Cacophony about Social Security shows our real political dysfunctionality

Summary: Here we have a wonderful example of the cacophony that takes the place of political debate in the New America, in this case about Social Security. It’s one of the simpler issues facing us: a moderately predictable and fully controllable stream of benefits vs. government revenue — mostly income taxes; some graduated (“income taxes”) and some flat (FICA tax on wage income). Our difficulty understanding it provides a dark omen of our ability to handle our larger problems. This post complements yesterday’s post about our difficulty seeing how the jobs picture has changed.

Contents

Cacophony on ABC about SS
Senator Johnson was quite right
Paul Krugman explains
Simple Facts about SS
For More Information

(1) Typical cacophony on ABC about Social Security

Excerpt from transcript of This Week With George Stephanopoulos, ABC, 10 March 2013

PAUL KRUGMAN: Is it a condition of any Republican support that you have to go for really terrible policies? Because raising the Medicare age is a terrible policy. It raises medical costs, it does very little to improve the budget. It introduces a lot of hardship. Means testing in Medicare is a better policy. I don’t particularly like it, but it’s a better policy. There are other things you can do, other ways you can cut. Even I don’t like the business about changing the price index for Social Security, but that’s not as bad … (CROSSTALK)

RON JOHNSON (R-WI): To say that the Republicans haven’t done anything is just false. The House has actually passed budgets. With bipartisan proposals to try and save Medicare. The Senate hasn’t passed a budget in over 4 years. Listen, unless we do something, these programs are going broke. It drives me nuts. When I hear people say that Social Security is solvent to the year 2035, it’s not. (CROSSTALK) In the next 20 years we’ll be $5.1 trillion more in debt than … (CROSSTALK)

STEPHANOPOULOS: Let me put a version to George Will’s question to you then. If the president went along with either means testing of Medicare beneficiaries, more far reaching, he’s done a little bit already, and also adjusting consumer pricing index for Social Security recipients, would you as a Senator be open to more revenues?

JOHNSON: If you’re taking a look at a entitlement reform package, actually bringing in revenue for those entitlement reforms, I might look at that. But the fact of the matter is we already have a $1 trillion in middle income tax increases hitting us in Obamacare. They’re hidden, but it’s middle-class … (CROSSTALK) … as well as another $600 billion. So, you’ve already got $1.6 trillion worth of tax increases hitting us in the next 10 years. That’s going to harm economic growth. George, the best way getting out of the situation is economic growth. (CROSSTALK)

DEBBIE WASSERMAN SCHULTZ (Rep D-FL, Democratic National Committee Chair): That is completely untrue. There are not $1 trillion in taxes in Obamacare. The President in his grand bargain, which is still on the table, which Republicans could take him up on right now, has $360 billion more in savings that add solvency to Medicare. Let’s look at what entitlement reform is necessary to reduce the deficit. It isn’t Social Security. Social Security’s solvency has to be dealt with. It could be dealt with separately because there are many years of solvency left in Social Security. So let’s not hit the middle-class first. Let’s make sure that we take a balanced approach to deficit reduction. The Republican leadership cannot dig in and say that we are done with revenue, because we are not. We got $600 billion. The speaker himself in his proposal in the grand bargain discussion they had with the president had $1 trillion in revenue, and so there is another about $600 billion left that we can do in revenue.

KRUGMAN: Just a question, you say let’s start with the facts, but we’ve just run aground right there.
JOHNSON: You’ve made my point, we have to agree on the facts. (CROSSTALK)
KRUGMAN: But the facts are false.
JOHNSON: No they are not. (CROSSTALK)
JOHNSON: They are not false.

KRUGMAN: The Social Security thing has a dedicated revenue base. It has a trust fund based on that dedicated revenue base. You can’t change the rules midstream and say, oh suddenly… (CROSSTALK)

JOHNSON: Here’s the problem with the trust fund: the federal government owns US Treasury bonds. It’s the same thing as if you have $20.00, you spend it. It’s gone. You write yourself a note for $20.00, stick it in your pocket and say, I got 20 bucks. No, you don’t. You have a note that you have to sell in the open market. The trust fund is a fiction, it doesn’t … (CROSSTALK)

KRUGMAN: If you want to think of Social Security as not being part of the government, then there’s no such thing as a Social Security problem, it’s just part of the general budget. You cannot say on the one hand … on the other hand we’re going to we’re going to restrict it to only operating off of (CROSSTALK) But it’s important to realize that the facts that are being brought out here are in fact, non-facts. And how… (CROSSTALK)

GEORGE WILL: As Pat Moynihan said, “Everyone is entitled to their own opinion, but not their own facts”, and we’re going to start this chimeric negotiation from two sides that can’t agree on the most basic thing…

(2) Senator Johnson was correct

Although the GOP position about the budget consists mostly of smoke and mirrors, Johnson correctly described the Social Security Trust Fund as a mirage. It is an accounting convention of offsetting assets in the Fund and debts of the Treasury (ie, loans to the Treasury from the Fund). Since both sides are part of the government, the net effect is zero. These internal accounts were created by FICA tax revenue in excess of Social Security payments, which were spent by the government — leaving behind nothing but offsetting ledger entries.

As the Senator says, an IOU to yourself is not an asset. You can try this at home. Write yourself an IOU for a billion dollars. Are you richer?

This is no secret. See here for excerpts from Federal reports acknowledging this.

Liberals refuse to admit this, as they believe admitting this simple truth would imperil the New Deals greatest legacy (neither Left nor Right is a “reality-based community”). So these debates go around in circles like water draining from the toilet.

(3) Paul Krugman explains what was lost in the TV debate

Krugman dances around this simple fact in his correct explanation. It was garbled on TV; here is something similar in the form of a word puzzle from his NYT blog on 21 June 2010:

Social Security is a government program funded by a dedicated tax. There are two ways to look at this. First, you can simply view the program as part of the general federal budget, with the the dedicated tax bit just a formality. And there’s a lot to be said for that point of view; if you take it, benefits are a federal cost, payroll taxes a source of revenue, and they don’t really have anything to do with each other.

Alternatively, you can look at Social Security on its own. And as a practical matter, this has considerable significance too; as long as Social Security still has funds in its trust fund, it doesn’t need new legislation to keep paying promised benefits.

Two views, both of some use. But here’s what you can’t do: you can’t have it both ways. You can’t say that for the last 25 years, when Social Security ran surpluses, well, that didn’t mean anything, because it’s just part of the federal government — but when payroll taxes fall short of benefits, even though there’s lots of money in the trust fund, Social Security is broke.

And bear in mind what happens when payroll receipts fall short of benefits: NOTHING. No new action is required; the checks just keep going out.

He says “It doesn’t need new legislation to keep paying benefits”. But the government might need new taxes or increased borrowing to pay those benefits — which was Johnson’s point (although poorly expressed).

(4) Simple Facts about Social Security

FICA taxes were a source of revenue for general government spending since begun in 1937. Payments (ie, benefits) slightly exceeded revenue in 2010 by $37 billion (ie, cash flow, not including intragovernment “interest” payments). And 2011 ($48 B) and 2012 ($48B). The 2011 Trustees report forecasts that this negative cash flow …

… will average about $66 billion between 2012 and 2018 before rising steeply … Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable earnings will grow rapidly from 11.3% in 2007, the last pre-recession year, to roughly 17.4% in 2035, and will then decline slightly before slowly increasing after 2050. Costs display a slightly different pattern when expressed as a share of GDP. Program costs equaled 4.2% of GDP in 2007, and the Trustees project these costs will increase gradually to 6.4% of GDP in 2035 before declining to about 6.1% of GDP by 2050 and then remaining at about that level.

These are large but manageable sums. Both SS and the far larger health care deficits (from Medicare, Medicaid, & TriCare) are relatively easily solved in the sense that a range of effective reforms is already known. See below for analysis of ways to fix Social Security. Health care requires more drastic reforms, but we can copy aspects of the more cost-effective health care systems of our peers (eg, France, Germany, Switzerland) with confidence of success. That our debates about these things circle aimlessly, ignoring well-understood facts and options, reveals the true dysfuncationality of our political system.

If we cannot make the relatively simple reforms, the more difficult challenges (eg, income inequality, our grand strategy for dealing with other nations, the robot revolution) might prove unsolvable. It’s not a pretty picture. But the truth is out there. Americans need only set aside their politics and grasp it. Knowing the truth solves nothing by itself, but will make possible political solutions.