Saturday, January 10, 2009

How Bruce Webb And I Helped Save Social Security (Maybe)

A few days ago Obama was quoted as saying that "getting entitlement spending under control" would be part of the effort to deal with budgetary problems. Most think he is focusing on getting rising medical care costs under control, which was part of his platform. But the question of maybe he might do something with or to social security has arisen, and with Larry Summers whispering in his ear, who wanted to go after the program under Bill Clinton, this may be worrisome. As it is during the campaign, Obama opposed any cuts in benefits or moves to privatization, with his only proposal being to possibly implement fica taxes on those making more than $250,000 per year starting in 2019, if the program needs financial shoring up at that time, with the widely publicized mid-range forecast of the system having that being a year or so after the program is scheduled to start running annual deficits rather than the (large) surpluses it has been running, and will continue to run forever if the very unpublicized low-cost scenario comes to pass.

This is where Bruce Webb and I came in last spring. While the system did not do so last year and certainly will not this year, in a majority of years over the past decade it has done better than that low cost scenario, raising the likelihood that the system may in fact never run a deficit. It may not need any fixing ever, and is just fine as it is. Ain't broke and don't need no fixin'. Initially Obama was proposing to implement his added fica tax immediately after taking office. At a certain point, Bruce and I composed a memo laying out the above facts and some others that was sent through channels I shall not discuss to the highest levels of the Obama campaign. Soon thereafter came the change in position to move this proposed change off to 2019, although this decision may have had little to nothing to do with our memo. But I still hold to the position of that memo and hope that Obama is not listening too closely to Summers now on this matter. The system is doing just fine and should be left alone as it is for the duration of his presidency, however long it proves to be.


Robert D Feinman said...

Presidents live in a bubble. Notice that Obama started to get daily threat assessments as soon as he won the election.

He doesn't get daily reports on how well various programs are doing, only on things to make him paranoid. Is it no wonder that no matter how reasonable candidates sound the soon buy into the need for a huge military to protect us from all these hidden dangers.

Once you have bought into this it is a short step to believing that it is fitting for social services to be sacrificed so that the military can have whatever it needs.

There are a few good studies of Truman which show how this type of dynamic pushed him into using the A bomb rather than trying other approaches. I find the ones which look at the psychological pressures the most compelling.

We now have so many secret police and intelligence operations that there is no guarantee that a president or agency head could find out the truth even if he demanded it.

His remarks about SS and Medicare are very troubling and I see this as a sign that he has already started to lose contact with reality.

I'd claim that medical expense projections aren't even believable. They make no allowance for the rise of new technological solutions. How much did society save per year on care once Polio was eliminated? How do we know that a similar breakthrough won't occur in some other area?

The high costs of drugs and certain medical procedures are due to political choices, not scientific limitations. As such they can be fixed whenever society decides to behave in a rational fashion - other countries do it.

TheTrucker said...

Dear Barkley Rosser:

I want you to know that I do not appreciate your meddling with Obama's promise to extend FICA taxation to CEO's and the like who make tons of money. I was looking at the increase in the income tax rate plus the FICA deal and both together they came close to taxing the CEO's at a rate that seems fair and economically correct. I was looking at a tax rate of 39% + 15% = 55% which is about right. That would be 5% higher than when Reagan destroyed the progressive tax code in the early 80's.

A little justice please. The capital gains taxes can then be increased substantially and still leave a good spread between capital gains taxation and ordinary income. The tax code can take all the progressivity we can sling at it.

And BTW, the CEO's won't apply for street sweeper jobs just because the taxes are higher. Nor will the baseball players. It should be pretty clear at this point that the private sector has not done a very good job of investing over the last 30 years. All the crap about how government is incapable of investing and how the private sector knows best has been pretty much debunked. The government can do a lot better job of health care and pensions than can the private sector.

Barkley Rosser said...


Hope you are wrong, but I do not know.


Here is the problem. Everytime anyone starts to do snything with social security, they always start engaging in compromises that involve both tax increases and benefit cuts. It is not remotely realistic to talk about a fica increase without a payoff to Republicans with a benefits cut to offset a filibuster. That is the bottom line why social security must be left alone. The bastards will cut benefits if they have to swallow a fica increase on upper income earners.

Better to get at the CEOs by simply raising the top marginal rate of the income tax. That can be done without some obvious cut in a specific program's benefits as will come with the fica effort.

muirgeo said...

I say drop the cap, decrease the rate to 4% (8% combined) and award benefits based on hours worked not wages.

Bruce Webb said...


And I say wave a magic wand and make us Sweden. Which is about as likely.

I find it constantly amazing that people think it possible to get progressive taxation via changing FICA who would never dream of suggesting that was politically possible on the income or capital gains tax side even where the practical effect is the same.

Raising the cap and applying it to all income would have the effect of getting us back close to Reagan level top rates. Not a bad thing in itself but totally unnecessary in the context of a Social Security system currently in surplus.

If you want progressivity in taxation you need to go at it directly and not by trying to sell it as a cure to a Social Security 'crisis' that is itself mostly mythical. Something most 'reformers' know full well. They are not going to be fooled by trying to hide increases in top marginal rates via changes to FICA.

TheTrucker said...

The beauty of "selling" the FICA cap removal is that it makes the Republicans come clean about the fact that the system is not in trouble unless wages do not keep pace with economic development. Every rightarded Republican bean counter scenario assumes that wages will not increase even as the workforce to retiree ratio decreases. That is merely a Republican self fulfilling prophecy that depends upon awarding all the economic gains to the owner class and sticking it to the producer class. It assumes no increase in productivity or that the benefit of all such increase will be awarded the the owner class.

That has been the case over the last 8 years but I am hoping to see some changes to this over the next 8.

Bruce Webb said...

Preliminary results out for 2008 Trust Fund balances.

Total surplus $181 billion as against projections of $196 billion (IC) and $204 billion (LC). Details at the link.

I really hope this stimulus package works. Because as of last June we were on track to easily beat IC. But man 7.2% unemployment just hammers the numbers.

Barkley Rosser said...

Clearly if we do not get out of this recession or get stuck in some sort of Japan-style stagnation, then even the intermediate cost projection may prove too optimistic. However, if we end up in one of those scenarios, the supposedly gloriously wonderful privatization scenario will also look awful, even though the SSA has never offered more than a single extremely optimistic projection about returns from the stock market in the future, which somehow never varies, no matter what the economy does. Heck, in Japan, the Nikkei is below 10,000, and has never gotten anywhere near its high 19 years ago at around 38,000 (which sort of reminds me of the absurdity of the Glassman-Hassett book on Dow 36,000).

Anonymous said...

The Trucker argued for increasing the FICA tax rate on upper incomes.

I am very much against this idea for political reasons, not financial or moral.

Upper income people have a lot more clout than I do. If FICA is raised on them they will resent the tax even more than they do now. With their clout I think it is best to not rile them. FICA should be left low enough so that they remain indifferent, or at least don't resent Social Security enough to end it.

They have that power.

Look, Trucker. We are really not equals with the wealthy, no matter how much democracy we think we have. We aren't equals with the CEO in the workplace, and not in Congress either.

My advice is, don't irk them.

TheTrucker said...

JohnT said

"FICA should be left low enough so that they remain indifferent, or at least don't resent Social Security enough to end it."

If we fear the rich it is because we have allowed them to destroy our K12 education system and to ab-use mass media to disseminate false information. That is the real battle that must be won if representative government is to survive. I do not want to live in fear of the rich or some overeducated "Central Committee". That is not my America.

David Alexander said...

Part of the reason why it seems that Treasuries held by the Social Security Trust Fund have value is that normally when Treasuries are held they have value to whoever holds them even if the Treasury has spent the proceeds from issuing them. However, when the Treasury holds Treasuries it is holding its own debt. In order to spend the value of the Treasuries to pay Social Security recipients, it must sell its own debt which is borrowing. Because of this, the only way in which it could have avoided needing to borrow in order to spend the value of the Treasuries in the trust fund would be to have not already spent the proceeds from the Treasuries.

If the Treasury were to withdraw Treasuries from the account, it would have to sell them for cash to give to Social Security recipients. When it is the Fed that sells Treasuries, it is not borrowing. Instead it is sterilization since the Treasury does not get additional funds to spend. However if the Treasury were to sell previously issued Treasuries, it would be the same as if they were issuing new Treasuries since they would be removing the ability to spend from the rest of the economy to transfer to Social Security recipients. No saved wealth would be made available. Selling Treasuries is the same as what would need to be done if there were no savings from previous years in the trust fund. It is different than if the Treasury issued the Treasuries and they were then bought and resold later since in such a case the reselling would be offset by the buying. If the Treasuries in the trust fund were resold, it would be using one Treasury to borrow twice since they would never have been bought.

In 2018 when the trust fund will need to borrow it will be in the same situation as if someone were spending more in a year than he was earning that year and needed to borrow because of this. However, he would only need to borrow if he didn’t have savings from previous years, which indicates that the trust fund really doesn’t have savings from previous years. The only way in which it can be said that the trust fund has savings from previous years is in the same way that someone could say that he had a savings account if it was a savings account where if he wanted to withdraw $100.00 the bank would say that he had to pay them $100.00. Without any savings, he would have to borrow the $100.00 to give to the bank to get his $100.00. He certainly wouldn’t be able to use such savings account as collateral for a loan!

If government borrowing is increased to replace the increased amount of government borrowing that goes to Social Security, it will harm the economy by increasing interest rates. To the extent that the additional borrowing causes the dollar to fall, interest rates will rise even more. In addition, as the employed percent of the population becomes smaller, GDP will decline in proportion to spending. This will cause the dollar to fall even more. As inflation increases because of these factors, Social Security obligations will increase to the extent that they are indexed to inflation.

The lack of funding of Social Security will become more apparent in 2011 when baby boomers start to retire. Since the government has depended on having more paid into the trust fund each year than is paid out and is using the net inflow of funds for financing spending, even though there will still be a surplus until 2018 the government will have to increase borrowing before then to maintain the same level of spending.

As bad as the situation is with Social Security, we have an obligation to all who paid for and were promised benefits. We must not attempt to break the deal we made with such schemes as privatization. It is fortunate that privatization was not enacted before the economic crisis made it clearly apparent that saving for the future is not as easy at it appears to be during a bubble. Whether stocks are being sold from private accounts to pay for living expenses which will cause falling stock prices or if Treasuries are being sold by the government, there will be a smaller economic pie to divide in the future. It is inevitable that when a smaller percent of the population is creating wealth but everyone is consuming it we will have to learn to live with less for each person. Whether we attempt to store wealth with a trust fund or with stocks, we could not really transfer enough present wealth to the future to support the baby boom population unless we had giant warehouses full of goods that we produce now with robots ready to perform services.