Mike the Mad Biologist

I Don’t Think This Is the Result Pete Peterson Wanted

Posted by Mike on June 28, 2010
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If you don’t know who Pete Peterson is, let me help you (We like helping!):

…we can now return to the never-ending attempt by conservatives to gut Social Security. One of the key figures and bankrollers in that attempt is financier Peter Peterson. By key, I mean that he has spent around one billion dollars financing the Peterson Foundation, which advocates various ‘fiscal responsibility’ measures (i.e., making Granny eat cat food) and slashing Social Security benefits… But as always, one must follow the money, since Peterson’s ‘charity’ seems rather self-interested–and not in the sense of ‘healthy children are good for all of us’

Last weekend, while most humans were trying to enjoy themselves, the Peterson Foundation held a series of well-staged propaganda pieces meetings called America Speaks. Despite this being a lengthy attempt at brainwashing, it didn’t seem to take.

Participants were given an option to choose how they thought the non-existent crisis* should be addressed. The top choices:

•Raising the limit on taxable earnings in Social Security
•A 5% tax increase on people making over $1 million dollars a year
•A carbon tax
•A tax on financial transactions

I’m guessing these were not the answers Peterson wanted**. I would appear Pete Peterson’s anti-Social Security propaganda didn’t seem to take, thank the Intelligent Designer. I’m impressed by the common sense shown by my fellow citizens, since many Democratic ‘leaders’ have either not pushed back on this propaganda or, worse, supported it.

Or maybe most Americans are just Dirty Fucking Hippies.

*I’ve dealt with this ad nauseum, but as I’ve written many times before, without a decades-long economic slump, the annual revenue generated by the Social Security payroll tax plus the liquidation of the trillions of dollars of U.S. securities held by the Social Security Trust Fund will adequately cover all expected payouts. The budgetary crisis has to do with the general budget (and national debt)–and that is due to uncontrolled healthcare costs. Why one would be motivated, instead, to consider slashing the most successful anti-poverty program in U.S. history as the first option in order to solve a general budgetary problem (as opposed to further reducing runaway Medicare costs, cutting other areas, or raising taxes–AAAIIEEE!!!) is puzzling. Given that Peterson is not stupid, and presumably understands the finances of Social Security, I assume he’s a moral degenerate.

**In fact, they’re expanding the list of ‘top’ in order to get their desired outcomes on the list.

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  1. #1 JasonTD
    June 28, 2010

    …plus the liquidation of the trillions of dollars of U.S. securities held by the Social Security Trust Fund…

    Won’t the liquidation of those securities need to be paid for out of the general revenues the Federal government collects? And when is there projected to be room in the budget for that extra expenditure? You are correct in your facts as I understand them when you describe the SS situation, but your dismissal of the problem is unwarranted.

    Since the government is essentially loaning itself the money with those securities, then the overall fiscal situation of the government is still sliding down due to the program. What those securities mean is that there is a legal obligation to pay those securities when the SS administration cashes them. So in one sense, you are right. SS itself is fine for the foreseeable future. But it is still a problem for the federal budget if expenditures in SS grow faster than the revenue from the payroll tax. And that is because it contributes to the overall problem of the total deficit.

    The real problem with the way the SS surplus was handled in the past is that it was either assumed that payroll taxes would always grow faster than benefits over the long term (and thus those securities would never need to be cashed) or that the problem of where to get the money to pay out those securities would be someone else’s to deal with.

  2. #2 Troublesome Frog
    June 28, 2010

    Since the government is essentially loaning itself the money with those securities, then the overall fiscal situation of the government is still sliding down due to the program.

    The overall fiscal situation of the government is definitely sliding downhill, but not “due to” the program. If I buy a government bond, they have to pay me back with interest later. Even though the government now has a liability that they owe to me, it’s hardly reasonable to blame me for “causing” their deficit, and it’s insane to imply that I’m insolvent.

    Social Security ran a surplus and loaned those funds to parts of the government that were in deficit. It amazes me how people manage to take the fact that Social Security took in more revenue than it paid out and spin it to make it look like Social Security is bankrupting the rest of the government. It’s the rest of the government that’s the problem.

  3. #3 JasonTD
    June 28, 2010

    That’s right, Social Security ran a surplus for a very long time. But instead of doing something with the money that would have allowed the government to actually get it back, they spent it.

    When you buy a government bond, you have given some of your money to the government to use with the promise of repayment with interest, just like you said. And that money to pay you comes from the general revenue stream of the government. The securities held by the Social Security Trust will be cashed and that money will have to come from the general revenue stream of the federal government, and/or the government will have to borrow from the public.

    I’ll concede that it was a poor choice of words to say that the problem is ‘due’ to Social Security. It isn’t the fault of Social Security, but you can’t deny that net result of the fiscal situation of the program going forward is to add to the deficit. The bottom line is that we have to make tough choices going forward. If reducing spending on Social Security is unthinkable, then the money still has to come from somewhere. That was really my whole point, which was something Mike seemed to be dismissing as an issue.

  4. #4 Troublesome Frog
    June 28, 2010

    That’s right, Social Security ran a surplus for a very long time. But instead of doing something with the money that would have allowed the government to actually get it back, they spent it.

    There’s the conflation again. You can have it one of two ways, but not both. Either:

    1) Social Security is just part of the larger budget. In that case, they stand and fall together and this “social security is insolvent” stuff is total nonsense, but you can sensibly say things “like they spent the SS money.”
    2) Social Security is a separate entity and things like “insolvency” actually make sense. In that case, the SS fund invested in US bonds the same way any other pension might and it’s the obligation of the rest of the government to pay on those bonds. Saying that “they” spent the money is just as ridiculous as saying that the manager of one of your 401k funds “spent” the money on GM’s production line when they bought GM bonds.

    I argue that (2) is a much more sensible way of looking at it as that’s the whole point of having a separate tax and doing all the actuarial work to figure out how much surplus you’ll need to cover a future deficit. If that’s the case, what we’re looking at is nothing more than a pension that is just about properly funded (with minor tweaks, depending on how things go).

    It isn’t the fault of Social Security, but you can’t deny that net result of the fiscal situation of the program going forward is to add to the deficit.

    Technically speaking, it’s not if you choose model (2). It added to the deficit when the trust fund was buying those bonds, and even then, the deficit existed whether the creditor was the SS trust fund or a private investor. If Social Security had never existed, we still would have had to borrow that money from somebody, and we’d still have to pay them back. We just wouldn’t be talking about defaulting on the debt or having our creditors killed to avoid paying them back as we seem to be when it comes to the SS trust fund.

  5. #5 JasonTD
    June 28, 2010

    Saying that “they” spent the money is just as ridiculous as saying that the manager of one of your 401k funds “spent” the money on GM’s production line when they bought GM bonds.

    If the Social Security surplus had been used as an outside investment like you describe there, then there would certainly be no problem at all. Really, however, the more accurate analogy is what happens when someone takes out a loan against their own 401k to pay for something now that doesn’t have its own value that can be redeemed later (fixing a broken car, paying medical bills, etc.). That person still has to find a way in future revenue to pay it back.

    The issue I am trying to drive at is that whatever the technical situation with Social Security being ‘solvent’ or not, the money to pay future benefits is not just going to poof into existence. Those securities won’t just magically turn into dollars. They will be redeemed at the expense of other areas of the budget and/or with more outside borrowing.

    Your insistence that (2) is the more accurate situation might reflect the legal aspects of how Social Security works (barring changes in the law, which might happen if the budget situation gets bad enough). But looking at Social Security in isolation that way is not going to give you the picture of whole nation’s budget, nor does it give you an accurate view of Social Security’s impact on the budget. To continue with analogies, it is like looking at someone’s 401k in isolation and saying that it’s in great shape versus looking at their finances in total when deciding if they are saving sufficiently for retirement. You get different information from each piece of data.

    If Social Security had never existed, we still would have had to borrow that money from somebody, and we’d still have to pay them back.

    No, we could have just spent less.

  6. #6 Troublesome Frog
    June 28, 2010

    Really, however, the more accurate analogy is what happens when someone takes out a loan against their own 401k to pay for something now that doesn’t have its own value that can be redeemed later (fixing a broken car, paying medical bills, etc.).

    So you’ve taken model #1 to describe Social Security. That’s fine, but be aware of the baggage that comes with it. We can no longer talk about how much money Social Security “takes in” or anything about solvency and still have it make any sense at all.

    I need to ask, though, what is the difference? Let’s say for a moment that we simply “privatize” the Social Security system and make it into a mandatory pension system that buys only government bonds. Suddenly, it becomes a solvent entity and all of those bonds become “real” investments. All that happened was that we nominally changed it from a “government” program to a private pension. What happened?

    Part of the problem is that we’re looking at a loan from one set of people to another as a “loan to yourself.” If you draw a bubble around the entire world, all loans are simply zero sum “loans to yourself” but that’s not really a useful analysis. The same is true if you draw a bubble around the American people or the US government. There is some information to be gleaned, but the “loan to yourself” part of it isn’t really that interesting. The people who paid into the fund and will receive benefits are different from the people who will pay for those benefits and to some extent, different from the people who received the benefits of the loan.

    Every dollar loaned out of the SS trust fund to the general fund is a dollar that is not taxed out of the economy. That dollar is “invested” in the US economy and ideally, will “return” a higher rate (in the form of increased ability to pay taxes later) than the rate on the SS loan. We can talk a little bit about what this means in terms of who pays in and who gets the benefits of the loan, but it’s not a simple “zero sum loan to yourself” as the simplistic analogies make it out to be.

    No, we could have just spent less.

    But we wouldn’t have. When was the last time availability of loanable funds was an issue big enough to affect our borrowing patterns? That budget deficit wasn’t invented just to soak up Social Security money. One could argue that the slightly higher interest rates would have made a difference, but looking at the past 20 years or so makes that seem like a claim of convenience.

  7. #7 JasonTD
    June 29, 2010

    So you’ve taken model #1 to describe Social Security. That’s fine, but be aware of the baggage that comes with it. We can no longer talk about how much money Social Security “takes in” or anything about solvency and still have it make any sense at all.

    Your model #1 is the only model that makes any sense when talking about the federal budget as a whole. People that are claiming that Social Security is going to become ‘insolvent’ are missing the point, but so are you and Mike when you talk about the government bonds it holds.

    Again, Social Security itself seems like it will be fine because of those bonds precisely because they represent a legal obligation against general revenue. And that is the point. Instead of some of the payroll tax providing extra money to spend on other things (in exchange for giving Social Security the bonds), paying back those bonds is going to become another expenditure.

    Every dollar loaned out of the SS trust fund to the general fund is a dollar that is not taxed out of the economy.

    Government financing (especially entitlements) is anything but simple, but it is plainly wrong when you said that a dollar loaned out of the SS trust fund is not taxed out of the economy, since it originally came from payroll taxes.

    That dollar is “invested” in the US economy and ideally, will “return” a higher rate (in the form of increased ability to pay taxes later) than the rate on the SS loan.

    I never understood that kind of argument. How is a dollar taken from one part of the economy through taxes supposed to end up returning more than a dollar to the economy later? I suppose the assumption is that the government knows how to ‘invest’ that dollar in something that will raise productivity more than how it would have been invested had it simply left the money where it was.

    Believe it or not, I actually consider myself a moderate. I think that Social Security and Medicare and Medicaid (as concepts, if not always in practice) are good things, worthy of my tax money. But I have no illusions that those programs, which make up nearly half of all federal spending, are ‘investments’ that are going to be a net positive for economic growth. Very little of government spending aside from that spent on infrastructure and science could be considered an ‘investment’ likely to generate an increased return in the long run.

  8. #8 holidays in tenerife
    June 29, 2010

    I have been looking through your blog, and you do amazing work! I have saved your blog to my favorite list so I can come back and look at your work some more! It is beautiful there! I’ll be back to see some more of your beautiful work!

  9. #9 Troublesome Frog
    June 29, 2010

    Government financing (especially entitlements) is anything but simple, but it is plainly wrong when you said that a dollar loaned out of the SS trust fund is not taxed out of the economy, since it originally came from payroll taxes.

    That was missing some words when I wrote it. What I meant was “elsewhere in the economy.” A loan from SS is not a “loan to yourself” but rather a loan from one set of people to (largely) another set of people just like any other loan. In this case, it’s generally a loan from the working class people who pay into SS to the wealthier people who would pick up the marginal cost of the additional tax burden (no comment on the macroeconomic effects of that) had the taxes been taken out of income taxes.

    Think about it this way: Group A loans Group B money at a very low interest rate. Group B pays back Group A later after investing in riskier things (basically any economic activity that isn’t low interest rate government paper). So what benefit does Group A get out of this? A low risk investment. They could have loaned to Group B directly at a higher rate, but that would change the risk distribution. This arrangement doesn’t increase net investment, but it does move it around to provide SS recipients a basically guaranteed deal.

    The other option would be to have the government take money out of taxes and put it into a “real” pension. On the net, it’s the same thing: Uncle Sam takes $1 from you and gives it to somebody else who pays back more of it later. The downside to that is that now we have to explicitly worry about the volatility of the investments rather than simply being a “shareholder” in the US revenue stream. That and the fact that Congress could never be trusted to invest with the best interests of SS recipients in mind.

    I never understood that kind of argument. How is a dollar taken from one part of the economy through taxes supposed to end up returning more than a dollar to the economy later?

    Ignore the fact that it’s taxes for a moment. What you’re asking is, “How does a dollar taken from one place and moved to another end up growing?” The same argument is made against stimulus spending, but the argument proves too much. If it was true, Bill Gates borrowing money to start Microsoft could not have grown the US economy.

    In this case, it’s even simpler. Nobody is claiming that it returns “more” money to the economy. Rather, it changes the distribution of risk. A dollar is “invested” whether you put it into a corporate bond or a government bond. In one case, the corporation gets a loan. In another case, a broad class of people get a loan. The latter case simply bears a lower rate of return with a risk of nearly zero.

    You never answered my question about how nominally privatizing the management of SS would affect government bonds. Would they become “real” investments at that point? Are government securities ever “real” investments if they’re purchased by citizens of the nation in question?

  10. #10 Troublesome Frog
    June 29, 2010

    JasonTD,

    I also want to say for a moment that I would rather have Social Security operate as part of the general budget and simply be treated as a pay-as-you go transfer. It’s a much simpler way to deal with things. I can’t really think of a good economic argument to do it one way or the other as it nets out to be the same thing. The reasons we’re stuck with it are political ones. If you make it part of the general fund, it looks like welfare and gets obliterated.

    All of the talk of “welfare” and “solvency” and “Ponzi schemes” ignores the basic fact that we have always taken care of our elders when they got too old to work, and the money always came directly from working people. The only difference is that we used to do it by having our parents move in with us until they died. Social Security is simply a restructuring of that agreement that allows more independence for both generations and a safety net for people who didn’t raise financially successful children. Looking at it like that, why not make it a general fund transfer and drop the Social Security tax entirely?