Wednesday, December 26, 2012

Caroline Poplin's Swiss Cheese Defense of Social Security

Is Social Security misunderstood? Yes--by Caroline Poplin, a "policy analyst" who argues that "We should take Social Security off the table in this [fiscal cliff] debate" because--well--the program is "surprisingly misunderstood." But, Poplin's argument for maintaining Social Security in its current form is so full of holes that it could be mistaken for swiss cheese.

For one thing, she denies that, as currently structured, it is unsustainable; i.e., there is no unfunded liability. 

This claim is factually false. It is a mathematical, actuarial certainty that the Social Security balance sheet cannot sustain benefits at the current level. Estimates vary, of course, with SS's own trustees estimating an unfunded liability of $8.6 trillion and other estimates ranging up to $20.5 trillion. How could Poplin miss this obvious fact? She confuses reality with need:

Deficit hawks insist that the U.S. cannot afford benefits at the current level. They are wrong. Most middle-class Americans, now and in the future, will depend on Social Security for a dignified retirement.

If you have a savings account upon which you are regularly drawing to pay your bills because your income can't support your lifestyle, it makes no difference how much you depend on those withdrawals. If your account is not large enough to sustain those withdrawals, you're going to have to cut back on your expenditures, sooner or later. Every middle-class American knows that.

A bigger misunderstanding lurks in Poplin's piece, though:

Conservatives claim that the Trust Fund is a fiction – that the Social Security surplus was spent, not lent. That is wrong. The government borrows from the Trust Fund just as it borrows from China. If these bonds are not redeemed or rolled over when they come due, the U.S. will default. Any other result would be a betrayal of President Ronald Reagan, Congress, and millions of boomers who paid trillions of dollars in extra taxes over four decades to secure a dignified retirement.

Suppose you decide to begin a systematic savings program of $100.00 a month. However, instead of depositing that money into a bank or mutual fund, you hand it to your spouse every month. In exchange, your spouse hands you an "I owe you $100.00" piece of paper, then goes out and spends the money. Years later, when an unexpected expense hits you, you hand your pile of I-owe-yous to your spouse. Instead of handing the accumulated savings back to you, your spouse puts her hand out and says, "In order for me to redeem these I-owe-yous, you need to give me the money to pay you back."

This is the misnamed "Trust Fund" that Poplin lauds, with one important difference: The money will have to be paid back, not by you, but by other, younger workers. Your SS tax money was spend, just as the spouse in my story spent the "savings" entrusted to her. However, the real-life spouse--the government--won't be turning to you to redeem your own savings, since you are now retired and no longer working. It will turn to your neighbor, who will have to cough up the money to redeem the Trust Fund's pile of I-owe-yous (government bonds) that your benefits depend upon.

"Social Security is often described as a pay-as-you-go system, with taxes from current workers going to pay benefits of today’s retirees," writes Poplin. And with good reason: It's true, Poplin's denials notwithstanding. The money a worker pays in Social Security taxes today goes toward today's retiree benefits, with any surplus in tax collections going into the Trust Fund, which is then spent by congress. Either way, the money is spent. It's gone. It was not deposited in an investment fund, available to provide capital fuel for economic growth--business expansion, factories, new technologies, labor-saving devices, and other productive activities. Your money is not part of a growing account balance spurred by investment returns thrown off by current production. Like the spouse in my story, the money is consumed. The only way to replace it is with taxes on future production, which will not be there because the money was not invested in the productive capacity to provide it.

Poplin notes that "Social Security payments ... are backed by the full faith and credit of the U.S. government." Who backs the government? The productive taxpayers. Just as the spend-thrift spouse had to turn back the the source of the original $100.00--you--to make good on your $100.00 I-owe-you, so the government will have to turn back to its original funder--the taxpayer--to make good on its "full faith and credit," which rests on that very same taxpayer. It's nothing more than a con game, played out in full public view for all but the Caroline Poplin's to see.

Social Security is "more important now than ever," says Poplin, because

with median income stagnant over the past 30 years despite the rising cost of housing, education and health care, it is difficult for many to save such large sums. That is why Social Security, which guarantees stable payments for life, is so valuable and must be protected.

With programs like Social Security diverting vast sums of earnings from productive investment and savings to consumption, is it any surprise that incomes are becoming stagnant? The only way for retirement savings to be able to provide for retirement is for them to provide the investment capital for economic growth--which means, productivity growth. Productivity raises the value of saved dollars, which can then be exchanged for the goods and services you'll need in retirement, which you'll be able to afford without soaking other, younger workers. Poplin's argument amounts to; SS helped reduce our current standard of living, so we'll need SS to help maintain that reduced standard of live, which will keep on declining because we continue to spend, rather than invest, our retirement "savings" in our spouse's (the government's) empty I-owe-yous!

Poplin concludes that "Social Security ... should not be part of any 'grand bargain' to fix [the deficit]." Not only should it be part of the "grand bargain": It (along with Medicare and Medicaid) should be at its center.

My own solution is: The government has had its chance at running our retirement savings, and it has failed. While I believe that SS is immoral and should be abolished, this is not yet politically feasible. What is feasible is a transition to self-directed personal investment accounts, into which all 12.4% of each worker's SS contribution would be deposited, beginning with younger workers. To get this transition started, a compromise may have to be made with the Left to bolster the accounts of the lowest income workers. This can be accomplished through matching government deposits that keep the lowest income workers at some minimum level of SS account balance, phased out as incomes rise.

This is still immoral redistribution,  but at least the low-income worker would have ownership control, and would have to be working and paying into his account to qualify for the matching grant. Best of all, the laundering of SS taxes through Washington would end. 

Related Reading:

The Social Security Injustice

The "Personal Account" Path to Ending Social Security

Social Security and the "Hypocracy" Charge


Steve D said...

So is it morally acceptable to propose less of the immoral distribution?

Mike LaFerrara said...

Only as a step toward abolition. The key reform I'm advocating is to return ownership control of the taxpayer's funds to the taxpayer, recognizing the property right of the person who earned it. Despite the forced savings, which is immoral, I consider such a reform to be a step toward more freedom and the recognition of individual rights.