BUDGET BABEL: Babel concerning what adds to the deficit!

WEDNESDAY, DECEMBER 12, 2012

Interlude—What Durbin said: Social Security has existed for a long time—and journalists still don’t know how to discuss it.

As a case in point, consider what Glenn Kessler said.

Let’s say it again—we’re not trying to single out Kessler. As recently as September 2000, we publicly judged that he might even be “The Man.” And his recent difficulty with Social Security is hardly unique to him.

That said, Kessler had a very hard time explaining Social Security in a recent piece in the Washington Post. To show you had bad this project can get, consider the way Kessler started.

Senator Richard Durbin had made a statement about Social Security and the deficit. As he started his Fact-Checker piece, Kessler quoted something Durbin said, then made a weird admission:
KESSLER (12/2/12): "Social Security has not added one penny to the deficit."
—Sen. Richard J. Durbin (D-Ill.), Nov. 27, 2012

In 2011, we evaluated a similar statement about Social Security and gave it a relatively rare rating—"true but false”—which seemed to please no one. Yet as the "fiscal cliff" negotiations have heated up, Democrats have once again been using this talking point to shield Social Security from the chopping block.
Say what? In late November, Durbin said that Social Security hasn’t added one penny to the deficit. Last year, Kessler examined a similar claim—and he judged it “true but false!”

According to Kessler, this rating “seemed to please no one.” Perhaps you can understand why!

So it goes when journalists explain the workings of this program. Twenty-nine years after Reagan and O’Neill produced their famous revision of Social Security, journalists still have a very tough time explaining basic aspects of the venerable program.

So it was when Kessler “fact-checked” Senator Durbin’s recent statement. On November 30, his piece appeared on-line. On Sunday, December 2, it appeared in the hard-copy Post.

In our view, Kessler’s piece is a terrible mishmash. We can hardly find a paragraph which doesn’t include some sort of problem—an apparent self-contradiction; the insertion of an irrelevant fact; a distracting example of technical talk; a logical leap which goes unexplained.

But this is pretty much par for the course when major journalists attempt to examine this seminal program. When it comes to basic aspects of Social Security, we live inside a Babel—and we always have.

Tomorrow, we’ll plow through basic parts of Kessler’s piece, noting the chaos along the way. For today, let’s take a fuller look at what Durbin said—and consider what he might have meant.

Kessler is quoting a remark by Durbin in a speech at the Center for American Progress. In his speech, Durbin discussed the way the “fiscal cliff” issues should be resolved.

In this part of Durbin's speech, he discussed Social Security:
DURBIN AT CAP (11/27/12): Now let me come to the most painful topic of all for progressives, entitlements. Social Security was included in the Simpson-Bowles commission report. I didn't agree with every aspect of it, but I thought that it was a sensible approach to breathing life into Social Security beyond its current longevity.

I was elected in 1982 to the House, came here in 1983 and was told that Social Security is on its way out. Six months and we'll be out of money. And so we rolled up our sleeves, came up with a bipartisan solution with Speaker O'Neill and President Reagan that ultimately bought over 50 years of solvency for Social Security.

What did we do? We raised the retirement age, we raised the payroll taxes on Social Security, and we indirectly taxed Social Security benefits for the first time, and we bought more than 50 years of solvency.

Today Social Security, untouched, unamended, will make every promised payment for the next 22 years. You can't say that about much in Washington, can you? But in Social Security, you certainly can. And, you also have to add, Social Security has not added one penny to the deficit.

Now for those who say, “Good reason to push it off the table and wait till another day,” I would add a note of caution. Small changes made today in Social Security will play out over the long run to buy us solvency for a long period of time. I think we should take Social Security off the table for the current fiscal cliff and deficit discussion but be very honest about what we're going to achieve in the near term.

I think we should create the equivalent of a Simpson-Bowles commission for Social Security and give them eight months to a year, a directive to come up with a plan to buy 75 years of solvency for Social Security and then bring it to the floor for a vote and allow any bipartisan group of senators or congressmen who can come up with a credible plan that meets the same goal to offer theirs to be voted on in the Senate and the House.

[...]

Social Security's important. It's important to us and to our kids and grandchildren. And if it is, even though it's not part of the fiscal cliff discussion, I think we should create a commission that will report back to Congress for a vote by the end of the next calendar year.
Durbin said the Congresss should act to extend the solvency of this program. But what did he mean by the highlighted statement about Social Security and the deficit?

In Kessler’s fact-check piece, he says “Durbin’s office declined to comment” on that point. On balance, we think that’s unfortunate. For decades, voters have been assailed by misleading claims from the right about Social Security. As these claims have (vastly) misled the public, the liberal world has napped in the woods, refusing to comment, challenge, resist, dissent, explain or simplify.

We liberals! For decades, we’ve have been too lazy, too feckless, too uncaring to challenge the flow of disinformation. Even today, do you know where you can go to find a clear, simple explanation of the point Durbin was making?

We don’t know where to go for that. But we could go a hundred places to find the relentless disinformation—the disinformation which has led the public to think that Social Security “won’t be there for them” unless major changes are made.

What did Durbin mean by his remark? Presumably, something like this:

In the 1983 “bipartisan solution” to which he refers, a long-term agreement was reached by a Republican president and a Democratic congress. Starting that year, workers would submit more in payroll taxes each year than was needed for that year’s payments to Social Security recipients.

Those surplus payments would form a “trust fund”—and a rather large trust fund at that. This surplus money (this “trust fund”) would be used to cover the growing costs of Social Security when those multitudinous baby boomer workers began to retire.

Everyone understood the deal. Year after year, baby boomers submitted more money than was needed that year. That extra money would be used to cover the costs of their retirement when they began to retire.

Now, those workers have begun to retire—and some people want to renege on the deal! The system is working exactly the way it was designed to work in 1983—and yet loud voices like that of Charles Krauthammer are saying the deal must be thrown down the drain because “the trust fund is a fiction, a mere bookkeeping device.”

In a recent column, Krauthammer said that Social Security “adds $165 billion to the deficit” in 2012 alone. But how odd! In his speech, Durbin said the venerable program “has not added one penny to the deficit.”

What did Durbin mean by that? We think it’s a shame that he wouldn’t tell Kessler. We’ll assume he meant something like this:

Since the time of the Reagan/O’Neill revamping, workers have submitted trillions of dollars in excess Social Security payments! Every year, those workers paid in more money than was needed, in line with the 1983 deal—the deal everyone understood.

If workers have paid in trillions beyond what was needed, it’s easy to see why Durbin would say that they haven’t added to the deficit. That said, in his fact-check piece, Kessler focused on the idea that Social Security is adding to the deficit now.

Is that true? Is Social Security adding to the deficit now? According to Krauthammer, the program “adds $165 billion to the deficit” in 2012 alone. In Kessler’s piece, he says “the cash flow deficit was $58 billion” in 2012—and he says it will be $75 billion in 2013.

Is Kessler’s “cash flow deficit” the same thing as Krauthammer’s “deficit?” Judging from their dueling numbers, it doesn’t seem to be.

Next question:

Should Kessler’s “cash flow deficit” be regarded as a deficit at all? Given the historical lethargy of us liberals, this topic gets confusing real fast.

Is Social Security adding to the deficit this year? People like Krauthammer have worked for decades, conditioning voters to assume that such gloomy claims must be true. In reply, we liberals have slept in the woods, entertaining ourselves by telling the world how stupid the other tribe is.

You know—the other tribe? The tribe that has been kicking our asses as it confuses the voters?

The professors have taken a pass on this topic. (In fairness, many of them were busy in France.) So have the so-called liberal journals and the alleged liberal columnists.

So have Democratic pols, they who “decline to comment.” (They rarely decline to fund-raise.)

Tomorrow, we’ll look at what Kessler wrote about that statement by Durbin. Largely due to the absenteeism of the self-impressed liberal world, this seminal topic just flat isn’t easy, as Kessler proved last week.

Tomorrow: Ball of confusion

16 comments:

  1. So Kessler is saying, in effect, Reagan, Greenspan and O'Neil were lying when they told us that the Boomer generation were investing for their retirement. The Republicans, and it is primarily them, financed, in part, the tax cuts for the wealthy by using the SS Trust Fund surplus (i.e. investments). No wonder a lot of people don't want to point this out. Tar & Feathers anyone?

    MGO

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    1. There is a difference between "using" the money and lending it. Every penny contributed to Social Security plus interest, in the form of interest-earning Treasury bonds, is still in the Trust Fund. None of the money was "used" -- that would mean the same as diverted -- for any other purpose.

      A Treasury bond is a super secure investment. Because it is a bond, like any other Treasury bond, the government borrowed that money when it issued the bond. Now, as with any other bond, the principal must be paid back upon demand. It's rather strange to say that paying back money borrowed in the past is "adding to the deficit" -- especially when paying it back reduces the deficit -- eliminates a fully legal debt to the Social Security Trust Fund in exactly the same amount.

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    2. As mm says below, they don't want to have to pay it all back. They either have to raise taxes to get the revenue to pay back the Trust Fund bonds or borrow more money to pay back the Trust Fund which would not reduce the debt. By the way, does anyone know if the SS Trust Fund obligations have any time limit like a 3 yr or 10 yr Treasury Bond? Not that they couldn't just recycle the Trust Funds.

      And why doesn't the CBO count the interest earned in their surplus/deficit calculation? Don't they believe it belongs to the Trust Fund?

      MGO

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  2. This whole thing boils down to the trust fund. They don't want to have to pay it back because they fear their taxes will have to go up to pay the bonds. It's as simple as that.

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  3. There is no deficit period. The US can not run out of money that it alone controls. There is only a deficit of vision and will power.

    http://my.firedoglake.com/letsgetitdone/2012/12/09/what-does-the-trillion-dollar-coin-do/

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  4. Just to remind Republicans what President Reagen said upon signing the Social Security Reform Act of 1983:

    ...

    This bill demonstrates for all time our nation's ironclad commitment to social security. It assures the elderly that America will always keep the promises made in troubled times a half a century ago. It assures those who are still working that they, too, have a pact with the future. From this day forward, they have our pledge that they will get their fair share of benefits when they retire.

    And this bill assures us of one more thing that is equally important. It's a clear and dramatic demonstration that our system can still work when men and women of good will join together to make it work.

    ...

    Today, all of us can look each other square in the eye and say, "We kept our promises." We promised that we would protect the financial integrity of social security. We have. We promised that we would protect beneficiaries against any loss in current benefits. We have. And we promised to attend to the needs of those still working, not only those Americans nearing retirement but young people just entering the labor force. And we've done that, too.

    ...

    So, today we see an issue that once divided and frightened so many people now uniting us. Our elderly need no longer fear that the checks they depend on will be stopped or reduced. These amendments protect them. Americans of middle age need no longer worry whether their career-long investment will pay off. These amendments guarantee it. And younger people can feel confident that social security will still be around when they need it to cushion their retirement.

    ...

    See the whole thing at:
    http://www.ssa.gov/history/reaganstmts.html#1983

    MGO

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  5. Quaker in a BasementDecember 12, 2012 at 4:51 PM

    Year after year, baby boomers submitted more money than was needed that year. That extra money would be used to cover the costs of their retirement when they began to retire.

    Now, those workers have begun to retire—and some people want to renege on the deal!


    Excellent. Clear and simple.

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  6. Last week I attended a program in Colorado which included a panel of congressional staff from both parties. Staffer for a Republican Congressman took shots at Social Security in a discussion of the Budget Control Act. Staff from Democratic members did not correct this misstatement. I asked after why no comment and staff of Democratic Senator admitted she did not understand social security and
    would not be able to respond. Hopeless!

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  7. So Kessler is saying, in effect, Reagan, Greenspan and O'Neil were lying when they told us that the Boomer generation were investing for their retirement.

    Exactly. In fact, every Administration from FDR has lied about SS. Here are some facts to consider:

    1. SS includes no contractual guarantee. Congress could cut all benefits to zero tomorrow.

    2. Money paid into SS isn't invested for the benefit of those paying in. It's mostly spent to provide benefits to current retirees. SS is a pay-as-you-go system.

    3. The current level of SS income is inadequate to cover the current level of outgo. Income would have to be raised by 33% or more for SS to be sustainable.

    4. Congress and the President have been running deficits above $1 trillion for 4 years in a row. Finding extra money to continue SS at its current benefit level while also coping with the enormous deficit will be very, very difficult.

    Would you buy a voluntary pension under these terms? I don't think so.

    Kessler describes two different ways of looking at SS on a 1-year basis. Neither is wrong, but both are not as informative as them might be IMHO. I think the best way to look at SS is on a long-term basis and taking into account other government spending desires and commitments.

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    1. Wondered when you would do your routine.

      As to #1: SS is law and laws can be changed. Also, contractual guarantees can be abrogated see Hostess pension plan for a recent example.

      #2: excess funds, for example the 2 trillion between 2000 and 2008 is invested in Treasury Bonds. The recent reduction in the employee share of 2% of salary has reduced the fund's cash flow to where with interest on the Trust Fund, SS in total is currently cash flow negative.

      #3 you mix 2 topics so as to confuse the short and long term. You, as usual, want to pretend that an infinite horizon is the basis for calculation of the " unfunded" liabilities. The program needs far less than a 33% raise.

      #4 has nothing to do with SS. However, look at sources and uses. Fed revenue is under 15% of GDP due to Bush tax cuts and the economy. SS and Medicare spend about 7% of GDP. Defense spends about 6% of GDP. The rest of the federal government spends almost 10%.
      Let's assume you cut SS completely as you say could be done. All else being the same, still have deficits. Every year.
      The Paul Ryan plan assumes 18.8% of GDP for taxes. Raise taxes to that figure (about where the Clinton rates take us) and let's talk.

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    2. Quaker in a BasementDecember 12, 2012 at 11:54 PM

      3. The current level of SS income is inadequate to cover the current level of outgo.

      False. SS income for FY2012 is $841 billion. Obligations are $830 billion.

      Source: http://www.ssa.gov/budget/2013KeyTables.pdf

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    3. Quaker in a BasementDecember 12, 2012 at 11:57 PM

      For OASI and DI only, outlays for FY2012 are $779 billion; income is $841 billion. Same source as above.

      Delete
    4. Tom M.:

      1. Contractual guarantees can be abrogated by a judge for an organization in bankruptcy. I don't believe the Federal government can go bankrupt. So, the pension of a retired federal worker is more secure than a retired person's SS benefits.

      2. Yes, on that basis the current cash flow is positive. However, I don't think it's particularly helpful to look at one year's results on any basis.

      3. the 33% figure comes from the 2012 SS Trustees' Report.

      4. IMHO SS should be evaluated in light of the rest of government, and not just federal. Many people advance the argument that SS can be made solvent by just increasing the assessment by the necessary amount. That's mathematically true. However, one needs to look at the entire economy to figure out of a tax increase of that magnitude is feasible in the light of all the other taxes that individuals and businesses are already paying.

      Also, one should look at how politicians acutally behave. My worry is that Washington will "fix" the problem by simply printing money. Such a course would lead to inflation problems at some point.

      Quaker -- please re-read my comment #3 including the last sentence. Your paraphrase is not what I meant. I understand that my wording was somewhat unclear. What I meant was that the rates in the current SS law are not sustainable.

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  8. "However, one needs to look at the entire economy to figure out of a tax increase of that magnitude is feasible in the light of all the other taxes that individuals and businesses are already paying."

    1) Taxes on the rich have never been lower.

    2) The rich pay the lowest effective SS tax rate, because most of their income is entirely untaxed due to the cap.

    3) Yes, we should compare to the whole economy: GDP. On GDP basis, the necessary SS tax increase is puny.

    Go away, David. Your talking points are stale and filled with false implications. Your contributions are worse than unhelpful.

    Improve the discourse by shutting up.

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    1. Anon 1018: he/she won't go away when you continue to feed him.

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