Saturday, April 6, 2013

President Obama Breaks His Promise On Social Security

Which was that he would not cut any of its benefits, a promise made during the 2008 campaign and now broken with his proposed budget that will replace using CPI-W for the COLA with the chained CPI-W, the former estimated by many to rise about 0.3% more per year than the latter.  However, nobody should be surprised that he has done so as he has been signaling a willingness to do so for some time now at least since the 2011 budget negotiations with Congressional Reptards over the debt ceiling increase (and, yes, he should declare the debt ceiling unconstitutional and dispense with that bloody thing).  I am not going to comment on the politics of this move, although plenty of people argue that it is not a winner in any way shape or form.

As it is, I weirdly take this sort of personally.  Back during the 2008 campaign, Bruce Webb and I wrote a memo to the Obama campaign at a time when he was supporting some sort of "Social Security Reform," arguing that such was not needed, and he made his promise not to do anything at all to or about SS shortly after our memo was sent, although I suspect that it was broader political forces that were responsible for his change of mind then rather than our memo.  However, I took the promise to heart and am now sad to see it definitely broken (although see more below).  There are many economic arguments for why this new proposal is a bad idea.

The obvious one that has been discussed by many is that it is highly likely to reduce the growth of SS benefits for seniors in an era when arguably they should be increased more due to the collapse of defined benefit private pension plans.  See and .  This latter by Steven Hill goes on to propose a major increase in benefits in a two-tier system, funded by raising the income cap and closing certain high income tax loopholes, not a bad proposal.

The other is the point that over a long period of time it appears that the cost of living for seniors has been rising more rapidly than the overall cost of living, so that the experimental CPI-E for elderly should be used after getting it into proper shape.  This higher rate of elderly cost of living increase has been largely due to the greater use of medical care by the elderly, which has risen more rapidly than the general rate of inflation for a long time, and has been 0.2% greater per year between 1982 and 2011 than the CPI-W.  Among those making this point previously have been Dean Baker , Bruce Webb at his own blog , and me , a matter that is getting more personal as I officially become a senior citizen this coming Friday.

I note that Will Wilkinson argues that between 2006 and 2012, the CPI-E actually rose by 0.1% less than the COI-W or CPI-U, although I think his argument that this reflects a deceleration of medical care cost increases does not explain it.  He supports going to a chained CPI-E index, .  In any case, if the main source of difference between the measures is medical care costs, this is all the more reason to get the rate of medical care cost increases under control and in line with the other sectors of the economy.

Having mentioned my old friend Bruce Webb's blog, I cannot avoid noting his discussion of "Rosser's Equation."  This is simply the empirical observation that after a supposed "bankruptcy" of the system, as much of the media likes to call it, that is projected to happen in the 2030s if nothing is done, recipients would actually be better off in real terms than are current ones although they would experience a cut from what they had been receiving at that point, with me estimating this in 2005 at 120% better, although more recently Dean Baker has it at 125%.  In any case, I must credit Dean with noting this before I did, although it has always been in the Social Security Trust Fund reports for anybody to see who looked closely enough, Anyway, I think I made more noise about it than did Dean then, although I would be fine with it being called the "Baker-Rosser Equation," :-).

All of this reminds me that in 2005 the three of us through the old MaxSpeak that preceded this blog fought long and loud and hard against Bush's campaign to partially privatize Social Security.  Although I cannot say for sure, I think that we were partly responsible for bringing the lack of a need to do anything to or about Social Security to the attention of more widely read bloggers such as Paul Krugman and Mark Thoma, who brought this argument to a wider public, with Bush's campaign failing pathetically. However, this time the threat looks more serious, coming as it does from a Dem president.  The public does not want this, and it is not needed for budgetary reasons in a world of rapidly falling deficits and still stagnating employment growth, but we need to move again to make our voices heard on what a bad idea this is all around.  Obama should go back to keeping the promise he made in his 2008 campaign.

Barkley Rosser


Unknown said...

Barkley thanks for the shoutout. But FYI and Econospeak readers the SSD blog exists but is on hiatus as most of my SS work goes on at the similarly named Daily Kos Group blog Social Security Defenders(pl) where I am Chief Editor and Head Bottle Washer. The Group just sponsored a Social Security Blogahon Mar 25-29 with featured guest poster our mutual friend Dean Baker on Thurs. Obama's Friday leak on Chained CPI looks to have sparked another one timed for budget release this Wednesday and focused on Chained Catfood, DKos members (or joiners) can get info or submit diary for potential inclusion by sending a Message/KosMail to the Group or to blogathon lead editor Roger FoxThe Social Security Defenders Group is kind of in high gear right now and we would like to see it as a center for blog based activism and advocacy while also serving as a perch for more analytic EconoSpeak style economic and financial pieces. So come one, come all.

Unknown said...

As to 2005 I would also give a lot of credit on the political side of the blogosphere to Billmon, Atrios/Duncan, and to Dave Johnson and the others at the "There Is No Crisis" effort/blog. As to Prof. Thoma, well Mark wasn't as widely read then as now and openly gave me/us props on raising the relation between Productivity and Social Security solvency for his then budding readership. So I think we can pat our selves on the back for moving SS discussion at Economists View without risking dislocating our shoulders.

And in more recent years there has been a lot of Social Security stuff published at Angry Bear, notably by Dale Coberly and, err, me. For readers who are not familiar with AB, we bill ourselves as a 'Slightly Left of Center Blog on Economics (etc)' but have been driven in the Econospeak direction in reaction to the Neo-Lib domination of the Obama Administration on matters economic and otherwise and welcome like minded commenters (and libertarians and contrarians and the more rational breeds of trolls for that matter)

(And as long as I am here it is 'blogaThon' not 'blogahon')

Unknown said...

Obama thinks he is going to break the Republican Party's opposition to tax hikes on the rich but this is the wrong way to go about it. The Democratic Party should never, ever touch Social Security, except to increase the benefits. It is empirically unnecessary to do this, and it is really stupid politics, since Obama will single-handedly lose every Democratic voter.

ProGrowthLiberal said...

The Republican agenda at least since Newt Gingrich became speaker is to take those payroll tax increases in 1983 that were supposed to be for future Social Security benefits and divert them to paying for tax cuts for the rich. Of course there is no need to cut Soc. Sec. benefits as long as we see the 1983 payroll tax increases for what they were originally intended. But the Paul Ryans of the world want to pull off the grandest larcery of all time. And for any Democratic President to go along in even the slightest of ways strikes me as an abdiction of duty.

Don Levit said...

How would you have invested the payroll tax increases to provide a trust fund which could simply be liquidated to pay benefits, just as an insurer would do?
Specifically, instead of paying benefits for the rich (which the excess taxes did not do, although you are right, they were diverted), how might the excess payroll taxes have remained in the trust fund? How would they have earned interest, without increasing the deficits?
Don Levit

Bruce Webb said...

Don earned interest in the Trust Funds REDUCES deficits.

It increases PUBLIC DEBT.

So your question is mal-formed..

Special Issues held by the Trust Funds are unique in that they always earn face interest until redemption and always are redeemable at par. That is they are effectively, operationally,mand legally isolated from movements of issued regular 10 Year Bonds which in all othe respects they mirror.

That this is not purely theoretical can be seen by examining the actual redemption patterns of the DI Trust Fund since it started net redemptions in 2008. In short lower yielding bonds were redeemed in advance of higher yielding ones because the 'price' was fixed by the par value and not the theoretical yield if they had been marketable. So there was no need to discount.

Now under current law the Trust Fund cannot invest/buy financial instruments not guaranteed as to interest and principal by the Fedeeral government, meaning that even the most ultra safe of municipal and corporate bonds qualify. And while this leaves the Trustees open to investing in Regular Treasuries those are not callable at will at par in case of immediate need. And in a downturn that would require liquidation of bond funds would equally mean selling at a loss to par.

Is there any insurer backing any annuity product that would not prefer having assets parked in a 100% price protected fully liquid at par instrument rather than exposing themselves to price and yield risks in a volatile market?

If so can you explain this in small words for the ignorant among us? Cause I don't see the advantage. Not for a fund designed to pay out a predictable stream of benefits for decdes and generations. Most investment folks don't like being forced to liquidate marketable assets in a down market. Or so I am told.

Don Levit said...

You are correct that earned interest in the trust fund reduces deficits as long as it is not redeemed.
When earned interest is redeemed, when the trust fund is tapped due to a cash shortfall, then the Treasury pays for this redemption the same way it pays for battleships, thus increasing the deficit.
Don Levit

Bruce Webb said...

Well except that retained earned interest is no longer interest but instead principal indistinguishable from other such. A small point.

A larger one is that redemptions of Trust Fund Special Issues are not classified as 'outlays' under Federal budgeting rules. And while there is little doubt that in the ultimate macro sense that Trust Fund redemptions are more or less offset by regular Treasury sales there is no precise one for one relationship.

Could you point out the actual line items in Federal accounts that clearly show TF redemptions being counted as expenditures in such a way that they would add to 'deficits' as defined within Federal budgeting rules(as opposed to common sense notions of 'deficits')?

Because it is not at all clear that "the Treasury pays for this redemption the same way it pays for battleships".. It seems that it SHOULD in some people's eyes, but not so much that it DOES.

The President's Budget is due Wednesday and is typically accompanied by the quite large supplementary text the Analytical Perspectives on the Budget. Two sections of great interest are the Chapters typically published separately as Budget Concepts and Budget Process and the Trust Fund section included in Special Topics. These sections and particularly the former are chock full of official definitions, explications thereof, and historical tables and make for profitable reading. Now I didn't say 'exciting' or 'quick' reading, in my experience it is kind of a slog. But if you stick to it you might find hints as to the answers of why SS interest isn't an 'outlay' and SS principal redemption not a 'cash transaction'. And maybe lose some of that breezy confidence you tend to exude when proclaiming on this topic.

Because it is not Accounting 101. And common sense will only take you so far. Mangia! And be sure to write!

Don Levit said...

Do trust fund redemptions add to deficits?
According to the Social Security Administration they do.
Select a year, since 2010, when cash outgo has exceded cash income, increasing the deficit.
For example, in 2011, net cash flow for the Social Security trust fund was -$45,379.
Don Levit

Bruce Webb said...

Don look again.

Does the word 'Deficit' appear anywhere in the Table that is the result of that search? Or in the explanatory text? No it doesn't.

You desperately want to make negative cash flow mean 'deficit'. Well that is a common sense usage. It just doesn't align with what OMB calls a 'deficit'.

I pointed out the $48 billion negative cash flow at least once on the Economists View thread. Along with pointing out that by the way CBO and OMB define 'deficit' that Social security ran a $68 billion surplus.

I am a little stunned that you think I am unaware of this particular web tool and that you thought to leave me gobsmacked.

Don, let me help you out. CBO makes a distinction between 'deficit' and what they call 'primary deficit'. Now while you would think the latter term was the one used for top line numbers, it in fact isn't. On the other hand it does exclude Trust Fund interest and thus shows Social Security with a nearly $120 billion PRIMARY DEFICIT. Gosh two and a half TIMES the paltry $48 billion you want to use. That is if you had just deployed the sentence "CBO reported a nearly $120 billion Primary Deficit for 2012" I would have been left in the unenviable position of starting my answers "Yes but----" instead of "No Don you are wrong". See you just have to KNOW something to successfully play this game (Biggs at AEI is a master at referencing 'primary deficit' and making the argument it actually is the right metric).

And Don here is another hint. The way OMB sees these things any decrease in Trust Fund principal via net redemptions does score as a 'deficit' as defined. And DI has been a net redeemer of Treasuries since 2008 and so considered IN ISOLATION contributes to the deficit. It just happens that interest on the OAS Trust Fund is still large enough that it covers OASs own small negative cash flow (started in 2012) AND DIs actual deficit (net redemptions starting in 2008) so that combined OASDI shows a $68 billion surplus.

Still the statement "The DI Trust Fund has been in deficit since 2008" is true. And once again would have put me in the position of starting "Yes but----" But you persist in trying to impose your own (admittedly common sense) definition of 'deficit' in a way that allows me to depict you as both innumerate and ignorant.

Don there are legitimate arguments to be had about whether the proper metric for Social Security health is to be found in federal budgeting terms of 'deficit' and 'debt' or in more macro economic terms focusing on 'cash flow' and 'percentage of GDP'. You could point out that Social Security is on pace to increase to 6% of GDP, a 16% increase from today. Now THAT is a difficult argument to counter. I can do it but it takes some time and appeals to such things as the role or societal equity.

But NOOOO! You want to play lazy 'gotcha!' games with 'deficit'. Well excuse me if that just ends up biting you in the ass.

Bruce Webb said...

Not to beat a dead horse. You pose this question:

"Do trust fund redemptions add to deficits" Okay that is a good question. Trust fund redemptions due to bond maturity that get rolled over to new Special Issues do not add to deficits. On the other hand if Trust Fund Cost exceeds all Trust Fund income including interest in such a way that some Trust Fund principal is redeemed and NOT rolled over, that net trust fund redemption DOES score as a deficit.

But you point to a cash flow metric that has nothing to do with Trust Fund redemptions, net or otherwise. Moreover you reference one that treats OASDI on a combined basis and which on that basis did NOT have net redemptions. That is you make two definitional mistakes right out the gate. Now as mentioned above you could have repaired your argument two different ways, one by appealing to CBOs 'primary deficit', the other by narrowing your argument to the DI Trust Fund in isolation. In the latter case you could have posed this modified question:

"Did net DI Trust Fund redemptions starting in 2008 add to the deficit?" to which the answer is "Well yes, but if----"
Now think how much better you would feel!!! If you knew enought to pose the right question in the right form.

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