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Social Security Isn’t a Pension Plan But

11:58 am in Social Security by masaccio

From Shanghai, Photo by Sean Munson via Flickr,

The most obvious way Social Security is like a pension plan is that the rich are trying to destroy it, just like Hostess Brands wrecked the retirement plans of its bakers. But there are other similarities. Since 1983, we have all paid in a lot more money in FICA taxes than needed to fund current payments on the theory that it would be there for baby boomers when it was needed.

Pension plans do the same thing. They use actuarial calculations to figure out how much money they need in out years, and how much they need to take in today to make those payments. Then they invest the money as safely as possible so that it will be there when it is needed. The Social Security Trust Fund was ordered to use the excess contributions to buy Treasury obligations, albeit of a type supposedly not to be sold to the public. Those obligations are the bulwark of the demands of citizens who don’t want to see any more cuts to Social Security. They also constitute a partial explanation for the desire of the rich to cut Social Security: the bonds will have to be redeemed, meaning either the Treasury will have to sell bonds to replace them or we will have to increase taxes to fund the repayment of the bonds, or some other step will be necessary that the rich don’t like.

The deep desire not to pay the bonds is part of a longer term project, tax reduction for the rich. In fact, the use of the Special Treasury Obligation/Trust Fund was meant to disguise the reality of the huge tax cuts handed to the wealthy in the 1980s in a lovely bipartisan way. The unfairness and stupidity of the tax cut for the rich was hidden by the increase in the FICA taxes imposed only on income from work, and only modestly affecting the income of the rich. Meanwhile, the rich funded the increasing Reagan deficits by lending money to the Treasury that should have been paid in taxes.

Congress adopted a unified budget approach that folded the increased FICA taxes into the revenue side, making budget deficits seem much smaller than they actually were. (That was theoretically changed in 1990; see this for details of the current situation.) Now that it’s time to pay off the bonds held by the Trust Fund, the richest Americans have made their position clear: they aren’t paying back those bonds, and they won’t pay more taxes. They get support from their servant think tanks, like this from Jagadeesh Gokhale at the Koch Cato Institute:

Let us recognize that past excess payroll taxes relative to benefit outlays (past Trust Fund surpluses under the “off budget” perspective) have been spent on other government programs. Grants of additional spending authority for Social Security must ultimately be paid out of today’s and future taxpayer resources so making them whole is not really possible.

Gokhale says that the bonds held by the Trust Fund are like corporate borrowings, where the proceeds are used for corporate purposes. When due, they are either are paid from future income and assets, or are dumped in the trash through bankruptcy or negotiations with creditors. Let’s default, he says. He might want to check out the Fourteenth Amendment.

But the richest Americans plan to act on Gokhale’s advice. They are going to cut the retirement benefits of millions of fellow citizens rather than pay more taxes. And they have their hired hands in government to make that stick. Here’s their pet Senator, Mitch McConnell:

Predictably, the President is already claiming that his tax hike on the “rich” isn’t enough. I have news for him: the moment that he and virtually every elected Democrat in Washington signed off on the terms of the current arrangement, it was the last word on taxes. That debate is over. Now the conversation turns to cutting spending on the government programs that are the real source of the nation’s fiscal imbalance.

Where does that leave people dependent on Social Security, Medicare and Medicaid? The Center for Retirement Research at Boston College recently issued an update on its retirement risk index. Here is the conclusion:

The NRRI shows that, as of 2010, more than half of today’s households will not have enough retirement income to maintain their pre-retirement standard of living, even if they work to age 65 – which is above the current average retirement age – and annuitize all of their financial assets, including the receipts from a reverse mortgage on their homes.

President Obama sees himself as a moderate Republican. He thinks that if half of the families in the country can’t maintain their standard of living in retirement, they should simply substitute a less pleasant life. They could, for example, live on a moderate amount of catfood, which is the logical substitute for tuna fish under his Chained CPI proposal. The Republicans in the House and Senate have a counteroffer: the old should die in the street. I’m sure there is a compromise for this infinitely flexible President: maybe we can set up Federal Die-In Locations so the rich won’t have to see the dead.

Matt Bai Needs New Economics Advisers

4:18 pm in Uncategorized by masaccio

Matt Bai apparently plans to remain perfectly ignorant about Social Security and the Social Security Trust Fund. First he wrote this piece for the New York Times, in which he mingles his wrong-headed ideas with quotes from Earl Blumenauer in a way that makes it look like the mild-mannered long-term Congressman from Portland agreed with him. Blumenauer was forced to issue a denial. When asked about it by reader english444, who correctly describes the situation, Bai doubled down on his ignorance:

Well, this topic did come up a lot, and I’m not looking to get into a whole new debate about it here. But the most credible experts I’ve talked to believe we need to draw a distinction between principle and reality. The principle to which you’re referring is that the government guaranteed all of this Social Security surplus money (which it spent) with Treasury Bills. The reality is that redeeming that trillions of dollars in debt would require issuing trillions more in debt. Now, if deficits are low and the national debt is manageable, that’s not such a huge deal. But given the projections for the next few decades (the national debt could reach 90 percent of GDP by 2020, which puts us in Greece territory), issuing that kind of debt would still entail some serious budget cuts, either in Social Security or other social programs, or a sharp rise in taxes. The longer we postpone this debate, the more draconian those measures would likely be.

Now, I can sympathize with the view based on principle, but I can’t really understand why introducing the pragmatic side of this, as I did, is somehow immoral or requires my having some sinister “agenda.” And I find it amusing that it tends to be boomers — whose generation happily spent all this money and who are now collecting their full Social Security benefits — who do most of the lecturing about the sanctity of the trust fund. But that’s a discussion for another day.

Bai needs to learn the basics before he starts relying on anonymous “most credible experts”. Here’s a starting place: the US Treasury website that gives the national debt to the penny every day. At September 21, the total public debt outstanding was $13.477 trillion. The GDP can be found on here, Table 3 (.pdf). At June 30, 2010, the estimate is $14.575 trillion. That puts US debt at 92.5% of GDP, or as Bai would say, into Greece territory. In May, 2010, the debt-GDP ration of Greece was about 115%.

As Dean Baker has repeatedly tried to explain, most recently here in response to Bai, bonds are easy to understand. I lend you money. You spend it. Then you start paying me back. There is nothing nefarious about this process. Baker speculates that Bai may be arguing that the Treasury should default on some of that debt. That will cause some heartburn at the FDIC, because it invests in Treasuries. In fact, at May 31, the FDIC held $38.531 billion of that kind of debt, just in case some bank might fail.

It would also anger baby boomers, whose Social Security Bai wants to cut after they paid $2.54 trillion into the Trust Fund. Bai thinks they should just shut up, because it’s all their fault. Actually, of course, it’s the “fault” of a completely different group of people. The same failed economists who promised that cutting taxes for the very rich would raise total tax revenues were the people who in 2001 told Congress that it was a bad idea to run surpluses, I’m looking at you, Alan Greenspan. There wouldn’t be an issue if not for the ludicrous Bush tax cuts. Our borrowing capacity would easily absorb the tiny amount of money needed to fund Social Security.

The people who are collecting Social Security today include a few baby boomers, but mostly it’s our parents, and I don’t know about you, but I’m glad they will be able to live on their own.

To top it off, actual credible economists like Paul Krugman at Princeton and the NYT, and James Horney of the Center on Budget and Policy Priorities, don’t agree with Bai’s theory that bad things happen when debt hits 90% of GDP, or that the correct measure excludes intra-governmental debt.

Mr. Bai, tear down that wall of secrecy and put some names to those “most credible experts”. Or admit that you are just repeating the latest whispers from the Catfood Commission and its servile staff minions, or some other tool.