Monday, January 10, 2005

Social Insecurity Complex

What I find most astonishing about the debate over Social Security is how it seems so truly, immutably, unalterably polarized. Hell, no longer do the White House and Democratic opponents even really debate the best route to resolve the predicted funding woes of Social Security.

Now, the fundamental question, according to sky-is-falling Republicans and head-in-the sand Democrats, has shifted from which policy works best to the more basic: Is there even a crisis that needs fixing?

Short answer, of course, is: Of course -- but I am suspicious of both dogs in this hunt. The Bush White House is intent on barreling through a revolutionary (and, as of this writing, still largely ambiguous) privatization plan based on a principle so suspect that it even sounds goofy to me -- and I tend to believe anything that dissuades me from having to do the math myself.

The White House is singularly focused on persuading the American people that there is a clear and present danger to Social Security (WMD, anyone?). A recently leaked email memo written by Karl Rove operative Peter Wehner lays out the administration's game plan."We need to establish in the public mind a key fiscal fact: right now we are on an unsustainable course," Wehner writes. "That reality needs to be seared into the public consciousness; it is the pre-condition to authentic reform."

Let's review the paradigm of the Bush plan: Social Security funds are expected to shrink as the result of declining productivity in future years, a problem that will be aggravated by a marked rise in retiring baby boomers. Fair enough.

So we avert the crisis through individualized accounts tied to the vagaries of the stock market, which inexplicably will be doing gangbusters in spite of a staggered economy.

And let's not even start considering the billions that would be needed in startup costs for the new scheme; early estimates of the Bush plan estimated such costs at up to $2 trillion. Of course, that's money Dubya insists would not be factored into the ever-worsening federal deficit. The President pays for programs the way Wimpy tried paying for hamburgers. Then again, at least Popeye was around to keep Wimpy honest with an occasional ass-whuppin'.

Not that the Democrats make much sense, either, deferring instead to the Alfred E. Newman approach to statesmanship: What, us worry? It's not our problem. Things aren't supposed to get desperate for, like, about 40 years. Take another bong hit and chill.

Something must be done. When Social Security began, there were more than 40 workers for each retiree. Now, there are three. Some remedies are painfully obvious and more than sensible: Raise the retirement age, a logical change when you consider Americans' longer lifespans; trim benefits for the wealthiest recipients and rethink the whole payroll tax cap that results in the less affluent actually paying a larger percentage of their share.

These suggestions, of course, are about as inviting as shit casserole.

With Social Security easily the most potentially critical domestic policy debate we will face this year, I thought I'd defer to some folks whose views I think at least merit attention.

That said, I'm still not sure where I come down in this fight.

Washington Monthly writer Kevin Drum, writing in the Dec. 29 Los Angeles Times' "Stop Sweating Social Security -- the End Is Not Near" dismisses the notion of calamity around the corner.

"Ten years ago Social Security trustees predicted that the system would become insolvent in 35 years, meaning 2029. Five years later they were still predicting that insolvency was 35 years away -- doomsday had been postponed to 2034. Today, they're predicting that insolvency is 38 years away, in 2042. What happened? Why does the insolvency date keep getting further away? How could the trustees have been so continually wrong?

"The answer is all in the numbers. For instance, the future of Social Security is highly sensitive to predictions of economic growth, and the trustees assume a very conservative growth rate of 1.8% per year. That compares with expected growth of 3.9% this year, a fairly average year for the U.S. economy. Another example: Because young people are the ones who support the system, Social Security projections are also sensitive to immigration rates. Immigrants tend to be young, so the more immigrants, the stronger the system.

"But despite the fact that immigration to the U.S. has been steadily increasing for more than half a century, the trustees assume not just that it will stop growing -- itself a conservative estimate -- but that it will actually decline. What this means is that every few years, as reality outpaces the previous year's predictions, the trustees move the insolvency date forward.

"For now then, making drastic and risky changes to Social Security is like performing major surgery before you even know the results of a biopsy. A more prudent course is to wait and see -- act only if problems really develop down the road. In the meantime, I've stopped being a Social Security doom-monger. On the list of things to worry about, it shouldn't even be in the top 10."

David Brooks, in the Dec. 11, 2004, New York Times, sees Democratic opposition as part of a kneejerk distrust of the free market:

"What you hear these days is not liberalism. It's conspiracyism. It's the belief that the Bushite corporate cabal is going to do to domestic programs what the Bushite neocon cabal did in the realm of foreign affairs. It's the belief in malevolent and shadowy forces that will grab everything for their own greedy ends. This is Michael Moore-ism applied to domestic affairs, and it will leave the Democrats only deeper in the hole.

"I don't deny that many business and Wall Street types would like to capture the system for their own benefit. As Theodore Roosevelt observed, every new social arrangement begets its own kind of sin, which has to be punished by law. But as Roosevelt and his great hero Alexander Hamilton understood, corruption is the price we pay for economic freedom, and the benefits of that freedom vastly outweigh the costs."

Paul Krugman wrote in the Dec. 7, 2004, New York Times that the so-called "Social Security crisis" is overblown bigtime. He points to a Congressional Budget Office projection that Social Security, even if it goes "bankrupt" in 2052, would still be able to pay 81 percent of promised benefits. As such, Krugman argues, Social Security's future funding woes can be corrected without privatization:

"The report finds that extending the life of the trust fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of G.D.P. That's less than 3 percent of federal spending -- less than we're currently spending in Iraq. And it's only about one-quarter of the revenue lost each year because of President Bush's tax cuts - roughly equal to the fraction of those cuts that goes to people with incomes over $500,000 a year.

"Given these numbers, it's not at all hard to come up with fiscal packages that would secure the retirement program, with no major changes, for generations to come."

Krugman's latest allegations of Social Security being a fake crisis arrived in his Jan. 3 New York Times column, "Stopping the Bum's Rush."

"Here's the truth: by law, Social Security has a budget independent of the rest of the U.S. government. That budget is currently running a surplus, thanks to an increase in the payroll tax two decades ago. As a result, Social Security has a large and growing trust fund.

"Where's the imminent crisis? Privatizers say the trust fund doesn't count because it's invested in U.S. government bonds, which are 'meaningless i.o.u.'s.'

"The short version is that the bonds in the Social Security trust fund are obligations of the federal government's general fund, the budget outside Social Security. They have the same status as U.S. bonds owned by Japanese pension funds and the government of China. The general fund is legally obliged to pay the interest and principal on those bonds, and Social Security is legally obliged to pay full benefits as long as there is money in the trust fund.

"There are only two things that could endanger Social Security's ability to pay benefits before the trust fund runs out. One would be a fiscal crisis that led the U.S. to default on all its debts. The other would be legislation specifically repudiating the general fund's debts to retirees. That is, we can't have a Social Security crisis without a general fiscal crisis -- unless Congress declares that debts to foreign bondholders must be honored, but that promises to older Americans, who have spent most of their working lives paying extra payroll taxes to build up the trust fund, don't count."

In "Talking Points Memo," Josh Marshall urges Democrats to take the bottom-line approach at what the debate really is about.

"Imagine for a moment that we were having a different sort of Social Security debate. In this alternative universe it wouldn't be about reform or privatization or who had the best plan to save Social Security. The issues would be different. The question would be whether we should abolish Social Security and replace it with a system of loosely-federally-regulated 401ks, or not.

"It wouldn't be abolished overnight, of course, but phased out over time. So any oldsters collecting benefits now wouldn't need to worry. And the same would probably go for pre-fogies too ... say, anyone over 55.

"But that's the essence of it: abolishing Social Security or not.

"Well, guess what? That is exactly the debate we're having. Only many of Social Security's defenders don't seem to know it. It's not that they don't know it exactly. They, more than anyone, understand the stakes involved. But for all the great facts they're bringing to the table, they still seem content to frame the argument in a way that obscures the true issues involved and benefits their opponents immeasurably."

I'm not the greatest proponent of the Heritage Foundation, but its Social Security analysis is worth a look for its pro-privatization case.

Mickey Kaus weights in, via kausfiles, with the option of (perish the thought!) a bipartisan compromise:

"I don't trust either David Brooks' knowledge of Social Security or my own, but I suspect Brooks is right that a 'grand bargain' is there to be struck between Democrats and Republicans -- a bargain that includes 'personal accounts.' Why? Because Democrats haven't been averse to creating private accounts for today's young workers as long as it's done on top of a solvent regular pay-as-you-go Social Security system that provides a basic floor of guaranteed benefits. (President Clinton called his proposed 'add-on' private accounts 'USA Accounts.') And because Republicans still have to do something -- cutting benefits or raising revenues--to fix the imbalance in the regular Social Security system for current, baby boomer retirees (who aren't young enough to think about substituting private accounts for regular Social Security).

"Suppose centrist Democrats did what was necessary to fix regular ol' Social Security, and then did what was necessary to create add-on private accounts. Would the result look all that different from what the Bush plan will actually look like (benefit cuts and all) when the president finally gets around to giving us the details?

"But, you say, Democrats would surely object to any Bushian system that would let today's young workers live in poverty in their retirement years if their private accounts were invested unluckily and went blooey -- Dems would insist on today's Social Security benefits as a minimum guarantee. And so they should! But couldn't that floor could be provided by a stringently means-tested old-style Social Security system--one that gave full guaranteed benefits only to seniors who really needed them?"

And then there is American Prospect writer Matthew Yglesias, who reviews the Bush push for partial privatization of Social Security:

"The reasoning, ostensibly, is that individuals would invest a reasonably large portion in the stock market, which gets relatively high returns. And that this would allow people to, on average, have as much retirement money as is promised under the current system without any need to raise taxes. The underlying assumption here is that future stock market performance will resemble past stock market performance, with investments seeing gains of between 6 percent and 7 percent per year over the long term.

"That seems like a reasonable assumption. ... But underlying that ... is the assumption that the economy will perform about the same in the future as it has in the past. This way, profits will grow at a roughly equal rate to the past profit-growth that's historically driven the stock market's relatively high returns. If the future economy is worse than the past economy, then future profits will be worse than past profits, and future stock investments will be worse than past stock investments.

"If it's true that the future economy is as strong as the past economy, we can therefore expect the future stock market to solve our Social Security problems. As a result, there is no Social Security problem.

"The $11 trillion long-term Social Security deficit we've been hearing so much about lately ... are based on a prediction that the economy will do significantly worse in the future than it has in the past. If this is right -- which it may be -- then the stock market will do worse, too, and solve nothing."

"Much less reasonable are the Trustees' assumptions about productivity growth. They say that after growing 3.8 percent in 2002, 3.4 percent in 2003, and 2.7 percent in 2004, productivity growth will crash to 1.8 percent in 2005 and then slowly decelerate to 1.6 percent by 2012. After that, growth will average 1.6 percent until the end of time.

"The important thing to note is not that the Trustees are necessarily wrong but, simply, that it's silly to pretend to think a panel of government accountants can predict economic events in the year 2037, much less offer a full 75-[year] projection of the future course of the American economy. The trustees might be right: An aging society might prove less innovative and less productive than the America we've come to know. If this is true, Social Security is going to have a problem. So will the stock market. So will the Defense Department. So will just about every aspect of the American government and economy."


At 10:06 PM, Blogger RedDirt said...

One toke over the line, sweet Jesus...

What's happened to Chase?

He's metamorphosed from film geek to policy wonk in a few short days.

As the Autorantic robot would say, "Social Security, indeed!"

At 11:00 PM, Blogger Chase McInerney said...

Chase will be back. He was temporarily insane


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