One of the signature programs of the New Deal of the 1930's, Social Security addressed the critical situation of widespread impoverishment of the elderly population. Those who had families were the lucky ones.
Listen to this episodeWe hear today about unfunded liabilities, about how we have to do something about entitlements or they will bankrupt us, about -- though it is never stated explicitly, Social Security and Medicare are somehow responsible for the current economic stagnation and how cutting these programs is the only route to economic stability. "Everyone agrees," it is often said. That "everyone" is primarily the political class of the beltway and their sponsors in corporate America and the media.
Today on the podcast, let's look directly at Social Security. Its financing. Is Social Security near bankruptcy? Is it going to go broke? Let's look at a bit of the history. It exposes the self-styled adults in the room as simply old cranks. Then let's examine the real economics around Social Security, how these and other New Deal programs served well as a floor under demand during the crash and how cutting benefits is a recipe for economic decline.
As a preface, to avoid confusion, we need to recognize that there is no evidence to support the attack on Social Security.The attack arises from the political opposition to the New Deal. These are the Old Guard Republicans, the Trickle Down Economists. This is fear of the future in the place of rational discussion. The entire case relies on convincing the gullible that the government is like a household or business and must manage its budget accordingly. When we follow this metaphor and the impose the austerity it intuitively demands, we will blindly impoverish real households and bankrupt real businesses until the society can take no more.
I make this comment here at the beginning of the podcast to alert the listener: It is not that I am omitting the evidence from the other side. That evidence simply does not exist. It is not that there is a more cogent argument which I do not allow you to hear. There is simply no argument. The entire proposal is built on a metaphor that falls apart under direct examination, and so the argument falls apart.
Now. History. The program was set up in the 1930's. It is now the twenty-tens. Eighty years. Never missed a payment. Looks pretty sturdy. Not too many other programs around for that length of time. Much less programs that bankrupt the nation. Certainly nothing of the scale of Social Security. Maybe the Defense Department.
What was the situation in the Depression? Millions of seniors faced impoverishment and deprivation. The retirement scheme of the day was to have lots of kids and move in with them when you were too old to work. If you had no kids, or they had no work, you were SOL. The financing of Social Security was in concert with the times. Pay-as-you-go financing. Were we really going to help starving old people by requiring them to pre-fund retirement? Take their non-existent incomes and cut it to invest in non-existent investments? No. We made it a quote "generational contract" unquote. Current workers would support current retirees. In this way we formalized the existing scheme. The kids as a whole supported the parents as a whole.
This had some enormous consequences.
One, A person no longer needed to have a dozen children to be assured of a secure retirement. Birth rates dropped.
Two, Children did not need to stay on the farm or at home to support their parents. They could plan their lives, go to school, follow their dreams without the constraint of worrying about Mom and Dad.
Three, A new tax regime came into being, one fully supported by citizens, who viewed Social Security payroll taxes as the payment to a retirement plan. While not correct from an accounting standpoint, it is correct from a programmatic standpoint. The contract has proven solid to this day.
But before we go any further, we should specifically dispel the notion that Social Security is on shaky financial footing. As a program, under conservative assumptions (though who knows what will happen if the market fundamentalists crash the economy again), under conservative assumptions, quote "all social security benefits are now expected to be payable in full on a timely basis until 2033, when the trust fund reserves are projected to become exhausted. At the point where the reserves are used up, continuing taxes are expected to be enough to pay 76 percent of scheduled benefits." unquote. These are the assumptions used by the Social Security Administration. The Congressional Budget Office offers more optimistic numbers.
There is no imminent crisis. At least not in the funding of this retirment program. Maybe in Europe or in the banks or in climate change, but not in Social Security.
Ah, the Trust Fund.
The Social Security Trust Fund
(a) Reserves are projected to grow to $3.1 trillion by the end of 2020.
(b) Of course, there is a Trust Fund, because the demands on Social Security are completely transparent, being a function of demographics, and hence are entirely actuarially anticipated.
(c) The Trust Fund is composed of special US Treasury bonds which everybody and his brother would love to have in their 401(k)'s.
The only crisis is if we fail to pay off the bonds that sit in the Social Security Trust Fund. Will that happen? Default on the debt owed to seniors would have to mean default on debt owed to a range of other bond holders. Perhaps the rogue Republicans will shoot us all in the foot. But there is no other way than willful refusal to pay. As listeners know by now, the Treasury can meet all its dollar denominated debts.
Why the hysteria, then? And you have to admit there is hysteria.
Let's go back to 1982, when the long-term financing of Social Security was fixed quote-unquote under the Greenspan Commission. Yes, that is the same Alan Greenspan who previously served as head economist to Gerald Ford (remember the WIN - Whip Inflation Now -- button?) and who later as Fed Chairman for so many years played such a pivotal role in removing regulation and enabling the credit needed for the Great Financial Crisis. The Greenspan Put. The Greenspan Commission raised taxes in 1982, or actually January 1983 was when it came out with its report. Yep. Raised taxes. Ronald Reagan cut income taxes. Reagan after the Greenspan Commission raised payroll taxes. Substitute regressive for progressive and call it prudent.
But another thing happened about then. The Social Security Trust Fund was included in the budget. That meant all taxes -- payroll taxes which are dedicated to the trust fund included -- were included in the revenues for surplus-deficit calculations. This was the so-called "Unified Budget" which exists to this day. That is, selling bonds to the public was accounted for as borrowing. Selling bonds to the Social Security Trust Fund was ignored. After all, it was still the government. Yes, the official deficit -- including the much-ballyhooed surpluses of the Clinton years -- were rosier by far for the surplus the Social Security trust fund was building in anticipation of the retirement of the baby boomers. Is that clear? The operating budget was actually far more out of whack than the public realized because its true deficit was masked by the payroll taxes.
Now we see the hysteria. The operating budget, and taxes to support it, were healthier in appearance only during the years the trust fund was growing. Now that the growth has slowed or reversed, the operating budget has to finance itself, has to come out from behind the curtain, and -- Whoa Nellie -- the sky is falling. Those folks so in favor of tax cuts in any climate now see the huge debts emerging from behind the curtain. Rather than blame their own profligacy, they blame Social Security for being too generous.
When you hear things like "100% of the budget will go to pay entitlements," this is because the payback to the trust fund is in operation. Repayment of that borrowing is now counted as expenditure. This is the legacy of the Unified Budget.
You may remember Al Gore and "putting Social Security in a lock box." He got pilloried for that at the time. It was thought of as a constraint on needed government spending by the Left. It was considered taking the candy away by the Right. That was then -- 2000. This is now -- when apparently we have to cut Social Security to prove our prudence.
Had we funded the operating budget in the meantime, that argument might carry more weight. But no, we ran a deficit and fought two wars without raising taxes, grew a defense establishment that grows more entitled, provided tax cuts for the rich, and now it is not prudent to run a deficit -- oops, not now, but twenty years from now -- it will not be prudent to run a deficit for the retirement of our old people. You see how there is no argument.
The argument for prudence has to begin with the operating budget. But further, if it were so much healthier for the economy to run a surplus, you would think it would reinforce itself as a policy. But it is not healthy, it is impossible. The more we try, the more the economy fades. The whole argument is and has been a continuing attack based on the household metaphor. In the early 2000's, it was privatization, because, Lord knows, or the Lord knew then, that financing Social Security the way it had been done for 70 years could not last. Privatization collapsed with the collapse of the stock market and all those 401(k)'s which depended on stocks growing at 7% per year. Today it is the same attack using new ammunition.
But they cannot come out and say Social Security is the cause of the current malaise, because it plainly is not. Nor Medicare. The malaise had the bad manners to show up before the budgetary problems hit -- and in fact caused much of them -- along with the wars and tax cuts. But the implication is left behind in the room is, "We have to deal with entitlements or we will have real problems." We HAVE real problems. We need to deal with those, and not this non-problem.
The self-styled adults in the room, the Bowles Simpson crowd, are not adults, they are simply cranks whose schemes have fallen apart, and who must find another scapegoat.
We could go on, but it is really beating a dead horse. There is simply no functional problem with Social Security.
But pretend we do need to act now. What would the appropriate solution be? Would it be to inflate the trust fund so the operating side could borrow through the back door some more? No. Simply remove the cap. A cap on earned income subject to payroll taxes is currently set at around $110,000. Remove it. Doesn't entirely reverse the great regressive-i-zation of the Reagan years, but it goes part way. And it solves the entirety of the crisis till the end of time. And raising taxes on the rich does address the economics of the times.
But before we move from the financing and budgeting into the economics, we should give a shout out to the politics. Everyone agrees, say the attackers, that we need to cut Social Security and Medicare. The problem is the politics. By this they mean that hundreds of millions of average Americans have formed a special interest group that promotes their interests. They are invested in the program as it exists and as it has been promised. They make it a political problem because they can vote, not necessarily because they can donate billions to favored candidates. Thank goodness for them.
The functional effect of a transfer program like Social Security, which is the transfer from current workers to current retirees, with the balancing of a trust fund informed by basic actuarial accounting, the functional effect is to reduce the level of savings. Workers reduce their savings because their income is lower on account of the taxation and transfer and also because they count their expected benefits from Social Security as retirement income and do not save in proportion to the amount they expect to receive. As we have discovered in our exploration of economics over the past five or six years, this is a good thing.
Our problem in an advanced economy, particularly one where austerity is the rule for the public sector, is too much savings. More savings than can be absorbed by productive investment.
When savings cannot be absorbed by productive investment, it is experienced as dropping income. You remember how it is investment that produces savings, not savings that produces investment. Investment produces the extra income from which savings is generated. When people want to save more than prudent investment can absorb, it is either a reduction in someone else's income, and it goes to bidding up financial assets and creating bubbles.
John Maynard Keynes was right about a great deal, but he was wrong when he projected the euthanasia of the rentier, whom he called a largely functionless and passive creature. Instead, the rentier, or the CEO acting in his name and the political party devoted to his interests, is conducting a coup. The rentier has become the bond vigilante.
The rentier is not satisfied with zero percent on his money, so he goes into stocks, which tank, and which must be kept afloat by the central bank. When his investments in banks go south, he must be bailed out in full. The Greenspan Put has become the Bernanke Put and the Draghi Put because the rentier will go apoplectic if the investments do not pay positive returns. It is the end of risk.
The point is that savings converted to investment in productive enterprise employs people and keeps the economy running. Likewise spending on goods and services employs people and keeps the economy running. Savings converted to cash or other financial instruments and held does not employ people and does not keep the economy running. You may call it prudent. And for an individual or household it may be prudent, but for an aggregate economy, it is decay.
It is as Leon Keyserling said, there is more savings than the available productive investment can absorb. Keyserling's solution in 1950 when he was chief economist to Harry Truman was to promote housing as investment. That did a fine job for many years. It became the preferred economic development strategy in later years to promote investment by making it cheaper, through the tax code. The preference to the corporate sector. Corporate income taxes dropped from 50% of revenue to 11% today. That led to over-investment and the pickle we are in right now, where it is going to take a heckuva lot more than a kick start to restart investment in any meaningful way. We're not going too far in that direction today. We've done that in the past.
But the point is that Social Security as a generational contract does a great deal to solve the over-savings problem.
So the transfer associated with Social Security helps this. But raising taxes on the rich would also help. Rich people save more of their incomes than poor people, or the middle class. When there is a cohort of, say, the top 20% saving a quarter of their incomes, it creates a huge burden for the rest of the economy. Lumped together, the savings rate may be 4%, 5%, but disaggregated it is 20%, 25% by some and negative or none by a great deal of others When we make people richer, they just save more, particularly when they are able to take advantage of interest rates the rest of us can only look at through the window. They are saving in the form of cash, bonds, stocks and real estate. These are the activities of the rentier, not the entrepreneur.
The public sector is basically a eunuch in service to the corporation, so this sort of savings means disaster for the rest of the population. That is, the public sector refuses to invest despite the sad state of public goods and the great and obvious need. People are getting shoved off the ship to make room for larger staterooms and told to swim.
And finally, imagine what life -- and DEMAND -- would be absent these programs. We have described in the past that the floor of demand in the crisis, what was really the safety net of the economy, is the set of programs centered on Social Security, Unemployment Insurance and Medicare. These are not only the safety net for the individual, they are what kept the economy from continuing to a deeper and more tragic bottom. Saving the banks did nothing for demand. All the money we shovelled there stayed there.
So, that in response to listener mail. Don't let it discourage you. demandside@live.com
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