Kevin Drum writes:
So why do Republicans waste time pushing private accounts? Because lots of people — especially young people — are convinced Social Security won’t be around by the time they retire. But why are they afraid it won’t be around? Because Republicans keep peddling scare stories about how Social Security is heading toward bankruptcy.
Kevin’s correct to say that Social Security is in no real danger (except the danger that Republicans will “fix” it by destroying it). But he should reserve at least some of the blame for Democrats, and in particular Clinton. After all, republicans have been calling Social Security an unworkable ponzi scheme for decades. As long as Democrats were arguing that SS was fine and only needed minor fixes, they still had the better side of the argument, and removing or privatizing SS was something that few serious candidates could advocate.
What changed all that, and what made “SS is going bankrupt” the Conventional Wisdom, was Clinton deciding to seek a short-term advantage in the tax policy debate by claiming that SS was going bankrupt and needed to be saved.
Good point. Although, to be fair to the Big Dawg, the bizarre success of Ross Perot led him to believe (correctly?) that people already bought the SS is DOOOOMED! line, and it was a matter of who was going to sell it. So if you are looking for who pushed it past the tipping point, don’t forget H-Ross. Clinton just jumped on for the ride.
And, by the way, if you are looking for who set up the thing to tip, I blame Sen. Moynihan, a great man and a great senator, but wrong wrong wrong on SS.
,
-V.
You don’t need to raise the payroll tax to save social security. You just have to eliminate the cap.
That said, yes, all the scaremongering is nonsense. Those who pay in will see something out.
Don’t want to get into a big fiscal argument, but “solvent” is not the same thing as “everything is fine”. Solvent means that on paper there are sufficient assets to cover the expected obligations. It doesn’t mean that there are sufficient cash flows to cover the obligations; there aren’t.
The problem with Social Security is that the incoming cash flow from payroll taxes are not going to cover the outgoing cash flow for SS benefits. Which means that the government will have to take the money that it has pretended to sock away, but actually hasn’t, and hand it out to SS recipients. There are only three ways to do that.
1) Raise taxes and create new cash flows, but slowing the economy,
2) Borrow the money, thus crowding private borrowers out and raising interest rates,
3) Print the money, thus creating major inflationary pressure and making SS benefits worth less.
Republicans say SS is a Ponzi scheme because it is a Ponzi scheme.
The problem with Social Security is that the incoming cash flow from payroll taxes are not going to cover the outgoing cash flow for SS benefits.
Actually, Social Security will run a surplus until 2018 or so – and longer than that if the job numbers improve (and it’s hard to see how they could fail to improve).
The situation you’re describing won’t come about until 2052, according to the Congressional Budget Office – and that’s assuming that the US economy does incredibly badly between now and then. If we assume that the economy isn’t about to be the worse economy ever, then Social Security won’t have any problem at all in our lifetime.
Now, maybe it’s fair to assume that the economy will suck (we should plan for the worst, after all). Be if we assume that the economy is going to enter a period of suckitude for the next 40 years, then all the calculations of great stock market returns I’ve seen in Republican plans to privatize Social Security are nonsense – the stock market will not soar while the economy tanks for 40 years. Contrariwise, if we accept Republican assumptions about stock market growth, then Social Security is fine.
Back to Robert.
All else held equal, taxes slow down the economy. But in the real world, all else is never held equal. Taxes that work to cut down Bush’s huge budget deficits, for instance, could have a net positive impact on growth (since it’s likely that large budget deficits slow down growth more than taxes). Taxes dedicated to R&D and infrastructure can increase growth. Etc.
A small rise in taxes (which is all that’s necessary, even under pessimistic assumptions, to “rescue” social security) is certainly compatable with continued economic growth. (There are many countries which have combined higher economic growth than the USA with higher tax rates than the USA). Perhaps that growth will be a tiny bit slower than it would otherwise be, but that seems like a worthwhile price to pay to avoid massive elder poverty and keep America’s promises to its workers.
Barry, name a country that has sustained both higher taxes and higher growth than us. And then explain why despite this wonderful growth rate, they’re so much poorer than we are.
The fact that the system is going to hit bottom in 2018 or 2052 or somewhere in between reveals that the problems with SS are structural. It’s a Ponzi scheme designed to bring in so many “beneficiaries” that it’s politically impossible to let it go down the tubes, so instead it gets propped up time and again. Just a little tax increase; just a small benefit cut; year after year after year, until we turn into France and have 14% unemployment.
I am totally on board with you that we have to avoid elder poverty and keep promises made to seniors. The way to do that is a means-tested antipoverty welfare program for poor elderly people, and private retirement accounts based on actual savings – not redistributionist hocus pocus – for people who can afford it. That would cost us a lot less than the current debacle; 15% of everyone’s real wage so that elders can get a check that barely covers rent and Medicare premiums! Absurd. Poor elders should receive a stipend that guarantees a modestly comfortable life, not catfood money.
And I’ll happily pay the taxes to pay for that – for the people who need it. All I ask in return is that I and everyone else in the country not be forced to throw away a seventh of our productivity.
Rob wrote: Barry, name a country that has sustained both higher taxes and higher growth than us. And then explain why despite this wonderful growth rate, they’re so much poorer than we are.
So do you think that all countries would be exactly equally wealthy if they only had identical taxes and growth, or do you think it’s possible that other things – such as resources, geography, size, history, etc., – also affect wealth?
To answer your question, Denmark has much higher taxes, virtually identical average annual growth from 1990-2000 (listing the US first: 2.0% vs 1.9%), unemployment (4.8% vs 4.3%) and percent of working age folks employed (63.8% vs 62.3%). For the same period, the Netherlands has higher annual growth than the US (listing the US first: 2.0% vs 2.6%) with much lower unemployment (4.8% vs 2.4%) and identical percent employed (63.8% vs 63.9%).
As for if people are poorer, that depends on who and how you measure. A poor person in the US who needs medical care is effectively much poorer than a poor person in Denmark in need of medical care, for example.
Robert: The fact that the system is going to hit bottom in 2018 or 2052 or somewhere in between reveals that the problems with SS are structural.
Robert, the system won’t hit bottom in 2052. If we do nothing to fix it, and if the economy tanks for the next half-century, the system will not be able to pay full benefits starting in 2052. However, that’s because SS benefits are scheduled to increase over time; far from hitting bottom, the SS will still be able to pay higher benefits than SS recipeients gets now.
Even if we change nothing, in other words, Social Security will still be able to afford to pay retired workers in 2075 150% of what retired workers receive today.
And that’s using the Social Security Trustees’ very pessimistic economic assumptions, mind you. If the next 75 years aren’t actually the worst in economic history, as those pessimistic assumptions predict, then SS is in even better shape.
That’s not “hitting bottom” by any reasonable measure.
Just a little tax increase; just a small benefit cut; year after year after year, until we turn into France and have 14% unemployment.
France has had under 10% unemployment for years, by the way. Higher than the US, but in other ways the French economy is stronger; they have a vastly superior health care system for non-wealthy people, and much lower poverty rates (especially child poverty).
In any case, yes – just one little fix between now and 2050 will make the SS system secure until well after you and I are dead of old age. How this turns the US into France is beyond me, unless you’re projecting 700 years into the future.
I am totally on board with you that we have to avoid elder poverty and keep promises made to seniors.
No, no, I said promises made to workers, not to “seniors.” I don’t think breaking the promise we made to current workers is acceptable.
SS was never meant to be a total retirement package; it’s only a safety cushion to keep the very worst economic disaster from befalling. Yes, $900 a month isn’t a lot to live on; but Social Security is more accuratley thought of as insurance than as investment, anyway. And far from not helping the poor, Social Security is the greatest poverty-fighting public policy in US history. 8% of people who qualify for SS live below the poverty line (and we should fix that, and we would already have fixed it, if liberals were in charge); but without SS, 48% of people who now qualify for SS would be below the poverty line.
Between 1959 and 1996, Social Security (which was expanded in the late 50s) was the major reason the poverty rate among the elderly dropped from 35.2% to 10.8% – I’d call that very damn effective.
In any case, if you think SS benefits ought be higher, then what makes sense is raising payroll taxes enough (plus removing the cap) to pay out more SS!
I agree that SS is in a way a Ponzi scheme, but the thing about Ponzi schemes is that you can’t get out of them. That is, any change from the current basic system (everybody pays in, the money goes to current retirees, the surplus is invested) to any private-account system is going to either screw a lot of people currently “invested” in the system or cost a whole boatload of money to buy those people out.
That said, this particular Ponzi system is sustainable as long as the working-age population continues increasing (which I think will happen for the foreseeable future) and there isn’t massive economic collapse of the scale that would make SS problems almost irrelevant. We could spend the money now to buy out of the Ponzi, but why should we?
Frankly, I think it’s more likely that the system will collapse because of some currently-unpredictable medical changes (plague? life expectancy of 150? rejuvenation that lets people work construction until 90?) than because of the structural problems we can see now.
,
-V.
“Actually, Social Security will run a surplus until 2018 or so”
Isn’t the current yearly budget dependent upon spending the large SS suplusses we are running? When these surpluses go down, there will be a larger budget shortfall (even while the Fund is still running small surpluses). The SS account may look like it is doing fine, but then the rest of the budget picture looks very bad.
The calculations account for that, Mrkmyr.
By the way, it’s also worth mentioning that every year or two, the year social security will “run out” is recalculated. And every time, the new calculations push the date further away a year or two.
So right now the official calculations, based on the assumption that every future year will be economically terrible for the USA, say that the surplus runs out in 2018 and the system will stop being fully funded from current payroll taxes in 2042 or 2052 (depending on which govermental office you ask). But five years from now, it’ll be 2046 (or 2056); and five years after that, the predicted date will be 2050 (or 2060).
So far from getting closer to us every year, the date has been receeding.
By the way, the entire issue goes away – until long after you and I have died of old age – if we just get rid of the payroll tax cap (so rich people pay it too) and raise the payroll tax from 6.5% to 7.25% or so.
I understand the “Social Security is doomed!” discussion as merely a politically palatable way of saying that we need to balance the budget. Otherwise, there’s no constituency for doing so, and everyone agrees that long-term deficits WOULD imperil the economy generally. See the dueling columns about budget forecasts at http://www.bepress.com/ev/
Sure, we could fix social security by applying modest remedies TODAY. But that’s irrelevant because we’re not going to. So we forecast the consequence if we don’t confront the problem until it’s unavoidable, in 2038 or thereafter. And those consequences are a tax increase of $1300/worker on average, or a 27-33% reduction in benefits (which would reduce benefits down to current levels, roughly), or some combination thereof. Not cataclysmic, but sub-optimal. And these changes would occur at the same time that Medicare and Medicaid expenses would be exploding, and reduced benefits would push more seniors into other government aid programs such as Supplemental Securing Income, compounding problems.
What about means-testing SS benefits? Love it, in theory. But in practice, no large program helps the poor unless it also helps a powerful political constituency. (Why is the food stamps program run out of the Dept. of Agriculture, not the Dept. of Human Services? It was designed and promoted by ag industries to expand ag markets.) If SS payments were targeted to only the poor, I predict that the program would lose political support and wither. (I’m all for taxing SS benefits, however….)
>[N]ame a country that has sustained both higher taxes and higher growth than us.
Uh … the US, prior to 2000?
>until we turn into France and have 14% unemployment.
For what it’s worth, when you factor in declines in US labor force participation rates, I understand US unemployment is approaching 8%. (Official unemployment statistics ignore people who abandon hope of finding a job.) Underemployment is also a growing phenomenon. So – oo la la! – we may be more continental than you imagine.
aaarrrrrgggghhhh. ugly truth is huuurting. our own fault. aaaarrrrrgghh. . .
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I hope to see the President bankruptcy soon :-)
The truth is that social security is headed for trouble. We are comming upon the baby boom retirement, along with declines in populations of the next gerneations to fund social security. It not a matter of when it will happen but the fact that it will happen at some point.
Also consider that if you die before reaching retirment age your family get almost Nothing from social security. Contrast this to having an IRA or 401K where a benfinciary will recieve the funds from your account. I don’t think its right to have worked your whole life and pay into the system to only recieve a minisule amount, when you have paid in a whole lot more. (if you die before reaching retirement age)
I think the best option is to phase social security out. Let those who want to opt out. They will forfiet any benfits, however they will not pay any social security taxes, and be free to invest their money how they see fit.