Matthew Yglesias: Still No Crisis

Still No Crisis

Well, I haven't written about this in a while, but without naming any (*cough* Jonathan *cough* Weissman) names I think it's fair to say that some members of the DC press corps need a refresher lesson on the lack of Social Security crisis. I get paid on a biweekly basis a sum of money that I won't name. Suffice it to say that 10 days into the current pay cycle, I'd already spent 14 days worth of money. I resolved this Day of Reckoning by going to the ATM and getting some cash out of the account I established when I moved to town at the Riggs Bank. You see, during some earlier cycles I'd only spent 9 or 10 days worth of money during a 14 day period. These savings were created so that I could afford to spend more money at some point in the future.

Social Security, similarly, has been saving money for the past 20 years and will continue to do so for the next 14. At that point, it will slowly begin paying down its savings. This is not a Day of Reckoning for Social Security. At best, it's a Day of Reckoning for the General Fund that owes Social Security the money.

Some people of my acquaintance believe that this is a distinction without a difference, since the General Fund is the government and the Social Security Trust Fund is just a different bit of the government. But the two notional entities have different revenue streams -- the SSTF is mostly financed by payroll taxes on the middle class while the GF is mostly financed by income taxes on high earners. When the GF borrowed from the SSTF America's middle class was lending money to America's rich with an understanding that the money would be repaid with interest. Similarly, I lent money to the Riggs Bank with the assumption that my money would be repaid with a (very modest amount of) interest. If the Riggs Bank proposed to just not pay me back, they'd be in trouble. Today, the agents of America's rich in the Republican Party are proposing that the wealthy default on their debt to the middle class. That this proposal exists is the only thing that Social Security must "reckon" with for the next several decades.

The people facing the day of reckoning are the high-income folks who will soon need to start paying their bills. Rather than pony up the cash, they prefer to default. The voters -- and the congress -- shouldn't let them.

January 2, 2005 | Permalink

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» Why Oh Why Can't We Have a Better Press Corps? (Brad Setser Has Had It with Social Security Doom Mongering Department) from Brad DeLong's Semi-Daily Journal: A Weblog
Brad Setser has also been pushed over the edge by Jonathan Weisman's claim that Social Security faces a "day of reckoning" in 2018: Brad Setser's Web Log: Social Security Crisis in 2018? Ridiculous: Take a look at this Washington Post article by Jonath... [Read More]

Tracked on Jan 2, 2005 10:43:50 PM

» Crisis, Social Security and the Federal Debt from Catallarchy
In a recent post, I tried to demonstrate that the Social Security Trust Fund was of no actual significance. It has become clear that arguments are ongoing as to the timing and existence of something called a Social Security crisis. The following pos... [Read More]

Tracked on Jan 3, 2005 1:07:45 AM

» Social Insecurity from CasdraBlog
This trying to have it both ways is pretty disgusting. The regressive FICA tax was created in the ‘80 for expressly the purpose that we are talking about today. It was suppose to earn a huge surplus and then get paid out the the baby boomers. This was ... [Read More]

Tracked on Jan 3, 2005 4:46:52 AM

» Social Security Word Games from Silent E
How does the GOP meme survive? SS privatizers define SS narrowly ... The most important question about the crisis is: Does the Trust Fund exist? [Read More]

Tracked on Jan 3, 2005 12:26:15 PM

» Unbiased from Craig's Thoughts, Theories, and Tantrums
I am really glad this Pres. likes to present an unbiased view to the people, "At an event planned for Monday, Bush will meet with White House-approved people of varying ages to illustrate how changes to Social Security would affect... [Read More]

Tracked on Jan 4, 2005 11:44:38 PM

» SS Trust Fund from Freiheit und Wissen
...Mr. Bush claims, as he did in his SOTU address that SS as it is now is heading for bankruptcy and that the necessary solution is to switch to private investment accounts—a move that would cost the U.S. tax payers over a trillion dollars.... [Read More]

Tracked on Feb 3, 2005 9:02:53 PM

Comments

Michael, you rock. This is the best explanation of how SS works that I've ever read. Get it published!

Posted by: grytpype | Jan 2, 2005 9:24:09 PM

This is right on the money.

What it comes down to is the President wants to play an Enron-like fast and loose shell game with the nation's balance sheet.

I don't forsee them defaulting, but I think we will see them try to move the debt owed to the SSTF off the balance sheet to make it appear the money is being paid back and the debt magically disappears.

--Chad

Posted by: Chad M Schuldt | Jan 2, 2005 9:34:44 PM

There certainly will be a crisis when the Right Wing Money Machine (tm) gets going on this.

Posted by: Paul | Jan 2, 2005 9:38:58 PM

This is an odd argument, Matt. I'm as skeptical of Bush's "reform" as you are, and I understand if you think Social Security shouldn't be changed. But you seem to be making a moral (or perhaps even legal) argument based on the sanctity of property rights or something.

Are you saying that no change in social security benefit formulas, retirement age, or anything else is ever morally (or even legally) justified, no matter what happens to demographics, or life-expectancy, or whatever? Is SS so much different from other transfer programs that it may never be changed? Do you really think it's like a bank, or should be?

Posted by: ed johnson | Jan 2, 2005 9:52:53 PM

This is an interesting quasi-Marxian take on the ultimate meaning of early-1980s fiscal policy. I would quarrel a bit with the idea that poor people suffered and rich people gained. The decision over the last few decades to apply FICA tax revenue to current general expenditure, rather than account for it separately and thus force the "on-budget" alone closer towards balance and reduce the aggregate public debt, has meant candy for everyone. Everybody got more current benefits -- pecuniary and nonpecuniary -- from this scheme. I don't know empirically who benefits most from federal govt. spending, but I would imagine that it is distributed fairly evenly across the income classes. To the extent that the financing of current expenditure shifted, in the early 80s, away from income taxes on rich people and towards FICA taxes on poor people, I see some truth in your point. But that's not the whole picture.

Here's another problematic issue with your post. Does society have an obligation to provide retirement benefits to people who dutifully paid their FICA taxes? Sure. Even GWB has acknowledged this. However, rich people certainly didn't perceive that they were "borrowing" from poor people; no liberals at the time of Reagan's policy shift bothered to frame it this way (OK, maybe they did... I was too young to notice then). So it would be rather difficult, practically, to convince the rich that they now have an obligation to start paying more income tax than they are in the status quo.

As the Republicans make a dogma out of not raising taxes or cutting benefits (Big Government Conservatism, indeed) it is rather easy to show that a radical step like personal accounts is the only alternative.

Dammit, we need (Bill) Clinton back to tell this story the right way...

Posted by: next big thing | Jan 2, 2005 9:58:26 PM

Ed and Next big thing, you may not enjoy Matthew's explanation, but that explanation is right on target. Since, by using FICA for the general fund, the tax burden was shifted from a progressive income tax, which hits the high income people the hardest, to a regressive tax, which hits the low to middle class the hardest, those high income people now will have to pay back what they "borrowed". But, of course, Bush's only real principle is that the wealthy shouldn't have to pay taxes, so he sees a crisis here. Until we get this simple concept across to the unwashed, unthinking masses, we will be faced with a threat to kill Social Security just to avoid the wealthy having to pay more taxes.

Posted by: Vaughn Hopkins | Jan 2, 2005 10:32:07 PM

Yep. MY outdid himself with the "Day of Reckoning" mockery. Totally brilliant.

Remember the surplus Bush talked so much about in 2000? Remember the tax cut he enacted on teh basis of that surplus?

The surplus was the Social Security surplus - the money the Social Security program took in beyond what it had to currently had to pay.

That surplus was created by the single most regressive tax in the United States. A tax disproportionately levied on the lower-middle class.

The 2000 tax cut went mostly to the top 5 percent of income earners.

At this point, to lower benefits of the people who contributed to Social Security could not more clearly be borrowing from the lower-middle class to give to the rich.

Posted by: Keith Touhy | Jan 2, 2005 11:15:54 PM

At this point, to lower benefits of the people who contributed to Social Security could not more clearly be borrowing from the lower-middle class to give to the rich.

Unless, of course, it is the benefits of rich Social Security recipients you're lowering.

Posted by: P.B. Almeida | Jan 3, 2005 12:21:45 AM

Interesting, Matthew equates putting money in the bank with writing an IOU to himself and spending the money.

Slightly different situation, no?

"When the GF borrowed from the SSTF America's middle class was lending money to America's rich with an understanding that the money would be repaid with interest."

This is becoming a common meme. I don't remember that being the argument at the time.

Posted by: Sebastian Holsclaw | Jan 3, 2005 12:24:58 AM

Matthew,

Could you please explain this to the Social Security Administration?

Over the holidays I called the Social Security Administration regarding a replacement Social Security card. While on hold, I was repeatedly told by a recorded message that Social Security faced a day of reckoning brought on by demographic changes.

Could you please explain to the good folks at the Social Security Administration what's going on with the program they run?

Thanks.

Posted by: setmajer | Jan 3, 2005 2:24:24 AM

Well, at least you finally addressed the point.

Perhaps you don't see a sharp increase in income taxes as a coming crisis, but most Americans will disagree.

However, I do think that SS should have its special status revoked and it should be funded just like any other program. It makes no sense to have a system that relies only on workers to fund it. Everything else is funded by everyone(with some small exceptions like things financed by user fees). Why should SS be any different?

I think that liberals are so attached to SS that they are scared to do anything that would harm its base of political support. If the richest age group in America was providing the bulk of the taxes for it's own Social Security, support for the program would evaporate. Same thing happens if you means test, or raise FICA taxes too high.

Face it. The salad days of SS's invulnerability are over. No matter how you go about this, it's gonna fail at some point.

Posted by: Adam Herman | Jan 3, 2005 3:18:46 AM

To me, the problem with liberals' view of Social Security can be summed up rather simply: Liberals have come to view Social Security as an end in itself, not a means. And that is why I think most are fooling themselves into thinking that they can avoid changing it.

Posted by: Adam Herman | Jan 3, 2005 3:21:40 AM

Shorter Adam Herman:

Facts, schmacts.

Anyway, all I gots to say is, class warfare!!!!!!!!

Posted by: scarshapedstar | Jan 3, 2005 3:28:27 AM

Perhaps you don't see a sharp increase in income taxes as a coming crisis, but most Americans will disagree.

Hey, if you've got an idea of how to close $400 billion in deficits without sharply raising taxes, well, I hear John Snow isn't precisely well-liked.

Posted by: Kimmitt | Jan 3, 2005 4:21:48 AM

Face it. The salad days of SS's invulnerability are over. No matter how you go about this, it's gonna fail at some point.

See, this is pure, 100% bullshit. So I am curious, have you been duped by the liars, or are you one of the liars?

SS is not guaranteed to "fail" at some point, and if you think it is, you are completely in the dark about what the hell SS is.

Now, if you want to say that the people won't want to pay for it at some point, fine, but that is not the same thing as failing. Further, you'll find that if you actually be honest, and admit that SS has no built in failure, and ask people to just dump it, the American people will tell you to go piss up a rope.

Which is rather why you conservatives play this crisis bullshit. There is such a thing as objective reality: saying "CRISIS," no matter how many times, does not make it true. And you're just full of shit on the "failure" or "crisis" of SS.

Posted by: Timothy Klein | Jan 3, 2005 4:49:55 AM

Perhaps you don't see a sharp increase in income taxes as a coming crisis, but most Americans will disagree.

We all remember what happened at the last day of reckoning - in 1982 Ronald Reagan signed a small increase in the payroll tax and it that was that. Maybe, if everything turns out wrong with the economy, things will be almost as bad ten years from now as they were in 1982.

The problem with conservatives view of Social Security is that the American people don't hate the program as much as they do, so they know they have to be dishonest when they try to dismantle the program.

The conservative solution to the "crisis" is "hey, everyone save and invest your own money" which is the exact same thing as no Social Security.

Perhaps you don't see a sharp increase in income taxes as a coming crisis, but most Americans will disagree.

The crisis that would case a sharp increase in income taxes is caused by George W. Bush and the Republicans in Congress spending a lot more money from the General Fund every year than the government takes in.

The idea that it is the responsiblity of the Social Security system to pay for that spending is crazy.

The whole liberal point on this issue is that conservatives are trying to slip that point past the American people. The Social Security system is not responsible for covering the general fund deficits caused by George Bush and Congress.

Right now Social Security is funding the rest of the government. Republicans want that to continue forever, even if they have to cut Social Security benefits to do that.

Liberals should spell out exactly what the "crisis" means - Republicans are calling it a crisis that one day Social Security will not be able to fund the deficit spending of the rest of the government.

Posted by: Keith Touhy | Jan 3, 2005 5:41:38 AM

Time to move the goalposts. People are still deploying the 2042 Trustees date and the 2052 CBO date as if they were still likely outcomes. They are not, they were based on substantially lower growth estimates for 2004 than actually occured, for the Trustees we had 2.7% predicted, 4.0% actual. Especially when you consider that the model which shows Social Security fully funded forever only called for 2.8%.

Over the last two months the debate on this has moved more than it has over a decade. And at least the left-wing of Gen-X have woken up to a degree. And the grumpiness on the Right shows a dawning awareness they don't get a free pass on this.

Now to move those goalposts. We do not need to raise the cap, we do not need to raise retirement age, we do not need to raise payroll tax. All we need to do to fully fund Social Security is to meet or beat the numbers of the Low Cost Alternative. Once people can bend their minds down this new concept the whole world transforms.

First the productivity numbers needed: 2004 2.8% (smoked that one with 4.0%), 2005 2.1% (who is predicting less?), 2006 2.2%, 2007 2.2%, 2008 2.1%, 2009 2.0%, 2010 2.0%, 2011 and following 1.9%. Hittting or exceeding these numbers produces the graph line labled ( I ), i.e fully funded with a five year reserve. Trust Fund Ratios under the Three Alternatives

Exactly no one is predicting numbers this crappy, at least no one who is selling a solution based on a 7% return on stocks. Any stock based solution that even fills the gap a little bit totally solves Social Security on the way. Take a look at the numbers and ponder a prediction whose best case forecast for future growth PEAKS at 2.2% and then only for two years. What happened to the 3.0% that Greenspan and others have been tossing around?

Plug any number for long term growth above 2.0% in the model and you have a fully funded system, one extraordinarily sensitive to changes in the early years (like 4.0% for 2.8%). Plug 3.0% in and step back.

Social Security is not broke. At all. Under any likely economic scenario it is overfunded, a fact that will become readily apparent over the next two years. Only by diddling with the numbers and hoping no one would look have they been able to maintain any sense of crisis.
Economic Projections under the Three Alternatives.

We can kick the Right all over the play ground on this one. They have been sitting smuggly back knowing, KNOWING I tell you, that the system is unsustainable without change. That was arguably true in 1996, the numbers suggested we needed above average growth over the next decade. Guess what, we got it, and the cost of the fix continues to get smaller and smaller and the shortfall date pushed back, to the point that the trend is irreversible without near recessionary growth rates.

Privatizers want to use two sets of books, one to predict crisis, another to propose solutions. Sorry Charley, you only get to use one data set, and you simply cannot make the numbers run however much "infinite future" projections you pull out.

You hand me 2.2% growth, I hand you a much overfunded Trust Fund. Good luck with your stock based plan with growth south of 2.2%. Have fun with the numbers.

Posted by: Bruce Webb | Jan 3, 2005 8:47:03 AM

"Today, the agents of America's rich in the Republican Party are proposing that the wealthy default on their debt to the middle class."

This is just wrong. Nobody proposes that the GF not repay its debt to the SSTF. The problem is that the SSTF has not saved enough to pay its obligations, because the lifetime benefits to participants have (on average) always exceeded the lifetime contributions they made (plus interest).

MY's main point is a good one: the GF does have a defined obligation the the SSTF, and it does matter. But the obligation is limited to repaying the amount that the SSTF has "saved." OK, maybe a bit more, to enable SSTF to pay what it has promised to those now near retirement.

Posted by: Steve T | Jan 3, 2005 8:57:58 AM

Matt, Great Post.
Keep in mind that the Conservative GOP strategy is to shift the tax burden from the wealthy to the poor and middle class to dampen enthusiasm for social programs. Sure the GOP is all about tax cuts, but the tax cuts are only ever for the wealthy. The GOP wants to keep taxes high on the poor and middle class so they will not support tax increase to fund additional social programs. Reagan was only too happy to sign onto a bipartisan SS fix that raised taxes disproportionately on the poor and middle class. Reagan gave massive tax cuts to the wealthy then smacked the working class with a 50% payroll tax increase.

Privatization is basically a wash. If the doom and gloom "SS will not be there for me" crowd would be happier with an account with their name on it, then do the paperwork. Of course, private accounts will have to be done in a way that people don't lose their retirement money the way Enron employees and others lost their 401Ks. The problem with any Bush/GOP version of privatization is we can bet it will have provisions that transfer $$$ into the pockets of wealthy supporters. (I.e. a prescription drug benefit that is a windfall for the pharmaceuticals, or Iraq contracts that are a windfall for Halliburton, etc.).

The real issue is GOP attempts to reduce SS benefits long term. I bet there will be GOP attempts to slip this in under the public radar.

Posted by: bakho | Jan 3, 2005 10:10:13 AM

This is an interesting quasi-Marxian take on the ultimate meaning of early-1980s fiscal policy.

Well, no. Its more of starkly factual account of the 1980s SS reforms championed by Alan Greenspan

I would quarrel a bit with the idea that poor people suffered and rich people gained.

Nowhere does Matt say that poor people suffered and rich people gained. He said that the part of the government funded by income taxes (paid more by the rich) explicitly borrowed money from the part of the government funded by payroll taxes (paid mostly by the middle classes and working poor). This is a fact. That's what the special debt instruments held by the SSTF are all about.

The decision over the last few decades to apply FICA tax revenue to current general expenditure, rather than account for it separately and thus force the "on-budget" alone closer towards balance and reduce the aggregate public debt, has meant candy for everyone.

No, it hasn't. First, because no such decision was actually made; it is, in fact, accounted for separately, hence the existence of the SSTF and the debt instruments it holds. Second, because you seem to assume that the alternative was to still go through with the FICA tax increase and then dump the money in a whole somewhere until it was needed -- hardly a realistic alternative. The FICA tax increase was specifically to allow the general fund to borrow the money; the alternatives would have been either income tax hikes, spending cuts, or greater budget deficits -- and in the 1980s, any of those were real possibilities.

Posted by: cmdicely | Jan 3, 2005 10:16:22 AM

"When the GF borrowed from the SSTF America's middle class was lending money to America's rich with an understanding that the money would be repaid with interest."

This is becoming a common meme. I don't remember that being the argument at the time.

The understanding that the general fund (funded by income taxes, paid largely by the rich) would repay SS (funded by payroll taxes paid largely by the middle class and working poor) is documented by the fact that the SSTF holds debt instruments from Treasury for the money taken for general fund spending. The reason such instruments exist is so that there doesn't have to be a debate about who remembers what about the agreement.

Posted by: cmdicely | Jan 3, 2005 10:19:47 AM

The problem is that the SSTF has not saved enough to pay its obligations, because the lifetime benefits to participants have (on average) always exceeded the lifetime contributions they made (plus interest).

This must be the most meaningless and ignorant comment I've read here.

Posted by: abb1 | Jan 3, 2005 10:30:18 AM

I resolved this Day of Reckoning by going to the ATM and getting some cash out of the account I established when I moved to town at the Riggs Bank. You see, during some earlier cycles I'd only spent 9 or 10 days worth of money during a 14 day period. These savings were created so that I could afford to spend more money at some point in the future.

Dumbest... Yglesias post... EVER!

Social security is not like Riggs Bank. The CORRECT hypothetical is as follows:

Matthew has two pockets in his pants: his left pocket is where all the TAP money is placed, which is the money he uses to pay living expenses. And his right pocket is where he puts the money from his second job, which he uses to pay for all those extra luxuries he buys (which he buys as soon as he gets any money in his right pocket). So those two notional entities (left pocket, right pocket) have different revenue streams. When "during some earlier cycles [he]'d only spent 9 or 10 days worth of [living expense] money during a 14 day period," Matthew moved the extra 5 or 6 days' money from his left pocket to his right pocket (and, at the same time, took an IOU from his right pocket and moved it to his left pocket). Now, of course, as soon as Matthew got the extra money (transferred from the left pocket) in his right pocket he promptly went out and spent it all on some fancy new luxury goods. Now, he's got a "Day of Reckoning" in his living expenses. He wants to resolve this by taking the IOU from his left pocket and going to his right pocket to cash it in. Except he's got nothing in his right pocket with which to repay the IOU. So Matthew is going to have to go out and work extra hours in his second job anyway (the extra money will, of course, go in his right pocket first, then immediately will be transferred from his right pocket to his left in repayment of the IOU). But, Matthew's pockets' notwithstanding, Matthew's still gonna need to work those extra hours to resolve his Day of Reckoning - the exact same result as what would occur if Matthew had no pockets at all (i.e., no notional accounts) and all of the money from both his TAP job and his second job was always just put in his cookie jar.

Every time I think that Harvard is an actual school of learning, Matthew comes up with on of these stinkers of a post, proving otherwise.

Posted by: Al | Jan 3, 2005 11:20:02 AM

The CORRECT hypothetical is as follows

That is only a "CORRECT" hypothetical insofar as the United States federal government has fully exhausted its general fund taxing power.

Posted by: cmdicely | Jan 3, 2005 11:32:37 AM

The real issue is GOP attempts to reduce SS benefits long term. I bet there will be GOP attempts to slip this in under the public radar.

I think its more about GOP attempts to reduce retirement security, and get people to work -- as Al has previously stated on these comment threads -- "more and longer". Increase the pool of surplus labor, drive down wages, increase corporate profits, and feed the capitalist class.

Posted by: cmdicely | Jan 3, 2005 11:35:06 AM

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