The "Disgrace" of Social Security

by publius

I just wanted to follow up on Hilzoy's post. Social Security is one of the most successful, efficient, and politically popular government programs in history. John McCain -- candidate for President -- said yesterday that the funding mechanism behind this wildly successful program is an "absolute disgrace." (And that's the charitable interpretation).

Anyway, since McCain feels pretty strongly about this injustice, I'm hoping that an intrepid member of the press corps will ask John "Details" McCain a simple question: "You said that the way Social Security has been funded for the past 75 years is a 'total disgrace.' In your view, how exactly should it be funded?" And if he starts mumbling about private accounts and market returns, the reporter should follow up by asking how he intends to cover the short-term resulting gap.

Inquiring Floridian minds want to know...

Comments

[Tony P.]

I don't know if 'the short-term gap' is a politically effective question. It's a very practical question, to be sure, but it's way above the level of discourse McCain has going here. That is, any voter stupid enough to overlook the absurdity of McCain's 'disgrace' comment is no way informed enough to grasp the transition cost issue.

I have been arguing for some time that Obama will have to win this election without the Stupid Vote. The Stupid Vote may, possibly, be as large as McCain evidently imagines it to be. But there's a way to minimize it: relentless ridicule of truly stupid things. McCain's 'disgrace' comment is one such thing. Let us publicize it widely. The goal should not be to educate McCain, but to elevate the self-esteem of the marginally-stupid voter by giving him every opportunity to think, "Gee, even I would be embarassed if I said something that stupid."

A propos of nothing in particular, has anybody seen a funky little movie from 2-3 years ago called 'Idiocracy'?

-- TP

[publius]

yep - good point. see edit above.

[publius]

idiocracy is great by the way, but i love all things mike judge. the trial and the state of the union were my favorite parts.

[KCinDC]

No doubt Obama will get the vote of "every thinking man", Tony. Somehow you're not filling me with confidence for the future.

[LT Nixon]

Social Security is one of the most successful, efficient, and politically popular government programs in history.

Not in my book, it ain't!

A propos of nothing in particular, has anybody seen a funky little movie from 2-3 years ago called 'Idiocracy'?

My cultural values were mocked in that movie. Too bad our ilk are taking over America, mwahaha.

[Gary Farber]

"Not in my book, it ain't!"

Yes, you haven't been one of the hundreds of millions of elderly or disabled people for whom it made the difference between keeping a roof over your head, and yourself at least barely fed, and having neither of those conditions.

However, those hundreds of millions of Americans have, nonetheless, lived and died, and so they continue to do so today. The country is larger then our own circumstances, and has a history.

Any chance you might respond to this and this and this, and to any of Eric Martin's posts?

Looking forward to it! Thanks!

[Jesurgislac]

Lt Nixon: Not in my book, it ain't!

Back to the "good old days" when old people had to work till they dropped and starve if they didn't have the good grace to die in harness?

Compassionate conservatism: oxymoron.

[hilzoy]

Actually, LTN's claims are empirical and testable. Popular (pdf): "Approximately 9 in 10 non-retired Americans agree (91% in 1995 and 88% in 2005) that “Maybe I won’t need Social Security when I retire, but I definitely want to know it’s there just in case I do.” Even if they feel they could do better investing on their own, nearly 9 in 10 of the nonretired (87% in 1995 and 85% in 2005) believe that it is important to continue to contribute to Social Security for the common good (see Figure 4)." (p. 7.) " 65% of respondents in 2005 thought SS was "the most important government program" (p. 5) More results there; SS seems, generally, to be very popular.

Efficient: From the SS trustees' report, I learn that administrative costs accounted for the following percentages of total costs for the different programs:

Old-Age and Survivors Insurance: 0.6%; Disability Insurance. Seems pretty efficient to me.

Successful: Social Security was designed to lift the elderly out of poverty, and to provide them with economic security when they could no longer work. You can assess its success here. Generally speaking, SS seems to have cut rates of poverty among the elderly to around a quarter of their previous level.

[rea]

But LT, what with global warming and all, there won't be enough ice flows on which to abandon our elderly. I realize that taking care of the elderly is immoral, but we have to be practical here . . .

[OCSteve]

First I agree that McCain’s statement is, uh, rather bizarre.

I just wanted to follow up on Hilzoy's post. Social Security is one of the most successful, efficient, and politically popular government programs in history.

So do you support making a fundamental change to this "wildly successful program" at this point? You seem to be saying “leave well enough alone”. (Am I misreading that?) I think that minor tweaks are in order, and I’d likely support raising the cap and/or some form of means testing at the other end – but I’m rather more uneasy about changing the fundamental structure of the program.

Changing it from a proportional/regressive tax into a progressive tax would certainly seem to be a radical change in the programs structure. I don’t think we can accurately predict what happens after that.

Do you support Obama’s Dunkin’ Donuts plan?

(I know this is yet another McCain thread but I’m starting to doubt that a “let’s discuss Obama’s plan” thread is in the making. ;))

[DanG]

McCain was first elected to Congress in 1982. What's he done about correcting this "disgrace" during his 26-year career?

[KCinDC]

OCSteve, you're saying that raising the cap or imposing means testing is a "tweak", but Obama's "donut hole" is a radical change?

[hilzoy]

OCSteve: you're right about an Obama on SS thread, at least as far as I'm concerned. I am trying -- really! -- to get to something about Obama, which positions he has changed, and whether this constitutes a move to the center, but stuff keeps coming up. (I mean, when McCain says that the funding system that SS has had since the 30s is "a disgrace", and seems to be under the impression that it's a recent development, can I possibly not write about it? Well, OK, it would be possible...) (And then stuff like the Goldberg article, my response to which took roughly three minutes, when I was waiting for someone to pick me up and go to lunch.)

I very much hope to get to other stuff. But Obama on SS? Probably not. (Fwiw, I don't think it's a very radical change. It's certainly less radical than McCain, at least when he's proposing to divert FICA taxes into private accounts. Obama's plan adds funding, and might change the optics of the program; McCain's would gut the program's funding, and add trillions to the projected shortfall.)

[Jeff]

Not in my book, it ain't!

I think LTN was being sarcastic and/or jocular. If you click through the link he provided, there's no way that someone as smart as LT has shown himself (if more than occaissonally misgiuded [grin]) could support writing in "God's President". (For what it's worth, I'm not sure that the site is serious.]

[OT and somewhat late: I was sorry to hear that you had to close your blog, LT. I never took the opportunity to read it, and from what others have said about it, I wish I had.)

[Jeff]

I retract one statement -- WriteInBush is definitely NOT serious. See http://writeinbush.com/blog/2008/07/09/our-lucky-day-funding-funding-funding/>this entry on his blog.

[Bruce Baugh]

I pause here to hoist a flag and say "Please don't use optics the way too many pundits do."

In the first place, it's wrong. Changing the optics of something should mean changing the way that thing perceives the world around it. It's abusive metaphor-making to say that the optics of a thing are other things' perception of it.

In the second place, there are perfectly serviceable words already at hand. "It would change the image of the program", for instance. "It would change the sort of PR used to justify the program", perhaps.

Campaign would-be experts use it now the wrong way, sure, but...are these the sort of people we want to be taking speech lessons from?

[OCSteve]

KCinDC: OCSteve, you're saying that raising the cap or imposing means testing is a "tweak", but Obama's "donut hole" is a radical change?

Yes.

I mean, the cap has been increasing all my working life. So that would certainly be nothing new or fundamental. People are used to that. And at least when the cap is raised again, I can take comfort in the fact that if I make that much it increases my average taxable wages and thus I’ll get a higher payout (assuming I make it that long).

I don’t have a problem with means testing “the richest Americans”. I’d want to be careful with the asset tests. It only makes sense to get a nice house and try to pay off the mortgage before retirement. So no, you don’t have to sell your nice house to move into the old folks home. But I have no problem with saying that people who can readily support themselves don’t need to draw SS. The meaning of “readily” is up for debate. But if you’ve got millions in the bank then I don’t think you need to draw SS. And again, even while that is a progressive aspect, it’s been there since the beginning. Originally it was called the "retirement earnings test", and if you made any employment income at all you lost your benefit for the month. It changed over the years. Earnings limits were put in place such that you could earn some employment income before you lost the benefit. Later benefits were reduced by half for income over a certain amount. Then part of it became taxable. The eligibility age was raised. The plan was born with a means test and politicians have been tweaking it ever since while calling it something else.

But the Donut hole changes the very foundation of the plan to a progressive tax. It changes it from an “earned right” to a(nother) wealth transfer system. Most people don’t oppose SS right now. But once that change is implemented and becomes clear then I think you will see a lot more opposition to SS. And it will be well financed opposition. IMO, trying to fix it this way could lead directly to its destruction.

[OCSteve]

Jeff: Different Lt.

Lt. N is back home now and still blogging.

The blog shut down was Lt. G.

Hah! On revisiting to get the URL I see that LT G's fiancée has taken it over and is still reporting at least some news (bad – a member of the unit was badly burned; and good – it’s now Cpt. G.)

[hilzoy]

OCSteve: this isn't entirely clear to me from what you write, but: are you confusing what Obama is proposing with means testing?

Means testing is: not paying benefits to rich people. (Basically.) Do you make money, or have assets? No benefits (or:reduced benefits) for you!

What Obama is proposing is: changing the system from its present form, in which only your first $102k of income is taxed, to a different one in which your first 102k is taxed, then income from 102k-250k is not taxed ("donut hole"), and then any income over $250k is taxed, at a lower rate. This isn't about benefits; it's about taxes.

Sorry if I misunderstood somehow.

[Some Observer]

No. They should not ask "what about the gap". That's kind of technical and obscure for many people. They should ask "Then who pays for the baby boomers who are retiring now and will be for the next decade."

[KCinDC]

But the Donut hole changes the very foundation of the plan to a progressive tax.

I don't understand how you figure that, especially since you're apparently not bothered by the progressivity of means testing the benefits. What is your definition of "progressive"? And where is all this opposition going to come from?

[tgirsch]

I'm going to take the middle road here. I agree with OCSteve that the "donut hole" doesn't qualify as a "minor tweak," but I don't think it qualifies as a "radical change," either. It is a somewhat fundamental change, however, insofar as at least in theory, people have always paid social security taxes roughly in proportion to the benefits they will ultimately receive. The donut hole changes that.

Back on topic, however, I think that the Obama campaign should be hitting McCain hard on this. The media can't be relied upon to do it on their own, so the Obama campaign needs to actively drive that narrative.

[Batocchio]

It looks like Jake Tapper stepped up to the plate. From a post today:

I asked the McCain campaign what Sen. McCain was referring to with the word "disgrace."

McCain spox Brian Rogers says that "the disgrace is our failure to fix the long-run imbalance in Social Security -- a failure of leadership evidenced by our willingness to kick to problem to the next generation of leaders. He’s also describing the looming and increasing demographic pressures confronting the Social Security system and Washington’s utter failure to address it."

Rogers points out that in an April 2007 speech in Memphis, McCain said:

"I'll fight to save the future of Social Security and Medicare. I won't leave office without doing everything I can to fix the fiscal problem that, more than any other, threatens our future prosperity and power. No problem is in more need of honesty than the looming insolvency of our entitlement programs. No government program is the object of more political posturing and spin than Social Security and Medicare. Americans have the right to know the truth, no matter how bad it is. So here's a little straight talk: the current Social Security system is unsustainable. Period. A half century ago, sixteen American workers supported every retiree. Today, it's just three. Soon, it will be only two. If we don't make some tough choices, Social Security and Medicare either won't be there for our children and grandchildren or we will have had to raise taxes so dramatically to support them that we will have crushed the prosperity of average Americans."

So, according to the McCain campaign, the senator was trying to explain how the system works but cut it short before describing the demographic pressures – as he did in the August 2007 speech.

That long-term imbalance and Washington’s failure to fix it is the disgrace, he meant to say, the McCain campaign suggests.

What say you?

[Tony P.]

How many 'workers' SHOULD support each 'retiree'?

Before SS was implemented, how many 'workers' WERE supporting each 'retiree'?

There's a really simple way to keep the worker-to-retiree ratio very high: just make sure there are very few retirees. That's easy to do: make it financially difficult for most people to retire before they die.

Let's ask McCain if THAT's what he wants.

-- TP

[Batocchio]

On the other hand, I just read this. McCain on CNN on Tuesday:

ROBERTS: Senator, I'm sure you're also hearing from them about social security. Because you say that part of this plan, if you're going to balance the budget, is to reform social security. You've talked about the idea of private accounts, as President Bush tried to get through and couldn't. What else would you do to reform social security?...

MCCAIN: On the privatization of accounts, which you just mentioned, I would like to respond to that. I want young workers to be able to, if they choose, to take part of their own money which is their taxes and put it in an account which has their name on it. Now, that's a voluntary thing, it's for younger people, it would not affect any present-day retirees or the system as necessary. So let's describe it for what it is. They pay their taxes and right now their taxes are going to pay the retirement of present-day retirees. That's why it's broken, that's why we can fix it.

I don't think even the most charitable takes on McCain's many statements on the subject weigh in his favor. At the very least, this bears a detailed follow-up with McCain. I'll also pass on Somerby's recent piece on the subject.

[OCSteve]

hilzoy: this isn't entirely clear to me from what you write, but: are you confusing what Obama is proposing with means testing?

Not intentionally;)

your first 102k is taxed

Right. This is where we are now, for everyone. This is a proportional tax in that we all pay the same rate regardless of how much we make up to the cap. It becomes a regressive tax for those who make more than the cap, in that the overall rate (as a percentage of their income) decreases the more that they make. But currently, there is a direct connection between what people pay in and what they will get back out of it. The person who makes $50k and the person who makes $500k are both eligible for benefits based on the income they were actually taxed on. I’m no expert in this, but the basic idea (before a variety of adjustments) is that your benefit is based on your best 35 years of taxable earnings (adjusted for inflation and indexed) – Average Indexed Monthly Earnings. The high earner does not have $500k for 12 of those months in that formula when their benefit is calculated – she has $102k. She wasn’t taxed on more than $102k, but her benefit will not be based on more than $102. There is a cap on the taxable income, but also the same cap on the earnings that will be used to calculate her benefit.

then income from 102k-250k is not taxed ("donut hole")

This is a good break for these folks, as many are getting killed by the AMT already. But why not just fix the AMT?

and then any income over $250k is taxed, at a lower rate.

This is 100% progressive. There is no increase in benefit, it is pure wealth transfer. The person earning $500k and being taxed on the extra $250k (over $250k) will have their benefits based on $102k. This is not how the program was conceived or sold to the public. They had to go to great pains to insure that it was not perceived in this way or it never would have sold. That’s why I call it a fundamental or radical change.

It’s breaking that link between “what I get back out is based on what I pay in”.

I just think that will cause a lot more opposition to the program than there has ever been before, ultimately to the determinate of the whole thing.

KCinDC: And where is all this opposition going to come from?

I think I responded to the rest f your question above, but as for the opposition…

Rich people can raise a lot of opposition. As things stand they have no reason to oppose SS. IMO this gives them plenty of reason.

[hilzoy]

OCSteve: my bad. (I think it was the linked article that did it.)

About this: "But why not just fix the AMT?" -- Obama proposes to do that too. ;) (Or, in proposal-speak: to extend the AMT patch, and index the point where it kicks in to inflation, so that this problem doesn't revisit us year after year.)

[Turbulence]

This is a good break for these folks, as many are getting killed by the AMT already. But why not just fix the AMT?

Because our system of government is structured so that any such fix has no benefits but very large costs for officeholders? The AMT defect has been obvious for over a decade yet it still persists.

They had to go to great pains to insure that it was not perceived in this way or it never would have sold. That’s why I call it a fundamental or radical change.

What pains are you talking about? Are you talking about the original SS legislation or the Reagen administration changes? Given the complexities of benefit structures and actuarial modeling, why exactly do you think there is a large constituency that would care about, let alone be made angry by such a change?

It’s breaking that link between “what I get back out is based on what I pay in”.

That link is extremely fuzzy right now, isn't it? I mean, lots of disabled people get way more from SS than they put in, and that can only work if other people are getting less than they put in.

You raise some interesting points but I'm having trouble seeing how large a group of people would really be upset about this change. People at or near retirement have no reason to care: while a very small fraction of them are at their peak earnings potential AND are earning sufficiently more than the cap (or donut hole) that the extra taxable chunk is worth caring about, that fraction won't be paying for very long since they're near retirement. Younger workers are typically not at their peak earning rate and are less likely to be earning enough to care about the cap. Even if we're talking about middle aged folk, it seems that number of such people earning not just more than 250K but enough past 250K to really notice is going to be very small. And while those people have a large enough disposable income to make trouble politically, they're arrayed against many many retirees who are invested in keeping the system solvency.

To be honest, I don't understand why people care about SS to the extent that they do. SS is much better off than medicare, medicade, and all private health plans in terms of long term solvency. To the extent that SS has problems, they can be fixed at relatively low cost, but the continuing explosion in health care costs is a really hard problem with which we haven't really grappled. It seems that the healthcare cost explosion should be getting a much larger share of attention in our national discourse than SS.

[KCinDC]

OCSteve, I was thinking you had some objection to the donut hole, but it seems it's not about that at all but about the idea of raising the cap without raising benefits (whether or not you introduce a donut hole). I still don't understand why you think it's okay to keep rich people's taxes the same but lower the benefits they receive (means testing), but utterly outrageous to raise rich people's taxes but keep the benefits they receive the same. The rich will feel ripped off either way.

[KCinDC]

No government program is the object of more political posturing and spin than Social Security and Medicare.

Spin such as the use of the phrase "Social Security and Medicare" to imply that the problems of the two programs are in any way similar in their causes or sizes. The problem of Medicare dwarfs the (possibly nonexistent) problem of Social Security, and the Medicare problem is just part of the larger problem of health care in general.

[Ugh]

Obama's not going to get the social security cap lifted, donut hole or no donut hole, unless the Democrats have a filibuster proof majority in the senate, and probably not even then. The moneyed interests in the country won't allow it. We can't even get rid of the carried interest loop-hole.

OTOH, since the Bush tax cuts will automatically expire without any congressional action, they likely will under an Obama administration, but don't look for them being rolled back earlier than when they're scheduled to expire.

[OCSteve]

Turb: Are you talking about the original SS legislation or the Reagen administration changes?

Original. To get it passed originally it had to be distanced from any kind of welfare or handout with means testing. It was sold based on that “link”.

I agree with you that healthcare deserves more focus. More response mixed in with the response to KC below.

KCinDC: I still don't understand why you think it's okay to keep rich people's taxes the same but lower the benefits they receive (means testing), but utterly outrageous to raise rich people's taxes but keep the benefits they receive the same. The rich will feel ripped off either way.

I wasn’t feeling outraged. Did I come across that way? It’s not going to directly impact me personally one way or the other in the short term – won’t affect my taxes a bit. I just think that taking this approach will increase opposition to the program overall. That could affect me and everyone else.

IMO it’s a perception thing. If I’m sitting fat and comfortable at retirement with no worries and you tell me I’m not getting any SS because I’m fat and happy… OK, well they’re pretty much right. I don’t need it. I paid for a safety net I don’t need. But I paid the same amount for it as everyone else. Not that much pain.

If I’m not there yet and suddenly I have to start paying in more than most everyone else, knowing I get no increased benefit for it in the end – pain.

That top 3% (or whatever it is today) has a lot of money and political influence. Right now they have no real reason to oppose SS at all. They pay the same as everyone else for the same benefit. They likely won’t even need it. Yeah there are a lot of seniors on one side. But why court trouble if the same goals can be accomplished another way?

[hilzoy]

"If I’m sitting fat and comfortable at retirement with no worries and you tell me I’m not getting any SS because I’m fat and happy… OK, well they’re pretty much right. I don’t need it. I paid for a safety net I don’t need. But I paid the same amount for it as everyone else. Not that much pain."

See: this is why I wondered whether you were confusing the donut hole with means-testing. Because it's means-testing that would result in someone not getting benefits because she's rich. And as far as I know, no one is proposing that. Or, OK: no candidate. (Iirc, a couple of years ago I spent a fair amount of time arguing with -- could it have been Seb? -- who thought it was a good idea.)

[OCSteve]

Hilzoy: I was proposing means testing as a better alternative to the donut hole. So since I was essentially arguing in favor of means testing I can see how that’s what came across. That plus my writing is even less clear than normal when I’m trying to compose while doing 8 other things. ;)

[hilzoy]

Ah, All is clear. ;)

[Gary Farber]

"Original. To get it passed originally it had to be distanced from any kind of welfare or handout with means testing. It was sold based on that 'link'."

OCSteve is entirely correct about this.

And liberals have spent 70 years working to keep Social Security structured so it wouldn't be perceived as a "welfare" prorgram.

[Lewis Carroll]

"But currently, there is a direct connection between what people pay in and what they will get back out of it. The person who makes $50k and the person who makes $500k are both eligible for benefits based on the income they were actually taxed on. I’m no expert in this, but the basic idea (before a variety of adjustments) is that your benefit is based on your best 35 years of taxable earnings (adjusted for inflation and indexed) – Average Indexed Monthly Earnings."

OCSteve, I don't think this is exactly correct. For incomes above the FICA threshold I believe you are 100% correct. But there are inflections in the SS benefit curve that provide diminishing expected income replacement for retirees, even those whose incomes were under the FICA threshold. See here:

http://www.eriposte.com/policy/socialsecurity.htm#1_180

Also, the taxability-of-benefits clawback you mentioned provides a sort of *means-testing* too, since SS benefits are taxed as ordinary income (depending on a complex formula using "modified adjusted gross income") when one's income in retirement reaches a certain level.

So in effect, we already have means-testing of the benefits.

[now_what]

I agree with the argument that the way we fund Social Security is a disgrace. An extremely regressive tax on the young used to make payments to old people, who tend to be wealthier, no matter how much the old people make?

A terrible way to allocate resources. Young people could be using the money for education, training, or to start a business at the very moment those actions could be most beneficial to society. Instead they are making payments that often go to a rich people.

I am not opposed to Social Security in general, and the system is not in any sort of financial trouble in the medium to long term, but the way it is structured and funded is, in a word, wrong.