Friday, November 16, 2007

Social Security and Raising Taxes on the Rich: Clinton v. Obama

For me – the highlight of the debate was when one woman framed a question on fiscal responsibility in terms of some alleged Social Security and Medicare financing crisis. Obama tried this spin:

This is the kind of thing that I would expect from Mitt Romney or Rudy Giuliani, playing with numbers to make a point.


Paul Krugman says Obama has been played for a sucker. I don’t get the logic of his proposed tax increase.



Paul writes:

Mr. Obama wanted a way to distinguish himself from Hillary Clinton - and for Mr. Obama, who has said that the reason “we can’t tackle the big problems that demand solutions” is that “politics has become so bitter and partisan,” joining in the attack on Senator Clinton’s Social Security position must have seemed like a golden opportunity to sound forceful yet bipartisan. But Social Security isn’t a big problem that demands a solution; it’s a small problem, way down the list of major issues facing America, that has nonetheless become an obsession of Beltway insiders. And on Social Security, as on many other issues, what Washington means by bipartisanship is mainly that everyone should come together to give conservatives what they want. We all wish that American politics weren’t so bitter and partisan. But if you try to find common ground where none exists - which is the case for many issues today - you end up being played for a fool. And that’s what has just happened to Mr. Obama.


Maybe Obama needed to read one of Paul’s columns explaining the actual numbers involved with the future financing of the Social Security problem. Clinton’s answer was much closer to the facts than Obama’a answer – which is likely why the audience booed Obama.

Ed Kilgore approvingly notes Obama’s tax increase proposal:

With another Democratic candidate debate on tap in Nevada later today, you can bet Barack Obama is going to get questions about his proposal for modifying the cap on income subject to Social Security payroll taxes. But it's important to understand why this is such a big deal for a lot of progressive Democrats. His proposal isn't the controversial thing (though it certainly would be in a general election campaign, where it would be hammered by Republicans as a tax increase); it's his decision to raise the subject at all, and particularly his use of the word "crisis" to describe the status of the Social Security system.


I hope Ed listened to the debate when Obama criticized Clinton for not wanting to raise taxes on the rich. Obama seemed to suggest raising employment taxes is the way to sock it to high income individuals. Clinton appears to want to raise income tax rates, which would tax both labor income and capital income. Given the degree of wealth inequality, one would think that raising income tax rates is a better way of restoring a progressive tax system than raising employment taxes. This simple fact seems to be lost on Obama.

Update: Greg Mankiw chastises Paul Krugman for that criticism of Senator Obama. But I don’t get what Greg is trying to say here. OK, back in 1998 we may have been forecasting that the Trust Fund reserves would be depleted by 2029. But I hope Greg has kept up with the revised forecasts that Paul was mentioning today. And Greg should know that what President Clinton was saying in 1998 is a far cry from the rightwing spin that Paul noted. Seriously – if one wants to attack Paul Krugman for something he said, one should be more accurate with what the argument was. And one should also realize to use updated forecasts – and not some forecast from a decade ago.

28 comments:

Bruce Webb said...

All I can think is that he is listening to Jeffrey Liebman, one of his top three economic advisors, and a principal author of the LMS Social Security Plan.

Liebman-MacGuineas-Samwick has a cap increase as one of four components, along with an increase in payroll tax across the board, a cut in benefits, and an increase in retirement age. If implemented it would accomplish some interesting goals but all at the expense of wage workers. What it does is drastically reduce and eventually eliminate exposure of the General Fund to Social Security liabilities, which might be intriguing to people of a certain centrist bent who would be willing to ignore the fundamental inequity of the plan vis a vis workers.

But a lifting of the cap in isolation does nothing. It serves to increase future General Fund obligations by pumping up the interest owed to the Trust Fund (because all extra funds will simply be borrowed) and in so doing sets the stage for an even worse intergenerational struggle after mid-century. Which makes me fear that it is just the camel's nose under the tent with the rest of LMS to follow. That can't be allowed to happen.

Anonymous said...

"Clinton’s answer was much closer to the facts than Obama’a answer – which is likely why the audience booed Obama . . . " WTF?!?

Obama proposed to close the actuarial gap in one of the less offensive ways. (Typically such a measure is accompanied by some brake on benefit growth ordinarily implied by an increase in contributions. Even with no break, increasing contributions probably narrows the gap, since there is lag between payments and benefits, just as with any increase in productivity over projections.)

Clinton just slung a lot of bullshit, especially with that rubbish about "the middle class" and firemen.

Now it is not necessary to close the gap. But Obama's answer on this is more clear and less bad than most others.

Clinton OTOH played to anti-tax idiocy at the same time babbling about fiscal responsibility.

Her trade answer was very close to what Clinton said in 1992, and we know how much he (they) meant it then.

She is the smartest among them, and she is also Satan. I'm not even sure she's our Satan.

You Know Who

Anonymous said...

Another thing -- the audience appreciated Obama's zinger about the 6%, then turned against him when he pushed it to comparing her to Republicans. He should have stood pat with the substantive piece.

I noted that the CNN swine immediately changed the subject, probably to get to 'diamonds and pearls' sooner.

ProGrowthLiberal said...

So some fellow calling himself anonymous is assured that a bipartian Obama-Thompson Soc. Sec. plan would only close the long-run shortfall for the Soc. Sec. system and would not be a long-run subsidy for the General Fund fiasco. Dean Baker's latest over at Beat the Press does the analysis and he shows that this theft from the Soc. Sec. Trust Fund is exactly what Thompson wants to do. Maybe Obama isn't there yet but when you make deals with the feces throwing monkeys in the GOP (a Max Sawicky classic line), there is where you end up. Sort of like that deal a Senators Clinton and Kerry made with Sec. Powell back in Oct. 2002 to have hard diplomacy with Saddam. That did not lead to any war now - did it?

Jack said...

You can always tell when someone is pitching bull shit and knows they are doing so. They hide behind the shield of anonymity so as to shield them selves from those monkeys into whose cage they have wandered.

juan said...

Not to distract from the political machinations but think I'll toss this modern day looting of SS recipients into the cage:

'Unholy Alliance Fleeces Social Security Recipients
by Laura Rowley

November 15, 2007, 12:00AM

Virginia grandmother Ruby Fauntleroy, 74, knew something was wrong when her rent payment bounced shortly after her Social Security check had been direct-deposited into her bank account.

Fauntleroy went to the bank, where a teller told her that the account was frozen following notice of a court judgment and garnishment order by Capital One. Fauntleroy had been trying to pay off this $4,000 credit card debt for years, but dropped her monthly payment to $100 after her husband died and her income declined. Capital One sued, and won a judgment.

"I was just numb, I couldn't believe this could happen," said Fauntleroy. "I told the bank, 'You know nobody is supposed to take a government check,' but they did. I couldn't sleep at night, I couldn't eat. I thought, why are they doing this to me when I was trying to pay [my debt]?"

When Exempt Isn't

Legal aid agencies across the country say they've been flooded with calls from seniors and disabled people whose accounts have been frozen by bill collectors. This is happening even though the federal government specifically prohibits the garnishment of exempt funds such as Social Security and veterans benefits.

In the worst cases, seniors go hungry or without medication because they have no access to funds -- in some cases, for months at a time.

[...]

The problems are becoming more frequent because of the burgeoning debt collection industry. In 2005, $110 billion in face-value debt was purchased by third-party debt buyers, 90 percent of it credit card receivables, according to the Association of Credit and Collection Professionals.

In New York City, the number of consumer debt cases filed in civil court has grown 300 percent in 5 years, to 320,000 cases in 2006, according to a new report from the Urban Justice Center. Ninety percent were brought by third-party debt buyers.

[...]

Like Fauntleroy, many seniors try to make good on their debts, legal advocates say. "Many of our clients made payments for years until they couldn't do it anymore," says Patricia Duecy, a paralegal with Legal Services of Northern Virginia who worked on Fauntleroy's case. "Some of them did pay them off -- if you looked at what they actually charged, outside of late fees and interest.

"A long time ago the country made a decision that when a person is old or poor, they should have a subsistence income to pay for rent, food, and medicine," Duecy adds. "The money is supposed to be going to their basic needs and not going into the hands of debt collectors. If we can't protect the most vulnerable among us, what are we doing?"'

[Complete article @: http://finance.yahoo.com/expert/article/moneyhappy/53832

The bigger war becomes increasingly filthy...

coberly said...

you know who

actually i don't know who.

but that doesn't matter as much as the fact that

you don't seem to know what.

Admin said...

Well I thought you would know who but obviously you didn't. That was your formerly esteemed blogger.

I think you (plural) are seriously confused. And what is this foolishness about my post and Thompson, whom I never mentioned.

As I said in the post, as I've been saying for years, it is not necessary to close the actuarial gap, also known as 'pre-funding.' If it came down to it, in the 2040s or whenever, if ever, we would be better using income tax (or estate tax) revenue to fulfill benefit commitments.

HRC praised the Greenspan commission as a model, which commission did two things, one good the other questionable. It assured the continuation of benefits (good), and it provided Trust Fund surpluses, the fate of which we know only too well.

If you're in the business of "fixing" the Trust Fund gap, as opposed to the cash gap in 2040-something, all you can do is cut benefits or raise payroll taxes. That's the field both Obama and HRC are playing in. In that field, Obama's proposal is less bad than most. You can be damn sure anything HRC cooks up will be worse.

If you oppose closing the actuarial gap ("looting the Trust Fund"), you can either assert there will be no gap a la Bruce Webb, o.k., or you are somewhere else, I don't know where, with PGL.

MBS

Hobson said...

What would be the result of taking the surplus away from the gov't? I mean just charging what it costs to run SS? What would the rates be?

I mean I resent the fact that I have been paying more for the last 25 years than it costs to run SS specifically to "save" SS for my retirement. And all I hear for 25 years is that it's still in an impending crisis.

They have already raised the age I can retire at. They have added taxes to benefits if I still make too much money after retirement and they keep talking about benefit cuts.

If the economy is as good as I keep hearing from the likes of Larry Kudlow, why aren't we talking about better benefits, no double taxing, and maybe even earlier retirement? After all, I like most people do not have a pension of any kind to look forward to and not enough saved to live on for very long.

I know the deal is "If it ain't broke, don't fix it." But it does seem to be broke politically. These arguments never go away.

coberly said...

former blogger

you will have to forgive me for not keeping track. in fact i think you are quite wrong about SS... if i understand what you are saying.

but these arguments can get pretty stupid pretty quick unless people are willing to come to some careful agreements, one at a time, about what exactly they are talking about and what constitutes "reasonable argument."

coberly said...

bruce

i wanted to thank you for keeping track of sawicky.

i read their plan a year or so ago and concluded it was a rather complicated way to destroy social securit while pretending to be bi partisan.

apparently they fooled some of the people.

rather that get you a statue, i wish we get get you a job and pay you for keeping track of all this for us.

statue comes later. after the victory.

coberly said...

hobson

your confusion is rather typical of people who don't know very much.

not trying to be mean here. just saying, you need to learn how the system works.

you have been paying in more than the system "takes" to pay for the currently retired. the reason for that is that your generation is much larger than the preceding generation, and if you paid in only the amount it "takes" to pay for the now elderly, and later on the baby bust generation had to pay in what it takes to pay for your generation, you would be getting a free ride at the expense of your childrens generation.

so they came up with the idea of prepaying part of the boomers retirement. that is the trust fund, which has been demagogued since the day it was founded (back in the 30's actually, for different reasons).

the point is you will get back everything you paid in adjusted for inflation, and with a little extra "interest" if the economy keeps growing... in the form of increasing real wages.

that is, if you can keep the bastards from "fixing it."

don't ask for money from the general fund: that is welfare, and would be death to a system that is essentially a guaranteed savings and insurance plan for workers that works very well for workers.

coberly said...

admin

i am not proposing any pre-paying. i only point out the cost of paying, on the one hand, the trust fund, amounts to... amounts to... a dollar per week increase in the tax each year during a time the average wage is increasing ten dollars per week...

this money should come out of general taxes. i am only describing the size in what i hope are terms the average person can relate to.

as it turns out, if by 2030 it appears the payasyougo deficit will in fact emerged as projected by the trustees, it would be better to start raising the payroll tax that dollar per week per year then. this would extend the life of the trust fund while raising the payroll tax so gradually that no one would notice... except the usual bad guys.

ultimately, according to the projections, the worker would pay an xtra twenty dollars tax on an income that was at least 300 dollars more than it is today. and he would get his money back when he retired, or became disable, or.. or...

i think we do not disagree with each other. but we need to be careful that we understand each other.

Admin said...

cob -- what you are describing IS pre-paying. ANY increase in taxes or cut in scheduled benefits pertaining to SS before Trust Fund exhaustion (in 2040-2050) is a change prior to when the program needs cash over and above its Trust Fund assets and 'tax income' (mainly payroll taxes, also some taxes on benefits).

There are liberal and conservative ways of pre-paying. Obama's is more liberal than many. HRC is just blowing smoke out of her arse.

The Baker/you-know-who position is that pre-paying is itself not necessary.

There is a weak case for somewhat lower deficits now to free up more income tax revenue to repay debts to the Trust Fund (rather than interest on debt held by the public) prior to exhaustion date, and after exhaustion, fully fund scheduled benefits. That's the best you could say about HRC's (hidden) position behind the 'fiscal responsibility' babble.

coberly said...

horrors

i meant to thank bruce for keeping track of samwick. by a freudian slip i said the name that cannot be said instead.

my apologies.

Bruce Webb said...

Dale thanks for the praise but I don't think that Max Sawicky is going to feel real good about being confused for Andrew Samwick. These are Sawicks of substantially different colors.

As for a job I could get one tomorrow, right now I am drawing maximum unenjoyment at a rate that this week increased to $12.75 per hour. Why work when the State is paying me $2100 a month to beer blog? It's like a year of pre-retirement retirement.

Bruce Webb said...

Well Dale caught up before I replied.

So-called Admin. Obama's plan is not more liberal, it is instead nonsensical. It quite literally makes no sense to throw dollars at a program currently in surplus that only go to pumping up a portfolio based on Special Treasuries. You are not doing anything positive and in fact by creating extra interest obligations actually doing a disservice to future generations at the expense of current contributers.

If Obama was openly adopting LMS it would be one thing and we could discuss that, but simply advocating a cap raise with no other changes to the system makes no sense at all. It sounds good, it sounds progressive, but examined at the cash flow level is just stupid.

ProGrowthLiberal said...

MBS (admin) and I heard different things from Senator Clinton. If she was on some anti-tax tirade, then we should shun her GOP nonsense. What I thought I heard from her - and maybe that's not the message she sent out - was that she would prefer raising income taxes (liberal way of closing whatever alleged gap there is) over raising employment taxes, which is the closet GOP agenda that should never been stated honestly. Of course, there is a long-run fiscal gap but it ain't in the Social Security Trust Fund so much as it is in the General Fund fiasco that George W. Bush just defended again this morning (see my post from a few minutes ago). So I'm disagreeing at all with MBS on the policy issues. Our difference seems to be what Senator Satan (whoops - Clinton) is up to. If she is a closest GOP candidate, then I owe Senator Obama an apology. But then so do a few others on the left.

Admin said...

I don't see how anyone could uphold LMS as superior to Obama's proposal from a progressive standpoint.

The notion that HRC would use income tax revenues to protect SS scheduled benefits is impossible to substantiate.

The best guide to what HRC would formally endorse could be gleaned from monitoring the Hamilton Project material, as well as the Diamond-Orszag book and proposal. They are our prospective rulers. They would use a mix of revenues and benefit cuts that is less bad than the R's benefit cuts. Obama's proposal is less bad than Diamond-Orszag, IMO, or at least no worse. Both are better than LMS.

HRC hasn't signed onto anything specific yet. She might endorse a Diamond-Orszag scheme, but her political inclinations to me indicate she would sell out for something like LMS.

Bruce Webb said...

Well Hillary might sell out to something like LMS. On the other hand all I hear from her is "Watch and Wait" which is objectively the right plan.

coberly said...

admin

i didn't hear the lady. but "the notion that she would use income tax revenues to protect SS benefits" seems bizarre.

SS benefits can be protected well enough simply by raising the payroll tax at the time it becomes necessary, as you have noted.

Income taxes might be necessary to pay back the money borrowed from Social Security, but that isn't exactly "protecting" benefits. As for that, the payroll tax could simply be raised even if the gov. defaults on the Trust Fund. it's still only a dollar a week raise each year. and the people who pay the tax, while more than they might have had to pay, will still be getting their money's worth in the form of full benefits over a longer retirement.

the problem is, as Jack noted on an earlier thread, no responsible economists are telling the candidates that they are being played for suckers.

Jack said...

Let me make one small revision to my comment, as coberly states it. Economists, both responsible and otherwise, as well as anyone else with an ounce of influence at the ears of our esteemed candidates, should be screaming at the top of their lungs that this entire social security short-fall issue is bull shit. A total canard. A ruse to rouse the rubes.

Ask the wealthy to start paying their fair share and we'll all sleep better. Hold the idiot in the WH responsible for squandering the national treasury on his desert escapades. Just those two revisions in our national debate would go a long way to bringing the country back to a solvent economic status. Health care could be paid for. The Trust Fund could be paid back what the Treasury owes it. Funny what a little bit of responsible governing can accomplish. Don't hold your collective breath before that happens. God forbid the Congress and the Executive consider governing in the interest of the majority of the nation.

coberly said...

Jack

I am assuming you want the rich to pay their fair share of the general budget. I don't want their steenkin hands anywhere near Social Security. That is a savings and insurance plan for the workers, paid by the workers.

Jack said...

coberly,
Yes, that is what I mean, though there's no particular reason not to institute a marginal system on payroll taxes as well. If the Trust Fund excess has been funding tax breaks for the rich, why not have the rich fund the bulk of the system? Keep in mind my basic popint of view, which I've reiterated here several times, the very wealthy benefit the most from our political/economic system. They should, therefore, bear the greatest share of the cost of maintaining that system.

coberly said...

Jack

as far as I know the rich do bear the greatest share of taxes.

but Social Security is a savings and insurance plan for workers, paid for by workers. what you would do would turn it into welfare. then the rich would kill it.

you want the workers to have a bigger share of goods and services... get them to unionize. vote for more equitable policies. raise the income tax. but leave social security alone. it's critical that it not be a welfare system.

Jack said...

coberly,
The issue is not whether the rich bear the greatest share of taxes. The rich should pay the share of tax revenues that is the equivalent of the share they take of total income.

coberly said...

jack

sounds like a flat tax to me.

i don't agree with the flat tax. poor people need to keep a larger pecent of their income just to feed themselves.

Hobson said...

Coberly, I appreciate your answering me. I get that the boomers are bigger than the generation I have been paying for.

What I don't get is the trust fund aspect of it. If the surplus is actually spent and replaced by treasuries, don't they have to be redeemed with money at some point in the future? Doesn't that money have to come out of the pockets of future generations? Or will growth simply keep that from becoming a problem?

Speaking of demogoguing, Biden, in one of the recent debates proudly talked about his part in passing the '83 or so legislation that "saved" Social Security. If it doesn't need saving now, did it need saving then?