Relevant and even prescient commentary on news, politics and the economy.

Who is the true beneficiary of welfare? or Please define: Entitlement

I wrote in February of 2012 about welfare: Welfare, I’m not hurting from it and neither are you.

I noted the following: but it looks to me like what we spend on welfare is not much more than what the government is spending on just doing the government thingy, unless of course people can’t get a job. Interestingly enough, the share of GDP spent on welfare in 1992 and 2010 is the same. In fact, at the peak of unemployment of the 2001 recession which was 2003, we spent just 0.0098 on welfare.

Understand that 0.0098 is the fraction of our GDP spent on welfare.  That is 0.98% of our GDP.  I did not include the medicaid/healthcare expenditures.

Of course there was the often heard comment to this article about welfare recipients not contributing. No skin in the game, not contributing, blah, blah, blah….stuff for free.  My first response and really the only needed response is “So what?”  I mean really Sooooooooo What!  Is the welfare person really stopping you from getting your Mercedes?

Well here’s the so what. The Public cost of low-wages in the Fast -food Industry

“Nearly three-quarters (73 percent) of enrollments in America’s major public benefits programs are from working families. But many of them work in jobs that pay wages so low that their paychecks do not generate enough income to provide for life’s basic necessities.”

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Rep Marsha Blackburn’s snow job. Explains how Social Security money flows

I was watching C span Washington Journal this morning.  Rep Marsha Blackburn was the guest.  I got to listen to her explanation of how the Social Security funds flow and just had to post the clip.   Copied from the transcript of the clip:

THEIRS MONEY THAT GOES TO MEDICARE AND SOCIAL SECURITY AND I THINK IT IS JUST IS SO INAPPROPRIATE THAT THE FEDERAL GOVERNMENT DOES NOT USE THAT AS A TRUST FUND BUT THEY MOVE IMMEDIATELY TO THE GENERAL FUND AND STACK UP IOU’S THAT ARE SITTING IN A CABINET IN WEST VIRGINIA.

What she says should not be allowed to stand and if C-span were half of what it used to be, she would not have had the following go uncorrected.  Thus I leave it to the Angry Bears to correct her here and thus document her ignorance of the subject. 

I have not watched this lady before.  I could not help but think she is just a more polished version of Sarah Palin. She is totally capable of pulling off what we used to call a “snow job” when writing their essay.

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Go ahead. Implement Austerity at your own peril

by Daniel Becker
(This is a long post. The time for sound bite debate to the demise of learned discussion is over for we are flirting with danger.)
Via a post at Financial Armageddon I learnt of a paper looking at the relationship of austerity implementation and social unrest. It is recent, dated August 2011.
Jacopo Ponticelli, Universitat Pompeu Fabra
Hans-Joachim Voth, UPF-ICREA, CREI and CEPR
Discussion Paper No. 8513
August 2011
Centre for Economic Policy Research
The Financial Armageddon article shows the first chart of the paper which presents: the relationship between fiscal adjustment episodes and the number of incidents indicating instability (CHAOS).
 
 
“CHAOS is the sum of demonstrations, riots, strikes, assassinations, and attempted revolutions in a
single year in each country. The first set of five bars show the frequencies conditional on the size of budget cuts. When expenditure is increasing, the average country-year unit of observation in our data registers less than 1.5 events. When expenditure cuts reach 1% or more of GDP, this grows to nearly 2 events, a relative increase by almost a third compared to the periods of budget expansion. As cuts intensify, the frequency of disturbances rises. Once austerity measures involve expenditure reductions by 5% or more, there are more than 3 events per year and country — twice as many as in times of expenditure increases.”
This is a rather disturbing chart. Certainly the recent events in England play into the subject of this paper. That WE are now setup for our version of austerity implementation, this paper should be put in the hands of all the staff members of congress and the president. If I had my own national news show I would have in the corner of the screen the above chart along with the google map of all the riot locations in London and in big letters: Cut SS, MC, Medicaid. Really? You want to go there?
There is more to this paper than just the apparent connection between austerity and upheaval. “Controlling for economic growth does not change our results. This suggests that we capture more than the general association between economic downturns and unrest.”
This is the most powerful statement of the paper. It implies that “Man” in all his glory is responsible for such social activity. It is not the “natural” course of economic activity that creates such volatile activity.  It is the economic policy implementedthat determines whether there will be unrest or not. Currently, the proposed austerity is based on an a priori of “we’re broke”. It is stated with the authority of natural cause. Mother Nature Economy did it’s thing and well…we’re broke. All we can do is rebuild after the storm. Yet, an economy is totally of human design. The republican who stated that the conservative movement was making reality was more correct than their fantasizing of control and power would allow them to realize. Thus I delve into this paper more after the jump.


 

There are two points that need to be understood if we are to apply the lessons of this social economic paper. Point 1:
“However, countries with very high levels of constraints on the executive show a weaker degree of association…Table 10 demonstrates that in countries with better institutions, the responsiveness of unrest to budget cuts is generally lower. Where constraints on the executive are minimal, the coefficient on expenditure changes is strongly negative – more spending buys a lot of social peace.”
So, some kind of governance that includes self determination is a mechanism for minimizing upheaval/unrest. I believe the American Revolution would be an example of upheaval in the face of “minimal executive” constraint. Finding that constraint of the executive is determinative does not mean such rights are exercised by the people to their benefit:
“The political economy literature on austerity suggests a paradox. There is no significant punishment at the polls for governments pursuing cut-backs (Alesina, Perotti, and Tavares 1998; Alesina, Carloni, and Lecce 2010), and no evidence of gains in response to budget expansion (Brender and A. Drazen
2008).”
I don’t know what to make of such findings. Certainly there must be more in the details of the studies sited. If such lack of response by the electorate is true, then we are in deeper trouble than realized.  
Based on this conclusion, the authors ask: 
“Why, then, is fiscal consolidation often delayed, or only implemented half-heartedly?” 
They suggest fear of unrest may be the reason and footnote the following: 
14 Alesina, Carloni and Lecce (2010) also suggest that implementation of budget measures may be harder if the burden falls disproportionately on some groups.
I would hate to think that austerity measures are not implemented simply because of fear of a reprisal that appears to be short lived with no political loss to those implementing the policy instead of not implementing austerity because research and experience prove it to be actually harmful in it’s results and even contradictory to the desired outcome of greater prosperity with reduced risk of living. If the politico is acting based on the former, it show’s no conviction of ideology and philosophy. If they fail to acted based on the latter, it shows a lack of character of inquiry and enlightenment. In either case, Naomi Kline’s work notes that austerity is always implemented with some form of force. In our country the force appears to be consolidation and control of the media combined with massive amounts of spending thus control of the debate and knowledge of the subject matter. Though the police state is in place thanks to Bush/Cheney and the expansion under Obama. 
Point 2:
“Further, we examine if the spread of mass media changes the probability of unrest. This is not the case. If anything, higher levels of media availability and a more developed telecommunications infrastructure reduce the strength of the mapping from budget cuts to instability.”
In their conclusion they flatly state: Contrary to what might be expected, we also find no evidence that the spread of mass media facilitates the rise of mass protests.
This suggests that cutting communications as some have done recently in an attempt to curb the upheaval is not a procedure that works in the long term. The focus of the complaint, materialized via upheaval will have to be addressed. It is not the ease of rallying the masses, the pep squad going viral that solely explains the materialization or degree of unrest. Though it may explain the reduction in strength of austerity implementation and resulting upheaval. I think the authors have stumbled upon the modern version of the printing press coming into existence and the effects it had.
The authors review current literature on the subject and find there is some confliction as to the effects of budget cutting. I’ll let you read it, but my take home is that it depends on what stage of national development the country is in as to the extent austerity will produce unrest, if the unrest is sustained post implementation and whether it promotes growth. They even site:
Giavazzi and Pagano (1990) and Alesina et al. (2002) find that cuts can be expansionary. Amongst the reasons suggested for this finding are a reduction in uncertainty about the course future spending (Blanchard 1990a), and a positive wealth shock as a result of lower taxes in the future (Bertola and Drazen 1993).3
I guess we know where the current meme comes from. Unfortunately the authors also note:
IMF interventions, on the other hand, often led to more frequent disturbances (Morrison, Lafay, and Dessus 1994).
Similarly, Haggard, Lafay and Morrison (1995) find that IMF interventions and monetary contractions in developing countries led to greater instability.
Recently, work by the IMF has suggested that austerity measures may be less expansionary than previously thought; they may well have the standard negative Keynesian effects as a result of lower demand (IMF 2010; Pescatori, Leigh, and Guajardo 2011).
Oh no! What is the IMF going to do now? I’m still praying for you Greece.
The author’s sum up the literature review with:
Remarkably, to the best of our knowledge, there exists no systematic analysis of how budget cuts affect the level of social instability and unrest in a broad cross-section of developed countries, over a long period.
Wouldn’t you think that such research would be considered key to one’s knowledge base before we start implementing policy that to date has been mostly tried and studied in 3rd world situations?  Wouldn’t you think that the advising 
the proof of effectiveness from these advising economist? Even medicine has acknowledged there is a difference between men and women other than genital development. The review of literature is clear. Start cutting and you will piss people off such that they express it ultimately in violent means though if you can ride it out the violence abates and prosperity looms until it doesn’t because people just plain have no money. The word for today is: Demand. Use it in a sentence as it relates to this discussion.
We can think that there are other issues involved when people protest, but the authors make it clear, austerity brings out the greatest number of people. For those considering how to handle the masses when the austerity gets implemented:
“The simple correlations suggest that these co-movements do not extend to all indicators of unrest equally – riots, revolutions, and demonstrations decline as expenditure rises, but assassinations and strikes seem – at a first pass – uncorrelated. Similarly, output growth seems to correlate negatively with assassinations, riots, revolutions, and demonstrations, but not with strikes.” 
And: “This suggests that unrest reacts particularly strongly to budget cuts and growth when unrest levels are already high.”
Go ahead, implement at your own imperil. In case you think this connection of unrest/upheaval is related to how they measure it, the authors checked that variable: “We conclude that the way in which we measure unrest does not matter for our main finding.”
Looking at the relationship of austerity policy involving taxes: 
Higher taxes and lower expenditure are associated with more unrest, but the relationship is not significant. Tax increases have a positive sign, but the effect is not significant at standard levels of rejection (column 2). It is also small – a one standard deviation rise in the tax/GDP ratio increases unrest by less than 0.01 events. Overall, we find that improvements in the budget balance raise the level of unrest (column 3). As the results in columns (1) and (2) make clear, this reflects the impact of expenditure cuts, and not of tax increases.
And:
We find the same results as before – expenditure cuts wreak havoc, tax increases do so only to a small extent and insignificantly. Overall, the budget balance matters for predicting unrest.
Just to make sure no one gets this wrong: A change in budget balance predicts unrest if the balance is reduced via cuts. Kind of makes it difficult to accept that the masses want something for nothing. In fact, I would suggest “entitlement” as it has come to mean something for nothing is the wrong word to apply to government programs of which people pay for willingly via taxes and don’t get riotous if they are asked to pay more.
If we wanted to avoid the upheaval of austerity implementation we should consider: 
In all specifications, the effect of GDP growth on unrest is negative. In contrast to the results for expenditure changes, the effect is not tightly estimated, except in the case of demonstrations, when it is also large – every 1% increase in GDP cuts the number of demonstrations by close to 0.4 events.
See, do something that actually improves the economy and people don’t protest! Wow, who’d a thunk it? Of course improving the economy such that people do not protest would mean having implemented something which produces an actually experienced improvement in the peoples lives. Something like real rising wages paralleling productivity rise and thus rising wealth. Unlike say, debt driven consumption only to have financing go away and then told to suck it up.
They look further at the connection of spending cuts vs economic growth and find:
In contrast, if expenditure changes are negative, they matter a great deal for unrest, driving up CHAOS by 0.19 incidents for each standard deviation of expenditure cuts. Next, we repeat the exercise for output changes. Increases in output do much to cut unrest (col. 3), with a one standard deviation increase in output (3.77%) reducing CHAOS by 0.2 incidents on average. In contrast, declines do not set off major disruptions to the same degree. Overall, the results in table 12 confirm that the relevant identifying variation for expenditure changes comes from cuts; for output changes, it comes from positive growth, not recessions.
This paper kind of makes you think about our current governance of Wall Street/Corp influence and apparent dominance of policy choices to the exclusion of polls showing people want no cuts in programs referred to as entitlements and instead have the budget balanced via tax revenue enhancement. Wonder what happens when virtual people known as corporations do not experience austerity yet have persuading influence over We the people’s choices via money into the election process.? I guess we are going to find out. As I have heard in the past: tort is the free market response to lax governance of the market. Is upheaval the same free market response to unresponsive policy toward the people?
My concern is that the initial response by those supporting and promoting austerity will be the furthering of the police state we have been developing since 9/11. Only it will also be fired up (pun intended) domestically. It is the response we have experienced in the past with the civil rights motion and even back to the labor movement. It appears that a police response is always the first response to protest as protest is interpreted as potentially criminal regardless of what the Constitution reads. Yet here we have a paper suggesting that all of it can be avoided. Combining this paper with the 2005 World Bank report on what creates wealth in a developed economy it appears to me that we have  in our hands the answer to what appropriate economic policy should look like for our current situation. 
I asked September 2008 if we could please broaden our discussion regarding the crisis. That has not happened. The discussion is still disjointed, segmented and narrow. Now I’m imploring that we broaden the discussion. Pleading!

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Duncan Black, Ph.D. who Specializes in the Economies of Cities, Explains It All to You

Bruce has made this point repeatedly. Dr. Black puts it in more direct language:

[I]nevitably the Social Security Trustees will, perfectly justifiably, tweak a few assumptions about future economic activity so that there will be a DOOM scenario, an EVERYTHING’S AWESOME scenario, and a “uh oh maybe in about 40 years we will have a problem” scenario. And then Fred Hiatt will print another million ZOMG WE MUST DESTROY SOCIAL SECURITY NOW IN ORDER TO SAVE IT FORTY YEARS FROM NOW columns and some future president will marvel at those worthless IOUS and blah blah blah.

We know how this works.

And the Sensible Centrists* are gathering behind someone who wants to do just that.

When the Voice in the Wilderness is Andrew Samwick (who is at least honest about his willingness to steal from the Trust Fund), two things are certain:

  1. Jason Furman should work on his c.v., and
  2. Even as only Nixon could go to China (because only Nixon was enough of a bastard to sacrifice Tibet to Chou En-Lai), only the Obama Administration can turn the Social Safety Net into something the Republicans “saved” (by making it look like Dresden).

UPDATE: Tim Duy at his branch of Ecoonomist’s View piles on (h/t Steve Randy Waldman‘s Twitter feed, or maybe Felix Salmon‘s), giving the lie to whatever was left of the DeLong argument that being left of a cadre of Bob Rubins makes one a “liberal.” Pull quote:

The strong Dollar policy takes shape in 1995. At that point, Rubin made it clear that the rest of the world was free to manipulate the value of the US Dollar to pursue their own mercantilist interests. This should have been more obvious at the time given that China was last named a currency manipulator was 1994, but the immensity of that decision was lost as the tech boom engulfed America.

Moreover, Rubin adds insult to injury in the Asian Financial Crisis, by using the IMF as a club to enact far reaching reforms on nations seeking aid. The lesson learned – never, ever run a current account deficit. Accumulating massive reserves is the absolute only way to guarantee you can always tell the nice men from the IMF and the US Treasury to get off your front porch.

Go Read the Whole Thing.

Full Disclosure Update: Bob Rubin’s son is a college classmate of mine. Haven’t really seen him in the past not-quite-thirty years.

*I’m 99.44% certain those are assigned correctly. The Sensible one thinks that “attempt[ing] to push Clinton administration economic policy a little further to the left” was a Liberal position, while the Centrist is stupid enough not to believe people who have said for years that they intend to pick his pocket have something valuable to contribute to a discussion of his welfare, and does not remember that he lived through a decade when “the program [was] officially in balance.”

If H*ll exists as a form of reincarnation, my next life will be spent as a Centrist. If all my sins are venial and Purgatory awaits, I could live with being Sensible. At least until my neighbors couldn’t send their academically-achieving issue to college for purely monetary reasons, after which point I would consider this post to be rampant optimism.

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Forget Jumping the Shark? The WaPo is Doing the Tango with It

UPDATE: Jason Linkins at one of the non-Breast-Enhanced sites of the Huffington Post did a burlesque of which I can only dream on the same piece.

Via Chris Hayes’s Twitter feed (and he got it from David Sirota), the following is from “No more ‘me first’ mentality on entitlements“:

While it does not happen often, our political system is capable of making unpopular decisions that are in our collective best interest. In 2008, during the most severe financial crisis in 80 years, Republican and Democratic leaders in Washington came together to do something deeply unpopular: bail out the financial system via the Troubled Assets Relief Program. These leaders understood the consequence of inaction was economic devastation for Americans. Passing TARP was the right thing to do.

[B]ailing out the financial system went directly against our shared beliefs in free markets and fair play. While the vast majority of Americans did not cause the financial crisis, we all had to sacrifice to stop it. Such a cultural violation has angered people nationwide, which makes cutting entitlements more difficult because it will again betray our sense of fairness.

The challenge of entitlements is more difficult than the financial crisis: First, we must reach consensus to make cuts before the fiscal crisis is upon us….If we wait until the bond market shuns Treasurys, the economic consequences could be dire. Virtually overnight, we could have far less money to spend on priorities such as defense, education and research.

Cutting entitlement spending requires us to think beyond what is in our own immediate self-interest. But it also runs against our sense of fairness: We have, after all, paid for entitlements for earlier generations. Is it now fair to cut my benefits? No, it isn’t. But if we don’t focus on our collective good, all of us will suffer.

I’ve resequenced the above paragraphs a bit, but remained faithful to the argument as presented.

The author: Neel Kashkari, who is described as “a managing director of the investment management firm PIMCO, served as an assistant Treasury secretary during the George W. Bush administration. He led the Office of Financial Stability and ran the Troubled Assets Relief Program until May 2009.”

His sacrifices for the sake of TARP are well known; indeed, documented in the paragraph above. And, gosh, isn’t it nice that he pushes an argument that would make fixed-rate securities—you know, the thing PIMCO is famous for trading—more valuable?

It’s good to know that “Me First” needs to change, and nice to see the Post presenting a prime example of why.

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Overfixing Social Security: the Importance of Honest Scoring

by Bruce Webb

And I could add honest definitions and honest framing to that.

In Dec 2005 three former staffers to Bill Clinton, John McCain and GW Bush respectively released the Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan (9 pg PDF) or LMS. The authors proposed a package of changes to Social Security comprised of a 1.5% across the board payroll tax increase, an adjustment of the payroll gap back to the 90% level (it had drifted down to 84%) for the equivalent of another 1.0% of payroll, and adjustment in retirement age scored at 0.62% of payroll, and a change in indexing of initial benefits that scored at 2.08% of payroll for a total worker financed ‘fix’ of 5.2% of payroll. Interestingly enough in that year the total 75 year actuarial gap was scored at 1.92% of payroll, meaning that an immediate hike of that amount would deliver 100% of scheduled benefits over the 75 year window traditionally used to score Social Security solvency. So why a 5.2% solution to a problem scored 1.92%?

Well therein lies a tale, and an important one when we are faced with a so-called Deficits Commission whose leaders make it clear that Social Security is front and center, as workers and future retirees we owe it to ourselves to understand what problem ‘reformers’ are actually addressing. Because LMS at least is not focused on retirement security, not at least in the dollars and cents sense. Much more under the fold. (It wouldn’t hurt to bring along your tin-foil hat).

My first introduction to LMS came the summer before publication when co-author Prof. Andrew Samwick outlined it in a guest post at DeLong. In the course of discussion he casually claimed that the payroll gap was 3.5%. When in comments I asked “Whence 3.5% Samwick?” and pointed to the standard 1.92% 75 year number reported by the Trustees, both he, and by e-mail DeLong, informed me that he was referencing the gap projected over the Infinite Future Horizon and pointed to Table IV.B7 in the Report. Well sure enough alongside the $3.5 trillion dollar 75 year gap was a $10.5 trillion Infinite Future one.

Well I had been reading and comparing Trustees Reports since 1997 and never heard of such a thing, was I just a sloppy reader? Well no, it turns out this particular measure was relatively new having been introduced with the 2003 Report. Why was it so introduced? And why should we prefer it to the previously satisfactory 75 year window? Well a tale within a tale. From the Report, bolding mine

Consistent with practice since 1965, this report focuses on the 75-year period from 2003 to 2077 for the evaluation of the long-run financial status of the OASDI program on an open group basis (i.e., including both current and future participants). Table IV.B7 shows that the present value of open group unfunded obligations for the program over that period is $3.5 trillion. Some experts, however, have described the limitations of using a 75-year period. Overemphasis of summary measures (such as the actuarial balance and open group unfunded obligations) for the 75-year period can lead to incorrect perceptions and policy that fails to address sustainability.
In order to provide a fuller description of long-run unfunded obligations of the OASDI program, this section presents estimates of obligations that extend to the infinite horizon.

Hmm, “some experts”, “incorrect perceptions”, “address sustainability”. What the heck is sustainability in context? Why should workers care? Got a name for any of those experts or an explanation of why an alternate perception that focuses on outcomes within our own lifetime and not on retirement of people not yet born is somehow “incorrect”? Why so? Well I suggest that the answer is that retirement security for current workers is simply not the focus of these unnamed “experts”, and that somehow the Trustees in 2003 rather silently adopted that same focus for reasons unstated.

Returning to LMS. In the description of the authors we get the following, once again bolding mine:

Andrew Samwick is Professor of Economics and Director of the Nelson A. Rockefeller Center for Public Policy at Dartmouth College. From 2003 to 2004, he was Chief Economist on the staff of President Bush’s Council of Economic Advisers, where his responsibilities included Social Security.

Well “responsibilities” is a broad term, but you would expect that an implicit change in the focus in Social Security from 75 year solvency to Infinite Future ‘sustainable solvency’ might suggest the involvement of the CEA Chief Economist, and certainly Samwick qualified as an “expert”, but Prof Samwick has informed me personally that he was not in fact responsible for this particular change. And Andrew is a truly nice guy and is often described along with Bruce Bartlett as one of a small number of “honest conservative economists” by people like Brad DeLong, still it is interesting to me that the introduction to LMS starts off with these sentences:

The three of us – former aides to President Clinton, Senator McCain, and President Bush – did an experiment to see if we could develop a reform plan that we could all support.
The Liebman-MacGuineas-Samwick (LMS) plan demonstrates the types of compromises that can help policy makers from across the political spectrum agree on a Social Security reform plan. The plan achieves sustainable solvency through progressive changes to taxes and benefits, introduces mandatory personal accounts, and specifies important details that are often left unaddressed in other reform plans.

So while Prof. Samwick was maybe not the engineer here, he certainly was willing to board the train in time to draft LMS.

To which we return once again with an examination of Table 2 on page 7 along with this accompaning text:

Sustainable solvency is achieved – The Social Security actuaries find that actuarial balance would improve by 2.14 percent of taxable payroll over the 75-year projection horizon. The current Social Security deficit is 1.92 percent of payroll. Therefore, the changes in the plan would lead to a 0.22 surplus. Trust fund balances in the last year of the actuaries’ projection period are positive and increasing. (See http://www.ssa.gov/OACT/solvency/Liebman_20051117.pdf).

Okay we have a 1.92% payroll gap and a 2.14% solution, reasonable enough. But what was this about a 5.2% solution? Where is the extra 3.06%? Well 1.56% percent of it is accounted for in the Table, that amount gets diverted to a new PRA, Private Retirement Account, leaving us missing only 1.5%. And where is that? Well buried in the text on page 1, LMS proposes a mandatory deduction of 1.5% credited directly to the individuals PRA and so not properly speaking contributing to Actuarial Balance and so excluded from Table 2.

Well I have to cry foul here. We have a problem scored 1.92% and a solution that includes a package of tax increases totaling 2.5% between the across the board increase and the payroll cap increase, that is more than enough to deliver 100% of scheduled benefits if simply applied to the Trust Fund. But we ALSO have an additional package of benefit cuts totaling 2.7% which itself would have closed all of the gap and then some. On the other hand the individual comes out of this with a PRA funded with a total of 3.06% of his wage income over that period. Perhaps the end result is a BETTER than 100% of scheduled benefit? Well no, a look at Table 1 shows that a retired couple can expect to get a result from 85% (low earner one worker) to 109% (high earner two worker) compared to the baseline schedule.

Well but what about Ownership Society? You have your PRA, surely you can pass those assets onto your heirs? Well no. Not unless you die quickly.

All payments from PRAs would be paid as annuities, which would initially be required to be fixed, inflation-indexed annuities provided by the Social Security Administration as part of a beneficiary’s regular Social Security benefit. Full annuitization by age 68 is required, but beneficiaries can choose to spread annuitization between 62 and 68 if so desired. Married beneficiaries would be required to purchase joint and two-thirds survivor annuities. Annuities would be 10-year certain annuities to provide payouts to heirs of those who die soon after annuitization. The total balances in the accounts of the two spouses in a married couple would be split equally in the case of divorce.

So what would workers see out of LMS? Well a joint survivor fixed income, inflation indexed annuity paid out monthly by the Social Security system. Which sounds identical to what happens today, except the result in the case of LMS is exposed to the market, the results in Table 1, bad as they are, assume “Expected Yield on Mixed Portfolio”. Meaning it is kind of a crap-shoot.

Does LMS do some good things? Well yes, but none of them particularly rebound to the benefit of most workers and certainly not lower earning workers. Instead they are asked to chip in a combination of 1.5% in ‘contributions’ (they obviously would not be exposed to the cap increase) and take a guaranteed 2.7% cut in benefits hoping to make up around half of that through returns on their PRAs. How did the authors possibly proposed to sell that?

Time to put that Tin Foil Hat on. If you bury the 1.5% increase in the text and address all the other changes you have workers giving up 3.7%, or 2.7% for those earning under the old cap. Which is a lot to only partially solve a problem scored at 1.92% over 75 years. But not a lot to solve a problem scored at 3.5% over the Infinite Future. It is really the odd coincidence to have a new number pop up in the 2003 Report so useful for the purposes of selling a Privatization Plan that on one accounting requires just that amount of offset. How do you sell a plan that proposes a 5.2% solution to a problem scored 1.92%? Easy hide 1.5% of the solution and re-score the problem by 1.58%. Tin Foil Hat off.

As we confront the work of the new Deficit Commission it will be important for workers to firmly keep their own self-interest in mind and ask some serious questions. One what problem is the Commission actually addressing. Two how much of that problem if any was actually caused by Social Security. Three if the solution to that problem only calls for sacrifices by workers in the form of benefit cuts where is the equity. We know the way the problem will be framed, it will be expressed in dollar terms over the Infinite Future Horizon, it will be blamed on excessive Backward Transfers to previous generations, there will be attempts to blame Boomers for ruining the whole world with their greed. Because that is what the ‘reformers’ have been doing for years, trying to find some way to stick workers with the tab.

Make them honestly define the problem they are solving. Make sure they use honest scores. Don’t let them frame this as some problem created by workers when it is nothing of the sort. And above all don’t let them bill you 5% for a problem that in 2009 was scored 2.01%. Social Security faces a real actuarial gap much as it has in various years past. And given that it is a plan financed for workers by workers it is incumbent on workers to suggest a solution. Dale, Arne and I have proposed a solution that delivers 100% of the scheduled benefit via a phased in set of payroll tax increases. Other workers might decide that it would be better to combine a lower set of increases with some changes in indexing or retirement age, or throw in some increase in cap levels. All of which is legitimate enough. What isn’t legitimate is for some Commission to use some bait and switch tactic like LMS does.

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Matthew S on Obama’s Picks to the Debt Commission

lifted from Bruce’s e-mail

Hi Bruce,

I really enjoyed your recent post to OpenLeft about the war on Social Security. I wrote a related piece deconstructing Obama’s latest picks to the Debt Commission:

Alternet: Obama Packs Debt Commission with Social Security Looters?

Any feedback about the article or thoughts on the matter would be greatly appreciated.

I run a watchdog website called LittleSis.org that tracks ties between corporate and government elites, with an emphasis on Wall Street. We’re gearing up for a sustained investigation into the networks of funding and influence behind the latest attack on Social Security, and I wanted to just say hello and touch base. It seems that there could be more coordination happening between various folks keeping watch on this.

Best,
Matthew

I have Matthew’s full contact info if serious people want it. But the piece is very good regardless.

(Update: Lifted from comments:
Movie Guy: “Matthew Skomarovsky wrote an excellent piece. It strikes me that it deserved a stronger presentation at Angry Bear. I doubt that many casual drive-by readers bothered to click on the main post sublink. But what a piece”)

Worth saying twice. Click and read.

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Will the Presidents Commission use CBO or SSA Numbers?

by Bruce Webb

Well some things are coming clear about the Presidents Deficit Commission. One its Chairmen have made it clear that its business starts and stops with Entitlements, the concerns some Republicans had that this would be Obama’s way of boosting taxes on the General Fund side or slashing military spending have been shown to be misplaced. Moreover it is clear from the NYT article cited by Jack yesterday plus many other indications that Social Security is front and center, after all the GOP has used the prospect of cuts to Medicare as a centerpiece to their opposition to HCR.

So the ground in being prepared for a grand debate on Social Security. But the question I want to throw out today is this: Who will be the scorekeeper? And the answer to that has huge implications.

There are three main governmental actors who score Social Security and they are not lined up neatly in either methodology or timing. First and foremost are the Trustees of Social Security. They release their Annual Report typically on March 31st though it can come out, as it did last year, as late as May. When it does come out it will be available here: Trustees’ Reports and of course in short order via a link in a post here at AB.

At that point we will be able to compare its numbers to those of the Congressional Budget Office. The CBO gives ten year numbers for Social Security with its standard Budget Outlooks and updates of its Baseline but its main analysis of Social Security comes each August in the form of a document entitled ‘CBO’s Long-Term Projections for Social Security’. The 2009 version of this is available here: CBO Publications: Social Security and Pensions

A third scorekeeper is the White House Office of Management and Budget which releases its own 10-year numbers on Social Security with its release of the President’s Budget. Normally these numbers would not be front and center in a Social Security discussion, but this is after all a Presidential Commission and moreover the current top two at OMB are themselves authors of prominent Social Security plans: Diamond-Orszag and Liebman-MacGuineas-Samwick (LMS).

So we are faced this year with our own Clash of the Titans. And it matters because the data sets are incongruent, where CBO in August projected a 75 year actuarial gap of 1.3%, SSA put it at 2.01% in May. Whereas SSA tells us that the Trust Fund will likely go to depletion in 2037 based on the best available information they had a year ago, CBO using updated information from last Spring/Summer still would have that date be 2043. And that time gap is very significant, it is the difference between mid-point Boomers being 82 or just crossing the average projected mortality date and 88 when most of that cohort will have shuffled off to Buffalo (and points beyond).

A couple of days ago it was announced that the Executive Director of the President’s Commission would be former top Clinton advisor and DLC Chair Bruce Reed and presumedly Bruce is staffing up as we speak. We don’t know when the Commission will actually hold its first hearings but certainly those will be shaped and informed by the numbers in the soon to be released SSA Trustees Report. But the time-table established would have the Commission issue recommendations in December presumedly to be acted on by the next Congress in Spring 2011. Which means that the Commission and then Congress are going to be dealing with four sets of numbers in succession: 2010 Social Security Report (April), Presidents 2011 Budget (Summer), CBO’s Long-Term Projections (August), and then in all likelihood the 2011 SS Report (April 2011).

So it should be interesting, because the set of policies you need to address a 2% of payroll gap in 2037 are very different from those needed to address a 1.3% gap in 2043. And the reality is that the situation on the ground has moved significantly since even those numbers were produced.

I addressed the question SSA? or CBO? to a big group of policy experts. And one of the biggest, and one with a long resume of top jobs at both SSA and CBO firmly answered ‘CBO’. But some people closer to the current action said essentially ‘Not so fast, that decision has not been made’. Well it makes a huge difference because coincidentally some of the major proposals out there like changes in retirement age and cap increases typically score right at 0.7% of payroll and so very close to the difference between SSA and CBO, if we adopt the former they might have to be included in a proposal, if we adopt the latter they could be scrapped without damage.

By and large the Press reporting in years past and most policy discussion generally has revolved around the Trustees numbers and until the debate over HCR few people even understood the role of CBO is scoring legislation. Now that the focus is turning squarely on Social Security commenters who have been content to deal with issues like Trust Fund Depletion in terms of ‘will run out’ are suddenly going to be confronted with an amount of ambiguity and varying datasets that they just are not prepared for. But at least Angry Bear readers will have had a little heads up.

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Seven Steps to Social Security cuts via Debt Commission

by Bruce Webb

I don’t visit the web-site EconomistMom much because Diane has hinted a while back that I was being rude, and like a good party guest does, took the hint and left. But my eye was caught by the caption and the very nice illustration to this post Yes Deficit Hawks Can Have Their Cake and Eat it Too, decided to drop in and found a conversation between olde acquaintances Bruce Bartlett, Jim Glass and commenter Brooks. I don’t want to copy Bartlett’s exact comment without his consent, so to see it and my reply, you may have to visit. Go ahead, I’ll wait below the fold.
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Back now? Good.

For those of you who didn’t go the short version of my comment is that the strategy to get major slashes to Social Security and Medicare takes an Seven Step and that this technique is not new and in fact mirrors the original plan for Bush’s Commission to Strengthen Social Security (CSSS) in 2001-2002.

Step one. Get consensus on ‘Crisis’. In this case that current debt growth levels are unsustainable.
Step two. Get consensus that there are only three possible paths out: revenue increases (A), cuts in military and other discretionary spending (B1 and B2), or cuts to non-discretionary spending, meaning Medicare and Social Security (C)
Step three: Having agreed that some combination of A, B, and C is needed set up a Commission with a mandate to propose an up or down vote.
Step four. Committee decides it is unwise to increase taxes during a recession and eliminates (A). Commission further decides that it is unwise to cut defense spending in the middle of two wars eliminating (B1) and that eliminating infrastructure spending or farm supports is both unwise or politically impossible in the current climate (B2)
Step five. Recommend a package of cuts to Medicare and Social Security-C on the basis of shared sacrifice, after all every CD and State has a share of the elderly population.
Step Six: Tell Congress that the statute doesn’t allow them to revisit A or B and then that NOT voting for a C based solution means denial of Steps one and two.
Seven: Either get a vote for C or run against opponents as ‘Do Nothing Deficit Deniers”

This was exactly the plan used by the Bush Administration in their Spring 2005 Social Security Tour. Rather than produce a Plan already in hand crafted to specifications, say like Model 2 of CSSS, and have people pick it to pieces, they held it back for a later stage. . So the proposed sequence there was:

Step A: Use Social Security Tour to get consensus on Social Security Crisis
Step B: Use tour to assure everyone that all options were on the table.
Step C: Having gotten consensus from Congress try to find some mechanism to assure a final up or down vote.
Step D: Having secured a vote indicate that any plan MUST comply with the seven existing guidelines of CSSS Guiding Principles to CSSS which bar any tax-based solution and mandate private accounts.
Step E: Remind Congress that they promised an up or down vote and that refusal just meant being in denial of what was conceded in step one and two.
Step F: Either get a vote to ‘reform’ Social Security or use a denial to go for a major victory in the 2006 mid-terms.

In 2005 Bush mostly got stopped at Step A. Since his proposal was narrowly focused on Social Security, a ‘There is No Crisis’ narrative WITHIN the Social Security context was able to get traction. This time we are on a very different track, instead of selling this as a proposal for an ‘Ownership Society’ (where the numbers were pretty easily debunked), it is being sold as a matter of ‘Intergenerational Equity’ and ‘Fiscal Responsibility’. And from that starting point Step one is pretty much in the bag and logic gets you mostly through Step two.

Leaving us where? Well we are within a week of a vote on Step three of the first list and if it passes steps four through seven pretty much follow automatically, they may not work but I would hate to have to bet on it. Meaning that we need to stop Step three by convincing people that Step four is already in the bag. So called ‘Deficit Hawks’ strongly overlap with ‘Tax Hawks’ and with ‘Military Hawks’. Moreover they are largely from farm states and not likely to vote for big cuts there. Which really leaves only one question in my mind, do they stop with proposing big slashes to Social Security, Medicare and Medicaid? Or make new runs at Urban Transit, Community Develpment, or (non-military) Foreign Aid?

I suspect they know better than to get too ambitious and will instead just strike at Entitlements as such.

A last note on Bartlett who revealed too much. In noting that while open to tax increases in principle history showed that while Congress couldn’t help cutting future tax increases back (as with AMT), both Congress and people allowed the benefit cuts in the 1983 Reform to occur on schedule. Since future wage working retirees actually decided to go along with that for the general good while the wealthy would predictably resist paying taxes for that same general welfare that we should just go with the benefit cuts. Because they were ‘doable’.

So workers are ‘doable’. Which puts us ‘working guys’ into a whole new category, except in this case we are paying the Johns.

(Original proposed title: The ABCs of BOHICA)

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Not-So-Select Short Subjects

Now that I know we’re just members of the “Peanut Gallery,”* let this random links post work as a placeholder for longer posts as we prepare for the “holiday”:

Shorter Mark Thoma at Marketwatch: If you can’t build a better model, best to reappoint a man who doesn’t think he has to do half of his job. (UPDATE: Or even less than that. [h/t Linda Beale])

Shorter Mark Thoma at his own blog: All of our current models prefer people to starve and die.

A fun graphic (h/t Abnormal Returns)

Think the Health Insurance “Reform” Bill will “bend the cost curve”? Think again.

*That the “Periodic Table” pretends to be about Finance Bloggers and yet categorizes DeLong, Thoma, and Mankiw, to name three, as “Rocket Scien[tists]” instead of Economists should in no way be seen to impune the quality of the analysis, of course.

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