The right’s smoke and mirrors scam about Social Security–it ain’t broke (unless China is too)
by Linda Beale
The right’s smoke and mirrors scam about Social Security–it ain’t broke (unless China is too)
We’ve noted in these postings the growing inequality between rich and the rest of us in America, and that is the appropriate backdrop against which to investigate further the right’s smoke-and-mirrors scams about tax policy and earned benefits. Let me remind you with Kevin Drum’s Mother Jones article on The Price of Plutocracy: “For all practical purposes, every year about $700 billion in income is being sucked directly out of the hands of the poor and the middle class and shoveled into the hands of the rich.” (That sentence is illustrated with a great chart, with data drawn from Joseph Hacker of Yale and Paul Pierson of Berkeley, the authors of Winner-Take-All Politics, a book I highly recommend.)
The national debate about deficits has been part of a relentless push by the right to reduce as much as possible the New Deal earned benefit programs of Social Security and Medicare. The right twists the facts to suit the arguments it wants to make. Krugman hones in on this issue, noting Dean Baker’s similar anger at the Washington Post’s inconsistency in considering Social Security in a recent article by Post writer Lori Montgomery, who seems to be miming for the hard right, anti-New Deal crowd in Washington . See Krugman, Social Security, Bait and Switch, a Continuing Series, New York Times (Oct. 30, 2011).
Social Security is a program that is part of the federal budget, but is by law supported by a dedicated source of revenue. This means that there are two ways to look at the program’s finances: in legal terms, or as part of the broader budget picture.
In legal terms, the program is funded not just by today’s payroll taxes, but by accumulated past surpluses — the trust fund. If there’s a year when payroll receipts fall short of benefits, but there are still trillions of dollars in the trust fund, what happens is, precisely, nothing — the program has the funds it needs to operate, without need for any Congressional action.
Alternatively, you can think about Social Security as just part of the federal budget. But in that case, it’s just part of the federal budget; it doesn’t have either surpluses or deficits, no more than the defense budget.
Both views are valid, depending on what questions you’re trying to answer.
What you can’t do is insist that the trust fund is meaningless, because SS is just part of the budget, then claim that some crisis arises when receipts fall short of payments, because SS is a standalone program. Id. (emphasis added).
Further, the right refers to these programs as “entitlements”, a term that is meant to dredge up resentments against those who have some rights to benefits from these programs. The right uses “personal responsibility” and “entitlements” as though they refer to two non-intersecting worlds, whereas in fact the opposite is true.
Workers pay into Social Security to support current workers who paid into it in the past. The trust fund was established, and amended with a good deal of actuarial research under Reagan in 1983, with the knowledge that the baby boom generation would be passing through and create a bulge of benefit needs and that US birth rates tended to be smaller now than they were a century ago. In other words. what is happening now in terms of the baby boomer population reaching retirement age and the decline in US birthrates was exactly the information on which the Social Security changes made in the 1980s were predicated. Either we believe that these kinds of predictions are reasonable (in which case it is utterly silly to raise nightmare scenarioes about bankruptcy, because there is nothing of the sort) or we believe that it is impossible to predict for sure what will happen (in which case it is utterly silly to raise nightmare scenarios about Social Security bankruptcy, because GDP could grow just a little faster than predicted, easing all future problems, or boomer needs could grow just a little less than predicted, easing all future problems). Either way, the crisis-bell ringing being done by the right as a way to attribute deficits to Social Security is a smoke and mirrors scam.
It is even more so since the Social Security trust fund is invested in US Treasuries and those Treasuries plus new tax funds coming in pay all the benefit costs. Is the US going to default on Treasuries. Well, if so, we have a bigger problem with Japan and China not liking that–not just the Social Security trust fund. The hard right seems to think it is okay to play political games with US debt, but American citizens should be aware that this is what they are doing.
For a good overall exposition of these issues, see the article in Salon by Gene Lyons, How the Rich Created the Social Security ‘Crisis’ (Nov. 3, 2011) (noting the “decades-long propaganda war against America’s most efficient, successful and popular social insurance program”).
[T]his is the beneficiaries’ money, invested by the Social Security trustees in U.S. Treasury bonds drawn upon “the full faith and credit of the United States.” Far from being “meaningless IOUs” as right-wing cant has it, they represent the same legally binding promise between the U.S. government and its people that it makes with Wall Street banks and the Chinese government, which also hold Treasury Bonds.
A promise not very different, the Daily Howler’s Bob Somerby points out, from the one implicit in your bank statement or 401K (if you’re lucky enough to have one). Did you think the money was buried in earthen jars filled with gold bullion and precious stones? Id. (emphasis added).
One might add that many of our multinational corporations that are currently lobbying heavily for yet another tax break in the form of a “repatriation holiday” for their offshored, untaxed profits actually have the substantial portion of those profits invested in those same U.S. Treasury notes. So, as ataxingmatter has noted before, much of that money is already in the US and repatriation will generally not be of much benefit merely from bringing cash back to go through the US economy. As the article notes, allowing repatriation would lead to corporations dumping about a trillion of US Treasuries on the market, and likely cause a rise in the interest rate the US government must pay to borrow. Not a win-win situation. IN fact, clearly a loss for the US government and the majority of US taxpayers, both in Treasury interest rates and in lost corporate tax revenues.
originally published at ataxingmatter
Another element of idiocy is counting the $2.6T in the trust fund as part of the debt subject to statutory limit and then saying it’s fictional or it’s just debt the government owes itself.
This is pretty simply an attempt by the right to get out of the back end of the Greenspan deal of 1983. The social pension savings of the baby boom was redirected into gov’t debt, and now that the bill is coming due it simply has to come from those above the FICA cap.
This puts a rather large target on the Republican moneybags that they’d rather avoid if they can.
And they can, since bamboozling the American people is their stock in trade.
Thanks for another expanation of the scam being propagated by politicians from both sides of the aisle. It is not just a right wing conspiracy. There are plenty of Democrats In Name Only who are contributing to the BS and have been for years.
BTW, I have a sense of deja vu all over again.
Yes and no. SS is a separate tax that goes into the trust fund or to pay recipients.
For close to 30 years SS has been taking in more than it paid out and this surplus has gone into the trust fund.
But the trust fund surplus has been lent to the government and either used to pay for current expenditures or to keep taxes below the level needed to fund current expenditures.
In the future the trust fund surplus will be drawn down to pay current benefits. Nothing wrong with that it is the way the system was altered in the 1980s reforms to adjust to the baby boomers retiring.
But as the trust fund is drawn down the government will have to pay off the bonds the trust fund now holds. This will make the gap ( federal deficit) between tax revenues and other government spending larger than it otherwise would be.
So yes, SS is outside the budget but it has also been part of the budget and is a major part of the projected future deficits.
“This will make the gap ( federal deficit) between tax revenues and other government spending larger than it otherwise would be.” Spencer
Yes, paying one’s debts are always an issue and the expectations and needs of bond holders do eventually come to fruition. Pay me now, pay me later, but pay me. The Treasury note holdings of the top ten foreign entities comes to nearly $3.6 Trillion. Satisfying that portion of Treasury debt will have the same effect as paying down the Trust Fund debtr as it becomes necessary. Or do we hold foreign debt holders to be more sacrosanct than our own retirement system? And what about the Treasury debt held by private, state and local governments and private institutions. They hold an almost equal amount of such debt. Do they come first before other debt holders, including our national retirement syatem?
Pay interest to the SSTF in cash, absurd!!
Pay back the trillions in ”special treasuries in the SSTF, insane.
The 99% are to work and be expolited, never to retire or have a dime in the bank once they are ripped off by the medical insurance cabal.
SS was the source of cash for tax cuts, and war profiteering.
Does anyone think the 1% who own the government had any other use for Medicare and Social Security?
Back the St Louis Occupiers jailed last night for exercising the right to assemble.
Jack and ilsm are right
but just between you and me, what people do with money they have borrowed is spend it.
the government borrowed money from Social Security, so of course it spent it. why else would they borrow it?
the issue is whether they will pay it back “in a timely manner.”
as i have argued at length elsewhere even that doesn’t matter very much, as long as the basic “pay as you go” financing of Social Security is not altered.
oh, and of course the government paying back the money it has borrowed… from anyone… will make force the government to find money elsewhere. where governments normally get their money is through taxes.
there is nothing wrong with taxing the people to pay back the money you borrowed in their name. hopefully the people got something out of borrowing the money. it’s too late to complain you didn’t when the time comes to repay.
Adding to Spencer.
In this case the future is the past. DI went cash flow negative in 2005 and started cashing in principal in 2008. In fact DI accounts for eight of every nine cash flow dollar flowing to Social Security this year as opposed to OAS which simply had to draw down 5% of one years interest on its Trust Fund.
DI needs a fix and yesterday, and in fact the Northwest Plan addresses that directly, but since it is easier to demonize Greedy Geezers than Gen Xers paralyzed in a crash it is all Intergenertional Warfare all the time. In any event OAS (Old Age/Survivors) has not been and still isn’t the problem, we blow more money in Af/Pak in a month than its total projected negative cash flow.
BTW the current payroll gap for DI in isolation is 0.3% of payroll. As Dale can tell you (and will) couch change.
Oddly Jack under the twisted logic used by critics in the course of ‘phony IOU’ the Right does argue that Debt Held by the Public is senior to Intragovernmental Holdings.
Now there is nothing in law or actual historical practice to support that but the theory was advanced during the debt ceiling debate that it was no big deal because we could just service what was implicitly assumed to be senior debt. I guess because it was mostly held by domestic and foreign bankstas who were then as always too big for us to allow to fail. Or even get their fee fees hurt.
It is an odd pathology, we are just the victims of it.
Troy: “Another element of idiocy is counting the $2.6T in the trust fund as part of the debt subject to statutory limit and then saying it’s fictional or it’s just debt the government owes itself.”
Indeed. It should not be counted as gov’t debt.
coberly: “the government borrowed money from Social Security, so of course it spent it. why else would they borrow it? “
Borrowing by the Federal gov’t is a kind of subsidy.
it is government debt. the “government” borrowed it from the baby boomers who paid it their own benefits in advance and lent the money to the government.
that’s what debt is, you know. you borrow money from someone. you owe it to them. you are supposed to pay them back.
what does that mean?
who is subsidizing whom?
Another intersting aspect of this so-called senior and subordinated debt categorization is that some of that foreign debt is held by: Carib Bnkng Ctrs foot note #4/ $161.2Billion. in fifth place.
4/ Caribbean Banking Centers include Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Panama. Beginning with new series for June 2006, also includes British Virgin Islands.
I wonder who it is that keeps so much money in those Caribbean Banking Centers, which then invest that money in Treasury notes that some would have us believe is senior to the Treasury debt held by the Trust Fund? Are our friends in the West Indie Isles that wealthy?
A good deal of that is US billionaires and corporations holding off shore profits. Brad Setser also maintains that a good piece of it is actually held by the Chinese and that there overall share of US Treasuries is somewhat higher than official Treasury estimates. But it is not clear on what evidence he bases that.
A fair assumption is that you can take the Carib Banking Centers, that chunk of the UK holdings held in similar shelters in the Channel Islands and the Isle of Man plus a big chunk of Leichenstein and even Swiss holdings and assume you are talking proxies for US and Chinese and billionaires and corporations with probably some Russian kleptocrats and Saudi billionaires thrown in.
Otherwise on a per capita basis the inhabitants of Jersey (island) and the Caymans would be filthy rich.
“GDP could grow just a little faster than predicted, easing all future problems, or boomer needs could grow just a little less than predicted, easing all future problems”
Exactly right. Should we have a Goldilocks outcome all will be fine. If GDP miraculously recovers to 4+%, inflation remains low and unemployment falls to 5% next year (and every year after that) there will be no problem at SS.
But face it. That is the least likely outcome. Ask Ben Bernanke at the Fed. He says that won’t happen. Ask the IMF. Ask private economists till you’re blue in the face. A soft landing is not going to happen.
You folks are living on Hopium. Come down to reality. If you did you would come to the obvious conclusion. SS needs a fix. It needs it soon.
i have never relied on Goldilocks. SS can do just fine with no fix at all. The workers who retire after 2036, with no tax increase at all, would still get a benefit equal to today’s in purchasing power.
But if they are smart they will raise their own tax one half of one tenth of one percent so that they can get a benefit equal to today’s “replacement rate”, that would be about 160% of today’s in purchasing power. They are really going to want that when they retire.
It will provide them a softer landing when they retire.
as for asking Bernanke
he was the guy who told the congress to rob Social Security because that’s where the money is.
The President and Congress tell us the federal deficit is too high, and the federal government must “live within its means,” and one way to accomplish this is to cut Social Security and Medicare benefits.
Now wait a minute. They can’t have it both ways. If Social Security and Medicare finances are separate from the U.S. government, and these agencies could go bankrupt separately from the U.S. government, that means the federal government isn’t supporting them.
If the government isn’t supporting Social Security and Medicare, how can cuts in benefits help the government live within its “means”? And if the government is supporting them, how can they go bankrupt?
I look at it this way: My working adult child receives no financial aid from me. Her job doesn’t pay enough, so she either must cut her expenses or go bankrupt. How does her cutting her expenses help me live within my means?
Krasting stop being a Pete Petersen tool,
“ Should we have a Goldilocks outcome all will be fine. If GDP miraculously recovers to 4+%, inflation remains low and unemployment falls to 5% next year (and every year after that) there will be no problem at SS.
But face it. That is the least likely outcome. Ask Ben Bernanke at the Fed. He says that won’t happen. Ask the IMF. Ask private economists till you’re blue in the face. A soft landing is not going to happen. “
Gee and why is that?…………. Because the tea party idiots and their friends like you insist that our government is “running out of money” and are imposing austerity on everyone (except themselves of course). If folks would wake up and realize we never have to cut social security payments because we can fully fund it at whatever level we politically find acceptable. There is never a lack of funds for social security. We cant run out of money.
“You folks are living on Hopium.”
And you are living on “scare-ium”.
your point is the same that Krugman makes. but it is so important that people realize SS is NOT part of the budget that I can’t let “if it were” go un-commented on.
SS is paid for entirely by the workers who will collect the benefits. not by the government, not by the rich. by the people who get the benefits.
it is the only way they have to save their own money safe from inflation and market losses. it is also insurance against death, disability, and failure to make and save enough money over a lifetime to be able to retire at a reasonable age.
it is not welfare. but it has saved millions and millions of people from desperate poverty in their old age. it also protects their children in case they die before the children are old enough to support themselves.
it can’t ever “go broke” as long as workers understand what they are paying for… and don’t let their congressmen “fix” it… the way they fixed the cat.
Unfortunately we already have a Congress and a President who either do not understand Social Security or are simply evil people willing to sell workers back into poverty in order to be nice to the people who give them money.
It’s hard to know what they expect to gain by crippling Social Security. A little money, but hardly enough to be worth all the trouble. I think they are mostly just stupid. The word “social” in social securty makes them think “socialism” (it’s not) and that makes them crazy. But from things that Peterson has said, I think they also really really hate the idea that “the help” would ever be allowed to take a day off, let alone retire, until they have squeezed the last bit of “useful work” out of them.
I don’t thin that’s what Troy is talking about. He is talking about the treasuries in the trust fund being counted as debt. But it is debt that the gov’t owes itself. The Social Security beneficiaries do not own the treasuries.
The interest that the Federal gov’t pays on its treasuries is a kind of subsidy to those who own them. The gov’t does not need to borrow money. Its choice to do so is a kind of subsidy to those it borrows from.
In the tail end of the Clinton administration, the projections were that before long the gov’t would pay off its debt. When they looked into the matter, they realized that they did not want to stop borrowing. Borrowing by the Federal gov’t provides a “risk-free” investment for the borrowers. It is a subsidy to those investors.