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Interesting links about Social Security

Social Security and the State of the Union, Part 2

Greetings,

Well, Nygaard Notes is leaving the country. This will be your last issue until sometime in March. Off to Nicaragua, where we will be tagging sea turtles, studying Spanish, and investigating local media efforts. I say that Nygaard Notes will resume "sometime in March" to allow for the possibility that we will come back with malaria, typhoid, or some other tropical disease. Actually, we return on March 11, so I expect to put out something on or around March 16. Hmmm.... I wonder if that edition will have anything to do with Third World economics and politics? We'll just have to wait and see....

As far as Social Security goes, I'm sure lots of interesting things will happen while I'm gone. I'll discuss them when I return. Will I be a whole different person? Or just the same old person with a sunburn? We'll know by St. Patrick's Day.

Nygaard

"Quote" of the Week:

"For all the talk of mutual funds and 401(k)s for the masses, of barbers and shoeshine boys giving investment tips, the stock market has remained the privilege of a relatively elite group."

-- Wall Street Journal, September 13th, 1999, front page.

Interesting links about Social Security

Someone recently said to me, "I just realized that everything I know about Social Security I learned from you, Jeff." Well, if you are going to have only one source, I suppose I am not the worst, but still, that seems rather limited.

So, to address that problem before I leave the country, here are a few websites of interest as regards Social Security reform:

1. The Century Foundation has the best basic information about Social Security reform for "beginners." They are at: http://www.socsec.org/
2. The Jerome Levy Economics Institute has a mind-boggling but useful analysis of the economics of Clinton's Social Security ideas. Find it at: http://www.levy.org/search/searchmainset.html
3. The Institute for America's Future has a good progressive site, although not as progressive as it should be. Nevertheless, they are worth a look: http://www.ourfuture.org/institute/sss.asp

Well, I have a list of roughly 6,000,000 other sites, but I'll spare you for now.

Social Security and the State of the Union, Part 2

Last week, I listed some ideas about Social Security that the President did not mention in his State of the Union address on January 19th. I pointed out that the President did not talk about improving our system to provide real security for Americans, and that he didn't talk about disability or survivors insurance, preferring to reinforce the false and dangerous idea that Social Security is nothing more than a retirement program.

I also included a list of other ideas worth considering that the President failed to mention: Mandatory and portable employer-funded pensions for all full-time workers; raising the cap on taxable wages; mandating a minimum benefit sufficient to lift all recipients out of poverty; shifting the funding of Social Security away from regressive payroll taxes and toward progressive income taxes; exempting wages at the low end of the wage scale from Social Security taxes; and national health care.

Now that we know some of the things that the President wants off the agenda for Social Security reform, it's time to look at what he opposes and what he supports in this crucial area. As always with the President, this will require some reading between the lines, some conjecture, and some guesswork. So let's get to it.

What the President Opposes

It appears that the President opposes, in no uncertain terms, the most extreme proposal on the official agenda in Washington: privatization. In his speech he said that "The best way to keep Social Security a rock-solid guarantee is not to make drastic cuts in benefits, not to raise payroll tax rates, not to drain resources from Social Security in the name of saving it." Since any sort of system of individual, private retirement accounts would require drastic cuts in benefits, increased taxes (or borrowing), and draining massive resources from the program, the President seems to be vetoing any serious move toward privatization." That's important, and good for him; privatization would be a disaster.

The President's opposition to tax increases has numerous implications. Besides ruling out the creation of individual accounts, it also probably means that the President will oppose any increase in the "cap" on taxable wages. Currently, workers do not pay any Social Security taxes on wages in excess of $72,400. If we raised or removed that cap, we could go a long way toward eliminating the projected shortfall in revenues, and it would only affect a small percentage of the population. But the President's "no tax increase" pledge appears to rule that out.

The President's call to place 62% of projected budget surpluses over the next 15 years into the Social Security trust fund is best understood as a statement that he opposes taking any steps to strengthen the program. First of all, to "commit" a projected surplus is to commit nothing at all. He is saying, in effect, that "If we have some extra money, we'll give it to the Social Security program." And if these notoriously unreliable projections are wrong, and there is no surplus, and then the "no tax increase" pledge apparently means that benefits will have to be cut. Of course, if the surpluses do fail to materialize, it will be long after Clinton is gone, so we'd better start working to be sure that whoever is President at that time will have a stronger commitment to the program, but that's another Nygaard Notes. But the important points, in terms of the President's (unstated) opposition to strengthening the program, are two: First, a failure to propose legislation committing the nation to set tax rates appropriate to Social Security's need is a failure to make any sort of real promise to future recipients.

Secondly, this balanced budget mania is bad for the Social Security program. Why? Because the capacity of any society to provide for those who are not economically productive (be they children, elderly, people unable to work due to injury or illness or for whatever reason) is a function of the productivity of the people who are working. In other words, do the people who are working produce enough to take care of themselves plus the people who are not working?

There is much talk of the "demographic problem" posed by the retirement of the baby boom generation. There is no good reason why this should be a problem. In the year that the last baby boomer retires, 2030 or so, the ratio of non-workers to workers in the United States will be higher than it is now, but it will still be far lower than it was at any time this century before 1975.

The question is, if we were able to feed, clothe, and educate the baby boomers, why do people doubt our capacity to pay for their (our) retirement? Even modest increases in productivity among America's workers should mean increased standards of living for all of us through the rest of our lifetimes and then some. (By the way, these modest productivity increases also mean that, even if we solved all of Social Security's projected problems through an increase in the payroll tax, the after-tax income of all workers would still be 40% higher in real terms in the year 2030 than it is today.)

Which leads us back to balanced budgets. Part of the reason we were able to pay for raising the baby boomers was that the government made major investments in productivity after World War II. The GI bill, which educated millions of today's workers, is a great example. But it's also true that all of the primary engines of our economy were developed with massive government spending. Computers, digital technology, pharmaceuticals, and on and on. If the federal government is determined to stick to the ideology (and it is about ideology, not economics) of the "balanced budget," then that will make it much more difficult to make the necessary investments in the training and infrastrucure needed to maintain the growth in productivity that will, ultimately, allow us to pay for the non-workers of the future.

What Does the President Support?

AARP Executive Director Horace Deets responded to the President's speech as follows: "We are pleased that the President has offered creative ideas to strengthen Social Security and Medicare -- issues of primary concern to AARP and the American people. We eagerly await the details." This seems to indicate that Mr. Deets thinks that the President supports "strengthening" the program. As mentioned above, there is no evidence to support such a positive spin on the President's speech.

What the President does support is a plan to invest part of the trust fund in the stock market, which will supposedly yield higher returns and fund the program for a few extra years. Higher returns, that is, unless the market declines, which is pretty likely if you listen to people like Alan Greenspan. Conservatives hate this idea, as to them it represents "socializing" the market. Not coincidentally, it also impedes their ability to enrich themselves through the setting up of individual accounts which would disproportionately benefit the wealthy among them.

Here is an important point about this, or any other, plan to invest the surplus in the market: it shouldn't matter. Why not? Social Security was set up as, and still largely is, a "pay-as-you-go" system (current taxes pay about 90% of benefits; only 10% or so goes into the trust fund.) Up until 1983 we always taxed the workers at any given time at a rate sufficient to pay benefits at that time. When we raised taxes in 1983 to partially "pre-fund" the retirement of the baby boomers, I don't think most people thought we were creating a permanent surplus. Why would we? The "surplus" is in the form of Treasury bonds which are earning interest, and the government will have to pay them off in order for the system to have money to pay benefits to the retired baby boomers. Guess what? The money to do that is going to come from taxes at the time those bonds are due. So, why don't we just agree now to set tax rates sufficient to provide for a decent income for recipients in the future? It would actually be cheaper for taxpayers, as we would only be paying actual benefits, and not all the interest on the bonds that the trust fund now holds. While I actually support the idea of a trust fund for this reason (because the funds to redeem those bonds will come from progressive income taxes rather than regressive payroll taxes) it still seems quite dishonest. Let's just fund Social Security from progressive taxes on income and wealth in the first place, and put the burden where it belongs.

The President said the following: "We should reduce poverty among elderly women, who are nearly twice as likely to be poor as our other seniors. And we should eliminate the limits on what seniors on Social Security can earn. Now, these changes will require difficult but fully achievable choices over and above the dedication of the surplus."

In order: Everyone should support any steps that will reduce poverty, among women or among anyone. The question is, how are you going to do it? If we are going to increase the benefits for one group, but not raise overall income to the program, then someone else's benefits will have to be cut. Who might that be? The President doesn't say.

Secondly, eliminating earnings limits will only benefit those who wish to work past retirement age, which will disproportionately benefit the educated classes who have less physically-demanding jobs. Very few plumbers, carpet-layers, truck drivers, or waiters will voluntarily work past age 65 (by the way, did you know that the official retirement age will shortly increase from age 65 to age 67?)

I don't think I'm the only one who gets nervous when the President talks about "difficult choices." Ultimately, the only ways to improve the ratio of expenses to income for the Social Security system are to either increase taxes or reduce benefits. The President has already said that we can't raise taxes. So his "difficult choices" must mean benefit cuts.

The other thing the President supports is what he calls "USA Accounts" ("Universal Savings Accounts"). This is entirely separate from the Social Security system, and seems like a poor substitute for committing to full funding for a universal system of Social Security. Plus, it opens the door for further "individualizing" the system of Social Security. This is the real and fundamental danger to the program. But further discussion on this will have to wait for a future edition of Nygaard Notes.