Open thread Dec 7, 2012 Dan Crawford | December 7, 2012 1:45 pm Tags: open thread Comments (25) | Digg Facebook Twitter |
Liberal Fallacies: Protecting Social Security from its ‘Friends’
L. Randall Wray
I do not have the space to go through all the reasons why the very long-term (75 years and beyond) projections of Social Security’s finances show growing budget deficits — but it mostly comes down to implausibly pessimistic and inconsistent assumptions about economic variables. In any case, it turns out that the projected financial shortfall amounts to about 2% of GDP per year after 2040 or so. In other words, if we find a way to shift 2% more of GDP annually toward Social Security’s funding over the next 30 years, the “looming financial crisis” disappears. By the way, we achieved a greater shift than that between 1960 and the 1990s. Only an ideologue could trump that up to a crisis.
“we achieved a greater shift than that between 1960 and the 1990s”
Sometimes some SS supporters are a little too clever. In 1960 SS was only about 20 years old. It had not yet gone through the startup that is the real reason it had such high worker to beneficiary ratios. The above is a meaningless factoid which does not support SS. There are more than enough facts that do, so this type of thing should not be entering in.
It is not “about 2% of GDP”
The 75 year actuarial gap between scheduled benefits and projected income is 0.9% of GDP. Even if we take it to Infinite Future we only get to 1.3% of GDP. Per the Trustees. And most of that gap comes during the second 25 year sub-period, i.e. after 2037.
The actual gap and so shift in GDP needed over the next 30 years is less than half of the 75 year gap and so less than a quarter of Wray’s number.
In light of that “Protecting Social Security from its Liberal Friends” may be a little more self-referential than Wray might prefer.
Interestingly enough the excerpt quoted is the only weak part of an otherwise excellent piece. With the edits suggested by Arne and me it would be really, really good.
My apologies to Prof. Wray
Always happy to see AB talking sense about Social Security. I have a question for people who are smarter on the subject than me. Isn’t the national debt equal to the sum of prior annual on-budget deficits/surpluses? (I think the question is relevant to arguments about Social Security’s’ relationship to debt and deficits.)
staying vaguely on topic, according to an IBD analysis, Social Security’s cash shortfall would raise public debt by 18% of GDP through 2032 — just before the trust fund is exhausted…
it’s just another indication that our messaging is failing, just like the 47% of the population surveyed believe that when you raise taxes and cut govt spending, deficits increase…
This is another excellent piece/interview with James Galbraith on SS and Medicare.
My favorite part:
“Galbraith also has a great rebuttal to those scary CBO charts showing entitlement costs surging, and swamping GDP, putting the US on a Greece-like debt-to-GDP ratio. Bunk says Galbraith. Those aren’t macroeconomic forecasts, but just “CBO baselines” that are used for scoring laws. The reality, he says, is that there’s no way for healthcare costs to surge and get so big while not also boosting nominal GDP significantly, meaning that the ratios can’t actually get that bad.”
Read more: http://www.businessinsider.com/interview-with-james-galbraith-on-lowering-the-retirement-age-and-the-fiscal-cliff-2012-11#ixzz2EP8NEpaM
PJR. Short answer: No
Longer answer: a pretty good approximation but—
First the standard label used for ‘national debt’ as in ‘national debt clock’ is ‘Public Debt’. Which is the source of the $16 trillion figure normally used by the MSM.
But ‘Public Debt’ is the simple sum of ‘Debt Held by the Public’ and ‘Intragovernmental Holdings’, something easily seen from the following Treasury web-app Debt to the Penny.
In turn just over half of ‘Intragovernmental Holdings’ is comprised of the Special Treasuries held in the two Social Security Trust Funds which for this purpose score as Public Debt.
Now as to ‘on budget’. Social Security is currently ‘off budget’ but hasn’t always been so, conversely other programs that were ‘off budget’ are now ‘on budget’. So there is no simple sum that equals “prior annual on-budget deficits/surpluses”. So that is your first part of ‘No’, one term of your proposed equation doesn’t exist. The other is that “national debt” as normally used includes the end product of Social Security surplus/deficits. So that is another part of ‘No’.
But it gets worse. Because ‘debt’ and ‘deficit’ can and have moved in opposite directions. Lets say the General Fund and other on-budget funds run a $100 billion surplus. And Social Security runs a $100 billion surplus. Net result is that the ‘unified budget’ runs a $200 billion surplus. This is close to what happened in Clinton’s last year. The GF surplus serves to lower the Public Debt baseline by reducing otherwise needed borrowing of Debt Held by the Public. And that portion of the SS surplus that actually came in excess tax collections does too. But that portion of the $100 billion SS surplus that came in the form of interest DOESN’T. While it is odd and I had to triple check the documents that interest is scored as income for unified deficit/surplus calculations but doesn’t reduce Debt Held by the Public. That is if we have $100 billion GF surplus, $75 billion in excess FICA collections and $25 billion in interest on the existing TF there is only a total of $175 billion cash to reduce Debt Held by the Public.
So the sum is broken even if we amend the terms. But it gets worse. Because Treasury credits SS $75 billion in new Special Treasuries to offset the $75 billion paid down in Debt Held by the Public. Leaving Public Debt unchanged on net (because those Specials get added to Intragovernmental Holdings and so score as a debt component). But it also credits SS with $25 billion in Special Treasuries for the accrued interest. Which not only did not pay down Debt Held by the Public but by adding to Intradgovernmental Holdings actually increases Public Debt.
Confused? Good. Because I was. But you can test this by using the above linked web tool to check Debt balances on the last day of FY1999 (Sept 30) against the last day of FY2000 (Sept 30, 2000), a year in which both the GF and SS ran surpluses.
Sept 30, 1999 Debt Held by the Public $3.636 trillion Total Public Debt $5.656
Sept 30, 2000 Debt Held by the Public $3.405 trillion (Hurray! Our grandchildren are being saved from crushing debt!!) Total Public Debt $5.674 trillion
WTF we just ran a $200bn+ surplus and ended up $18 billion MORE in debt? Welcome to the wonderful world of Federal debt accounting.
AS to rjs’s site of IBD
“Social Security’s cash shortfall would raise public debt by 18% of GDP through 2032”
WEll I need to check their math. But try this though experiment. What if SS ran a cash SURPLUS each year through 2032? Well that surplus would be added to TF balances in the form of Special Treasuries and so “raise public debt”.
In fact any move to cut Social Security benefits has the arithmetic result of adding to TF balances compared to baseline. And all such additions score as “raises public debt”. Just as these cash shortfalls supposedly do.
Plus that 18% is suspect on its own. Total Social Security cost PER YEAR tops out at just over 6% per year. Since FICA will continue to be collected that cash shortfall can’t be 18% of GDP in that final year, the whole program projects to cost a third of that. By that same logic the 18% can’t be of all GDP from now to then. All that it could mean is that the sum of 20 years of cash shortfalls equals 18% of final year GDP. Which is a meaningless number since we would be making up the shortfalls (by paying our interest bills and then principal redemption in cash) all along the way.
GIGO. Even before reading it. Which I’ll do. Not that anything IBD publishes on this could astonish me, they are worse than the WaPo on SS issues.
IBD. It’s by Jed Graham. Life or at least the weekend is too short to explain every bit of deceit hidden in plain sight in that “analysis”. I’ll leave it as an exercise for the reader.’
Shortest version: you can’t glide from cash flow to deficit to debt and sum back and forth in the way Graham does. It does violence to what OMB calls ‘Budget Concepts and Budget Process’ in their annual Analytical Perspectives on the Budget. Which chapters are available as a separate PDF.
Also worth reading: chapters on the Trust Funds included in ‘Special Topics’.
Not fun reading. Unless you are some sort of freak. Which explains why I go back time after time and brush up.
Bruce, thanks for the thoughtful comment and, with enough concentration, I could follow it. SO my confusion appears to be rooted in the calculation of the on-budget deficit/surplus. In your illustrative example, the $100 billion GF surplus presumably equals on-budget receipts minus on-budget outlays; if the outlays don’t count interest paid/credited to the TF, I see how you got your answer (debt the the public goes down $175 billion, using $100 borrowed from the TF and $75 spent from the GF). I believe that would be a dishonest way to calculate the on-budget deficit/surplus, but that’s all the more reason to suspect that you’re right.
Your “no” answer prompted me to find the OMB/President’s FY 2013 budget proposal, historical tables annex, and add up the deficit/surplus numbers. The total of all on-budget deficits/surpluses since 1789 (using OMB’s estimates for FY 2012) is -$13.365 trillion. This is $2.7 trillion short of the national/public debt on 30 Sept, using the website that you recommended. Curiously, the shortfall is equal to the total of all off-budget deficits/surpluses (since 1937) in the same OMB table. Whatever that implies.
PJR I think it would have to sum. But note that neither the $13.7 or the $2.7 equates neatly to Debt Held by the Public (which is smaller by around $3 trillion) or Intragovernmental Holdings (which is that much smaller) On the other hand that summed up since forever off budget $2.7 is quite close (identical to?) the then current SS TF balance.
I would have to read the section again but IIRC they went quite far to make sure that different years/decades were apples to apples even as vagaries of law moved items legally on and off budget.
On the second point interest credited to the TF is definitely not counted as outlay, but that portion actually paid out in benefits may or may not be. The treatment thoroughly confused me. Maybe with some extra pairs of eyes and additional brains we can figure it out. It ain’t easy.
a couple of maybe not helpful thoughts (eyes are shot)
i took a bookkeeping course once. the debits and credits are not intuitive, though i had the feeling that if i stayed around long enough they might become so.
i don’t know if what you are looking at is that strange bookkeepers way of keeping track of debits and credits..
as for the interest paid to the TF… since that has been until recently a strictly bookkeeping transaction… no actual cash leaving the treasury… i wonder if that would account for “interest credited to the TF is definitely not counted as outlay…”
i don’t want to get into this… as you note, it’s confusing and convoluted and i don’t have the time.. but i would bet, first, it all makes sense when you know what they are trying to accomplish AND it doesn’t change the fact that the money borrowed FROM SS is real debt TO the United States and it will be paid back (not counting the, as we saw, non vanishing reserve)..
so for purposes of “explaining” SS to the people it is not helpful.
though possibly in such a way
Coberly yes, I was fruitlessly hoping that the accounting numbers would easily convey the concept that SS does not add to the national/public debt (because the holder of the debt makes no difference to the size of the debt). And by extension that none of the annual interest payments on the debt, which contribute to annual deficits, can be blamed on SS just because SS happens to hold some of the debt. But alas, the accountants appear to be unhelpful.
(BTW, I had a typo earlier–the annual on-budget deficits/surpluses add to -$13.366 trillion; which is $2.7 trillion short of the national/public debt of $16.066 trillion on 30 Sept; which is the total of off-budget deficits/surpluses in the historical tables.)
Bruce’s statement that the on-budget outlays exclude interest payments to the SSTF shocks me. I see in the historical tables that net (unified budget) interest outlays equal on-budget interest outlays minus off-budget interest receipts. This addition would seem improper if Bruce is correct. So I probably need to throw my hands into the air and admit that the available budget numbers aren’t useful for this subject.
that is also my opinion. at the risk of agreeing with you agreeing with me.
the national accounting system might be worth studying and making clear, if possible, to the masses, or the aristoi, in its own right.
but convoluted “explanations” of convoluted accounting doesn’t help either the polloi, or the aristoi it seems, to understand the “debate” about SS, most of which is conducted about unimportant side issues.
what is important, don’t stop me if you have heard this one before, is:
SS has nothing to do with the deficit.
the workers pay for it themselves.
SS is not going broke.
the workers can always pay a reasonable amount to pay enough for their own future retirement, if all else fails.
pictures at eleven.
I read an interview a while ago with Alice Rivlin. The journalist asked her why she,Domenici, Bowles and Simpson among others want to cut SS/Medicare/Medicaid payments and benefits. She said that no one wanted to raise payroll taxes but didn’t say why. So, they had to cut benefits.
She said that the best reason to cut “transfer program payments” such as SS from a budgetary standpoint is that middle class and poor people don’t have a lot of resources to call on. Rivlin said that would insure that the amount of domestic spending would go down by roughly the same amount as the amount cut and stay at that level. This was important to avoid inflation.
The deal was that bond and equity markets needed to control inflation to preserve the value of their assets. And the best way to control spending and inflation was to reduce the available income of middle/lower income people.
So, the budget people saw the economy not in terms of how well it served the people, but how well the budget/economy served the markets and investment banks.
So, now I understand why the centrists don’t worry about messing with SS/Medicare/Medicaid. It’s not about the domestic economy and ordinary people. All that matters is the markets and investment banks. FYI. NancyO
well, volker controlled inflation by driving the country into recession. he refused to change policy until the recession got so bad that banks started failing.
and he is regarded as a hero.
Well PJR, coberly, Bruce, Nancy,
I conclude that accounting as it is done in the real world shares little resemblance to the arithmetic or math of my youth.
well, you would be right. but i need to say for the accountants that there is a rationality to the way they do it. it’s not obvious at first to… well, to me… but it makes sense for what they are trying to do.
i’m not sure it makes much sense for someone who doesn’t understand what they are trying to do to use “accounting definitions” to explain what the transactions “mean.”
which means to me that using “on budget off budget debt deficit” language to try to prove one way or another that the Trust Fund is a real debt (in the ordinary sense of the word) is doomed to frustration and confusion.
PJR your last paragraph leaves me both confused and intrigued. Since I don’t know anyone else off hand that actually reads national income tables maybe we could spare everyone some eye glazing talk and continue this offline.
I just set up a new e-mail solely devoted to social security stuff and was insufferably pleased to find out that SocSec.Defender at GMail was up for grabbing. So if you are still reading this thread or heck anyone wants to talk about the crazy world of DebtDeficitUnfundedLiabilityOnBudgetAnalytic Perspective feel free to e-mail. In particular I would like to nail down the treatment of Trust Fund interest. Because counterintuitive doesn’t begin to capture it. It wasn’t hard a few years ago when all such interest was retained at least on net between the two Trust Funds, but now that the combined Trust Funds are cash flow negative things got wacky indeed.
I have got a head for numbers and excellent reading skills but I am neither an economist or a bookkeeper which fact becomes all too obvious sometimes. At least to me. So I am happy to take an assist from people who know stuff.
And to Nancy’s point.
While Alice Rivlin’s actual views may be as Randian as they come she is routinely called “Even sensible centrist Democrat Alice—-“
Can you say ‘Overton Window?’ Well yes you can.
I am old enough to remember whenNew Deal Liberals consciously distanced themselves from the DFH New Left. Now me Che and Emmanuel Cleaver are seen as being indistinguishable by Rivlin et al. Just redistributionist Commies.
‘s okay Bruce
sometimes I give unsolicited advice to my friends on the left about how to actually win a fight, and now they treat me like a Randian, if not actual traitor to the Revolution.
as for reading national income tables, don’t count on me. i have been desperately trying to avoid having to.
i know what hay is. and i don’t have to follow all the biochemical equations to understand what comes out the other end, when i am standing in it, pitchfork in hand, and only two hours to move it out of the barn before it is too dark to see.
Dale I guess I need to ruminate on that one.
On the other hand my grandpa was a H.S. ag teacher graduate of Purdue and prolly had a good sense of the process from hay to rumen to cow pie. Sometimes important when it comes time to administer the bolus.
When the bad guys try to convince you the manure still smells like lilacs you might want to reexamine the ‘supply chain’ to see where the magic happened. Because sometimes calling ‘Bullshit!!’ doesn’t suffice.
I am hoping you will do that for us.