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June 16, 2010

A Brief History of Attacks on Social Security

Ted Marmor

This is the second in a series of guest posts about Social Security reform, which was organized by the Roosevelt Institute's New Deal 2.0 blog. Ted Marmor is Professor Emeritus at Yake School of Management.

The National Commission on Fiscal Responsibility and Reform set up by President Obama claims both that reducing the projected federal deficit should be a major national objective and that Social Security should be considered as one potential source of relief either through reducing benefits or enhancing revenues or some of both. That much is simply a fact.

But this commentary is about ideology. It is to remind readers that the same attacks on Social Security have been going on — in different guises — for at least four decades. The stagflation of the 1970s, precipitated by the oil crisis of 1973-74, provided long-term, ideological critics of social insurance an opportunity to argue that such programs — retirement, survivors’ insurance, Medicare, disability coverage, unemployment — were unaffordable. Critics from the Cato Institute, the Heritage Foundation, and increasingly, in the 1980s, in publications financed by the Wall Street financier Peter Peterson, were not prepared to attack the desirability of social insurance programs directly. Instead, claims varied from how ungovernable such programs seemed during the 70s to the follow-up charge of affordability.

What is crucial to understand is how devious and misleading such lines of argument are. They are best understood as an ideological remedy searching for plausible occasions to celebrate what was presumed. This strategic ploy is obvious in the case of Social Security pensions. Currently, Social Security is not suffering worrisome fiscal imbalances. The worry of the worriers is about 2035 or 2042 when, according to forecasts of the actuaries and CBO, there might well be some shortfall in revenues against predicted claims. To the extent the worriers worry about 2016, they must focus on an aspect of the program never before considered in history — whether payments from the general fund to the trust funds for interest payments are in excess of payments from the trust funds to the general fund for the purchase of bonds. But why go decades into the future or invent a new concern when the deficit in the nearer term is the issue at hand?

The answer has two components. Specters raise present fears, the more so if exaggerated by demographic forecasts with some plausibility. So the aging of baby boomers is the first premise, and the falling ratio of workers to retirees is the second. Together, these two premises suggest that there will be a need for cutbacks or increased contributory taxes. But if the baby boomers are growing in numbers and if Social Security is the ‘ third rail of American politics”, then critics had better scare citizens into accepting cuts now because it will be harder later on. Note, however, the deceits. The ratio of workers to non-workers, for example, is a much more relevant measure than simply the ratio of workers to retirees. More older Americans means more for pensions and medical care and less for youngsters and their diminished numbers at schools. This ratio hit its height in 1965 and has generally been decreasing since that time.  The ratio also ignores increasing productivity. As productivity increases, as it has and is projected to continue to do, the burden on workers falls. Finally, there is every reason to believe that relatively small adjustments on the revenue and outlay side can take care of any shortfall. The genius of social insurance is that small adjustments add up to huge long-term changes in fiscal balance. But there is precious little discussion among the deficit hawks about this point.

What we have is a case of ideology masked as fiscal prudence. There is every reason to believe that Peter Peterson and the personnel of his foundation believe profoundly in the virtues of a smaller public sector, a robust means-tested conception of social welfare policy, and the importance of not providing most citizens with a collectively financed system of income protection against major losses in family income from recognized and understood risks. So they are advancing their cause as prudent, fiscal watchdogs.

But the distortion of this longstanding approach is evident in the concentration on Social Security rather than the most important threat to America’s fiscal future, the continuing, disproportionate rates of increase in medical care spending, both private and public. The health reform legislation of 2010 was celebrated as insurance expansion for millions of uninsured Americans, but it did not seriously take on medical inflation. There is a big problem in this policy space, but the Fiscal Commission meetings of late June 2010 are not focused there. Instead, they are locked on the one sphere of American domestic policy that has been a substantial success over its history since 1935.

It is ironic — and infuriating — to have a debate in 2010 about Social Security when that program had nothing to do with the transformation of the nation’s fiscal policy from surplus to deficit since 2000. Two wars, Bush tax cuts, and the fiscal consequences of the economic crash of 2008-9 explain the size of the deficit. Why are we even talking about reducing Social Security at this time? It is not because there is a good rationale, but because of the money behind the rationalizers of a smaller government.

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Comments

horeth

Maybe if congress would stop using what should be a "trust" fund as a "slush" fund, there would be less to criticize. My generation doesn't expect to get a check, in fact, I don't want a check. Phase out the social security, medicare, and medicaid systems honorably before they make federal fiscal sustainability impossible.

Frank Katz

Maybe I'm a bit thick, but how do productivity gains enhance Social Security? It is a fact that the amounts contributed by any individual worker, at whatever level, do not pay for that worker's benefits. Therefore, there must be other workers, not currently collecting benefits, whose contributions will be used to pay benefits for that worker. Their productivity, i.e., the amount of profit that their employer can receive for their efforts, may raise their own pay, which, in turn, will raise their own ultimate benefit, but, once they are over the maximum salary on which Social Security tax is paid, will do nothing to help Social Security's financial position.

Pensiongeek

Social Security's looming problem is a cash flow issue. The "Social Security Trust Fund" is a collection of IOU's from the federal government. They may be called Treasury notes, but they still amount to an IOU from the government.

Historically, cash inflows from social security taxes have exceeded the cash outflows for benefits. The government spent the excess and gave the "Trust Fund" IOU's. Now, the number of workers per retiree has declined to the point where cash inflows barely cover the outflows. In a few years, the outflows will exceed the inflows. At that point, the government has to start repaying part of what they have borrowed over the years. The looming problem is where to get the cash to repay those IOU's.

If Social Security had been run like a company sponsored defined benefit plan, we wouldn't be having this discussion. Instead, there are no real assets set aside to pay for these benefits. If anyone other than the federal government was running Social Security, they would have been put in jail a long time ago for running a Ponzi scheme.

Another Actuary Speaks

When the resources to pay these benefits are all coming from taxes collected or from money borrowed in the capital markets, this has now become very interesting.
Ignore the fiction that the trust fund has assets; they can only be turned into cash payments by having some other party buy the investments. If the funds don't come from taxes transferred, they come from borrowing.
The taxes collected are not growing nearly as quickly as benefits to be paid. The year 2010 is the start of a long period where borrowed money will have to be used. This will have a continuing effect on the economy because it squeezes other borrowers out, suppressing construction, retail trade, autos, etc.

So you only get three choices here, and the compromise is to use some of each.
1. raise more taxes.
2. slow the rate of benefit payments.
3. borrow funds in the capital markets.

Don Levit

The trust funds represent the amounts available that can be used to pay benefits, without an annual authorization from Congress.
They provide a gauge on the solvency of the trust funds, much like providing a balance in one's checking account.
Focusing on the remaining balance, and when this balance may run out, is helpful in that, if this occurs, Treasury securities will have to be redeemed.
Actually, when expenses exceed receipts, not including interest, Treasury securities will have to be redeemed, which occurred in 2009.
However, the key point here, according to the Treasury Department, is not the trust fund balance, but what has been happening all these years, when the surplus has been accumulating.
According to "Issue Brief No. 4 Social Security Reform: Mechanisms for Achieving True Pre-Funding," "These surpluses increase the government's capacity to pay future benefits, only if they result in smaller amounts of public debt issuance that would occur if there were no surpluses. This is because reducing near-term debt increases the government's capacity to issue future debt to pay benefits when the trust fund bonds are redeemed. Running a Social Security surplus today would instead lead to more debt outside the trust fund that must be paid by future generations, leaving them with no net gain."
Has public debt been reduced over the years, commensurate with the surpluses in Social Security and Medicare?
Go to:http://www.treas.gov/press/releases/reports/ss_issuebrief_no.4.pdf.
Don Levit

Mary lou Ernest

Decreasing or taking it away sounds like a tax - guess we should have called it what it is if we don't receive it. Most people receiving it paid into it - they didn't have the option and now we want to decrease or take it away because it is an ENTITLEMENT.

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