Archive for the ‘Social Security’ Category

The 0.2 Percent Solution: Some Advice for Debt Hawks

Michael Stephens | October 25, 2013

Larry Summers recently noted that the projected long-term budget deficit for the federal government basically disappears if we’re able to achieve annual economic growth rates that are 0.2 percentage points higher than the Congressional Budget Office assumes.

The notion that eliminating the budget deficit is a valuable goal in and of itself deserves some pushback. But if you start from the premises of those who do think (or claim to think) there’s a problem with debt levels of the sort projected by the CBO, then debt hawks should be running around promoting any scheme they can think of that will boost growth. If the debt really is as big of a problem as they claim, this ought to be their first priority. And it’s a far better strategy than the current one, which seems to revolve around pushing for an increase in the eligibility ages for Social Security and Medicare.

Now, it’s obviously the case that “push the US political system to pass policies that increase growth” isn’t an easy thing to accomplish, but there are a couple of reasons why this would be a better goal for (genuine) debt hawks to pursue.

First, even if the FixtheDebters succeed in getting what they want, which seems to be a particular type of entitlement cut (raising the retirement age counts; reducing hospital readmissions or spending less on ineffective treatments does not), it would be a tenuous accomplishment. The CBO recently evaluated the budgetary effects of raising the Medicare eligibility age to 67 and found that it would reduce deficits by … about $2 billion per year (Aaron Carroll and Austin Frakt have more on why this actually overstates the savings).

Moreover, whether the hawks intended for this to happen or not (I believe the “grand bargain” blueprint still contains some pro forma calls for short-term stimulus), their contribution to the austerity campaign that has gripped the US political system since 2010 has resulted in changes to fiscal policy that hamper the United States’ growth potential — and thereby make more difficult the job of reducing the debt as a percentage of GDP.

For instance, they have lent their voices, access, and mobilization efforts to a process that has resulted in stagnating research and development spending. A new Levy Institute study shows why the deep cuts scheduled for R&D are a significant blow to the economy, and a huge wasted opportunity. Beyond the fact that spending cuts in general reduce GDP right now, well-targeted R&D investments have the potential to revitalize the US export sector. Simply halting or slowing down the R&D cuts would help; beyond this, the Levy Institute’s macro team have projected that $160 billion per year in new R&D investments could increase export volume and bring unemployment below 5 percent by 2016.

There are far better reasons to push for more growth-friendly policies than a reduction of the debt-to-GDP ratio, but if the debt hawks are serious about this, if they believe the debt ratio itself has some sort of real and profound significance, they should look for allies among those who are already trying to change the conversation to growth and jobs. On the other hand, if the goal is really to scale back the social insurance system for its own sake, then by all means, carry on.


What Is the Political Payoff of Proposing Social Security Cuts?

Michael Stephens | April 10, 2013

The President’s budget has arrived and, as reported, it does contain proposed cuts to Social Security (through adopting a different measure of inflation called “chained CPI”).  The emerging consensus seems to be that this is mainly intended as a political/messaging ploy.  The idea here is that Republicans are extremely unlikely to make a deal that contains any revenue increases on high-income-earners; even one that includes the entitlement cuts they have (sort of) demanded.  As a result of the President putting these cuts on the table in so public a fashion, so the theory goes, centrist op-ed writers will finally drop the false equivalence and declare that Republicans are being intransigent and are not negotiating in good faith toward a grand deficit-reduction bargain.

Paul Krugman points out that this is an exceedingly unlikely scenario.  But even if DC pundits play along, here’s a question about this gambit that I don’t think has an obvious answer:  what’s supposed to happen next?  What’s meant to be the tangible payoff of the new narrative that would be created by all these editorial spankings?

Put it this way.  What will have a bigger impact on a (generally more elderly) midterm electorate in 2014:  ads about Republican obstinacy featuring sorrowful quotations from Fred Hiatt, or ads savaging Democrats for trying to slash Social Security?  Charges of hypocrisy are unlikely to carry much weight with an electorate that suffers no cognitive discomfort in demanding that “spending” be cut but “Social Security” preserved or strengthened, and they’re even less likely to work if a voter is unaware that Republicans have even mentioned chained CPI as part of their wish list.  In fact, it’s hard to see how the overall message wouldn’t just boil down to this:  Republicans are being stubborn … in refusing to go along with very unpopular cuts.  How many more House and Senate seats will that deliver to the President’s party?


The Sources of Personal Income Since 1947

Greg Hannsgen | February 10, 2012

(Click to enlarge.)

See the blue line in the upper half of the figure above? That line shows the portion of personal income made up of wage and salary disbursements, as a percentage of total personal income.  (As the figure notes, I’ve subtracted social insurance contributions such as Social Security taxes. Also, employer contributions to Social Security, private pensions, etc., have been completely ignored in my calculations.) I have been looking into the possible effects on consumer spending of changes in the composition of income. Please click on figure if you want to see a larger version.


Ponzi Encore

Michael Stephens | October 3, 2011

“It may come as a surprise to some, but the original scheme by Charles Ponzi did not make its money by providing seven decades of benefits to retirees before folding up shop and leaving town with a suitcase full of cash,” writes Benjy Sarlin.  In a new One-Pager Greg Hannsgen and Dimitri Papadimitriou display just how loopy it really is to compare Social Security to a Ponzi scheme.  The authors produce a graph tracing the long history of new taxpayers (“investors”), new beneficiaries, and those leaving the program (and this mortal plane); the picture that emerges is not one of a fraudulent money-making venture that is about to sneak out the back door with your savings.

But let’s leave Charles Ponzi alone for the moment.  What about the looming shortfall in the program, you ask?  Citing testimony delivered last year by their Levy Institute colleague James Galbraith, the authors suggest that there are reasons to be skeptical of these projections.  To see why, have a look at this critique by Galbraith, Wray, and Mosler of the intergenerational accounting methods used to forecast fiscal doom in programs like Social Security (highlights here).

I can tell by that glazed look in your eye that you’re still not convinced.  Alright:  even if the official projections pan out (and there is, as the authors point out, reason enough to be distrustful of them), Social Security would supposedly see a difference between what it takes in and what it puts out that amounts to about 0.6 percent of GDP.  That’s not nothing, but it’s manageable enough that no one should have any doubts that “investors” will be paid off.  Put aside trust funds and lock boxes.  The key point is this:  the solvency of Social Security is ultimately dependent on the solvency of the US government.  And as long as Social Security benefits are owed in US dollars, there is no reason to believe that the US government must default on its commitments to future beneficiaries.

Whether it will is, of course, another question.  Ultimately, in what is something of a depressing trend these days, the real problem, the real source of uncertainty, lies not in the fundamentals of the program, but with the potential decisions of political authorities.  As Papadimitriou and Hannsgen conclude:  “Looking at the figure, one begins to draw the conclusion that it would take an act of legislation—and a very foolish one indeed—to create a “Ponzi” generation of ordinary elderly people with virtually no retirement income.”  You can read the One-Pager here.


The power of moral framing

L. Randall Wray | September 14, 2011

Here is an excerpt from the most important article you will read this year, by George Lakoff:

Here’s how public intimidation by framing works.

The mechanism of intimidation is framing, not just the use of words or slogans, but rather the changing of what voters take as right as a matter of principle. Framing is much more than mere language or messaging. A frame is a conceptual structure used to think with. Frames come in hierarchies. At the top of the hierarchies are moral frames. All politics is moral. Politicians support policies because they are right, not wrong. The problem is that there is more than one conception of what is moral. Moreover, voters tend to vote their morality, since it is what defines their identity. Poor conservatives vote against their material interests, but for their moral identity.

All language activates frames in the brain. Conservative language activates conservative frames, which activate conservative moral worldviews in the brains of those who hear the language. The more those frames are activated, the stronger the conservative moral views get in people’s brains.

Please go to this link, read the article, and then we will discuss it.  (Continued at EconoMonitor…)


How many Social Security checks fit inside one tax break?

Greg Hannsgen | August 30, 2011

The Congressional deficit reduction committee has numerous government programs on the chopping block, and we may soon see some very severe spending reductions. The committee must agree upon, and Congress must pass, $1.2 trillion in spending cuts and/or tax increases by November 23, or automatic, across-the-board spending cuts will go into effect in 2013. I hope that cuts to Social Security are not among the committee’s recommendations, but fiscal hawks are beating the drum harder than ever with their insistence that spending on the program must be reduced soon.

The Social Security issue came to mind a week or two ago, when I read James B. Stewart’s article in the New York Times on possible changes in the way the federal government taxes certain kinds of investment income.  Stewart’s article makes the point that some of the wealthiest taxpayers benefit greatly from the special tax rate of 15 percent that currently applies to capital gains* and dividends:

“The IRS reports that for taxpayers with the top 400 adjusted gross incomes, capital gains in 2008 amounted to an eye-popping average of $154 million for each of these taxpayers…and this in a year when the stock market plunged.”

Suppose the government taxed capital gains at the same rate as “ordinary income” (wages, salaries, most interest payments, etc.). For the 400 ultra-wealthy taxpayers mentioned in the quote above, a marginal tax rate of 35 percent would have applied to this income, instead of the special rate of 15 percent. Hence, if all 400 had been required to count their capital gains as ordinary income for tax purposes, their tax bills would presumably have been about $31 million higher on average than they actually were. It seems that the special, reduced rate for capital gains yields a large amount of tax savings for these 400 income tax filers, along with others who report capital gains on their income tax forms—who make up a fairly wealthy group themselves.

This brings us back to Social Security and to the relatively modest benefits that it offers. Social Security literature available on the web  lists the 2009 primary insurance amounts (PIAs) for covered workers with various income levels. (By the way, 2010 numbers can be found at this link.) This is the monthly payment to which a worker is currently entitled if he or she retires at the current full retirement age of 65 years old (not including Medicare, any applicable spousal benefits, etc.). Here are three examples: continue reading…


Did problems with SSDI cause the Output-Jobs Disconnect?

Greg Hannsgen | May 6, 2011

Chart 1 (Click to enlarge.)

In a New York Times blog, Nancy Folbre recently discussed the alarming disconnect between economic growth and job creation in the United States. While the economy has been growing since the Great Recession’s end in 2009, the employment rate remains stuck at its December 2009 level of 58 percent. This percentage had reached 65 percent during the boom leading up to the 2001 recession—a level not seen since then. The slow recoveries of the job market after the last two recessions have fostered a concern among many that the link between economic growth and job creation has been severed, a phenomenon that might be called the American Output-Jobs Disconnect. Chart 1 at the top of this post illustrates this turning point in the employment rate (employed persons divided by population). The blue line shows the employment rate for males plunging from 71.9 percent in 2000 to 63.7 in 2010, while the red line depicts the rate for females falling from 57.5 percent to 53.6 percent during the same 11-year interval.

Reading an interesting proposal from the Center on American Progress (CAP) and the Hamilton Project to reform the Social Security disability program, also known as SSDI, I noticed this chart, which seemed relevant to the same topic.

Chart 2 (Click to enlarge.)

Chart 2 above shows that among men aged 40 to 59, employment rates for those who do not report having a disability were approximately the same in 2008 as they were in 1988, while the percentage of disabled men who are working fell from 27 percent in 1988 to 17 percent in 2008. It is remarkable that the decline in the employment rate for men aged 40-59 can be accounted for almost entirely by a fall in the employment rate for the disabled members of this group, at least for the period 1988–2008.

Another well-known fact seen earlier in Chart 1 is that employment rates for women rose dramatically until approximately the year 2000. In Chart 3 (just below this paragraph), also from the CAP-Hamilton proposal, one finds that what was true for women in general was not true for disabled women, at least in one age group. The employment rate for disabled women aged 40-59 was only 16 percent in 2008, compared to 18 percent in 1988.

CAP and the Hamilton Project argue in the paper that the long-run fall in the employment rate for disabled people can be blamed largely on the design of the Social Security disability program. This problem is one of the many issues that motivate the paper’s proposal for a “front-end” disability benefit. The proposed disability benefits are designed to be quickly obtainable after the onset of disability and to encourage a quick return to the workforce when one is possible.

More recently, this proposal, along with a number of other issues related to the Social Security disability program, were discussed in this article by Motoko Rich in the New York Times. The New York Times article quotes some experts who question the importance of problems with the Social Security disability program as factors in recent employment trends.

While reading Folbre’s blog post last week, I realized that a disabled–nondisabled breakdown of employment rates might also shed some light on the post-recession employment issue mentioned by Folbre.  To wit: did the recovery from the 2007–09 downturn improve employment rates for the disabled or nondisabled subgroups of either gender, in spite of the ongoing slump in the overall employment rates for both males and females of working age?  This question was addressed in a fascinating article in the BLS’s Monthly Labor Review (MLR) last fall, which focused on the thesis that the recession disproportionately affected the job-market prospects of disabled workers. The article found declining employment rates for both disabled and nondisabled Americans. We have created Chart 4 below using BLS data similar to those analyzed in the MLR article but for a broader age group, namely ages 16 to 64, and for an updated dataset.

Chart 4 (Click to enlarge.)

Given the findings reported in the MLR article, it is not surprising to find a sharp decline in employment rates for all four subpopulations depicted in Chart 4: male and female disabled people, as well as males and females without disabilities.

The data series shown in Chart 4 are among many pieces of evidence against any theory that the largest drops shown in our charts can be explained mostly by a structural or long-term change in disability policy. To wit: at least since 2008, the ongoing fall in the probability of being employed has strongly affected the job prospects of both disabled and nondisabled people of both genders. Also, the acceleration of the declines shown in Chart 1 starting in 2007, as well as the substantial decreases shown in Chart 4 for 2008 to the present, hints at an important and negative role for the recent recession and the weakness of the current recovery. Hence, a new government jobs program such as an employer-of-last-resort (ELR) program and/or other anti-recession measures—and not just long-term improvements in entitlement programs such as federal disability benefits—are still very much apropos.

(Thanks to Alex Bartik of the Brookings Institution for providing Charts 2 and 3 and to Brookings for permission to use these charts in this blog.)