"More to the point, Social Security has nothing to do with the deficit. "Since Social Security is legally prohibited from ever spending more than it has collected in taxes," Dean Baker correctly argues, "it cannot under the law contribute to the deficit."
The Social Security system "fell outside of the mandate" of the Deficit Commission, Baker said. "They must have been expecting extra credit."
This is a bit of news that the deficit commission and the political parties, the Obama administration and the mainstream media seem to have deliberately left out of the story......but thanks to Rep Brad Miller (D NC) this very important tidbit has been pointed out.....WE NEED TO POINT THIS OUT TO PRES OBAMA BY E MAILING HIM AT
http://www.whitehouse.gov/contact AND TO OUR REPRESENTATIVE AND SENATORS, FIND THEIR E MAIL ADDRESSES AT
http://www.usa.gov/Contact/Elected.shtml
This from HuffPost followed by Dean Bakers piece in The New Republic...
The PowerPoint released by Erskine Bowles and Alan Simpson, the co-chairs of the National Commission on Fiscal Responsibility and Reform ("The Deficit Commission"), said we should "Reform Social Security for its own sake, not for deficit reduction."
No kidding. Social Security has nothing to do with the deficit. Not now, not ever.
Critics of Social Security have frequently made alarming claims about the future of the system to support calls for "reform." President George W. Bush conceded in 2005 that "it's not bankrupt yet," but said we couldn't "wait until it's bankrupt." "The problem with that notion is that the longer you wait, the more difficult it is to fix," President Bush said. "You realize that this system of ours is going to be short the difference between obligations and money coming in, by about $11 trillion, unless we act... That's trillion with a 'T.'"
That does sound scary.
So what was the period for that projected shortfall? It was for the "indefinite future."
Forecasts of the end times are usually the work of religious prophets, not economists or actuaries. According to the Book of Revelation, at the end of days earthquakes will level mountains, hail will fall mixed with fire, and a beast with seven heads and ten horns will arise from the seas.
In that context, a shortfall in the Social Security system just doesn't seem like that big a deal.
At least President Bush used the term "projected shortfall," but Republican talking heads sent forth to battle on cable television routinely used the word "deficit," implying that we'd have to pick up the difference.
No, we wouldn't. Here's how it would work if we just left the current law alone.
The system has been running a substantial surplus for a generation because the Baby Boom has been working and paying payroll taxes, and the Baby Boom dwarfs the generation now receiving benefits. The surplus has gone into the Trust Fund, which now stands at about $2.6 trillion (That's trillion with a "T.") As the Baby Boom retires, the system will stop running a surplus later this decade. Then the system will pay full benefits, including cost-of-living adjustments, from payroll taxes and the interest from the Trust Fund. About a decade after that, payroll taxes and interest on the Trust Fund will not be enough to pay full benefits, including cost of living adjustments. Then the system will pay full benefits, including cost of living adjustments, from payroll taxes, interest and the principal of the Trust Fund.
Around 2037, the principal of the Trust Fund will be exhausted. Under the existing law, the system will then reduce the benefits to what can be covered by payroll taxes. The projection is that the benefits would then be reduced by about 22 percent.
A 22-percent reduction in benefits is pretty unattractive, especially if the finances of the middle class are as fragile in 30 years as they are now. But proposals to "fix" Social Security by reducing benefits would really just swap one reduction of benefits for another.
Paul Krugman argues that raising the retirement age is a reduction of benefits that works to the disadvantage of blue-collar workers:
[W]hile average life expectancy is indeed rising, it's doing so mainly for high earners, precisely the people who need Social Security least. Life expectancy in the bottom half of the income distribution has barely inched up over the past three decades. So the Bowles-Simpson proposal is basically saying that janitors should be forced to work longer because these days corporate lawyers are living to a ripe old age.Would blue-collar workers be better off if we raised the retirement age or let an across-the-board cut in benefits go into effect in 30 years or so? Isn't that a question we should ask?
More to the point, Social Security has nothing to do with the deficit. "Since Social Security is legally prohibited from ever spending more than it has collected in taxes," Dean Baker correctly argues, "it cannot under the law contribute to the deficit."
The Social Security system "fell outside of the mandate" of the Deficit Commission, Baker said. "They must have been expecting extra credit."
We are right to worry about Social Security, and we are right to worry about our long-term deficit. But the two are completely distinct.
So proposing to "reform" Social Security because of long-term deficits is like invading Iraq because Afghanistan attacked us.
Or maybe the Social Security system has weapons of mass destruction.
Deep-Six the Deficit Commission Report
- Dean Baker
- November 11, 2010 | 12:00 am
For more coverage of the debt commission report, read Jonathan Chait and Jonathan Cohn.
Senator Alan Simpson, the chairman of the bipartisan deficit commission, spent much of his life scolding people for being dependent on Social Security and Medicare and complaining that they didn’t save enough. Now, based on the draft proposal released yesterday, it appears that he and his co-chairman Erskine Bowles never departed from this attitude in steering their thinking.
Given the state of the economy, the co-chairs’ report reads like a document from Mars. Just to remind those of us who earn their living on planet earth (outside of Wall Street), the country is suffering from 9.6 percent unemployment. More than 25 million people are unemployed, underemployed, or have given up looking for work altogether. Tens of millions of people are underwater in their mortgage and millions face the prospect of losing their home to foreclosure.
We did not get here because of government deficits, contrary to what Mr. Bowles seemed to suggest at the co-chairs’ press conference today. We got here because of the bursting of an $8 trillion housing bubble. This bubble was fueled by the reckless and possibly unlawful practices of the Wall Street banks, like Morgan Stanley, the bank on whose board Mr. Bowles sits.
This is important background—because the economy’s current problem has nothing, zero, nada to do with deficits. Its problem is a lack of demand. If there were more demand, more people would be employed. The government is the only force capable of creating demand right now, since the housing bubble wealth that had been fueling the economy has largely disappeared. This means that if our commission co-chairs had ever bothered to look at the current deficit in the context of the economic crisis, they would be complaining that the deficit is too small rather than too large.
Their ignorance of basic economics also leads them to hype unfounded fears about the longer-term picture. If they understood the fact that the current deficit is a support for the economy, rather than a drain on the economy, they would not be concerned about the buildup of debt taking place at the moment. There is no reason that the Fed can’t just buy this debt (as it is largely doing) and hold it indefinitely. (The Fed has other tools to ensure that this expansion of the monetary base does not lead to inflation.)
That way, the debt creates no interest burden for the country, since the Fed refunds the interest to the Treasury every year. Last year the Fed refunded almost $80 billion in interest to the Treasury, nearly 40 percent of the country’s net interest burden. This means that the fears raised by Simpson and Bowles of an exploding debt reaching 90 percent of GDP by the end of the decade have no foundation in reality.
The other fear that Simpson and Bowles raised, the Chinese holdings of debt, should be condemned as xenophobic fear-mongering. Insofar as China’s holding of U.S. assets is a problem, it is holdings of assets period, not just government bonds. If China holds $2 trillion of private stock, bonds, and other assets it has the same impact on the United States as if it held $2 trillion in government bonds. It represents money in interest, dividends, and profits that is flowing out of the United States and to China, meaning that we will be less wealthy since much of our future output will be income to foreigners, not to people in the United States.
But the transfer of wealth to China depends entirely on our trade deficit, which is determined by the value of the dollar, not the budget deficit. Simpson and Bowles decided not to let this basic economic fact get in their way.
Over the longer term, the country is projected to face a deficit problem, but this is almost entirely attributable to the projection that private sector health care costs will continue to grow at an explosive rate. More than half of our health care is paid for by the government, so this projected growth rate of health care costs would eventually lead to serious budget problems in addition to leading to enormous problems for the private sector. However, the underlying problem is the broken health care system, not public sector health care programs. This subtlety also seems to have escaped Simpson and Bowles.
Finally, it is striking that they felt the need to address Social Security's solvency even though it was not part of their mandate. The commission’s mandate was to deal with the country’s fiscal problems. Since Social Security is legally prohibited from ever spending more than it has collected in taxes, it cannot under the law contribute to the deficit.
But Simpson and Bowles are scolds. So they produced a plan that will substantially reduce Social Security benefits for most middle class workers, even though this program fell outside of their mandate. They must have been expecting extra credit.
There are certainly some positive items in the report. For example, they want to limit the mortgage interest-rate deduction for expensive houses. They also want to get rid of the deduction for cafeteria benefit plans; one of the stupidest tax breaks ever designed. But, these items will likely go nowhere, which would be a good place to leave the rest of the report.
Dean Baker is the co-director of the Center for Economic and Policy Research. His most recent book is False Profits: Recovering from the Bubble Economy (Polipoint Press, 2010.)
For more TNR, become a fan on Facebook and follow us on Twitter.
Senator Alan Simpson, the chairman of the bipartisan deficit commission, spent much of his life scolding people for being dependent on Social Security and Medicare and complaining that they didn’t save enough. Now, based on the draft proposal released yesterday, it appears that he and his co-chairman Erskine Bowles never departed from this attitude in steering their thinking.
Given the state of the economy, the co-chairs’ report reads like a document from Mars. Just to remind those of us who earn their living on planet earth (outside of Wall Street), the country is suffering from 9.6 percent unemployment. More than 25 million people are unemployed, underemployed, or have given up looking for work altogether. Tens of millions of people are underwater in their mortgage and millions face the prospect of losing their home to foreclosure.
We did not get here because of government deficits, contrary to what Mr. Bowles seemed to suggest at the co-chairs’ press conference today. We got here because of the bursting of an $8 trillion housing bubble. This bubble was fueled by the reckless and possibly unlawful practices of the Wall Street banks, like Morgan Stanley, the bank on whose board Mr. Bowles sits.
This is important background—because the economy’s current problem has nothing, zero, nada to do with deficits. Its problem is a lack of demand. If there were more demand, more people would be employed. The government is the only force capable of creating demand right now, since the housing bubble wealth that had been fueling the economy has largely disappeared. This means that if our commission co-chairs had ever bothered to look at the current deficit in the context of the economic crisis, they would be complaining that the deficit is too small rather than too large.
Their ignorance of basic economics also leads them to hype unfounded fears about the longer-term picture. If they understood the fact that the current deficit is a support for the economy, rather than a drain on the economy, they would not be concerned about the buildup of debt taking place at the moment. There is no reason that the Fed can’t just buy this debt (as it is largely doing) and hold it indefinitely. (The Fed has other tools to ensure that this expansion of the monetary base does not lead to inflation.)
That way, the debt creates no interest burden for the country, since the Fed refunds the interest to the Treasury every year. Last year the Fed refunded almost $80 billion in interest to the Treasury, nearly 40 percent of the country’s net interest burden. This means that the fears raised by Simpson and Bowles of an exploding debt reaching 90 percent of GDP by the end of the decade have no foundation in reality.
The other fear that Simpson and Bowles raised, the Chinese holdings of debt, should be condemned as xenophobic fear-mongering. Insofar as China’s holding of U.S. assets is a problem, it is holdings of assets period, not just government bonds. If China holds $2 trillion of private stock, bonds, and other assets it has the same impact on the United States as if it held $2 trillion in government bonds. It represents money in interest, dividends, and profits that is flowing out of the United States and to China, meaning that we will be less wealthy since much of our future output will be income to foreigners, not to people in the United States.
But the transfer of wealth to China depends entirely on our trade deficit, which is determined by the value of the dollar, not the budget deficit. Simpson and Bowles decided not to let this basic economic fact get in their way.
Over the longer term, the country is projected to face a deficit problem, but this is almost entirely attributable to the projection that private sector health care costs will continue to grow at an explosive rate. More than half of our health care is paid for by the government, so this projected growth rate of health care costs would eventually lead to serious budget problems in addition to leading to enormous problems for the private sector. However, the underlying problem is the broken health care system, not public sector health care programs. This subtlety also seems to have escaped Simpson and Bowles.
Finally, it is striking that they felt the need to address Social Security's solvency even though it was not part of their mandate. The commission’s mandate was to deal with the country’s fiscal problems. Since Social Security is legally prohibited from ever spending more than it has collected in taxes, it cannot under the law contribute to the deficit.
But Simpson and Bowles are scolds. So they produced a plan that will substantially reduce Social Security benefits for most middle class workers, even though this program fell outside of their mandate. They must have been expecting extra credit.
There are certainly some positive items in the report. For example, they want to limit the mortgage interest-rate deduction for expensive houses. They also want to get rid of the deduction for cafeteria benefit plans; one of the stupidest tax breaks ever designed. But, these items will likely go nowhere, which would be a good place to leave the rest of the report.
Dean Baker is the co-director of the Center for Economic and Policy Research. His most recent book is False Profits: Recovering from the Bubble Economy (Polipoint Press, 2010.)
For more TNR, become a fan on Facebook and follow us on Twitter.
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