Friday, July 11, 2008

McCain is right: It is a disgrace

The Democrats are all over John McCain for referring to the current status of social security (not, as they falsely imply, the program itself) as a disgrace. For a local manifestation, check out Michael Leon at Jay Bullock's bog, supported by Jay in the comments. McCain was referring to the fact that the program is about to go upside down with expenditures exceeding revenues. It is in that context that McCain said that younger workers paying for older workers retirement is a disgrace.

What a fool, they say. He doesn't understand the program. It has always been "pay as you go."

No, it hasn't. Not since 1983. In keeping with Mark Steyn's observation that demography is history that has already happened, we have known for a long time - over thirty years - that "pay as you go" was unsustainable. The reason, of course, was a combination of longer life spans and the pig in the python called the Baby Boom. We knew that a time was coming when there would be dramatically fewer workers than retirees because there are a lot more people who are my age than Jay's.

So we did something about it. In 1983, we effectively abandoned "pay as you go" raising social security taxes to a level that were designed to exceed what was required to pay current benefits with the excess going into a social security trust fund which could then be used to pay benefits during the time that the Boomer pig was passing through the snake. This was the "lock box" that Al Gore kept referring to before he realized that he had to save the world.

The purported existence of this trust fund is the reason that Jay and others claim that social security is solvent and can continue to pay most of the promised benefits.

And that would be true - if the trust fund really existed. But it doesn't. The lockbox is, for all practical purposes, empty.

Oh, it's there as a matter of bookkeeping but it contains no cash or marketable securities that the government can use to pay its obligations. What has happened is the government has spent the excess social security taxes - the ones that were supposed to be set aside for the rainy day that we have long known is coming - on other things.

The trust fund consists of nothing but treasury bonds. That might be a great asset if you are someone other than the government, but not so good if the entity holding the bonds (the US) is also the one liable on the bonds (the US.) It's as if I saved for my kids education or my retirement by spending what I was supposed to save but dutifully writing myself IOUs. Here's how OMB puts it:

These [Trust Fund] balances are available to finance future benefit payments and other Trust Fund expenditures – but only in a bookkeeping sense.... They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large Trust Fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits. (from FY 2000 Budget, Analytical Perspectives, p. 337)


So - in about 2018 - when benefits begin to exceed revenues - we are going to either have to raise taxes or borrow more money or, but this is probably fantastical, cut spending. This is because, although the trust fund can redeem those bonds and the government will presumably honor them, the government that redeems them is the same government that is paying the social security benefits. In order to redeem the bonds, it has to find the money to do so.

As time goes on, the shortfalls - particularly when combined with projected shortfalls in medicare - figure to be huge. We have known about this for years and we have done nothing about it. That is a disgrace.

15 comments:

Anonymous said...

McCain is referring to the "pay as you go" system in the sense that he's referring to a system where current taxpayers are paying for the social security of current retirees, regardless of whether a portion is supposed to be going into a trust fund for later expenditures. That is, whether the system was altered in '83 to include a trust fund is immaterial to McCain's assertion that the basic way in which the system was and always has been set-up to operate is a "disgrace."

And the reason McCain is calling the basic structure of Social Security a disgrace is b/c he thinks current taxpayers should be paying into privatized accounts rather than into a trust fund for current (and, in theory, future) retirees. What makes this a problem for McCain is that privatization -- although McCain prefers not to call it that these days -- is a widely unpopular policy prescription for the problems facing Social Security. In other words, he's trying to hit on an issue of excitement for the base w/o rousing the suspicions of the general electorate, and using the word "disgrace" was a little too rousing.

Anonymous said...

Twisting McCain's words to falsely imply that he believes taking care of older Americans is a "disgrace" is like when his words were used to disingenuously claim that he wanted to keep the same level of combat ready American troops in Iraq for "100 years." To use the left's vernacular, this is shameless "swift boating."

Seth Zlotocha said...

Twisting McCain's words to falsely imply that he believes taking care of older Americans is a "disgrace"

Who did that?

(By the way, the first comment was mine...I just failed to put in my blogger ID before submitting it.)

Jay Bullock said...

Rick, you're right that changes were made to SS in 1983, but they did not change the essential PAYGO structure of the program--a structure very much like every pension and insurance program on the planet.

The changes made in SS were, essentially, a bargain: The working classes have been paying more than necessary to fund the program through the payroll tax--a tax that, as you know, hits the working classes the hardest. The surpluses have been used to fund all aspects the budget, basically subsidizing those who pay income taxes--and the wealthy tend to pay the most of those.

When the t-bills come due, they have to be paid from the revenue raised through income taxes, a fair proposition given that the working classes have been subsidizing them for the last 25 years.

And now that that moment is inching closer, those who spend their days serving the whims of the upper classes are howling and angling to allow the upper classes to renege on their part of the bargain. Screw that.

Rick Esenberg said...

The changes made in SS were, essentially, a bargain: The working classes have been paying more than necessary to fund the program through the payroll tax--a tax that, as you know, hits the working classes the hardest. The surpluses have been used to fund all aspects the budget, basically subsidizing those who pay income taxes--and the wealthy tend to pay the most of those.

Calling that a "bargain" seems like revisionist history. This may have been the effect but it was not the intent. Nor does it seem right to say that this is a deal for which the wealthy who benefitted must now pay. If it was boomers earning over $100,000/yr who benefitted, they are not going to be those who will, for the most part, have to pay because they will be retired and earning much less that is subject to income tax.

A better description is that no one wanted to exercise the fiscal discipline that would have been required to do what was intended. And, as to that, McCain is right. It's a disgrace.

And, as Paul Ryan has shown, it's a priblem that we can't tax our way out of.

As for "paygo" generally being a disgrace, I don't think that you can divorce one sentence of what McCain said from the ones that preceded it. Paygo is, essentially, a pryamid scheme. It doesn't work if the pyramid is going to become inverted. We've known that was coming my entire adult life.

AnotherTosaVoter said...

This problem brought to you by both political parties.

Jay Bullock said...

This problem brought to you by both political parties.
It's only a problem if the funds aren't there to pay the t-bills when they come due. Right now it looks grim, because one GW Bush blew a budget surplus giving back to the top 5% of earners (or, as he calls them, his base) and getting bogged down in Iraq. The size of the Clinton surplus in 2000 was about half the size of total SS payouts that year (which were already fully covered by payroll taxes). A surplus of that size in 2018 would have covered the shortfall (and then some) without a need to cut benefits or raise taxes. I'd suggest there's one party--one guy, really--responsible for the predicament.

So, to paraphrase what I have said before about SS: It is not in crisis itself, but our present poor deficit and debt situation make it seem that way.

Preparing for it won't be easy, and neither candidate right now is earning my love on this one issue. Obama won't pledge to balance the budget, which is at least honest. McCain's plan to balance it is about half smoke, half mirrors, and half leaving stuff out (like the cost of his plan to transition SS to private accounts).

Seth Zlotocha said...

As for "paygo" generally being a disgrace, I don't think that you can divorce one sentence of what McCain said from the ones that preceded it.

Here's the entire quote: "Americans have got to understand that we are paying present-day retirees with the taxes paid by young workers in America today. And that's a disgrace. It's an absolute disgrace, and it's got to be fixed."

Not sure what's being divorced there.

And here's McCain the morning before on CNN (emphasis mine): "Let's describe [Social Security] for what it is. They [i.e., working Americans] pay their taxes and right now their taxes are going to pay the retirement of present-day retirees. That's why it's broken, that's why we can fix it."

If McCain was merely interested in fixing the system as it currently exists, it would be believable that he just misspoke in this case and really meant the long-term projected shortfall is what's disgraceful. But that's not the case. These are clearly shots at the basic set-up of SS -- current workers pay into a pot used mostly (or entirely, as has been the case) by current retirees -- taken because McCain's preferred format for the system is privatization where current workers pay into their own personal accounts rather than a shared pot. But rather than come right out and say that, due to how utterly unpopular it is, he focuses on attempting to convince voters that the basic system is at fault, and therefore the only possible solution is a fundamental transformation of that system. He just went too far for political comfort when he used the word "disgrace," not once, but twice.

Rick Esenberg said...

The relationship between the budget surplus and the Bush tax cuts is far too complicated to pronounce upon with a few sentences and a quick link. Part of the end of the surplus was due to the recession which began during 2000. Some was due to the fact that 9-11, without regard to the Iraq War, ended the peace dividend. Some was due to the spending orgy which the GOP Congress was only too willing to participate in. In fact. some people argue that the 2000recession was due to what was a higher than normal federal tax burden but I don't know if that's so. When the recovery began in earnest in 2003, tjhe deficit (and the tax burden) began to go down. Some people argue that this was because of the Bush tax cuts. I suspect they had something to do with it, but, again, the complete story is probably more complicated.

But you can't get away from the fact that an intergenerational deal was struck in 1983. America would honor its commitment to the elderly but recognize that the boomers were going to tax the system. The boomers would start to pay more than was necessary to fund current benefits in order to pay for their own retirement and avoid sticking our kids with an excessive bill. We reneged on that.

When Bush tried to do something about it (probably too late; Clinton completely ignored the problem) by treating social security in the same way that you treat your own savings and in which your union and employer treat your pension contributions, the Democrats demagogued him to death. Thus, the unpopularity of "privatization."

Look at the numbers, Jay. The taxes required to maintain a paygo system at current benefit levels would choke the economy. Personally, I think that social security may have to become a means tested program and basically serve as a safety net for lower income elderly persons.

As for McCain's remark, Seth, you didn't go back far enough. He began his comments by stating that we have no way to pay promised benefits. The reason for that, the inverted pryamid caused by the baby boom, does make "paygo" a disgrace.

Compassionate Badger said...

Favorite line of the post: "This was the 'lock box' that Al Gore kept referring to before he realized that he had to save the world."

Thanks for the history lesson.

Dad29 said...

I'd suggest there's one party--one guy, really--responsible for the predicament

Pishposh, Jay.

Many additions to benefits (and beneficiaries) of SS were made during the LBJ era--when Congress and the White House were (D) controlled.

Your BDS problem is showing again.

Seth Zlotocha said...

As for McCain's remark, Seth, you didn't go back far enough. He began his comments by stating that we have no way to pay promised benefits. The reason for that, the inverted pryamid caused by the baby boom, does make "paygo" a disgrace.

Here's the full quote: "I'd like to start out by giving you a little straight talk. Under the present set-up, because we've mortgaged our children's futures, you won't have social security benefits that present day retirees have unless we fix it. Americans have got to understand that. Americans have got to understand that we are paying present-day retirees with the taxes paid by young workers in America today. And that's a disgrace. It's an absolute disgrace, and it's got to be fixed."

Add to that what McCain said the morning before on CNN about how current workers "pay their taxes and right now their taxes are going to pay the retirement of present-day retirees" being the reason for "why it's broken," and there is absolutely no way to argue that McCain isn't calling the basic structure of SS as we know it today and since its creation -- as opposed to just the financial state of the system today -- a "disgrace."

And, furthermore, when put into the context of McCain's proposed "fix," which is privatization that completely abandons the basic structure of the original and existing system, it's beyond a stretch to claim he's saying anything else. The disgrace, in McCain's clear statements, is that you are paying for someone else's retirement, regardless of the current state of the system, which is a play on the same argument conservatives use about needing to cut taxes because it's your money.

After all, conservatives have been railing about the basic structure of SS since day one, and privatization has been the position of the GOP at least since Goldwater over forty years ago. It flies in the face of history to say the exact same argument made by McCain today is just about current day conditions.

I'm not faulting McCain for wanting to abandon the original and current structure, although I disagree with it. But if that's how he feels, and he's really interested in "giving you a little straight talk," he should be upfront with the fact that he wants to privatize the public system of Social Security rather than hiding behind veiled critiques and bogus statements about how using personal accounts somehow isn't privatization.

Seth Zlotocha said...

Just want to add one more point about what McCain was describing when using the word "disgrace" (i.e., the basic structure of SS or just the basic structure under current day pressures).

If referring simply to a system that can no longer keep up with the times, using the word "disgrace" is a pretty awkward descriptor. What's far more logical is that McCain used that word (twice) to describe a system that he views as not only currently unsound but also inherently flawed and fundamentally shameful.

Again, if that's his view, fine, but he should be owning up to it along with his proposed solution.

Anonymous said...

Have to agree with Seth on this one. The original implementation of the plan was a disgrace and at every point after. If McCain thinks that, and I think he does, say it.

Now apply that to BO. If you think the gun-totin' religious crowd (but not Muslims) are all racist bastards, say it. In fact, aren't all white non-liberals racist bastards? Say it!

Except Muslims... they just kill you for being different, they don't put you through all that kid hazing and mental anguish and racism. They don't cop out and submit to anything like say women's or gay rights like stupid wishy-washy Christianity. That is something to be admired somehow...
Tuerqas

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