If You Really Care About Social Security, Stop Capitulating to the Left

I woke up this morning expecting to spend the better part of the day writing letters of recommendation for Ph.D. students. Then I came across an e-mail message that had been posted to a list serve that is read by many progressive (some might say “radical”) economists. The subject line read: DEFEND SOCIAL SECURITY so I took the time to read it.

Its author was outraged by the recommendations coming out of President Obama’s “bi-partisan” deficit reduction commission, which he characterized as “disgusting” and something that should “be fought as hard as possible.” Then, having urged “credentialed economists” to “take the fight” to the airwaves, newspapers, Internet, etc., he drew my ire and derailed my morning plans (sorry students) with the following tactical proposal:

“[I]t sometimes is necessary to defend incremental reforms when they’re under attack.”

Allow me to suggest an alternative approach, one that actually would be “radical” and therefore appealing to a self-proclaimed radical: Let’s start telling the truth about Social Security. We are not (or should not be) patsies for the Democrats (or any other political party or organization). We are educators. So let’s educate people on the basic facts.

Fact #1: Social Security is not “broken.” It is not “going broke.” It will, as Eisner told us more than a decade ago, “be there” as long as we protect it from its so-called saviors.

References:
Eisner, Robert. “Save Social Security from its Saviors”, Journal of Post Keynesian Economics, Vol. 21, No. 1, Fall 1998). This is, in my view, the most honest and concise essay on the subject.

Bell and Wray. “Financial Aspects of the Social Security ‘Problem’”, Journal of Economic Issues, Vol. 34, No. 2, June 2000.

Fact #2: The balance in the Social Security Trust Fund is absolutely irrelevant when it comes to the government’s ability to make payments, in full and on time – today, tomorrow and forever.

References:
Eisner (again) who said, “Accountants can just as well declare the bottom line of the funds’ accounts negative as positive – and the Treasury can go on making whatever outlays are prescribed by law”.

Bell and Wray again.

Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.” (1997)

Greenspan: “I wouldn’t say that pay-as-you-go benefits are insecure, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase” (2005)

Social Security isn’t broken. It doesn’t need to be “fixed”. Why on earth would we play along with this charade in order to give cover to the Democrats? Doesn’t anyone remember 1983? For anyone who doesn’t, that was the last time we saw “incremental reforms” of the kind many “progressive” economists support. As a result of those reforms, today’s workers are contributing more and retiring later. And for what? Those reforms were supposed to make the system solvent for 75 years. Now, here we are, less than three decades later and it’s still “broken”? And we’re supposed to defend further, incremental cuts?!

I guess it sounds like a small price to pay. An added year to two before retirement, a small hike in the payroll tax, a modest reduction in the cost-of-living adjustment. Whatever. Worth it to “DEFEND SOCIAL SECURITY” according to some. But just look at the impact of one of these so-called “incremental reforms”, taken from a paper I wrote in 2005:

Benefits promised to an average wage earner who retires in 2050 are a full 69% higher than the benefits that were paid to the average retiree in 2004. Republicans argue that these increases are too substantial and that the system promises a full $5,600 more than it can afford to pay to retirees in 2050. To deal with this problem, [they] call for a change in the way future benefits are calculated. If the President succeeds in redefining the formula, the “bend points” will be calculated using an inflation index instead of the current wage index.

At first glance, this might seem like a relatively innocuous adjustment. After all, the historical trajectory for prices is also upward, so benefits will still tend to increase over time. But prices tend to rise more slowly than nominal wages – over the long run – so benefits would increase less rapidly under inflation- indexing.

To see the full impact of switching to inflation indexing, consider the benefits that would be due to a hypothetical 20 year-old worker who enters the labor force in 2005, earns the average wage throughout her working life (roughly $36,500) and retires at age 65 in 2050. Using Congressional Budget Office (CBO) projections, she would be scheduled to receive benefits of roughly $22,000 (in today’s dollars). Thus, under the current system, she would receive $459,800 in guaranteed benefits over the course of her retired life (estimated at 20.9 years).

Now consider the impact of indexing to inflation rather than nominal wage growth over this same period. During the relevant period, the CBO projects that nominal wage growth will outpace inflation by 1.2 percent (i.e. real wages will grow at 1.2 percent). With the “bend points” indexed to inflation beginning in 2009, this worker will lose 1.2 percent of her scheduled benefit in each of the 39 years (2009 to 2047) included in her benefit calculation, leaving her with only 62.8 percent of her scheduled (2050) benefit. This amounts to a reduction of $8,184 in her annual benefit (0.628 x $22,000), which translates into a $170,000 reduction over the course of her lifetime!

So there you have it. Incremental reform? I doubt the twenty percent of retirees who rely on Social Security as their only source of income would agree. (Or the 60 percent who rely on it as their primary means of subsistence in retirement.)

Funding Social Security is always and everywhere a political choice. The strongest evidence of this comes directly from the 2009 Annual Report of the Trustees. In that report, they predict gloom and doom for Social Security because “there is no provision in current law that would enable full payment of benefits, once the Trust Funds are exhausted”.

In contrast, the Supplementary Medical Insurance (SMI) Trust Funds are “both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.”

It is that simple. The former is in ‘trouble’ because the government isn’t committed to making the payments, and the latter gets a clean bill of health because the government will always make the payments.

It does not take courage to rally around the liberal mantra (Obama, Reich, Baker, Krugman, etc.) regarding ‘entitlements’ and ‘tough choices’. It takes courage to speak out against it.

About Stephanie Kelton 24 Articles

Affiliation: University of Missouri

Stephanie Kelton, Ph.D. is Associate Professor of Economics at the University of Missouri-Kansas City, Research Scholar at The Levy Economics Institute and Director of Graduate Student Research at the Center for Full Employment and Price Stability.

Her research expertise is in: Federal Reserve operations, fiscal policy, social security, health care, international finance and employment policy.

Visit: Economic Perspectives

2 Comments on If You Really Care About Social Security, Stop Capitulating to the Left

  1. Subject: The Deficit Commission, the Republicans, and the Last of the Middle Class

    Americans remain clueless regarding the deficit commission scam being hoisted upon them by the Republicans, the media, and purported business leaders regarding the Federal deficit. I don’t want shared sacrifice. I want the people who caused the problem to provide restitution for the grievous damage they caused to the U.S. economy in 2008.

    The stated purpose of the deficit commission is to find $4 Trillion Dollars of reductions in Federal government expenditures over a ten-year period. Most middle-class Americans consider the real purpose to be finding a way to finance continuation of the tax cuts that benefit American businesses and the high income earners with incomes over $250K a year. The recommendations are neither bipartisan, nor balanced. They are an extension of the continued pillaging of the middle class of the United States to advance a small, but rich, segment of the electorate and the business community.

    Far too many politicians, business leaders, and Americans enjoyed the government free lunch. It is now time for them to pay for the Federal government services and benefits they enjoyed and the damage they caused. It is also time for the politicians and media to stop telling our middle class, retirees, veterans, and grandchildren to pay for the free lunch that most of them never received.

    What is glaringly missing is any corporate responsibility in paying taxes that would pay for the myriad of government services dedicated to the care, well-being and profitability of the American business community. What is also glaringly missing is any accountability for the Trillions of Dollars of damage to the U.S. economy and the moneys and values taken out by unwarranted costs and bonuses that was reflected in reduced values for investment and retirement accounts, home values, job losses, and damage that ripped through the entire U.S. and global economies.

    The Republicans are perfectly willing to gut Medicare, Social Security, and the Veterans Administration as a major portion of the way to save $4 Trillion Dollars over 10 years. After watching the “best and brightest” pillage the U.S. economy with the help of a pliant political class and media, they now have the gall to come up with a plan to “share the pain”.

    I don’t see any shared pain; I see the same people and their enablers dealing from the bottom of the deck again to forestall taking responsibility for their actions and indemnifying the U.S. middle class and taxpayers who had their pockets picked and futures destroyed while the business community and the upper 3% of the electorate stripped the middle class of jobs, retirement opportunities, healthcare, and financial security.

    The same politicians, pundits, and business community hope to continue pillaging what’s left of the middle class blithely ignore that they can end the deficit commission circus and actually reduce the deficit by $4 Trillion Dollars by simply letting the 2001 and 2003 tax cuts expire as written on New Years Eve and sending the deficit commission members a letter thanking them for their efforts.

    It’s interesting that at the same time Congress is considering massive cuts in benefits and services from the nation’s middle class that includes 40 million seniors, 24 million veterans, and approximately 100 million working Americans, the political leaders are willing to “temporarily” extend the tax cuts at a cost of $400 Billion Dollars a year.

    All of the talk about the need to reduce the Federal deficits has the Republicans continuing to ignore the fact that Social Security is largely self-supporting and the costs of Social Security over the next ten years are largely paid for by Social Security FICA payroll taxes paid by American employees and employers; not the U.S. Treasury.

    The current retirements benefit levels can be paid indefinitely with small incremental changes in the wage limits and rates of FICA payroll taxes. The Republicans and interest groups supporting the deficit reduction recommendations don’t want the Social Security and Medicare funding concerns resolved. They want the programs decimated via means testing and extending the age of eligibility. They consider the FICA payroll taxes as another revenue source for tax cuts.

    It is sad that so many Americans, politicians, business leaders, and the media are willing to gut meaningful and worthwhile programs to simply let American businesses U.S. and a selected portion of the electorate continue to receive government services and benefits but not pay the taxes to provide the government services.

    If you want a paved road; pay the paving contractor. If you want educated children; pay the teachers. If you want Medicare and Social Security; increase the FICA payroll tax and tell the politicians to use it for Medicare and Social Security.

    It is insulting to penalize the 140 million or more Americans and thousands of employers who pay or have paid into Social Security since 1937 and Medicare since 1966, and the 24 million Americans who served in the Armed Forces to provide tax cuts for a business community and small portion of the electorate that expects a free ride. Telling them to pick up the tab for the financial debacle of 2008 and significant further sliding of the U.S. middle class to third-world status is no different than asking the witnesses and victims of a robbery to “share” the jail term of the robber.

    Tell General Electric and Exxon that it makes no sense for them to pay no U.S. corporate taxes while they demand that middle class Americans fight in the Middle East and Asia for access to cheap oil while and work until age 70 for Social Security.

    End the unfunded 2001 and 2003 tax cuts. The only thing standing in the way of significant deficit reductions starting on January 1, 2011 is the U.S. Congress.

  2. Sorry, but I have very serious doubts about any article regarding Social Security from any site with the words “Wall Street” in it. Asking a Wall Streeter about what to do about Social Security is like asking Ted Bundy about unescorted Girl Scouts selling cookies door to door or asking a Grand Wizard of the KKK what should be done about Affirmative Action.

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