How the Deficit Commission Painted Itself into Corner on Social Security
by Bruce Webb
High on the list of tasks mandated of the Obama Deficit Commission is to get the deficit down to 3% of GDP by 2015. Unfortunately for them they have set up a situation where they can’t move that number via cuts to Social Security, if anything such cuts more one of their metrics the wrong way. To understand why we need to revisit old friends including ‘Leninist Strategy’, ‘CSSS’, ‘deficit’, ‘debt’ and ‘unfunded liability’.
It was well understood as far back as the publication of Butler and Germanis’ Leninist Strategy (11th article here) in 1983 that cutting benefits in the near term for existing retirees and even for newly approaching retirees was both politically deadly and deeply inequitable, these people simply didn’t have time to do alternative planning through Personal Retirement Accounts or anything else. This reality was explicitly recognized by Bush’s 2001 Commission to Strengthen Social Security where it was established as Guiding Principle no 1 of 6 CSSS. Now how long this grace period should be and whether it would be permanent for that class of retirees, or whether they would ultimately share in whatever index changes were adopted vary across plans. What doesn’t vary is the fact that no plan entirely based on benefit cuts can move that 2015 target number.
The why and how of this below the fold.
The first problem is that Social Security ‘reformers’ continually confuse ‘deficit’, ‘debt’ and ‘unfunded liability’. They implicitly assume that current year deficits sum into ten year debt increases which in turn equate to long-term unfunded liabilities. And if we were just talking about General Fund spending this would largely be so. But Social Security throws some wrinkles in.
Lets take the extreme case, one where benefit cuts happen right away from Day One. Well if big enough they would put Social Security back in cash-flow positive territory (CBO’s ‘Primary Surplus’) and so score as a reduction in deficits compared to the baseline, so far so good. But by forestalling the need to pay a portion of the interest accruing on the Trust Fund in cash those cuts equally serve to pad the bottom line of Trust Fund balances, which for this purpose score as a part of total Public Debt. To make it worse interest not paid out in cash gets transformed into new principal which itself starts drawing interest and so boosting Trust Fund Balances compared to the baseline. Exactly how are you creating ‘intergenerational equity’ and relieving your children and grand-children when the net effect of short term cuts is a boost in long-term debt. (I know this sounds goofy, but that is the way the numbers run).
So the Commission is already in a trap, they can improve the short term deficit position by cutting benefits and in so doing also have positive effects on 75 year and Infinite Future actuarial gaps but only at the cost of actually increasing Public Debt over the medium term. But it gets worse, because they have already ruled out short term benefit cuts.
The strictest plan being floated right now is that of co-Chairman Alan Simpson. He would reduce the grace period so that it only cover people 60 and older. But this means that you simply don’t see any savings at all until people now aged 59 reach Full Retirement Age which in practice means 2017. Meaning you don’t move the number in the target year of 2015 AT ALL. And unless you quickly phase in those benefit cuts in a big way in 2017 you end up with no real impact on your standard CBO Ten Year score.
And the Ryan Roadmap makes this worse, he would exempt people 55 and older which means your very first savings come in 2022 and so outside the 10 Year scoring window altogether. And then you have people like Bachmann vaguely proposing to ‘wean’ people under 50 off Social Security, which puts any savings off until 2027. Which is fine if your real goal is to eliminate Social Security over the long run, but not particularly compelling when you are trying to sell this as a deficit and debt reduction measure sparked by short term Obama spending. It literally does not compute.
The current public line being taken by most of the Commissioners is that they have to tackle Social Security to show the bond market that they are serious. But since it is doubtful they have the cojones to cut benefits in the short term and even if they do won’t have the effect they need on either their Public Debt or Debt Held by the Public metrics, how is that supposed to reassure the bond markets of anything?
Now the Commission has a tiny exit hole. If they can keep the focus entirely on reducing the 75 year and Infinite Future actuarial gap and keep the public in the dark about the actual effect of their proposals on ten year deficits and twenty year debt levels they might escape the trap. But their political need in the here and now to make unpopular future cuts to Social Security somehow forced on them by current deficits makes it difficult for them to pull the bait and switch, over the last year the informed public has been trained to look at the CBO score and in that regard the Commission has nothing.
Bruce, Clarify a point for me, please. You say, “So the Commission is already in a trap, they can improve the short term deficit position by cutting benefits and in so doing also have positive effects on 75 year and Infinite Future actuarial gaps …”
I assume that your reference to “the short teerm deficit” is the general budget deficit, not a deficit in the Social Security program budget. First, is my assumption correct? If so how is such a short term improvement made when the two budgets are seperate as a matter of law.
Am I wrong in recollecting that there is specific legislation which prohibits the use of a “unified” budget in this manner?
See this page from the SS Admin web site:
i think you make a mistake when you think the Commission has to come up with a plan that “adds up.” Their goal, it looks like, is to kill Social Security, probably by the kind of cuts whose damage won’t be apparent right away. There is no difficulty in convincing the public and the congress and the press that two plus two equals any damn thing they want it to equal.
isn’t it a definition of evil that we are proposing sacrificing the well being of almost all americans to “reassure the bond markets.”
even if bond traders are real human beings, one would have thought that risk was an accepted part of their game. okay, maybe “evil” is another word for insanity.
over the next twenty or thirty years, the general budget will have to repay money it has borrowed from social security. this creates a budget deficit in the minds of the congress because they see it as money that has to be raised to spend on something that doesn’t matter to them. the fact that if they borrow the money from the public in order to retire the debt owed to SS is “deficit neutral” escapes them because, well, after all, the money they owe to Social Security is “off budget,” while the money they would borrow (or, shudder, tax) to repay that money would be “on budget.”
Bruce and coberly,
A thought…is there a chance that the entire point of the commission is to LOOK like they are doing something to stem the tide of the hude Obama deficits vs. actually really doing something?
Not a reason to be complacent, but just a thought…
Islam will change
The US polar social contract is set up for the few rather than the many. The US will not set it in the middle closer to the benefit of the many.
The few are the bond market, the many the other 99%.
The issue is: does the USG borrow the money from the private sector, instead of taxing it (the cash seems to be there). Is there so much cash that the USG is the investment of last resort?
And/or tariff it from the Chinese and Japanese rather than borrow it (again the cash is there). Is there so much cash that the USG is the investment of last resort, with nothing needed to be done in China or Japan?
The bond market is the undertaxed sector, lending instead of paying taxes.
And worse the discretionary part of USG spending around 13% of GDP is non productive spending building militarism and other forms of dividend generation corporate welfare for the people making up the bond market.
Tax them all…………………..
Looking at the bond market as a source of tax revenues is harder than cutting SS for a 100M US persons.
Write to the people in the Senate and House that claim to represent you. Here’s a boiler plate:
Dear……..,Please make it your business to be aware of the fact that the Deficit Commission’s focus on the Social Security porogram is misplaced. The Social Security budget is not the problem. The general budget is the problem and that problem stems from wasteful military spending, especially as it relates to Iraq and Afghanistan, and inadequate tax receipts from that sector of the population that can most afford to pay more. The Bush tax cuts have been a serious drain on the country’s revenues. The Obama Deficit Commission is stacked with members who have made it clear that they favor cutting Social Security benfits, but have no basis in fact to justify such cuts. FICA collections cover the cost of the program with the occasional need for supplementation from the Trust Fund. These are facts that are not in dispute. That a Democratic administration will make an effort to interfer with Social Security is antithetical to everything that the party is said to stand for. Don’t be a part of that lie. My vote and the votes of all my friends and relations is depenmdent on your support for the Social Security program as it is, not as the dismantelers would have it become.
PS: I vote and I talk to friends, acquaintences and relations about their need to understand the issues
I didn’t proof this for spelling.
Mr. Buff–I have also been hoping that the Commission is just “political theater.” Ordinary people don’t want cuts in benefits. Anyone in Congress who votes for any such cuts will be jobless in the next election. So, what’s the point? Just to say, “We tried!” and go on with business as usual just sounds nutz. True, it’s not the first time, but I’m confused. Is Obama hoping for some type of tax reform out of this? Any ideas?
Who are these hand wringers in the bond market the commission is looking out for? The 20 year composite rate for T-bills is 4 points and change. The >10 year composite rate is barely 4%.
The sky appears to be staying up there where it belongs Pete Peterson be damned.
Jack the interaction between SSA, CBO and OMB accounting on this is very complex and just when you think you got it, it slips away.
Social Security and the Post Office are officially ‘off budget’ for CBO purposes, in that sense there legally is no more ‘unified budget’. Equally though CBO when projecting effects on the deficit accounts for off-budget and on-budget surpluses separately but combine them for their bottom line number, that is when the Stimulus package came in with a score $767 billion or whatever that included both General Fund and Social Security components. And it is that combined number that the MSM uses when they talk ‘surplus’ or ‘deficit’ as simple terms.
Whatever you want to call the CBO 10 year number, whether ‘Unified Budget’ or something else the effect of a short term cut in benefits results in a larger part of accrued interest flowing into the Trust Fund as opposed to out the door in the form of benefits and so increases the Trust Fund balance in relation to the existing baseline. This increased surplus or decreased defict (as the case might be, in 2011 it would be the former for OAS, the latter for DI) will score as a positive number for the bottom line reported by the MSM. So certainly on the OAS side it doesn’t do a thing for the General Fund deficit one way or another, only on the combined one however labeled.
Legal separation doesn’t help if all the metrics are focused on that combined number in the end.
Mr. Amateur–Seems like the bond market is never happy. They have tons of money to lend, and want interest on it to be higher. Which would happen if the govt. borrowed money from them in a pinch. So, isn’t it counterproductive to get the national debt down from the bond market’s perspective? N Ortiz
“is there a chance that the entire point of the commission is to LOOK like they are doing something to stem the tide of the hude Obama deficits vs. actually really doing something?”
That may be Obama and Rahm’s point, but it certainly isn’t what was driving the push for Conrad-Gregg or Cooper-Wolf or Peterson-Pew or Brookings-Heritage. Congressional Republicans plus Blue Dog Dems joined with various Peterson associated groups to push this kind of ‘Entitlements Commission’ years before it became clear that either the recession would bite in the particular way it did, or indeed that Obama would actually get elected, and believe me no one thinks any of those guys are intent on doing Obama any favors.
Best case is that the Obama team is just trying to ride the tiger but all the evidence is that he has bought the Peterson line complete with hook and sinker. It was only the intervention of Nancy Pelosi that kept the WH Fiscal Responsibility Summit from a total takeover by PGP (he personally was originally set to be key-noter and moderator) in the interest of shoving through a commission plan based on 2007 Cooper-Wolf legislation that was deliberately modeled on BRAC.
So no, this train left the track years before the 2008 election
Well that comment was supposed to appear higher up.
But to answer Coberly, yes the Commission’s plan has to add up in the sense of passing the smell test.
They have a primary mandate to move the 2015 deficit number and a secondary mandate to inject some long term ‘fiscal discipline’. But their scare tactics are all focused on short term effects, particularly ones that can be pinned on Obama, if the plan they come up with doesn’t move CBO’s 10 year deficit or debt numbers then it can be perceived (with a little help from us) as just a failed attempt at bait and switch.
It is kind of like the Republican’s HCR plan. It accomplished some goals of theirs, cutting state level regulation of insurance in favor of a lowest common denominator approach and sticking it to trial lawyers by tort ‘reform’. It just didn’t save any money or cover any more people and as such didn’t get taken seriously.
The Commission is in that same trap, their goals of destroying Social Security are not in alignment with what most people see is the problem, by chosing to present this as a problem in short to medium term deficits and debts they have backed themselves into a position where at a minimum there solutions make the deficit and debt scores move the wrong direction.
Mr. Bruce–Ok, as we thought, Peter the Wolf is going for the big enchilada. And, no matter what political game the current admin may be playing, they buy the “entitlements as bankruptcy” idea. Ok. But that doesn’t change the question about why do this? That’s what I don’t understand. You have an economy built on consumer spending, and you propose to cut the monthly float of SS benes from its current statutory level to a substantially lower number.
So, in the future, people are helping out their parents because their reduced benes aren’t sufficient to support them AND workers are earning less than they would if there were any material increase in industrial/business activity. And, we dismantle public education, and so on and so on. To what end?
It’s not simply the bond market that is never happy. In general there appears to be a high positive correlation between level of personal wealth and level of personal greed. Theink of it as, “I have more than I’ll ever need. I want more.”
It strikes me as impossible that Obama and his closest advisors do not understand the Social Security program as it relates to the general budget and that they truly believe that it is the benefits paid out of the program that is the cause of the deficit. Enough has been written on this issue making the facts of the matter clear cut. There may be some degree of uncertainty regarding the level of FICA deductions required to maintain the Social Security program in an adequately funded manner. That’s not the same issue as the general budget deficit. GThey are in reality and by law seperate issues. If there is a concern that repayment of Trust Fund Treasuries is a problem then I’ad suggest that repayment of any Treasuries are in jeopardy. They’re all backed by the good faitha and credit, etc.
There may be a few real humans in the bond market, but like the stock market, it is mostly SkyNet.
That is, a conglomerate of CBs, foreign governments, banks doing arb on the yield curve using humans’ ZIRP money and Fed liquidity money. Not to mention pensions funds that happen to be government and private (for the pre 401K generation) and are likely to be bailed out by the Federal government pension fund guarantee program we have so that they will get their 60% of peak career pay.
Now if the bond market was simply old Americans lending their retirement savings to the USG and having interest paid by working Americans, there is a chance this all would work.
But no, we have gone far beyond that point.
So now they tell us the big problem is paying 25-30K in SS bennies, which we did fund better than most retirement programs out there. And the retirement programs need 10% year investment returns to pay as advertised, where all we ask from SS is for Congress to give back the money they took from us and 4% interest.
Jack I think it is deeper than that.
Among the ruling classes a sure fire proof that you are the inside looking out is your willingness to enter into a little game of ‘Kick the Peasant’, it doesn’t depend on whether the peasant actually deserves to be kicked, instead it is a sign that if and when calls for anything resembling ‘redistribution’ comes up that you will be on the property owners side of the barricades.
That is it really didn’t matter whether the conventional measure of NAIRU was set in the right place or whether minimum wage was in fact in line with typical marginal productivity for entry level workers, ultimately what mattered is proof that you were in solidarity with property owners.
Among Rahmbo and friends the test that shows that you are a Serious Player starts with your willingness to declare every day ‘Punch a Hippie Day’, workers not wanting cuts in Social Security being all the validation you need to pursue them.
Jack–Perhaps they are trying to solve a big problem they perceive but are not explaining. If so, then the reason is purely political and has nothing to do with the budget. It’s absurd to trust any President’s administration and this one is no different. So, what is the problem and how can we deal with it? Otherwise, to say that the US is danger of default just means that the world is coming to an end.
And, I really can’t see how that is happening. The US really isn’t Greece. The anti-SS crowd would never cry wolf on the possibility of a general default if it were even remotely possible. They’re in the bond and stock markets and that’s how they make their obsecenely huge amounts of money. If the US defaults, their paper is worthless. So, this situation is evidence of a major mental aberration on the part of these entitlement freaks. Doesn’t change the need to combat this idiocy, though.
If you look only at current interest rates you would have to conclude that US Treasury bond investors are the Happiest Campers In The Entire World. (This is the Krugman View)
But they are sort of manic depressive types and suffer Minsky Moments as we have seen in Europe. (where the retirement age is 60-61) So that problem has to do with debt/gdp ratio. We don’t really know when it may happen either. But that is a problem with deficits, not SS. Unless, like we all know here, they decide to screw us to maintain the mismatch between taxes and government spending. And I’m hoping that some economist somewhere will point out that SS payments increase the ever so important Aggregate Demand in this country. (Tho not for Lambos and Learjets)
PS: Have you heard we are going to Mars, but it doesn’t cost much?
Ilsm “The bond market is the undertaxed sector, lending instead of paying taxes. “
Foreign governments and central banks do not pay taxes on their bond interest. American bond investors pay full income tax rate on interest. (they are not Bush dividends)
If you don’t believe me, try it sometime.
This was my first reaction, too. A high % of the people don’t understand the basic premise of SS – especially those far from collecting it. A much higher % have never seen or read excellent explanations like you and Bruce give, and most would not make it through them or understand them if they did. All of which tells me that they can say “any damn thing they want” and if they say it often enough and make it sound like a “kitchen table” (god, I’m getting tired of that term) discussion, there will be plenty who believe them.
Mr. B– I expect you’re right. And, yep, no point in siding with the ones who’re gonna get kicked. Still, I’d like a chance to kick back a time or two. Wouldn’t you? 😎 NO
I prefer my hippie sauted with rare Peruvian white wine with a side of arugula. Now a little tenderizing prior may do wonders for the dish so I will take the advice of the “Serious Players” next time I prepare the dish! Need a large party for it or you just have too many leftovers…
ON a more serious note, do you really beleive Obama would sign legislation that gutted or even significantly reduced SS?
I have said it before, I just have a hard time seeing this from someone trumped as this generation’s FDR…
Islam will change
If the US defaults the world will be in a world of hurt.
umm… It’s definitely Kick the Peasant since the problem is endemic. If you have no one to kick, you’re going to be the one who winds up fighting over large cardboard boxes on the edge of town.
Rahmbo’s “Hippies” (and those who would explode over such a label) will never be hurt as badly as those who are young, poorly educated, and “too busy” (trying to keep themselves and their children afloat) to study and vote their own interest.
It seems like a natural alliance – and a good way to spend some retirement time. That’s probably why we hear so much about intergenerational inequities.
well, i would only add to the “kick the peasant” game
what our rich friends fail to notice is that since the New Deal showed that giving the peasants a little money and, more important, a little security, makes the rich richer than even they can imagine… that kick the peasant is self-destructive.
unfortunately they can’t help themselves.
I sometimes think the answer isn’t rational. Seems like it’s based on a collective blindness born in the belief that Successful Individuals “made it” on their own and can continue to do so. They don’t seem to understand the points you have made are relevant.
They aren’t necessarily looking forward to a world anything like the one we’ve been living in for a while. Maybe they think a desperate population will compete with each other for crumbs, and walled compounds and private armies can protect them from whatever “unrest” might result. In other words, there will always be someone willing to work for them; competition might bring the cost down to subsistence food; the rest don’t matter. “If you have enough money, you can have/get anything you want.” Why worry?
As for the Obama team, the explanation is a mystery. Maybe it’s another naive attempt to “work with” the opposition? Or a perceived basis for a political talking point? Ignorance doesn’t strike me as possible, but maybe it’s evidence of a power struggle, ideological or otherwise, within the Administration in which, as Bruce says, “all the evidence is that he has bought the Peterson line complete with hook and sinker.“
It’s not wealth that they are after…It’s power that they want. You can’t create a dependant society and restructure the entire system with the old dinasaur set ups of the past.
If you have no security, and can’t take advantage of the American dream you only end up making the rich…Richer and more powerful because nobody will be able to come up behind them and compete against them…which we basically can’t do now anyway.
Why would you be concerned about finding the money to fulfill the prior obligations if your intention is the change the entire set-up?
Change we can believe in!……..or at least some fools do!
Peter Orszag, one of the President’s advisors, wrote a book ten years ago or so, before anyone ever heard of Obama, “Saving Social Security, a balanced approach”, which on first glance looks moderate and reasonable and not following the Peterson line. But when you read it carefully you realize that Orszag either does not understand Social Security at all (insurance for workers paid for by workers) or is writing a political document designed to “compromise” with all players, whatever the actual facts, or value of the facts, might be. He introduced the concept of “legacy debt” in which it appears our grandparents did us a bad thing by paying for their parents retirement instead of saving the money at interest for their own retirement so we could save our own money at interest instead of paying for theirs. I have tried to explain the fallacy of this elsewhere, but it essentially denies the whole point of Social Security, which was to solve the problem of poverty in old age by keeping workers savings beyond the risks of markets and inflation. But somehow we are supposed to feel deeply injured because we may earn less on our money than our grandparents did on theirs… as if we should feel injured because the cost of our automobile or medical insurance is higher than theirs. As if there were a cosmic justice system that guaranteed the price of bread from one generation to the next stayed within a hundredth of a percent. As if one generation did not have a war or depression the other one did not. As if one generation did not build the schools and roads and armies that made the next generation richer than the one who “got the better deal on Social Security.”
Now, it is entirely possible that a sociopath with some mathematical talent could come up with the Orszag argument in complete good faith. But i’d be more inclined to look at who his political friends are. Even some lesser lights among “progressives” have been known to come back from an evening of drinking with their conservative colleagues having discoverd that Social Security is a “jobs killing tax.”
To try to be fair to Orszag, his “balanced approach” is not obviously evil. It does destroy the fundamental nature of Social Security, but at least in the short run it would make it a more effective welfare plan.
the gutting won’t be obvious, and it will be sold as “saving Social Security” and “solving the budget deficit”.
out of the mouths of babes…
i am inclined to agree with you.
Jimi–For crying out loud, we have a population of at least 300 million people plus an uncounted number of people here without documents. What do we expect these people to do to make a living when they can no longer work?
Well, of course the guys with gazillion bucks want power. They already have it. So did Vanderbilt, Carnegie, Rockefeller and Morgan. During the last long depression from about 1880 to 1890, there were many other rich men with political connections who had amassed amazing fortunes–all income tax free. Estates of $5M were not common hardly nonexistent. And, this was before federal income tax. Now, that was real money!
We have been there and done that before. In fact, there were similar periods of rapid accumulations of wealth before that during the Colonial period. Why did we reject taxation without representation? Because if the rich merchants in New England represented themselves, they wouldn’t enact taxes on themselves at all.
So, all of this has a drearily familiar ring to it. How rich can you be? Well, how long can you live and how successful are you in stealing everything in sight? Consider England’s Victoria who reigned for so long that her son died only a few years after her. Now, that was one rich lady. She owned, absolutely owned, an empire on which the sun never set. Beat that, Pete Peterson.
Well, there’s just another rant in a world of possible rants so vast, there is no end to them. Old liberal arts majors get like this from time to time. Never mind.
I believe that if the USG needs $1B and the bond buyers have the cash they don’t have better things to do with it, then that $1B should be taxed from them rather than borrowed from them so the US don’t have to pay them extra in the form of interest which they would only get back about 10%.
So the bond buyers pay 1 to 2% in taxes on their interest rather than the 100% if it were taxed.
I am a beliver!
ilsm will not chnage.
It is so rare that I agree with Jimi that I think I need to try to pay attention to what is going on here. I am guessing that Jimi is afraid of the same thing I am, though he generally sees the danger coming from the left… not surprising considering the propaganda from the right. While I generally see the danger coming from the right… because the right usually attacks things that i believe in with what i know to be lies and stupidities. But there isn’t a whole lot of excuse for me to ignore the danger from the “left” since I have reason to know that both the left and the right are routinely used by the real players to confuse and “motivate” the people. And especially since Mr Obama and his advisors seem to be presenting a classic case of being hit on the head from behind by people you thought were your friends.
I can only add that there are players on the left who are quite sincere and very knowledgeable who think they are trying to save social security. Only they think social security is “welfare for the aged” and have no understanding whatsoever of the importance of “insurance for workers paid for by workers.” Since the workers don’t seem to understand it either, it is likely it won’t survive. But it is an idea that belongs neither to the left nor to the right. It is a rather elegant solution to the problem of “retirement” for workers who can’t count on getting lucky on the stock market, or even staying reasonably lucky with their own jobs, their own health, or ordinary prudent savings.
They have so much cash laying around and nothing to do with it…………….
The price of USG treasuries stays low because there is so much cash and there is no way to “invest” the money as safely.
It is almost proving Greenspan’s fear of balanced budget.
Instead of taxing the money the rich need deficits to invest the money.
Imagine if the money were taxed, would investment opportunities be any different.
Deficits are a scam to pay interst to the r=ich on money they owe as taxes.
The wealthy have a greater stake in the USG spending 13% of GDP for corporate welfare than the poor who get nothing from that 13% of GDP but a few jobs if they are connected.
Going to Mars does as much as paying the gods of war.
Rather the money be invested in roads, hospitals and schools instead of corporate welfare raising the price of engineers and technical workers.
oh, forgot to say
the people who desire power have no limit to that Desire. Jimi expects, I think, to be protected by free market competition. I don’t expect to be protected at all, but there was a long period following on the American revolution and the New Deal that promised some institutional safeguards, if only we had a population strong enough to maintain them. We do not.
It would never get to the O man’s desk.
ilsm will not change.
You have a strange idea about who the majority of Treasury bond holders are.
I wish I knew where to get the entire breakdown of exact ownership, but largest to smallest group goes something like this:
Foreign governments and central banks and they do not pay taxes on their bond interest.
Banks, US and foreign, and they get their free cash to buy them with ZIRP deposit accounts and Fed liquidity and QE.
Pension funds and life insurance companies.
Then there would be the little guys and 401Ks, buit there are lots of us.
Then there would be the ultra safe portion of “The Rich” portfolio.
And actually the Rich like buying tax free muni bonds for obvious reasons. Then for the risky part of the portfolio they use hedge funds or private equity funds and buy whole companies.
We have deficits because the government runs deficits. It really is why.
Ilsm that is too funny.
I value you and Buff both, even as I kind of shake my head sometime. But apart from my general agreement on the MilitaryIndustrialComplex I am thinking even Buff hasti be twitching his lips a little.
“….but combine them for their bottom line number,” it is either contrary tpo law or it is not. CBO is a political animal by its very nature. i trust no one that must account to elected officials in their appointed roles. That a certain claculation serves a particular political agenda is the very basis for insisting that Social Security be regarded as off budget, and that its funding stream be recognized as distinct from tax revenues and sufficient to meet its obligations. That money is borrowed from that stream does not change the nature of the distinction between the two budgets. To address the issue any other way is to scam the public. To accept that that will be done is to abet the scam.
Buff the secret all along is selli g the idea that ‘Special Treasuries
are by some legalistic reasons less real than ‘Regular’ ‘marketable
Treasuries. Not true in law or logic or numeracy, in fact due to some technical reasons the Special Treasuries in the Trust Funds are actuallymore secure than Regular ones, but it doesn’t help muchwhen a sitting President describes them as ‘phony IOUs’ just sitting in a ‘filing cabinet in Maryland’.
I think someone also needs to ask why there is $5 trillion in intergovernmental debt, only $2.5 trillion of it is in the SS trust fund, and we know where that part came from, and why is the principle and interest on only that part being talked about by Pete and the Gang?
And as a side exercise, just for grins, ask Bush Jr. for his take is on what the other $2.5 trillion is.
“We have deficits because the government runs deficits. It really is why.”
Easy the rich would rather lend their hoard than have it taxed.
A rich person has networth, and prefers to have poor folks’ “income” taxed and her networth left to lend to the government to increase her networth.
Before income taxes governments raised money from net worth taxes. Northwest ordinance and property taxes.
To achieve a civil society, short of Bolshevism, the minute bond holder segment of the social contract allowed the poor to pay taxes far above their economic networths while the rich hid their networths from “confiscation”.
The income tax scam.
An observation: the SS special issues are about equal to the USB bond holdings of the two largest sovereign concentrations: China and Japan.
That is about $2T of bond holders networths protected by folks with no money in the bank.
It is all Kharma.
The rest of the intra gov holdings:
About $800B is in the civil service retirement system over at Office of Personnel Management filing cabs. CoRev and I are not concerned no one is asking us to ante up.
Another bit is $300-400B in military retirement trust bonds which should have been appropriated each year from the Military Personnel segment of the war machine plunder, but no cash there either. Buff and I should be worried but the gods of war are looking out for us.
Rest is in delayed projects for roads, energy etc, which may actually make sense compared to no one delaying the waste of trillions to appease war profiteers who talk to the gods of war…………………………
OMG!!! My economic status is totally related to the USG being good for their intra gov paybacks!
SS will lay out $700b this year. This number is already too large and it is growing by $2b per month.
There will have to be proposals that reduce the costs ealier than 2015. Everything will have to take a hit if the goal of 3% is to be achieved.
I agree with Webb that it would be unfair and politically impossible to cut benefits across the board to those now 60. So what to do? A means test for the next five years would be helpful to bridge the gap.
I think we will see this from Obama. There are many American who are/will become elligable that simply don’t need the extra $1,500 a month. Those with taxable incomes in excess of ($200k?) will not be getting their checks.
This is the “Bill Gates” exemption that Webb hates. But something like this must happen. Question to Mr. Webb. A guess on the % of those that would be impacted by this? Something between 5-15% is my guess. Call it 10%. That means $70b a year. Do that for five years while the other cuts you described get phased in over that time period and you have the basis for a solution.
I am happy to see that this site is now discussing the bond market implications of this. That is healthy. We see what is going on in Europe. The bond market is forcing draconian changes in policy across the EU. This is coming to America. It is only a year or so away. Do not believe that the US can “print” itself out of a problem. That will not work and will bring us much pain.
Bruce, we need to cut SS by at least 10%. There is no solution to raising taxes as you have proposed. We will have plenty of tax increases in our future. I doubt there is a will to raise SS on 160mm workers. Too regressive.
So rather than point to obvious road blocks the commission faces I task you in a different direction. You have to save 10% of SS outlays (no tax increases) for the next five years. What would you do?
There is no air of crisis in this today. It is coming very fast now however. If you wait for five years it will be too late. You will not have much to save.
Hmm. The Fiscal Times is worried that the miserably small budget ($500K) of the Deficit Commission is too little to permit it to complete its vital work. Its staff is provided mainly by Pete Peterson and his various foundations but at only 15 or so people is inadequate to perform the staggering work it needs to accomplish by December. Well, all I can say to these poor suffering souls is, “Welcome to the US government, guys!” 😎 /snark
I think the first I would do is take people like you out and shoot them. I used to be an easy going kind of guy who didn’t believe in firing squads. But you and I have talked about this before and while you seemd to get the point then, you seem to have forgotten it by now. It’s like having a sex pervert in the neighborhood. You always mean to reform, but then you get to thinking about all that nice young money out there going by your door, and well, you just can’t help yourself.
The “rich” paid for their beneiftis. Moreover their payment is what enables the Social Security system to enhance… by an insurance functioni… the benefits of those who for one reason or another don’t make enough money over a lifetime to save enough for retirement. Social Security was designed not to be means tested, not to be welfare. Means testing means visiting the government proctologist every quarter to prove you have no hidden assets.
Meanwhile, Social Security has paid for itself. Can’t say that for the Congress, or even the goddamn bond traders. Big important men, too goddam dumb to cover their own bets, need to be bailed out by stealing the money from widows and orphans. Perfectly happy to commit murder to get the money and cover their tracks.
You disgust me sir.
These goddamn experts are going to tell us how to manage our budget… the budget of a huge country… and they are too goddam dumb to manage their own budget.. the budget of a kaffeklatch.
Krasting: “SS will lay out $700b this year. This number is already too large and it is growing by $2b per month.”
Thanks for only half of the relevant information. So now we know what the benefits side of the ledger enumerates. Just to add additional light to your factoid, the ’09 direct military expenditures were $685.1Billion and the 2011 total budget, including all defense and anti-terror activities is estimatede to be $1.01Trillion-$1,223Trillion. Now we’re talkin’ abouot real money. http://en.wikipedia.org/wiki/Military_budget_of_the_United_States#Budget_Breakdown_for_2011
The other side of the SS ledger is estimated to be: $940 billion – Social Security and other payroll tax, for the year 2010. That seems to be sufficient to cover the benefits. So what’s your point? What do we do with the extra $240B in receipts. In regards to the bond market, I tend to be a free marketer. Let the market seeks its own level of satisfaction, and “Frankly Krasting, I don’t give a damn.”
Cedric apologies in advance. Editing out duplicates is kind of tricky in the same way that accidentally inserting them is, you think the action hasn’t taken when instead you have just been taken to the original. So I can’t promise that in reducing all your triplets to singletons that the latter might not vanish by accident.
“only $2.5 trillion of it is in the SS trust fund, and we know where that part came from, and why is the principle and interest on only that part being talked about by Pete and the Gang? “
Cedric it is $4.5 tn and not $5 tn so 20% of your question gets answered right there. Of the remaining $2 tn you have $742 bn in civil service retirement (OPM), $300 bn in Medicare (HHS), $292 bn in military retirement (DOD) and $143 bn in medicare-eligible military health (DOD). Most of what is left over is split between some other retirement/health care funds and bank stabilization funds like FDIC.
The Petersons of this world would explain that most of these were direct contractual obligation in ways that Social Security are not, but in any case there is not much in this iist for progressives to attack
I think you are stepping on your own point. The Petersons have never been worried about the debt. They want to destroy Social Security. I don’t think Cedric was suggesting that Progrssives attack the non SS intra government debt.
Means testing is a benefit cut. And if you think that someone earning $200,000 is not going to miss a 10% income cut when his Social Security is taken away you are delusional. Besides people in that income bracket are already being taxed on benefits, the money raised by going from taxation to confiscation has to be reduced by the former, already more than $26 bn a year. And if you have some sliding scale means test (what we call ‘progressive taxation’) you rapidly come to a point of diminishing returns precisely because the existing payroll tax cap equally caps the maximum payment made to anyone. In any event the number of households that earn more than $200,000 in taxable income IN RETIREMENT is vanishingly small, that implies around $6 million in income producing assets, i.e. assets whose returns come in the form of interest or dividends and not just as unrealized capital gains. It certainly isn’t any 15% of the beneficiary population as you wold suggest. BK we live in a world where the wealthy squeal even at the prospect of returning to Clinton era top rates, you think that they will just willingly accept the equivalent in the form of means testing? Without totally undercutting all political support among the upper middle class for Social Security along the way? Which of course is the real point of the exercise.
We did not fall off the turnip truck yesterday. The cheapest solution to Social Security crisis is to keep the current cap in place and phase in 1.1% increases on both employee and employer over 20 years. Under this scenario the wealthy are called on to contribute at most an inflation adjusted $1100 a year, $2200 if self-employed and only if they are still in the workforce at the end of the phase in period. So why was this essentially pain-free proposal for the wealthy left off the table while a proposal that might cost them up to $25,000/yr per wealthy person left on? Because it is not about ‘fiscal responsibility’ or anything like it. 99% of the impulse behind Social Security reform is about pissing on FDRs grave.
Krasting if I suggested that every household in this country earning over $200,000 should simply pay a $25,000 a year War Tax devoted to paying down the costs associated with two wars the howling would be deafening, “redistribution” would be the mildest epithet. Yet you think you can charge that same tax on wealthy retired households and devote the money entirely to reducing General Fund transfers to Social Security and not raise a peep? Come on man, get real.
Nancy if it makes you feel better not all staff is being supplied by Peterson aligned folk, at least a handful currently work for organizations sincerely devoted to fixing and not gutting Social Security and belong to the same mailing list I use to keep in touch with the good guys.
I second that. Maybe Cedric can try a different sign in platform, same name. Or something else, since the problem is only Cedric’s.
Bruce–Thanks for this encouraging information. However, when I looked for information on the web about staff employed by the Commission, I could find only one person specifically mentioned, and he was on loan from one of Peterson’s foundations.
The composition of the staff is of interest to people like me who used to do staff work on policy issues related to SS payment operations and other aspects of the SS program. It’s my experience that when you know who the staff is, you know what the recommendations will be, based on their previously published views and positions. So, it would interest me to know who is also working on the Commission’s staff. Leaving that aside, any insight you can provide as we go along this rocky road will be very helpful. NO
Umm. Yeah, they are such experts, ya know. I can’t believe the chutzpah. For 20 or so years, he spends a billion with a Big Big “B” bucks on convincing everyone to ditch SS.
And he gets within spitting distance of getting his vile scheme adopted, and all of a sudden money’s tight.
You can’t expect me to destroy the universe with such a small budget!, he cries. My ebeel minions has to pay their own way to meetings, and their own cab fare, and tips and everthing! Hey! I said I’d pay for some of this, but really, you don’t expect me to run this show on peanuts, do you? You can’t be serious!!
Jesus Lord, this guy is such a schnorrer. We should give him an award for stealing us blind? Hah! NO /snark, undisguised and unremittingly sarcastic, forget I said it.
i’d feel better about Bruce’s Social Security good guys if i did not know they can’t tell the difference between insurance for workers paid for by workers and “the dole.” they will find a way to “fix” social security by taxing the rich, which will instantly make all of Peterson’s lies true.
And then ten years (two years) from now when there are pressing needs to solve the budget crisis by reducing “welfare,” they will make the standard liberal noises, which will be ignored by “practical” men.
wonder why i have no friends?
speaking of which
i have no problem with taxing the rich to pay back the money they borrowed. they got the tax cuts that created the deficit, they can surely afford a tax increase to retire the deficit out of all the money they made growing the economy.
a one percent increase to start with would go a long way. i am reasonably sure that a 4% increase over the next 20 years would solve the problem.
now you can’t see how a guy who makes over a hundred thousand a year can get along with only 96 thousand? well, it might help if he looked at the country he lives in and recognizes it is a machine for making him money. think of it as an investment that returns 200% per year.
Y’all–The fate of AFDC in the Clinton administration should be instructive to those who think that means testing is a way to “save Social Security.” Now called TANF, eligibility for families is limited to a 5 year maximum period with few exceptions. State budgets which pay for part of child care and training benefits are shrinking in many states and so is the possibility of obtaining any assistance during periods of protracted unemployment.
With means testing, depending on what your definitions and accounting methods are, you could have people whose annual incomes meet the federal poverty level ineligible for Social Security payments for part or all of a year. Not a good idea for retirement, survivors and disability benefits I’d say. However, I still don’t think that we’re in real danger of this coming about–yet. Bruce’s argument is fact, not faith based and may yet prevail. NO
I don’t he was either. But we don’t get anywhere by just throwing out sloppy attacks accusing the enemy of ignoring numbers that with ten seconds of fact checking turn out to not be correct.
Peterson and associates are indeed reflexively hostile to most programs current backed by Intragovernmental Holdings. To suggest somehow that they are willfully ignoring $2.5 trillion when that figure is actually $2 tn and includes Medicare doesn’t move the train down the tracks. It just makes us look sloppy.
Nancy the one name I know came to me off the record, but he is a policy analyst at EPI, which is generally a good sign, and he believes he is not the only one with similar views among incoming staff.
The key point to keep in mind is that we have the numbers and not only do we know it, so does the other side. When the time comes to evaluate final numbers on any Social Security reform plan there are two official scorekeepers: OACT and CBO, and there are enough outside observors with enough knowledge to keep them honest. I don’t think it will violate any confidences to tell you that former Deputy Commissioner van de Water, now a top figure at CBPP, http://www.cbpp.org/about/index.cfm?fa=staff&type=dept is keeping a sharp eye on this. And while both Dale and I have butted heads with Paul in the past, by that same token he is not the kind of guy that will put up with bullshitting the numbers, prior to his stint at SSA he held some top spots at CBO overseeing the number crunchers.
And as long as I am letting the cat out of the bag CBPP generally is a place to visit if you want to see the bad guys be made to keep their numbers honest: http://www.cbpp.org/ Paul is not the only pistol in their arsenal.
Jack Social Security was taken ‘off-budget’ to keep Congress from playing certain games during the budget process, I don’t know anyone at any point that suggested that calculating the total impact of all government operations on the future borrowing market was somehow illegitimate.
Total current year cash deficit/surplus, what CBO calls a ‘primary deficit/surplus’ is a legitimate measure of current year borrowing needs. That number explains why total Debt Held by the Public was dropping after 1998 even as the General Fund was still in deficit.
Likewise it is perfectly legitimate to track total Public Debt so as to calculate the actual amount of debt service we will encounter in any given future year.
Annual combined deficit, by whatever name is a critical tool needed by Treasury to plan auctions. That one component of that borrowing is officially ‘off budget’ in regards to CBO, OMB and the Congressional Budget committee doesn’t mean that we should not report the numbers for this important planning tool. The key is to keep the concepts of ‘debt’, ‘deficit’ and ‘liability’ distinct in our own minds.
It may help to not think ‘on budget’ and ‘off budget’ and instead think ‘debt subject to the limit’ vs ‘debt not subject to the limit’. Most or all Social Security balances are in the form of debt subject to the limit, and that latter is a proper object of Congressional attention, legislation has to be passed every time total borrowing approaches the maximum debt limit. And while the latter is not identical to total public debt or gross debt, they track very closely, and like it or not that means using a ‘bottom line number’ to report the combined change in that due to both GF and TF operations.
Little of this is about CBO or Treasury playing political games, no matter who is doing what to whom in the Boardroom, somebody has to keep an eye on the minutiae of Accounts Payable and Accounts Receivable so as to keep the lights on.
So we disregard the distinction of off and on budget. So explain to me where is the deficit in the SS budget? Down stream a bit Krasting tries to tell us how high the cost of benefits are, but neglects to point out that those benefits are fully covered by FICA and the Trust Fund assets. The focus should be to push for any assessment of the deficit be focused on actual deficiencies and costs that contribute to those deficiencies. If Social Security benefits are fully covered by current funding streams what is the purpose of benefit cuts? I have several good assumptions to answer my own question and all of them suggest that the benefit slashers are looking to shift the target of the SS funding sources. Do we really want to help Peterson and his ilk to use FICA to fund the wars in Iraq and Afghanistan
i dunno. there is room for a little slop in a blog. you may not wish to be sloppy in articles or comments with your name on them. but i personally cannot tell the difference betwee 2 trillion and 2 and a half trillion from where i sit.
peterson is ignoring for the present the “other” intra governmental debt (according to one Bruce Webb comment above). this is because he, unlike us, is focused. and he is focused on destroying social security. after he does that, he will go after government pensions.
Nice talk DC. You want to put me in front of a firing squad, and I disgust you. I thought this was a more intellectual place to go.I thought questions and alternate views would be welcome here. Guess not. Bill Gates (and me) are widows and orphans? You must be kidding.
Bruce, You are way off on that $6mm number. It is smaller than that, as a guess closer to $3mm. In my thinking this is done off of the prior year tax return for individuals/couples. If they make $200/250K in the prior year no checks are sent for the next year. If the market is bad and they do not make the threshhold amount they get the checks. Some will be in and out of the threshold, but many will always be above it.
Is this going to be popular? No of course not. But we have to keep in mind that in order to adress some funamental problems we must cut the ‘real” deficit. To do that we will have to raise income taxes and also Cap gains. So how hard are your going to hit the population?
On paper the proposal to increase SS taxes over a 20 year period is acceptable. But our problems are short term (2-7 years). So that does not address the real issue.
Look what is happening across Europe. They are ripping apart their social contracts contry by country. We do no want that. They are doing that because they have a gun to their head called the global bond market. We need to get ahead of that curve.
We will see what comes. My bet is that the deficit commission recomends a plan to deal with both the short term and longer term issues with SS. A means test will be part of it.
I would suggest that listening to the global bond markets are what created this mess Mr Krasting. The global bond markets need to be put in their place. Investors in NY should not be able to dictate to govts in Europe or anywhere else about the level of compensation they give their workers, especially since their motives for doing so are simply to maintain THEIR OWN income stream. Its nice for you to sound all “concerned” about “structural deficits” and “real” deficits when in fact YOU are only concerned about YOUR OWN BOND YIELDS!
i cannot argue with you about what the criminals and idiots in washington will do. but the bond market is supposed to be for grownups. they can deal with whatever comes. and the federal government can deal with whatever the bond market does.
poor people, on the other hand, cannot in general “manage” their own retirement funds without the insurance provided by social security. which DOES NOT COST THE GOVERNMENT A DIME.
I don’t know if it is brain damage that keeps you from understanding this, or just terminal greed.
Anyone with a $3M estate is going to be thinking about passing it on to the next generation. That means a large chunk of capital gains. In turn, that means avoiding your proposed tax will not be difficult.
“The cheapest solution …”
Like it or not the cheapest solution is some form of benefit cuts. Even though it increases the interest on the TF, it stretches the time over which the special treasuries gets converted to public debt. BK is right that the bond markets would prefer that.
But the next generation is not suddenly going to become stupid. They will continue to improve productivity. Living standards will continue to improve. There is no need to accept the cheapest solution when other solutions are better.