• Social Security

    Since I don’t spend a lot of time thinking deeply about Social Security and how to fix it (though I did dig into it a little, once), I appreciate that Don Taylor is thinking about it and, moreover, explaining his thoughts simply and concisely. I have a few questions. Hopefully, Don will consider answering them.

    First, he wrote,

    We should go ahead and focus on Social Security using momentum (assuming there is some,or if not we need to create some) coming out of the President’s Deficit Commission that will report on Dec. 1. I was helping one of my kids with homework planning the other day and told them to complete the easiest assignment first, then move to the next, and so on. Waiting to address Social Security until after Medicare and Medicaid are fully addressed doesn’t seem wise, and it would be good for us (the 310 Million version of us) to actually address a big problem and come up with a solution and prove the concept still exists. Maybe doing this will provide some momentum for Medicare and Medicaid fixes.

    I’m not confident that what works for homework applies to governing. Is there really such a thing as momentum from legislative achievements? Or does each struggle for major reform consume political capital and invigorate the base of the losing set of constituents? If the momentum theory applied, wouldn’t we have seen a heap of it after passage of the ACA?

    I’m all for solving Social Security if there is no way to make equivalent progress on federal health costs. I’m not for addressing Social Security at the expense of addressing health costs. My position is that if we make progress on the cost of health care financed by the government, it’ll leave a lot more budgetary headroom to deal with the (far simpler) problems with Social Security.

    Was that even a question? Sorry. Now for an actual question based on Don’s history lesson of the Greenspan Commission and its consequences:

    I favor extending the essence of the compromise that was the Greenspan Commission fix of Social Security in the early 1980s that extended the life of the trust fund until 2039. […] Greenspan et al. set the wage level to which the OASDI payroll tax was applied to the 90th percentile of wages (wage point at which 90% of the population has a lower wage). This level has been indexed by average inflation ever since. The problem is that high end wages have risen much faster in the past 25 years than have average wages, so the OASDI payroll tax now is set to the 83rd percentile of wages.

    Don says we should reset it to 90% and fix the update factor so it stays there. My question is, why don’t we take the equivalent amount of revenue generated by that, but get it by exempting the first X% of wages and taxing everything above that level? Why are low income individuals paying a higher percentage of their wages toward this tax than are high income individuals? Shorter: why is it a regressive tax?

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    • It’s a regressive tax because payroll taxes are tied directly to later-life social security benefits, adjusted for inflation, and then further adjusted to ensure that they are progressive to the extent that people with lower lifetime payroll taxes paid get a higher proportion of social security benefits than people with higher lifetime payroll taxes paid. The simplest solution in my mind is just to eliminate the payroll tax, and transform social security from a returns-based model to a social safety net model. But the AARP would oppose this to the last man, and we saw in 2005 how powerful the AARP is on social security.

    • In short, if we exempt income below a certain percentage, then the low income lifetime income households will stop getting social security based on the current returns-based model.

    • I highly recommend Dean Baker’s recent treatment of the Social Security “problem” in light of ACA’s passage: http://bit.ly/aH1iMG

    • We need to understand what the trust fund actually is.
      It really doesn’t matter if it has a balance or not.
      Social Security has “dedicated collections” which means the FICA and SECA taxes are credited to the trust fund. The actual dollars remain in the Treasury, as the trust fund is simply one component of the Treasury.
      Medicare Part D has “dedicated collections” in that 25% of the premiums are paid by beneficiaries. The other 75% is paid by general revenues, which is directly and immediately reflected as a budget outlay.
      Because Social Security has its own trust fund within the Treasury, it is able to withdraw money as long as their is a positive balance in the “Fund Balance with the Treasury.”
      The FBWT allows Socioal Security to pay expenses without an annual authorization.
      The only practical difference between Medicare Part D benefits paid with general revenues and Social Security benefits paid with dedicated collections is an accounting distinction.
      Social Security benefits are considered as “budgetary authority” and Part D benefits are considered as “out;ays.”
      All benefits are paid from the treasury, whether it is from general revenues, a trust fund, a special fund, or a revolving fund.
      Don Levit

    • @ Don Levit: It definitely matters whether there is a trust fund or not. The trust fund consists of government securities, which are as good as money.
      Some, including at least one former president, have said those securities are nothing but a bunch of IOUs.
      However, the U.S. government has not defaulted on a security since the War of 1812. I doubt it will start on obligations owed to its senior citizens rather than those held by, say, the Chinese, or Goldman Sachs.

    • RZ:
      What is the difference between a trust fund of government securities and an annual appropriation for say, battleships?
      I contend the only difference is the trust fund has a “Balance with the Treasury,” and the battleships has no balance, and thus needs an appropriation.
      Would you agree or disagree? Why or why not?
      Don Levit