Economist's View

Tax Cuts Can’t be Financed by Reducing Government Waste

I have a new column (my title was "Some of These Markets are Not Like the Others"):

It’s a Ruse: Tax Cuts Can’t be Financed by Reducing Government Waste: The Republicans suffered a humiliating defeat on their proposal to cut taxes for the wealthy disguised as healthcare reform. But as the Trump administration has made clear, they are not about to give up on their tax cut plans.

But how will those tax cuts be financed? The Republican’s health care reform plan would have delivered $600 billion in tax cuts, but with that option gone where will the money come from? ...

Don't Believe Trump’s Tax and Spending Plans

At MoneyWatch, why I think Social Security and Medicare will be in danger of large cuts if Trump is elected:

Don't believe Trump’s tax and spending plans: Donald Trump’s new tax plan will increase the national debt between $4.4 trillion and $5.9 trillion over a decade, and that’s according to estimates from the conservative Tax Foundation. That range of $1.5 trillion is due to uncertainty about how Trump would levy some types of business taxes and how his tax cuts would be paid for.

First, the Republican candidate says, higher economic growth from lower taxes and deregulation will pay for most of the increase in the debt. According to Trump, his plan will boost output substantially, and the higher tax revenue that comes with it will offset most of the lost revenue. 

Second, his “penny plan” would make up the rest of the revenue lost to his tax cuts. This plan would cut spending on nondefense programs funded by annual appropriations by 1 percent each year. 

Since the cuts would affect only a part of the budget (defense and entitlement programs such as Medicare and Social Security are excluded), the plan would reduce spending on programs such as“veterans’ medical care…, scientific and medical research, border enforcement, education, child care, national parks, air traffic control, housing assistance for low-income families, and maintenance of harbors, dams, and waterways,” according to the Center on Budget and Policy Priorities. The total spending reduction would be approximately 25 percent over 10 years.

You should be skeptical of both claims. ...

The 2016 Social Security Trustees Report

Dean Baker:

Statement on the 2016 Social Security Trustees Report: The 2016 Social Security Trustees Report is little changed from the 2015 Report. It shows a small decrease in the projected 75-year shortfall of 0.02 percentage points. Changes in the disability program, along with small changes in projections more than offset the increase of 0.6 percentage points due to shifting the projection period by a year. (The new projection adds 2093, a year with a large projected deficit, and loses 2015, a year with a surplus.) While reporters and politicians routinely focus on the projected shortfall, what will matter far more to the people covered by Social Security is the projected growth in real wages and their distribution. As has been pointed out, almost 40 percent of the projected shortfall in the program is attributable to the upward redistribution of income over the last four decades. This has pushed a larger share of wage income over the taxable maximum. For this reason, the finances of the program are directly affected by the distribution of income. ...

This means that workers have vastly more at stake in whether they will receive their share of wage growth over this period, than whether it is necessary to raise the Social Security tax rate at some point. ... (Of course any shortfall in Social Security could be covered through other mechanisms than increases in the payroll tax.)

This is the last Trustees report of the Obama administration. For this reason, it is worth comparing the changes with the last report of the Bush administration. The 2008 Trustees Report showed a considerably smaller projected shortfall for Social Security. It projected a shortfall of 1.70 percentage points for the years 2008–2082. This figure has increased to 2.66 percentage points in the 2016 report. Roughly half of this increase is attributable to the change in the projection period. Moving the period out eight years added approximately 0.48 percentage points to the projected shortfall. The other half of the increase in the gap was due to the Great Recession. This reduced employment and wage growth, leaving both far below the projections in the 2008 report. This is a clear warning as to the importance of the strength of the overall economy for the health of Social Security.

The positive side of the picture is that the projected shortfall in the Medicare program is now much smaller than had been projected in 2008. At that time, the Trustees projected a shortfall in the program equal to 3.54 percent of payroll. This brought the combined projected shortfall for the two programs to 5.24 percent. In the most recent report, the projected shortfall for Medicare is just 0.73 percent of payroll, bringing the combined projected shortfall to 3.39 percent of payroll.

This means that the longer term shortfall projected for these programs together is now considerably smaller than when President Obama took office. The reason for the decline in the projected Medicare shortfall is a slower projected rate of health care cost growth. This is undoubtedly attributable in part to changes implemented as a result of the Affordable Care Act (ACA). While the size of the impact of the ACA on health care cost growth can be debated, it is clear that the combined finances of these programs looks better in 2016 than when President Obama took office.

President Obama Leans into Social Security Expansion

Jared Bernstein:

President Obama leans into Social Security expansion: “It’s time we finally made Social Security more generous and increased its benefits so today’s retirees and future generations get the dignified retirement that they have earned.” 

Guess who said that? Bernie Sanders? Hillary Clinton? The Donald? Sen. Warren? Dean Baker? Me? None of the above.

Those words were spoken by President Obama on Wednesday in his economics speech in Elkhart, Ind. ...

But wouldn’t it be fiscally reckless to expand benefits, say, for low-income retirees? Well, first, you heard the president suggest a “payfor,” by increasing taxes on those at the top of the scale. In fact..., there’s now a smaller share of covered earnings below the tax max: about 81 percent now vs. 90 percent a few decades ago. So there’s a real margin for new revenue to support the program.

Second, if you consider the three-legged retirement security stool — savings, pensions and Social Security — for many less well-off aging people, the latter is in the best financial shape of all..., contrary to critics’ false claims, it ain’t exactly going broke.

That said, the big point here is that we should get the venerable program on a more solid fiscal trajectory, one that doesn’t just close the long-term funding gap but considers an expansion of the type the president suggested. ...

It’s great to hear the president defending this essential, efficient, progressive program. ...

Why Is the CBO Concocting a Phony Debt Crisis?

Lifted from Brad DeLong at Equitablog:

Why Is the CBO Concocting a Phony Debt Crisis?: Must-Read: Ari Rabin-Havt: Why Is the CBO Concocting a Phony Debt Crisis?: “The CBO assumes that Social Security and Medicare Part A will draw on the general fund of the US Treasury…

…to cover benefit shortfalls following the depletion of their trust funds, which at the current rate will occur in 2034. That would obviously lead to an exploding debt, but it’s a scenario prohibited by law. In the case of both programs, benefits must be paid either from revenue collected via payroll taxes or from accumulated savings in the programs’ trust funds. When those funds run out, full benefits will simply not be paid. ‘Because there is no borrowing authority, there is really a hard stop,’ said Goss.

Congress could pass a law saying that Social Security and Medicare Part A would begin drawing on the US Treasury general fund after 2034. Or, Congress could preemptively pass laws to avert the situation before the deadline; it could take the approach favored by progressives and increase revenue to the programs by lifting the payroll tax cap, or alternatively raise the retirement age and lower benefits. But the bottom line is the CBO projections disregard the actual law and assume a worst-case legislative scenario—and one that is politically unlikely, to boot…

'An Aging Society Is No Problem When Wages Rise'

Dean Baker:

An Aging Society Is No Problem When Wages Rise: Eduardo Porter discusses the question of whether retirees will have sufficient income in twenty or thirty years. He points out that if no additional revenue is raised, Social Security will not be able to pay full scheduled benefits after 2034.

While this is true, it is important to note that this would have also been true in the 1940, 1950s, 1960s, and 1970s. If projections were made for Social Security that assumed no increase in the payroll tax in the future, there would have been a severe shortfall in the trust fund making it unable to pay full scheduled benefits.

We have now gone 25 years with no increase in the payroll tax, by far the longest such period since the program was created. With life expectancy continually increasing, it is inevitable that a fixed tax rate will eventually prove inadequate if the retirement age is not raised. (The age for full benefits has already been raised from 65 to 66 and will rise further to 67 by 2022, but no further increases are scheduled.)

The past increases in the Social Security tax have generally not imposed a large burden on workers because real wages rose. The Social Security trustees project average wages to rise by more than 50 percent over the next three decades. If most workers share in this wage growth, then the two or three percentage point tax increase that might be needed to keep the program fully funded would be a small fraction of the wage growth workers see over this period. Of course, if income gains continue to be redistributed upward, then any increase in the Social Security tax will be a large burden.

For this reason, Social Security should be seen first and foremost as part of the story of wage inequality. If workers get their share of the benefits of productivity growth then supporting a larger population of retirees will not be a problem. On the other hand, if the wealthy manage to prevent workers from benefiting from growth during their working lives, they will also likely prevent them from having a secure retirement.

'The Implications of Growing Gap in Life Span by Income for Entitlement Programs'

On raising the retirement age for Social Security (and other social insurance programs):

New report examines implications of growing gap in life span by income for entitlement programs, National Academy of Sciences, EurekAlert!: As the gap in life expectancy between the highest and lowest earners in the U.S. has widened over time, high earners have disproportionately received larger lifetime benefits from government programs such as Social Security and Medicare, says a new congressionally mandated report from the National Academies of Sciences, Engineering, and Medicine. The report looked at life expectancy patterns among a group of Americans born in 1930 and compared those with projections for a group born in 1960.

"Life expectancy has risen significantly in the U.S. over the past century, and it has long been the case that people who are better-educated and earn higher incomes live longer, on average, than those with less education and lower incomes," said Peter Orszag, co-chair of the committee that carried out the study and wrote the report, and vice chairman of Citigroup in New York City. "What has changed is that the life expectancy gap across different income groups has become so much bigger."

Men born in 1930 in the highest of five earnings levels who survived to age 50 could expect to live to be about 82 years old, on average, while men born in 1960 in the same earnings bracket are projected to live an average of 89 years - a substantial gain. In contrast, life expectancy for men with the lowest earnings was found to decline slightly, from 77 years old on average for men born in 1930 to 76 years old on average for men born in 1960. The projections for women show a similar pattern, in that life expectancy gains have been larger for higher earners than lower earners. ...

"The increasing gap in longevity by socio-economic status is important in itself, but it also means that high earners will increasingly collect some government benefits over more years than will lower earners," said committee co-chair Ronald Lee, professor of demography and economics at the University of California, Berkeley. "Policymakers considering changes to put entitlement programs on firmer financial footing should take into account how such policy changes interact with these differential trends in life expectancy." ...

[They go on to evaluate various changes in eligibility for Social Security and Medicare, and how the changes would impact low and high income households. For example, "Increasing the earliest eligibility age for Social Security from 62 to 64 would not generate significant savings for the Social Security system and would slightly widen the gap in benefits received between high earners and low earners."]

Paul Krugman: Republicans Against Retirement

Why do Republicans want to get rid of Social Security?:

Republicans Against Retirement, by Paul Krugman, Commentary, NY Times: Something strange is happening in the Republican primary — something strange, that is, besides the Trump phenomenon. For some reason, just about all the leading candidates other than The Donald have taken a deeply unpopular position, a known political loser, on a major domestic policy issue. And it’s interesting to ask why.

The issue in question is the future of Social Security... The retirement program is, of course, both extremely popular and a long-term target of conservatives, who want to kill it precisely because its popularity helps legitimize government action in general. ...

What’s puzzling about the renewed Republican assault on Social Security is that it looks like bad politics as well as bad policy. Americans love Social Security, so why aren’t the candidates at least pretending to share that sentiment?

The answer, I’d suggest, is that it’s all about the big money.

Wealthy individuals have long played a disproportionate role in politics, but we’ve never seen anything like what’s happening now: domination of campaign finance, especially on the Republican side, by a tiny group of immensely wealthy donors. Indeed, more than half the funds raised by Republican candidates through June came from just 130 families.

And while most Americans love Social Security, the wealthy don’t. ... By a very wide margin, ordinary Americans want to see Social Security expanded. But by an even wider margin, Americans in the top 1 percent want to see it cut. And guess whose preferences are prevailing among Republican candidates.

You often see political analyses pointing out, rightly, that voting in actual primaries is preceded by an “invisible primary” in which candidates compete for the support of crucial elites. But who are these elites? In the past, it might have been members of the political establishment and other opinion leaders. But what the new attack on Social Security tells us is that the rules have changed. Nowadays, at least on the Republican side, the invisible primary has been reduced to a stark competition for the affections and, of course, the money of a few dozen plutocrats.

What this means, in turn, is that the eventual Republican nominee — assuming that it’s not Mr. Trump —will be committed not just to a renewed attack on Social Security but to a broader plutocratic agenda. Whatever the rhetoric, the GOP is on track to nominate someone who has won over the big money by promising government by the 1 percent, for the 1 percent.

Paul Krugman: Zombies of 2016

Some bad ideas just won't die:

Zombies of 2016, by Paul Krugman, Commentary, NY Times: Last week,...Chris Christie ... gave a speech in which he tried to position himself as a tough-minded fiscal realist. In fact, however, his supposedly tough-minded policy idea was a classic zombie — an idea that should have died long ago in the face of evidence that undermines its basic premise, but somehow just keeps shambling along.

...Mr. Christie ... thought he was being smart and brave by proposing that we raise the age of eligibility for both Social Security and Medicare to 69. Doesn’t this make sense now that Americans are living longer?

No, it doesn’t..., almost all the rise in life expectancy has taken place among the affluent. The bottom half of workers,... who rely on Social Security most, have seen their life expectancy at age 65 rise only a bit more than a year since the 1970s. Furthermore,... many ... still have to perform manual labor.

And while raising the retirement age would impose a great deal of hardship, it would save remarkably little money. ...

And there are plenty of other zombies out there. Consider, for example, the zombification of the debate over health reform. ...

Finally, one of the interesting political developments ... has been the triumphant return of voodoo economics, the “supply-side” claim that tax cuts for the rich stimulate the economy so much that they pay for themselves.

In the real world, this doctrine has an unblemished record of failure..

In the world of Republican politics, however, voodoo’s grip has never been stronger. Would-be presidential candidates must audition in front of prominent supply-siders to prove their fealty to failed doctrine. ... Supply-side economics, it’s now clear, is the ultimate zombie: no amount of evidence or logic can kill it.

So why has the Republican Party experienced a zombie apocalypse? One reason, surely, is the fact that most Republican politicians represent states or districts that will never, ever vote for a Democrat, so the only thing they fear is a challenge from the far right. Another is the need to tell Big Money what it wants to hear: a candidate saying anything realistic about Obamacare or tax cuts won’t survive the Sheldon Adelson/Koch brothers primary.

Whatever the reasons, the result is clear. Pundits will try to pretend that we’re having a serious policy debate, but, as far as issues go, 2016 is already set up to be the election of the living dead.

'Disability Insurance: An Essential Part of Social Security'

Kathy Ruffing at the CBPP:

Disability Insurance: An Essential Part of Social Security: With a House subcommittee holding a hearing tomorrow on the future of Disability Insurance (DI), policymakers need to understand that DI is an essential part of Social Security.

Social Security is much more than a retirement program.  It pays modest but guaranteed benefits when someone with a steady work history dies, retires, or becomes severely disabled. Although nobody likes to think that serious sickness or injury might knock them out of the workforce, a young person starting a career today has a one-third chance of dying or qualifying for DI before reaching Social Security’s full retirement age. ...

DI’s eligibility criteria are strict (...most applications are denied) and its benefits modest..., on average, only about half of their lost earnings... DI beneficiaries are far likelier to be poor or near-poor than other Americans. ...  And at age 66, DI beneficiaries are seamlessly switched to retirement benefits without filing a fresh application. ...

Despite ... close links, the disability program’s trust fund is separate from the retirement and survivor program.  There’s no longer any good reason for that — the 1979 Advisory Council recommended a merger of the trust funds — but lawmakers instead have relied on periodic reallocations of tax revenue between the two programs to shore up whichever trust fund needed it.  They need to do so again to prevent a sudden, 20-percent cut in payments to vulnerable DI beneficiaries in 2016.

The need to replenish DI isn’t a crisis, nor would reallocating simply “kick the can down the road” as some contend.  Instead it’d allow lawmakers to focus on the real task:  assembling a package of revenue increases and modest benefit reforms to preserve long-term solvency for all of Social Security.  Americans of all ages and incomes support Social Security and are willing to pay for it.

'The Disability Insurance Non-Crisis'

Republicans and misguided centrist Democrats are coming after Social Security. One target is disability insurance. However:

The Disability Insurance Non-Crisis, CBPP: Although the Senate Budget Committee will hold a hearing tomorrow titled “The Coming Crisis: Social Security Disability Trust Fund Insolvency,” Disability Insurance (DI) is not, in fact, in crisis.

Here, briefly, are the facts...

'Getting It Wrong on Disability Insurance'

It didn't take Republicans long to begin their assault on Social Security:

Getting It Wrong on Disability Insurance, by Kathy Ruffing, CBPP: I’ve explained that a new House rule will make it harder to reapportion payroll taxes between Social Security’s retirement and Disability Insurance (DI) trust funds to avert a one-fifth cut in benefits to severely impaired DI recipients in late 2016.  In a revealing statement, co-sponsor Representative Tom Reed (R-NY) says the change is designed to prevent Congress from “raiding Social Security to bail out a failing federal program.”  He’s doubly wrong.

First, far from “failing,” DI has grown mostly in response to well-understood demographic and program factors like the aging of the baby boom, and the program’s trustees have long anticipated the need to replenish the trust fund next year...  Second, DI isn’t distinct from Social Security; it’s an essential part of Social Security.

Social Security is much more than a retirement program.  It pays modest but guaranteed benefits when someone with a steady work history dies, retires, or becomes severely disabled. ...

Statements like Representative Reed’s implicitly attempt to pit Social Security retirement and disability beneficiaries against each other. ...

Social Insurance Guaranteed

I was looking for an old post of mine on social insurance and entrepreneurship to complement this post today from Nick Bunker when I came across this from September of 2005 (slightly edited). Maybe I wasn't one of the people yelling loudly that the Great Recession was about to hit, but I did warn that "Things happen," so be ready when they do:

...The discussion concerning Social Security has, in my view, largely underplayed the role the government has to play in guaranteeing the social insurance aspect of the system, particularly from those in favor of private accounts. When all shocks that hit people are individual so that there are winners and losers, but overall the winners and losers balance, then it is possible for people to voluntarily enter into arrangements where the individual risks are shared and thus largely eliminated (abstracting for the moment from market failure problems in social insurance markets). Conversely, if people want to bear the risks individually, they can. This system works fine for time periods when shocks are small and idiosyncratic. But what about large disasters such as a hurricane that floods New Orleans, or a Great Depression that guts an entire economy?

The Social Security program grew out of a time when there was a large aggregate shock, a shock that resulted in the Great Depression. The Great Depression affected people collectively, it wasn’t just a few unlucky individuals balanced somewhere else by winners. It’s been hard for me to see how private accounts would help when stock market values fall, as they did after the crash of 1929, to one sixth their pre-crash values. Without some sort of social support from the government, such as it is, people would be much worse off after such events. How will personal accounts and individual accountability rebuild schools or bridges in New Orleans? How will private accounts or even the private sector rescue the elderly from rooftops or provide security against looters? They won’t. For large collective shocks the government, not the private sector induced purely by profit, must stand ready to act as the "insurer of last resort."

To have a social security system that falls apart when you most need it, when there are large disasters affecting entire regions or economies, is not optimal. Personal accounts would not have withstood the stock market crash associated with the Great Depression. Why do we want to implement a social support system that fails when it is needed the most? I don’t think any of us believes we should leave it to individuals to bear the full cost of the disaster caused by Hurricane Katrina, i.e. that government should not be involved at all. We all know that government has a role to play in this disaster, the cry from all sides is that the government is doing too little, not that it is doing too much. Things may not be perfect with government involved, and there is certainly room for improvement, but things would be even worse if government did not get involved at all. And just as the government has an essential role to play in this disaster, it will also have an essential role to play when the next big shock, whether it’s financial, natural, or human induced, hits us in the future. Social insurance systems aren’t just for the next few years, they must survive as long as the country does. Social insurance must survive the big shocks, and for that to happen the government must, in the end, provide the insurance.

If you think such large shocks cannot happen again, that big shocks such as a Great Depression will never, ever happen again to anyone ever, think about the events in any one hundred year time period. Things happen.

'Hiatt Hysterical Over Losing His Schtick'

Barkley Rosser feels "sorry for Fred." Sort of:

Hiatt Hysterical Over Losing His Schtick: Poor Fred Hiatt. For years, this Editor of the Editorial page of the Washington Post has made his named appearances on the editorial page (he daily bloviates the main ed lead anonymously) only to call for cutting Social Security, and occasionally Medicare as well. This has been his schtick for many years. Now it is over, but he fails to recognize it. ...

So, I feel sorry for Fred. Beating up on seniors who have paid in their taxes for what they are getting has been the one an only topic that has inspired him to write columns under his own name for many years. The new projections of lower deficits, good news to most of us, simply do not register with him. Actually, they probably do. But Krugman is right. As much as anybody, he is the longstanding VSP in DC who has been whining for years about cutting Social Security and Medicare, whose excuse for this argument has simply disappeared, but he and his pals simply are not willing to face the new facts.

'What Does the Fed Have to do with Social Security? Plenty'

Dean Baker:

What does the Fed have to do with Social Security? Plenty: Most of the people who closely follow the Federal Reserve Board’s decisions on monetary policy are investors trying to get a jump on any moves that will affect financial markets. Very few of the people involved in the debate over the future of Social Security pay much attention to the Fed. That’s unfortunate because the connections are much more direct than is generally recognized. ...

'It Never Seems to Sink In'

Paul Krugman:

Don’t Prosper and Die Early: I was pleased to see this article by Annie Lowrey documenting the growing disparity in life expectancy between the haves and the have-nots. ... Many of us have been trying for years to get this point across — to point out that when people call for raising the Social Security and Medicare ages, they’re basically saying that janitors must keep working because corporate lawyers are living longer. Yet it never seems to sink in.

Maybe this article will change that. But my guess is that in a week or two we will once again hear a supposed wise man saying that we need to raise the retirement age to 67 because of higher life expectancy, unaware that (a) life expectancy hasn’t risen much for half of workers (b) we’ve already raised the retirement age to 67.

'The Real Poverty Trap'

Paul Krugman:

The Real Poverty Trap: Earlier I noted that the new Ryan poverty report makes some big claims about the poverty trap, and cites a lot of research — but the research doesn’t actually support the claims. It occurs to me, however, that the whole Ryan approach is false in a deeper sense as well.

How so? Well, Ryan et al — conservatives in general — claim to care deeply about opportunity, about giving those not born into affluence the ability to rise. And they claim that their hostility to welfare-state programs reflects their assessment that these programs actually reduce opportunity, creating a poverty trap. ...

In fact, the evidence suggests that welfare-state programs enhance social mobility, thanks to little things like children of the poor having adequate nutrition and medical care. And conversely, of course, when such programs are absent or inadequate, the poor find themselves in a trap they often can’t escape, not because they lack the incentive, but because they lack the resources. ...

So the whole poverty trap line is a falsehood wrapped in a fallacy...

'How Well Did Social Security Mitigate the Effects of the Great Recession?'

I started blogging during the Social Security wars of the Bush administration. Looks like it's a good thing reason prevailed:

How Well Did Social Security Mitigate the Effects of the Great Recession?, by William B. Peterman and Kamila Sommer: Abstract: This paper quantifies the welfare implications of the U.S. Social Security program during the Great Recession. We find that the average welfare losses due to the Great Recession for agents alive at the time of the shock are notably smaller in an economy with Social Security relative to an economy without a Social Security program. Moreover, Social Security is particularly effective at mitigating the welfare losses for agents who are poorer, less productive, or older at the time of the shock. Importantly, in addition to mitigating the welfare losses for these potentially more vulnerable agents, we do not find any specific age, income, wealth or ability group for which Social Security substantially exacerbates the welfare consequences of the Great Recession. Taken as a whole, our results indicate that the U.S. Social Security program is particularly effective at providing insurance against business cycle episodes like the Great Recession.

Paul Krugman: Expanding Social Security

Social Security benefits "should be expanded, not cut":

Expanding Social Security, by Paul Krugman, Commentary, NY Times: For many years there has been one overwhelming rule for people who wanted to be considered serious inside the Beltway. It was this: You must declare your willingness to cut Social Security in the name of “entitlement reform.” It wasn’t really about the numbers, which never supported the notion that Social Security faced an acute crisis. It was instead a sort of declaration of identity, a way to show that you were an establishment guy, willing to impose pain (on other people, as usual) in the name of fiscal responsibility.

But a funny thing has happened in the past year or so. Suddenly, we’re hearing open discussion of the idea that Social Security should be expanded, not cut. Talk of Social Security expansion has even reached the Senate, with Tom Harkin introducing legislation that would increase benefits. A few days ago Senator Elizabeth Warren gave a stirring floor speech making the case for expanded benefits.

Where is this coming from? One answer is that the fiscal scolds driving the cut-Social-Security orthodoxy have, deservedly, lost a lot of credibility over the past few years. ... Beyond that, America’s overall retirement system is in big trouble. ...

Many workers used to have defined-benefit retirement plans, plans in which their employers guaranteed a steady income after retirement. And a fair number of seniors ... are still collecting benefits from such plans.

Today, however, workers who have any retirement plan at all generally have defined-contribution plans — basically, 401(k)’s... The trouble is that at this point it’s clear that the shift to 401(k)’s was a gigantic failure. Employers took advantage of the switch to surreptitiously cut benefits; investment returns have been far lower than workers were told to expect; and, to be fair, many people haven’t managed their money wisely.

As a result, we’re looking at a looming retirement crisis, with tens of millions of Americans facing a sharp decline in living standards at the end of their working lives. For many, the only thing protecting them from abject penury will be Social Security. Aren’t you glad we didn’t privatize the program?

So there’s a strong case for expanding, not contracting, Social Security. Yes, this would cost money, and it would require additional taxes...

Realistically, Social Security expansion won’t happen anytime soon. But it’s an idea that deserves to be on the table — and it’s a very good sign that it finally is.

Democrats Will Have to Swallow Entitlement Cuts?

I honestly can't remember if I voted for Obama or Hillary in the primary, but if I voted for Obama, it was a mistake:

Obama's Top Economic Adviser Tells Democrats They'll Have to Swallow Entitlement Cuts, by Joshua Green: This morning, Gene Sperling, director of the White House’s National Economic Council, appeared before a Democratic business group for what was billed as a speech about the economy after the shutdown, followed by a Q&A session. The White House didn’t push this as a newsmaking event, so it didn’t get much billing. But I went anyway, and I was struck by what Sperling had to say, especially about the upcoming budget negotiations that are a product of the deal to reopen the government.

In his usual elliptical and prolix way, Sperling seemed to be laying out the contours of a bargain with Republicans that’s quite a bit different that what most Democrats seem prepared to accept. What stood out to me was how he kept winding back around to the importance of entitlement cuts as part of a deal, as if he were laying the groundwork to blunt liberal anger. Right now, the official Democratic position is that they’ll accept entitlement cuts only in exchange for new revenue—something most Republicans reject. If Sperling mentioned revenue at all, I missed it.

But he dwelt at length—and with some passion—on the need for more stimulus, though he avoided using that dreaded word. He seemed to hint at a budget deal that would trade near-term “investment” (the preferred euphemism for “stimulus’) for long-term entitlement reform. That would be an important shift and one that would certainly upset many Democrats. ...

'What We Mean When We Talk About Middle-Out Economics'

Hilary Wething at the EPI:

What We Mean When We Talk About Middle-Out Economics: Paul Krugman and Mark Thoma have been discussing (see here and here) the views of the (increasingly influential) very rich on this fall’s fiscal debate. They hypothesize that rising inequality has led to exorbitantly large incomes for a select few, and that these select few don’t understand the value of social insurance because they reap little-to-no benefits from programs like Medicaid, and SNAP, for example. The top 1 percent, after all, rarely realize the benefits of social insurance, since the likelihood that they experience unexpected income losses to the extent that they fall below the middle class living standards is slim. More often, social insurance benefits those who may be in the middle and lower classes, and experience unexpected income losses (like a lay off). Complaining about insurance simply because you don’t think you will need it is a pretty pithy argument, but let’s ignore that for now.

Thoma and Krugman go further, noting that rising inequality seems to have confirmed the top one percent’s notion that they are the indispensable economic engine of the U.S. economy, who take risks and work the hardest and should justly reap the benefits. They push for lower taxes (even though their current tax rate is one of the lowest in history) because they don’t think anything should impede their productivity, and they demand respect for being the “job creators” in society. In the context of this fall’s showdowns over the federal budget and the debt ceiling, not only is this take wrong, but it is totally divorced from the reality the broad middle-class faces—a reality of high joblessness from an anemic recovery, and meager wage growth over the last 30 years.

President Obama and others like to frame economic policy as growing the economy from the ‘middle-out.’ Last week, my colleague, Josh Bivens and I published a paper arguing that the fiscal policy debate this fall needs go beyond rhetoric and put actually improving middle-class living standards front-and-center. We attempted to explore what, if taken seriously, a ‘middle-out’ approach would look like.

A ‘middle out’ approach to fiscal policy would first and foremost focus on creating jobs and ensuring a full recovery from the Great Recession. Relative to other recessions, government spending in recent years has been steeply contractionary... had it just matched typical growth during previous recoveries. Further, had the historical average of public spending been replicated in the current recovery, roughly 90 percent today’s output gap would be closed and there would be 5 million additional jobs. ... At the very least, fiscal policymakers should repeal “sequestration”...

After addressing the jobs crisis, a ‘middle out’ approach would then work to reverse the rise of inequality... [S]ocial insurance programs so many of the very rich despise: these programs (particularly Social Security and Medicare) have been among the only sources of real strength for middle-class Americans in recent years and hence should not be on the chopping block in this fall’s fiscal showdowns. Middle-out economics should focus on preserving key areas of strength for middle-class living standards, and these social insurance programs are one such area.

'Social Security is, by Far, the Most Effective Anti-Poverty Program in the United States'

Via Elise Gould at the EPI:

...While the United States is still slowly recovering from the worst recession since the Great Depression, fortunately this time around government safety net programs have been in place to keep more people from falling into poverty. The Supplemental Poverty Measure (SPM) shows the strength of the government to mitigate the incidence of poverty.

As the figure below shows, Social Security is, by far, the most effective anti-poverty program in the United States. Without Social Security, an additional 8.3 percent of Americans, or over 25 million more people, would fall below the SPM poverty threshold. Refundable tax credits, such as the Earned Income Tax Credit, kept 2.5 percent, or nearly 8 million Americans above the SPM poverty threshold. Other programs such as SNAP (food stamps), unemployment insurance, Supplemental Security Income, and housing subsidies also have a significant impact on the ability of families to stay afloat.

Source: http://www.census.gov/hhes/povmeas/methodology/supplemental/research/Short_ResearchSPM2011.pdf

We Need a Bigger Social Security System

One more from Brad DeLong:

Why We Need a Bigger Social Security System with Higher, Not Lower Benefits: Edward Filene's idea from the 1920s of having companies run employer-sponsored defined-benefit plans has, by and large, come a-crashing down. Companies turn out not to be long-lived enough to run pensions with a high enough probability. And when they are there is always the possibility of a Mitt Romney coming in and making his fortune by figuring out how to expropriate the pension via legal and financial process. Since pension recipients are stakeholders without either legal control rights or economic holdup powers, their stake will always be prey to the princes of Wall Street.

That suggests that what we really need is a bigger Social Security system--unless, of course, we can provide incentives and vehicles for people to do their retirement saving on their own. But 401(k)s have turned out to be as big a long-run disaster as employer-sponsored defined-benefit pensions when one assesses their efficiency as pension vehicles.

And so let me turn the mike over to James Kwak: The Problem with 401(k) Plans ...

'Why is Free-Loading Now a Conservative Value?'

Good question:

...all those extra costs for the uninsured drove up premiums for everyone else, drove up hospital costs, giving them a reason to raise prices even further, and played a role in rendering healthcare unaffordable for many others.

What Obamacare does, like Romneycare before it, is end this free-loading.

The law is telling these young adults that if you want to go without insurance, you are not going to make everyone else pay for it if your risk-analysis ends up faulty. You have to exercise a minimum of personal responsibility to pay for your own potential healthcare. In other words, rights come with responsibilities in a liberal democracy. At least that is what I always understood the conservative position to be.

So why is an allegedly conservative organization actively encouraging personal irresponsibility? Why are they encouraging one sector of society – the young and the fearless – to rely on everyone else’s sacrifice to get bailed out if they have an accident, or contract cancer, or need a hospital to deliver a baby? This is not freedom as the Founders understood it; it’s recklessness, irresponsibility and short-sighted selfishness. Now, if the twentysomethings cannot afford it, it’s one thing – and part of our healthcare cost crisis. But now that Obamacare has removed that excuse and demands that every citizen actually contribute to the insurance pool, that completely defensible excuse is over. No more free-loading, in other words.

So I ask again: why is free-loading now a conservative value? ...

Social Security is similar. If people weren't required to contribute, many wouldn't (if for no other reason than the immediate financial demands for many families make it hard to save). But we, as a society, wouldn't let them starve and die when they are no longer able to work, and the rest of us would end up footing the bill. So we require people to contribute to their own retirement through withholding for Social Security. Like health insurance for the young, many people don't need Social Security to retire comfortably, but for those who do it's a lifesaver, one that is at least partially funded through their own contributions.

Where Do Older Workers Work the Most?

[via CBPP: "... Elsewhere we’ve noted that our Social Security system pays pretty modest benefits compared with other advanced nations. ..."]

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).