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March 31, 2008

Hands Off Harrop

Justin Katz

Nobody wants to upset the imposing beast of a retiring Me Generation, and Froma Harrop joined that nobody with her Sunday column:

What should we do about Social Security?

"I would just say, 'Let's sit on this,'" Baker answers. If come 2030 Americans see problems looming, he adds, "we can do something."

Much could change in over 20 years. Productivity gains have helped fewer workers pay for more retirees in the past and could in the future. And longer life spans may also alter the dynamics.

"How long into their lives should someone born in 2020 work?" Baker asks. "I have no idea."

The Baker whose prescription Harrop takes without question is Dean Baker, "a founder and director of the progressive Center for Economic and Policy Research," and his advice is premised on the assertion that 2017, when the Social Security system will have to start dipping into its trust fund, "means zero to the program." Of course, it does mean something to the people whose government likes to spend in the red and will have to come up with the money to honor the IOUs that wholly constitute that fund.

For the sake of argument, though, let's assume that 2041 — when the trust fund bonds will run out — is the danger date. I find the Baker-Harrop balance of risk and lead time, well, convenient. Rather than address a structural problem thirty-plus years in advance — establishing a new strategy with plenty of time to assimilate and a large retiring generation to maximize the benefits of any reform — the guardians of Social Security would have us sit back and watch the Boomers inch their way to octogenarianism in the hopes that something will just come up. (Sounds like the General Assembly method of budget planning, no?)

Now it becomes conspicuous that Harrop glides right through the assertions that really require further explanation, such as the suggestion that "productivity gains have helped fewer workers pay for more retirees in the past and could in the future." What past? When? If she means a time when advances in farming enabled a family to feed more of its elders, I'm not sure the observation applies. At best, the economic mechanism seems likely to have something to do with workers' earning more (because more productive) and therefore being able to pay more in taxes for retirees' benefit.

Or consider this: "How long into their lives should someone born in 2020 work?" That looks like an admission that the age of retirement will have to be pushed back, but for future generations — TBA. My fellow young(ish) adults might join me in wondering why there's no calculation of balance. If Baby Boomers were to wait five years for Social Security benefits, maybe we'd only have to wait ten, instead of twenty-five, or whatever it will prove to be when we reassess things mid-century.

Hands off Social Security, Harrop insists, at least until the Boomers have gotten their share. It's their last chance to stick it to those who've followed them, after all.

Comments

The Baby Boomers really need to be renamed the "F@#& You Generation".

Posted by: Greg at March 31, 2008 1:54 PM

What irked me most was her claim that there were any funds in the 'trust fund'. This is completely disingenuous. There is nothing but some musty IOUs in the 'trust fund'. It is true that the social security needs will be adequately met on a pay as you go basis for the next 9-10 years. Then you have to start raising money to write the checks. How do you raise money? Increase the SSI payment from its current 12.4% to what level? Or means test payments. Or collect it on any and all wage income - sky's the limit. Our 535 reps/senators +1 president for the past 20 years have, in aggregate (not individually), been absolutely gutless.

Of course, this isn't our biggest elder entitlement problem. That is Medicare and Bush didn't help with the extended drug coverage - which bought zero accolades from the donks. So, barring a miracle, a decade or so in the future, we'll start to face a problem that will make the sub-prime and liar loan mortgage woes look trivial.

My own personal response to the intergenerational turmoil this is going to cause is that I'll continue funding my kids. I'll try to do that in a way that is the least demeaning to them, for example, incenting their private retirement funds with a dollar for dollar wage replacement. I was proud when I was no longer on my parents payroll. Too bad my kids generation may not be able to experience the same sense of independence and self worth.

Posted by: chuckR at March 31, 2008 2:11 PM

Social Security is easy to fix. Just get rid of its regressive structure by raising the taxable limit on earnings to a half million dollars, or provide a tax free "donut hole" from the current ceiling of $90,000 to $200,000 and then tax up to $1,000,000. Most wage earners won't be affected and we'll certainly increase the Social Security coffers.
OldTimeLefty

Posted by: OldTimeLefty at March 31, 2008 6:12 PM

I sure hate to agree with someone styled "Old Time Lefty" but SS can be fixed in fell swoop by raising the income limits on people who are already millionaires.
Of course the 3 billion being spent by Bush, the neo-cons and the globalist Democrats in this doomed "war on islam" would also have fixed it in toto.

Posted by: Mike at March 31, 2008 7:29 PM

I'm going to Hell for this...

I agree with OldTimeLefty.

And add means standards. No reason to send Bill Gates a check every month and he won't mind.

Posted by: Greg at March 31, 2008 7:32 PM

The amount of misinformation contained in that piece by Harrop makes you wonder which of the two things it is with her, neither very flattering: Is she so stupid that she doesn't understand this stuff; or, does she know the truth, but has to lie through her teeth to come to faulty, wishful conclusion?

Does this lady actually believe there is a "trust fund" with actual money in it? Does she take the time to gain even a cursory knowledge about the topic she is going to write on?

I know that liberals are stupid, but does she have to make it so painfully obvious?

Posted by: Mike Cappelli at March 31, 2008 7:48 PM

According to the 2008 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (OASDI), better known to most as Social Security. Here are two paragraphs from the Highlights page:

“Conclusion
Annual cost will begin to exceed tax income in 2017 for the combined OASDI Trust Funds, which are projected to become exhausted and thus unable to pay scheduled benefits in full on a timely basis in 2041 under the long-range intermediate assumptions. For the trust funds to remain solvent throughout the 75-year projection period, the combined payroll tax rate could be increased during the period in a manner equivalent to an immediate and permanent increase of 1.70 percentage points, benefits could be reduced dur¬ing the period in a manner equivalent to an immediate and permanent reduc¬tion of 11.5 percent, general revenue transfers equivalent to $4.3 trillion in present value could be made during the period, or some combination of approaches could be adopted. Significantly larger changes would be required to maintain solvency beyond 75 years.

The projected trust fund deficits should be addressed in a timely way to allow for a gradual phasing in of the necessary changes and to provide advance notice to workers. Making adjustments sooner will allow them to be spread over more generations. Social Security plays a critical role in the lives of 50 million beneficiaries and 164 million covered workers and their fami¬lies in 2008. With informed discussion, creative thinking, and timely legisla¬tive action, present and future Congresses and Presidents can ensure that Social Security continues to protect future generations.”

Another reason of underfunding pointed out in the report is that generations after the “Baby Boomers” have not produced the numbers of children which will enter the USA workforce paying SSN taxes. You younger people have got to start working a lot harder to reverse the low USA fertility rates and save social security.

“Long-Range Results
Under the intermediate assumptions, OASDI cost will increase more rapidly than tax income between about 2010 and 2030 due to the retirement of the large baby-boom generation. After 2030, increases in life expectancy and the relatively low fertility rates experienced since the baby boom will continue to increase Social Security system costs relative to tax income, but more slowly. Annual cost will exceed tax income starting in 2017, at which time the annual gap will be covered with cash from redemptions of special obliga¬tions of the Treasury that make up the trust fund assets until these assets are exhausted in 2041.”

2008 Annual Report of the Board of Trustees of the Federal OASDI
http://www.socialsecurity.gov/OACT/TR/TR08/trTOC.html

Posted by: Ken at March 31, 2008 10:32 PM

What's in a name? Forget the "liberal-Conservative" label on this one. If we agree on this issue we ought to push for it. Politics does indeed make strange bedfellows. If it will make you feel better in the morning, just consider it a one night stand. We can throw bricks at each other after we heave a few at the millionaires.
OldTimeLefty

Posted by: OldTimeLefty at March 31, 2008 11:10 PM

I am generally a complete idiot regarding economics,but Old Time Lefty sounds sensible here.If that solution he advances would really work,it should be tried.

Posted by: joe bernstein at April 1, 2008 7:34 AM

Joe,
The math is quite simple. The S.S. tax rate is about 6%, and is taken on the first $90,000 in wages. The tax is 0% for every dollar in wages after the first $90,000. Make under 90 grand a year and you pay 6% on your wages. Make $180,000 a year and you pay 3% of your wages. Make $900,000 a year and you pay 1% of your wages. The more you earn the less you pay.
OldTimeLefty

Posted by: OldTimeLefty at April 1, 2008 1:40 PM

Are there any numbers that show that imposing SSI taxes on million dollar salaries will fix the problem? Will it fix the problem after those folks adjust how they are compensated after the tax is imposed? At some level, you risk offshore movement of both capital and compensation. I don't mean tax haven dodges, I mean the capital, the jobs creation and the income all go offshore. Are you sure you want to risk that structural change? Lets say you do this for Medicare as well. What happens when the top few percent of earners' effective tax rate goes from around 30% to around 45% (people in this bracket understand that they are paying both sides of SSI/Medicare)? There is a word for static-based budget projections. The word is moronic.

We have four bad choices: 1) whack the rich (it just feels so good) 2) make it even harder for young families to achieve some economic prosperity by grabbing off even more of their dollars in taxes 3) reduce benefits, either directly (political suicide) or by changing the inflation bump and growth rate of bennies 4) means testing, which for many people will be a multi-decade betrayal of the whole notion of SS as a modest pension payment based on multiple decades worth of annuity payments. I don't have long until I'm able to collect, but I still have to vote for a combination of 3) and 4). Option 1) is stupid and short-sighted with respect to jobs creation and option 2) screws the up-coming productive generations.

Posted by: chuckR at April 1, 2008 2:24 PM

OTL - didn't see your last comment until after I posted. The actual number that you pay is somewhere between 6.2% and 12.4%. You just don't see the business half of what is deducted. If it weren't a required deduction, you would likely get some or all of that extra hidden SSI tax. The real numbers are 7.65% and 15.3% - the difference being Medicare. Medicare has a much larger unfunded liability than SS.

You may look at the people making from $200k to $1m as some kind of plutocrats. I look at them as people who fund new ideas and new companies which create new jobs. A lot of these people are not big business upper management or Wall Streeters. I speak from experience as I have worked in a number of consortia who depend on what is called angel financing - a small group of people who kick in moderate amounts of seed money. And my business partners and I did the same thing internally in a decision that did create several dozen jobs (not that we were million dollar earners). Grab off 15% of their income and you're likely to starve some of these activities.

Posted by: chuckR at April 1, 2008 3:11 PM

chuckR
Two points:
1. Quibbling over the percent I used, or 6.2 or 7.65 is immaterial to the argument. The point is that the more you earn the less percentage you pay.

2. You have not explained why income over $90,000 should not be subject to S.S. tax. Is $90,000 some kind of magic number. Are you saying that there will be a mass exodus of businesses from the United States if we upped the limit to a million dollars? Are you saying that business owners are so greedy that they will leave the shores of this wonderful democracy for a few bucks? Some patriots they are!
OldTimeLefty

Posted by: OldTimeLefty at April 1, 2008 6:07 PM

OldTimeLefty,

In my post of the 2008 Annual Report of the Board of Trustees of the Federal OASDI concluded:

1) “For the trust funds to remain solvent throughout the 75-year projection period, the combined payroll tax rate could be increased during the period in a manner equivalent to an immediate and permanent increase of 1.70 percentage points, benefits could be reduced during the period in a manner equivalent to an immediate and permanent reduction of 11.5 percent, general revenue transfers equivalent to $4.3 trillion in present value could be made during the period, or some combination of approaches could be adopted.”

2) “After 2030, increases in life expectancy and the relatively low fertility rates experienced since the baby boom will continue to increase Social Security system costs relative to tax income, but more slowly.”

In other words, increases taxes and adjust benefits or some combination and the population in USA after the baby boomers are not populating fast enough to sustain SS with new workers entering the workforce and paying SS taxes.

Expanding the tax base would help SS but how are you going to address increasing population without crossing religious and moral boundaries?

Posted by: Ken at April 1, 2008 6:45 PM

Ken
Your argument begs for a tax increase.
Argument #1 need not require an increase of 1.70 percentage points. We can keep the rate the same and increase the ceiling. Only the very wealthy would be affected.

Regarding your argument #2, increased social security costs can be had by, you guessed it, raising the taxable ceiling. Again, only the very wealthy would be affected.

Your penultimate paragraph is unclear. Please rework the wording to make it more intelligible and then I will comment.

Regarding the last paragraph, the increasing population need not ever be addressed if we apply a sliding scale which inversely increases the taxable ceiling as population rises or falls. No religious or moral boundary need be crossed.

You are standing on your head to avoid lifting the taxable ceiling. Either a good portion of your income exceeds the current social security tax limit or you are a stooge to the rich.
OldTimeLefty

Posted by: OldTimeLefty at April 1, 2008 11:09 PM

OldTimeLefty,

I hope you noticed the quote marks indicating I was quoting directly from 2008 Annual Report of the Board of Trustees of the Federal OASDI.

Those are not my words or ideas but the ideas from the Trustees of the Federal OASDI, you know, the people paid to manage Social Security and advise the President and Congress.

So if you beg to differ with what Washington, DC has written and see a need to tell them “You are standing on your head to avoid lifting the taxable ceiling. Either a good portion of your income exceeds the current social security tax limit or you are a stooge to the rich”, I respectfully suggest you make an appointment to appear before Congress and the President to tell them where they are going wrong.

All I asked you was “expanding the tax base would help SS but how are you going to address increasing population without crossing religious and moral boundaries?”

PS: The above and all my posts are written in American English.

Posted by: Ken at April 2, 2008 12:28 AM