said Ronald Lee, a UC Berkeley demographer and economist who coauthored the study, "Who wins and who loses? Public transfer accounts for U.S. generations born 1850-2090."

On average, Americans pay the taxes that subsidize education 30 years after receiving the benefits, the study noted. By contrast, people start drawing their Social Security and Medicare benefits 30 years or so after paying taxes into these government funds. Thus, each education dollar is worth $10 in retirement benefits, according to the study, which is published in the March issue of the journal Population and Development Review.

The study marks the first time that analysts have treated public education from kindergarten through college as an intergenerational entitlement benefit, which refers to programs funded by taxes paid by generations other than the recipients. The analysts calculated the value of public education relative to the recipients' lifetime earnings.

Contrary to conventional wisdom, "older Americans are not making out like bandits when you factor in the value of public education," Lee said. ...

Using historical data and future projections, Lee and his research team calculated the net value of Social Security, Medicare and public education at all levels – minus taxes – for Americans born from 1850 through 2090. They found that people ages 38 and younger – including those born 20 years from now – will make net gains in earnings of 4 to 6 percent over their lifetimes. By contrast, those now aged 63 to 80 will have paid out more in taxes than they will have received in Social Security, Medicare and public education benefits, losing 1 to 2 percent in net earnings over their lifetimes. ...

While the study found greater benefits for those born after 1972, it projects that tougher times are ahead for generations born 50 years from now. Unless significant changes are made to the Social Security and Medicare programs, those later generations would have to be heavily taxed – 44 percent of their lifetime earnings – and their benefits reduced, to make up for severe shortfalls due to population aging and escalating health care costs...

"The current young and future generations are sometimes viewed as victims of profligate public policy in the United States, whereby the current elderly cohorts live comfortably at their expense," the UC Berkeley study said.

"In fact, however, an elderly person born in 1936 experienced a net loss of about 2 percent of lifetime earnings, while a baby born today is projected to realize a net gain of 5 percent … Evidently, adding education to the mix dramatically changes the generational equity picture," the study concluded.

Reich: Why More Immigrants Are An Answer to the Coming Boomer Entitlement Mess

I'm guessing that not everyone will agree with this:

Why More Immigrants Are An Answer to the Coming Boomer Entitlement Mess, by Robert Reich I was born in 1946, just when the boomer wave began. ... Sixty years later, we boomers have a lot to be worried about because most of us plan to retire in a few years and Social Security and Medicare are on the way to going bust. I should know because I used to be a trustee of the Social Security and Medicare trust funds. Those of you who are younger than we early boomers have even more to be worried about because if those funds go bust they won’t be there when you’re ready to retire.

It’s already starting to happen. This year Social Security will pay out more in benefits than it receives in payroll taxes. ... And it adds new urgency to reforming Social Security — a task the president’s commission on the nation’s debt is focusing on.

So what’s the answer?

Fed Chair Ben Bernanke this week listed the choices. “To avoid large and unsustainable budget deficits,” he said in a speech on Wednesday, “the nation must choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above.”

Bernanke ... leaves out one other possible remedy that should be included in that combination: Immigration.

You see, the biggest reason Social Security is in trouble, and Medicare as well, is because America is aging so fast. It’s not just that so many boomers are retiring. It’s also that seniors are living longer. And families are having fewer children.

Add it all up and the number of people who are working relative to the number who are retired keeps shrinking. ...

This is where immigration comes in. Most immigrants are young because the impoverished countries they come from are demographically the opposite of rich countries. Rather than aging populations, their populations are bursting with young people.

Yes, I know: There aren’t enough jobs right now even for Americans who want and need them. But once the American economy recovers, there will be. Take a long-term view and most new immigrants to the U.S. will be working for many decades.

Get it? One logical way to deal with the crisis of funding Social Security and Medicare is to have more workers per retiree, and the simplest way to do that is to allow more immigrants into the United States.

Immigration reform and entitlement reform have a lot to do with one another.

I didn't expect this from Reich - he should know better than to blame the problem on demographics (e.g. see the graph here on the demographic issues, and here for the relative size of the Social Security and health care cost problems, e.g. "The fiscal gap does not arise, as many believe, primarily from the coming retirement of the baby boomers. Rather, the rate at which health-care costs grow will be the primary determinant of the nation's long-term budget picture."). I don't oppose more immigration, but trying to sell it to the public through scare tactics about social security is not the way to make the case.

"The Long-Term Impact of the Mortgage Crisis"

Richard Green is concerned about the old people of the future. Are they saving enough today?:

The long-term impact of the mortgage crisis--and why it keeps me awake, by Richard Green: My parent's generation behaved differently than mine in all sorts of ways. A paper of mine with Hendershott shows that they spent less, controlling for education, etc., throughout their life cycle than any other generation. One of the reasons for this is that they paid off their mortgages. According to the American Housing Survey, 70 percent of households headed by someone over the age of 65 have no mortgage at all. Loan amortization became a mechanism for forced saving, and as a a result, those born during the depression are in pretty decent shape financially. ...

My generation is different. Even under the most benign circumstances, we refinance in a manner that slows amortization. I refinanced ... twice to take advantage of lower interest rates--this was, of course, the right thing to do financially. But each time, the amortization schedule reset, and so it extended the period at which the mortgage would pay off. Now yes, one can take the money one doesn't put into home equity and put it in other savings vehicles, but it is not clear that everyone does that. Forced saving is slowed.

But this is not the worst of how people have handled their mortgages. A substantial fraction of borrowers pulled equity out of their houses, putting themselves on a lower savings path even in the absence of falling house prices.

I am going to run some American housing survey data on this, but it is hard for me to imagine that 70 percent of my generation will have no mortgage debt when we are elders. My parents' generation has used housing wealth to, among other things, finance long-term care. I hope I am missing something here, but the lack of housing wealth in the future could become yet another challenge as we seek to fund the needs of the elderly.

"Are Those $250 Social Security Checks Just Pandering to Seniors?"

Some pushback against a recent article that questions the value of giving people on Social Security a $250 check to stimulate the economy and denounces President Obama for pandering to the elderly:

Are Those $250 Social Security Checks Just Pandering to Seniors?, by pgl: David Leonhardt tries to make this case... But why did Mr. Leonhardt start his discussion by talking about the depressed economy and who would be most likely to consume any checks that the government may wish to extend?

If you wanted to help the economy and you had $14 billion to bestow on any group of people, which group would you choose: a) Teenagers and young adults, who have an 18 percent unemployment rate. b) All the middle-age long-term jobless who, for various reasons, are not eligible for unemployment benefits. c) The taxpayers of the future (by using the $14 billion to pay down the deficit). d) The group that has survived the Great Recession probably better than any other, with stronger income growth, fewer job cuts and little loss of health insurance. The Obama administration has chosen option d — people in their 60s and beyond.

Let’s think about the macroeconomic impact of a $14 billion one-time transfer payment in terms of a life-cycle model of consumption. This would be equivalent to a one-time increase in household wealth with the impact effect on consumption being equal to the increase in wealth divided by the number of remaining years of life for the individual receiving the check. If a young person were given $250, he would likely save most of it. If the $250 were given to the elderly instead, then more of the transfer payment would be consumed. Mr. Leonhardt seems to be unhappy with the President’s proposal but his reasoning here seems to be very confused.

Dean Baker:

David Leonhardt's Age-Based Politics, by Dean Baker: David Leonhardt is upset that people on Social Security will get a $250 check from the government next year and denounces President Obama for pandering to the elderly. There is a lot of serious confusion in this piece.

First, he argues that the elderly have suffered less from the downturn from other groups be comparing declines in income and employment. This is actually a much tougher question that Leonhardt implies. The elderly have accumulated assets over their working lifetime. These assets plunged in value with the collapse of the housing bubble and the plunge in stock prices. This plunge has hit the elderly far more than other groups... So, if we took a wealth-based measure of impact, we would find that the wealthy were hit hardest by the downturn. ...

Second, in terms of government assistance, the making work pay tax credit is giving money to the vast majority of the under 65 population. The $250 boost to Social Security beneficiaries can be seen as an effort to provide comparable help to those who are no longer working. It's not obvious how this creates an injustice.

The third point is that Leonhardt seems to misunderstand the point of stimulus. We need people to spend money. Given the enormous idle capacity in the economy, we would benefit from handing checks to anyone who will agree to spend it. (Contrary to Leonhadt's assertion, this does not create a burden on children and grandchildren -- if anything the growth created by the stimulus is likely to mean we hand them a wealthier country.) The elderly will spend a high share of their checks, which makes this a good form of stimulus.

In fact, we really need larger deficits at this point to boost the economy, but politically this is not acceptable. We should thank the elderly for making some additional stimulus politically acceptable. ...

Lastly, we get a line about protecting Medicare benefiting the elderly at the expense of our grandchildren. Actually, we could substantially reduce costs for Medicare and fully protect the quality of care. However, this would require attacking the interests of the health care industry. This is an interest group that the politicians (and the media) really pander to.