SOCIAL SECURITY AT TWENTY PACES
In his first graph, Matt says the job of EPI and economic populists is to scare the rich into endorsing "Hamilton-style technocratic tinkering." This is not a good start. Speaking for myself, not necessarily for anyone at EPI, I don't really look forward to more Clintonoid policies. It's not that they are too small. It's a difference of kind, not degree.
The converse is more to the point: the Clintons are making careers out of triangulation -- using caricatures of leftist bogeymen to advance their own rotten agenda. What is that agenda? Kiss the arse of Wall Street to secure political power. On the domestic side we have Gene Sperling's "pro-growth progressive" spiel (sic); in foreign policy, it's Peter Beinart "doughface" canard. David Ignatius of the Post says that Democrats under the leadership of the Hamilton Project (i.e., Robert Rubin) should harness populist rage on behalf of "budget-balancing entitlement reform." Daily Kos chief economist Stirling Newberry says populists have good hearts but dumb thoughts. Get the picture?
The more pertinent distinction between left and center is what I call the inside game and the outside game, or what Jesse Jackson called tree-shakers and jelly-makers. You can advance ideas aimed at encouraging people to think differently, our ambition at my gigantic web site, fully understanding that the political system and public opinion are nowhere near ready for instant implementation. Such activity -- I hope -- creates a more benign environment for incremental, practical efforts. Generating fear of a more radical alternative is the least of it. It's the idea that matters, if anything does.
For a populist, there is also an inside game, or what I've also called here the salami business. But the incremental changes in mind are not neo-liberal ones. As I said, it's a difference in kind, not degree.
Take Social Security, for an example. (See also the Mighty Atrios.) A true populist would like, to the extent possible, to finance the retirement of the working class with the wages they deserved but did not receive, wages that became profits that have been accumulated by the wealthy. The correct policy is to block any increased pre-funding from payroll tax hikes, not to mention benefit cuts.
Pre-funding -- running Trust Fund cash surpluses -- has proven to be a scam, since the aim of Social Security reform from neo-liberals and from the right is to prevent the use of income tax revenues to repay debts to the Trust Fund, or to finance future benefits. There is no other way to interpret language from the right -- that the program will be "broke" in 2018 when the Trust Fund will be awash in assets -- or from neo-liberals, that program costs will "explode" and require "huge tax increases."
Recall that for all his unpopulist deficiencies, Senator Moynihan understood this and proposed in 1990 or so to eliminate the Trust Fund surpluses with payroll tax cuts -- to go to a strict PAYGO regime. He wrapped some objectionable measures around this, but the core idea was salient. I would not go that far since the surpluses are needed to pay for other spending and would not be easily replaced in the current taxaphobic atmosphere.
The practical approach to this problem is stalling tactics, something that is always politically feasible. What Sebastian Mallaby, the other economic royalist outlet on the Post op-ed page, today calls "block[ing] policy." Pardon my francais, but if I refuse a shit sandwich, it's not because I'm not hungry.
So on Social Security, stall, baby. Excoriate any call for benefit cuts: demand "Social Security, more not less." Take a jaundiced view of payroll tax hikes in advance of any actual need for the money to finance benefits. The logic is that benefits will be harder to reduce than taxes to increase. You try to choose your risks. I'd rather take this risk than lock in changes in law and formulae thart are arcane to the public but have the effect of transforming U.S. social insurance into old-age welfare, building a bridge to the 19th Century.
Max:
As you point out Social Security has been running a surplus since its founding. The excess has been shifted to the treasury and used for normal government expenditures. This is such a lucrative scam that no president has been willing to admit it. There is no "trust fund" or "lock box". Since most people confuse a government administered insurance system with a retirement plan the ideas of accumulating benefits and a dedicated tax seem to make sense.
I've proposed an alternative financing mechanism:
Saving Social Security
One of my options is to eliminate the payroll tax and adjust the income tax brackets to compensate. This could be both progressive and eliminate the cap on deductions, thus making the wealthy pay a fairer share.
--- Policies not Politics
Daily Landscape
November 27, 2006 8:52 AM | Reply | Permalink
The surpluses do not date from the founding, but from tax increases launched under Reagan at the behest of the Greenspan Commission in 1983. The Trust Fund depends on the commitment of the Gov. It exists if we have responsible leaders, just as a debt is made good by a reliable debtor. So I don't buy the Trust Fund doesn't exist slogan.
Junking the payroll tax is a bit too dramatic for me. I would be content with topping off any cash shortages (after 2040 or so) with income tax revenue.
Max B. Sawicky
http://maxspeak.org/mt
max@maxspeak.org
November 27, 2006 9:22 AM | Reply | Permalink
The trust fund doesn't exist in the sense that most people think of it. People think that the federal government can hold on to funds just like individuals can. I can take my excess funds and "invest" it, the government can't. It can take the excess revenue from Social Security and transfer it to the treasury giving special bonds in return. When it comes time to redeem these bonds the money will have to come from the cash flow at the time.
So, technically the "trust fund" is all the special treasury bonds, but this is not what most people think of, they think more in terms of their own bank account. The government can't "invest" excess income, what would it put the money into? It can lower the deficit, if any, or use the funds for operations, but it can't put it in a "trust fund".
All this is a technical detail compared to the main issue that the government is pay as you go and when cash paid out exceeds revenue there are only two options: borrow or print more money. So far the Bushies have chosen to borrow. This has never worked well for empires in the past (Henry VIII, Louis XIV, etc), but then neither has printing money...
--- Policies not Politics
Daily Landscape
November 27, 2006 9:43 AM | Reply | Permalink
I agree, Max: we can just dismiss Social Security 'reform' out of hand. The downside risk of doing nothing is that we may need additional funding sources sometime after 2040.
Meanwhile global climate change is gathering steam, and the downside risk of doing nothing is that our GDP may take a serious hit sometime around mid-century, which would threaten our ability to afford all sorts of beneficial programs.
November 27, 2006 10:10 AM | Reply | Permalink
Max! When will you give us a clear Marxist argument which justifies the right of retired workers to demand support not out of the current incomes of younger unretired workers but out of the disgorgement of property wrongfully(?) acquired by the wealthy members of the retired workers' own cohort?
November 27, 2006 10:15 AM | Reply | Permalink
When it comes time to redeem these bonds the money will have to come from the cash flow at the time.
Why do you say that?
Bonds are almost never redeemed out of "current cash flow." They're redeemed by substitution; the debt is rolled over. And that's how the special bonds held by the Social Security Trust Fund trustees will be redeemed -- that is, Treasury selling a like amount to the public and to foreign central bankers and using the proceeds to redeem the special bonds dollar for dollar.
November 27, 2006 10:21 AM | Reply | Permalink
I'm just a rotten pragmatist, but Ellen, call me.
November 27, 2006 10:29 AM | Reply | Permalink
You're too modest, Max.
November 27, 2006 10:33 AM | Reply | Permalink
Simple solution. Drop the cap. It's absurd to fund this program with a regressive tax. You'd have to increase payouts to reflect some of the increased contributions, but that would still do the trick.
You may also have to tax some dividend income or capital gains income as the top 2 percent or so shift their pay out of income into capital.
November 27, 2006 10:37 AM | Reply | Permalink
If you drop the cap since the employees payment is matched by the employers we might see a faster ending of traditonal pensions. Also small corporations will make even less of an effort to provide benefits.
As a self employeed person the self employment tax is quite onerous. While the Right does not grasp that few small businesses are detered by taxes. The goal is to run the business. The Left does not seem to grasp that small businesses will not be run as non-profits. Even if we were willing our lenders don't like it very much.
Daniel A. Greenbaum
November 27, 2006 10:48 AM | Reply | Permalink
"-- using caricatures of leftist bogeymen to advance their own rotten agenda."
Yeah, and it's not like you use ridiculously flase, offensive caricatures of "Clintonoids"
Peter Orszag > Max Sawicky
November 27, 2006 10:53 AM | Reply | Permalink
Traditional pensions are over. Period. I speak as someone who spent ten years on a project managing the pension plan software for a fortune 50 company that provided benefits consulting.
As for businesses reducing benefits, of course the business calculates the total cost of the hire rather than the salary. So, yes, dropping the cap would mean that not only would an employee over the cap pay the employee share, but also the employer share in the form of reduced salary.
But if it's okay that a guy making 50K when he could be making 53,500 if it we not for the payroll tax, how is not okay for a guy who makes could make 107K not give up the 7K that goes to the payroll tax? Why does it not make sense to make the tax proportional, rather than regressive?
(The answer, in part, is that the payouts are progressive. That's why I said you'd have to increase the payouts for higher income earners. But you would do so following a similar model to the one in place today.)
November 27, 2006 11:09 AM | Reply | Permalink
It would make more economic sense if he did.
Stirling Newberry http://www.bopnews.com
November 27, 2006 11:12 AM | Reply | Permalink
Assorted responses --
Ellen -- The Trust Fund itself cannot borrow money. Whether the bonds are liquidated or rolled over is a decision for fiscal policy at the time.
Jay -- eliminating the cap would not be the worst solution, but it begs the question of when to lift it, and what to do with the money. If you do it sooner and 'lockbox' the money, the required cash later is smaller. Many program supporters worry about the politics of weakening the link between taxes paid and benefits received, which lifting the cap would do.
Daniel -- see above.
Dustin -- I think the world of Peter and I made no negative personal comments about him. The Clintons . . . not so much. I just think his economics are wack. Without doubt, he's much smarter and more accomplished than me. So are a lot of other people who are oh so wrong.
Max B. Sawicky
November 27, 2006 11:22 AM | Reply | Permalink
Be hard to recall it since I was unaware that Senator Moynihan understood the problem. That is phenomenol. I have felt like the tree falling in the forest until I read your post, Max.
So glad to know there are at least two of us.
There are more? :-)
What a wonderful day this is.
Thank you.
Best, Terry
November 27, 2006 11:47 AM | Reply | Permalink
fyi, stirling newberry left daily kos about the same time kos removed you from his blogroll. bondad is the main economist over there now.
i was on vacation during the populism back and forth between you and newberry. i guess i sit somewhere in between in my feelings on populism, but i did want to point out that they had some rather sophisticated ideas about money that were not adopted in the party platform.
the populists were not simply silver bugs, they had been influenced by the Greenback party, and supportive of Lincoln's fiat currency. the "Cleburne Demands" from the Farmer's Alliance convention of 1886 called for "federal regulation of the banking system and a national currency that was not restrained by gold". This included, yes, more gold--and silver--coinage, but the main feature was government issued legal tender, replacing private bank notes, and regulated by congress.
in 1889 Charles Macune of the Texas Exchange cooperative took it as step further. He called for the US Treasury to establish federal grain elevators as "sub-treasuries". Farmers could store their surplus crops in these silos, and borrow against them at a very low rate, paid by the treasury in the new legal tender (they could also just sell the grain to the treasury, or borrow against their land). This idea basically anticipates the federal reserve; the government creates money, and puts it into circulation based on loans that are tied to real assetts tied to real economic activity. The main difference here is that the private banking system as middleman is completely bypassed.
Now maybe this system was too agro-centric, but it was highly sophisticated, and probably would have worked pretty well. it is worth noting that keynes himself praised it, it's too bad that it did not make it to the 1892 platform. this is where stirling is undeniably right; the idea was too sophisticated for a large movement to rally around; however, it was also too sophisticated for the elite bankers and economists of the time who first scoffed and then just ignored them. by the time william jennings bryan came around with his call for "free silver" there was no hope, it was all just righteous anger.
November 27, 2006 11:52 AM | Reply | Permalink
The Trust Fund itself cannot borrow money. Whether the bonds are liquidated or rolled over is a decision for fiscal policy at the time.
To meet outgo obligations after 2018c.the trustees will regularly redeem -- neither liquidate nor roll over -- so much of the portfolio of the special bonds they hold as may be necessary.
How the USG (Treasury?) meets the Trustees' legal demand may be a political question but if history is a guide it will be by way of selling general obligation bonds to raise the required cash.
And since the "special bonds" are accounted as part of the US general debt, the sale of bonds accompanied by the cancellation of special bonds is, practically, a "rolling over" of the debt.
November 27, 2006 12:20 PM | Reply | Permalink
Thanks much for the elaboration, c. green. My only claim was that the Pops' silver fetish was not nutty. No doubt it was not fully baked, but no mass movement slogan is. I don't buy every radical nostrum floating around, but enforcing an automatically patronizing attitude about them is not an inducement to clear thinking.
November 27, 2006 12:21 PM | Reply | Permalink
Don't look at the technique, look at the aggregate cash flows.
Other government spending "G_o".
Social security payments "G_s".
Other government tax receipts "T_o".
Social Security tax receipts "T_s".
Assume that whatever G_o and T_o, they are held stable. So (Deficit/Surplus)_o is stable.
If G_s > T_s, than the (Deficit)_s is initially covered by issuing purchasing power ... not literally printing money, of course, since we have a tap-issue currency system, but creating new reserves, which is what people normally mean when they say "print money".
The Fed can either allow those reserve to circulate in the banking system with some of it, of course, spilling over into the rest of the economy as cash, or it can sell bonds to destroy those reserves.
... in the common vernacular, print money or issue debt.
Of course, the constraint on the amont of the deficits is not financial, it is the real impacts that they have. There is no damage done in a deep recession in simply making payments by issuing reserves, but doing so when the economy approaches full capacity is inflationary. And since social security entitlements are not intended to be discretionary, that means that those payments cannot be foregone simply because the economy is near full capacity. So for social security income payments of any sort that is ongoing and not triggered by a recession (retirement, universal health coverage, etc.), the system has to be set up as if the economy is in an inflationary part of the business cycle.
The stimulus required if the economy is not in the inflationary part of the business cycle must come from some other part of the government budget, and preferably from investment in infrastructure and training that improves the long-term productivity of the economy.
That, therefore, is the rationale for ongoing PAYGO. The substantial improvement in progressivity in simple PAYGO is to incorporate Supplemental Social Security into the same payroll tax stream, by having the payroll tax to fund SSI kick in at the point that the main SS payroll tax contribution kicks out ... presently at around $90,000. Then the middle of the income spectrum finances the social security entitlements of those in the previous generation at the same position, and the present day big winners cover the safety net supplement for the previous generation that left the economy in the state where they could win so big.
November 27, 2006 12:23 PM | Reply | Permalink
But they are also part of government assets.
November 27, 2006 12:25 PM | Reply | Permalink
"fyi, stirling newberry left daily kos"
He's just slagging me for writing free articles for the general public rather than working in a Washington DC think tank the way Real Populists do.
Or something like that.
As for the paper money ideas of the time - the driver for the gold standard wasn't internal policies of the US - which Friedman's focus on closed macro-economics overlooks - but the international policies, particularly of Germany and the United Kingdom. They wanted gold backed currencies, and since, at that time, the terminal goods in the trade chain were from the UK and Germany... they got what they wanted.
Nothing is more inevitable than a bad idea whose time has come, and in 1871, the gold standard, one of the great bad ideas in history, had arrived.
The problem of previous credit/paper money systems had been information - they had worked in small areas for periods of time and then collapsed under crisis. The gold standard, it should be noted, also collapsed under crisis, and roughly of the same kind - a large war. In fact, monetary systems tend not to survive the wars fought over them.
In the last half of the 19th century what was missing from the ability to run a paper money system was ... well, let's call it what it is: socialism. Only by socializing the risks inherent in a paper money system can people be constrained to participate whole heartedly. China's paper money system is strained right now because people insist on saving, because they don't trust the pension system - corporate or state. China wants people to consume and develop an internal economy not based on real estate speculation, but the public isn't interested in buying things that they can't sell later or rent to support them in their old age.
The stability of our present monetary system in no small part rests on the social innovations of the late 19th and early 20th century, often promoted by conservatives as a way of disembowelling the socialists who proposed them in one form or another.
Stirling Newberry http://www.bopnews.com
November 27, 2006 12:59 PM | Reply | Permalink
Proves I don't follow Kosovia too closely. In any case, I don't see why it's a put-down. I've complimented Kos numerous times, an unrequited pastime in my case. When I start slagging you, you'll know it.
Max B. Sawicky
November 27, 2006 1:10 PM | Reply | Permalink
Excuse me while I fight my way through the smoke and mirrors.
If the money that had been paid in was still there waiting to be paid out, would we have a shortfall on the horizon?
Does a country that admits the money to pay its obligations is not there admitting bankruptcy?
Since the USA is creating dollars for other reasons they attempt to hide from the public, can't they make one of those reasons filling the social security fund? (I know an answer to this one, but the "other reasons" are eroding the currency almost as quickly anyway- lets just get it over with.)
November 27, 2006 2:41 PM | Reply | Permalink
What's wrong with using current taxes to pay current benefits? That's just the financial side of the economy, and as we all know, that is not real.
The current economy has to support retirees out of currently produced goods and services (which are real, not numbers in a computer), since the retirees are not producing. Using currently collected taxes is little more than keeping score of the cost of supporting non-productive members of society (like widows and children, disabled people, or retirees.)
November 27, 2006 2:45 PM | Reply | Permalink
Actually, the other possible downside is already written into the Social Security Law.
If at any time the anticipated benefits to be paid cannot be covered by the anticipated tax revenues and the trust funds, then the anticipated payout will be reduced to the level that is CAN be covered by revenues and savings.
At no time in the future even under worse case scenarios would that ever require more than a 20% reduction, and the actual would be a lot less. Assuming that the economy doesn't grow fast enough to eliminate the problem before we get there. Predictions are extremely unreliable, especially about the future.
November 27, 2006 2:50 PM | Reply | Permalink
Actually the money you think is in your bank account does not exist, either. The bank has already spent it on loans to someone else. [Usually not loans to their own officers, but that's another issue, and less likely since the S&L collapse.] That's why a bank is allowed to hold your savings for 60 days after you request it before they are required to pay off.
All of this scary shit about Social Security is nothing more than saying that Social Security is JUST LIKE YOUR BANK and there might someday be a run on your bank, just as some day benefits due MIGHT exceed revenues expected.
The reason everyone is so frightened about Social Security running out of money is that the Republican Party runs by scaring the shit out of the voters on as many subjects as possible, then offering themselves to be the saviours of the voters.
November 27, 2006 3:01 PM | Reply | Permalink
And the assumptions about the future are an important point. One aspect of the trend of social security receipts is the wage stagnation of the majority of the working population, with most income growth occuring among people earning far more than $90,000.
But a shift in income share cannot proceed indefinitely at a constant rate. If the next expansion features broadly distributed wage gains, all the horror tales from the projections suddenly disappear.
Consider that the last increase in the withholding rate took place under President (as opposed to Resident) Bush, and yet the big surge in transfers from Social Security to the general fund occured during the latter part of Clinton's presidency.
November 27, 2006 3:45 PM | Reply | Permalink
well, it's fitting, doesn't that seems to the way this country works? radicals and revolutionaries build movements around social and economic goals, and then then liberals/conservatives in power co-opt the movement by passing laws that roughly address their concerns, all the while making sure they are mostly serving themselves.
i'd like to know more about the history of money, however, i haven't been able to get into baudel's civilization and capitalism series, perhaps david hackett fischer's the great wave is a better place to start?
November 27, 2006 4:12 PM | Reply | Permalink
Read Brad De Long .
November 27, 2006 4:55 PM | Reply | Permalink
Read Dean Baker -- and Max Sawicky.
November 27, 2006 5:13 PM | Reply | Permalink
DeLong begins by giving Atrios lead billing and then has some modest proposals which make tactical if not economic sense.
The trust fund is of course completely irrelevant. Is now , always has been .Social security is a "basic" function- i.e. I like it -of any government I want to support. There is no more need that its outgo be matched to some particular rivulet in the government's income stream than there is for a special tax to pay for the DOD. Which Paulsen of course understands. I'm not sure about Brad.
That said it's worth thinking about how to upgrade its body armor before the next campaign. For that , I think Brad is useful.
November 27, 2006 6:44 PM | Reply | Permalink