Wednesday, January 9, 2008

Do We Have to Cut Social Security Benefits?

I was going to pass on the latest from Robert (no relationship to Paul) Samuelson until Greg Mankiw offered the silly oped to his readers without critical comment. The most offensive line in my view was:



Lightening the burden on the young requires cutting retirement benefits for the old - raising eligibility ages, being less generous to richer retirees and making beneficiaries pay more for Medicare. Simply increasing taxes or cutting other programs won't work. The problem is not just closing the budget deficit.


In other words, we must cut Social Security benefits according to Mr. Samuelson. Part of my objection to this silliness has been outsourced to Dean Baker:

Robert Samuelson has yet another diatribe talking about the budget breaking cost of "Social Security, Medicare and Medicaid." As CBO director Peter Orszag has tried to teach those willing to learn, the problem is health care, not aging.


Simply put – the expected future payments to Social Security recipients do not exceed the expected future payroll taxes dedicated to this program by all that much with the really big ticket items coming from things like expected future health care costs and expected future Defense Department costs relative to expected future income taxes under what those in the Republican Party (including that current President that Greg used to work for) wish to have as permanent policy. So when Samuelson makes claim that members of both parties are making false promises, then he must think George W. Bush is a Democrat.

We have all sorts of means for closing the fiscal gap including raising income taxes, cutting defense spending, and yes finding some means for providing for health care at lower costs. While Samuelson may be correct that we cannot simultaneously keep tax rates low, defense and health care spending high AND maintain the current level of Social Security benefits, his oped becomes yet “another diatribe” as Dean puts it when he limits his choice of policy options to slashing Social Security benefits. Now we know Samuelson and the Washington Post have had a slew of such silly opeds in the past, but why can’t Greg Mankiw point out even the obvious to the readers of his blog?


21 comments:

rosserjb@jmu.edu said...

pgl,

Thanks for posting on this. I was tempted to. This column was worse than many. He spends most of his time going on about all the ways to cut social security benefits, while only briefly mentioning once anything about medicare, and that not involving the broader problem of reforming the health care system of the US, which is the real issue here (see my earlier post on the US wasting money on health care).

There seems to be a fresh outbreak of people simply pushing this "something must be done with(to) social security," without even remotely acknowledging, that, well, maybe nothing does have to be done about it, at least not anywhere in the near term, certainly not during the next presidential term. Gag, yet again.

Barkley

rosserjb@jmu.edu said...

pgl,

I have tried to comment twice over on Angry Bear about your post praising Goolsbee. My comments do not appear to have shown up.

I'll note here that he seems to be part of Obama's line that social security really is in crisis and something must be done, with which they bashed Hillary in Iowa. Not clear whether they know better or are just cynically appealing to the ignorant youth vote. After all, more young people think they will see a UFO than that they will receive any social security benefits.

Barkley
PS: If I am not able to post over there, it is not the first time...

ProGrowthLiberal said...

Barkley - that praise is from Cactus (sort of Bear #4). Papa Bear still runs the admin part and for whatever reason, his version of blogging does have its troubles. Email him and maybe he can fix the problem. Bear #2 of course was Kash who has his own blog but seems he's working corporate and gone radio silent. While I was Bear #3, seems Bear #4 is running the show - and I'm not in total agreement with all he says.

Bruce Webb said...

"but why can’t Greg Mankiw point out even the obvious to the readers of his blog?"

There seems to be a selective blindness among professional economists on this issue, and I mean among the good guys.

It is just not the fact that fellow professionals like Mankiw and Samwick don't know the realities. They know the numbers full well and push Social Security crisis anyway. It is why Dean chose to title his book 'Phony Crisis' instead of say 'Wrong headed crisis'.

If you read the papers printed in Cato's Fall 1983 Social Security issue of their Journal it is pretty clear that these people really did believe the system was fatally flawed and that when the time came they simply needed to be in place. Well things didn't work out as expected, for whatever reason the 90's happened and transformed the economic playing field. Which left the anti Social Security people in a bind. They could admit that the numbers had changed, simply dismantle the multiple institutions that had grown up around the campaign, and leave people who had devoted their entire working careers designing for a post Social Security world adrift. Or they could ignore the numbers and keep going. Which meant allowing 'Phony' have a place at the table and a certain conscious acceptance of sacrificing their intellectual honesty.

It is my long standing belief that not only do privatizers fully understand the moderate levels of growth needed to fully fund Social Security as is, they are actually counting on it. Which is what put the barb in No Economist Left Behind and why the very existence of Low Cost must be hidden at all cost. The plan was to move to private accounts, have the economy naturally grow to the point where 'crisis' evaporates, and then credit the private accounts for the cure.

Because it is true that private accounts plus 2.8% Real GDP give a better result than a public system plus 2.2% Real GDP. Unfortunately for them they can't show better results for most workers than a public system with that same 2.8% GDP. In the end Social Security solvency is only fractionally helped by the return on the Trust Fund, boosting that return by diversification might be marginally useful but pales in comparison to the income/cost ratio which in turn is related to the overall payroll dollar at any given time which itself is related to the size of the overall economy.

The time for 'reforming' Social Security is fast running out and supporters of privatization know that full well. They could come clean, explain why private accounts would not give a better outcome for lower earning workers but explain why they are preferable on ideological grounds, (which is roughly where they are on the 'tax cuts pay for themselves' argument, where the new line is 'okay they don't, but should be done for reasons x, y, z anyway'), but that is a pretty tough sell, for one thing it requires turning risk/reward on its head, asking workers to take more risk for less reward. So pretty much they are reduced to playing out the clock, Mankiw here just trying a last minute Hail Mary before time runs out.

Why didn't Mankiw 'point out the obvious'? For the same reasons that you try to score a touchdown in the last minute being three scores down. Its been 'Game on!' since 1935, just giving up betrays seventy two years of team effort. On the other hand you can't shovel back the tide of numbers that are rolling in, we are just not that far from 'Game over!' no matter what Mankiw et freres attempt.

Anonymous said...

Sometimes I need to hear Bruce Webb and revive my faith in ordinary citizens...esp when we have professional economists (like Mankiw ) serving private, not public, interests.
Mankiw: the triumph of training over education.

coberly said...

the fundamental problem with all of this analysis is that it assumes that Social Security is federal spending just like other federal spending. that the payroll tax is just another tax.

please learn to separate these things in your mind:
with regular federal spending and ordinary taxes we pay for the level of government our representatives think we need.

Social Security is actually an insured savings program for workers, paid for by workers. No doubt cutting payroll taxes would save workers a few dollars today, but at the expense of cutting their own pensions below survival levels... in other words destroying the "security" part of social security.

as far as actual numbers go... sadly lacking in the debate... the Trustees intermediate projection of the SS deficit amounts to a tax raise of one dollar per week each year from 2016 to 2036 (or from 2030 to 2050 depending how you read the Trust Fund). During this time the Trustees project that incomes will be rising about ten dollars per week. So there is your "crisis": a dollar tax on a ten dollar raise. And you get the money back.

At a "two workers per each retiree" ratio... every dollar in tax cuts costs you four dollars in benefits per month. So they are talking potentially of avoiding a 60 dollar per month tax raise our of an income of 3000 dollars per month, at the cost of a 240 dollar per month benefit cut out of a benefit of a thousand dollars a month, leaving the elderly... that's you dear...trying to get by on 760 per month (using today's values).

When all the baby boomers are dead, and the rise in life expectancy has leveled out, the bottom line will be about a twenty dollar per week raise in the tax on an income that is 300 dollars higher.

the "solvency" of the Trust Fund really has nothing to do with this except to change the date the very small payroll tax raise would need to be initiated.

coberly said...

i realize that barkely and bruce have a slightly different take on the trade off between tax raises and benefit cuts.

they point out correctly that with no tax raise, future beneficiaries will still get a benefit that is more or less equal to today's in buying power.

what they don't seem to understand is that today's buying power may not mean much in 2040. that their theory of holding "real" income constant for retirees would ultimatley result in retirees living in stone age conditions while the society around them was living in jet age conditions.

in any case since it is the workers own money, let him (them) make the decision for himself when the problem actually gets here if it ever does.

Denis Drew said...

Funny thing is that the end result of this generation of workers paying in more to S.S. than the generation which is now receiving benefits is that today's workers in their turn will receive more than we did when it comes to retirement (in accordance with the average wage growth adjustment).

This assumes that per capita income keeps on doubling every two generations (assuming Mars doesn't invade, today's workers are safe).

rosserjb@jmu.edu said...

coberly,

Not "more or less equal." Just plain "more," and by quite a bit. And, no, "real per capita income" is a meaningful concept, not that tomorrow's real per capita income equal to today's would lead to stone age living conditions. If that is the case, then there is some very serious mismeasurement going on, very serious.

Where your argument has bite is in terms of social expectations. Clearly, when there is real economic growth, people become accustomed to the higher real standards of living. So, a lifestyle that is actually materially as good as today's will seem much poorer. But again, we are not talking about the same, we are talking about "more," like about 20% more, pretty substantial.

Barkley

rosserjb@jmu.edu said...

coberly,

Of course we also know from the happiness lit that people do not like suffering sharp declines in real income. So, if the implicit scare scenario that keeps getting publicized were to occur, in 2041 recipients suddenly taking a 25% hit, or whatever it would be, sure, those people would feel a lot of pain.

But this is part of how totally phony this crap is. That will never happen, no f-ing way. If indeed the more pessimistic scenarios occur, adjustments will be made long before 2041. No Congress and no president would ever oversee or allow such an outcome to happen, not never, not no how, not no way.

Barkley

Anonymous said...

Rather than get caught up in the larger issue of ideological mindsets I think I'll just reiterate a pet peeve. Contrary to what almost everybody thinks, we aren't living much longer than we did a hundred years ago. A bit, as in just a few years, but not much. The confusion stems from the widespread use of life expectancy at birth, which has risen sharply, rather than the more meaningful (in discussions of the costs associated with elder care social programs) life expectancy at any given mature adult age such as at 30 or 60. A person lucky enough to survive the childhood mortality of 100 years ago was quite likely to get his "three score and ten".
The greater cost issue approaching has to do with how much we are willing to spend to supply the medical care necessary to get people at age 85 to make it to age 87 or, in other words, to extend life for those last few, disease riddled years. There will tough decisions, there will be rationing. Let's hope we will all be generous and compassionate. And that we can all learn to accept death as a normal part of the life process and not bankrupt friends, family, and country in order to spend another year in the hospital.

juan said...

New attack on SS as one of the big three rating agencies threatens a future downgrading of U.S. debt "unless...radical action [is taken] to curb soaring healthcare and social security spending..."

[clip]

"The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moody’s, the credit rating agency, said on Thursday.

"The warning over the future of the triple-A rating – granted to US government debt since it was first assessed in 1917 – reflects growing concerns over the country’s ability to retain its financial and economic supremacy.
[...]
Unlike Moody’s previous assessment of US government debt in 2005, Thursday’s report specifically links rises in healthcare and social security spending to the credit rating."

Financial Times, January 10 2008
complete article: http://www.ft.com/cms/s/0/40f3a2be-bfa9-11dc-8052-0000779fd2ac.html

Particularly apt warning/threat when coming from one of the firms involved in misrating structured products such as CDOs.

"Since the 1970s, largely due to issuer demand for ratings as a way to increase investor confidence, the rating agencies revenues have increasingly been generated by issuers of securities. 8 In the past few years, these revenues have been increasingly driven by ratings for relatively newer structured finance products. As a result rating definitions have undergone significant changes to their meaning as well as the manner in which they are employed. These changes and their implications to the integrity of the rating process are significant."

Where Did the Risk Go? How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt Obligation Market Disruptions JOSEPH R. MASON† JOSHUA ROSNER ††

[† Associate Professor of Finance and LeBow Research Fellow, Drexel University LeBow College of Business, Senior Fellow at the Wharton School, and Visiting Scholar, Federal Deposit Insurance Corporation. †† Managing Director, Graham Fisher & Co.]

Eighty plus pages and available at:
http://www.hudson.org/files/publications/ Hudson_Mortgage_Paper5_3_07.pdf


More militancy than has been the case may well be required if SS is to be saved from grasping, excuse-searching, finance capital and most politicos.

rosserjb@jmu.edu said...

The big joke here is that Moody's downgraded Japan's national debt a number of years ago. Of course, they have been amassing enormous amounts of dollars ever since, and, well, we know what they are worth. So, clearly Moody's was very farsighted.

Barkley

Brenda Rosser said...

I'm not so sure that the US Government will not enforce cuts to Social Security and Medicare. I agree with Barkley that there is likely to be an enormous outcry if this happened. However I've been reading stuff (over the last 18 months) that indicates the US Government is anticipating and preparing for some form of mass revolt.

"In January 2006, the Department of Homeland Security gave Halliiburton subsidiary Kellog, Brown, & Root a $400 million dollar contract to build vast new domestic detention camps within the United States. The camps are ostensibly being built to house and process an "emergency influx of immigrants", which is exactly what the U.S. will be facing between 2008 and 2012 as Mexico's oil production collapses.

and
The United States Federal Emergency Management Agency has numerous detainment camps throughout the United States. Some camps have been recently constructed and / or renovated and are fully staffed. The existence of the camps coupled with Presidential Executive Orders giving the President and Department of Homeland Security (of which FEMA is now part) control over ‘national essential functions’ in the event of ‘catastrophic emergency’ have resulted in concerns that the camps will be used to forcefully detain American citizens for unconstitutional purposes...

US FEMA Camps

by Geopolitical Monitor
http://www.globalresearch.ca/index.php?context=va&aid=7763

Denis Drew said...

There is no reason for people in 2041 to take a 25% hit: the income tax that has been "cashing" government owned bonds will simply be reduced by the same proportion that the payroll tax (FICA) will be raised and the party will go on. The clunkiness will simply go out of the clunky retirement collections.

The only good reason to have a Trust Fund for S.S. is to bridge a temporary shortfall in the payroll tax stream, until Congress raises it a mite (happened twice so far) -- meaning a (say 5 year) bridge should be maintained permanently anyway -- meaning FICA should take over even before the Trust Fund is completely depleted.

Denis Drew said...

To add to my comment above:

S.S. is basically a reverse Ponzi scheme in which each generation get more than it paid in because of economic growth: if you start your work career at $50,000/yr, you should end doing $100,000 doing equivalent work, 40 years later.

I am sure the wages of my old Teamster buddies back in 804 kept up with per capita growth since I left them in 1970 (back problems). They had just gotten an increase of $18/wk over 3 years from a base of $120/wk ($95 increase on $640/wk in 2007 dollars). They recently raised their defined retirement benefit from $3300/mo to 3600/mo: to more then they were making in wages 38 years ago!

Meantime Chicago cabdrivers now earn half what they earned when I started there 28 years ago (wouldn't catch me cabbing in Chicago now): one 30 cent mileage raise between 1981 and 1997 -- at which 1990 midpoint Chicago began adding 40% more cabs (still adding) while cutting the business seemingly in half with trains to both airports and open limo licenses (the cream) and finally (the coup de grace) free trolleys between all the hot spots downtown (the bread and butter).

The difference between the two segments of labor is bargaining muscle, nothing else -- in the Teamsters supplied by excess testosterone. I remember our local president, Ron Carey, calling a "strike" shouting "I'm not saying there's a dollar there". There was, the very next day: $18/wk instead of only $17. I had the feeling as he called the strike it was just to get strike out of these very militant guys' systems -- with a wink and an nod from management.

Sector-wide labor agreements (as practiced around the OECD world) dispel with the need for testosterone overload and make things easier for employers (around the OECD world) too -- like the minimum wage really does by raising everybody's costs the same amount at the same time. Sector-wide is really the soft solution to the race to the bottom state side.

Get wages back to LBJ era distribution at today's doubled average income and all our poverty and S.S. problems would go away.

coberly said...

Rosser

you and i should not argue. we agree about all the important stuff. and i think we agree about that minor point if we each only understood what the other is saying.

sadly, i have looked at this pretty comprehensively (if i say so myself) and when i read other people's comments, even the well intentioned and reasonable well informed, all i can feel is despair at the difficulties of getting them to connect ALL the links.

IF (and only if) a shortfall in benefits becomes a near certainty by about 2030, "they" could begin raising the payroll tax about one tenth percent per year (over the next twenty years) and close the (currently projected) gap, while raising the tax a dollar per week per year for the average worker... something he would be unlikely to notice while his income is rising (as projected) about ten dollars per week per year.

as for my stoneage analogy. it was an analogy. no fear of real stones... just such a gross disparity in standard of living that everyone living on "more" than they have now (in retirement) would think they were living in cruellest poverty. and... a point you never seem to take... the changes in that future higher standard of living world,, might make it impossible for someone on "today's" income to function at all. i still can't take a bus downtown like my grandmother could.

but let's not argue about this. it doesn't matter now. no one gives a real damn about it. when the time comes the people then can argue about it.
meanwhile we have Moody's to worry about. and the fact that 99% of the people don't understand a damn thing about Social Security.

coberly said...

apologies

last word from my grandmother

back in the day, she needed to go downtown once a week. cost her ten cents on the bus. so her transportation costs were ten cents per week.

today, there is no bus downtown. but if there was one, it would cost a dollar. so michael boskin would say her cost of living has gone up by a factor of ten.

but the reason there is no bus is because there is no "downtown." to get any shopping done, granny now has to have a car and to go to many places to shop. a car takes gas, and insurance, and maintenance... say about three thousand a year minimum to own. granny's ten cent bus trip now costs her 70 bucks a week. but mr boskin says that's all "improved standard of living" not rise in the cost of living.

mr rosser agrees. he is willing to increase my granny's pension to "more" than the cost of living, but not as much as the standard of living.

i don't know what the "standard of living" in 2050 will be, but i am fairly sure a Boskinized CPI will not cover the actual cost of living in that world. and some who know better should be careful about inadvertently agreeing with Congressman Leghorn about using the CPI as the basis for SS benefits.

juan said...

Barkley,

Read through that Mason & Rosner paper and you'll see how incestuous relations became between the rating agencies and 'investors' .

My point was, I think, that these agencies have not only been financially complicit in creation of the mortgage mess but, also this decade, began exerting greater political pressures.

rdan said...

rosserjb@jmu.edu
I do not know why comments did not post. Let me know if it happens at AB under rdan, on the left.

Anonymous said...

you do not know what you're talking about. look at the numbers. when social security started there were over 15 workers for every retiree. Soon there will be around 2 workers per retiree. You cannot conserve your way out of this or get healthy as a way of reducing this truth. benefits must be cut. how about giving all of us working out here the option out of social security and mediScare? That way we could actually have something to show for what we're being forced to give right now.