Wednesday, January 05, 2005
SOCIAL SECURITY SOPHISTS
Let’s start by stressing a fact: The Social Security crisis begins the day that Social Security has to rely on revenues other than just the payroll tax to pay benefits. Read that sentence again. Got it?
That means that the crisis date comes at roughly 2018. Not 2042 or 2052. 2018. Period.
It is important to understand that fact as the Social Security debate heats up, because there is no shortage of sophists who will try to confuse you on that matter. The most recent inductees into the Social Security Sophists club appear on the op-ed page of the New York Times.
The first inductees are the editorialists of the paper. In a screed from Monday the Times contends that there really is no crisis because:
Over a 75-year time frame, Social Security's shortfall is estimated by the Congressional Budget Office at $2 trillion and by the Social Security trustees at $3.7 trillion, a manageable sliver of the economy in each case. If the shortfall is on the low side, Social Security will be in the black until 2052, when it will be able to pay out 80 percent of the promised benefits. If it is on the high side, the system will pay full benefits until 2042, when it will cover 70 percent.
The Times gets those numbers by overlooking the obligation in the Social Security trust fund (SSTF), which will be about $2.4 trillion. When Social Security starts paying out more in benefits than it collects in payroll taxes in 2018, it will redeem the bonds in the SSTF to pay for benefits. The federal government must come up with the money to pay for those bonds from someplace. Assuming the SSTF lasts until 2042, that means an average of $100 billion extra a year that the federal government will have to come up with to pay for the bonds. And remember, the government has to come up with that new money starting in 2018.
Yesterday, long-time member in good standing of the Social Security Sophists club, Paul Krugman, advanced the deceit even further:
Privatizers say the trust fund doesn't count because it's invested in U.S. government bonds, which are "meaningless i.o.u.'s."...
The short version is that the bonds in the Social Security trust fund are obligations of the federal government's general fund, the budget outside Social Security. They have the same status as U.S. bonds owned by Japanese pension funds and the government of China. The general fund is legally obliged to pay the interest and principal on those bonds, and Social Security is legally obliged to pay full benefits as long as there is money in the trust fund.
There are only two things that could endanger Social Security's ability to pay benefits before the trust fund runs out. One would be a fiscal crisis that led the U.S. to default on all its debts. The other would be legislation specifically repudiating the general fund's debts to retirees.
That is, we can't have a Social Security crisis without a general fiscal crisis - unless Congress declares that debts to foreign bondholders must be honored, but that promises to older Americans, who have spent most of their working lives paying extra payroll taxes to build up the trust fund, don't count.
Politically, that seems far-fetched. A general fiscal crisis, on the other hand, is a real possibility - but not because of Social Security. In fact, the Bush administration's scaremongering over Social Security is in large part an effort to distract the public from the real fiscal danger.
This is a common tactic among the Social Security Sophists: refuting an argument that the reformers don’t make. No reformer suggests that the government will default on those bonds, or that a future Congress will refute the obligation of the SSTF. What we argue is that the general fund will have to come up with the money from somewhere to pay for those bonds. It isn’t going to come from a Social Security fairy. It means either (1) much new federal government borrowing, something that the Times and Krugman would have to rule out given that they are unwilling to borrow to fund personal accounts—assuming that they are intellectually consistent, which, granted, is an assumption of titanic proportions; or (2) higher taxes.
Indeed, it is exactly because the bonds, as Krugman puts it, “have the same status as U.S. bonds owned by Japanese pension funds and the government of China” that taxpayers face such a huge future burden.
And none of this deals with what will happen when the SSTF runs out of bonds in 2042 (or 2052 if you accept the CBO’s rosy assumptions.) Taxpayers will still be on the hook for paying Social Security benefits, only then there will no longer be a trust fund filled with bonds that the Social Security Sophists can use to confuse the public that there is no crisis.
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MORE SOPHISTRY FROM THE EDITORS
It is apparent in that same editorial that the Times editorialists are so wrapped up in their own sophistry that they didn’t realize that they made a pretty good case for reform. To wit:
In any event, doing well under privatization is relative. Congress's budget agency analyzed the privatized plan that is widely regarded as the template for future legislation and found that total retirement benefits - including payouts from the private account plus the government subsidy - would be less than under the present system. The amount available from the privatized system was less even after midcentury, when the current system is projected to come up short.
Fair enough, although I’m a bit skeptical of that report since it assumes a rate of return on personal accounts of only 4.9%. Anyway, the Times preceded that with this paragraph:
Contrary to Mr. Bush's frequent assertion that Social Security is constantly imperiled by political meddling, it has in fact been preserved and improved by political intervention throughout its 70-year history, most significantly in 1983. The system could - and should - be strengthened again by a modest package of benefit cuts and tax increases phased in over decades.
So let me get this straight. Personal accounts are bad because we might get less in benefits with them than with the current Social Security system. And the Times solution is to ensure that we get less benefits in the future and pay higher taxes to get them!
Is it that hard to decide between paying the same to get less and paying more to get less? One would think the average six year-old could figure that one out. But apparently not the Sophists at the Times.
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AND MORE SOPHISTRY FROM KRUGMAN
Yesterday Krugman stated,
Here's the truth: by law, Social Security has a budget independent of the rest of the U.S. government. That budget is currently running a surplus, thanks to an increase in the payroll tax two decades ago. As a result, Social Security has a large and growing trust fund.
But wait a minute! That surplus isn’t supposed to be there. It is all used up for Bush’s “irresponsible” tax cut. At least, that’s what Krugman warned about back in February of 2001:
Right now the federal government is running a large budget surplus; but most of that surplus comes from Social Security and Medicare, programs that rely on payroll taxes to pay benefits to retirees. Those programs must run surpluses now, while the baby boomers are still paying into them, if they are to avoid either sharp tax increases or sharp benefit cuts when the boomers retire.
Mr. Bush likes to declare that a surplus means that the government is collecting too much in taxes. But it means no such thing if the surplus is mainly a matter of preparing for the fiscal consequences of an aging population. And it is. Nonetheless, Mr. Bush's advisers continue to search for reasons that doing the responsible thing is actually a bad idea.
True, Mr. Bush insists that he will not raid the Social Security surplus. But he has conspicuously refused to make the same promise for Medicare — and has also refused to consider proposals that would make future tax cuts contingent on actual surpluses, instead of locking them in on the basis of highly questionable projections. Why? Because if you make realistic estimates both of future spending and of the costs of Mr. Bush's proposed tax cut (which will end up being at least $2 trillion, and probably considerably more), it becomes clear that he will use up all of the Medicare surplus and make a substantial dent in the Social Security surplus too.
If the tax cut used up all of the Social Security surplus since the federal budget is now in deficit, then how can Krugman assert yesterday that Social Security is running a surplus? Could it be that Social Security runs a surplus (at least until 2018) regardless of whether or not we cut taxes?
Gee, Krugman wouldn’t have put forward a bogus argument to stop the Bush tax, would he?
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AND…
Another comparison of those columns shows another inconsistency by the great Sophist. In yesterday’s column Krugman wrote that in a future column he would “explain why privatization will fatally undermine Social Security.”
Yet in the February 2001 column the great Sophist claimed that:
The responsible thing, for both the couple and the federal government, is not to give up on planning for the future; it is to make alternative investments. And if this means that the Social Security and Medicare trust funds must buy stocks and bonds from the private sector, so be it. [Italics added].
So back then, when there was a Bush tax cut to defeat, investing Social Security in private sector stocks and bonds was the “responsible thing” to do.
What is the difference now? Well, in Krugman’s way of thinking, letting government “experts” invest in the stock market is good. But letting poor, benighted individuals do so via personal accounts, as President Bush wants, is bad.
Typical left-wing elitism.
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Sunday, January 02, 2005
Copyright 2005 The New York Times Company
The New York Times
January 3, 2005 Monday
Late Edition - Final
SECTION: Section A; Column 1; Editorial Desk; Pg. 14
LENGTH: 1374 words
HEADLINE: The Social Security Fear Factor
BODY:
If you've lent even one ear to the administration's recent comments on Social Security, you have no doubt heard President Bush and his aides asserting that a $10 trillion shortfall threatens the retirement system -- and the economy itself. That $10 trillion hole is the basis of the president's claim last month that ''the [Social Security] crisis is now.'' It's also the basis of the administration's claim that the cost of doing nothing to reform the system would be far greater than the cost of acting now.
Well, the $10 trillion figure is the closest you can get to pulling a number out of the air. Make that the ether. Starting last year, as the groundwork was being set for the emerging debate, the Social Security trustees took the liberty of projecting the system's solvency over infinity, rather than sticking to the traditional 75-year time horizon. That world-without-end assumption generates the scary $10 trillion estimate, and with it, Mr. Bush's putative rationale for dismantling Social Security in favor of a system centered on private savings accounts. The American Academy of Actuaries, the profession's premier trade association, objected to the change. In a letter to the trustees, the actuaries wrote that infinite projections provide ''little if any useful information about the program's long-range finances and indeed are likely to mislead any [nonexpert] into believing that the program is in far worse financial condition than is actually indicated.''
As it often does with dissenting professional opinion, the administration is ignoring the actuaries. But that doesn't alter the facts or common sense. If the $10 trillion figure is essentially bogus, so is the claim that Social Security is in crisis. The assertion that doing nothing would be costlier than enacting a privatization plan also turns out to be wrong, by the estimates of Congress's own budget agency.
Over a 75-year time frame, Social Security's shortfall is estimated by the Congressional Budget Office at $2 trillion and by the Social Security trustees at $3.7 trillion, a manageable sliver of the economy in each case. If the shortfall is on the low side, Social Security will be in the black until 2052, when it will be able to pay out 80 percent of the promised benefits. If it is on the high side, the system will pay full benefits until 2042, when it will cover 70 percent.
Contrary to Mr. Bush's frequent assertion that Social Security is constantly imperiled by political meddling, it has in fact been preserved and improved by political intervention throughout its 70-year history, most significantly in 1983. The system could -- and should -- be strengthened again by a modest package of benefit cuts and tax increases phased in over decades.
Instead, the administration wants workers to divert some of the payroll taxes that currently pay for Social Security into private investment accounts, in exchange for a much-reduced government benefit. To replace the taxes it would otherwise have collected -- money it needs to pay benefits to current and near retirees -- the government would borrow an estimated $2 trillion over the next 10 years or so and even more thereafter.
In effect, the administration's plan would get rid of the financial burden of Social Security by getting rid of Social Security. The plan shifts the financial risk of growing old onto each individual and off of the government -- where it is dispersed among a very large population, as with any sensible insurance policy. In a privatized system, you may do fine, but your fellow retirees may not, or vice versa.
In any event, doing well under privatization is relative. Congress's budget agency analyzed the privatized plan that is widely regarded as the template for future legislation and found that total retirement benefits -- including payouts from the private account plus the government subsidy -- would be less than under the present system. The amount available from the privatized system was less even after midcentury, when the current system is projected to come up short.
It should come as no shock that individual investors might not do as well as hoped. The stock market's historical returns -- some 7 percent a year -- are predicated on a hypothetical investor who bought an array of stocks in the past, reinvested all dividends, never cashed in and never paid commissions or fees. That's not how investing works in the real world. An especially grave danger is that investors would withdraw their funds before retirement, a pattern that is pronounced in 401(k) plans. It would be politically very difficult to refuse people access to accounts that were sold to them on the premise that they -- not the government -- would own them.
The Congressional Budget Office analysis also likely understates the costs to individuals of privatizing Social Security. The borrowing that would be needed to establish private accounts could lead to higher interest rates, a weaker dollar and slower economic growth. It is also likely that future tax hikes would be required to cover the interest payments on the additional national debt.
The only hands-down winner would be Wall Street, as fees to manage millions of accounts poured in. (Those fees, not incidentally, would come out of your return.) Current stockholders would also stand to benefit, as increased demand pushed up stock prices, giving existing owners a gain at the expense of newcomers who would be forced to buy high. The affluent, who could afford professional investing advice, would also be advantaged, even though everyone would be taking the same risks.
The zeal over privatization is fueled by the belief of Mr. Bush and his supporters that free-market fixes are appropriate for virtually every problem. That faith is misguided. For a society to be functional and humane, it's not enough that some people have a chance to be rich in old age. Rather, all old people must have the dignity of financial security, and that requires universal coverage.
Social Security is the core tier of old-age support, replacing about a third of preretirement income for a typical retiree and providing inflation-proof income for life -- a feature not available in private accounts. Its purpose is not to supplant other retirement investing, but to provide a crucial safety net. Anyone who wants to maintain his or her standard of living into old age must also amass substantial personal savings and investments. To introduce the same risk into the core tier of benefits that already exists for the bulk of one's retirement savings would be as unfair as it is unwise.
If Mr. Bush were not so serious about privatizing Social Security, his urgency would be silly. Compared with other challenges looming for the government, it's a non-problem. The shortfall in the Medicare hospital insurance fund is two to three times the size of the Social Security shortfall, and that fund is projected to be insolvent some two to three decades before Social Security. Taken together, the costs of the Medicare prescription benefit and of making the tax cuts permanent -- Mr. Bush's two main domestic initiatives -- are 5 to 8.5 times larger. And his hair is on fire over Social Security?
One of the most distressing aspects of the debate over Social Security privatization is that it distracts from more pressing issues and obscures better solutions to the problem of secure retirement. A future editorial will discuss new strategies to increase private savings outside of Social Security that draw on market theory and behavioral economics and are more promising than rehashing the same tired formula of tax-sheltered savings accounts. In the meantime, however, Mr. Bush and his supporters will be pursuing their idee fixe of privatization. It's bad policy. And it's bad politics, too, driven by reflex, ideology and special interests, and sustained by conformism that masquerades as party discipline.
Lawmakers who still value their right and obligation to think for themselves -- and to act in the best interest of their constituents -- must champion solutions that will build on Social Security, not undermine it.
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