October 5, 2010

Can We Trust David Cicilline's Style of Budgeting To Work For Social Security?

Carroll Andrew Morse

Social Security is a pay-as-you go program disguised by conceptual accounting gimmicks. Reporter Mary Williams Walsh of the New York Times described the primary gimmick this past March...

Although Social Security is often said to have a “trust fund,” the term really serves as an accounting device, to track the pay-as-you-go program’s revenue and outlays over time. Its so-called balance is, in fact, a history of its vast cash flows: the sum of all of its revenue in the past, minus all of its outlays.
Given this structure, when a political candidate like Democratic First District Congressional candidate David Cicilline promises to "protect social security", if by that he means that he will oppose any change in the basic structure of the program, questions of both short and long term fiscal responsibility are raised.

The short term issue relates to the Congressional Budget Office's March projection that about 60 billion dollars more will be needed to pay benefits than will be collected from Social Security taxes over the next 5-6 years. Since there is no "trust fund", the 60 billion dollars will have to be raised through taxes, debt or Federal program cuts. Does Mayor Cicilline believe that making up this 60 billion dollars is a concern, or perhaps a warning signaling that some kind of future changes will be necessary, or does he think that this is simply a problem for someone in the future to worry about?

And speaking of the future, on the longer term issues, the liberal wing of the within-government Democratic party seems to be coalescing around a position that also opposes just about any change to Social Security. Here is CBS news' report on the Dem position...

A group of Democrats today pressed President Obama's bipartisan fiscal commission, which is will be putting fourth recommendations on December 1st to reduce the deficit, not to include any cuts to Social Security when they do.

The National Commission on Fiscal Responsibility and Reform "should keep their paws off" Social Security, Rep. John Conyers (D-Mich.) said on a phone call with reporters, calling for "no benefit cuts, no raising the retirement age, no privatization."

The general long-term question is identical to the short-term question: with the options listed above off of the table, what methods do Mayor Cicilline (and other Dems) propose for paying for Social Security's future shortfalls?

Finally, beyond the long-term outlook of Social Security alone and relevant to the issue of retirement security in the US in general is Mayor Cicilline's statement reported by Randal Edgar of the Projo that one source of his opposition to Social Security reform is that income taken from younger workers is needed to keep the current system "stable"...

Cicilline, the acknowledged front-runner in the race, also said allowing younger workers to put some of their contributions into private accounts would “destabilize the system” because some of that money is needed to pay current benefits.
Actually, with Social Security currently running a deficit and no "trust fund" in existence, all of that money collected annually is needed to pay current benefits; nothing is saved for the future. More to the point, two years ago the US House of Representatives Committee on Education and Labor held hearings on retirement security that included discussion of a proposal to replace the tax-breaks allowing 401(k)s with mandatory government accounts instead...
Going forward, I propose Congress establish universal Guaranteed Retirement Accounts and the federal government deposit $600 (inflation indexed) in those Guaranteed Retirement Accounts every year for every worker.

Every worker (not in an equivalent defined benefit plan) would save 5% of their pay into their Guaranteed Retirement Account to which the government pays a 3% inflation-indexed guaranteed return. Workers would earn pension credits based on these accumulations...

[W]orkers’ contributions would be mitigated by a $600 a year contribution from the federal government indexed for inflation which will be paid for by scaling back substantially the tax breaks for 401(k) type accounts.

The question is, when the next set of Congressional hearings on retirement security are being held, and decisions on whether to scale back or even end private retirement savings incentives are being made, do you want a Congressman who believes 1) that no change to Social Security is possible and 2) that income from younger workers is needed to "stabilize" the system to be the Congressman representing you?

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The accounting gimmickry that is the basis for Social Security's "soundness" is no different than that which enveloped Enron.
Like so many things in government, it's allowed to be different...than in the private sector where you would go to jail.

As a private sector employer, try taking money from your employees weekly payroll checks that is supposed to be deposited in their 401k accounts, and then depositing that in your general operating fund.
Just try it, and see what happens.
Why is it allowed to happen in the government? It is outright fraud! It is a Ponzi scheme. We are being fooled by the big government socialist scumbags that it is OK because it is the government. Just wait and see.

Posted by: Mike Cappelli at October 5, 2010 2:51 PM

"Every worker would save 5% of their pay into their Guaranteed Retirement Account to which the government pays a 3% inflation-indexed guaranteed return"

Wait, where would those billions of dollars come from to pay the 3%? Taxes? I guess I'm missing something here. We would no longer pay into Social Security, instead we'd pay 5% of my gross salary into my new GRA, and then each year, I make 3% on that? And with the way that Social Security has been raided and underfunded, I'm supposed to "trust the government" that the 3% would be paid? I don't see how this is much different from the current system, other than the fact that my 5% would be there, possibly with zero growth. Why not just let me stick it under my mattress?

"with the options listed above off of the table, what methods do Mayor Cicilline (and other Dems) propose for paying for Social Security's future shortfalls?"

The same answer they always have...raise taxes.

Posted by: Patrick at October 5, 2010 3:07 PM

Heh. Great question; great analysis.

Posted by: Monique at October 5, 2010 6:46 PM
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