If You Really Care About Social Security, Stop Capitulating to the Left

By Stephanie Kelton

I woke up this morning expecting to spend the better part of the day writing letters of recommendation for Ph.D. students. Then I came across an e-mail message that had been posted to a list serve that is read by many progressive (some might say “radical”) economists. The subject line read: DEFEND SOCIAL SECURITY so I took the time to read it.

Its author was outraged by the recommendations coming out of President Obama’s “bi-partisan” deficit reduction commission, which he characterized as “disgusting” and something that should “be fought as hard as possible.” Then, having urged “credentialed economists” to “take the fight” to the airwaves, newspapers, Internet, etc., he drew my ire and derailed my morning plans (sorry students) with the following tactical proposal:

“[I]t sometimes is necessary to defend incremental reforms when they’re under attack.”

Allow me to suggest an alternative approach, one that actually would be “radical” and therefore appealing to a self-proclaimed radical: Let’s start telling the truth about Social Security. We are not (or should not be) patsies for the Democrats (or any other political party or organization). We are educators. So let’s educate people on the basic facts.

Fact #1: Social Security is not “broken.” It is not “going broke.” It will, as Eisner told us more than a decade ago, “be there” as long as we protect it from its so-called saviors.

References:
Eisner, Robert. “Save Social Security from its Saviors”, Journal of Post Keynesian Economics, Vol. 21, No. 1, Fall 1998). This is, in my view, the most honest and concise essay on the subject.

Bell and Wray. “Financial Aspects of the Social Security ‘Problem’”, Journal of Economic Issues, Vol. 34, No. 2, June 2000.

Fact #2: The balance in the Social Security Trust Fund is absolutely irrelevant when it comes to the government’s ability to make payments, in full and on time – today, tomorrow and forever.

References:
Eisner (again) who said, “Accountants can just as well declare the bottom line of the funds’ accounts negative as positive – and the Treasury can go on making whatever outlays are prescribed by law”.

Bell and Wray again.

Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.” (1997)

Greenspan: “I wouldn’t say that pay-as-you-go benefits are insecure, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase” (2005)

Social Security isn’t broken. It doesn’t need to be “fixed”. Why on earth would we play along with this charade in order to give cover to the Democrats? Doesn’t anyone remember 1983? For anyone who doesn’t, that was the last time we saw “incremental reforms” of the kind many “progressive” economists support. As a result of those reforms, today’s workers are contributing more and retiring later. And for what? Those reforms were supposed to make the system solvent for 75 years. Now, here we are, less than three decades later and it’s still “broken”? And we’re supposed to defend further, incremental cuts?!

I guess it sounds like a small price to pay. An added year to two before retirement, a small hike in the payroll tax, a modest reduction in the cost-of-living adjustment. Whatever. Worth it to “DEFEND SOCIAL SECURITY” according to some. But just look at the impact of one of these so-called “incremental reforms”, taken from a paper I wrote in 2005:

Benefits promised to an average wage earner who retires in 2050 are a full 69% higher than the benefits that were paid to the average retiree in 2004. Republicans argue that these increases are too substantial and that the system promises a full $5,600 more than it can afford to pay to retirees in 2050. To deal with this problem, [they] call for a change in the way future benefits are calculated. If the President succeeds in redefining the formula, the “bend points” will be calculated using an inflation index instead of the current wage index.

At first glance, this might seem like a relatively innocuous adjustment. After all, the historical trajectory for prices is also upward, so benefits will still tend to increase over time. But prices tend to rise more slowly than nominal wages – over the long run – so benefits would increase less rapidly under inflation- indexing.

To see the full impact of switching to inflation indexing, consider the benefits that would be due to a hypothetical 20 year-old worker who enters the labor force in 2005, earns the average wage throughout her working life (roughly $36,500) and retires at age 65 in 2050. Using Congressional Budget Office (CBO) projections, she would be scheduled to receive benefits of roughly $22,000 (in today’s dollars). Thus, under the current system, she would receive $459,800 in guaranteed benefits over the course of her retired life (estimated at 20.9 years).

Now consider the impact of indexing to inflation rather than nominal wage growth over this same period. During the relevant period, the CBO projects that nominal wage growth will outpace inflation by 1.2 percent (i.e. real wages will grow at 1.2 percent). With the “bend points” indexed to inflation beginning in 2009, this worker will lose 1.2 percent of her scheduled benefit in each of the 39 years (2009 to 2047) included in her benefit calculation, leaving her with only 62.8 percent of her scheduled (2050) benefit. This amounts to a reduction of $8,184 in her annual benefit (0.628 x $22,000), which translates into a $170,000 reduction over the course of her lifetime!

So there you have it. Incremental reform? I doubt the twenty percent of retirees who rely on Social Security as their only source of income would agree. (Or the 60 percent who rely on it as their primary means of subsistence in retirement.)

Funding Social Security is always and everywhere a political choice. The strongest evidence of this comes directly from the 2009 Annual Report of the Trustees. In that report, they predict gloom and doom for Social Security because “there is no provision in current law that would enable full payment of benefits, once the Trust Funds are exhausted”.

In contrast, the Supplementary Medical Insurance (SMI) Trust Funds are “both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.”

It is that simple. The former is in ‘trouble’ because the government isn’t committed to making the payments, and the latter gets a clean bill of health because the government will always make the payments.

It does not take courage to rally around the liberal mantra (Obama, Reich, Baker, Krugman, etc.) regarding ‘entitlements’ and ‘tough choices’. It takes courage to speak out against it.

18 Responses to If You Really Care About Social Security, Stop Capitulating to the Left

  1. So then, on account of the fact that I am still learning how to think like ya'll do, let me ask: Should SS/FICA tax collections discriminate between sources of income (wages, rents, capital gains, etc.)? Should SS/FICA tax collections be capped at some max income?

  2. Yeah, you're right.

  3. Dave,If you want to think "like we do," then we'd probably argue that SS/FICA taxes should be eliminated.Best,Scott Fullwiler

  4. So, lets repeal the payroll tax. Since they can go on making payments without it, we can end this regressive tax on the working poor and still have all the benefits.The Weimar Republic didn't go bankrupt either.

  5. I'm baffled by your repeated reference to "the Democrats." It isn't Democrats who are demanding cuts to Social Security benefits or increasing the eligibility age; it's Republicans. Well, OK, Bowles, one of the co-chairmen of the Catfood Commission is nominally a Democrat, but he has exposed himself as the most radical of Blue Dog ConservaDems. The Democrats have been proclaiming for the last four years exactly what you've argued in this column. Where have you been? Writing letters of recommendation?

  6. Roger,My memory isn't too good. Remind me — who set up that Catfood Commission? I think it was the same guy that campaigned on the promise to "make tough choices" regarding our nation's "entitlement" programs. The same guy also promised to "cut the deficit in half by the end of 2012" by tackling these "unsustainable" programs because the US has "run out of money". Let me sleep on it . . . I'm sure it'll come to me. As for the rest of "his" party, there is every reason to believe that many of them will make concessions to the so-called reformists (again). Have you heard a single one of them stand up and declare that Social Security isn't broken? No, because as President Clinton told Robert Eisner years ago, "This is politics."On this issue anyway, I've got far more faith in Tea Party victor Bobby Schilling (R-IL), who, when pressed on the issue of entitlements and the Commission's recommendations, simply said, "With full employment, most of these problems go away anyhow."

  7. tz,Thank you for demonstrating you have no idea what you are talking about.best,Scott Fullwiler

  8. Professor -You scared me with your title. The people you mentioned I hardly would consider left. They are just a different sect of a flawed religion. It is difficult arguing for saving and strengthening of social security when those on your side are willing to concede incremental changes. But the arguments and advocacy must continue. You are right to speak out against this thinking. We may not achieve the understanding and change that we seek in our lifetime but the seeds have been planted. And for that I thank you.

  9. "The people you mentioned I hardly would consider left."The Left = those who remain after the Deluge:)

  10. "On this issue anyway, I've got far more faith in Tea Party victor Bobby Schilling (R-IL), who, when pressed on the issue of entitlements and the Commission's recommendations, simply said, "With full employment, most of these problems go away anyhow." "That does not mean, and I have no faith, that he endorses government as employer of last resort. If he does, then I am wrong and should find a Tea Party to attend.Thanks, everybody, I've got more to think about…Comrade Raithel

  11. Stephanie, thanks for the great article. Being taxes are technically not necessary to make federal payments, it seems to be a complete waste of time for the government to be using so many resources figuring out "how" they are going to pay for SS etc.

  12. Great post. It's amazing to me that any "serious" proposal on the debt always ends up focusing on social security. Our current and long term debt is almost entirely the result of rising health care costs and defense overcommitments. Social Security is the one major piece of government spending that isn't bankrupting us.

  13. Tanzarian, But the point is, we're not going "bankrupt." We can't and won't because the government can change the numbers in the bank accounts or print the money. We may want to reduce deficits and the debt to reduce inflation and depreciation of currency, but the government can't go bankrupt, no matter how much it spends or how big its deficits get.

  14. "It isn't Democrats who are demanding cuts to Social Security benefits or increasing the eligibility age; it's Republicans."Apart from Bowles, there are 8 other Democrats appointed to the Commission by Obama. At lease 4 of the 8 are Blue Dogs who may be open to cutting entitlements. Also, many Ds in Congress have refused to sign pledges refusing to cut SS or entitlements more generally. They're keeping their options open.At this point, I doubt that the Catfood Commission will carry the day now, because I think Pelosi won't allow any cuts to SS to come to a vote. However, we can't delude ourselves into thinking that it's only Republicans who want to cut entitlements. Far too many Democrats have bought the idea that we have a long-term deficit/debt problem that is threatening the economic future of the US.It's all a fable, of course. But a lot of these folks are really ignorant and they think the Government is very like a household when it comes to budgeting.

  15. @ tz,You are right, we should repeal payroll taxes. They are unnecessary for the finance of the social safety they provide, and their repeal would have an immediate positive effect on demand. Not to mention, their repeal would have a positive effect on investment, because their absence in future periods would signal to the business community that consumers will have more disposable income to spend on their products. The repeal of payroll taxes also gives a little breathing room to businesses in terms of wage determination, since their portion of the payroll tax is no longer required as well: they can either hire more workers, raise the wages of current workers, purchase more capital, or retain more profits. In each case, this stimulates aggregate demand.But, your sarcasm is not lost on me so I feel compelled to respond. The inflation of the Weimar Republic is completely inapplicable to the US for so many reasons it's exhausting to think about. Luckily for you I'm chock full of energy so I'll list them in full.It will be useful to you, or anyone reading this exchange, to keep the following "litmus test" in mind when attempting to compare consequences of US public finance / expenditure to that of the Weimar Republic. Restated, simply ask yourself the following list of questions. If you answer no to any of them, then throw the Weimar Hyperinflation story in the garbage, and start from scratch with a new approach to deficit hysteria:Q1: Has the US recently been sanctioned with reparations by external creditors?A1: No. Unlike Weimar Germany, the US did not recently lose a "war to end all wars." We did not experience the wastage of most of our industrial capacity do to a protracted land war in North America. A body of international creditors have not levied a payment in terms that are not denominated in our domestic currency, at a level that is beyond our real capacity of output. We have not signed a treaty that has binded us, legally, to not rebuild our industrial plant. Q2: Have the users of the US currency ($$$) any reason to believe that the US Treasury will default on its obligations?A2: No. Unlike Weimar Germany, the US has a stable set of institutions that have a long history of creditworthiness. From its inception, the US has never missed an interest payment on its debts outstanding. In contrast, post Versaille Germany was comprised of a new set of institutions, that from its inception was under tremendous political stress. The Weimar system that replaced Imperial Germany was thought to be short lived, so the debts of that political system never established the convention of faith that is characteristic of US debts.Alright, so I've only listed two questions. But, the exercise is designed to get you think about what differences exist between two countries and whether certain analogies extend to the general case or not. The US is not subject to the conditions that produced the hyperinflation of Weimar Germany, nor the more recent example of Zimbabwe. We have a fully intact industrial system; our debts are denominated in our currency.If the analogy did hold, then this post would probably not be about social security. In fact, I doubt the capacity to engage in this form of communication would even be available.

  16. The problem is one of semantics…the destruction of SS has been a right wing wet dream since reagan took office…the culprit is the prevailing right wing ideology called neoliberalism aka reaganomics aka corporate welfare and war. reagan, bush 1, clinton, bush 2, were all neoliberals and now it seems that obama is also

  17. Great article we need more that like this that clearly dispel the repeated myths about the Fed being about to fund SS.