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One Simple Measure That Would Save Social Security and More

letsgetitdone's picture

The Fiscal Times is a digital rag funded by Peter G. Peterson to propagandize the ideology of neoliberal austerity. Yesterday, a post by Josh Boak highlighted the proposal of “fixing” Social Security by lifting the cap on payroll taxes.

”Social Security already appears to be running aground, just two decades before the program — which accounts for about 20 percent of federal spending — is projected to crash into insolvency.

“The program launched during the Great Depression — keeping millions of senior citizens from sliding into poverty — has steadily been paying out more in benefits than it collects in taxes, relying on the interest earned on federal bond holdings to help bridge the difference. Social Security costs are estimated to total $789 billion this year, paid for by $623 billion in payroll taxes.

“There’s an easy repair, but it involves drastically hiking taxes, so voters aren’t hearing about it on the campaign trail. Under federal law, millionaires and billionaires get to dodge payroll taxes on a substantial percentage of their salaries. Employers and workers are charged payroll taxes on salaries up to $110,100 a year, meaning anything above that — a category that includes some of the middle class — is payroll-tax free. Simply lifting that cap would cover about 90 percent of the projected shortfall over 75 years, according to forecasts by the Social Security Administration.”

Boak then goes on to point out other difficulties with, as well as benefits of, the proposal.

Even though this proposal is very simple; there is an even simpler solution the problem, without the drawbacks. Stephanie Kelton outlines it this way:

“Every year, the Trustees of Social Security and Medicare issue an annual report that examines the financial status of the various “trust funds” that purportedly sustain these vital programs. Social Security’s (OASI) and (DI) Trust Funds, as well as Medicare’s (HI) Trust Fund all face chronic problems, some in the not-too-distant future. In contrast, Medicare’s (SMI) Trust Fund always receives a clean bill of health. Why is that?

“The answer is so simple it apparently escapes notice, but here it is, straight from the annual report:

“The Hospital Insurance (HI) Trust Fund is expected to remain solvent until 2029. The Disability Insurance (DI) fund is projected to become exhausted in 2018. And the Old-Age and Survivors Insurance (OASI) Trust Fund is considered adequately financed until 2040. In contrast:

“Part B of Supplemental Medical Insurance (SMI), which pays for doctors’ bills and other outpatient expenses, and Part D, which pays for access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs.”

“In other words, it is sustainable — INDEFINITELY — because the government is committed to making the payments. Indefinitely.

“And, as we have argued many times on this site (and elsewhere), the same commitment can easily be made to sustain Social Security (OASI and DI) and Medicare (HI) in their current form. There is no economic justification for cuts to either program. The decision is entirely political.”

So, the simple solution to the Social Security solvency “problem” (if something with such a simple solution can be called a “problem”) is for Congress to make the financing for Social Security (OASI and DI) automatic.

Of course, the first thing anyone will say about this simple solution for Social Security is that it's not really a solution to the SS solvency problem because it just transfers the financing problem from payroll taxes to general tax revenues, and the solvency problem from SS alone to the whole Federal Government. However, as I've been at pains to point out in many, many posts in the past, for example, here, here, and here, there is no solvency problem for a Government like the US with a non-convertible fiat currency, a floating exchange rate, and no debts payable in currencies it doesn't issue. For example, here's how automatic financing of SS by Congress could easily be managed.

First, the President should use the authority provided by a 1996 law to mint a $60 Trillion coin and deposit it at the Federal Reserve.

Second, Congress should make SS funding automatic.

Third, Congress should also provide for imposition of the payroll tax at the discretion of the President, with the maximum payroll tax set at what it is today, but with the payroll tax salary cap removed to at least reduce the regressive character of the payroll tax.

Fourth, the President should reduce the payroll tax to zero for both employers and employees, until full full-time employment is reached. At that point he or she can use the authority provided by the Congress to gradually re-impose the tax, if and when inflation reaches 3%.

The effect of these changes would be to immediately add $625 Billion plus to the Federal deficit, but not to the Federal debt because the increased deficit spending would be covered by credits issued by the Federal Reserve to the Treasury upon depositing the $60 T coin. This increase in the Federal deficit will move the economy forward, since we know that most SS recipients would just spend the additional money, and since the Federal deficit is projected at about $1.2 - $1.3 Trillion right now, which is at least 3% of GDP UNDER where the macroeconomic sectoral financial balances model says it should be for full employment, assuming that the trade deficit will be about 4% of GDP and savings will be at 6% of GDP. I say, at least, because so much of deficit spending is tied to subsidies for well-off corporations and individuals and so has low fiscal multipliers, providing more space than otherwise for even higher deficits before demand-pull inflation becomes a problem.

Apart from the extra stimulus provided by using deficit sending to finance SS, the changes I've proposed would provide an additional automatic stabilizer to the economy. SS would contribute much more stimulus to the economy on a continuing basis to the economy than it does now. But in addition, and unlike the situation from the 1980s until very recently, SS would provide a fiscal drag on the economy, only when a fiscal drag was needed to fight inflation. Otherwise it would provide only continuing stimulus.

So, there we are, a simple solution for SS solvency, and an accompanying answer for those who are worried about “how we gonna pay for that?” In both cases, there really is no “problem.” Just a few simple things to do to change a “problem” into an “opportunity!”

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letsgetitdone's picture
Submitted by letsgetitdone on

Also, "printing money" is a loaded term from gold standard days, when merely printed money wasn't as good as money backed by gold. However, today, no money is backed by gold, so any new money we create is just as good as any of the old money already there. Please see this post for further analysis.

letsgetitdone's picture
Submitted by letsgetitdone on

is tough. But we just have to counter those objections with patient explanation. See here.

I also cross-posted this at DailyKos where I got a lot of pushback. Here's one by Maddog that's done pretty well.

I can give references to more advanced treatments if you'd like. But the bottom line is that the Quantity Theory of Money on which the printing money fears are based is an economic theory that holds only under very specialized conditions that we're not subject to right now.

Submitted by ubetchaiam on

This supposed 'conundrum' isn't about logic but perspective. Have to laugh when I read the argument "Of course, the first thing anyone will say about this simple solution for Social Security is that it’s not really a solution to the SS solvency problem because it just transfers the financing problem from payroll taxes to general tax revenues,"; like the Congress hasn't been borrowing from the SS trust funds for general budget spending for years now. That's what Gore's 'lock box' was all about.

And my reading of the Trustee's report indicates that the DI will run out in 2016, not 2018 but what's a couple of years when the DI is being hit because of layoffs of older workers?

Asked a published widely commentator why he always lumped the OAS and DI together when he ranted about SS insolvency and his response was that if the government doesn't see fit to explain the difference to the public and lumps them together when talking about SS insolvency, why should I? (though his response was not as clear and lacking smack talk as my description).

It's really the perspectives that need to be examined and discussed in the public discourse, as restricted as it is by the CMM(corporate mass media).

mtngun's picture
Submitted by mtngun on

I vaguely remember Beowolf writing about the laws required to rewrite SS funding -- seems like it required more than a simple majority vote ? Regardless, I agree that we should put SS in the general budget rather than continuing with the imaginary "trust fund" concept. Then we would be in a position to talk about lowering the retirement age to 55 and increasing benefits to an amount you could actually live on.

I very much like the idea of bigger and better automatic stabilizers, but I wouldn't choose FICA as the guinea pig. In fact, if we move SS into the general budget, there's no reason to have a FICA tax at all. FICA is regressive and should be done away with.

Re: the 3% inflation target. Until such time as we have a precise way to distinguish between demand-pull inflation and cost-push inflation, is inflation targeting really a good idea ? It seems like most inflation is cost-push and we have little control over that, so does it really make sense to target inflation ? What would happen if we had a big oil shock, or a big food shock ?

Re: giving the Prez discretion over tax rates. You gotta be kidding ? I say come up with a mathematical formula to automatically link tax rates to unemployment, and then legislate the formula.

Alternative suggestions for automatic stabilizers:

-- amend Humphrey-Hawkins to make it a workable law. That could be as simple as clarifying that the Treasury is required to write the checks for the temporary government jobs authorized in the current H-H law. Change the 3% unemployment target to 0%. Then you'd have a stealth JG.

-- Mathematically link the retirement age to unemployment rate. If the unemployment rate goes up, the retirement age goes down, until it hits 55. Alternatively, if we had a JG, the retirement age would be linked to JG participation. Perhaps any 55+ worker who applied for a JG could, at the discretion of the local JG manager, be offered early retirement, depending on whether the local JG office had a suitable job opening for that particular older worker?

-- Mathematically link a financial transaction tax to unemployment. According to Beowolf, the Fed already has the discretion to do this under current law.

-- Add a line on the 1040 for the "automatic stablilizer tax credit," mathematically linked to the unemployment rate. Also, the withholding formula could be mathematically linked to the current unemployment rate.

letsgetitdone's picture
Submitted by letsgetitdone on

I'd like to discuss each one.

I vaguely remember Beowolf writing about the laws required to rewrite SS funding -- seems like it required more than a simple majority vote? Regardless, I agree that we should put SS in the general budget rather than continuing with the imaginary "trust fund" concept. Then we would be in a position to talk about lowering the retirement age to 55 and increasing benefits to an amount you could actually live on.

I don't think a stipulation to require automatic funding would require more than a majority. First, because no mere bill requires more than a majority. Second, I know the filibuster makes it seem that way, but if you're going to pass an automatic provision you'll have to beat the filibuster anyway. Strangely enough, apart from some guts, it only requires a majority vote in the Senate to get rid of the filibuster (the nuclear option)!

On SS being in the "general budget" it is already in it, in the sense that SS payments are made from the Treasury General Account (TGA) just like other spending. It's true FICA taxes are collected under another accounting category than income taxes; but all the money ends up in the TGA anyway. SS is credited with securities in return for the FICA taxes collected, but that's strictly a matter of accounting. There's no Fed account involved. So, the automatic funding provision wouldn't really change any concrete operations; it would just guarantee the payments regardless of what the SS books show.

I agree that once the automatic provision is placed into law we would be in a position to lower the voluntary retirement age, and also expand the benefit to provide the standard of living enjoyed by retirees in other modern industrial nations.

I very much like the idea of bigger and better automatic stabilizers, but I wouldn't choose FICA as the guinea pig. In fact, if we move SS into the general budget, there's no reason to have a FICA tax at all. FICA is regressive and should be done away with.

Well, I did suggest removing the payroll tax cap. Thus making it at least a flat tax for everyone. But on the point of its being used as an automatic stabilizer, I like that because SS tax increases can happen quickly when demand-pull inflation becomes a problem, and we know they'll have a 1.3 negative multiplier on demand, which would make a big difference in curtailing consumption quickly. Income taxes could be used in the same way; but people might respond to increases of this kind by manipulating withholding exemptions. In any event, I'm thinking FICA taxes are easy to manipulate in this way. We remove them to begin with, which ends the progressivity issue and only re-impose them gradually and temporarily when demand-pull inflation occurs.

Re: the 3% inflation target. Until such time as we have a precise way to distinguish between demand-pull inflation and cost-push inflation, is inflation targeting really a good idea ? It seems like most inflation is cost-push and we have little control over that, so does it really make sense to target inflation ? What would happen if we had a big oil shock, or a big food shock ?

I think we can distinguish between demand-pull inflation and cost-push inflation using econometric modeling and I also think that's something it can do well, however badly it may work for macroeconomic modeling. In particular food and oil shocks can be modeled very well, so when they occur, the President would not reimpose FICA taxes; but would look to price controls and rationing to cushion those shocks.

Re: giving the Prez discretion over tax rates. You gotta be kidding ? I say come up with a mathematical formula to automatically link tax rates to unemployment, and then legislate the formula.

To handle unemployment I prefer a JG because that program directly affects provides jobs, also I want to use tax variations to control inflation as one approaches full private sector employment. Income tax payments are more subject to manipulation, at least in the short run than FICA payments, and that's why I prefer varying FICA payments as quick way to cut back and increase demand. On the subject of having a formula, you earlier raised the question of ambiguity in distinguishing between the two primary types of inflation. But insofar as there is ambiguity about doing this, then it may be that after economists do their estimations, it is better for the final judgment about what to do to humans who weigh the uncertainties and risk in the situation. Look at it this way. If a formula is applied and the result is bad, who will be blamed the formula or the President? If the President is going to be accountable, then I think he or she should make the decision, after consulting what the data and the models say, of course.

Alternative suggestions for automatic stabilizers:

-- amend Humphrey-Hawkins to make it a workable law. That could be as simple as clarifying that the Treasury is required to write the checks for the temporary government jobs authorized in the current H-H law. Change the 3% unemployment target to 0%. Then you'd have a stealth JG.

I'm all for amending H-H; but I think the way we should amend it is to have a JG, not a "stealth JG." I think the actual JG target is zero percent in the sense that the remaining unemployed are unemployed by choice. So that takes account of the 2% or so between jobs at any time who don't want a full-time job. I agree about amending the H-H 3% target.

-- Mathematically link the retirement age to unemployment rate. If the unemployment rate goes up, the retirement age goes down, until it hits 55. Alternatively, if we had a JG, the retirement age would be linked to JG participation. Perhaps any 55+ worker who applied for a JG could, at the discretion of the local JG manager, be offered early retirement, depending on whether the local JG office had a suitable job opening for that particular older worker?

I don't like that idea. I think the age for full SS payments should go down to 55; but I also think that anyone who wants to remain in the Labor force should have the right to a job offer at a living wage with full fringe benefits through the JG. I don't foresee a problem in having JG job openings. Please read Bill Mitchell, Randy Wray, and Pavlina Tcherneva on this subject. They think, and I agree, that worthwhile jobs can be formulated from the bottom up in the non-profit sectors, and that these jobs can absorb all the unemployed who want to work. You may want to start with Randy's series.

-- Mathematically link a financial transaction tax to unemployment. According to Beowolf, the Fed already has the discretion to do this under current law.

I don't know how I feel about a transaction tax. It may be a good idea, but I don't see what it has to do with unemployment unless you don't have a JG. My friend beo isn't for the JG, having bought it into Cullen Roche's MMR stuff, which I critiqued at this blog last January at length. For myself, I want to use taxes to regulate inflation and create greater economic inequality; but not to raise revenue, since the Federal Government doesn't need the revenue. Anyway, the financial transaction tax seems far removed from the SS solvency issue to me, and it's also small potatos compared to the use of Proof Platinum Coin Seigniorage to fill the public purse.

-- Add a line on the 1040 for the "automatic stablilizer tax credit," mathematically linked to the unemployment rate. Also, the withholding formula could be mathematically linked to the current unemployment rate.

Again, I prefer using FICA because of its immediate impact.