Wednesday, November 21, 2007

Why Social Security "Reform" Needs to Wait a While

This morning brought an op-ed in the Washington Post by someone named Ruth Marcus giving the smack down to Paul Krugman's rebuke of the Washington, D.C. Insider's cries for Social Security reform on the basis of that program's "crisis" status.

You can follow the back and forth here.

But the most important issue to address regarding Social Security's long term financing status is taken up by Josh Marshall in a post I am going to quote at length here. In particular, Marshall challenges the conventional wisdom that Social Security reform must start sooner rather than later in order to minimize the magnititude of the tax increases/benefit cuts establishing long term solvency would require. As Marshall points out, this is just wrong:

I said last night that I disagreed with the oft-stated claim that it just gets harder to 'fix' the non-existent Social Security crisis the longer you wait. In fact, as I thought about Obama's proposal to remove or retool the cap on Social Security taxes I got to thinking that it's not just not necessary to do right now but that it actually might be a bad idea altogether.

Many have argued that having this debate at all buys into the right-wing argument that there's a 'crisis' that needs to be solved and thus that the politics are all wrong. But put that aside, let's talk about whether it makes sense even on substance.

When it comes to the policy and number-crunching nitty-gritty of Social Security I'm definitely an amateur. But I think I've got a decent sense of the political-economy of the question. We need to remember that now and for at least a decade into the future Social Security is actually subsidizing the rest of the federal budget. The program brings in much more than it pays out. As we all remember from the voluble debates two years ago, the surplus is being used to buy US government bonds which go into the Trust Fund. And that socked away money will keep the program solvent through the middle of this century as the baby boomers retire, and revenues in no longer cover promised payments out.

We've been doing that for about a quarter of a century.

The problem on the political side of the equation is that the enemies of Social Security have spent a couple decades arguing that the Trust Fund doesn't exist or that it is simply a bookkeeping device with no true financial meaning. If that's true, it means that American workers have spent the last twenty-five years using their payroll taxes to subsidize general revenues and make it easier to float big tax cuts for upper-income earners without getting anything in return.

If we start pumping a lot more money into Social Security coffers now it will by definition go into more government bonds, which is another way of saying that it will go toward funding our current deficit spending. In fact it will enable more deficit spending and probably more upper-income tax cuts because it will make the consequences of both easier to hide.

If we want to push the buffer of the Trust Fund further out onto the horizon, then fiddle with payroll taxes when Social Security would need to start dipping into Trust Fund. In other words, in a decade or so. I see no reason why this approach doesn't work just as nicely then as it would now.

As Paul Krugman noted in the interview I did with him a few weeks ago, the window of time we had to seriously pare down the national debt to prepare for the retirement of the baby-boomers is close to over. Still, though, our best way of ensuring the future health of Social Security is to stop running up the national debt now. So I'm very reluctant to put more payroll taxes in the pot while we're still running big deficits because of the Bush tax cuts. The money will just go to subsidizing that irresponsible fiscal policy.

If there is any sense in which the 'Trust Fund' is not 'real' it is that it must be paid back from general revenues. And that will only be harder the more other debt we're running up. So rather than solving the problem, I think we're actually enabling it.

The second problem is that we need a national agreement or consensus that the Trust Fund is real, that it will be honored, and have the debate about the future of the program on that basis. Otherwise, we're still risking getting played in the same bait-and-switch privatizers have been trying to pull for years -- using regressive payroll taxes to fund current government spending and then telling future recipients that that money has disappeared and thus Social Security has to be phased out altogether.

Lifting the payroll tax cap while Social Security is still running a big surplus not only solves a problem that doesn't exist it enables the very policies that put the program in danger. Perhaps this is all another way of saying that I'm not a fan of putting more hens in the hen house while the foxes are still at the door, or even in the house.


This I think is exactly right. The only thing a benefit reduction or tax increase to Social Security would do now, is what it has succeeded in doing for the past two decades, and that is subsidize the rest of the federal budget, allowing for income, capital gains, corporate and other tax cuts, which would benefit mostly the well to do, and encourage deficit spending generally, both of which are bad for Social Security and its recipients, further magnifying the ultimate day of reckoning when Social Security's bonds will come due.

Monday, November 19, 2007