>Does Social Security Really Need Fixing?

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In a recent Op-ed for USA Today, Office of Management and Budget Director Jacob Lew argued that “Social Security isn’t the problem.” Social Security isn’t running a deficit, according to Lew because the Social Security “trust fund” will make up the difference between the revenue generated by Social Security taxes (FICA) and the amount Social Security pays in benefits for the next 26 years.

Other Democrats have also made similar claims. Harry Reid, Chuck Schumer, and Richard Durbin have all recently claimed that Social Security does not add to the deficit (see FactCheck.org). Also, former Clinton Labor Secretary Robert Reich recently wrote, “Now that Social Security has started to pay out more than it takes in, Social Security can simply collect what the rest of the government owes it. This will keep it fully solvent for the next 26 years.”

Until last year, Social Security had been running surpluses. The revenue generated by the FICA tax was more than enough to pay out to Social Security beneficiaries. The Social Security trust fund used this additional money to buy treasury bonds, or borrow money from the federal government. These Democrats are arguing, therefore, that since Social Security is now running deficits, it only has to cash in those bonds to pay the difference, and it has enough bonds on hand to pay the difference for another 26 years.

There is a major flaw, however, in this logic. Social Security is a federal government program. So, when one part of the federal government borrows money from another part of the federal government, it amounts to nothing more than paper shuffling. (There are actual papers that are “shuffled” in filing cabinets at the Social Security Administration office in Parkersburg, WV.)

When Social Security cashes in those bonds, the revenue has to come from the federal government. That means that, if the federal government is running deficits as it is now, it must borrow more money by selling more debt to someone besides itself to pay for it.

As the Concord Coalition points out, the Congressional Budget Office has made the same point when it wrote:

Trust funds have no particular economic significance. They do not hold separate cash balances; instead they function primarily as accounting mechanisms to track receipts and spending for programs that have specific taxes or other revenues earmarked for their use.

Social Security deficits, therefore, are contributing to our federal government deficits. The Social Security “trust fund” is a mirage. It is simply an “accounting mechanism” and contains nothing of real value.

Social Security is the single largest federal program and is a major contributor to our federal government deficits today and in the future. Unlike the deficits in Medicare and Medicaid, however, fixing Social Security’s problems are easy and well known. In tomorrow’s post, I’ll describe seven ways to fix Social Security. Can you guess all seven before then? Let me know in the comment section below.

>Obama vs the GOP on the Deficit

>After President Obama introduced his budget to Congress last week (as he is required to do by law), he has been in a public debate with Republican leaders on federal spending. Obama’s budget would freeze discretionary non-defense spending, makes cuts in some areas, raises spending in other areas. GOP leaders in Congress counter that Obama is not taking the deficit seriously enough because he wants to freeze spending at high levels (non-defense discretionary spending has increased over the last two years). Republicans are countering with their own budget cuts that would reduce overall non-defense, non-homeland security discretionary spending. Some Republicans, mostly representing the Tea Party, want to make cuts in the current year’s budget as well.

This pitched battle over non-defense discretionary is, however, a smoke screen. Both sides want the public to believe that they are taking our national debt seriously, but they are avoiding the root causes of our current debt crisis. Here is the key point that Americans need to recognize: any plan to reduce our deficit that does not address Social Security, health care, and military spending is not a serious plan.

Take a look at this chart of federal spending for FY 2010 provided by the Concord Coalition. Social Security, health care, and defense comprise 65% of spending, while non-defense discretionary spending (education, environment, international affairs, and other) are only 11% of the budget.

Critics from both the right and left of the political spectrum have pointed out these failures by Obama and congressional Republicans. Here are a few samples:

“The more charitable interpretation of the president’s decision not to tackle entitlement spending or the tax code is that the administration decided that leadership, in this case, was not good strategy.” —Ruth Marcus, Washington Post  

“In this budget, in his [Obama’s] refusal to do anything concrete to tackle the looming entitlement debt, in his failure to address the generational injustice, in his blithe indifference to the increasing danger of default, he has betrayed those of us who took him to be a serious president prepared to put the good of the country before his short term political interests. Like his State of the Union, this budget is good short term politics but such a massive pile of fiscal bullshit it makes it perfectly clear that Obama is kicking this vital issue down the road.” —Andrew Sullivan, The Atlantic

“The classic test of whether politicians are serious about balancing the federal budget is whether they confine their suggestions to eliminating earmarks, foreign aid, and fraud, waste, and abuse. Politicians love to rail against these things because they’re unpopular and therefore make attractive targets. But doing so is a dodge. All combined, they account for only a tiny fraction of federal spending, so doing away with them does little for the bottom line. Anyone who implies otherwise isn’t being forthright about the problem or the possible solutions. But politicians have always gotten away with this because most voters don’t know enough about the budget to realize they’re being snowed.” —Joshua Green, The Atlantic

“And now what this has become, I read, is a political strategy. The president is not talking about because he is waiting for the Republicans to talk about it. And our new, bold republicans we just sent to the House of Representatives aren’t talking about it because they are waiting for him to talk about it. Let me suggest to you that my children’s future and your children’s future is more important than some political strategy. Let me suggest to you that what game is being played out here is irresponsible and it’s dangerous. We need to say these things and we need to say them out loud- when we say we’re cutting spending, when we say everything is on the table, when we say we mean entitlement programs we should be specific. 

And let me tell you what the truth is. What’s the truth that no one is talking about-here is the truth that no one is talking about: you’re going to have to raise the retirement age for social security. Oh I just said it and I’m still standing here! I did not vaporize into the carpeting and I said it! We have to reform Medicare because it costs too much and it is going to bankrupt us. Once again lightning did not come through the windows and strike me dead. And we have to fix Medicaid because it’s not only bankrupting the federal government, it’s bankrupting every state government. There you go. If we’re not honest about these things, on the state level about pensions and benefits and on the federal level about social security, Medicare, and Medicaid, we are on the path to ruin.” —Governor Chris Christie, speech at the American Enterprise Institute

“No one can reasonably claim that the budget crisis exists because America spends too much on bed nets and AIDS drugs. Our massive debt is mainly caused by a combination of entitlement commitments, an aging population and health cost inflation. Claiming courage or credit for irrelevant cuts in foreign assistance is a net subtraction from public seriousness on the deficit.” —Michael Gerson, Washington Post

“Over the next few weeks, Republicans will try to cut discretionary spending to 2008 levels and tell their constituents they are boldly reducing the size of government. That is a mirage. Anybody who doesn’t take on entitlement spending is an enabler of big government. The supposedly rabid Republican freshmen are actually big government conservatives. They will cut programs that do measurable good while doing little to solve our long-range fiscal crisis.” —David Brooks, The New York Times

Related Posts:

Public Opinion on Deficit Reduction

Thoughts on the Bowles-Simpson Debt Commission Report

The Difference Between the Deficit and the Debt

>Public Opinion on Deficit Reduction

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Americans want to reduce the deficit, but don’t support policies that will reduce the deficit. This seems to be the case, at least, from a recent Washington Post poll.

A majority of respondents (56%) think we should start reducing the deficit now, rather than after the economy recovers. Yet, a majority (62%) also support the tax cut deal reached by Obama and Republican leaders, even after they were told it will add $900 billion to the deficit.

Also, other policies that would reduce the deficit got little support, such as increasing the gas tax (21%), reducing the rate of growth in Social Security benefits (36%), eliminating the tax deduction for children (34%), reducing defense spending (44%), reducing agriculture subsidies (44%), and raising capital gains taxes (43%). Only 3 proposals came close to receiving majority support: increasing the retirement age for Social Security (48%), eliminating the mortgage interest tax deduction for homes worth more than $500k and second homes (49%), and reducing Social Security benefits for wealthy retirees (49%).

These results show the difficulty in reducing the deficit. The message members on Congress hear from the public is “reduce the deficit, just don’t make any cuts that effect me.” Congress members often take a lot of criticism for our current financial mess. This criticism is partly deserved, but in a democracy the legislative body is simply responding to popular will, as it should. Therefore, (as I pointed out in a previous post) the blame ultimately lies with us, the voters.

>Suite 101: 3 Posts on US Government Basics

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1. The Differences Between the House and Senate
2. Who Leads Political Parties?
3. The Difference Between the Deficit and the Debt

>I.O.U.S.A.

>The following is a shortened version of the documentary I.O.U.S.A. It explains some of the problems with our current budget deficits, national debt, and entitlement spending. It was filmed with the support of the Concord Coalition. The full documentary is available on DVD.

>Stimulus Bill "Lost" in Time: CQ Politics

>Here is a video from CQ Politics showing how fundamental differences between Republicans and Democrats on fiscal policy have not changed much:

http://services.brightcove.com/services/viewer/federated_f8/1431564060

>GM’s Restructuring: Why are they Keeping GMC?

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General Motors announced some of their restructuring plans this week. Currently, GM has eight separate brands: Chevrolet, Buick, Pontiac, GMC, Saturn, Hummer, Saab, and Cadillac. The plans now are to cut that back to four brands: Chevrolet, Cadillac, GMC, and Buick. Saturn will be gone. Pontiac will still be a brand on some vehicles, but not a separate division, and Hummer and Saab will be sold (if they can find a buyer).

The oddest part of this plan, to me, is that they are keeping GMC. As I mentioned before, GMC makes a bunch of vehicles that are almost identical to Chevy vehicles. Look, for instance, at the Chevy Silverado and GMC Sierra (pictured above). So, why is GMC needed? The only reason to keep a brand, is if it has an image that consumers can easily identify. Hummer definitely has a brand image, for instance. But can any consumer identify what makes a Buick, or a GMC, distinctive? Other car companies have done well with just two brands–a mass brand and a luxury brand. Some examples are Nissan/Infiniti, Toyota/Lexus, and Kia/Hyundai. So why not have just two brands for GM–a mass brand (Chevy), and a luxury brand (Cadillac)?

Before Congress approves any more loans for GM, it should send GM execs back to the drawing board. I don’t think they have gone far enough to make the company competitive in the future.

>Senate Passes Stimulus Bill

>In my predictions for 2009, I said, “Olympia Snowe will break with Republicans to enable Obama to pass a major piece of his legislative agenda.” It didn’t take long to get that one right. Since I was wrong about Blagojevich, I am now 1 for 2 in my predictions.

Besides Snowe, Susan Collins (ME) and Arlen Specter (PA) were the only other Republicans to vote for the bill.

In the next step, a conference committee will be formed of members from both houses, both parties. Their job will be to reconcile the House and Senate versions of the bill. Since the Senate vote was more narrow than in the House, I predict that the final bill will be closer to the Senate’s version than the House’s.

>Top 5: Most Perplexing Things About US Automobiles

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The Treasury department has recently given a line of credit to the “Big 3” automakers (GM, Ford, and Chrysler) to help them survive the economic downturn. Whether they continue to survive long-term is still an open question. Ultimately, it will be consumers who decide. Will consumers prefer Big 3 products, or other companie’s products? With that in mind, here are some of the most perplexing things I find about the products of the Big 3.

1. GMC: GMC makes products that are almost identical to Chevrolet products. Many of the parts are even interchangeable. So, isn’t it superfluous? Why would GM have a division that mostly competes with another one of its divisions?
2. Heating/AC: Why can a Japanese car company make heating and AC controls that are more intuitive and practical than American car companies? What the heck does “bi-level” mean anyway? And why can’t I have the AC and the lower vent on at the same time in an American automobile?
3. Car Names: Two words, Fiesta and Probe. Why would anyone want to drive something called a Fiesta or a Probe? I don’t think anyone buys a car because they like the name, but I’ll bet there are plenty who wouldn’t buy a car because of the name. There are so many choices out there, it’s easy to cross one off the list because it has funny name.
4. Ford Minivans: Why can’t Ford make a decent minivan? If you already make good trucks and SUVs, is it that much of a stretch to come up with a good minivan? Ford used to make the Windstar, which was awful according to any rating organization you look at. Now, it no longer makes a minivan. I guess it’s accepted defeat.
5. A political scientist can tell what’s wrong, but highly paid auto executives can’t: The US auto companies pay a lot of smart people a lot of money to make good management decisions. So, why do they do so many dumb things? I’m just a political scientist with no auto industry expertise, and yet, many of the problems with US automobiles seem obvious to me. I can only surmise, as an outsider, that there is something wrong with the decision making structure in these bloated, bureaucratic companies. There is a theory in political science that while the public is largely stupid when it comes to political issues, it is collectively quite wise. Maybe in these car companies we are witnessing the opposite—a bunch of smart executives who are collectively quite stupid.

Anything you find perplexing about GM, Ford, or Chrysler products?

>Medicare Finds How Hard It Is to Save Money – New York Times

>This story is a good illustration of how difficult it is to change how bureaucracies do things. With the rising cost of health care, the Medicare program is one bureaucracy that needs to find creative ways to save money. It often finds it difficult to do that, however.
Medicare Finds How Hard It Is to Save Money – New York Times