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Reading List for the Serious Student of Social Security

by Bruce Webb

Want to make the move from wanking to wonking on Social Security finance and policy? Consider the following list.

First read an Annual Report, you don’t need to understand every number but you do need some grounding in the terms and concepts. 2010 Trustees Report

Then fill out your knowledge with this really excellent explanation from current SSA Chief Actuary Steve Goss The Future Financial Status of the Social Security Program

Now for a little something from supporters of traditional Social Security Baker and Weisbrot (1999): Social Security: the Phony Crisis

Read the comprehensive case AGAINST traditional Social Security Cato Journal (Fall 1983): Social Security: Continuing Crisis or Real Reform (pay particular attention to Butler and Germanis’s “Leninist Strategy”)

For some real heavy lifting advanced students can read through the following sections of the Analytical Perspectives on the Budget (OMBs official explanation of the President’s Budget). Ch. 11 Budget Concepts and Budget Process (pdf) (note in particular the Glossary starting on pg. 131). The following will give a good guide to the rest Analytical Perspectives: List of Tables and Charts. The LOT starts on page vii and gives you a guide to chapter titles including Ch. 5 Long Term Budget Outlook, Ch. 6 Federal Borrowing and Debt, and Ch 27 Trust Funds and Federal Funds.

Then you can cross check OMB with the latest versions of these two annual documents from CBO: Long Term Budget Outlook (via CBO Director’s blog) and CBO’s Long-Term Projections for
Social Security: 2009 Update
(2010 version is late this year).

Then to pull all this together with the current policy debate you can read the long version of CBO’s Social Security Policy Options. If you are short on time you can just read the Summary version, but the long version gives a very comprehensive explanation of Social Security overall, and taken with the Goss article above really fills out the picture.

And I would be remiss if I didn’t add this link from The real meat starts about half way through Historical Background and Development of Social Security

No not all of this is the most thrilling read ever. On the other hand not a word of any of it is filtered through me. Heck that should make it worth it right there! Call it ‘Social Security Sans Webb’. Snark aside, those who work their way through even most of this will be heads and shoulders above 99% of commenters out there. And everyone feel free to make additions to the list in comments.

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On-budget vs "Unified Budget": Where Social Security Fits.

by Bruce Webb

If I had to pick out the two biggest sources of confusion about Social Security finance it would have to be one, the relation of the Trust Funds to Public Debt and two, the relation of Social Security surplus/deficits to Budget Scoring. At Angry Bear we have discussed the equation Debt Held by the Public + Intragovernmental Holdings = Public Debt enough that most regular readers probably get it. So today I want to lay out some definitions and explanations of ‘on-budget’ directly from the source.

Office of Management and Budget: Budget Concepts and Budget Process This comes from Section 12 of OMB’s Analytical Perspectives on the Budget which is the explanatory supplement to the Budget itself. The best guide to it is List of Charts and Tables where the lead number refers to the Section, with Section 5 being ‘Long Term Budget Outlook’ (compare with CBO’s report with the same title), Section 6 being ‘Federal Borrowing and Debt’, and Section 27 ‘Trust Funds and Federal Funds’. Not exciting reads, but full of good to know information. Under the fold I have extracted from Section 12 ‘Budget Concepts and Budget Process’ the portion discussing the difference between ‘On-budget’ and “Unified Budget” ‘.

submit to reddit p. 134

Every year since 1971, however, at least one Federal entity that would otherwise be included in the budget has been declared to be off-budget by law. Such off-budget Federal entities are federally owned and controlled, but their transactions are excluded, by law, from the rest of the budget totals, which are also known as “on-budget” totals. When a Federal entity is off-budget by law, its receipts, budget authority, outlays, and surplus or deficit are separated from all other (on-budget) receipts, budget authority, outlays, and surplus or deficit. The budget reflects the legal distinction between on-budget entities and off- budget entities by showing outlays and receipts for both types of entities separately.

Although there is a legal distinction between on-budget and off-budget entities, there is no conceptual difference between the two. The off-budget Federal entities engage in the same kinds of governmental activities as the on- budget entities, and the programs of off-budget entities result in the same kind of outlays and receipts as on-budget entities. The “unified budget” reflects the conceptual similarity between on-budget and off-budget entities by showing combined totals of outlays and receipts for both types of entities.

The off-budget Federal entities currently consist of the Postal Service Fund and the two Social Security Trust Funds: Old-Age and Survivors Insurance and Disability Insurance. Social Security has been classified as off-budget since 1986 and the Postal Service Fund has been classified as off-budget since 1990. A number of other entities that had been declared off-budget by law at different times before 1986 have been classified as on-budget by law since at least 1985.

So in examining Table 12-1 we can see that for all practical purposes ‘Off-budget’ = Social Security (the Postal Service Fund showing little activity) while ‘Total’ Surplus or Deficit = the so-called “Unified Deficit”, in quotes because in law there is no longer any such thing, it is just a very convenient reporting number.

Hopefully this will help clear up some rampant terminological confusion, if not fuller explanations are available in the various sections of the Analytical Perspectives.

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What caused the Budget Deficit (Before the Financial Crisis)?

by Linda Beale
crossposted with Ataxingmatter

What caused the Budget Deficit (Before the Financial Crisis)?

Kash on Angry Bear put together a really good graph in 2006 comparing where we might have been if Clinton policies (bad as they were in many cases) had stayed in place compared to where we were and expected to be with the Bush tax cut and spend policies. Responsibility for the Federal Budget Deficit, Angry Bear 2006. Deficits under Bush were projected for more than $500 billion annually. Of course, that was before the greedy, reckless banks threw the financial system into a tizzy with too much credit invested in too many houses by people with too little income to pay for them. Add the costs of backstopping the Big Banks, and we end up with the trillion dollar hole we are currently in.

Answer would seem to be–1) make the banks pay with a tax based on leverage and 2) end the tax cuts or at least a goodly share of them and 3) reinstate an estate tax that has some bite, so that those at the top who can afford to pay do pay.

Seems like there are at least a few in Congress realizing that item 3 makes some sense. Sanders, Harkin and Whitehouse have proposed that the estate tax should have a $3.5 million exemption and a graduated rate, with those at the top paying a rate of 65% (a base rate of 55% and a surtax of 10% on the amount above $500 million or above $1 billion for a couple). The surtax would mean that the estate tax would hit the 403 billionaires who have a net worth of $1.3 trillion harder than it hits the smaller estates. See Janet Novack, Three Senators Call for Billionaires Estate Tax,, June 24, 2010. Now that makes some sense.

Senators Kyl and Lincoln are pushing the so-called “compromise” that would eviscerate the estate tax by creating a $5 million exemption and lowering the rate to 35%. That is a step in the wrong direction. Especially when Congress is making such big noises about the deficit that it is unwilling to pass stimulus funding for unemployment benefits to support Americans hard hit by the Great Recession.

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Ending Stimulus and the Shape of the Recovery

by Tom Bozzo

Brad DeLong observes that the FY2011 budget features “big, very big” tightening on the revenue and spending sides (2.5% of GDP “from 2010 to 2011”) for the prevailing labor market conditions. DeLong wants his “morning in America” (don’t we all?), and is understandably alarmed at the pessimistic forecast of the rate of labor market improvement. Paul Krugman echoes the sentiment on “near-term” fiscal tightening.

As is always the case, the tightening question has to be “relative to what?” [1] Receipts as a fraction of GDP are expected to increase fairly substantially, for example, but that’s largely a consequence of expected economic growth.

Compared to the current-policy baseline, the FY 2011 (10/2010-9/2011) budget increases the FY 2011 deficit by around 0.8 percent of GDP. In FY 2012, the budget would subtract around 0.7 percent of GDP from the current-policy deficit. Krugman is correct to attribute this to the winding-down of ARRA stimulus and of our “overseas contingency operations” better known as the wars in Iraq and Afghanistan. Go see Table S-2 here [PDF]. Additionally, current policy has some stimulus on top of current law. Allowing most of the Bush tax cuts to become permanent reduces FY 2011 receipts by around 0.9 percent of GDP. (See Table 14-2, here.)

As for the timing, the budget assumes (see Table 2-1) that real GDP in quarter 4 of calendar year 2010 will be 3 percent higher year-over-year; in Q4 of 2011 (a/k/a Q1 of FY 2012), real GDP is expected to increase another 4.3 percent. Even with the tightening, Q4 2012 real GDP would increase another 4.3 percent y/y. So the FY 2012 tightening only arrives after two years of modest growth.

If measures labeled as such are actually to be temporary economic stimulus measures, they obviously must end sometime. Ending them after the expansion ends is stupid — the tightening would reinforce the subsequent downturn — so it’s going to take some steam out of the expansion one way or another. The most pressing timing concern would be not to take away the stimulus before it’s clear that the recent GDP growth is sustainable; I’d argue that after two years of growth, should we get there, the case that measured GDP growth is a matter of one-time shots and/or statistical glitches will be fairly weak.

The slow assumed labor market recovery Brad DeLong notes might be seen as a mirror-image of the GDP recovery assumed in the budget baseline:

The budget’s baseline economy (with the triangle marks) isn’t as pessimistic as OMB is willing to imagine in public (and if you’re Ken Houghton, you might see all of these as irrationally exuberant), but the ‘output gap’ opened by the recession is assumed to close very slowly. While higher-frequency data are not equally optimistic, there’s building evidence (so far, outside of employment) for a reasonably strong recovery. And as Maynard explains at Creative Destruction, it’s arguably in the administration’s interest to err on the pessimistic side since people (again, even including some economists) don’t understand counterfactuals and thus tend to inappropriately place blame (or credit) for surprises.

[1] Every economics professor who disparages the “jobs created or saved” concept should be immediately stripped of tenure and exposed to the current labor market for forgetting that all economic analysis is counterfactual.

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Obama’s FY 2011 Budget

by Linda Beale

Obama’s FY 2011 Budget

The Obama Administration released its FY2011 Budget proposals today which assumes a substantial amount of tax cuts (making the 2001-2003 Bush cuts permanent for most Americans costs about $3.75 trillion over ten years) and some tax increases to cover important programs (about $1.9 trillion), resulting in a substantial net tax cut of almost $2 trillion over ten years. See press release and Green book.

The press release claims that the Administration’s plan covers “short-term tax incentives to create jobs and encourage business investment, …proposals to deliver tax relief to middle class families and small businesses, and its blueprint for restoring fiscal discipline and responsibility to our tax code.”

Personally, I think most of the tax cuts are stupid and will do very little to create jobs. Passing a law to permit modification of home mortgage loans in bankruptcy would do more than any item in the bill. And many of the famlies offered “tax relief” are not really middle class–they are the upper middle/lower upper class. They aren’t the ones the Administration should be focussing on. The best way we could help ordinary Americans is to get more people at the lower end spending more. That would let the businesses thrive that are threatened by the drop in spending as people face difficult times, and letting businesses thrive means creating new job opportunities. And the best way to do that would be to use the money wasted in these tax cuts on real programs to create jobs–public infrastructure and public education. And how can you claim that a bill that includes even more tax expenditures for businesses that have been proven not to work except that they give managers and owners more money to spend on themselves (or invest overseas) is a bill that “restores fiscal responsibility”. Nah. I don’t think so.

Naturally, the media are plugging this as a tax hike. See, e.g., Donmoyer, Obama Seeks $1.9 Trillion Tax Rise on Rich, Business, BusinessWeek (Feb. 1, 2010). The Donmoyer story starts out with “the Obama administration wants to increase tasxes on Americans earning more than $200,000 by almost $970 billion.” But of course that’s achieved by letting the law Congress passed in the Bush adminstration play out as the law was written to play out–eliminating the tax cuts which were described as “temporary” measures that were expected to stimulate the economy. Now, if tax cuts really worked as economic stimulus, we should expect to have seen robust job creation over the entire Bush administration. But even though Bush began two wars of choice (Iraq and Afghanistan), which tends to make the military-industrial complex happy and sometimes also creates more jobs as soldiers go to war and others have to fill in back home, neither the war machine nor the temporary tax cuts managed to crank up the economy past weak growth.

The Obama administration takes as a given extending the Bush tax cuts to everybody earning less than $250,000. Most people in government probably think of that as an average wage, but folks making $250,000 are actually quite well to do. The Administration also proposes continue to “patch” the AMT to protect the upper middle class from paying that tax. The media keep repeating that “originally it was intended to ensnare millionaires and now it gets people at lower incomes” but they never read the history. For a long time, the AMT has been intended to get people who have quite high income ($250,000 to $500,000 qualifies) and who have lots of “preferences” that reduce the amount of tax they pay too much. Instead, the AMT expands the base and taxes it at a nearly flat rate. We need to make some corrections to the AMT, but we don’t need to protect the $250,000 to $500,000 group from its impact.

The Obama administration has scaled back its proposals aimed at companies that shift profits offshore. It won’t include a proposal to drop the check-the-box rules–an administrative change that facilitated all kinds of offshore gamesmanship by the big multinationals. Instead, the administration proposes to crack down more on transfer pricing. My view–it will be hard to make the crack down effective, because this is a place where businesses have the facts and can manipulate the results. It’s clear, though, that the transfer pricing changes are targeting the right area–the transfer of intangible properties that are created in the US, so that future profits are offshore. But will the concept of “excessive returns” do the trick? Not sure.

Obviously, big businesses lobbied with complaints about their “competitiveness” to get these watered down provisions. This is just whining–but whining that works on vulnerable congresspeople who don’t want to recognize that the US, after all, is a tax haven, with lower effective corporate tax rates than most OECD countries. It isn’t the tax structure that is keeping US corporations –like Campbell Soup, GE, and Caterpillar–from competing. It may be their over-paid management that has lost the ability to think lean and act smart.

Other business tax changes proposed here don’t make much sense. Making the research & development credit permanent is another one of those crazy giveaways that will reward drug companies for developing a tweak to a patent that keeps them in monopoly profits a little longer and raises our medical care costs even faster. We should instead be investing that tax expenditure money in funding basic research at universities. The expensing writeoff for businesses investing in equipment is just another concession to the lobbying–nobody has shown that it works, and it probably doesn’t work to create jobs. But we keep doing it anyway.

So is there anything I like. Yes. The proposal to ensure that carried interest is characterized appropriately as compensation income. The managers of big equity funds have been playing a game with their wages for years–one that is not clearly sustainable under the Code as written. They claim they earn capital gains, and then they defer their income “to boot” by claiming to work for offshore companies that are essentially mailboxes in the Caribbean run by people in the US. That tax dodge shouldn’t work to start with. And the Congress surely should make sure it doesn’t with a clear statement clarifying the law that such items are 1) compensation and 2) earned currently.
crossposted with ataxingmatter

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