The Donkey Is Sleeping Today

Taking Care Of The Lesser People

In Deficit Reduction, Economics, Social Security on July 17, 2010 at 5:35 pm

There’s a new meme that has gripped official Washington over the past few months. I’ve got a fever, and the only prescription… is more deficit reduction.

More Deficit Reduction

But instead of ringing a cowbell, our Very Serious Leaders are trying to lead us to slaughter, using this deficit “crisis” to justify their ultimate goal of shredding the social safety net. Naomi Klein talked about this in her seminal book, The Shock Doctrine, and it seems her theory of disaster capitalism has infected current inside-the-beltway thinking when it comes to Social Security.

We are already starting to see the signs of a trumped-up crisis, fed by lies and misinformation about Social Security’s current “insolvency.” We are told that Social Security is now running at a deficit, that it won’t be around when those currently paying in retire, and that skyrocketing life expectancy rates have put a burden on the system, among many others.

But now for something completely different: the truth.

Zombie Lie #1: Skyrocketing Life Expectancy Rates Burdening The System

Nancy Altman has a beautiful takedown of this right-wing, zombie lie in her book, “The Battle For Social Security: From FDR’s Vision To Bush’s Gamble” (h/t to Susan Gardner of DailyKos):

For Social Security purposes, the correct question is not how many live to age 65, but rather how long those reaching age 65 live thereafter. Here the numbers are not as dramatic. In 1940, men who survived to age 65 had a remaining life expectancy of 12.7 years. Today, a 65-year-old man can expect to live not quite three years longer than he might have in 1940, or 15.3 years beyond reaching age 65. For women, the comparable numbers are 14.7 years beyond age 65 in 1940; 19.6 years in 1990.

Zombie Lie #2: Social Security Is Running At A Deficit

While the traditional media is falling all over itself to report that Social Security will run at a deficit starting this year, this stat only takes into consideration the primary deficit due to depressed payroll taxes because of almost 10-percent unemployment. It fails to include the interest payments that the Social Security Trust Fund continues to earn. Here’s a handy chart from the Center on Budget and Policy Priorities (CBPP):


Those who tout Social Security’s impending doom (any day now… really… I’m not kidding… we’re completely screwed) conveniently forget that Social Security is currently running trillions in surplus. According to the CBO, old age and disability trust funds are projected to grow from $2.5 trillion in 2009 to $3.8 trillion in 2020.  Here’s another handy chart:

Zombie Lie #3: Social Security Won’t Be Around When I Retire

The Social Security Trust Fund is not estimated to run out of money until 2037, and even then tax income would allow payment of about 75% of benefits through 2083.  Kathy Ruffing of CBPP has more:

  • In 2009, the combined Old-Age, Survivors, and Disability Insurance Trust Funds — commonly known as Social Security — ran a surplus of $137 billion, meaning that the trust funds’ income (from taxes and interest) exceeded their spending (for benefits and administration) by that amount.
  • The Congressional Budget Office (CBO) expects the surplus to slip to $91 billion in 2010 before rising again — reaching $137 billion in 2015.
  • The Office of Management and Budget (OMB) echoes CBO’s projections for the next two years and expects a more robust recovery in the system’s finances thereafter.

Certainly, there are ways to ensure Social Security remains solvent well into the rest of this century, but the fixes to the system do not need to be draconian. Noted economist Monique Morrissey of the Economics Policy Institute explains (emphasis mine):

Poll after poll has shown that voters are willing to pay higher taxes to preserve and strengthen Social Security. But most of the gap can be closed without raising taxes on ordinary workers—just those with earnings above the taxable earnings cap of $106,800.

For example, gradually restoring the cap to again cover 90% of earnings for workers, and eliminating it altogether on employer side, would be enough to shrink the long-term deficit by 69%, while still preserving the link between these workers’ contributions and the benefits they receive.

Raising or eliminating the cap on taxable earnings is appropriate because almost all the earnings growth (and the growth in life expectancy) in recent years has been at the top.

So why the sudden rush to slash Social Security benefits? Our old friend, Paul Krugman, has an answer:

There has always been a sense in which [Republican] voodoo economics was a cover story for the real doctrine, which was “starve the beast”: slash revenue with tax cuts, then demand spending cuts to close the resulting budget gap. The point is that starve the beast basically amounts to deliberately creating a fiscal crisis, in the belief that the crisis can be used to push through unpopular policies, like dismantling Social Security.

So let me get this straight, Republicans ran up huge deficits by cutting taxes for the very wealthy, waging two wars in Iraq and Afghanistan, and drove the financial system to the brink of ruin through their deregulation mania. And now the middle class, the working class, and the elderly need to foot the bill? Perhaps this is what Alan Simpson was referring to when he was talking about “taking care of the lesser people.”

We have been told that Social Security is “the third rail of American politics,” but if politicians of either party use lies, misinformation, and a trumped-up crisis to justify slashing this very important and beneficial program, then perhaps they deserve to be electrocuted (politically speaking). Unfortunately, I fear that this political “electrocution” Obama and the rest of his Democratic followers face will be largely self-inflicted, once again by their zeal to prove their conservative bonafides.

-SF

UPDATE: The Trustees of the Social Security and Medicare trust funds released their annual report on August 5th. It shows that Social Security will remain solvent through 2037, at which time “…tax income would be sufficient to pay about 75 percent of scheduled benefits through 2084.”

In terms of Medicare, the report finds (emphasis mine):

The outlook for Medicare has improved substantially because of program changes made in the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (the “Affordable Care Act” or ACA). Despite lower near-term revenues resulting from the economic recession, the Hospital Insurance (HI) Trust Fund is now expected to remain solvent until 2029, 12 years longer than was projected last year…

UPDATE 2: Our friends at CBPP are also reporting that Social Security keeps approximately 20 million Americans out of poverty, including 1.1 million children. But who cares? It’s much more fun to invent a crisis so that we can privatize Social Security and use the money to gamble at the casinos on Wall Street. Right?

  1. nice post. thanks.

  2. Well I don’t generally comment on weblogs but I ran into yours while I was doing some work researching in Google today so i decided I might shoot a simple comment. Obviously I’ve become a little sidetracked after sticking around to browse some of your posts. Great stuff here and I’m going to be back again in the future to check out more. Take care!

  3. This is a wonderfully thought out and relatively well researched defense of Social Security’s stability. However, the entire base of your argument stands upon the fiction that is the trust fund. It appears that you do not realize that the wonderful “surplus” that is earning “interest” is made up of US Treasury Notes. The “interest” is (more or less) simply paid in the form of additional notes (it’s paid out and replaced by Congress with more notes to be precise). So, you could certainly argue that there is value in these notes, but to have value the treasury would have to sell these notes on the market which has the same effect as creating new US debt in the external market. In other words, there may as well be no surplus at all, because the government will have to issue debt to pay for any expenses which exceed the current collections from FICA. So, the surplus and “interest” are effectively fairy tales since the money has been spent from 1966 to present. And, in reality, we are facing a huge issue as we are starting to face the reality where payments are exceeding collections and I fear that your “Zombie Lie #2” may not be a lie as a number of people are concerned about structural employment changes.

    I thought I would add a little transparency as I saw your post on Krugman’s blog. He really should be ashamed, as he knows all this, but is simply playing politics. This is a legitimate issue that requires statesmen to address (not partisan politicians from either side). But, making arguments without the facts simply misleads people and continues the status quo.

    • Thank you for your very well-thought and articulate response. I hope my comments can help put your mind at ease regarding the Social Security trust fund and how it really operates. The following is information taken from the Trust Fund Data page at http://www.ssa.gov.

      How are the trust funds invested?

      By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are “special issues” of the United States Treasury. Such securities are available only to the trust funds.

      In the past, the trust funds have held marketable Treasury securities, which are available to the general public. Unlike marketable securities, special issues can be redeemed at any time at face value. Marketable securities are subject to the forces of the open market and may suffer a loss, or enjoy a gain, if sold before maturity. Investment in special issues gives the trust funds the same flexibility as holding cash.

      Why do some people describe the “special issue” securities held by the trust funds as worthless IOUs?

      Far from being “worthless IOUs,” the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.

      Here’s the full link:

      http://www.ssa.gov/OACT/ProgData/fundFAQ.html

      And as for Krugman, I will let him defend himself when touching on your criticism that the trust fund is worthless.

      But the privatizers won’t take yes for an answer when it comes to the sustainability of Social Security. Their answer to the pretty good numbers is to say that the trust fund is meaningless, because it’s invested in U.S. government bonds. They aren’t really saying that government bonds are worthless; their point is that the whole notion of a separate budget for Social Security is a fiction. And if that’s true, the idea that one part of the government can have a positive trust fund while the government as a whole is in debt does become strange.

      But there are two problems with their position.

      The lesser problem is that if you say that there is no link between the payroll tax and future Social Security benefits – which is what denying the reality of the trust fund amounts to – then Greenspan and company pulled a fast one back in the 1980s: they sold a regressive tax switch, raising taxes on workers while cutting them on the wealthy, on false pretenses. More broadly, we’re breaking a major promise if we now, after 20 years of high payroll taxes to pay for Social Security’s future, declare that it was all a little joke on the public.

      The bigger problem for those who want to see a crisis in Social Security’s future is this: if Social Security is just part of the federal budget, with no budget or trust fund of its own, then, well, it’s just part of the federal budget: there can’t be a Social Security crisis. All you can have is a general budget crisis. Rising Social Security benefit payments might be one reason for that crisis, but it’s hard to make the case that it will be central.

      But those who insist that we face a Social Security crisis want to have it both ways. Having invoked the concept of a unified budget to reject the existence of a trust fund, they refuse to accept the implications of that unified budget going forward. Instead, having changed the rules to make the trust fund meaningless, they want to change the rules back around 15 years from now: today, when the payroll tax takes in more revenue than SS benefits, they say that’s meaningless, but when – in 2018 or later – benefits start to exceed the payroll tax, why, that’s a crisis. Huh?

      I don’t know why this contradiction is so hard to understand, except to echo Upton Sinclair: it’s hard to get a man to understand something when his salary (or, in the current situation, his membership in the political club) depends on his not understanding it. But let me try this one more time, by asking the following: What happens in 2018 or whenever, when benefits payments exceed payroll tax revenues?

      The answer, very clearly, is nothing.

      The Social Security system won’t be in trouble: it will, in fact, still have a growing trust fund, because of the interest that the trust earns on its accumulated surplus. The only way Social Security gets in trouble is if Congress votes not to honor U.S. government bonds held by Social Security. That’s not going to happen.

      Here’s the full link:

      http://krugman.blogs.nytimes.com/2008/03/28/about-the-social-security-trust-fund/

      And unfortunately, I believe there are precious few “statesmen” left in Washington to solve any problem.

      • Look, you and PK are just playing word games here. Nobody is saying that there is a SS crisis that is somehow separate from the overall gov’t budget.

        If the Treasury has to redeem $3.8 trillion worth of T-bonds between ~2020 and 2037 in order to pay back SS so SS can pay its recipients (see my earlier post), that’s a US general fund hit, whether there’s a SS “Trust Fund” or not.

        When you & PK say that “nothing is going to happen” to SS, you’re simply ignoring the fact that beginning ~2020, the general budget will become responsible for feeding more and more of the SS beast.

        If you really want to do something useful, how about coming up with a plot of just how much money will need to flow from the Treasury into SS each year for, say, the 50 years after 2020.

        Please tell me where I’m missing something here. And don’t patronize me with your Upton Sinclair quotes; I’m as much of a Progressive and a SS fan as anyone.

        Jifster

  4. […] Click on this for an excellent analysis and update [Added 8/16/10]. Possibly related posts: (automatically generated)The Social Security shell gameRoundup: sick bees, tanning taxThe Social Security ScamThe Government and Banking Social Security Theft […]

  5. Seriously is this article a joke? You speak of SS trust fund as if it has all this money just lying around waiting to be distributed. Do you not realize that in fact all this money has been spent already by the government and all that is sitting there is a bunch of IOU’s? So what happens when SS (actually starting this year) needs to pull money from it’s fund? The government will then have to borrow more to pay back the IOU’s!

  6. Look, I’m on Paul Krugman’s side on pretty much everything. But on the SS Trust Fund issue, his non-quantitative “everyone’s-confused-but-me” argument just doesn’t have much information content.

    Yes, I understand that SS is taking in more than it pays out, that the surplus goes into the Trust Fund, that the Trust Fund then lends the excess to the US Gov’t in return for US Treasury Bonds, that these bonds have the “full faith and credit” of the Gov’t, and that the Gov’t has never defaulted on its bonds. That’s great.

    I also understand that around 2020, the Trust Fund will contain some $3.8 trillion and SS outgo will begin to exceed income, so that we will need to begin withdrawing from the Trust Fund to pay SS recipients, and that the Fund will be cleaned out by 2037.

    So here’s my question: How are Treasury Bonds functionally different from interest-bearing IOUs? Why isn’t the cashing in of $3.8 trillion worth of Bonds over a 17-year period a significant burden on the General Fund, especially in the out-years, leading to an increase in the National Debt of roughly the same amount (all other factors assumed equal for our purposes here)? And why doesn’t the problem get much worse the farther past 2037 we go?

    Jifster

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