• • •
"Mike and Jon, Jon and Mike—I've known them both for years, and, clearly, one of them is very funny. As for the other: truly one of the great hangers-on of our time."—Steve Bodow, head writer, The Daily Show
"Who can really judge what's funny? If humor is a subjective medium, then can there be something that is really and truly hilarious? Me. This book."—Daniel Handler, author, Adverbs, and personal representative of Lemony Snicket
"The good news: I thought Our Kampf was consistently hilarious. The bad news: I’m the guy who wrote Monkeybone."—Sam Hamm, screenwriter, Batman, Batman Returns, and Homecoming
January 31, 2005
Hands Off Social Security! v2.0
Below is a revamped version of the Q&A from the beginning of Hands Off Social Security! The whole thing is just about done, and will be available here soon. It will be flogged relentlessly.
In the meantime, I'd very much appreciate feedback on whether this is understandable. I want the book to be something that will make sense to anyone, even if they don't know anything about Social Security or economics to start with. If this part doesn't do that, I need to fix it now.
What is Social Security?
Social Security, founded in 1935, is a government-guaranteed retirement program. (At least, this is what people usually mean when they talk about Social Security. It also provides disability and life insurance.)
45 million of us, or more than one in every seven Americans, receive Social Security benefits. It's the most successful and most popular government program in U.S. history. In fact, it may be the most successful and popular government program in the history of the world.
How does Social Security work?
It's very simple: the government takes 12.4% of every worker's paycheck in what are called "payroll taxes." Then the Social Security Administration sends the money off to current retirees and other beneficiaries. The amount each retiree gets varies. The more you paid in during your working life, the more you get when you're retired.
Today, an average retiree—I'm going to call her Mary, after my grandmother—gets about $15,000 per year in benefits. Mary is guaranteed to get this $15,000 every year as long as she lives. Her savings might run out, the stock market might crash, and her old company might go bankrupt and stop paying her pension. But she will still get Social Security. Just as important, her benefits are protected against inflation. So if prices double, her benefits will automatically double to $30,000.
Once set, a retiree's benefit stays the same but is guaranteed no matter how long he or she lives. That's a lot of the "Security" part of "Social Security." It's almost impossible to get that guarantee, and protection against inflation, from anywhere except Social Security.
Hands Off Social Security! explains the nitty-gritty of how Social Security functions, but for now there are only two more things you need to know:
First, the promised benefit level for each new batch of retirees rises over time. Mary, our average retiree in 2005, receives about $15,000. However, Mary's granddaughter Marianne, who's an average person retiring in 2055, is promised $23,300—in 2005 dollars. This is even after inflation is taken into account; retirees get higher real benefits as time go on. (HOSS! explains why this is possible, and also fair.)
Second, if the Social Security Administration takes in more in taxes than is needed to pay current beneficiaries their promised benefits, the money is used to purchase U.S. treasury bonds. These bonds make up the Social Security Trust Fund. If the Social Security Administration takes in less in taxes than is promised to current beneficiaries, it cashes in some of its Trust Fund bonds to make up the difference. (See "What is the Social Security Trust Fund?", below.)
Is Social Security in crisis?
NO. There is no Social Security crisis. Under the main government projections, Social Security can with no changes whatsoever pay full benefits through 2042—and then continue forever to pay benefits higher than the $15,000 Mary gets today. Under other government projections, Social Security is fine through 2052. Under still others, Social Security is fine indefinitely.
Here's a graph showing this, based on the most recent Social Security Administration projections (full benefits through 2042) and Congressional Budget Office projections (full benefits through 2052). All numbers are in 2004 dollars; that is, higher benefits are higher in real value, not higher because of inflation.
Source: "Basic Facts on Social Security and Proposed Benefit Cuts/Privatization" by Dean Baker and David Rosnick.
(For more details, see the questions about Social Security projections below.)
But didn't President Bush just say Social Security is in crisis?
He did. In December, 2004 he said that "the crisis is now."
However... President Bush sometimes says things that aren't 100% true. Perhaps you remember him telling us about Iraq's terrifying weapons of mass destruction.
The Social Security crisis is just as real, and just as terrifying, as Iraq's WMD.
Then why is Bush saying there's a crisis?
Because he wants to dismantle Social Security.
Conservative Republicans have hated Social Security since before it began. In 1935, Republican Senator Daniel Hastings said Social Security would "end the progress" of America. Ever since, conservatives have been claiming Social Security is about to collapse. When people who are now receiving Social Security checks were starting to work in the 1960s, conservative Republicans were telling them they'd never see a dime. Bush himself, when he was running for Congress in 1978, said Social Security would "go broke" within ten years.
However, until now conservative politicians have never made any serious attempt to kill Social Security. That's because Social Security is extremely popular. And as much as conservatives dislike Social Security, they dislike losing elections even more. Social Security has often been called the "third rail" of American politics—touch it and you die.
But things have changed. Not Social Security itself; it's fine. But conservatives think that—after saying since 1935 that Social Security is about to collapse—they've finally gotten Americans to believe it. As a recent internal White House memo put it, "For the first time in six decades, the Social Security battle is one we can win."
The person who wrote this was being honest: conservatives have been fighting against Social Security for 60 years. It didn't have anything to do with a "crisis" in 1945, 1965, or 1985. And it doesn't now.
Now, you may be wondering: why exactly do conservatives hate Social Security? Why do they think something so many Americans like is so terrible?
Here's one answer: $$$$$$$$$$$$$$$$$$$$$$$$
President Bush's plans for Social Security would mean Americans would be required to hand billions and billions of dollars over to Wall Street. As Fortune magazine recently put it, Wall Street is "salivating" over this. Even the Cato Institute, a Washington think tank that has pushed for privatization for decades, says that "financial institutions in particular" would benefit.
Another answer is that conservatives believe getting rid of Social Security would make them more powerful. Their thinking about this is too complicated to go into here. It's interesting, though, and is discussed in Hands Off Social Security!
But... don't people on the news talk about Social Security being in crisis too? Didn't Bill Clinton say we had to "save Social Security first"?
You do see many people on television saying there's a Social Security crisis. But again—you also saw many people on television saying Iraq had weapons of mass destruction. Just because you're on TV doesn't mean you know what you're saying.
In fact, people on TV usually have less idea what they're saying than the rest of us. It's not that they're stupider than we are—it's that being on TV takes up lots of time. For instance, if you're Bill O'Reilly, you have to spend most of each day putting on makeup, coiffing your hair, sexually harassing employees, and so forth. (Well, allegedly sexually harassing employees.) This doesn't leave you much time to learn about Social Security.
Bill Clinton is a different story. Clinton did say, in his 1998 State of the Union address, that we should "save Social Security first."
This was a catchy slogan. But what he actually meant was something different, and less catchy: "Reduce the debt/GDP ratio first, thereby increasing the general solvency of the federal government and reducing the cost if we eventually have to rollover the Social Security Trust Fund debt in private markets."
Confused? That's okay. Hands Off Social Security! explains what Clinton was talking about. (For a little help now, see "What is the Social Security Trust Fund?", below.) But the point is that most of what Clinton said was reasonable at the time, but it didn't mean Social Security was facing a crisis.
Does this mean all the talk about the "Social Security shortfall" is just made up?
It depends on what you mean by "made up."
Every year, Social Security's Trustees are required by Congress to make projections of the program's health over the next seventy-five years. You could argue that this is dumb; no one can predict much that far into the future. No one in 1930 could predict spam email, Christina Aguilera, or spam email about Christina Aguilera. Likewise, we can't accurately predict what the world will be like in 2080. (Except for the killer robots.)
Nonetheless, that's the law. And every year, the Trustees present three different projections of Social Security's health: low cost (optimistic), high cost (pessimistic), and intermediate. When you read news stories about what the Social Security Trustees predict, the stories generally only refer to 2004's intermediate projection. That's the one that shows Social Security running short of money in 2042.
Now, Bush and others often speak of this date as though it's written in stone. But of course it's not; it's just a best guess. The 1996 intermediate projection showed a shortfall occurring in 2029. Because of better economic performance since then, it's continually moved further into the future. 2005's intermediate projection will likely show a shortfall occurring in 2043 or 2044.
Similarly, a recent prediction by the Congressional Budget Office (another part of the government) shows Social Security as fine through 2052. The Social Security low cost projection shows Social Security as fine forever. (Well, at least until the sun explodes. At that point Social Security will admittedly face real problems.)
Which of these projections is correct? No one knows. However, the 2004 intermediate projection—the one showing the shortfall in 2042—is strangely pessimistic. It predicts that over the next seventy-five years the US economy will grow at half the rate of the past seventy-five years.
Some people have begun to wonder whether the Social Security Trustees are pessimistic on purpose, in order to make Social Security's finances look bad. This is probably wrong. However, it is true that the Social Security Trustees (there are six of them) are appointed by the President. And while the Trustees receive professional recommendations from Social Security's non-political actuaries, there's no way to know whether they follow these recommendations. All their deliberations are sealed.
But what happens if the Social Security projections are exactly right?
First, remember that even if 2004's intermediate projection is right, Social Security will not be—as George Bush recently said—"broke" or "flat busted" in 2042.
Bush clearly is trying to confuse people about this, because he often refers to the Trust Fund as going bankrupt. But while it's true the Trust Fund could be out of money in 2042, Social Security is not the Trust Fund. Social Security itself will never be out of money. It will always have payroll taxes coming in to pay some benefits. The question is whether payroll taxes will be enough to pay promised benefits.
As mentioned before, promised benefits rise over time. Mary today receives about $15,000/year, while her granddaughter Marianne retiring in 2055 is promised about $23,300/year. As the graph above shows, payroll taxes are projected to be insufficient to pay the $23,300. But they will be enough to pay more than $15,000. Thus, even with no changes whatsoever to Social Security, under the intermediate projection an average retiree in 2042 would receive more than an average retiree today. This would only be 73% of promised benefits, but it's a lot more than nothing.
However, it's likely that we would decide not to cut benefits. Instead, we would probably raise taxes so that full, promised benefits could be paid.
Social Security's opponents often point to this as disastrous outcome. They say the higher taxes would place a crushing burden on future Americans. However, this is ridiculous.
That's because America will be a much richer country in the future—just as we're much richer now than we were forty or fifty years ago. Per capita GDP in 2005 is $39,450. Under the 2004 intermediate projections, in 2050 it will be $66,580.
Thus, even if we raised payroll taxes to pay full promised benefits to retirees, everyone working would still have a much higher after-tax income than everyone working today. This can be seen in the graph below.
Source: "Basic Facts on Social Security and Proposed Benefit Cuts/Privatization" by Dean Baker and David Rosnick.
And in fact, raising payroll taxes is exactly what's been done before to keep Social Security solvent. Workers in 1955 paid lower payroll taxes than workers today. But despite this, no one ever would choose to go back to the standard of living of 1955. No one ever says: Geez—I wish I had lower taxes, plus a tiny black and white TV, no VCR or cell phone, and a much smaller house.
What is the Social Security Trust Fund?
As mentioned above, most Social Security benefits are paid from payroll taxes. However, payroll taxes and promised benefits don't always match. When Social Security takes in more than it pays out, it uses the money to buy US savings bonds. When it pays out more than it takes in, it cashes in the bonds and uses the money for benefits.
Until recently, the Trust Fund wasn't that big. However, in the early 1980s it became clear Social Security would have to be changed to provide for the baby boomers when they started retiring in the 21st century. In 1983 Congress took the advice of Alan Greenspan (now head of the Federal Reserve and a conservative hero) and raised payroll taxes to their current rate. This was (and still is) far more than is needed to pay full Social Security benefits for current retirees.
For instance, in 2002 Social Security took in $516 billion in payroll taxes, while only paying $455 billion in benefits. As usual, this extra revenue was used to buy Treasury bonds. By now the Trust Fund holds bonds worth about $1.5 trillion.
Under the 2004 intermediate projections, payroll taxes will exceed benefits until 2018. Until that date, the Trust Fund will increase. From that point forward, the Trust Fund will be drawn down to pay promised benefits. There will be enough in the Trust Fund to do this until 2042, at which point it will be empty.
But isn't the Trust Fund just meaningless IOUs?
No. ABSOLUTELY NOT. Anyone who suggests the Trust Fund is "meaningless IOUs" is someone you cannot trust. Either they don't understand this issue, or they're trying to trick you.
This part of the Social Security picture is somewhat complicated. But hopefully this explanation will be clear:
The Trust Fund holds US Treasury bonds. They're the safest investment on earth. That is, among other reasons, why the Trust Fund holds them. In the entire history of the US, the government has never failed to pay off its bondholders. That's why Americans and people from all over the world buy them. Millions of people have bonds besides the Social Security Trust Fund. In fact, George Bush's financial disclosure forms show he personally holds lots of US bonds. No one is suggesting George Bush won't get paid back.
Now, it's true the money to pay off the Trust Funds bonds—like all other bonds—won't come from Mars. It will come from Americans. But the important issue is which Americans.
Payroll taxes fall most heavily on poorer Americans. It's a flat tax. And only your salary is taxed. (See "How does Social Security work?", above.)
By contrast, income taxes are paid mostly by richer Americans. Income taxes are progressive; that is, the more money you make, the higher a percentage of your income you pay. And your entire income is taxed. While the income of most Americans comes from working, richer Americans have lots of non-work income from stocks, bonds, real estate, etc.
Thus, the richest 1% of households in the US pay about 37% of all federal income taxes. The richest 5% pay about 59%. And the money to pay off the Trust Fund will mostly come from income taxes.
In essence, the plan in 1983 was a promise: younger, poorer workers would pay higher taxes during their working lives. In return, a chunk of their retirement would be paid for by richer people in the future. Not honoring the Trust Fund would break this promise.
Of course, breaking the promise would be good for some people. Economist Dean Baker, one of America's foremost experts on Social Security, estimates it would transfer $1 trillion from the poorer 95% of Americans to the richest 5%. Each household in the top 1% would receive about $730,000.
Thus, the Trust Fund is not meaningless IOUs. The only people who say it is do so because they don't like the fact that it is meaningful. They don't want to pay.
This is a neat trick. Everyone would like to borrow lots of money and then, when the time came to pay it back, start claiming you didn't have to. But only if you are very rich can you pay other people to go on TV and say this for you.
But hasn't the Trust Fund all been spent? Shouldn't it have been invested in something real?
Again, anyone who says this is confused.
Whenever you make any kind of investment—government bonds, corporate bonds, stock, or real estate—the money you pay for it is spent. For instance, if you buy a bond issued by General Electric, they take your money and spend it. Certainly the CEO of GE doesn't take your money home with him and stick it underneath his mattress. In fact, if GE weren't going to spend it, they wouldn't sell you the bond in the first place. Getting your money and spending it is the whole point.
But what you get in return for buying a General Electric bond is not a meaningless IOU. It's a claim on GE's revenue in the future. This is a real, smart investment: GE is a stable company that's consistently profitable. By buying their bond, you're investing in GE's future productive capability. You're betting that in the future, they'll make enough money to pay you back, with interest.
It's the same thing when you buy a US Treasury bond; the government takes your money and spends it. What you get in return is an even safer bet than a GE bond: a claim on the future productive capability of the entire economy of the US, the richest country on earth.
This is as real as investments get. Rather than investing in one American company like GE, you're essentially investing in all American companies. If GE goes bankrupt, GE bondholders may never get their money back. But US bondholders will, because there are many other American companies. However, it doesn't work the other way around. If things get so bad the US government can't pay you back, it's extremely unlikely GE will have money to pay its bondholders.
To understand this in terms of the Trust Fund, imagine that the Trust Fund was used to buy lots of stocks and corporate bonds. (I.e., what supporters of privatization call "real" investments.) When it came time to cash the Trust Fund in, the Trust Fund would sell these stocks and corporate bonds. The money the Trust Fund made from the sales would go to retirees.
Investing the Trust Fund in US Treasury bonds only changes the process slightly. The stocks and bonds the Trust Fund would have owned will still exist. However, they will be owned by individuals. When it comes time to cash in the Trust Fund, the individuals will be taxed. They will sell stocks and bonds to pay their taxes. The money the government gets from the taxes will go to pay off the Trust Fund's bonds. The money the Trust Fund makes from the bonds will go to retirees.
What does President Bush want to do to Social Security?
As of February 1, 2005, he hasn't formally proposed specifics. However, during his first term Bush appointed a commission, and has endorsed one of its proposals. His plan will clearly be quite close to this.
Each person working today pays 12.4% of their salary in payroll taxes for Social Security. (See "How does Social Security work?", above.) Under the plan Bush endorses, a big chunk of this would be diverted into a private account in each person's name. Probably Bush will eventually propose that this chunk be 4% of each worker's salary (about a third of their payroll taxes) or 6% (about half).
At the same time, promised benefits would be cut deeply over time. Someone born today would see their benefits cut almost in half.
Why is Bush's plan such a bad idea?
Eh. Where to start? It's such a bad idea in so many ways I'll only go into a few of them here. The rest will be found in Hands Off Social Security!
The most important thing to understand is that private accounts will not make up for the cuts in promised benefits. Everyone pushing privatization talks about the wonderful return people would get investing their private accounts in the stock market. Over the past 75 years, they'll tell you, the return on stocks averaged 7% per year. Whenever privatizers calculate returns under their plans, this is the number they use.
And it's true that was the return on stocks in the past. But remember that the Social Security Trustees project that over the next 75 years, the US economy will grow at half the rate of the past 75 years. That's why there's a shortfall in the first place. (See "Does this mean all the talk about the "Social Security shortfall" is just made up?", above.)
And if the US economy is growing at half the rate of the past, it's impossible for stocks to produce returns like in the past. It simply can't be done.
Now, hopefully the Social Security Trustees are wrong. Hopefully the economy will grow like it did in the past. Then there could be similar returns on stock investments. But then there would be no problem whatsoever with Social Security.
In other words, the privatizers want it both ways. They want to claim the economy will be terrible for decades. But their proposed "solution" assumes the economy will be doing great.
Their dishonesty is shocking, if you're the kind of person who gets shocked. No one knows for sure whether the Bush administration was lying about Iraq and WMD, or whether they're just completely incompetent. With Social Security, it's different: they're very consciously lying. As HOSS! explains, there's no question about this at all.
And it's not just that Bush's plan would be worse for Americans than what they're promised today, under the supposedly unsustainable current rules. Without the impossible stock returns, Bush's plan would be significantly worse than what will happen with no changes to Social Security whatsoever. In other worse, Bush says there's a crisis—yet his proposed solution does nothing but make things for retirees worse than that.
This can be seen in the below graph. It's taken from an analysis of Bush's plan by the Congressional Budget Office. "Current Law Expected" is what's projected if nothing is done to increase Social Security revenue over the next hundred years. (The big drop around 2054 is when the Trust Fund runs out.) "CSSS Plan 2 Expected" is what Bush wants to do. The line represents the total benefits retirees would receive under Bush's plan—not just their reduced Social Security benefits, but also the returns from their private accounts. The numbers on the left signify percent of GDP.
In dollar terms, it works out like this: Mary's granddaughter Marianne, an average person born in 1990, is promised $23,300 per year when she retires in 2055. According to the CBO, if the "crisis" hits and nothing whatsoever is done over the next fifty years, Marianne will receive only $18,100. Under Bush's plan, Marianne gets—from Social Security and her private account—$14,500.
And yet this makes Bush's plan look better than it is. After all, Marianne has exactly average luck in the stock market. Margaret, Madeline and Matilda—in fact, half of all retirees—will have worse luck in the stock market. They'll have even less money coming in.
Finally, there's a small but real chance Bush's plan would cause a gigantic financial meltdown during the near future. I'm not kidding. It's complicated, so I won't go into it here. But all the terrifying details can be found in HOSS!
There is a bright side, however. No matter what, under Bush's plan, his big contributors on Wall Street would make billions of dollars. That's worth any number of old ladies eating dog food.Posted at January 31, 2005 06:47 PM | TrackBack