Mike the Mad Biologist

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I’m always astonished how so many people can think that Iraq had anything to do with 9/11, that the sun revolves around the earth, or that intelligent design is a valid theory. Another idiocy that can joined this esteemed list is the belief that Social Security will go bankrupt.

Bob Kerrey and Warren Rudman have an op-ed piece in the Washington Post about getting the deficit under control where once again they claim that entitlements are going to increase out of control. First, they confuse the issue by conflating (and combining) Social Security and Medicare. This is incredibly disingenuous, since Social Security combined with any large government program will run at a deficit. By the same logic, the War Defense Department and Social Security combined also run at a deficit, and consequently, defense spending should be brought under control (which actually wouldn’t be a bad idea…).

What’s even worse is that Kerrey and Rudman both misrepresent the health of the Social Security system, which is much stronger than they claim (Medicare is a different story). As I once wrote (and economist Dean Baker described in his book “The Phony Social Security Crisis”):

For a long time, the accepted wisdom has been that social security will go bankrupt. If you read the report, that’s simply not the case. Barring a sustained, decades-long economic collapse (average growth of less than ~1.7%), social security will be able to meet its obligations: in the worst case, a slight increase in the tax rate is needed. If we removed the cap on taxable income, the needed increase in GDP for sustainability is even lower. In other words, the revenue generated by social security will meet all expected payouts.

What scares the hell out of most politicians is that, as the baby boomers retire, the social security surplus will diminish. Why does the surplus matter? Last year, the surplus was around ~$200 billion dollars. That money doesn’t get tucked under a giant mattress out at Area 51-instead, it is borrowed by the federal government (i.e., turned into T-bills). In other words, the social security surplus is the world’s largest municipal bond issue.

Now what does $200 billion mean? If you take away all of the mandatory payments (debt relief, medicare, social security, etc.), the entire rest of the federal budget is a little over $800 billion (I’m leaving out Iraq for now). Roughly $400 billion is spent on defense, and the other $400 billion on everything else. Imagine if tomorrow morning the $200 billion surplus vanished. If cutting defense is assumed to be a political kiss of death, that means all other discretional spending would have to be cut in half: medical research, the Justice Department, the CDC, and education, just to list a few things.

This is why in 1986, Democrats and Republicans voted for the social security hike. Sen. Moynihan always admitted that this was a backdoor (and regressive) way to generate revenue and keep the government solvent. To put it another way, currently, the federal government is running a deficit that ~$200 billion dollars higher than stated. Instead of cutting spending or increasing taxes, many politicians have decided to balance the budget on the backs of the most vulnerable: the financially strapped elderly and the disabled. (Where are the “values” people when you need them?)

So why are Democrats and Republicans predicting the immenent collapse of social security? For the Democrats (and many Republicans), the reason is simple: they want the revenue and do not want to suffer the political fallout from raising income taxes (or other taxes). This why we keep hearing about social security lockboxes, tackleboxes, lunchboxes, and boomboxes. For the Republicans, some want to privatize everything (including your financial security); this is just part of the ideological program. Other Republicans just don’t like safety nets.

I would take whatever agenda Kerrey and Rudman are pushing much more seriously if they were honest about the future of Social Security.

an aside: Kerrey and Rudman also claim that interest payments will spiral out of control. A primary source of interest payments, of course, is the deficit, which if current trends continue, will also increase. Funny how they don’t really talk about that…

Comments

  1. #1 Pablo
    August 29, 2006

    Good class! I’m new in the country, and I didn’t understand all this… But I’m still paying my social security!
    I think it’ll be very interesting to see what actually happen when the baby boomers retire!!!

  2. #2 Ed
    August 29, 2006

    Ironic that you refer to those who rely on data and analysis by independent experts without an ideological agenda such as CBO and GAO for their arguments as stupid while citing misleading arguments rejected by analysts on both sides of the political spectrum.

    It’s an incontrovertable fact that the costs of Social Security are growing faster than the revenues dedicated to it. that fact does not materially change with stronger economic growth, because costs increase in proportion to economic growth under a wage based system. Dean Baker engages in a slight of hand by selectively citing productivity numbers to claim that the low cost scenario is more plausible, while ignoring that it is the differences in demographic assumptions that are primarily responsible for the better projections. You can continue to believe the estimates that the stochastic analsysi by the non-partisan Social Security actuaries concluded had a 2.5% chance of coming to pass, I’ll choose to believe “stupid people” such as the professionals at CBO, GAO and elsewhere who all agree the likely result is much closer to the intermediate scenario.

    I’m puzzled by the interest argument. The growth in interest spending is a result of the borrowing necessary to cover the gap between revenues and outlays — exactly what Rudman and Kerrey are saying needs to be addressed. If spending continues to grow faster than revenues (something that would happen even if the Bush tax cuts were repealled and we withdrew from Iraq immediately), spending on interest will continue to grow as we borrow money to make up the growing difference.

  3. #3 bigTom
    August 29, 2006

    I think the reality is much closer to Ed’s than Mike’s posts. Nevertheless it is irresponsible of politicians to feed the myth that
    Social Security will go bankrupt (which the public thinks means vanish entirely), rather than the actual issue, either benefits will have to be reduced, or taxes increased to balance out the system (or some combination of the two). In any case the projected SS deficit is roughly 25-30%. If for example benefits take the entire hit, they would still be 70-75% of current promises. Also of course any benefits adjustments will affect future -not current retiries, -so frightening the already retired generation is particularly unnecessary.

  4. #4 SLC
    August 29, 2006

    The thing that all of the folks pontificating on this issue are ignoring is that the Social Security Trust Fund, is invested in T Bills which pay interest. I believe the investment amount is around 2.5 trillion dollars which at current T Bill rates (5%) will throw off 125 billion dollars a year. That 125 billion, which is avaliable to pay off annuitants is not included in any of the calculations. If this interest payment is included, the the yearly surplus is actually 325 billion, not 200 billion.

  5. #5 Golstein Follower
    August 30, 2006

    AS long as the democrats run candidates who say stuff like “I voted against the war, after I voted for it” they don’t deserve to win.

    And what about Hillary Clinton. Shes essentially supporting the war, unless of course she is just lying thinking it would get her elected but I can not believe she would do such a thing.

    And, she DID handle the health care issue brilliantly when she had the chance.

    Didn’t she?

    What more could we ask for.

  6. #6 Scorpio
    August 30, 2006

    Really. If the government can dig us into a dam*ed hold over Iraq, it can darned well support its retired population. Better — retirees will put money back into this country instead of pouring it out on the sand or feeding Halliburton.

  7. #7 azdırıcı damla
    May 2, 2009

    thanks for all

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