However, that the payroll reduction hurts SS is a common misperception. That's not correct. Every month, the Treasury transfers cash to SS in order to make up for the shortfall. I follow this stuff; if these transfers had not been made, I (and a bunch of others) would have blown the whistle months ago.
As a result of these transfers, SS ends up unharmed by the tax break. Other taxpayers foot the bill. But since we have a deficit to begin with, this just adds to the countries red ink. Uncle Sam is digging into one pocket and transferring wealth to SS. This is the socialization of Social Security. What does it mean if SS becomes a ward of the state? Charles Blahous, an ex Bush advisor had this to say:
“The payroll-tax cut would take a major step toward transforming Social Security from what it has long been — an earned benefit, funded by separate worker payroll taxes — into an income-tax based system more akin to welfare.”
For years the SS defenders have pointed out that SS is self-funding and does not contribute to the deficit. That was not true in 2011 (to the tune of $115b). The on-budget expense/increase to public debt will be $120b in 2012. That’s real money.
It's an unfortunate fact that the US economy will flounder if workers pay only 2/3rd of the statutory rate in 2012. That’s how fragile the economy is. It’s not likely that things will be much different a year from now. Another “one time only’ extension of the FICA tax breaks will be on the table twelve months from today. From the Times:
Robert Reischauer, Ex CBO and SSA.
“Imagine that next December the unemployment rate is 8 percent and a year later it’s 7.4 percent. We’ll still be trying to stimulate employment and terminating the payroll tax holiday will be a big hit on most families, one that will hurt job growth.”
Reischauer is right, we will not revert to the statutory rates, much less the 1% increase that is require to stabilize SSA. I think he's also correct with his projection of a huge fight:
“The nightmare that I have is that when it comes time to raise the tax back up to 6.2 percent, conservatives are going to propose that these two percentage points of payroll tax be devoted to individual accounts. That will precipitate a huge fight and could change Social Security in a fundamental way.”
There is a huge brawl in front of the country on this issue. Folks on both sides are deeply entrenched. The following is an exchange I saw on Angry Bear blog. It's an example of the rhetoric we will get, The fellow who wrote this, Dale Coberly, is a fairly well-know contributor to the SS debate. Dale loves SS and hates anyone who thinks that changes are required. If you have any doubts how visceral a fight we're in for, consider this bit of fluff:
rjsjust a heads up...
Bruce Krasting says Social Security 2011 - Another Bad Year...he concludes: The current thinking is that SS is a problem that can be worried about in another ten years or so. That's simply not true.12/08/2011, 13:00:51– Reply
coberly
rjs
there are bigger liars than Krasting writing about SS. I can't keep up with them all, and with Obama killing SS outright with the permanent payroll tax holiday, and the Democrats and Progressives rallying behind him, there is nothing more I can do.
Maybe Krasting will be out of a job soon.
The stalwarts of SS recognize that the program is now vulnerable. They want bad things to happen to those who believe changes are essential. We're going to have a fight. A big one. Think, “Age Warfare”.
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Posts
They can try to squeeze blood from a turnip, but there's no way the younger generation can pay for SS, let alone medicaid & medicare, as well as keep the housing ponzi alive, all in an environment with no real wealth-producing jobs.
ReplyDeleteSomething's gotta give - we are headed for a train wreck.
"However, that the payroll reduction hurts SS is a common misperception. That's not correct. Every month, the Treasury transfers cash to SS in order to make up for the shortfall. I follow this stuff; if these transfers had not been made, I (and a bunch of others) would have blown the whistle months ago."
ReplyDeleteBruce you are following the accounting. The economic substance is trashed. The wealth transfer from current workers to retirees no longer works. The economic substance of Social Security is the wealth transfer. The "earned income tax credit" and the 2% payroll tax reduction are evidence that Social Security is not working as intended.
“[Robert Reischauer says]...The nightmare that I have is that when it comes time to raise the tax back up to 6.2 percent, conservatives are going to propose that these two percentage points of payroll tax be devoted to individual accounts...”
ReplyDeleteWhat a great idea! Even better, drop the future benefits in line with the workers' contributions.
I am in the same age camp as Mr. Krastings and a very new arrival to Social Security Benefits. I agree this to be a very "hot" topic and in my own experience, seen resentment about my "payout" from those only 10 years young than myself. I can imagine the anger of the 20-30 set about paying into a system whose benefits to them are uncertain. Even though I paid into the system my whole life, as did my employers on my behalf, it was never "opt" out……..there was no choice.
ReplyDeleteDespite this, I know we have a demographics issue in the USA and that China and Japan share a similar metric in that there are too many elderly as a ratio to productive workers. I believe that future generations may not have the same standard of living that I enjoyed and I also believe my generation could collectively be one that does not live as long as our parents. I recently read an article that a reversal of life expectancy is already happening in Germany for those lower income workers in their mid sixties. I cannot see how its possible that our Government grants the same levels of benefits to future generations and mine that they gave to the WWII Generation. How can the country afford to give knee or hip replacements to people in their late 70's or early 80's or keep them on a dozen medications? I know its hard "math" but what's the cost benefit of that.
I am on the "wrong" end of the demographic equation in that I am actuarially within the last 14 years of my life. Perhaps we have a system where the government offers the elderly good medical subsides up to a given age and then reduces them substantially. Perhaps competition for financial resources and social priorities forces these issues. Perhaps we all make healthier choices throughout our life if we know the subsidy ends at "x" birthday. I am sure many "options" will be discussed over the next 10 years. Hopefully, those discussions remain civil……….
Great comments on SS, Bruce. An analogous situation is playing out in the state and local government funded pensions. Most states and local governments are having to raise their contributions to the pensions funds significantly and will need to continue to do so for many years into the future. This funding is detracting from current spending and is causing layoffs and preventing hiring by municipal governments which is a big part of the lack of a bounce in employment generally. This funding is deflationary in the extreme because most or all of the contributions are not being invested but simply going back out to beneficiaries (to whom it is not new money--i.e., unexpected). The federal government has one great advantage in dealing with this problem--it can simply create money and continue the payments without needing to take it from somewhere else, but all the obfuscation and morality surrounding the SS transfer process will perhaps prevent them from doing it.
ReplyDeleteThere is no particular need to have a "trust fund" for SS other than our need to convince ourselves that the payments are "deserved" or that some of our taxes are being "saved" for our retirements. Maybe that's necessary from a public policy standpoint but it's not from an operational standpoint.
"Uncle Sam is digging into one pocket and transferring wealth to SS. This is the socialization of Social Security".
ReplyDeleteIf both hands belong to Uncle Sam - doesn't that mean SS has always been socialized?
Thanks for the frequent posts on SS, they are my favorite part of this blog.
ReplyDeleteWow, sorry to hear you might soon be "out of a job". Hopefully you will be able to make ends meet even without your blog paycheck? :)
Or do you still have a day job (I always had the impression you are retired) and he intends to orchestrate pressure on your employer? That would suck.
off topic: best wishes for the holidays, Merry Christmas to all, Jim,MtnViewCA,USA
I have the honor of being kicked off of the Angry Bear blog.
ReplyDeleteIt was not for profanity, but, rather, Bruce Webb's and Coberly's inability to respond to objective governmental links and excerpts on Social Security.
The biggest hurdle is that Bruce Webb thinks that unfunded Treasuries are better than cash for the Treasuries earn interest.
When I explain that these Treasuries, when redeemed from the trust fund, require new revenues, AS IF THE TRUST FUND DID NOT EXIST, he has no answer - other than to boot me off the blog.
Tapping the trust fund is the same financial dynamics as paying for battleships.
The only difference is that battleships have to have an explicit appropriation.
Don Levit
All sides on this should look into MMT.
ReplyDeleteUncle Sam is digging into one pocket and transferring wealth to SS.
ReplyDeleteNo. This is to make the fundamental error of confusing wealth and money. "Wealth" is actual economic good (e.g., a shoe or a haircut). Money is simply a means of exchange whereby the real wealth becomes fungible.
The US treasury is running a massive deficit, so when it transfers money to SS, all that means is that it's borrowing more money. Now, if that were actual borrowing, that would signify the assumption of debt in exchange for the wealth of bondholders. But in practice, all this means is that Bernanke takes the bonds in return for creating a line in an account that starts with a number and has a lot of zeroes after it.
And all those numbers followed by big strings of zeroes mean that the Fed has no choice but to continue its interference with interest rates (artifically lowering them, of course), destroying the value of long-term value of cash and making it pointless to save money. And this is a trap that cannot end, since any significant increase in borrowing costs will push the treasury over the cliff.
The end of this story will be very ugly. The only question is when the end comes.
"The end of this story will be very ugly. The only question is when the end comes."
ReplyDeleteThe Fed has been increasing base reserves in an ever increasing amount, thus diluting the currency once it makes its way into the economy. The reality is no one, in general, is buying US gov't bonds - sure there's temporary influxes of dollars back into bills/bonds during times of uncertainty but with huge budget deficits/trade deficits, the Fed must print on behalf of the USG. China bought the bonds for a decade; no more.
They can raise taxes/cut spending but this will continue to have negative feedback loops in the economy necessitating more Fed printing. This is a vicious feedback loop.
And as base reserves continue to make their way into the economy, this will lead to higher prices and eventually, hyperinflation.
This story will end ugly.
Maybe? Krasting and others are already out of a job. So when are our jobs coming home? Is it going to take SS to cave in before anyone in Congress, the White House do something about all the errors in the free trade agreements. When will the Supreme Court come to Americans aid that these free trade agreements violate the Constitution when our trade balance is not balanced by shipping our jobs offshore?
ReplyDelete