Sunday, January 21, 2007

Some Clarifications

The comments to the last post contain a thread, spilling over from AngryBear, about whether Dean or I favor default on some part of the government's obligations. I don't favor default on securities issued by the federal government. I didn't bring this up--it shouldn't even be a question.

But Social Security is not a security issued by the federal government. It is a program that current generations legislate on their own behalf and largely at future generations' expense. It is not the only such program. I think all such programs need to be carefully considered, and in particular, that we should tread very lightly on future generations' income when the proceeds go for our own consumption, not for investments that increase the size of the economy they will inherit. That attitude applies to Social Security, to Medicare, and to the level of federal debt.

I admit that I applied it first and most attentively to Social Security. I have been studying the program since 1988. The current debate about Social Security was beginning at that time. Medicare was smaller. Over the subsequent years, there appeared to be some hope for the federal debt to brought to a manageable level. But if you read the two things I wish that Bernanke would have said in his testimony in the previous post, I am acknowledging that there is no difference in how I would apply this attitude today. And it's the past six years that have done it.

I wouldn't characterize anything I've suggested at any point as a default on Social Security. I do want to scale the program back to what can be afforded in the long term (as I have defined both "afforded" and "long term") with roughly the same payroll tax rate on future generations as we've paid. I have been clear about what I would do if I could implement my own preferences and what I would do if I had to compromise with others who don't share my preferences. If those two options are not on the table, then I tend to side with changes to the program that keep the program--and its impact on future generations of workers--small rather than large. So, perhaps to PGL's disappointment, I would take the President's plan (Commission Model #2, possibly updated to Progressive Price Indexing, and with the carveout personal accounts, which I don't view as necessary in this plan) over the status quo, even though I think we can do better.

But that's really not the issue here. In his post, Dean said that "workers have already paid for these benefits" and "if benefits are cut at a point where the program could easily afford the benefits (e.g., 10-20 years), then the government has effectively stolen from the people who paid Social Security taxes." He equated that with defaulting on the bonds in the trust fund. Others have appropriately argued that the two are not the same thing. I argued that I don't buy his appeal to morality to preserve benefits for current workers at the level in current law, largely because the balance in the trust fund that he's using to make his case doesn't actually represent savings that those workers have amassed to help future generations afford the scheduled benefits.

UPDATE: Felix Salmon has a nice roundup of the blogosphere's discussion of this issue.


PGL said...

I've tried to move this forward a bit in "Privatization without Grand Larceny". Dean is objecting to the larceny aspects of some proposals from the right as am I. I don't see you as advocating larceny no more than we would.

Jason F said...

The sooner we act to raise revenues and schedule future benefit increases, the more we can meet Dean's desire to honor the benefits people were "promised." This is both because we would have more money to pay benefits and workers would have more notice about reductions to their benefits.

The longer we stall by saying there's no problem, the more benefits will need to be cut, and the more abrupt the cuts will be. Not exactly an efficient or equitable outcome.

Roland Patrick said...

Was it 'default' in 1977 when Congress cut back on its promised benefits?

PGL said...

My goodness - the level of Roland Patrick's ignorance is staggering. In 1977, we had virtually no Soc. Sec. reserves. The present value of promised future benefits exceeded the present value of expected payroll contributions. Roland Patrick needs to check Brad DeLong's latest. He needs to check out the Reagan-Greenspan commission report way back in 1983. If he did (assuming he has the capacity to understand these things) he would not ask such incredibly stupid questions.

baxter said...

From your previous post, you say
I might believe that if the Social Security surpluses were actually being saved rather than spent. But they aren't. It would be more appropriate to say that what the workers--Dean, me, you, all of us--have paid for is all of the government services that the Social Security surpluses have purchased in the past 20 years. We've already consumed them

Unfortunately, I am going to call you an outright crook for making that statement.

You know very well, that
(1) Payroll taxes are regressive
(2)Income taxes have been cut by Republicans and payroll taxes used to fund govt.

So essentially, a racket to make the progressive income tax less, and the regressive payroll tax more was being run, under the guise of saving for future SS needs. It was a racket.

Yet, you keep on pushing this "we" business as in "we" meaning "Dean, me, and all of you" spend the money for our benefit. Yes, but it came disproportionately from the working stiff, without his consent Bill Gates paid the same SS tax as someone earning $75,000

That is the theft. Using a regressive tax to fund govt, under the guise of promising SS benefits.

I suggest you go read Setser's blog and see why what you are pushing is a crock of bull. Especially his response to comments. Not that you need anyone to help you with this, - I just don't want to rehash his points it here.

Yes, there are no savings now, but to imply that what happened was a fair deal is dishonest in the extreme.

I am calling you a crook, because you are smart enough to know all this. Yet you chose to lie.

Anonymous said...

"I don't favor default on securities issued by the federal government."

So your point is that the SS Trust fund was an idiot not demanding real Treasury bonds rather than IOUs?

Would you favor taking those IOUs and replacing them with Treasury bonds? If not, why not?

Anonymous said...

There are number of problems of both fact and interpretation, both with Mr. Baker's original comments and with the subsequent follow-up comments equating Social Security adjustments with "defaulting" on government bonds.

First, neither Bernanke nor other would-be reformers is seriously advocating "defaulting" on government bonds. To the contrary, analysts on all sides of this debate, including the reformist side, stress that no one doubts that the government will honor the bonds. Further, if you actually read the specs of the various reform proposals that have been introduced, they all they all honor the bonds in the Trust Fund. In fact, some would even issue additional bonds, though this is besides the point.

All that is being pointed out is that the government can't effectively pre-fund future benefits by issuing bonds to itself, from one account to the other. This has nothing to do with the creditworthiness of the federal government. If someone proposes to spend money that the government doesn't yet have the resources to pay, saying that the government will issue a bond to cover the expenditure doesn't answer the question of where the money will come from. Bond or no bond, we still have to decide who is going to pay for that expenditure, and how.

Equating adjustments to Social Security's benefit schedule with a default on government bonds is a red herring. The government has adjusted Soc Sec's benefit schedule repeatedly (for instance, in 1977 and 1983) without this being interpreted as a government default.

Moreover, it's simply incorrect to assert that the Baby Boomers have already paid for their own benefits. The Social Security shortfall does not arise because of an imbalance between the scheduled benefits and promises of future participants; it's entirely a function of an excess of promised benefits over revenues for participants in the program to date. Diamond-Orszag and others have written about this as the "legacy debt." Here it shows that the excess of past taxes over benefits for participants in the program to date is $1.9 T. The excess of future benefits over taxes from those people is $15.1 T, producing a net shortfall (after rounding errors) of $13.3 T. (Diamond-Orszag estimated it at closer to $11 T, which reflects the fact that they wrote in 2003). It's simply not correct that participants to date have pre-paid their own benefits. Under current law, future generations are being asked to pay for their own benefits (in the aggregate) plus make good on the enormous imbalance of payments of program participants to date.

Finally, it's a widely-accepted myth, but a myth nevertheless, that the Greenspan Commission "deliberately" tried to pre-fund benefits by building up a big Social Security Trust Fund. This myth is so widely accepted now that anyone could be excused for repeating it, but a review of the historical evidence shows clearly that it isn't true. Whether you read the CRS report on the 1983 amendments, the interview with the Commission's Executive Director Robert Myers, the documents consulted by the Greenspan Commission itself, or transcripts of various speeches by the late Senator Moynihan, another Commission member, it's clear that they never thought they were pre-funding future benefits through the Trust Fund. They simply sought a result of 75-year actuarial balance on average, without careful attention to how they got there. This is one reason why a series of Advisory Councils since the Commission have all advocated using a different metric than 75-year balance, so as not to repeat the same mistake. According to Myers and others, had they realized that they had produced "balance" by following big surpluses in the 1980s, 1990s and 2000s with big deficits in the 2020s and beyond, they might have gone about it another way. So, not only has the Trust Fund not been an effective source of advance funding, the Greenspan Commission never actually argued that it would be.

The bottom line is that if Bernanke's critics were more confidently in the right, they'd respond to the arguments he had made, rather than attacking one (arguing for default) that he didn't.

bakho said...

I seem to remember Clinton making the argument "Save Social Security First" every time the GOP Congress proposed to cut general fund revenue (taxes). It was clear to me in the 2000 campaign that GW Bush was proposing to balloon the deficit with budget busting tax cuts. Bush did not even get all the tax cuts he proposed and look at where we are today?

Where were fiscal conservatives back in 2000 when Bush presented his fiscal policy? Gore criticized it, but no one other than Krugman piled on the Bush tax cuts as bad policy. Economists concerned about sound fiscal policy need to pile on early and often to politicians that promise unaffordable tax cuts.

Tax cuts are too easy to sell and too difficult to repeal as GW Bush and Reagan proved. By giving Bush and Reagan a free lunch, those politicians posed as tax cutters and gained a lot of undeserved political capital. Neither Reagan nor Bush were tax cutters because both greatly increased spending. They both increased the future taxes that need to be collected to balance the budget.

Any lying politician selling snake oil tax cuts should be hounded unmercifully to list a specific set of spending cuts because the spending cuts are too politically unpopular to pass. It was too obvious that GW Bush was going to be a repeat of the Stockman era of massive revenue shortfalls. Bush was going to get his tax cuts, but he had no plans going in to cut spending. What sane economist could not have forseen the resulting budget deficits?

bakho said...

The bottom line on SS:

The public overwelmingly favors fully funding SS to tax cuts of any sort.

The estate tax loses to SS funding.
Tax cuts for the wealthy lose to SS funding.
Taxes on businesses lose to SS funding.

This means that we are due for a tax increase and a some measure to contain rising health care costs to bring the general fund into balance. The sooner we accept that reality and quit trying to nickle and dime SS, the better. Bush tax cuts were NEVER affordable. The sooner they are repealed, the better. If the economy slows, the Fed can lower interest rates.

The ideal vehicle to repeal Bush tax cuts is the Iraq Supplemental. After all, the Bush Iraq failure is costing us Billions per year. Dumping Bush tax cuts to pay for the Bush Iraq failure would be justified. It would also add political pressure on Bush to craft a truly new Iraq policy (as in actually pursue a political settlement) to replace his "Stay the Course with 20,000 new troops" failure.

Andrew Samwick said...


I don't disagree with your characterization of the tax shift as a racket. I'm describing that racket in the posts. The LMS plan helps to make it less of a racket. But I'm also saying that I don't see why future generations of workers--who were not party to any of the decisions being made as part of that racket--should have to pay the consequences to the degree suggested by Dean Baker in his post.

If I'm a crook with respect to the working stiffs in the current generation, why are you not a crook with respect to future generations of workers?


The issue is not what kinds of Treasuries are in the trust fund but whether the trust fund can be used to save resources at all. It can be used to accumulate claims of the Social Security system against the General Fund. In practice, it has not been used to lessen the financial burden on future generations of workers to pay our Social Security benefits. If you want that to happen, you should support add-on personal accounts.


I basically agree with you. I would have much preferred "Saving Social Security First" to the Bush tax cuts. In 1998, I thought that's what I thought I was working on.

Thanks for all the comments.

pensiondoom said...

But I'm also saying that I don't see why future generations of workers--who were not party to any of the decisions being made as part of that racket--should have to pay the consequences to the degree suggested by Dean Baker in his post.

That again is a dishonest argument. This whole concept of "generations" is bogus, and anyone who pushes it is, umm.., lets say, dubious at best.

Q.Who benefited from excess SS taxes today?
A. Today's rich, via reduced income taxes

Q. Who foots the bill for repaying that SS bonds tomorrow?
A. Tomorrow's rich, via increased income taxes.

So the whole thing is between todays rich and tomorrow's rich. Both minorities (who earn income way beyond the payroll limits)

To conflate that rich minorities of today and tomorrow, with the vast majority of working stiffs, into "todays generation" and "tomorrows generation", is another one of the rightwing con jobs.

Given the fact, that social mobility is very less in the US (and becoming more so) tomorrows rich is mostly going to be the children of today's rich.

This rich minority is trying by crook and hook to eliminate the estate tax, to ensure that their children are indeed tomorrows rich.

The vast SS reform exercise, by today's rich, to transfer their wealth to tomorrows rich (their children), makes the crime worse. It is obscene, and they know what they are doing.

I am not going to call you names.
But certainly, to abet this scheme, is not befitting your position.

Lord said...

the balance in the trust fund that he's using to make his case doesn't actually represent savings that those workers have amassed to help future generations afford the scheduled benefits

Doesn't it? Sure the government doesn't have store of cash to tap in the future, and sure, one can say they have spent it, but who is to say it has not been among that portion used to build and enhance the country's assets and income generating capacity. One can't conclude only other taxes were spent on that and only these were wasted. And if our assets and income generating capacity are not what they should be, who is to say they would not have been worse without this spending. Much has been consumed, but a society can't really store much for future consumption.