If You Really Care About Social Security, Stop Capitulating to the Left

October 26th, 2011
in Op Ed

by Stephanie Kelton, New Economic Perspectives
This was originally posted November 10, 2010

Social-Security-card I woke up this morning expecting to spend the better part of the day writing letters of recommendation for Ph.D. students. Then I came across an e-mail message that had been posted to a list serve that is read by many progressive (some might say “radical”) economists. The subject line read: DEFEND SOCIAL SECURITY so I took the time to read it.

Its author was outraged by the recommendations coming out of President Obama’s “bi-partisan” deficit reduction commission, which he characterized as “disgusting” and something that should “be fought as hard as possible.”  Then, having urged “credentialed economists” to “take the fight” to the airwaves, newspapers, Internet, etc., he drew my ire and derailed my morning plans (sorry students) with the following tactical proposal:

“[I]t sometimes is necessary to defend incremental reforms when they're under attack.”

Follow up:

Allow me to suggest an alternative approach, one that actually would be “radical” and therefore appealing to a self-proclaimed radical:  Let’s start telling the truth about Social Security. We are not (or should not be) patsies for the Democrats (or any other political party or organization). We are educators. So let’s educate people on the basic facts.Benefits promised to an average wage earner who retires in 2050 are a full 69% higher than the benefits that were paid to the average retiree in 2004. Republicans argue that these increases are too substantial and that the system promises a full $5,600 more than it can afford to pay to retirees in 2050. To deal with this problem, [they] call for a change in the way future benefits are calculated. If the President succeeds in redefining the formula, the “bend points” will be calculated using an inflation index instead of the current wage index.

Fact #1: Social Security is not “broken.” It is not “going broke.” It will, as Eisner told us more than a decade ago, “be there” as long as we protect it from its so-called saviors.

Eisner, Robert. “Save Social Security from its Saviors”, Journal of Post Keynesian Economics, Vol. 21, No. 1, Fall 1998). This is, in my view, the most honest and concise essay on the subject.

Bell and Wray. “Financial Aspects of the Social Security ‘Problem’”, Journal of Economic Issues, Vol. 34, No. 2, June 2000.

Fact #2: The balance in the Social Security Trust Fund is absolutely irrelevant when it comes to the government’s ability to make payments, in full and on time – today, tomorrow and forever.

Eisner (again) who said, “Accountants can just as well declare the bottom line of the funds’ accounts negative as positive – and the Treasury can go on making whatever outlays are prescribed by law”.

Bell and Wray again.

Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.” (1997)

Greenspan: “I wouldn’t say that pay-as-you-go benefits are insecure, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase” (2005)

Social Security isn’t broken. It doesn’t need to be “fixed”. Why on earth would we play along with this charade in order to give cover to the Democrats?  Doesn’t anyone remember 1983?  For anyone who doesn’t, that was the last time we saw “incremental reforms” of the kind many “progressive” economists support.  As a result of those reforms, today’s workers are contributing more and retiring later.  And for what?  Those reforms were supposed to make the system solvent for 75 years.  Now, here we are, less than three decades later and it’s still “broken”?  And we’re supposed to defend further, incremental cuts?!

I guess it sounds like a small price to pay. An added year to two before retirement, a small hike in the payroll tax, a modest reduction in the cost-of-living adjustment. Whatever.  Worth it to “DEFEND SOCIAL SECURITY” according to some.  But just look at the impact of one of these so-called “incremental reforms”, taken from a paper I wrote in 2005:
At first glance, this might seem like a relatively innocuous adjustment. After all, the historical trajectory for prices is also upward, so benefits will still tend to increase over time. But prices tend to rise more slowly than nominal wages – over the long run – so benefits would increase less rapidly under inflation- indexing.

To see the full impact of switching to inflation indexing, consider the benefits that would be due to a hypothetical 20 year-old worker who enters the labor force in 2005, earns the average wage throughout her working life (roughly $36,500) and retires at age 65 in 2050. Using Congressional Budget Office (CBO) projections, she would be scheduled to receive benefits of roughly $22,000 (in today’s dollars). Thus, under the current system, she would receive $459,800 in guaranteed benefits over the course of her retired life (estimated at 20.9 years).

Now consider the impact of indexing to inflation rather than nominal wage growth over this same period. During the relevant period, the CBO projects that nominal wage growth will outpace inflation by 1.2 percent (i.e. real wages will grow at 1.2 percent). With the “bend points” indexed to inflation beginning in 2009, this worker will lose 1.2 percent of her scheduled benefit in each of the 39 years (2009 to 2047) included in her benefit calculation, leaving her with only 62.8 percent of her scheduled (2050) benefit. This amounts to a reduction of $8,184 in her annual benefit (0.628 x $22,000), which translates into a $170,000 reduction over the course of her lifetime!

So there you have it.  Incremental reform?  I doubt the twenty percent of retirees who rely on Social Security as their only source of income would agree.  (Or the 60 percent who rely on it as their primary means of subsistence in retirement.)

Funding Social Security is always and everywhere a political choice. The strongest evidence of this comes directly from the 2009 Annual Report of the Trustees. In that report, they predict gloom and doom for Social Security because “there is no provision in current law that would enable full payment of benefits, once the Trust Funds are exhausted”.

In contrast, the Supplementary Medical Insurance (SMI) Trust Funds are “both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.”

It is that simple. The former is in ‘trouble’ because the government isn’t committed to making the payments, and the latter gets a clean bill of health because the government will always make the payments.

It does not take courage to rally around the liberal mantra (Obama, Reich, Baker, Krugman, etc.) regarding ‘entitlements’ and ‘tough choices’. It takes courage to speak out against it.

Related Articles

Analysis Blog articles and Opinion Blog articles by Stephanie Kelton

About the Author

kelton Stephanie Kelton is Associate Professor of Economics at the University of Missouri-Kansas City, Research Scholar at The Levy Economics Institute and Director of Graduate Student Research at the Center for Full Employment and Price Stability. Her research expertise is in: Federal Reserve operations, fiscal policy, social security, health care, international finance and employment policy. She writes at New Economic Perspectives. Full bio is available here.

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  1. pito says :

    THere is no Social Security trust fund. There are no trustees and there is no money. Social security was gutted in the late 1960's by Lyndon Johnson to fund his Great society program and the war in Vietnam. All money collected in the name of social security goes into the general treasury.
    This article is no more than "progressive propaganda."
    Sorry, I am getting ready to collect my social security and I know that it is a ponzi scheme that is coming to it's end.
    How it it going to be funded when workers in the future will be both fewer in number and making lower wages as the baby boomers all begin collecting their due? The numbers are not there!

  2. Admin (Member) Email says :

    pito - - -

    Read the article again.

    The author mentions the Social Security Trust Fund only in passing as part of a quote from somebody else, and the quote only mentions the trust fund in passing.

    Your statement about ss taxes going into the general treasury is both correct and wrong at the same time. The "trust fund" is nothing but an accounting statement. The ss surpluses are used as if general revenue and the amount used gets a bookkeeping IOU. The trust fund is essentially a government debt to the wage earners who funded the surplus.

    What would you expect? Something the equivalent of Fort Knox with Gold bars stacked to the ceiling? What is strange is that if that had been done (bought gold) instead of "lending" to the government, the trust fund would be substantially over-funded as far as the eye can see. The federal debt would be larger by an even greater amount than it is today, but, when netted out against the value of the "gold" in the "trust fund" there would be a large accounting gain.

    The above hypothetical is beyond absurd, however, because (1) the gold has no economic utility until some far distant time in the future (it's an unused hoard) and (2)although I have not attempted to calculate the amount, is there even enough gold in the world to fund the "social security Fort Knox"?

    The author makes the point that social security is not set in concrete. Future social security benefits will be whatever future law says they will be. The social security "problem" is not one that will be (or even can be) resolved for all-time, or even 75 years, as was claimed in the 1980s. It will be funded and expenditures defined in real time as we progress forward. The "unfunded liabilities" are a hoax promulgated by economic theologists, political partisans, who try to gain advantage with scare tactics, and those who are just plain ignorant.

    One final thought: What better way to become a successful politician/bureaucrat than to set up a straw man and then destroy it?

  3. JGBellHimself says :

    Reading this article is similar to having a "Stef" infection - what it says is not consistent with what it is also saying. That's both an internal and an external article inconsistency.

    First, we do agree with Stef that the SS system is not "broke" - literally or figuratively. Politically, yes; economically, no. SS is not, in fact, financially "broke". And, before it might become broke - to pay Baby Boomers Drug Bills for example - it can quickly and easily be "fixed".

    As Stef points out, however, what we c/should do is very different from what we probably WILL do.

    Second, we are astounded by Stef being totally oblivious to political and economic "positioning" - aka "posturing".

    Oh, of course, she SEES the statements by the "radical/left" that offend her - we all do. What she apparently, if we are to believe her, does NOT see are the statements by the "radical/too Far Right" that are totally in disagreement with both her and her article.

    That's like saying everything that is said on MSNBC-TV is extremist nonsense, while everything that is said on Faux News is the Gospel Truth, or better, BG!

    Third - as in The Third Rail - senior citizens vote! R U surprised by that fact, Stef?

    And, they do NOT want people like you saying that the radical left and/or the radical right are not telling them The Truth, which is true; and then also not telling them the Full Truth, which is also true.

    Asked Admin: "What better way to become a successful politician/bureaucrat than to set up a straw man and then destroy it?"

    Asked we:
    "So why DID Stef also do that to "her radical-left" - economically & politically? Bcuz that wasn't the "right" thing to do (pl,puns).
    Is Stef now running an economic campaign for the Senate, in Kansas or Missouri, too?"

  4. Admin (Member) Email says :

    JGB - - -


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