Yves here. As we and others have discussed at some length, the concern over Social Security funding is vastly overhyped. As Nicole Woo discusses in this Real News Network interview, one simple fix, that of eliminating the cap on who is subject to the tax, would solve most of the gap that is anticipated in long-term projections. And the Social Security tax as now constituted is regressive and thus promotes inequality, so lifting the cap also moves the tax system toward being more progressive. That’s before we get to the MMT issue that “taxing” to fund any government activity is a political mechanism that is a holdover from the gold standard days, and not how government functions are funded operationally.
In fact, with more and more promised pensions being slashed, and investment returns flagging thanks to QE and ZIRP, the notion that ordinary people can save enough for their retirement is a chimera. Thus preserving and strengthening Social Security is more important than ever.
JESSICA DESVARIEUX, TRNN PRODUCER: Welcome to The Real News Network. I’m Jessica Desvarieux in Baltimore.
It’s a new year, and if you’re one of those early birds, you’ve started on your taxes. But did you know that if you earn more than $118,500 year, the government can’t tax those earnings under the Social Security tax, which is also known as the payroll tax cap? That means that someone who makes twice the cap this year pays the tax on only half of his or her wages. It’s a big issue, considering the future of Social Security is continuously being debated in Washington.
Our guest today is Nicole Woo. She is the director of domestic policy at the Center for Economic and Policy Research in Washington, D.C. Her new paper is titled Who Would Pay More If the Social Security Payroll Tax Cap Were Raised or Scrapped?
Thank you for joining us, Nicole.
WOO: Thank you for having me.
DESVARIEUX: So, Nicole, let’s start off with that question that you pose in your paper. Who would actually pay more if this tax cap were raised or scrapped?
WOO: Well, we looked at the numbers, and it comes out to the top 6 percent, six out of 100 Americans. So the people who are at the very top of the income scale are the only folks who would have to pay more if this payroll tax cap were raised or eliminated.
DESVARIEUX: And how high would that payroll tax cap have to be raised?
WOO: Well, there are different proposals out there. There are some proposals to eventually slowly phase the cap out entirely. And that would mean that the wealthiest people among us would pay the same rate as the rest of us, which seems kind of fair. If they were to do that, if Congress were to pass a bill like that, the Social Security shortfall that we’ve seen in the future would be reduced by about 70 to 80 percent.
There are some other bills in Congress that would raise the cap a little higher or a little higher, still shielding the highest incomes from the tax. So there are different proposals out there, but they all kind of look at the same thing, and that’s trying to get some more inequality in the rate that regular people pay versus the wealthy.
DESVARIEUX: But should we really be concerned about Social Security, since it’s solvent and currently has close to $3 trillion in its trust fund?
WOO: That’s right. Right now the Social Security trust fund does have a lot of money in it. And that’s because back in the ’80s Congress and the president back then decided that they saw the baby boomers coming. It wasn’t a surprise. And they decided to sort of pre-fund Social Security. So since 1983, workers, American workers, have been putting more into Social Security than has been coming out. It’s their money that’s in the trust fund.
What has happened since the ’80s is actually inequality has increased. So more and more of the wages in this country are above the payroll tax cap–they’re above what’s right now $118,500. That cap has been moving up with inflation every year. But as the income gaps have gotten wider, more and more of the wealthy’s income has been shielded, which is part of why the trust fund isn’t quite as big as we needed it to be.
However, right now, with the $3 trillion, Social Security will be fine until about 2033. After that point, Social Security will be able to pay about three quarters of the benefits promised, and nobody wants to see a cut of 25 percent. But that’s still significant money. It’s not like Social Security will just stop paying immediately. If nothing were to be done, then people would still get checks, but they would only be about three-quarters of what they were expecting.
DESVARIEUX: So, Nicole, are you saying that if we were to do away with this cap, then we wouldn’t run into that issue?
WOO: As I said earlier, one of the bills, some of the bills out there that were in the last Congress would slowly eliminate the cap entirely, and that would take care of 70 to 80 percent of the shortfall. There are some other bills that raise the cap, like, from 118,000 to 250,000 or to 400,000, and that would mean people would pay the payroll tax, but not on all of their income for the wealthiest, who would just capture some of the highest incomes. And, of course, those bills would take care of less of the shortfall. But certainly, as people talk about ways to shore up Social Security, this is one of the most effective ways to take care of it. And, again, it’s about fairness. It’s about making sure that all workers pay the same rate in their Social Security taxes.
DESVARIEUX: Nicole, can you just speak to specifically which lawmakers are supporting these types of proposals?
WOO: Well, we are in a new Congress now, but in the last Congress, Senator /pɑːrkɪn/, who has since retired, and Senator Begetch introduced some bills, as well as Senator Sanders. On the House side we had representative Gwen Moore, Linda Sánchez, Ted Deutch, Peter DeFazio, and some others I probably forgot, but all Democrats at this point. I don’t think there are any Republicans on those bills.
DESVARIEUX: Okay. So who do you see as being the largest opponents to these bills? And what’s really their interest?
WOO: Well, I’m not a mind reader, but from what they’re saying, there’s a split. A lot of Democrats are saying that Social Security needs to be expanded, that especially after the financial crisis we went through, where people’s home prices crashed, they lost their homes–a lot of people’s social security stayed, but their retirement accounts, their 401(k)s and IRAs crashed along with the stock market. That Social Security is even more important. And with the unemployment rates we’ve seen, more and more people don’t have savings as they’re going into retirement. So there are a number of Democrats who think we should reduce or eliminate the payroll cap, not only to shore up the fund, but also to perhaps expand it a bit and give people a little bit more security in retirement. And that’s pretty much the Democratic view.
On the Republican side, there is a lot more talk about cutting benefits, saying that retirees are spoiled or there might be fraud in the program. And so they’re interested in just cutting benefits rather than increasing the revenues into the program.
DESVARIEUX: But, Nicole, what about Wall Street? Wasn’t there a push to reform Social Security by those on Wall Street?
WOO: You might–that’s a good question. Back in the Bush years, you might remember, there was a push to privatize Social Security, and that was taking money out of the trust fund, or future–or revenue that people would putting with their taxes would not go into the trust fund and instead would go to the stock market. And that was back in the mid 2000s. Could you imagine if that had happened and that Social Security money had been in the stock market right before the crash? We would have such a larger retirement crisis now than we already do. And certainly Wall Street would make a lot of fees if millions and millions of American workers’ retirement money that’s now in Social Security went into the stock market and other Wall Street vehicles. So certainly they are behind any sort of push to either privatize Social Security, move more money into the private industry, or to just sort of push out ideas and concepts about Social Security being in crisis, because if people believe there’s a crisis, then they’re going to say, oh, well, maybe we should go with the private market. But the fact is that Social Security is one of the best investments out there. The fees are very low because the trust fund is in U.S. Treasury bonds. They’re very safe. And the fees are not like what you would get in a 401(k). So, in many ways Wall Street and the financial industry have an interest in sort of scaring people about Social Security and eventually moving that money into the private sector.
DESVARIEUX: Alright. Nicole Woo, joining us from Washington, D.C., thank you so much for being with us.
WOO: Thank you.
I broadly favor progressive taxation, but one of the reasons social security has been so widely embraced is the idea that each worker is paying his own tax for his own benefit. That illusion could be maintained if the cap were simply raised to $250,000. Another way that could be more palatable than removing the cap would be taxing dividends in Sub S corporations at the same rate as W-2 earnings. Or we could scrap the illusion that we all pay for our own and tax all income and reduce the tax to a very modest %. That would be my preference, but there would still need to be a mechanism to relate benefits to contributions.
Or we could scrap the illusion that we pay for our own and tax all income at a higher rate and redistribute the proceeds to create a livable and civilized existence for all, period. Relating benefits to contributions intrudes the idea of hierarchy into a realm it does not need to be in. Else why support ‘progressive’ taxation?
Gotta stop equating wealth with income. This is the jedi mind trick of the 0.01%
Today’s wealth comes from yesterday’s income. Why do you think it’s important to differentiate the two? Income inequality is precisely how that .01% keeps the educated technocrats of the 19.99% or so, and especially the 9.99%, in line and oppressing the bottom 80% or so.
You distinguish between the two if you want to tax wealth. There are multimillionaires that can keep their INCOMES below what the average person could even live on and their taxes below what the working stiff pays (capital gains and paid off assets like houses helps with this), however they own a lot of wealth.
Capital gains and dividends are both types of income.
Correct, taxing incomes at the top will not increase real wealth for everyone else.
You’re suggesting that destroying currency units doesn’t makes all the other currency units more valuable?
Currency is not real wealth.
Who says fiat currency is real wealth?
Holding the aggregate amount of real wealth constant, reducing the number of currency units increases the amount of wealth per currency unit. This is the basic principle of progressive income taxation – targeting that currency destruction precisely at those with plenty of currency units.
Irrelevant. Taxation does not increase availability of real wealth to the non-wealthy, nor does it by definition increase the value of remaining currency. Assuming it will is the height of simplistic thinking, akin to believing a sledge-hammer like QE or the interbank rate can be used to precisely manage economic performance.
Ben, if you don’t like taxation, that’s cool. I’m not here to convince you I’m right. Rather, I’m pointing out that political economy is comprised of personal preferences, not scientific facts.
Some people want to tax the rich, others don’t. That’s a difference of opinion, not a lack of understanding.
The idea that something that would benefit 94 percent of the population is “unpalatable” is rather odd.
What is your reason for wanting a cap at all at this point? Is it for the principle of having a cap, or do you think there is something important that happens at $250,001 in wages?
More generally I’m a big fan of taxing all income the same, but that’s a bit bigger picture issue than the specific OASI/DI wage cap.
The reason for the cap is political, Pollyanna. See Bulb below.
Yes and point well taken, you’d have to change the entire psychology of this country otherwise (and maybe it could be done LONG term … I’m trying to nudge the country away from it’s Calvinism see … ).
Why do the same people that think that people will accept a Job Guarantee but not a BIG for these same reasons (people will never accept people getting money they didn’t earn) not see that it might be true of SS, that as soon as people don’t see it as earned by paying in for years and years of one’s working life, will mean it goes away? Although true SS might be gutted anyway.
Everything is about work and what is “deserved”, and heaven forbid anyone get anything that wasn’t earned by work (never mind that income from capital isn’t earned, as it’s assumed to be at one time, and never even mind what appears to be the massive governmental income transfer upward that is QE, as people have a remarkable capacity not to see this).
Hunh? There was no transfer upward. Or downward. Or sideways.
QE was nothing more than the Fed buying someone’s treasury securities on the open market. No one knew that they were selling to the Fed; they were merely cashing them in for whatever reason.
What QE did do was remove the interest income those treasury securities generated from the working economy.
I think in 2012 and 2013 it was around $100 billion each year. The Fed returned about 97% of that, after expenses, to the US Treasury. Which means the money was destroyed. The economy in 2012 and 2013 had $200 billion less sloshing around in it.
In QE, the entity earning the income was the Federal Reserve, not someone else as you imply, and think we have a remarkable capacity not to see.
It’s not really an “open market” if who the Fed buys from is essentially commercial banks or hedge funds. The same banks and hedge funds that essentially are able to borrow money from the Fed at no cost to purchase those securities to begin with
“Open market” means operating through supply and demand rather than diktat. Buying from a hedge fund is as open market as it gets.
The Fed does not buy directly from commercial banks or hedge funds.
It buys from the 50 or so designated “primary dealers”–the designated “open market” brokers–who have sell orders from commercial banks, hedge funds, university trusts, pension funds, individuals, estates, corporations, small businesses, foreign banks, foreign investors, and state and local govts.
I figured that’s where you were going with that. I hear you that’s a concern. But I’d offer two thoughts on that.
First, I think it’s an interesting opportunity in our present predicament where both major parties openly advocate tax cuts as a solution to just about everything to advocate exactly the opposite. For me, I think a variety of policies united by the principle of taxing the rich could actually be quite popular, and one of the easiest I’d say is removing the OASI/DI cap completely.
Second, HI already works like that (the hospital insurance trust fund for Medicare). The cap was removed a couple decades ago. Medicare is one of the most broadly popular ideas in all of American political economy.
We could also remove the cap and have benefits increase forever (with diminishing returns).
So a person with income of $250,000 (2x the current cap) gets 1.5x the current max benefit, a person with income of $1,000,000 (8x the current cap) gets 3x the current max benefit, etc (just arbitrary numbers, but the idea is that the benefit always increase with income but slower and slower). Social security already does this, actually, just not so strongly and with a cap. And it makes sense as a form of income insurance.
Thus nobody gets nothing for any particular SS tax dollar.
Medicare tax has no cap, but the benefits are equal for everyone, a far more socialistic setup.
But, yea, some of the people who want to make this change see it as step 1 with step 2 being undermining the popularity of the program and gutting it.
Personally I think the idea that Social Security is a pre-funded program is a toxic one. It leads to a lot of “got mine” thinking by older Americans. I think the french attitude toward their old age pension system as a “contract between the generations” is a healthier way to look at it and a more realistic appraisal of the situation. Storing up huge piles of dollars in government accounts is really pretty meaningless, in reality the goods and services consumed by the elderly are provided by current workers, so an entire society cannot ‘save’ for retirement in a truly meaningful way.
Social security is thievery. There is no “trust fund” unless you consider a promise to tax future generations to be as good as gold. Raising the cap without raising the accrued benefits to those who pay above the existing cap would simply exacerbate the theft. A more honest approach would be to just call it a tax for general revenues and expose the redistributionist truth.
“Social Security is thievery.” Using that as a starting point, what then in the economic realm is not? By the way, I have to admire the juxtaposition you used in the last sentence. Start out with “more honest approach” and end with “expose the redistributionist truth,” and you have created the sneaking suspicion that one is good, and the other bad. I just happen to think that redistribution is a social good. FDRs New Deal pretty much proves that point.
There is a cap on SS taxes because there is a cap on the accrued benefit, regardless your earnings. My point is simply that any debate regarding removing the cap unaccompanied by a commensurate increase in benefits should be debated openly as an increase in the “progressivity” of the tax code. It should not be hidden behind the FICA ruse.
There is a cap on benefits for the purpose of hedging against inflationary pressure. Fewer real goods and services for working people means more available for retirees.
Is Obama traveling into the future to steal food, cars, medical care and housing, then transporting it back through time to our present? Is that how a “tax on future generations” works?
And now, a word from Jamie Dimon. Thanks Jamie for your ‘well reasoned’ argument.
Let’s travel back in time to 1935, to when our great grandparents were adults. In their relatively self-sufficient world, going on the dole was seen as shameful. To sell SocSec, Frank Roosevelt shaded the truth by describing it as an insurance program, where your benefit is linked to what you pay in. In fact, SocSec has extensive, non-transparent internal subsidies for lower earners. But there remains a link between contributions and benefits.
Breaking the link would mean converting SocSec to a middle class welfare program. But that would smash the other plank of what ol’ Frank saw as the evil political genius of SocSec: ‘what you’ve paid for can never taken away from you.’ (That isn’t actually true — see Fleming v. Nestor (1960) — but the peeps still believe it with a fanatical intensity.)
Take away the link, and it’s just another government program which can be cut or ditched at any time.
In other words … y’all is playin’ with fire. Don’t get burned!
Your logic escapes me. You are saying that SS has always been to some degree a welfare program therefore we shouldn’t turn it into a welfare program. Of course raising the cap will give the plutocrats even more reason to hate and oppose it and, I guess you are saying, put the program in greater jepoardy. But the reason SS persists is not because of some mistaken belief by the peeps but because they like their insurance program that is occasionally a welfare program. Perhaps it’s the plutocrats who are playing with fire by attacking it. Their deceptive propaganda about SS bankruptcy may soon get them more taxes.
Hey, the logic of SocSec escapes me too, brother. It was sold to Americans as self-paid insurance, but the Supreme Court ruled in Helvering v. Davis (1937) that it’s actually just a payroll tax and a separate spending program. Roosevelt said it would be politically bulletproof, since beneficiaries were told they’ve paid for their own benefits (though there’s internal redistribution, opaque because it’s programmed into SocSec computers, using formulae that are nowhere published explicitly).
Lifting the salary cap would explode the still-extant myth that Soc Sec constitutes self-paid ‘insurance,’ and thus potentially render it subject to sequesters, budget cuts and the like.
Making SocSec subject to Erisa would impose a fiduciary duty on its trustees to act in the best interests of the beneficiaries, instead of as handmaidens to politicians. This will not happen, because the program was designed from the beginning to make beneficiaries dependent upon the kindness of partisan politicians, rather than granting them legal rights that would be enforceable in a court of law. That’s skeevy, and it always has been.
Baloney. It was tested in the Supreme Court, and it stands as the law of the land because Congress made it a tax.
Alright. Let’s get rid of all taxation in regards to SS entirely. Let’s drop the pretense of funding through taxation and simply guarantee a minimum level of socialized, government paid support for old people, funded entirely by fiat money printing. But of course you hate that idea as well because the money isn’t ‘real’. So what do you propose?
The reason it persists is that there is NO OTHER rational way to deal with the fact that old people are often physically unable to work (even if one were absolutely hung up on everyone working including 80 year olds) in this society but agreeing socially to take care of them.
The alternatives are mostly insane. Like telling old people to invest their money in the (also government backed by how secure is that backing?) casino that is Wall Street. Or ice floes, or some climate change friendly alternative to kill old people.
And this can take us back to Speenhamland. From Polanyi:
“The mechanism of the market was asserting itself and clamoring for its completion: human labor had to be made a commodity. Reactionary paternalism (Speenhamland) had in vain tried to resist this necessity. Out of the horrors of Speenhamland men rushed blindly for the shelter of a utopian market economy.”
The working class is still striving for its proper dignity which I think would include a living wage, single payer medical care, free K-16 education, and a retirement pension. Not QE fueled asset appreciation.
Wage and employment levels would seem to me to be other important variables that factor into the health of the Social Security system, but I don’t see them linked to the discussion often enough.
Imagine if wages had not been stagnant for decades, or if the employment rate was higher, or if the number of workers who enjoy full-time status versus part-time status were higher.
More people, working more hours, at a higher wage would automatically increase taxes paid into the Social Security system. Substantially, I would think.
Yep. I always think the prognosticating on Social Security is amusing because the variables involved in it aren’t constant.
In the spirit of Yves introduction ‘that “taxing” to fund any government activity is a political mechanism that is a holdover from the gold standard days, and not how government functions are funded operationally’, I would go further and suggest that the best way to guarantee social security is with a job guarantee program.
Seniors (and the rest of us) need money but even more we need something to buy with that money, from food, clothing, and shelter to various services like medical services. These are provided by a healthy, functioning, working economy.
Joe Firestone has made several substantial comments on JG at a recent post at NEP including:
‘Then, I’d pass a comprehensive fiscal program while the public was in a mood for leadership on how to stabilize the economy. The program would include a huge green stimulus infrastructure and new energy foundations program large enough to, along with an SS tax holiday, and enhanced Medicare for All, get rid of most of the under- and unemployment in the country. It would also include the JG to give transition work to people, while the other programs got going and the stimulus woke up the private economy.
From where I sit political imagination seems to be limited to the current political context and working with it given only small changes from what exists now. In my view the past 45 years show that is a losing game. I’m about finding a way to change the political context in such a way that real solutions and not just band-aid policies that will fail can be passed’
Eliminating the Cap would go a long way toward stabilizing SS. But – it would also increase payouts to ridiculous levels.
SS payouts are based on a formula. The amounts people pay in are subject to the cap. If the cap is raised for high income folks, then they will get a much bigger check when the retire. SSA would be paying basketball players $20k a month if the cap was eliminated. It gets silly.
To “fix” SS it would be necessary to 1) eliminate the cap and 2) change the benefit formula. In other words, gut SS from what it now is (worker paid) to a socialized system that was designed to redistribute wealth.
Okay, sounds easy – Do #s 1 and 2 and the problem is solved. Not so easy. There is no support for a combo of 1&2 today. If Yves doubts that she should consult with Webb and Coberly at Angry Bear. These two defenders of SS hate the idea of socializing SS. I think their views are similar to many of the SS defenders.
Want to wreck SS?? Eliminate the cap and change the formula. The program would be dead in a decade.
“To “fix” SS it would be necessary to 1) eliminate the cap and 2) change the benefit formula. In other words, gut SS from what it now is (worker paid) to a socialized system that was designed to redistribute wealth.”
Oh, so those who make more than $118,000/year don’t work? Or, they only work for the first $118,000 a year and the rest is gravy?
Well, I always kinda suspected as much.
The government is constantly tweaking the Social Security Act, both legislatively through acts of Congress and judicially through ALJ determinations. You make it sound like that would be some sort of doomsday scenario for something to be tweaked.
In Japan, dividend income is also applicable for FICA type taxes.
How about sticking some FICA onto earned income rollover? That’d bring in some cash.
SS doesn’t need cash.
But SS sure could use a bit of redistributionism via that diversion of part of the dividend income stream from out the pockets of the wealthier cohort and into the pockets of the less wealthy. In other words, a diversion of part of the income flow. (That is what government is good at.)
Why make it more politically difficult to keep SS going?
It relates to the ongoing attempts by rightwing actors to gut Social Security. Since that power centre has staked out an extreme position on the subject, it behooves their opponents to stake out a position on the other extreme. Then let the politics begin! By accepting a lesser position on the subject from the beginning, the leftwing would be, indeed, so far has, conceded valuable ground to the rightwing. The rightwing, having already announced an extremist position, can with all honesty refuse to make any compromise. All or nothing becomes the default position. At that point, the leftwing must make a momentous decision; fight or fold. Given the extremity of the rightwing position; fight means all out war, (probably including actual blood in the streets,) or fold means humiliation and servitude, (with blood in the streets for other reasons.)
This is a time to push politics to its’ limits. (Indeed, the actions of the present Powers That Be already demonstrate that this is at work.)
There is no such thing as “the left”, just a bunch of squabbling serial losers, utopianists, basement dwellers and confused weirdos who hate each other more than they do the presumed enemy. We aren’t going to see anything like a pushback in the traditional sense of manning the political barricades and defeating the right, as the traditionally-minded left has no fight in it; it’s a spent force.
The answer is to infect, co-opt and dismantle their ideas the same way they intellectually infected and castrated the left. You don’t battle a superior force on their terms. When they demand cuts we explain why their own thinking means cuts are unnecessary. When they attack the poor for laziness we present a program that ends the behaviors they complain of while raising living standards. When they scream “redistribution” we turn it around on them for being the hypocritical redistributionists. No one flails about like a conservative or right-libertarian once you’ve taken the ideological bullets out of their guns, and it ain’t hard to do.
My problem with your last paragraph is that the trick of applying ‘judo’ political style is very hard to pull off, and not be coopted yourself. I agree that “You don’t battle a superior force on their terms.” Thus, when a Lefty, (I use the term for rhetorical purposes,) gives cogent and logical arguments undercutting a Righty position, the Right will tend to abandon logic and apply arbitrary formulations. Believing six impossible things before breakfast was a howler in Queen Victorias day precisely because educated readers of the time understood the formulation to be an accurate description of the ruling class of their era. Thus, logical jui jitsu will establish an intellectual framework for the Left, but what about a concrete physical ground game? The Occupy protesters had the right of things, and yet, were swept away by the Powers That Be in a naked display of force and aggression.
Taking the ideological bullets out of the Rights’ guns avails us naught when real bullets start flying. Just ask any “person of colour” about that.
As for there being no Left. Well, that might be, but let me observe that any real Left will not advertise themselves. They understand all too well the repressive tendencies of the State. So, yes, by all means let us work out a philosophical framework for Progress in its’ myriad forms. Then the hard work begins.
‘Should we really be concerned about Social Security, since it’s solvent and currently has close to $3 trillion in its trust fund?’
‘WOO: That’s right. Right now the Social Security trust fund does have a lot of money in it.’
‘A lot of money in it’ … AH HA HA HA! It’s really funny, listening to folks who never took Accounting 101 and wouldn’t know to spell ‘accrual,’ enthusing wide-eyed over ‘a lot of money.’
In fact, that $3 trillion balance is, as of last Oct. 1st, $12.294 trillion short of what it should be to fully fund promised benefits. See Table 8 on page 19 of Management’s Discussion and Analysis:
If SocSec didn’t face the dismal prospect of earning a pitiful two (2) percent on its 100% Treasury portfolio, those numbers wouldn’t be so awful. But modernizing the charter of a pension scheme created 30 years before Modern Portfolio Theory just isn’t palatable to the John Nance Garner wing of the Democratic Party.
It would be laughable, if their head-in-the-sand intransigence weren’t impoverishing folks. The petrified politics of Social Security are another vivid symbol of American decline.
That table you refer to includes medicare expenditures which has zero to do with the social security trust fund.
Table 8: [in billions]
Open Group (Net)
Social Security (OASDI) …………….. ($12,294)
Medicare (Parts A, B and D) ………….. ($27,302)
Other ……………………………………….. ($102)
SocSec underfunding, under its own line item, is $12.294 trillion. Medicare underfunding — not part of today’s discussion — is $27.302 trillion under its separate line item.
Are we clear?
Jim, I’m not a fan of fearmongering about social insurance (especially the core old age program) because the very presence of the trust funds render them more sound than the rest of the government that is completely funded by future taxation/money printing. For better or worse, we use cash-based accounting, not accrual-based accounting, so it makes no sense to use accrual-based accounting solely for social insurance programs. And we certainly agree that healthcare spending is the big question mark. Like you said, beyond the scope of this article, but wow, we spend more per capita to cover some people than countries like Canada, the UK, and France spend to provide universal healthcare.
But I do agree some things will need to be updated over time. for example, the concentration of income at the top has meant less taxable income available for OASDI than was intended by the current round of compromises (to catch about 90%, if memory serves). Of course, eliminating the cap completely solves the OASI problem completely. At least until we have flying cars or aliens invade or Yellowstone erupts or whatever.
However, you may want to analyze OASI and DI separately for issues about long-term projections (notice that chart of $13 trillion in liabilities is for OASDI combined). It’s the disability portion specifically that runs into issues in the nearish future (ie, over the next decade or so). The core OASI program can continue as is for decades, and even after something like three to four decades, it can pay out about 3/4 of benefits indefinitely, give or take, even if no improvements are made at all.
Yeah. You don’t understand how it works. As Frank N Newman’s quote below states, Social Security payments are determined by law, not by amounts in the trust funds.
Dean Baker points out that the US got from having Social Security go from 0% of GDP to about 4.5% was done with no difficulty and had no adverse growth impact. So pray tell how does having it take another 1% of GDP do any harm?
Plus everyone who looks at deficit scaremongering says to the extent that Social Security were to encounter any funding issues (and projections that far out are hardly reliable) , they can easily be remedied. As for Medicare, which appears to be the bigger issue, the CBO projections are shockingly off base and were shredded in an academic paper by budgetary analysts at the Fed, see here for an overview:
And here for the paper proper:
But modernizing the charter of a pension scheme created 30 years before Modern Portfolio Theory That was a good thing. Economists then like Keynes, Lerner, Commons (many of his students became administrators of SS & other federal programs) understood basic economics and accounting, as did ordinary people. Economic understanding started moving backwards in the 50s & 60s. Before then, everybody understood MMT, endogenous money. etc., more or less. The decline in economic understanding caused completely unnecessary, destructive “fixes” like the 1982 Greenspan SS tax hike.
If SocSec didn’t face the dismal prospect of earning a pitiful two (2) percent on its 100% Treasury portfolio, those numbers wouldn’t be so awful. As Robert Eisner suggested, the sensible and easy thing to do would be for Congress to decree that the SS bonds would get a 5% or whatever return. Basically just change one number. Why raise the cap? Why bother to do anything else? Of course people should grow up and understand that having a trust fund with any investment at all in it is unnecessary and pointless. But that takes time. .
Read the 1941 Luther Gulick Memorandum at the SSA historical site:
It would be laughable, if their head-in-the-sand intransigence weren’t impoverishing folks. The petrified politics of Social Security are another vivid symbol of American decline.
If head-in-the-sand intransigence means don’t “fix” SS, don’t let Wall Street anywhere near it – then this petrified politics is one of the few things that are keeping the US economy and the working class afloat. It’s a symbol of resistance to decline, resistance to predatory Wall Street con men and their dupes.
There is no such thing as the Social Security Trust Fund. That’s a fiction. All payments come out of general revenue from the US Treasury.
As former Deputy Secretary of the US Treasury, Frank N Newman, explained in Freedom From National Debt:
“The question of whether or not the government has enough IOU’s to itself cannot be meaningful.”
Oh, really? The bare fact of the governments’ undertaking the funding in the first place is paramount. That is the beauty of being sovereign, you set the parameters of the discussion. All else is social and economic engineering.
This isn’t actually an argument against anything he wrote.
Yep, mea culpa. I’ll have to slow down my response time a bit.
I agree with some of what you say. The government could indeed fund social security the same way it funds wars, simply by saying it is going to do so.
However, I do take issue with the term IOUs. The trust fund contains bonds, essentially the same thing that anyone else who “invests” in our government has. If you wouldn’t say China or the Fed has IOUs then you probably shouldn’t say the trust fund has them.
Not any more, cwaltz.
From the Social Security website:
The federal government issues “special issues.” Wanna’ call that printing them up? Fine. But these days these are electronic accounting entries.
Be careful of neoliberal plans to ‘help’ most workers…
The truly rich make their money from capital gains. Eliminating the social security tax caps would soak the upper-middle class (doctors, lawyers etc) and leave the oligarchs unscathed. No I am not opposed to raising the taxes on surgeons. But if we are just sucking the blood out of everyone that works for a living, so that we can continue to subsidize the super-rich, well, I’m not so sure about that.
How about we apply the social security tax to capital gains? Now THAT would help most workers.
What, you say if we increase the taxes on capital gains then we would have fewer hedge fun managers playing games with derivatives and demanding bailouts etc? That is a problem why? Increasingly ‘capital gains’ has zero to do with investment in the real economy, so what.
And then why not have a financial security tax, applied only to capital gains and that has no deductions, and is used exclusively to fund bank bailouts. Surely turnabout is fair play…
In the very long run the SS cap will have to be raised — over time — to avoid cap reversal. What’s cap reversal? That’s what would when and if the Trust Fund bonds were ever cashed — with income taxes. Then, the bottom 50% of earners who don’t make enough to pay income taxes will get a free ride — while the top 10% will because of progressive taxation take the heaviest hit. Can’t have that — just have to raise that cap. (IOW, the TF will never be tapped) :-) That’s the very long run anyway — which we can point out to anyone who objects to raising the cap “on principal.”.
Does anyone remember an article or two during the last round of SS discussions that made the case for cutting the SS tax in half and applying it to all income levels? Cutting the rate in half on lower income workers would be a huge stimulus and a very big help for small businesses. One of the problems with using numbers like the top 6% (I am not in this group) of the income earners is that it is so badly regionally skewed. For someone living in Seattle or Chicago 200K a year is a lot less than someone living in rural North Carolina.
I’m curious why you view the regional skewing as a big deal? $200K is a lot of money anywhere.
It’s a H— of a lot more than I ever earned any year! It’s also a level of income that allows for discretionary income when expenses are kept reasonable.
Not in Manhattan. Not with Federal, State, and City taxes. By the time I left Manhattan, I was paying a combined 58% tax. God only knows what it is now.
You were paying 58% and overseas billionaires were getting massive property tax rebates on their sky digs. I would suggest that this state of affairs was the result of decades of pro-income inequality policy. If the seriously wealthy had paid their fair share of the tax burden, you would have kept a lot more of your money. (To define seriously wealthy, I include individuals and corporations.)
Yes, $200K is a lot of money in Manhattan. Or San Francisco or Honolulu, the big three of land restrictions. Does it buy less land than $200K in Boise or Butte or Billings? Of course, because millions more people want to live in the major cities – the vast majority of whom make less than $200K.
“investment returns flagging thanks to QE and ZIRP”
Hedges and Wall Street equities and commodities desks did quite well thanks to leveraging QE. What’s needed are honest, trustworthy investment returns for us muppets.
Yves, this is total garbage. How about instead of borrowing from the SS trust fund to pay for endless wars and backstopping failed speculative banking operations, we reduce spending on needless garbage and actually make the system balance. The top 6% of earners of WAGES, this Dolt thinks that the people that make 2MM a year are making it as wages??? Give me a break – total garbage. Make the benefit match the contribution, put some enforcement on SS disability, and eliminate the welfare queens. Thats how you fix an insolvent social service.
Yes, you clearly don’t know people in finance. $2 million and higher is middle-senior level pay for lots of people on Wall Street and at hedge funds and PE firms. And those people in the US are the bulk of the 1%.
You may find this link useful. Of course people earning multi-millions in wages are rare. That’s just the math. 90% of workers make less than $90K a year. But there are a few who make over $2 million. Some even make more than $10 million. Apparently 110 workers had wage earnings reported to SSA of over $50 million.
Hannity earns $35 million in wages.
Shouldn’t that be, “Hannity steals $35 million in wages?”
Re: “Removing the Social Security Tax Cap Would Benefit Most Workers”
Translation: Having the government confiscate more of other people’s property would benefit most workers.
There’s nothing new there; that’s the basic proposition of socialism.
The basic proposition of socialism is ownership of the means of production by the working classes. Income is not a means of production.
Just a question; what then would constitute “property” for the purposes of this discussion? I’m not up to speed on “pure” Marxism, but I thought things like natural resources could be ‘property’ and precursors to the ‘means of production’ at the same time.
Natural resources are ‘subjects of labor’, a subset of the means of production; the other being the ‘instruments of labor’ (buildings, factories, tools, capital investment), IIRC.
It doesn’t matter what Yves, these commentators, the 99%, or I think, prefer or advocate. It’s not gonna happen if this change has to be thru the government that is controlled by the corrupt crony oligarchy. Whatever arguments you use, they fall on deaf ears of our elite lords and masters in DC. So stop talking about anything that involves the government, taxes or the 1% doing anything for us. Bill Gates thinks better cell phones will help eradicate world poverty when most people first need income (a legal & accounting fiction). All the govenmental books, money, currency, trust funds, etc. are legal and accounting fictions. Perhaps people should take matters in their own hands and start something outside the Matrix for their mutual benefit. I recommend they visit this new website for a viable, legal and achievable alternative: http://www.i-globals.org. Thanks and best wishes to all for 2015. PM
Yes comrade, it is. I for one prefer the beneficiaries of the ongoing State Socialism to be the working classes rather than, as is now the case, the rentier class.
Meant as a reply to Thomas M McGovern above.
“That’s before we get to the MMT issue that taxing to fund any government activity is a political mechanism that is a holdover from the gold standard days and not how government functions are funded operationally.”
Just to keep perspective on the issue of how government functions are funded operationally(ie in reality an intense ongoing debate) I will quote some analysis from Brett Fiebieger, first his (November, 2011, Working Paper Series No. 279 PERI University of Massachusetts, Amherst). In his abstract he states:
“The paper argues that Modern Money Theory, know also as neo-Charalsim, does not describe the modern monetary system….it makes highly implausible assumptions;… The paper concludes that modern money theory does not offer a viable alternative to fiscal austerity and suggests consideration of narrow banking a la Minsky (1994).
Fiebiger additionally argues in his Feb. 2013 analysis “A constructive critique of the Levy Sectoral Financial Balance approach: that “MMTers reject the conventional understanding of money-financed fiscal policy (i.e. the Fed buying T-bonds in the open market) in favor of an unconventional position that all “government” spending is financed by “government: via crediting bank accounts or “keystrokes”. The MMT description of how the modern monetary system and public finances work in practice is counterintuitive and has received critique from several heterodox analysts….In short there is no utility in depicting the “government” as financing all spending by net/new money creation when that claim applies only to the central bank.”
One consequence of this type of MMT ideological politics– of viewing only their description of how our monetary system functions operationally as the only real valid truth about it– is that any heterodox economist or any interested layperson(such as myself) who admits to worrying about the sustainability of public finances is potentially liable to a dismissive critique from MMTers.
On a more philosophical plane the MMT theorists and their followers should,perhaps, reflect more carefully on the following thought of that evil nihilist Nietzsche:
“Against positivism, which halts at phenomena–“There are only facts”–I would say No, fact is precisely what there is not, only interpretations. We cannot establish any fact “in itself” perhaps it is folly to want to do such a thing.” “Everything is subjective,” you say, but even this is interpretation.”
Well, Fiebinger doesn’t understand how it works.
Congress appropriates new money into the system–into existence–by “spending” bills. THEN…THEN…the US Treasury issues treasury securities in the same amount of the spending, which it only offers to the public at auction, to restore the money supply balance.
The Federal Reserve has nothing to do with this money creation. It’s not even allowed to buy these treasury securities at auction.
The Federal Reserve buys and sells treasury securities on the open market to maintain its target overnight interest rate. That is a separate operation. And it is NOT fiscal policy. It is monetary policy.
Congress does fiscal policy, not the Fed. (But Congress has failed to do fiscal policy.)
Only the interpretation of MMT is the truth.
I am glad you clarified that.
You have not bothered to understand MMT and made an objection. Name calling is not tantamount to argument.
It would be helpful if you try responding to what MRW wrote, not issuing the blog equivalent of crossing your arms and loudly huffing.
Actually, Jim, I don’t have Yves’ facility with matters financial or economic. I have spent over five years struggling to understand this stuff, By that I mean understand how the federal monetary system works from a nuts-and-bolts’ POV, as in first this, then that. And I am pig-headed enough not to accept words on a screen or paper, or anyone’s consensus view, except as a jump-off point, or research start.
So I contacted the Federal Reserve, the US Treasury, and Congressional Research Service writers to verify every damn thing I didn’t understand. For example, Warren Mosler said they shred dollars at the Federal Reserve? I contacted them. I wanted to know the machines, how they did it, where the machines are located, how often it’s done, where does the shredded cash go, why did they decide to shred and not burn in the first place. Same with how Congress first appropriates and then the US Treasury issues treasury securities in the same amount (basically). How does that work? What are the exceptions? What law was involved? Why did we start doing it this way? How is interest on the treasury securities handled; who pays for that? And on and on. The whole nine-yards John McPhee. In addition to GBs of data on my computer, I have 12 banker boxes of documents, articles, and original papers from the creator of the Federal Reserve that haven’t seen the light of day, and that even G Edward Griffin doesn’t know about. (His big mistake was believing Paul Samuelson’s 1947 statement that the Panic of 1907 precipitated the creation of the Federal Reserve.)
So this isn’t any damn interpretation of MMT. Rather, it’s the other way around. I found out that MMT is right in its descriptions of how things work. In 2008/2009 I thought we borrowed from China and that we could go broke as a country. So that’s the 180 I’ve made.
What kills me most about economics is that it’s entirely man-made. It isn’t dealing with great natural mysteries of the universe, and yet the majority of the profession can’t even clearly explain where money comes from. Truly it is the dismal ‘science’.
At its core MMT isn’t an opinion, or a model for how its proponents think things should be. It is an objective description of how our monetary system operates, and how it has operated for decades. You can post quotes from that madman Nietzsche all you want, it isn’t going to change the fact that money is created in one specific way in our modern economy, and MMT explicitly describes that process.
Whether it’s a good system, or indefinitely sustainable are valid topics for discussion, but it’s ridiculous to see people say that the system doesn’t exist at all.
“At its core MMT isn’t an opinion or a model for how its proponents think things should be. it is an objective description of how our monetary system operates, and how it has operated for decades.”
I am glad to get confirmation that MMT, has definitely discovered the truth about how our monetary system operates. I guess if it is the truth then there are no more grounds for conversation of any sort– i should just submit to your “truth.”
Rather than calling this perspective the truth I would characterize it as ideological dogmatism of the worst kind..
If you think he is incorrect, then you challenge the specifics of his description. Responding with passive-aggressive remarks intended to divert attention from anything specific cedes the battlefield to the person with whom you claim to disagree.
Jim, some understanding of MMT depends on understanding Fed – Treasury coordination. I briefly commented on this a while back & Wray liked it enough to write a post on it here: To Consolidate or Not To Consolidate, that is the Question (or maybe it isn’t) , calling it “pretty novel”. I had in mind back then to write similar more detailed criticism of that Fiebiger paper. Anyway, hope this link might help.
… any interested layperson(such as myself) who admits to worrying about the sustainability of public finances is potentially liable to a dismissive critique from MMTers. In what sense of “sustainability” do you worry? Some make good sense, some don’t. The problem is that people are taught to fear nonsensical senses, but then become entirely heedless of the real ones.
MMT flows from its philosophical exploration of the nature of money and accounting. ( Mitchell-Innes etc.) Quite consistent with what Nietzsche is saying there. I am all for looking at economics (worldly philosophy) – philosophically, as has been done – but often forgotten (even by our current MMT sages I think) – through the ages.
Fiebiger has already been rebutted. See here –
There are links to the other parts so you will have an ample opportunity to read up on the responses to critics.
“…is potentially liable to a dismissive critique from MMTers.”
MMTers that I have read have discussed and rebutted over and over again and still find themselves having to go over their arguments again and again. Especially for those who find it beyond their temperaments to really dig into the available material. Perhaps if you were faced with the same circumstances you might find yourself to be somewhat? dismissive also??
“…,only interpretations. We cannot establish any fact “in itself” perhaps it is folly to want to do such a thing.” “Everything is subjective,” you say, but even this is interpretation.””
Yeah well, see how that works with gravity.
As Bugs Bunny once said:
I have dug into their arguments as well as the arguments of many of their critics.
What now is going on is a vigorous debate between different interpretations of how our monetary system operates.
MMT is not an “interpretation”. The Bank of England, Alan Greenspan, former Treasury officials, among others, have all confirmed that MMT is an accurate description of how a fiat currency system operates. You’ve refused to do the work to understand MMT.
I completely agree Yves. That’s exactly what appears difficult for some people to handle.
Greenspan, Bernanke, Cheney, Reagan, Bush, Obama, Geithner, Pelosi, Reid, McConnell, Boehner…they’re all MMTers. They all know we can print however many dollars we want to, no taxation required. They all know the debt ceiling is a fake controversy, political theater, not an actual funding constraint. Year after year after year, they use MMT to cut taxes on the rich and go to war and run the biggest prison system on the planet and bail out the banksters and so forth.
Wrong as always. MMT is just an effort in explaining to people like yourself what elites already know, yet rather than express your gratitude, you demand MMTers stop helping people understand.
And we get your insane ramblings like this, stating that Greenspan and Reagan traveled into the future to learn MMT and then went back to 1980, “using MMT to cut taxes on the rich and go to war and run the biggest prison system on the planet and bail out the banksters and so forth.”
Do us a favor and devote your time to finding the location of the time machine so you can stop them, ok? Please washunate, you’re our only hope.
Yves is the one who said MMT describes a fiat currency system. I’m agreeing with her. That you don’t like what American politicians have done with our currency system certainly is a predicament. You don’t appear to like taxation, which puts you in the company of most of our political leadership over the past three plus decades.
Describes what some elites already knew and now you know because some people went to the trouble of informing you. Yet instead of thanking them you accuse them of being responsible for the system you claim to hate.
The system existed and was serially abused before MMT was developed to inform you of the abuse. Do you understand? The cause (an abused monetary system) preceded the effect (of MMT being formalized to describe the abuse).
Cause precedes effect. Effect doesn’t preceed cause. There is no time travel .
lol, my critique of sovereign money is not that it’s wrong. Rather, it’s that it is irrelevant. Money is just a tool, the idea of human labor, nothing more.
It can be used to build houses or prisons.
And the idea is quite a bit older than Mitchell, Wray, and Mosler. What they added was the specifics of the ELR approach. Which of course isn’t relevant to Yves’ comment because a JG does not describe how our current system works.
Well, except for the Selective Service System and Americorps and so forth perhaps. But then, I’m not sure those are examples MMT would want to claim as representative of their vision for wages and working conditions.
That’s just butt-f**k-stupid.
Tell me what you really think :)
Reagan understood MMT? You nutz? The fourth platform of his first election campaign was to restore the gold standard. He was a state governor who understood state financial accounting. Same With Clinton and Bush. And that level of accounting is no different than yours and mine. We all have to earn income. We are all income-restrained.
Reporters had no clue what happened on August 15, 1971 when Nixon took us off the gold standard internationally, and failed to follow up. Watergate intervened. BTW, in the last few years, David Stockman let it be known that Reagan allowed the deficits to soar during his time–against Stockman’s advice–to show American how dangerous they were and let the Democrats get the blame. Didn’t work. Economy soared instead. And Reagan was praised.
If Greenspan did understand he lied to an incoming President with Robert Rubin, something he could not do to a sitting president without going to jail. The two of them told Clinton that the US could go broke, and that he couldn’t institute the reforms he wanted. It’s at minute 12:20 in Part 2 of The Trap by Adam Curtis.
Just across-the-board spending. Willy-nilly. As if it were a monetary policy issue and not a fiscal one according to need of the people and state of the economy. They convinced Clinton there was an alternative way to build a better society: he should let the market do it, as Curtis says, and that the economy is superior to democracy, and preferable. Clinton allowed them to transfer what belonged to the people, what belonged in the public domain and was under the President’s purview, to the private sector. Greenspan was free to start foaming the runways for the private sector the way he wanted it as Yves wrote last summer here.
That pretty much complements what I’m saying. Which is that who cares what people say? What matters is actions.
And the actions of our leadership are quite clear. When it comes to funding priorities they believe in, there are no financial constraints. It’s only when they don’t like a program that magically people worry about deficits and spending and so forth.
It’s a con, a crime spree, not an intellectually honest discussion. Cutting spending? You must be kidding. Which President advised by Greenspan and Bernanke cut spending? And notice how the discussed solution even within that reported exchange sweeps aside taxation, that other method of reducing deficits?
You’re throwing your hands up and saying everyone is subject to idiocy. I am saying you need to be clear about how the system works. Reality. You need to counter stupidity with reality.
The only “crime” is refusing is understand how a fiat currency works in 2015. The economy is in the toilet. We need 24 million jobs to put the middle class back to work. I fault the Republicans, Democrats, and Independents elected to office for their ignorance. I fault The Fourth Estate, the media, for falling all over their 8-figure salaries and not telling the American people the truth so that they can elect knowledgable officials. You don’t cut spending when the American people are in trouble. Taxes for Revenue are Obsolete (1946).
So you agree with me? Presidents aren’t actually proposing federal budgets that cut spending. War, tax cuts for the wealthy, the largest prison system on the planet, a bloated healthcare system, a criminal financial sector, ag subsidies, etc.
Almost as if our leaders do, indeed, understand exactly how our money system works.
Step 1: Give money to connected insiders.
Step 2: Repeat step 1.
Have to go to the local library to watch youtube.
OOOOH! I have to go to the local library to -read- youtube.
(I’m having a Wile E Coyote moment.)
Heh, heh, heh! Only in a Nietzchean world could we interpret away the subjective effects of gravity. Heh, I love it! :)
Now I see why you feel ‘dismissed’. It’s probably because you are. You, like Fiebiger in the paper you’ve referenced, simply take a position, without so much as attempting any effort whatsoever to provide argument in defense of that position. And this, in the face of arguments to the contrary from such distinguished persons as Yves has mentioned. Perhaps you could make an argument as to why, anyone, would waste their time on you in the face of such petulance.
I don’t want Jim to feel dismissed. I understand fully why he would think MMT is a bamboozle or a consensus view here that he better believe or else. It’s daunting. We can all sound dismissive when we write short responses. But on this topic alone that I know of, I am five years ahead of him digging into whether it’s true or not.
Ok, I’m with you MRW. I have to say that MMT’ers are the most patient lot I’ve ever met. The do seem to really want to get their message out. Considering how politically important it is I can understand why.
I’ve read your comment above where you’ve stated how long you’d been studying MMT. I’ve spent quite a bit of time over the years looking at economics for an explanation of why I’ve never seemed to get ahead no matter how many rungs up the latter I’ve gone. Most of economics I’ve seen appear to be attempting to be oblique than anything else. Frustrating. So when I bumped into MMT, I thought, well this is great.
Then to have deal with someone who says they have gone over the material but yet don’t have any specific arguments one wonders whether one is dealing with someone who is being dishonest or just a troll.
You have the advantage. My patience isn’t near is great as yours.
It’s not patience. I have a congenital disease. i cannot stand on financial, environmental, or social quicksand. I can not. It’s visceral with me. I have to find out what I don’t know.