The View from Right Field

Offloading Obligations Onto Future Generations – In Germany and the United States

A recent decision of the constitutional court in Germany has a lesson for the United States.  In Germany, the constitution works differently.  The constitution, actually, it’s called the Basic Law, and it dates back to 1949 and the founding of West Germany, allows for the federal constitutional court to get involved on issues and in ways that are different from what happens in the United States.

In late April, the constitutional court issued an important decision on Germany’s climate change law.  The Financial Times reported:

Lawless in Washington – Donald Trump Edition

Back in the day, I wrote a lot about Barack Obama’s overreach in the use of presidential power.  After the election in 2016, I asked “Lawless in Washington – Will There Be a Donald Trump Edition?”  The answer was always going to be yes, and some of President Trump’s actions over the weekend were of a kind with things President Obama did; i.e., lawless.

I’m not exactly sure what President Trump was trying to do with his order about evictions and rental relief.  It sounds like it is mostly just telling federal agencies to see what they can do.  In other words, not much.  Student loan relief was already being done.  This is a little more, I guess, but overall it, too, is not much.

Social Security Is Paying More Than It Takes In; Let’s Increase Benefits

In the 1980s, there was bipartisan concern about the future solvency of Social Security.  The solution they came up with was to increase Social Security taxes.  The idea was to take the extra money, above and beyond the amount of benefits that the government was paying out, and put it into an account, which could be used later, when benefits to be paid out were projected to be more than the amounts coming in.  And they did it.

The only problem was that, while the government put all that extra money into a separate account, it actually just turned around and used the money to cover deficits (and, during the end of Bill Clinton’s second term, pay down some of the national debt).

Now, we need money from that account.  The Great Recession has meant that the amount of Social Security benefits paid out has increased faster than expected (as people who lost their jobs started collecting benefits earlier than they otherwise would have) and the Social Security taxes collected was less than expected (because fewer people were working).  Overall, that meant the point at which Social Security was paying out more than it was taking in came earlier than expected.

Social Security and the Fiscal Cliff

As negotiations to avoid the fiscal cliff continue (or not – who really knows), Democrats are saying Social Security is not relevant to getting the deficit under control.  Senator Dick Durbin (D-Ill) said this about Social Security:

“Social Security does not add one penny to our debt -- not a penny. It's a separate funded operation …”

White House Press Secretary Jay Carney agreed:

“We should address the drivers of the deficit, and Social Security is not currently a driver of the deficit.”

In a literal and superficial sense, these statements may be defensible.  But let’s look at the reality behind the technicalities.  While Mr. Carney claims that Social Security is not “currently a driver” of budget deficit, it is certainly increasing the amount of money that the federal government has to borrow each year in order to fund its operations.

Similarly, as Senator Durbin says, Social Security is separately funded – sort of.  There is a separate Social Security tax.  The question is, what happens when the amount of Social Security taxes coming in does not cover the amount of Social Security benefits going out.  My guess is that Senator Durbin would say this is not a problem because that extra money is just coming out of the balance that has been built up in the Social Security Trust Fund over the years.  I, on the other hand, say the federal government has to borrow the money to pay those benefits.  Let’s see who is right – and the answer will explain why Mr. Carney’s and Senator Durbin’s statements are wrong.

I previously talked about how Social Security is financed in my post “How Social Security Fits Into Our Deficit/National Debt/Entitlement Spending Problem”.  Let’s review the situation today.  But first, let’s look at some history, especially as it relates to what happens when Social Security taxes and Social Security payments do not match.  As I said in my earlier post, when Social Security is in surplus, i.e., when we are collecting more in Social Security taxes than we are paying out in Social Security benefits (which is the way it used to be), the Social Security Administration takes the extra money that comes in and “invests” it in U.S. government bonds.  In other words, it gives it to the U.S. Treasury and gets back an IOU.*

Today, however, Social Security is no longer in a surplus situation.  Today the Social Security Administration is collecting less money in taxes than it is paying out in benefits.  So where does the Social Security Administration get the extra money to pay these benefits?  It goes to the U.S. Treasury and asks for some of its money back.  And where does the Treasury get the money to pay to the Social Security Administration?  Simple, it borrows it – along with all of the other money it has to borrow each year.

In other words, politicians can claim that Social Security does not add “to our debt” and that it is not a “driver of the deficit,” but it does add to the amount of money the Treasury has to borrow each year, which seems like debt and deficit to me.  And with more and more the baby boomers retiring each year, it is only going to be worse unless our politicians face up to what is really happening, as opposed to technicalities that sound good and let them put off tough decisions. 

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* In other words, in spite of what some politicians may have told us in the past, there is not and there never has been a “lockbox” where people’s Social Security money was put and protected.  The excess money in Social Security was always given to the U.S. Treasury and used to fund government operations.  When the Social Security Administration needs the money back, the Treasury has to go out and borrow it, unless it has some extra money laying around, which it clearly doesn’t at this point.

Paul Ryan Tells the Truth to AARP

Paul Ryan, the man who, according the President Obama and his campaign, wants to do unspeakable things to Medicare, went to talk to the American Association of Retired Persons on Friday.  This is from an editorial in The Wall Street Journal today*:

“The headlines this weekend were all about the boos Paul Ryan elicited on Friday when he addressed the AARP ….

Mr. Ryan deserves credit merely for showing up ….

AARP CEO Barry Rand used his opening remarks to defend President Obama's health-care bill ….  He then turned the event over to President Obama, who via satellite attacked Mitt Romney and Mr. Ryan for wanting to deny medical care to seniors.

Mr. Ryan … didn't soften his message that Medicare is on a path to bankruptcy if it isn't reformed. …

Largely unreported … was the applause Mr. Ryan received. That came in response to his criticism of ObamaCare's Independent Payment Advisory Board, the 15 ‘unaccountable bureaucrats’ empowered under the Affordable Care Act to make cuts to Medicare that Mr. Ryan rightly said will ‘jeopardize access to care.’ The payment board is largely shielded from Congressional review precisely so it can ration care with little democratic oversight. This is how Mr. Obama will rein in Medicare costs—whether seniors like it or not.

The Wisconsin Congressman was also cheered for his promise that his Medicare premium-support reform would ‘force insurance companies to compete against each other to better serve seniors, with more help for the poor and the sick—and less help for the wealthy.’

Perhaps most striking, Mr. Ryan even earned some applause when he discussed Social Security reform, including ‘slightly raising the retirement age over time and slowing the growth of benefits for those with higher incomes.’ …

The press corps likes to whine that politicians duck the ‘hard choices,’ but when a politician doesn't duck they quickly call it politically foolish and a lost cause. …

Everyone knows that Medicare spending can't continue on its current course, and one difference in this campaign is that Mr. Ryan is willing to say so ….”

In 2003 Don Rumsfeld, then Secretary of Defense, famously said that “you go to war with the army you have, not the army you might want or wish to have at a later time.”  The same is true about political campaigns.  You campaign for the candidates you have.   

Mitt Romney is better than Barack Obama.  Mitt Romney and Paul Ryan are so much better than Barack Obama and Joe Biden that the choice is easy.

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* “Ryan at the AARP,” The Wall Street Journal, September 24, 2012.  You may be able to find it online here.

What Does Social Security Say About Our Kids’ Math Skills?

In those international rankings of how well students do in various subjects, American students often do poorly, especially in science and math.  Their math scores are frequently near the bottom.  But I am not sure that is fair.  I think our kids are pretty smart at math.

I was talking to our daughter recently, and she told me that people her age (i.e., under 30) don’t expect to ever collect anything from Social Security.  They look at things like these:

• More and more boomers are retiring and the number of workers isn’t growing that much.
• Social Security is paying out more in benefits than it is collecting in taxes.
• The date that the Social Security Trust Fund will run out of money keeps getting sooner and sooner.  It’s now in the early 2030s.  A few years ago it was in the late 2030s.
• But it doesn’t really matter when the Social Security Trust Fund is going to run out of money because the Social Security Trust Fund doesn’t really exist.  When we were collecting more Social Security taxes than we were paying out in benefits, Social Security just gave the extra money to the federal government and got back IOUs.  Now Social Security has to collect on those IOUs in order to pay benefits.  And as the gap between Social Security payments being made and Social Security taxes being collected gets bigger, Social Security will need to get more and more money from the federal government – at a time when the federal government has a huge deficit.
• The Democratic leadership in Congress says we don’t need to worry about Social Security because the [pretend] Social Security Trust Fund won’t run out of IOUs (except they say “money”) until the 2030s.  We can worry about it later, they say; i.e., after they’re out of office.

Our daughter and her friends look at these facts, and they add up the numbers.  And they have decided Social Security won’t be there when it is time for them to collect.  Sounds to me that they understand math pretty well.

Social Security Trust Funds Running Out of Money Even Faster

The trustees of the Social Security trust fund issued their annual report yesterday.  And once again, the projected date that the trust fund has been moved up.  Now it’s 2036.  The disability trust fund is in even worse shape.  Its trustees say it is going to run out of funds in 2016, two years earlier than was predicted just last year.

And what is the Obama administration’s response?  Here’s what The Wall Street Journal reported this morning.  First on the disability trust:

“Treasury Secretary Timothy Geithner said the Obama administration would seek to work with Congress to come up with a long-term solution to repair the solvency of the disability trust but didn’t offer specifics. ‘The best thing to do is a long-term solution,’ he said.”*

And on Social Security itself:

“President Obama’s re-election campaign used the new data to attack Mr. Romney …, saying [Romney] would make ‘devastating cuts to Medicare and Social Security’.”*

But what is the President suggesting?:

“The Obama administration has said it would support changes to Social Security to improve the program’s solvency but hasn’t proposed any.”*

In other words, we’re just the Administration.  We can’t be expected to have a program.  Barack Obama doesn’t have a proposal.  He’s just the President.  He’s got an opinion on Trayvon Martin, but nothing on Social Security.  It’s like what Secretary Geithner told Representative Paul Ryan about Representative Ryan’s plan to solve our country’s long-range budget problem: We don’t have a plan.  We just know we don’t like yours.

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* Damian Paletta, “Stress Rises on Social Security,” The Wall Street Journal, April 24, 2012.

Means-Testing Social Security and Medicare. Why Should We Be Giving Money to the Rich?

As at least some people in Washington struggle with the deficit and what to do with various entitlement programs, there was, a couple of weeks ago, a fascinating exchange, at least in the media, between Republican Representative Paul Ryan, chairman of the House Budget Committee, and Senator Bernie Saunders of Vermont, an independent who calls himself a democratic socialist and who caucuses with the Democrats.

According to Representative Ryan, “Means-testing is an obvious solution to our fiscal problems.  The alternative is everybody gets cut, so why don’t we put the money where it should go -- to the people who need it.”

Senator Sanders, on the other hand, doesn’t agree.  “The strength of Social Security and Medicare is that everybody is in.  Once you start breaking that universality and you say that if you’re above a certain income, two years later that income goes down and 10 years later it becomes a welfare program.”

I don’t know if we can afford Senator Sanders’ position, but I understand his point.  Means-testing could turn Social Security into just another welfare program.

On the other hand, those who favor some kind of means-testing for social security and Medicare, argue like Democratic Representative Steny Hoyer of Maryland:  “I don’t adopt the premise that you’ve got to treat Ross Perot the same as Mr. and Mrs. Jones, who are making $40,000 a year.”  And Karl Rove: “When he start receiving Medicare, Bill Gates should bear a greater share of his healthcare costs than the less healthy or less wealthy.”  And finally, Senator Dick Durbin of Illinois: “We have to acknowledge that some in the highest-income categories, frankly, can take care of themselves.” 

The problem with these comments is that, when you start to look at them, you realize how similar they are to proposals to balance the budget by taxing the rich.  And just as you can’t solve the deficit by taxing the rich (because the money’s not there), you can’t solve Medicare’s problems, or ensure Social Security’s solvency, by cutting benefits for Bill Gates and Ross Perot – or even the people “in the highest-income categories”.* 

To solve the problems of Social Security and Medicare by means-testing, you need real money.  To get at real money, you have to go to at least some part of the middle class.  And if you do this, people are going to be surprised how low those “highest-income categories” wind up going.  I’m not saying it shouldn’t be done.  I’m just saying we need to understand what such proposals really mean and not hide behind references to Bill Gates and Ross Perot.

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* This is not to say that you shouldn’t restrict certain benefits for the really rich.  Just because the money is small, is no reason not to do it.  Every little

How Social Security Fits Into Our Deficit/National Debt/Entitlement Spending Problem

There are so many crises today, it is hard to know which one to talk about.  There was the earthquake in New Zealand that killed 200.  Then came the earthquake and tsunami in Japan that killed 10,000 and threatened a disaster at the Fukushima nuclear power plant.  Then the war in Libya, with a policy that on the surface seems as simple as a game of tic-tac-toe, but underneath is as complicated as a Rubik’s Cube and with as much internal consistency as you would get from a Magic 8 Ball.

But I thought I would go back to the original American crisis:  Our deficit, our national debt, our runaway entitlement spending.  They are all part of the same problem, and it is only going to get worse if we don’t do something about it now.  The problem is the answers are hard enough that many politicians would prefer to kick it down the road, instead of trying to deal with it.  They justify their inaction by saying we have to focus on other more immediate problems first or by saying that they are certainly willing to talk about it and they are interested in hearing what the other side has to say (i.e., you first) or by just denying there is a problem. 

The Obama administration has used variations of all three responses to justify what some see as their lack of a credible policy on our deficit/national debt/entitlement spending problem.  When it comes to social security, their approach, at least recently, has been to deny that there is a problem.  For example, even though it is contrary to things he said in the late 1990s when he was in the Clinton administration, Jacob Lew, Director of the Office of Management and Budget, has recently denied that there is a problem with Social Security.  He says that the Social Security Trust Fund has enough money in it to last until 2037.  Mr. Lew’s statement is both literally true – and very misleading.  Let me explain. 

First, though it is obvious, it needs to be repeated whenever Social Security is discussed:  Social Security is a pay-as-you-go system.  The Social Security Administration takes the money it receives in taxes today and pays it out to people who have already retired.  Social Security does not put the money that is being paid in today aside for the retirement of the workers who are paying the money in.  There is no Social Security lockbox.  It’s just in one door and out the other.  Back when the Social Security Administration collected more money in taxes than it paid out in benefits,¹ Social Security “lent” this extra money to the Department of Treasury, i.e., the government, and Social Security got back an IOU² from Treasury.  The IOU was a promise by Treasury that, whenever the Social Security Administration needed the money, Treasury would pay it back to them.

Meanwhile, Treasury used the money it got from the Social Security Administration to pay the government’s other bills.  That meant, for example, during George W. Bush’s administration, when the government was spending more money than it collected in taxes, the government didn’t have to go out and borrow as much money as it would have otherwise had to borrow.  Which helped the national debt.  The national debt number that economists look at, and that politicians talk about, is the amount of debt that the government owes to outsiders; i.e., it does not include the debt that one part of the government owes to another part of the government.  It does not include, for example, the money the Treasury Department owes to the Social Security Administration.  Therefore, during the Bush Administration, the national debt was not going up as much, each year, as the amount of the deficit – because some of the deficit was being covered by the extra money the Social Security Administration was collecting and giving to Treasury. 

Let me give an example using simple numbers.³  Say that the deficit was $100 and that Social Security was collecting $20 more in Social Security taxes that it was paying out in benefits.  In that case, since the Social Security Administration lent (i.e., gave) that extra $20 to the Treasury Department, the national debt only went up by $80; i.e., the $100 deficit less the $20 in extra Social Security taxes that the Social Security Administration lent to Treasury.

That did several things.  By reducing the amount of money the government had to borrow from third parties, it reduced the government’s demand for money, which kept interest rates a little lower.  It also meant that there was less “crowding out” of private investment by the government’s demand for money.  The national debt went up less than it would otherwise have gone up.  And the interest that Treasury paid to the Social Security Administration on the money that Social Security lent to Treasury didn’t have to be actually paid in cash.  It was just an accounting entry. There was no real out-of-pocket expense, and it didn’t add to the deficit – or the national debt.

But now we are in a different situation.  Now we are paying out more in Social Security benefits than the Social Security Administration is collecting in taxes.  However, according to Jacob Lew, this is not a problem.  The U.S. government has a AAA rating, so the Social Security Administration can just ask Treasury to pay back some of the money that Social Security has lent to Treasury over the years, and Social Security will pay the benefits.  There is enough money in the “trust fund,” i.e., the Social Security Administration has lent so much money to Treasury over the years, that the Social Security Administration will not run out of money to pay benefits until 2037.⁴

But let’s look at today’s situation the way we did the situation in the Bush administration.  As I said, during the Bush administration, the Social Security Administration was collecting more in taxes than it was paying out, and it gave that money to the Treasury to use for other things.  Now we are in the reverse situation.  Now we are paying out more in Social Security benefits than we are collecting in Social Security taxes.  So Treasury has to pay back some of the money that the Social Security Administration has lent to it over the years.  Where does Treasury get that money?  Since there is no lock box, Treasury has to go out and borrow the money.⁵  Which means that, in addition to the money Treasury has to borrow to cover this year’s deficit, it also has to borrow even more money so it can repay the Social Security Administration.

Let me give an example using simple numbers again.³  Say the deficit is $250.  Say we are paying out $20 more in social security benefits than we are collecting in social security taxes,  Since Treasury has to go out and borrow the $20 that it needs to repay the Social Security Administration, that means Treasury has to borrow $270 from third parties, instead of just $250.

This does several things, most of which are the reverse of what happened before.   First, there is more “crowding out” of private investment by government borrowing than there would be if social security benefits and social security taxes were equal.  Second, to the extent that the government is borrowing even more money than the amount of the deficit, interest rates will probably be a little higher.  But the third thing is perhaps the biggest problem:  We have to borrow even more money from third parties than we would otherwise have had to borrow.  And the national debt is going up by more than the amount of the deficit, which is big enough by itself.

If you think that there will always be people willing to lend money to the U.S. government at reasonable interest rates and in the amounts the U.S. government needs to borrow, and that the amount of interest the U.S. government will have to pay in the future is not all that important, then there is no problem.

On other hand, if you are worried about the size of the national debt and about the amount of money we are borrowing from third parties, if you think there may be a limit to the amount third parties are willing to lend to the United States at reasonable interest rates, or that there may be a limit to how much third parties will lend to us at any interest rate, then this is a real problem.  Of course, the problem is not just Social Security, nor is Social Security even the biggest part of the problem.  The problem is that the federal government is spending way more money than it takes in, and the current administration doesn’t seem to have a realistic plan for getting this problem under control.  But while Social Security is not the biggest part of the problem, it is a part of the problem.  And it cannot be ignored on the grounds that there are bookkeeping entries somewhere that say there is enough money to pay full benefits for years.  Because the money isn’t there.  It was spent years ago, and now the government has to go out and try to borrow new money in order to pay these benefits.

The fact is that Social Security payments are adding to the amount of money that the U.S. government has to borrow, and as more and more baby boomers retire, the Social Security deficit; i.e., the amount of money Treasury has to borrow each year so the Social Security Administration can pay Social Security benefits, will increase.⁶

In the short run, there is not a lot we can do about the amount of money the Treasury Department has to borrow so it can repay the Social Security Administration and so the Social Security Administration can pay retirees.  And we can’t eliminate this amount in the long run, either – nor should we.  We made promises to people.  We can modify those promises around the edges, but that’s it.  We can push back the age at which people can retire and get full Social Security benefits.   We can also adjust how Social Security increases with the cost of living.  These changes will help, but they won’t mean that Social Security taxes will equal Social Security benefits again.  We have to realize that, for the foreseeable future, the amount of Social Security taxes collected is going to be less than Social Security benefits paid out, and Treasury is going to have to borrow the difference so that these benefits can be paid.

But there is one thing we can do:  We can acknowledge this situation, i.e., we can stop saying Social Security is not a problem because the trust fund will last until the 2030s.  And we can take this extra borrowing into account when we are determining what we need to do with our deficit and our national debt.  We need to realize that third parties, when they decide whether to lend money to the United States and how much interest to charge, are going to look at both the regular budget deficit and the amount Treasury has to borrow to repay the Social Security Administration.  That means that we need to reduce our budget deficit even more than we might have otherwise planned, so we can get control of our total borrowing requirements.  Because if we don’t control how much we borrow, our lenders may control it for us – by refusing to lend.⁷

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¹ As I will discuss below, this is no longer true.  Social Security is now paying out more than it takes in.

² Obviously, “IOU” is short for “I owe you”.  The reverse of IOU is UOI, which could stand for “Union of Idiots,” which seems like an appropriate name for those who think that Treasury will never have a problem borrowing money.

³ I am using simple numbers here to try to explain the problem more clearly.

⁴ Back in the 1990s, the Social Security Administration was supposedly not going to run out of money (under Jacob Lew’s theory) until 2046.  (See Paul Krugman, "Fiscal Poison Pill," The New York Times, June 16, 2008.)  Now the date is sometime in the 2030s.  Until recently it was thought that the Social Security Administration was going to be collecting more in taxes than it was paying out in benefits until 2016 (or so).  It has already happened.  In other words, the accuracy of estimates about Social Security funding leave something to be desired.

⁵ New Zealand, on the other hand, actually does have something very similar to a lock box.  New Zealand pays Social Security-like benefits out of general tax revenues; i.e., it does not have a separate tax for retirement benefits.  From an overall government revenue point of view, however, this is no different than what we are doing.  It is pay-as-you-go.  Except that about ten years ago, the Labour government saw that there was going to be a problem when the baby boomers hit retirement age.  So, the Minister of Finance, Michael Cullen, set up a special investment fund.  Each year the government put an amount of money into the fund and invested it.  The idea was that the money in the fund would then be available to help pay retirement benefits to the baby boomers when they retired.  It wouldn’t pay all of the benefits, but it would pay some of them, and it would reduce the amount that had to be paid out of tax revenues at the time.  We haven’t done that.  Instead of money in the bank, we have numbers on a page.

⁶ To get an idea of the size of the problem, let’s look at some real numbers.  In 2010, Social Security taxes were about $37 billion less than Social Security benefits paid to retirees.  According to Jacob Lew’s 2011 budget for the Obama administration, this number will be $56 billion this year.  While it will decrease back into the $30 to $40 billion range for a few years after that (assuming the economy picks up), it will start increasing again by the end of the decade and will be close to $100 billion by 2020.  While $100 billion doesn’t seem like a lot of money when the deficit is over $1.4 trillion, if you compare it to some of the deficits during the George W. Bush administration, it would have increased the total amount of annual borrowing by 25% to 30% or more.

⁷ Greg Mankiw wrote about what might happen someday if we don’t get our borrowing under control.  My only disagreement with his article is that I think he was too optimistic when he had it happening in 2026.  I am afraid it could happen before that.

P.S.  Unfortunately, this problem is NOT an April Fool's joke - except possibly on all of us if we don't address the problem of our deficit/national debt/entitlement spending really soon.

Means-Testing Social Security

Earlier this week, Ross Douthat suggested, in The New York Times, that a new Republican agenda could include means-testing Social Security and Medicare. The Wall Street Journal mentioned the same idea in an editorial on December 29, 2009, though, not surprisingly, they did not mention it in a favorable way.

One concern about means-testing Social Security: If you means-test Social Security, so that people with more money would get lower payments than they would have otherwise received, or maybe no payments at all, even though they paid into Social Security every year while they were working, haven’t you destroyed the universal nature of Social Security – and of the taxes that are paid to support it.

If you means-test Social Security, aren’t you changing Social Security, and the tax monies that support it, into nothing more than just another welfare program – and thus undermining the social consensus that supports Social Security?

Inflation-adjusted increases in Social Security over the last 35 years have helped protect our senior citizens from poverty once they stop working. Those increases were possible because of the consensus supporting Social Security. There never has been this kind of support for programs to aid poorer Americans, and money paid out under those programs has decreased, in inflation-adjusted terms (except for medical care expenses), over the years. (Here and here.) If Social Security becomes just another welfare program, would the same thing happen to it?

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Update (1/8/10 12:08 pm): Added links in the last paragraph.  Also, added the parenthetical to the third sentence in the last paragaph.