DEAR PAUL KRUGMAN Please Read This about Social Security
by Dale Coberly
DEAR PAUL KRUGMAN
Please Read This
about Social Security
Dear Paul Krugman,
There was an indication the other day that you read Angry Bear, at least sometimes. I hope you read this, because it is important, and you have a better forum than I have.
I think the following facts would be game changers in the so-called “debate” about Social Security, if they become widely known and understood.
Social Security has nothing to do with the deficit…
In spite of tortured logic like that of Chuck Blahous who admitted grudgingly that “technically” Social Security does not affect the budget, but “in reality” if Congress has to pay back the money it has borrowed from Social Security, that will have an effect on the budget. This amounts to blaming granny for lending me her life savings. After all, if she hadn’t lent it to me I wouldn’t have spent it. Therefore it’s her fault that I have to get a job or borrow money from someone else to pay her back.
… and therefore should not be part of the “deficit reduction” hysteria.
Again, in spite of logic so tortured it gives lies a bad name: The serious folks who are so very worried about the deficit sometimes admit that Social Security has nothing to do with the deficit, “but we need to cut Social Security to give confidence to the markets.” Because even though Social Security has nothing to do with the deficit, cutting it will show “the market” that we are serious about controlling our deficit.
Social Security is not going broke.
It can’t go broke. It is paid for by the workers who will get the benefits. As long as they understand the value of protecting part of their savings from inflation and market losses… insuring at least a minimally decent retirement… they will want to be allowed to continue to pay for their Social Security.
The Trust Fund is NOT Social Security. It does not matter at all when it “runs out.”
The Trust Fund is normally a reserve of one year’s benefits designed to smooth the ebbs and flows of taxes versus benefits. It was allowed to grow following the 1983 increase in the payroll tax to about three times the normal size in order to allow the Boomers to help pay in advance for their own Social Security benefits beyond what would normally be paid by “pay as you go” financing. This corrected a potential “generational inequity.” This enlarged Trust Fund was always supposed to run out of money about the time the Boomer cohort no longer put unusual stress on the pay as you go system. So far it is on schedule to do exactly that. The precise date that the Trust Fund returns to the normal level is completely unimportant to Social Security.
The “Eight Trillion Dollar Actuarial Deficit” can be paid for by raising the payroll tax eighty cents per week each year.
This is a fact that can be established with certainty with real arithmetic (real arithmetic is not the “it’s just arithmetic” you hear about from journalists and congressmen who have no idea what they are talking about). Raising the payroll tax one half of one tenth of one percent per year… about forty cents per week in today’s terms … would entirely close the projected actuarial deficit over the 75 year actuarial window. Wages are projected by the same Trustees Report to rise about eight dollars per week each year over the same time period. So at the end of the day the workers will have twice as much money in their pockets AFTER paying for their Social Security, plus they will have guaranteed their own retirement at the normal retirement age with the present replacement rate… an amount that will also be twice in real value what today’s retirees get. Because of the recent recession, it would be better to raise the tax eighty cents per week each year over the next twenty years instead of at the slower rate. Eighty cents per week would still not be felt by the workers.
Social Security was designed…insisted upon by Roosevelt…to be worker paid: “So that no damn politician can take it away from them.”
Roosevelt did not count on the persistence of damn politicians, or the bad memories of workers, or the failure of the “defenders of Social Security” to honestly inform the workers. The workers will be glad to pay that eighty cents once they know about it, and understand it. The “defenders” of Social Security play into the hands of its enemies by calling for schemes to “make the rich pay for it.” Roosevelt knew that would be the death of Social Security. The rich will not pay for it. Or if they did, they would own it, and it would not be long before they would insist upon cutting it, turning it into welfare, and means testing it. And the workers would no longer be able to say… as they do now… “we paid for it ourselves.”
The “bi-partisan groups worried about the deficit”… which means folks paid by Peter Peterson to destroy Social Security by pretending Social Security is causing the deficit… tell very carefully crafted lies about Social Security. The people who style themselves defenders of Social Security waste their time deconstructing the little lies, while the Big Lie goes unanswered. One of those people apparently believes that “doing nothing” is the answer. He seems to believe that something will turn up that will extend the life of the Trust Fund and silence the calls for “fixing” Social Security. He could be right… the best “fix” for Social Security would be to raise the wages of workers. But this is not something we can realistically expect to accomplish in any reasonable time. And the Big Liars are not going to wait. Unless we can offer a realistic plan, that people can understand, to pay for the projected Social Security actuarial deficit, the Big Liars will push forward their “fixes” that are designed to destroy Social Security.
The Big Lie is that “Social Security is going broke, causing huge deficits that will burden our children.”
Social Security is not going broke. It has nothing to do with the deficit. The workers pay for it themselves. They can always pay for it themselves. If the costs of retirement rise as they are expected to, the cost of Social Security will rise…. about eighty cents per week per year. This is not a burden on the young. It is money they will get back with interest when they need it most. It is in fact the best deal that workers have ever had.
Tell the people.
After “Social Security is not going broke” you may want a bolded statement about “but the costs really are going up”.
Each generation is living longer in retirement (on average) than the one before it, and that really does take more money.
—
You cover that doing nothing is not the answer farther down, but IMHO you should touch on why the future SS deficit is real before you show how easy it is to eliminate. The people need to hear it.
Arne
I thought I had been pretty clear about that.
Yes, the cost IS projected to go up. About eighty cents per week each year.
Things could happen to make it go up faster or slower or not at all. Best bet is “eighty cents per week each year for the next fifteen or twenty years. Forty cents per week per year “on average” over the next seventy five years. Less than eight cents per week per year after that.
I hate to give people more than they can handle. You would be surprised how many people can’t understand what I just said. Or keep in mind that their pay will be going up eight dollars per week over that time so they end up richer AND still have Social Security to protect them.
Many of them can’t even understand that they are very likely to need it.
“Each generation is living longer in retirement (on average) than the one before it, and that really does take more money.”
And by paying 80 cents per week per year more, they will pay for it.
Thanks Jerry
What is even more interesting is that apparently they understand it. See the article by Richard Eskow:
http://www.huffingtonpost.com/rj-eskow/as-public-makes-hard-choi_b_2619776.html
When actually asked point blank, people say they are willing to pay what it takes to keep their Social Security intact.
To head off another criticism:
Longer life expectancy is apparently not the only factor driving the increased cost needed to pay the same benefits:
Social Security pays an “effective interest” that comes automatically from “pay as you go” financing in a growing economy.
Trouble is, the wages of ordinary workers have not been growing at a normal rate. This would mean that benefits would have to be lower than what would have been possible with that “effective interest,” OR that the tax needs to be a tiny bit higher to make up for the lost growth in wages.
To some people this means that you should “really” tax the rich who have been getting higher wages. They talk about this in terms of raising the cap to capture 90% of total wages as Social Security did some years ago.
This is misguided. Raising the cap would just tax “the rich” more than Social Security is worth to them. Currently they get all their money back and they can write off the difference in SS “interest” and what they “would have gotten” from other investments as the cost of insurance.
Raise the cap and that is no longer reasonable to them.
The answer.. besides paying for our own benefits.. is to work on redressing the unequal wage distribution. That will take some time. But waiting for that to happen, and worse, calling for a higher tax on those who won’t get any benefit, is a way to make sure the enemies of Social Security can kill it by saying either that “it is going broke” or “it will cause [us] huge tax increases.”
Maybe the “tax the rich” canard needs to be addressed as a corollary to Coberly’s excellent explication of the Social Security issue. Raising the FICA cap is the wrong approach for the reasons described by Dale.
On the other hand the general budget deficit is as enormous as it is in large measure because of the ridiculously low level of taxation on all forms of income, but especially capital gains, dividend income and corporate profits, over the last decade. In effect the general budget deficit has contributed to the enormous growth of wealth amongst a very small segment of people, the One Percenters, so to speak. That’s where the tax the rich focus needs be, on giving back what political hacks and lackeys have provided to the wealthiest Americans by refusing to tax those Americans in accordance with their benefits obtained from our economy.
Granted that this issue is tangential to the financial structure of the Social Security program. That is the point. Make the tax the rich mantra fit into its appropriate place in any discussion of budgetary issues and keep it clearly related to the general budget deficiencies and overall debt. It should have nothing to do with any discussion regarding “fixing” Social Security. And that term should only relate to adjustments in the FICA that may be required to keep Social Security revenue in line with its benefits.
Jack
I agree completely.
Better than that, I am reasonably convinced that taxing the rich… say a 10% patriotic surtax for the deficit emergency… will start the process of reforming the abuses of our economy by the rich for the rich that have caused the stagnation in workers wages and much else that is bad for people… even rich people.
Another hack at the “Social Security Problem”, which plays ad nausea. Ugh.
Let’s call this what it really is, an attempt to present a well beaten argument that has been massaged time and time again since the mid-nineties. Only this time this is presented as a “Please stroke my ego Paul Krugman!”
You might as well work for P&G making labels that say “wash rinse, repeat.”
No focus on something of a future ordeal and ignore the fact that SSI benefits don’t cover my 90 year old grandmothers cost of living. Sorry mom, you have to pick up Nana’s morning nurse because The Medallian will not. Oh, but wait, Nana has to pay taxes for that income?
No, no, lets focus on the b.s. arguments of the day and refuse to look at the fact that 5.6% ROI in the financial services industry is what is keeping employment down. But wait, big banks are posting huge profits without lending to ’06 levels nor are they making any money in the bond or treasury markets.
Oh and then there is the overheated stock market. Last time we saw the DJA at 14k we were about to bust at the seams…repeat? Oh no, no research done there, I am going to copy and paste some other schmo’s shit rhetoric and maybe Krugman will notice. Oh I hope he does.
Let us also ignore the student debt forgiveness and the predatory practices in the market, but f- it, those 22 year old’s who can’t find employment can figure it out for themselves. School of hard knocks ya’know. Oh but if we have a huge write off as those “Crazy liberals” want, then Sallie Mae and the multi-billion dollar student loan market will collapse like Lehman!
Let’s just go to a flat tax system, kill everyone over 75 and install a one child policy. Yeah, that’s how we do it. Then we will never have to raise taxes again!
Your bullshit post has made me lose all credibility with this site.
But I do hope that Krugman calls, or mentions you when he goes on Bloomberg News.
Coberly:
You did well here.
I worried a bit about the Krugman call,
but I am serious that he has a better… bigger… forum than I have .
And someone needs to tell the people they are being lied to about Social Security.
Krugman has readers, and I assume he is capable of checking the arithmetic.
Coberly, as a AFC I think your post makes sense but the folks out there have been lied to over and over and over and have come to believe that SS will not be there for them and when we explain it to them as you do they do not hear it. Mike, as far as your comment try explaining why the post is BS?
Sky – same argument we heard back when the Good Lookin’ was in office, Teddy Ruxpin reminded me of the Gremlins, and OASDI payments exceeded their income, which lead us to detest Camel Cigarettes as well as our parents telling us we would never see any SSI benefits when we got to that age. Same “kick the can down the road” b.s. we have been hearing for decades, yet SSI continues to live, prosper “and not be that big of a deal”.
The only thing we need to know about Social Security, Medicare, Medicaid and funding for post secondary education (the last three take up 75% of the State of Michigan’s budget) is that fiscal policy may be used to fund these programs to the extent needed. Social Security can never go broke as the Sovereignty funding it (the US treasury) can never go broke unless rear guard Tea boilers want it to. When that happens we may all wish to have bunkers-to protect ourselves from the tea fallout.
There are several web sites that support education and discussion on Modern Money theory and those are highly recommended. We could transform our society and move into the 21st century instead of blowing steam over tea bags made in the back rooms of some economic hackers during the days of the sun never setting on tea leaves.
Mike that is a marvelous combination of the incoherent and the uninformed.
I mean what does a talking Teddy Bear have to do with anything? Is there some well known political trope hiding under the whole Teddy Ruxpin/Gremlins/Camel Cigarettes schtick? I mean I am 56 years old and presumedly old enough to pick up any well known cultural references but am left scratching my head.
Plus ‘SSI’ does not stand for ‘Social Security Insurance’. A common mistake, but also a common indicator of someone who doesn’t understand the basics.
And relatively few ‘Nana’s earn enough to pay taxes on their actual OAS (Old Age Survivor’) benefit and most of those who do could probably pay for the occasional taxi ride. Moreover NO ONE can afford to pay for any kind of assisted living based on any of a OAS, SSDI or SSI check, even for a morning nurse. Instead those ‘Nana’s who get governmental support for that get it through Medicaid after meeting strict income and asset requirements, which in turn is incommensurate with them actually paying taxes on their Social Security benefits.
The whole thing is such a mess that I can only conclude that you don’t have any idea of even what it is that you don’t know about this program. Whereas Dale’s analysis is known fairly widely in DC Policy Circles (although maybe not given as much attention by PK as we would like).
But as for this?????
“Teddy Ruxpin reminded me of the Gremlins, and OASDI payments exceeded their income, which lead us to detest Camel Cigarettes”
At best you need to unpack that a little for the slower members of your audience. And I must be the slowest because (forgive me) that reads like pure gibberish.
Mike Smith
I agree with Bruce that your comment appears to be gibberish,
but in support of my basic observation about your intellectual attainments, let me observe
that a careful reading of my essay here would reveal to most people without cognitive impairment that
far from “kick the can down the road” I am advocating an immediate increase in the payroll tax of one tenth of one percent per year, repeated as needed.
and that this is indeed “not that big of a deal.”
What is a big deal is the refusal of either “side” to recognize the obvious answer to the phony crisis is to let the workers pay for their own benefits as they always have. Instead we have one side trying to kill it by cutting it. And the other side trying to kill it by “making the rich pay for it.”
Raymonde
it is true that Social Security can never go broke.. except as a consequence of a political decision to break it.
But the “money” that pays for retirees groceries and those other people’s medical care, school teachers, and other goods and services
represents a “demand on resources” that are usually created by “paying” money to someone to produce them.
I don’t see how Magical Money Theory can get around that. Money is only the means to keep track of the transactions… or “half transactions”.
The ability of the government to print money in times of monetary crisis is useful, even important, but it does not eliminate the need to match resources with consumption according to some predictable rationale that most people regard as “fair.”
If you have a way to explain why this is not so, be our guest, but try to make an actual argument, not a “read this” or “read that” “and you will see” assertion.
You make excellent points about how social security is definitely not going broke.
However, the point about social security’s role in the deficit is not quite true. The headline budget deficit figure does include the inlays and outlays of social security. And this deficit figure is the one that really matters, economically. It is true that those inlays almost always exceed the outlays, meaning that on net, the existence of social security reduces the deficit, but contrary to your claim, it is also true that cutting social security benefits will reduce the deficit, and thereby reducing the debt held by the public relative to what it would otherwise be.
I think the point you were trying to make is that cutting social security benefits, or raising social security taxes, won’t do anything to help us avoid hitting the statutory debt ceiling. This is true because we live in a world with bizzare accounting rules that say that net revenues from Payroll taxes count as net debt for the purposes of the statutory debt limit.
SS does not contribute to the deficit.
You guys can keep telling yourself this story all you want, but accounting is not what this is about.
It is about debt, not deficits. SS is adding to the Debt Held by the Public.
In 2013 it will add $75B to the public debt. By 2015 the number will top $100b a year. And then it really goes wild.
Stop harping on phoney accounting. Focus on the cash, and you will start to get worried.
Don’t trust me on this? Then read this article by IBD.
http://news.investors.com/020613-643479-social-security-kitty-is-drying-up-faster-cbo-forecast-finds.aspx
Matthew almost correct and showing a lot more understanding of SS finance than most.
But ‘almost’.
Social Security assets grow any time total income including interest exceeds total cost. Which in the tables is called ‘Net increase during the year’. In turn, and as you point out, Social Security assets by law held in Treasury notes and bonds, score as Intragovernmental Holdings and with Debt Held by the Public make up the category of Total Public Debt in turn essentially identical to Debt Subject to the Limit. Okay so far so good.
But in that equation any reduction in costs results in an additional net increase in assets year over year. Which translates dollar for dollar into additional Notes and Bonds and so additional Public Debt.
That is cutting Social Security benefits DOES reduce the deficit’s top line number. Point to you and one which even most supporters can’t quite grasp. But I’m cutting deficits it directly INCREASES debt held by the Public.
Now there is a more advanced argument that ANY reduction in the deficit automatically results in a decrease in other public borrowing. Personally I think this just mistakes an accounting identity for actual political policy, but smarter people than me swear by it. But no one I know has argued that it would do any more than offset the INCREASE in Intragovernmental Holdings by DECREASING Debt Held by the Public leaving total Public Debt UNCHANGED ON NET.
But leaving this theoretical offset aside, the first order effect of cutting SS cost is to increase Public Debt by increasing the Trust fund balances that score as such debt. That is deficits and debt move in opposite directions in regards to SS.
Krasting you are confusing ‘unfunded liability’ for ‘debt’.
As soon as Social Security starts cashing in TF principal, something that under current numbers will strt in earnest in 2015 then Public Debt starts dropping dollar for dollar. Now of EVERY PENNY of this is offset by resorting to borrowing on open markets then the increase in Debt Held by the Public will match the reduction in Intragovernmental Holdings in turn leaving total Public Debt unchanged on net.
And frankly most writers at IBD seem more confused on basic terminology and public debt concepts than you are. So forgive me if I don’t avail myself of your offered ‘authority’.
Not to mention that there are alternatives to public borrowing. For example redemption of TF assets could be handled by an express tax levy equivalent to a war tax, in effect just offsetting the 90s and 00s tax break funded by SS surpluses. Or alternately revenue could be adjusted within the SS structure in ways that would avoid TF redemption at all. So even the theoretical borrowing offset wouldn’t necessarily have to happen.
Krasting
you are the easiest to dispose of here because you don’t know what you are talking about. never have.
Social Security is paid for entirely out of the payroll tax. It does not borrow. Period. Therefore it does not add to the debt or deficit, however creatively those words are used in the government’s accounting for its own purposes.
You are among those who think you are adding to my deficit if you lend me money. That is backward thinking. Truly beyond ignoramus into the land of pathological lying.
The projected “deficit” for Social Security is “actuarial.” That means that SS is projected to pay more than it takes in. This “projected” event will never happen. The current law prevents it.
Social Security does not borrow. It does not add to the debt/deficit.
Matthew
You are merely confused.
In the first place “matters economically” is nonsense.
Social Security does not borrow. It cannot contribute to the debt/deficit.
For its own purposes the government counts the money it borrows FROM Social Security as “revenue.”
But accounting is not quite the same as law. When it comes to the end of the day, the government still understands that it has to pay back the money it borrows FROM Social Security. The government does not lend money to Social Security.
The recent payroll tax holiday was an attempt to confuse this. By refusing to collect the payroll tax, the government borrowed money to make up the difference. This was not Social Security adding to the deficit. This was the “Tax Holiday” adding to the deficit.
I am not being cute here. It was the “holiday” that was trying to be cute…. exactly for the purposes of confusing you about Social Security.
Cutting SS benefits cannot reduce the deficit. SS is not paid for out of “the budget,” it is paid for out of the payroll tax. Cutting SS benefits might avoid the need to raise the payroll tax that eighty cents per week, but it will have NO effect on the budget whatsoever.
I will try to explain this more carefully in a later post, but in the meanwhile you need to try to think about it more carefully.
Bruce
I think you are being too kind to suggest that the interpretations offered by IBD and its authors results from a lack of understanding. The facts of the matter are too simple and clearly demonstrable. For example, in the article that Krasing links to Jed Graham makes the following statement, “While the trust fund’s nonmarketable Treasuries — really IOUs from one branch of government to another — have no value to offset the cost of benefits, they provide Social Security the legal authority to run cash deficits until they’re spent.” Note that he fails to point out the origin of those “IOUs” which started out as excess FICA revenue. Clearly the Trust Fund is more than a mechanism that “allows” the
SS program to run cash deficits. If I, you, Krasting or Graham purchase T-Bills and then borrow against their value are we simply allowing ourselves to run a cash deficit? Denyiing the source of the Trust Fund Treasuries is deceitful at best given that it is a well known and understood fact.
Graham also states, in Krasting’s referenced article, that, “Already, the Social Security Trust Fund’s scheduled 2033 demise means that workers just becoming eligible for Social Security at age 62 face steep future benefit cuts under current law if they live to the average life expectancy, now about 84.”
He again ignores the fact that the Trust Fund’s existence in large measure was to offset the “baby boomer” population imbalance and was expected to be markedly reduced in the not far future. Also he ignores the fact that there will still be a significant revenue flow from FICA contributions. And that doesn’t even begin to factor in any improvement in the economy and jobs/income improvements that can be expected. On top of which he conflats the two seperate issues of funding the TF depletion as it occurs with any actual deficiencies in the revenue source (FICA) in that future.
So all in all it would seem that Krasting and his referenced source of expertise seem not to understand the system. Or maybe they are simply gaming the description that they offer regarding the SS system.
As we have now suggested if the Trust Fund’s on going depletion is too costly and only accrues additional debt we can always turn to those patriotic Americans that have benefited mostly from the deficit budgeting over the past decade, or two. It’s a class war for sure and its about time that the One Percenters began facing the need for them to pay back what they have been looting from the Treasury in the form of insufficient taxation.
Jack
thanks. but there may be some confusion in your closing paragraph(s).
The Trust Fund will not accrue additional debt. And if by too costly you mean that paying back the money it borrowed from the Trust Fund is “too costly” then you would be right that the answer is to raise the general tax to pay the debts of the general government. This has nothing to do with the Trust Fund… except of course to repay the money borrowed FROM it.
Krasting does not understand the system. The people he references do, and they are indeed gaming and obfuscating. I am sorry that Bruce seems to contribute to the obfuscation by trying to “explain” it in its own terms. That cannot be done. The ins and outs of terminology used in non normal senses and the complication of Federal bookkeeping… which does not track the law (while remaining perfectly legal… as bookkeeping… and maybe even “understandable” for their own purposes) is impossible to “explain” to people who don’t have the background and several hours to sit down and think it through line by line and word by word.
All a “quick explanation” does is add to the confusion and leave those who want to believe the lies free to keep on believing them.
Jack
to be fair to a liar, the future “steep benefit cuts” do contemplate the continued FICA tax… at current levels.
What the liars ignore and hope you will not notice is that the steep benefit cuts can be avoided by a very small increase in that tax.
It’s like they plot your trip from Chicago to Los Angeles by drawing a straight line on the map, and show that the line crosses the Grand Canyon. Then they tell you that this “steep drop” means you can’t get to Los Angeles from Chicago, because of course there are no roads around the grand canyon and they have taken away your steering wheel.
Coberly,
You said “Social Security is paid for entirely out of the payroll tax.” Does that include the administration of SS as well or does it only cover SS benefits?
Jerry Critter
the administration is paid for out of the payroll tax. it runs about 1% of the total outlays.
The source of Krasting’s confusion, I believe, is the common belief that there is such a thing as a “unified budget.” There is no such thing as a matter of law. That the White House reports numbers for a thing as a “unified budget” is a matter of convenience for those who want to do analysis based on such a concept, but as a matter of law, the Social Security Trust Fund is completely separate from the general budget. It can be used solely for benefits. (I trust you understand that lending is not the same thing as using.) FICA is collected as a dedicated tax, and the funds may be used solely for the same dedicated purpose.
This means those who say Social Security contributes not one penny to the deficit are correct. The only deficit that exists is a deficit in the general budget. When the Trust Fund treasury bonds are redeemed, the expenditure by the general fund is exactly offset, penny for penny, by a reduction in its deficit obligations. Legally, the fact that it’s “intragovernmental” is meaningless. As a matter of law, the Social Security Trust Fund and the general fund are separate entities.
Yes, this also means it was misleading for Clinton to claim a $200 billion-plus surplus. They did, indeed, see an actual surplus (in 2000, I believe), but it was a lot less than that.
Correction: it may be used solely for benefits and administration of Social Security.
Mr. Crawford, thank you for an eye-opening suggestion on financing SS. I admit that I’m one of those who are relatively ignorant about the mechanics involved in how SS is structured. With that in mind, I also admit that I have always thought that raising the limit on the percentage of income to increase revenue was a good idea. Now I must revisit this and think about your very astute reasons for not doing that.