ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Thursday, November 01, 2007

The Left on Social Security

No wonder the GOP (and I) have such difficulty in discussing Social Security with the Left. I originally thought that they were simply a bunch of ostriches with their heads stuck in the ground, unwilling to consciously admit that the program had actuarial problems due to the demographics of our country and the specifics of the program. I had assumed that they subconsciously understood the issues, but just weren't willing to admit it, out of fear that the GOP might score some political points.

In fact, the problem isn't that they are just convincing themselves that the program is fine - the problem is that they don't even understand the problem or how social security works. Instead of ostriches (who, while they have their heads in the sand, at least know the reason for blinding themselves to the obvious danger), the Left are a bunch of single-celled organisms that have no clue about their external environment.

Josh Marshall provides this ridiculous post... (Keep in mind that someone pays him for his opinions):

Stop Saving Social Security
10.31.07 -- 11:36PM
By Josh Marshall

I said last night that I disagreed with the oft-stated claim that it just gets harder to 'fix' the non-existent Social Security crisis the longer you wait. In fact, as I thought about Obama's proposal to remove or retool the cap on Social Security taxes I got to thinking that it's not just not necessary to do right now but that it actually might be a bad idea altogether.

Many have argued that having this debate at all buys into the right-wing argument that there's a 'crisis' that needs to be solved and thus that the politics are all wrong. But put that aside, let's talk about whether it makes sense even on substance.

Yes, it's just some right-wing frame-ology taking place, Josh. Perhaps it's a Rovian ConspiracyTM.

Despite the fact that FDR envisioned it as a temporary program... despite the crushing demographics of the baby boom, which means that there'll soon be more retirees receiving Social Security checks than workers contributing to the account.

More on the details in a bit...
When it comes to the policy and number-crunching nitty-gritty of Social Security I'm definitely an amateur. [ed - you don't say!] But I think I've got a decent sense of the political-economy of the question. We need to remember that now and for at least a decade into the future Social Security is actually subsidizing the rest of the federal budget.
First, I should tell Josh that this isn't a new development. Social Security contributions have always subsidized the federal budget.
The program brings in much more than it pays out.
For now... at least, for the next few years.
As we all remember from the voluble debates two years ago, the surplus is being used to buy US government bonds which go into the Trust Fund. And that socked away money will keep the program solvent through the middle of this century as the baby boomers retire, and revenues in no longer cover promised payments out.
This is where Josh shows his ignorance in full. Let me explain Social Security using a simpler, down to earth example.

Let's say Josh and his 4 buddies each give Bob $100 for him to save for them until they get older. He promise them no specific rate of return, but is overly generous and tells them, "hey.. instead of just assigning a fixed rate of interest, we'll let it float with the annual wage increase. While this won't be a great return year over year, it's better than nothing!"

They agree and he proceeds to blow the $500 on booze, coke, and hookers - which isn't too terribly far from what most DC politicians do with the money.

Josh and the guys come back and ask how their money is doing and how it's growing. Bob tells them that every thing's fine, because he's printed up a pretty document which promises each of them $150 when they retire 20 years from now ($750 total). Sure, he hasn't invested the money in anything that will provide a rate of return, nor does he have their original investment on hand. But, they do have the pretty pieces of paper, right? And, he's forced other suckers to hand him his cash (which he spends on booze, coke, and hookers) as well.

20 years later and Bob is still spending the money on booze, coke, and hookers. He realizes that he still owes Josh & the guys that money. He open up my shoebox and pulls out the pretty pieces of paper and realizes that it never turned into cash. So, he whips out his pistol and mugs everyone he sees who's not retired until he comes up with the $750, plus the money he owes everyone else. Since there aren't that many people working, he has to get more than $150 from each of the people he mugs. Painful for the mugging victims, but it works.

If Josh and Co would've simply invested their money in an index fund, they would've been okay. Instead, they trusted a guy who can't stay within budget and forced that guy to mug someone else to pay for the obligation.

Back to Josh's post.
We've been doing that for about a quarter of a century.

The problem on the political side of the equation is that the enemies of Social Security have spent a couple decades arguing that the Trust Fund doesn't exist or that it is simply a bookkeeping device with no true financial meaning. If that's true, it means that American workers have spent the last twenty-five years using their payroll taxes to subsidize general revenues and make it easier to float big tax cuts for upper-income earners without getting anything in return..

Actually, we've spent the last 25 years floating idiotic pork-barrel projects and other outlandish programs which are not enumerated in the Constitution.
If we start pumping a lot more money into Social Security coffers now it will by definition go into more government bonds, which is another way of saying that it will go toward funding our current deficit spending. In fact it will enable more deficit spending and probably more upper-income tax cuts because it will make the consequences of both easier to hide.

If we want to push the buffer of the Trust Fund further out onto the horizon, then fiddle with payroll taxes when Social Security would need to start dipping into Trust Fund. In other words, in a decade or so. I see no reason why this approach doesn't work just as nicely then as it would now.

But it won't work now, despite what Sen. Obama would like you to believe.

The problem with removing the cap on Social Security taxable income is that that money then becomes a larger future obligation for future generations - one big ponzi scheme. Unless of course you're going to tax wages all the way up and not stipulate that they'll be set aside for that person's future social security benefits - which, while done legislatively, is still a mugging.

Here's how it'd work:
Hey worker, I'm going to take 20% of what you make up to $95k and "invest" that for you... *snicker snicker... where's my crack pipe?*

Everything you make over $95,000, I'm going to tax at 20% and pay to all the people I promised to pay 30 years ago. You don't know them, but they sure appreciate it.

And if you think that the economy can grow out of the Social Security problem, keep in mind that benefits are tied to the wages, and any change (cough reduction cough) in that formula means that you're cutting benefits for the elderly - political suicide.

Raise the retirement age? Why, it's a good idea, what with people living longer and all. But many will feel that this too is cutting benefits for the elderly, since people will have to live longer in order to get their benefits. And the unfortunate millions who may not reach the new retirement age...
As Paul Krugman noted in the interview I did with him a few weeks ago, the window of time we had to seriously pare down the national debt to prepare for the retirement of the baby-boomers is close to over. Still, though, our best way of ensuring the future health of Social Security is to stop running up the national debt now. So I'm very reluctant to put more payroll taxes in the pot while we're still running big deficits because of the Bush tax cuts. The money will just go to subsidizing that irresponsible fiscal policy.

You interviewed Krugman? Perhaps you should've take an Econ 101 course, first.

Josh - You may not realize this, but federal tax receipts are at record highs, so no need to tinker with the tax rates - unless you plan on lowering them to increase the amount of money hitting the books thanks to an improved economy.

If you'd like to reduce the federal debt, I'd recommend that we start cutting the spending. Because, for every government program with a projected expense, you know that the amount will be likely higher. You may not know the degree, but you know the direction in which the expense will be in relation to the projection. If the program didn't exist, the expense wouldn't exist. Then, we could take the money and cover the future outlay.

Or, better yet, allow the youth of the country to start investing in conservative index funds, allowing for the Time Value of Money to work its magic and provide a substantial sum in their retirement years. The feds might have a short-term crunch as the Boomers retire, but there will be a light at the end of the tunnel as those without the defined benefits of Social Security start to approach retirement. It will be painful, but at least people's retirements would be secure indefinitely.
If there is any sense in which the 'Trust Fund' is not 'real' it is that it must be paid back from general revenues. And that will only be harder the more other debt we're running up. So rather than solving the problem, I think we're actually enabling it.

The second problem is that we need a national agreement or consensus that the Trust Fund is real, that it will be honored, and have the debate about the future of the program on that basis. Otherwise, we're still risking getting played in the same bait-and-switch privatizers have been trying to pull for years -- using regressive payroll taxes to fund current government spending and then telling future recipients that that money has disappeared and thus Social Security has to be phased out altogether.

Lifting the payroll tax cap while Social Security is still running a big surplus not only solves a problem that doesn't exist it enables the very policies that put the program in danger. Perhaps this is all another way of saying that I'm not a fan of putting more hens in the hen house while the foxes are still at the door, or even in the house.

I'm interested to hear your thoughts.

I assume that you think the GOP tax cutters are the foxes, but you do realize that it's spending that's out of control, right? More government programs and the requisite higher taxes are not the solution.

That'd be like telling Bob that the solution to his inability to budget properly is that he hasn't had enough booze, coke, or hookers and that if he could just mug a few more people a day he'd become a millionaire in a week.

Your Co-Conspirator,
ARC: St Wendeler

Comments (1)
George said...

...which is just as frustrating an exercise as trying to reason with a two-year old.