Biden Appoints Biggs to Social Security Advisory Board

I (run75441) saw this article on MSN early (AZ time) this morning and sent it off to Dale. For those of you who may not have been around. Dale Coberly, Bruce Webb and Arne would discuss Social Security and how to save it. You also may not know it; Dale and Bruce proposed the Northwest Plan to a NJ Congressional Representative who forwarded it on to the Social Security Administration. In turn, SS replied. it could work.

I was not privy to much of the back and forth with Andrew Biggs by Dale, Bruce, and Arne. It can be found though if you are interested in reading it on Angry Bear and also elsewhere. One point Andrew Biggs has in his argument is the addition of “legacy costs” which are described by him as “additional payments made to SS recipients” before the issue of insolvency. I would add, additional payments to which appropriate congressional funding supporting it was not allocated by a change of law by Congress.

In my planning of capital acquisitions, we would call this “sunk costs.” They (additional past costs) would not be included in any present value calculations of analyzing major acquisitions. Andrew insists they should be included in present value calculations for Social Security. He insists they were not funded by Congress and the funds need to be recouped going forward from recipients in a solution to Social Security’s future short fall. Bruce Webb opposed this backward transfer of $17 trillion in the calculation.

Dale and Arne may have other info. to add.

Recent CNBC article:

Changes to fix Social Security to take compromise, says Biden nominee(cnbc.com), Lorie Konish

Dale Coberly (Me) I think this is bad news. Andrew Biggs has been an enemy of Social Security since I began paying attention about twenty years ago.  He is also very good about concealing his agenda in quite reasonable sounding language well-crafted to lead the reader to false conclusions.

I haven’t time right now to go into the whole history, but I intend here to write a fast essay by commenting interlinear on the article appearing in CNBC’s report by Lorie Konish August 11, 2022  “Changes to fix Social Security to take compromise, says Biden nominee” (cnbc.com)

CNBC

When Andrew Biggs, senior fellow at the American Enterprise Institute, was nominated by President Joe Biden to be a member of the Social Security Advisory Board in May, it came at an important inflection point for the program.

A report subsequently released by the program’s trustees in June projected its combined trust funds can only pay full benefits through 2035, at which point 80% of benefits will be payable. While that is one year later than was projected in 2021, it still sets a deadline by when Congress must act to make changes to a program approximately 70 million beneficiaries rely on for income.

Me

Mostly true, but keep in mind that the Trust Fund is not especially important to Social Security financing.  Social Security is paid for by the workers who will collect the benefits.  That is the key to understanding Social Security. The worker’s contribution is deducted from his paycheck and credited to his account which is maintained by the Social Security Administration.  When that worker retires benefits will be calculated based on the worker’s own contributions.  The benefit is not calculated as a direct “interest” rate of return, but in fact amounts to a rate of return that is equal to inflation plus the real growth in average wages since the contribution was paid in.  This contribution is called the “payroll tax,”  but unlike regular taxes the worker gets his money back plus interest  when he will need it most.

CNBC

The Social Security Advisory Board does not have a direct role in coming up with fixes to address that issue. But after decades of research on Social Security, Biggs has established himself as an opinionated voice on the program.

Me

“opinionated voice”… read that as dedicated enemy of Social Security. He is paid by the American Enterprise Institute.

CNBC

Lorie Konish: You were nominated to be a member of the Social Security Advisory Board by President Joe Biden. You recently wrote that he is the “biggest obstacle” to expanding Social Security. Why?

Andrew Biggs: The article I wrote actually was arguing that President Biden’s position on not raising taxes on lower-income people pushes Democrats and Republicans towards a compromise on Social Security, that the existing plans to expand Social Security significantly rely on raising taxes on Americans earning less than $400,000, which is contrary to the President’s position. So if the president has said he doesn’t favor that approach, that pushes towards a more compromised position, which is what I would favor.

Me

This is technically correct, but wait for the “compromise.”  The “existing plan” is the Larson plan discussed below.  It is a bad plan because it will raise taxes on the rich, destroying the “worker paid” nature of Social Security which is what makes SS work. 

The payroll tax is limited to the first 147 thousand dollars or so of income so that the amount paid by the “worker” will be a fair price for the value he receives in benefits and insurance.  Taxing income over this amount would be seen by those being taxed as being taxed for welfare: or paying for other people’s retirement. 

Social Security was designed as a way for ordinary workers to save for their own retirement, with their savings protected from inflation and market losses as well as their own failure to save or thrive:

There is a substantial increase in benefits over the amount paid in (including interest) for those whose lifetime incomes did not generate enough savings for a basic retirement.  Even those high earners, who paid more in taxes even though their tax rate was the same, can benefit from this boost if by the time they retire, or are disabled their, lifetime income turns out to be a lot less than they might have expected when they were doing well.

MSNBC

(Reporter’s note: The Social Security 2100 Act: A Sacred Trust proposed by Rep. John Larson, D-Conn., calls for reapplying the payroll tax and $400,000 in wages, in keeping with Biden’s promise. However, the exclusion of increases to the payroll tax rate limits the amount of time the program’s solvency can be extended, Biggs argues.)

Me

True enough I suppose.  I think he is saying that the Larson plan does not raise the payroll tax for those under the current [and otherwise projected] cap.  And this means that the increased tax on the rich will not extend the “solvency” of SS very long.  That is true.

MSNBC

LK: Democrats are staunchly opposed to benefit cuts. Republicans are against tax increases. Do you think they can meet somewhere in the middle?

AB: The political reality is that on really any big legislation, but in particular entitlement reform like Social Security, it’s impossible for one political party to pass its own plans without any support from the other side. Our system requires it to pass the House, then have a super-majority in the Senate, then get the president to sign on. It is very unusual for one political party to hold all those keys to power. So in the U.S., big reforms like the 1983 Social Security reforms tend to be bipartisan. I think that ultimately is how things are going to have to turn out.

Me

This is how the system generally works,  but it is very dangerous if the compromises on the table are all bad. The R’s actually want to cut benefits, the Dems want to “make the rich pay.” The “compromise” should be:

Leave everything as it is…worker paid with reasonable cap on wages taxed… and raise the payroll tax on the workers who will get the benefits just enough to pay for their expected longer retirement.  That would amount to about a 2% tax increase for the worker,  but this can actually be reached by raising the tax rate one tenth of one percent (per year) at a time, an amount no one would notice.

Even introducing the 2% ultimate increase in 2035, when it will be needed, would not be a burden anyone would notice after they got over the shock.  But a one tenth percent per year increase would keep the Trust Fund fully solvent…and save us from having to pay back the money it borrowed from the Trust Fund, as well as result in a slightly lower payroll tax going forward (because the interest on that trust fund would help pay for benefits). And this way the workers continue to own their own retirement savings rather than rely on the generosity of the rich or their luck on the stock market or personal investments.

There is a lot of misunderstanding about how Social Security works, which I haven’t time to discuss.  The remainder of CNBC article is mostly Biggs claiming he is a mere technician and will have no effect on any plan that emerges. So it is hard to understand why Biden hired American Enterprise Institute’s smartest enemy of Social Security to be his advisor.

I am going to stop there for now.

Soc Sec XXXVI: $17 trillion backward transfer – Angry Bear (angrybearblog.com)