Monday, May 12, 2014

The Social Security Dog Whistle

Progressives like to claim, as Senate Majority Leader Harry Reid has said, that “Social Security has contributed not a single penny to the deficit. So we can talk about entitlements as long as you eliminate Social Security." AARP CEO Barry Rand claimed, "The fact is, Americans pay for Social Security, and it hasn't added one dime to the deficit."

As I explained at Real Clear Markets, this argument isn’t just wrong, it’s basically a BS line used to pretend that we don’t need to make the tough choices required to fix Social Security.

But you don’t need to take my word for it: former Treasury Secretary Timothy Geitner, in his new book Stress Test, recounts being asked to parrot the “not a dime” line for the Sunday talk shows. To his credit, Geitner refused:

“I remember during one Roosevelt Room prep session before I appeared on the Sunday shows, I objected when Dan Pfeiffer wanted me to say Social Security didn't contribute to the deficit. It wasn’t a main driver of our future deficits, but it did contribute,' he says. 'Pfeiffer said the line was a 'dog whistle' to the left, a phrase I had never heard before. He had to explain that the phrase was code to the Democratic base, signaling that we intended to protect Social Security.”

The problem is, this “dog whistle” also signals to everyone else that you’re not committed enough to entitlement reform to give it to people straight.


JoeTheEconomist said...

What is the point of making the distinction between a unified budget or the on-budget budget when neither uses anything close to actual accounting standards?

Social Security increases the cost of domestic production - that hurts jobs and income taxes. SS encourages people to retire earlier (a point you have made in the past). Social Security adds to the deficit, but whether it appears on-budget or in a unified budget is a pointless discussion when it treats payroll taxes as revenue and ignores the cost of future benefits associated with that revenue.

Social Security has been adding to the deficit since the ink was dry on the first check ever collected.

Arne said...

How can SS contribute to the deficit when it is not allowed to spend more than it takes in?

Andrew G. Biggs said...

Arne, Read the article I linked to. OASDI can't spend more than it takes in on a PV basis over time, but that doesn't mean it can't contribute to (or reduce) the deficit at any given time. Back when the system was running payroll tax surpluses, it was common to hear that those surpluses reduced the deficit (which they did, in the most common measures of the budget deficit). But once payroll tax surpluses turn to shortfalls, the opposite occurs.

WilliamLarsen said...

Social Security and Medicare Payroll tax increases in from 1937 to 1972 were responsible for the Earned Income Tax Credit (EIC). Congress concluded that low wage earners were hurt more by the payroll tax increases and compensated them with the EIC. If there were no payroll tax there would be no need for the EIC. The EIC has added well over $1 Trillion including interest to the national debt since 1973.

We can also look at the effect on US Savings. During the 50's and 60's the perception when looking at US Savings rate was that the payroll tax was a type of national savings. It was common to add the payroll taxes paid to the savings rate. However in the 70's after years of negative cash flow for Medicare and Social Security this was deemed to be an illusion and the practice was stopped. Not long after this, economists began forecasting the US savings rate was dangerously low. Congress created the 401K and IRA, both pre tax savings. This reduced federal income tax revenues further.

We could also look at the payroll tax as reducing savings across the board, making it more difficult to save for college, put 20% down on a home, pay for healthcare and save. This led to the Regan tax cuts, increase in dependent exemptions, child tax credit, college tax credit and more.

But there is proof that the payroll tax has "pushed" out general revenue taxes. The US tax rate has been mostly steady for the past 50 years. However the compisition of these taxes has changed dramatically. The payroll tax now makes up more than 35% of all taxes collected.

Congress has fully paid on a cash flow basis Social Security and Medicare and in the meantime borrowed to fund deficits. Without Social Security or Medicare, it is doubtful the percent paid in US taxes would be much different. What would be different is the size of the US Debt.

Arne said...

Andrew is actually saying that whether or not SS contributes to the deficit depends on the time frame you choose.

If it is a matter of perspective, how can you call it a lie to use the life of the program instead of the more arbitrary 12 month calendar.