I agree with Paul Krugman on this:
The bigger problem for those who want to see a crisis in Social Security’s future is this: if Social Security is just part of the federal budget, with no budget or trust fund of its own, then, well, it’s just part of the federal budget: there can’t be a Social Security crisis. All you can have is a general budget crisis. Rising Social Security benefit payments might be one reason for that crisis, but it’s hard to make the case that it will be central.But those who insist that we face a Social Security crisis want to have it both ways. Having invoked the concept of a unified budget to reject the existence of a trust fund, they refuse to accept the implications of that unified budget going forward. Instead, having changed the rules to make the trust fund meaningless, they want to change the rules back around 15 years from now: today, when the payroll tax takes in more revenue than SS benefits, they say that’s meaningless, but when - in 2018 or later - benefits start to exceed the payroll tax, why, that’s a crisis. Huh?
The Social Security Trust fund is irrelevant; we do not have a Social Security problem, we have a general fund problem. (I also think that we should roll the payroll tax into the general income tax, while levying somewhat higher bottom rates, but that's a different rant). I also agree that it doesn't start in 2018; it starts much earlier, in the early part of the next decade, when the revenues from the payroll tax peak, and other taxes have to be raised to pick up the slack.
But I disagree about this:
Now it’s true that rising benefit costs will be a drag on the federal budget. So will rising Medicare costs. So will the ongoing drain from tax cuts. So will whatever wars we get into. I can’t find a story under which Social Security payments, as opposed to other things, become a crucial budgetary problem in 2018.What we really have is a looming crisis in the General Fund. Social Security, with its own dedicated tax, has been run responsibly; the rest of the government has not. So why are we talking about a Social Security crisis?
We will have to find something in the neighborhood of an extra 2% of GDP to cover Social Security. That doesn't sound like much . . . but if you make $50,000 a year, that's an extra $1,000 a year in taxes. For most families I know that make that kind of money, cutting extra $1,000 a year from their budget is a pretty big deal.
Looked at in the context of the federal budget, it's an increase of about 10% of the budget to spend on one program. That, again, is kind of a lot.
I think the budget problem is ugly-but-manageable, however. The real problem is structural: Social Security discourages labor force participation among both younger workers and retirees. Every time the payroll tax gets raised, you give workers incentive to move into the informal sector. And of course, defined-benefit pensions encourage workers to retire as early as possible. Given that seniors tend to consume highly labor-intensive services, that probably means a decline in their living standards, and ours.
The other problem is precommittment--retirement programs are hard to reform on anything less than a 20-30 year time scale. So while the next administration can repeal tax cuts rapidly, whatever you do to Social Security will endure for decades. This introduces a lot of rigidity into the government.
"This introduces a lot of rigidity into the government."
Um, like, "If you want to prepare for your retirement, you need to start planning for it when you're 35 or 45. This introduces a lot of rigidity into your life."
"Introduces" is the wrong word. "Acknowledges" is a lot better. As in: "acknowledges reality."
Isn't the real problem that the whole basis of Social Security as anything but a redistributive tax was a lie to begin with?
Sorry, Megan, but The Krug-man is right. We have (and have had) a huge budgetary fiasco on our hands since, basically, Reagan. I remember when raising the debt ceiling to a trillion was a big deal -- now it is at, what? Ten trillion? And we're worried about SS? It is so fucking dishonest.
"Isn't the real problem that the whole basis of Social Security as anything but a redistributive tax was a lie to begin with?"
I don't know. I seems to have a lot of the features of a "pay as you go" pension plan. Assuming a stable demographic base, this wasn't exactly a ridiculous idea.
Of course, with the "baby boom" demographic shift things are looking problematic.
But the idea, itself, wasn't that crazy -- a government pension plan should be less susceptible to theft or bankruptcy, for example.
Krugman appears to conveniently forget, or willfully ignore, the origins of the Unified Federal Budget. While the first UFB was the FY1968 budget (Nixon's first year), that budget was created in CY 1967 (LBJ's last year) to "cover" the deficits of LBJ's "guns & butter" budget.
What exactly are the implications of a unified budget?
"Having invoked the concept of a unified budget to reject the existence of a trust fund ..."
I don't understand this part. The trust fund doesn't exist because it consists of meaningless "debts" that the government owes to itself, not because someone has "invoked the concept of a unified budget." The rest is true, to be sure; Social Security will soon become a big drain, but Medicare and probably other things, too, will be a lot worse.
Alan Gunn is correct- the unified budget is not just a concept, it is the reality. It is a bit amusing that Krugman doesn't seem to really understand this fact. And I will point out that this reality did not start with the 1967 budget, it has been the truth from the very beginning of SS.
I don't know. I seems to have a lot of the features of a "pay as you go" pension plan. Assuming a stable demographic base, this wasn't exactly a ridiculous idea.
Right. One worker puts in 40 years at 100k, and the other puts in 10 years at 20k, and both get the same benefit. Seems like redistribution to me.
Black male, life expectancy 70 years.
White female, life expectancy 81 years
Seems like redistribution going on there too.
secret asian man,
When SS was structured, with an age 65 full retirement, the average life expectancy of black males was less than 65. Redistribution or discrimination? Remember, we're talking about Saint FDR and his "band of merry persons" here.
There need to be a big expansion of affirmative action programs to bring different races back to parity on a wide range of indicators.
For example, the rate of incarceration of whites is way too low, so preferential treatment needed to give them conviction rates that equal blacks need to be applied by the judicial system.
Similarly, life expectancies of whites are just too high, so there must be programs to bring them back in line by reducing the availability of life prolonging treatments like pacemakers.
Something else also need to be done about these Asians that are flooding universities and crowding out everyone. Measures are needed to reduce their test scores to ensure that university places are not monopolized by one group.
Then there are these Hispanics who have become so numereous that they are now imposing severe social costs like having to choose service in English or Spanish at ATMs, customer service lines, etc. Hispanic languages must be banned in homes and the population of speakers are dispersed to ensure that opportunities for English speakers are equalized.
2 points:
1. the SS benefits formula, while it is weighted toward the low end (it is social security), pays several times as much monthly to someone at the maximum benefit level as it pays to someone at the minimum.
2. Those who receive benefits spend them for current goods and services which will not be available to those currently working. It's a question of allocation of resources. How much goes to those working or otherwise receiving income versus those receiving SS benefits? Excluding the rest of the world, you maximize the total by increasing economic growth in the US. The rest of the world owns more chits on US then we on them increasingly and their demographics are mostly worse then in the US. It's unlikely they are going to save us.
Most of the discussion of the SS funding problem is about some other agenda.
"This introduces a lot of rigidity into the government."
Um, like, "If you want to prepare for your retirement, you need to start planning for it when you're 35 or 45. This introduces a lot of rigidity into your life."
"Introduces" is the wrong word. "Acknowledges" is a lot better. As in: "acknowledges reality."
Posted by praxis | March 29, 2008 11:30 AM
Isn't the real problem that the whole basis of Social Security as anything but a redistributive tax was a lie to begin with?
Posted by Charlie (Colorado) | March 29, 2008 12:01 PM
Sorry, Megan, but The Krug-man is right. We have (and have had) a huge budgetary fiasco on our hands since, basically, Reagan. I remember when raising the debt ceiling to a trillion was a big deal -- now it is at, what? Ten trillion? And we're worried about SS? It is so fucking dishonest.
Posted by John McCain: More of the Same | March 29, 2008 12:12 PM
X2
I'd like to say a few words in favored of dedicated taxes. Polls show the American people are wildly ignorant about what the government spends money (e.g. foreign aid is often believed to be one of our primary expenses). Dedicated taxes help solve this problem and allow voters to make fair evaluations of programs (e.g. do I like the prospect of Social Security benefits more than I dislike payroll tax?).
Megan's comment that the trust fund "is irrelevant" is only partly true. It is irrelvant to financial standing of the government as a whole. But it is not irrelevant to the question of which revenues get increased and which expenses get cut over the coming years.
By law and by public promise, we have committed to Social Security as a dedicated tax stream. As a political reality, we will honor that commitment and meet the general fund shortfalls through cuts in other programs / increases in other taxes.
Megan also suggests that payroll tax increases give "workers incentive to move into the informal sector." Is the payroll tax worse than other taxes? I'd say less bad - it's not a high marginal rate and the taxes you pay increase your expected future benefit.
The early retirement issue is partly addressed by the flexibility Social Security offers on how soon to retire.
Finally, the long-run SS deficit is 1.1% of GDP. By contrast the Bush tax cuts are about 2% of GDP. I think I know which is closer to voters hearts, but I'd be happy to see a campaign run on the issue.
Tom
Re: The real problem is structural: Social Security discourages labor force participation among both younger workers and retirees.
Retirees I can see. But younger workers? How does that happen? Unlike retirees they don't generally have alternate sources of income and have no choice but to work.
Re: And of course, defined-benefit pensions encourage workers to retire as early as possible.
A problem that's solvable by raising the retirement age. And by the way, insofar as Social Security does not provide anything beyond a subsistence income a great many older people are working well past the retirment age. The early retirment people are generally those with additional sources of retirement income (and healthcare), not the poor schleps who only have Social Security, many of whom will have to work until the drop in the traces. Maybe we should ban 401ks if we want people to stay in the labor force.
Re: One worker puts in 40 years at 100k, and the other puts in 10 years at 20k, and both get the same benefit.
That not how Social Security works at all. Higher paid workers get a bigger check than lower paid workers.
"Having invoked the concept of a unified budget to reject the existence of a trust fund ..."
The government spent away the social security trust fund. The only theory needed to establish that is the Law of Unconservation of Money: once you spend it, it's gone. Why anybody takes Krugman more seriously than, I don't know, James Carville, is a mystery.
The real problem is . .
There isn't a problem. This is a blessing in disguise. Spending on other social programs will shrink to cover the psuedotrust fund payouts to the retired. No other result is politically possible.
That isn't a bad thing. Americans would be more free today if the government flushed the money they took from us down the toilet rather than spend it trying to regulate our lives, "help" us every time we run up against life, and other wise turn us into helpless children who can't help ouselves. If this is going to force the federal government to strip itself down to social security and defense and kick the rest of the social engineering back to the states or kill it off, then I see a very bright silver lining to this cloud.
"Every time the payroll tax gets raised, you give workers incentive to move into the informal sector. And of course, defined-benefit pensions encourage workers to retire as early as possible."
You should probably research this. It does not at all match my experience of the real world. By "informal sector" you mean working under the table right? So like I'm working as a dental hygenist and they rasie the payroll tax so I.... go stand in a vacant lot and wait for someone to drive by needing their teeth cleaned?
cw,
The underground economy, the part not reported to the IRS is variously estimated to be 10-15% of GDP. The incentive to work on a cash basis with no records is quite large- you can evade all taxes and other state-mandated employment costs. The key feature of payroll taxes is that they apply to the first dollar of wages, whereas net income taxes don't effect everyone. Any increase taxes will, of course, increase this incentive, thus increasing the frequency at which it occurs.
Of course, not everyone working is immediately in such a position to do this (it takes cooperation between the employer and the employee), but I could easily imagine there are single proprietorship dental practices out there employing hygienists on a cash basis, with no reporting of income to the IRS.
See the latest Trustee's Report, the balance of the OASDI program never exceeds more -1.44% of GDP not -2% as you suggest. BTW the GDP is expected to be $465 trillion dollars in 2085. So it makes a BIG difference :-)
Yancey,
Are you arguing payroll taxes have a greater dead weight loss than regular income taxes? That a flat rate has more dead weight loss than a increasing marginal one?
Tom
I agree with Krugman. But there's one thing I never hear talked about. The reason the trust fund is "empty" is because the money was spent by the government. This gave the people alive at the time more government services for less money than they were paying. The solution here seems simple - cut the amount of government services they get later to match. This means cutting the social-security payout.
It's basically like the Baby Boomers spent their retirement money during their 20s-50s, and now they want us to give them MORE money in old age to make up for that. (It's ironic that the problem Social Security was instituted to correct - i.e. spending your retirement savings while you're young - is the same problem the program itself ran into.)
Social Security and other social-benefit programs are indeed redistributive taxes. oooohhhh...scary boggieman stuff. These programs appease those who build and maintain the common infrastructure and provide the human resources for those at the top to become increasingly wealthier. It is the bauble and twaddle that keeps us from asserting a true democracy; demanding a return proportionate to investment in the common weal. Social Security was created with a retirement age of 70, yet the empowerment of the illiterate who can be persuaded to hate almost anyone, has resulted in the pop disparagement of all social programs as anathema to the children and grandchildren of the people whose very existence depended upon them for survivial.
I doubt anyone here is sending back their checks. Where is the clamor to reform the obscene corporate welfare? Antitrust laws? Increasingly offensive unaccountability? If the corporate citizens were held to the standard of the legal citizen upon which they exist, we wouldn't be having this discussion.
I wish each of you well and may you have a great day.
CW: Don't you have friends, neighbors, and relatives without dental insurance who'd like their teeth cleaned for a discount for paying cash?
Admittedly, most of them will also prefer that your work be backed up by a real dentist that can do something about problems besides food remains and tartar on their teeth. Too bad you didn't become an auto mechanic or plumber instead... Or for that matter, a dentist, so you could pocket the cash from cash customers, pay the hygienists, clerks, and bills from the insured customers, and report very small profits to the IRS.
Tom G,
The answer to your question is no. All I am pointing out is that evading the payroll tax is an incentive to work on a cash basis for everyone, whereas the income tax is not since those at the lower levels of income do not pay net income taxes.
Re: The incentive to work on a cash basis with no records is quite large- you can evade all taxes and other state-mandated employment costs.
Very few people make enough money in the underground economy to qualify as middle class, and there very few skilled, professional jobs available in it. Most "under-the-table" work is minimum wage grunt work. For people who are middle class (even at the low end) the loss of wage and benefits they would suffer by moving into the underground economy utterly dwarfs any tax benefit they might enjoy.
JonF,
Mostly, you are correct. However, there are still a lot of middle class, single proprietors who evade a lot of taxes by working for cash. I know this because I have dealt with quite a few over the years that preferred to be paid in cash for services rendered, often giving me really good discounts as an enticement. I didn't ask questions, but knew what they were up to.
"It's ironic that the problem Social Security was instituted to correct - i.e. spending your retirement savings while you're young - is the same problem the program itself ran into."
Ironic only if one expects people to act more responsibly when acting in a collective than individually. Given my general observation of behavior, I rather think that it was predictable all along and is a sound argument for returning the responsibility for retirement planning back to individuals.
Re: Mostly, you are correct. However, there are still a lot of middle class, single proprietors who evade a lot of taxes by working for cash.
Yep, but they are serious risk of getting caught (unlike the cash-paid busboys and lawn-mowing guys) since th government starts to pay attention to things at this level. A friend of mine a few years ago got slapped with a ghastly bill for back taxes when the IRS discovered that he had not paid his taxes from his IT contracting days for several years.
JonF,
Yes, you can get caught, especially if you are greedy and stupid. To get away with it, I imagine the smart ones report some income, and spend the cash on consumables.
The higher amount you earn yearly for 35 years is the amount they use to decide the amount of Social Security you will draw. So those who don't work long, do not get much of a benefit at all.
Social Security is given bonds for the loans to the government. Legally, that is the only way Social Security can be loaned, because it is the law.
Those bonds have to be honored.
The powers that be are trying to make a crisis out of Social Security in order to destroy it.
They never mention the deficit and the millions in interest that we are racking up on it.
People are only living 2 years longer than they did when Social Security started. We allowed for that in 1983, when the government added two years to the retirement age. It is gradually being raised. Full retirement age now is 65 and 10 months if you were born in August of 1942.
It seems like as long as we have paid it in, 45 years by the time we retire, that we should get our benefits.
Full retirement should be left alone. Some will want to work until they are 70 and some need to retire at 62. Let them decide. My husband was laid off at 65 and had to take Social Security. It is hard to find a good job when you are 65.
The higher amount you earn yearly for 35 years is the amount they use to decide the amount of Social Security you will draw. So those who don't work long, do not get much of a benefit at all.
Social Security is given bonds for the loans to the government. Legally, that is the only way Social Security can be loaned, because it is the law.
Those bonds have to be honored.
The powers that be are trying to make a crisis out of Social Security in order to destroy it.
They never mention the deficit and the millions in interest that we are racking up on it.
People are only living 2 years longer than they did when Social Security started. We allowed for that in 1983, when the government added two years to the retirement age. It is gradually being raised. Full retirement age now is 65 and 10 months if you were born in August of 1942.
It seems like as long as we have paid it in, 45 years by the time we retire, that we should get our benefits.
Full retirement should be left alone. Some will want to work until they are 70 and some need to retire at 62. Let them decide. My husband was laid off at 65 and had to take Social Security. It is hard to find a good job when you are 65.