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Social Security: The Real and The Unreal

April 5th, 2011 by selise

Stephanie Kelton

YouTube clips and transcript quotes are from last year’s Fiscal Sustainability Teach-In and Counter-Conference. Complete audio, video, transcription and presentation materials are available at the link.

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Q: Why is there even a debate about “fixing” Social Security when it’s not broken?

A: Because the focus of the debate is on problems that are unreal.

Focusing on unreal problems makes no sense. Unreal problems are NOT REAL!

Let me explain what I mean here by real as opposed to unreal problems with an example of each:

  • Unreal = “We can’t afford to Social Security because the Trustee’s report says that costs will exceed payroll tax receipts”
  • Real = “We can’t produce the goods and services needed by our nation’s seniors to keep them fed and housed”

The unreal problem is about the availability of dollars. However, our federal government is the monopoly issuer of the nation’s currency. We’ve been off the gold standard for almost 40 years and we have floating exchange rates. Therefore, the availability of dollars is a political issue. Tax revenue is not required, borrowing is not required — unless Congress chooses to impose those constraints.

The real problem is actually not a problem. It could be, but it’s not. As Warren Mosler said during his Teach-In presentation, “The Deficit, the Debt, the Debt-To-GDP ratio, the Grandchildren and Government Economic Policy”:

We’re producing 8000 calories per person per day; there’s no reason to limit the intake of our seniors.

We have a housing problem, which is vacant homes in record numbers; there’s no reason to have them out on the streets.

Worse, by focusing on unreal problems, we come up with unreal solutions! “Solutions” that are no solution and will, in fact, make matters worse, as Bill Mitchell explains in this YouTube clip from his Teach-In presentation, “What Is Fiscal Sustainability?

From Bill Mitchell’s presentation:

slide 26 (typos and bold are mine):

  • The concept of fiscal sustainability is intrinsic to the ageing population — intergenerational debate.
  • But not in the way that the public things about it.
  • There is no financial crisis ahead with respect to increasing health care and pension entitlements.
  • The government will always be able to afford to pay these bills
  • The actual issue is about real resource availability
  • By focusing on the financial we are undermining the real capacity to deliver these goods and services.
  • … the intergenerational debate is the sort of long-term attack on fiscal policy. So even though we were quiet for a little while, while the governments were bailing the economy out and putting a floor into the collapse of spending, what’s emerging out of that – and this is sort of the way in which the mainstream work – they were so discredited by this crisis.

    It’s absolutely amazing that for the first few months, right-wing colleagues that I know just wouldn’t talk, they just went and hid in their rooms, so discredited and embarrassed by it. But the reasonable ones come out now and say, “Oh yeah, we really did have to have a bit of fiscal intervention, we understand that now, but the problem’s worse than you think, because we’ve got these long-term structural pressures that are going to blow the budget out of the water and make it unsustainable.”

    What are they talking about? Providing pensions to our elderly, providing a bit of health care to people who might need a few hip replacements. And what I tell them is, “Look, the only issue is whether there’s enough titanium available to put in our hips and our knees. And if there is, the government’s going to be able to buy it no matter what. And if the government wants people to have a pension, then all they need to do is type a few numbers into a computer and that’ll send some money to the bank. And the only issue is whether the pension check that the pensioners get will be able to buy anything.”

    And the irony of this whole debate about the – we call it the intergenerational debate in Australia, it’s more generally known as demographic debate – the irony of it is that everything that the mainstream wants us to do now about it will actually undermine our capacity to deal with it in the future. So the absolute irony is that the way in which fiscal austerity plans are implemented is – in our country and elsewhere – is to attack higher education and secondary schooling, and not realizing that investing in education is the way you get productivity growth and the way you deal with rising dependency ratios in real terms. It’s moronic.

    So, what are we going to do? Should we fire teachers and increase class sizes? Cut Social Security? Increase taxes? If we do it will be only because our politicians — and we — don’t understand the meaning of some numbers on a spreadsheet. Or are we going to invest in the kinds of things that will increase the real productive capability of our economy for the future: education, the environment, health and R&D?

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    My favorite solution is to abolish the payroll tax altogether and have Social Security benefits paid out of general revenue…. just like we pay for wars. No more fear-mongering or worries about projected shortfalls in Social Security revenue. Abolishing the payroll tax has additional benefits: the payroll tax is regressive, unfair (only payroll, not all income) and is a large tax burden on both workers and employers that makes it more expensive to employee Americans.

    However, when a partial payroll tax cut was announced last year as part of the tax bill compromise, progressives were not cheering… and I’m not sure exactly why that is, other than, perhaps, it is feared that it would somehow undermine support for Social Security. But is that even true?

    One argument is that Social Security is an earned right — money is owed to the people who have paid in and that benefits are tied to the amount that has been paid in — and that is a necessary source of political support for the program as a whole because it is seen as a retirement program and not a welfare program.

    But, if this is true, why then is it that no one (to my knowledge) has suggested that the approximately quarter of Social Security beneficiaries who are non-worker (have been collecting payments not tied to having paid in) should stop receiving benefits? (Please, don’t anyone start advocating that!). It seems to me that such a large number of non-worker beneficiaries undermines that argument entirely.

    Another argument is that the payroll tax holiday will give Peterson and all the deficit hawks more ammunition to weaken Social Security. Is this true? We have some evidence it may not be from Stephanie Kelton (see YouTube at the top of the post):

    Stephanie Kelton: I think this comes back to what we’ve been hammering at all day long which is that there are all kinds of self-imposed constraints. If you say that you’re only going to fund Social Security out of the payroll tax and you use, you establish these Trust Funds and you say the Trust Fund must have a positive balance or else we’re not going to clear the checks at the level that’s been promised then we’re only going to be able to meet 77 percent, or so, of promised benefits after some date. I was rereading, I was telling Warren yesterday, I was looking at the Trustees Report from 2009 for Social Security and Medicare and what the Trustees are projecting for the Old Age Survivors Insurance Trust Fund OASI, the Disability Insurance Trust Fund DI and you put them together and you get OASDI and you get what everyone commonly refers to in everyday language as the Social Security Trust Fund. [Trustee's report -- selise]

    Those are both projected to go bankrupt at some future date. In the 2009 Report, the day of doom is now 2037 on those two programs. Health Insurance Trust Fund, the Medicare care side is also projected to blow up. That’s supposed to go bankrupt. The Supplementary Medical Insurance Trust Fund (SMI) is projected to be solvent into the indefinite future. As far as the Trustees can see, 75 years and beyond, there is no problem with the SMI Trust Fund which is Medicare Part D and Medicare Part B. Why is there this difference? Why are the other three going broke but this one is perfectly fine? And it happens to be that the government has guaranteed to make all payments for Medicare Part D and Medicare Part B out of General Revenue and tied the payment of benefits for other Medicare payments, hospital benefits, and Social Security to the availability of the funds in the Trust Funds. And so, I mean it’s crazy, it’s right there in the Trustees Report and they say it very clearly that the reason Supplementary Medical Insurance plan is solvent as far as the eye can see is because the government says so. It’s as simple as that.

    I don’t see Peterson et al. making a big deal about Medicare Parts B and D.

    If a compromise “fix” is needed, let’s go with this one from beowulf:

    There is hereby appropriated to the Federal Old-Age and Survivors Insurance Trust Fund for the fiscal year ending June 30, 1941, and for each fiscal year thereafter, out of any moneys in the Treasury not otherwise appropriated, amounts equivalent to 100 per centum of:
    the taxes imposed by subchapter A of chapter 9 of such Code with respect to wages (as defined in section 1426 of such Code), and by chapter 21 …as determined by the Secretary of the Treasury by applying the applicable rates of tax under such subchapter or chapter 21.

    http://www.law.cornell.edu/uscode/42/usc_sec_42_00000401—-000-.html

    … the simplest fix for the expected 20% shortfall in 2043 and thereafter is for Congress sometime between now and 2042 (no rush), to amend the above code section to read, “amounts equivalent to 100 120 per centum of”. Problem solved.

    And then let’s move on so we can focus on dealing with real problems.

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    Further Reading:

    Social Security: Truth or Useful Fictions? by L. Randall Wray

    If You Really Care About Social Security, Stop Capitulating to the Left by Stephanie Kelton

    Reality Check: Why Truth Will Protect Social Security by Marshall Auerback and Randall Wray

    Cut the Payroll Tax to Save Social Security by Marshall Auerback and Randall Wray

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