Wednesday, May 20, 2009

Michael Lind weighs in again on Social Security

The other day I ran through some of the claims made by the New America Foundation's Michael Lind and, well, found them a bit wanting. (Sorry about the "lefty claptrap" line…) Since then, Lind has again written on Social Security and his arguments are typical enough of those you hear from the left that they're worth revisiting.

To start, Lind says:

Last Tuesday, just before the release of the annual Social Security trustees report, I predicted that no matter what the report contained the perennial enemies of America's most effective and efficient universal social insurance program would cite it as proof that Social Security needs to be means-tested, privatized or both. The report is in, and its contents are far from dramatic. The (dubiously) estimated date at which, absent changes, the trust fund dries up and Social Security shifts to a pay-as-you-go program paying most, but not all, promised benefits has moved up slightly from 2041 to 2037.

In the 2008 Report, Social Security's long-term deficit was 1.7 percent of payroll; in the 2009 Report, it's risen to 2.0 percent of payroll. By my math, that's an 18 percent increase. One would think that a nearly one-fifth rise in the deficit would be at least worth mentioning.

Next, Lind says:

The "unfunded liabilities" argument is … only applied to programs that, like Social Security and Medicare, are paid for by a dedicated tax like a payroll tax. The projected gap between future revenues and future outlays from this special-purpose tax is the "unfunded liability." Why do we never hear of the "unfunded liabilities" of Pentagon spending -- the third of the big three spending programs (Social Security, Medicare, defense) that take up most of the federal budget? Defense spending comes out of general revenues, not a dedicated tax.

A couple points: one reason Social Security has a dedicated tax was to wall it off from the rest of the budget. So long as it's adequately funded, Roosevelt reasoned, it would be very hard to cut the program's benefits. Fine. But the same holds true on the negative end: if the program is supposed to be self-financing, then any shortfalls are reported. I'm not sure what the problem is with that, unless Lind disagrees with how Roosevelt established the program. Second, defense spending is largely done on a year-to-year basis; at most, the government pays for a ship today that it won't receive for several years. Social Security, by contract, taxes you from the day you begin working and upon those taxes incurs an obligation to pay you benefits until you die. The 75-year reporting horizon was chosen for exactly that reason: to span the typical life of an individual entering a program, to let him know the sufficiency of the program's funding to the approximate maximum age he might live. (I can probably find this explicitly stated somewhere in the Trustees Report if needed.)

Next, Lind tackles the trust fund debate:

Cato's [Michael] Tanner does concede that the Social Security Trust Fund will pay benefits until 2037. He claims, however, that "that figure is misleading, because the Trust Fund contains no actual assets. Instead, it contains government bonds that are simply IOUs, a measure of how much the government owes the system." So government bonds backed by the full faith and credit of the U.S. government, a government that has never defaulted on its obligations in its entire existence since 1776, are not actual assets?

Imagine you're a taxpayer and you're offered two possible options: first, the trust fund is filled with U.S. Treasury bonds. When Social Security starts running deficits in 2016 it redeems those bonds and to finance the redemption the government raises your taxes, cuts other programs or increases the deficit. What this points to is that the trust fund, while an asset to Social Security, is an equal and opposite liability to the Treasury – and to you, the taxpayer. Now imagine instead that the Trust Fund held, say, Canadian government bonds. Come 2016, it's our friends up north who have to raise taxes, cut spending or run a deficit. This is the point people on the center and right make about the trust fund: not whether it will be paid back, but how. The trust fund is an asset to Social Security, but it's not an asset to taxpayers.

Next, Lind moves to reform options:

[E]ven when the trust fund runs out and Social Security becomes a pure pay-as-you-go system… lifting the cap on the amount of income subject to the payroll tax would eliminate that problem forever. In other words, the contract between elderly Americans and the rest can be honored in half a century by slightly higher taxes that would fall chiefly on much richer Americans in a much richer America."

Unfortunately, this really isn't the case. Even if we eliminated the payroll tax ceiling in 2037 – something that would radically change the nature of Social Security as originally designed – and if we didn't pay any additional benefits in exchange for the extra taxes – another blow at Social Security's founding ethos – the program wouldn't even be solvent in 2037, much less forever. That is to say, Lind's proposed tax increase, which would raise the top marginal tax rate by 12.4 percentage points, by the by – wouldn't even cover the deficit in that year.


JG said...

one reason Social Security has a dedicated tax was to wall it off from the rest of the budget. So long as it's adequately funded, Roosevelt reasoned, it would be very hard to cut the program's benefits....~
FDR's words on the reason for the payroll tax: to put SS "out of the Treasury forever".

Since FDR put SS out of the Treasury, it as been the "third rail of politics" for one and only one reason: it has its own dedicated source of funds, separate and apart from general revenue.

Now, what does Lind imagine is going to happen if his thinking, that SS should go back into the Treasury and be treated as a general revenue obligation, like Pentagon spending....

"Why do we never hear of the "unfunded liabilities" of Pentagon spending...~
... is actually applied? What will happen is that, to get each and every very valuable general-revenue income tax dollar amid the great shortfall of circa 2030, SS will have to compete with the Pentagon ... and not just the Pentagon, also with the Agriculture Department, the Education Department, Health advocates, Housing advocates, Welfare advocates for the truly poor ... work your way through the alphabet, down to the Zoological Societies of America.

Every single one of those groups will have its lobbyists running to Congress in full force and its PR agents all through the press going: "Why, oh why, are we taking money from family farmers, from children and their schools, from health care, from the poor, from national defense, from the space program, from ... our last-chance plan to save the endangered polar bears, to pay SS transfers to THE RICH, and to let well off middle-class boomers retire early to sail off on their yachts? Means test Social Security! Delay the retirement age further!..."~
Third rail of politics no more! Does Lind fantasize SS is actually going to win that fight? (After benefits were already cut and made taxable to reduce a much smaller funding shortfall in 1983?)

These hard-line denialists like Lind are actually dooming SS as they know it by getting people to believe it has no real problem to deal with.

If I was the left's fantasized "Karl Rove, Evil Political Genius" and I was out to destroy Social Security as we know it, this is exactly how I'd do it. "Hmm, there's no way to destroy Social Security today by frontal assault, it's too popular with today's masses. So I'll put Michael Lind, Dean Baker and Paul Krugman on my payroll, and order them to convince everybody that everything is just fine with it, hunky dory, the Trust Fund will pay for itself, there's no real problem to deal with, so nobody will do anything about it ... until the roof caves in on it. Heh, heh, I can wait!"

The thing I don't understand is why these guys, who claim to want to preserve SS "as is" forever, don't see this. Are they so ideologically blinded that they can only visualize the future of SS through the rear-view mirror? Or maybe they do see the future, but their first priority is to use SS as a political issue to hold the left alliance together in the next election, always no more than two years away, so they are cynically willing to adopt this pose, at the cost of deep-sixing the future of SS that they are pretending to protect?

James said...

Second, defense spending is largely done on a year-to-year basis; at most, the government pays for a ship today that it won't receive for several years.


The comparison with defense spending by Lind is absolutely inane. You're right, defense spending has a limited horizon. Secondly, programs can and are cut all the time, as we're witnessing right now. A priori, there is nothing other than lack of political will and the conflicted relationship between lawmakers and industry that prevent the budget from being cut in half in five years (fyi, we outspend the rest of the world by far in this area).

Social security is a completely different creature, and Lind confuses the discussion occasionally with off the wall commentary.