WHAT OTHERS SAY: Social Security reductions and the deficit

Tuesday, July 26, 2011 | 12:41 p.m. CDT; updated 8:16 p.m. CDT, Tuesday, July 26, 2011

If Social Security by law is not funded out of general revenues, then why would reductions in Social Security reduce the federal deficit?

There is an answer to this, but the question reveals some of the problems the funding of Social Security creates. Let me start with a disclaimer. I’ve never read the enabling legislation for Social Security and would be happy to have any errors or misunderstandings corrected.

Social Security is funded by the payroll tax, separate from income tax. Every worker pays the payroll tax. Low income earners might not pay any income tax. (Thus, the complaint is often made that some people pay no taxes yet get benefits from government.)

The accusation is also sometimes made that Social Security is a Ponzi scheme, but Social Security has accumulated a surplus in taxes for many years in excess of payouts. The purpose of the surplus was to create a fund for the time when boomers began withdrawing payments from the system.

It would all work fine if the government hadn’t spent the money. By law, excess Social Security payments are invested in U.S. Treasuries. So the government has gotten the money but owes it back to the Social Security system when needed to pay future benefits.

Back to the initial question. The reason that reductions in Social Security benefits would reduce the deficit is that such reductions would require the government to borrow less from other sources (China?) to repay the money owed to Social Security as demands are placed on the Social Security system to fund benefits.

So if you think low income people who pay no income tax but pay only the payroll tax aren’t contributing to the system overall, well, you should advocate for the government leaving Social Security alone and allowing people to get the Social Security benefits the system was set up to pay.

On the other hand, if you think Social Security benefits should be reduced so the government deficit can be reduced, you’re essentially saying that payroll tax and income tax are all just the same government money.

And you thought Al Gore was an idiot for talking about a lock box for Social Security.

George Harris contributed this column for the Kansas City Star. Copyright Kansas City Star. Reprinted with permission.

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Jimmy Bearfield July 26, 2011 | 2:40 p.m.

It's also worth noting that SS is not guaranteed. The U.S. Supreme Court has ruled multiple times that Congress can reduce or eliminate payments to anyone and everyone regardless of how long or how much those people have paid into the system.

That's one reason why I'd rather have the option of investing that money on my own. If I'm worried about losing it in a stock market crash, I can always invest it conservatively, such as in CDs.

(Report Comment)
Jess Dinkin July 26, 2011 | 3:09 p.m.

Ok. So now if I understand this correctly, you are saying that Social Security is not a Ponzi Scheme. It's different because it had built up a surplus in prior years, but the federal government spent the money. That seems a little like saying that Bernie Madoff ran a legitimate investment business and everything would have been fine if he hadn't spent the money.

(Report Comment)
John Schultz July 26, 2011 | 4:18 p.m.

What a horribly written article. I'm glad it didn't come from anyone local.

(Report Comment)
Michael Williams July 26, 2011 | 5:42 p.m.

JimmyB says, "...That's one reason why I'd rather have the option of investing that money on my own."

Damn straight.

But the MAIN reason I support privatization of SS would be heritable.

But, we can't have that, can we......

PS: Right now, you and your spouse can collect SS simultaneously. BUT, if one spouse dies, the surviving spouse has the luxurious option of (1) keeping their own SS payments or (2) abandoning his/her own SS payment and choosing the spouse's benefits. BUT, you can't have both. Nice deal, huh?

Lock-box/trust fund indeed. And, yes...I thought Al Gore was an idiot because he thought the rest of us were idiots to believe there ever was a "lock-box".

(Report Comment)
Michael Williams July 26, 2011 | 5:45 p.m.

Speaking of financials.

Just saw this graph:

What do you think?

(Report Comment)
Ellis Smith July 26, 2011 | 6:06 p.m.

@ Michael:

This goes back to the difference between the situations Greece and the United States now find themselves. Greece cannot print money. They could if they had their own currency, but they are hooked to the Euro.

Shortly after WW II Greece did engage in printing press inflation and their currency became as worthless for a time as was the case in Germany in the 1920s. I had some relatives who got caught up in that mess.

(Report Comment)
Ellis Smith July 27, 2011 | 5:58 a.m.

I agree with John Schultz: This is a poorly written piece. Looks like an engineer wrote it! Hopefully it won't be displayed to local journalism students as an example of good writing.

As originally initiated in 1935, Social Security would NOT have qualified as a Ponzi scheme, because it was actuarially sound. There were plenty of active workers to fund the system, and there were relatively few retirees - and retirees of that time didn't live as long as retirees do now.

The problem is that demographics have changed, but that hasn't been reflected in how Social Security has operated.

So today Social Security DOES bear some resemblance to a Ponzi scheme. Folks in Washout, D. C. will strenuously deny that, but more than a few experts have posited that Social Security is not actuarially sound. The Supreme Court has ruled that Social Security is a welfare program and that Congress can change its provisions as it sees fit.

As the great economist P. T. Barnum has said: "There's a sucker born every minute." Actually, Barnum was off by a factor of at least one magnitude (10/minute). What the federal government is doing is forcing those now paying into Social Security, and their employers, to play the role of suckers.

(Report Comment)
Paul Allaire July 27, 2011 | 8:54 a.m.

You don't suppose that 76 years is long enough of a time for all of those horribly erroneous assumptions to be proven wrong. Do you? In another 76 years will someone else be erroneously quoting the same entertainer?

From Wikipedia, the free encyclopedia

"There's a sucker born every minute" is a phrase often credited to P. T. Barnum (1810–1891), an American showman. It is generally taken to mean that there will always be many gullible people in the world.

When Barnum's biographer tried to track down when Barnum had uttered this phrase, all of Barnum's friends and acquaintances told him it was out of character. Barnum's credo was more along the lines of "there's a customer born every minute" — he wanted to find ways to draw new customers in all the time because competition was fierce and people could become bored easily.[citation needed]

Some sources claim the quote is most likely from famous con-man Joseph ("Paper Collar Joe") Bessimer,[1] and other sources say it was actually uttered by David Hannum, spoken in reference to Barnum's part in the Cardiff Giant hoax. Hannum, who was exhibiting the "original" giant and had unsuccessfully sued Barnum for exhibiting a copy and claiming it was the original, was referring to the crowds continuing to pay to see Barnum's exhibit even after both it and the original had been proven to be fakes.

In turn, Barnum's fellow circus owner and arch-rival Adam Forepaugh attributed the quote to Barnum in a newspaper interview in an attempt to discredit him. However, Barnum never denied making the quote. It is said that he thanked Forepaugh for the free publicity he had given him.[citation needed]

(Report Comment)
Charles leverett July 27, 2011 | 8:58 a.m.

The best thing the government did to create dependency was to convince several generations of Americans that they didn't have to worry about retirement, that the government would take care of them, that they could spend their money on other things. So now we have a huge number of senior citizens living off the government, many of them barely affording to do anything but survive. It's sad, and you would think we would of learned our lesson by now.... but how many people actually save for retirement?
But what does our government care? This is just another bloc they can by votes from, or when someone sensible comes along asking to fix what's broken, the other side (read Dems) turn them into a huge boogeyman.

(Report Comment)
Mark Foecking July 27, 2011 | 9:23 a.m.

Michael Williams wrote;

"Just saw this graph:"

Do you know what the units are of the Y-axis on that graph? The reason I ask is that very little money is actually printed - almost all of it exists only in silico at various institutions.

Banks create far more money than government does by making loans that are not backed by anything. That's a lot more of the problems than the printing presses.


(Report Comment)
Ellis Smith July 27, 2011 | 9:47 a.m.

" many people actually save for retirement?" I know several of my generation who did, including myself. Granted, we may have been more fortunate than many people in that we always had employment during our working years, along with reasonable disposable income, some of which we chose to invest.

Years ago, when Social Security was only about 15 years old, our elders sat us down and told us that if we wanted some degree of security in our old age we should plan for our retirement AS IF SOCIAL SECURITY DID NOT EXIST.

I'm glad I was given that advice, and I'm happy that I took it.

(Report Comment)
Mark Foecking July 27, 2011 | 10:47 a.m.

I wrote:

"Do you know what the units are of the Y-axis on that graph?"

I need glasses sometimes.

Still, $2 trillion or so is only a tiny fraction of what banks have created through poorly loans, and in many cases, these loans have not been repaid. Then we get the whole derivative casino that bids the price of these things up further, and pop goes the bubble.

We no longer make enough things of value in this country to allow such uncontrolled expansion of the money supply.


(Report Comment)
Jimmy Bearfield July 27, 2011 | 11:23 a.m.

"We no longer make enough things of value in this country to allow such uncontrolled expansion of the money supply."

We're still the world's largest manufacturer, according to the UN. We produced $1.7 trillion in goods in 2009. We outproduce China by more than 40 percent.

The obvious question is, why have we spent the past few decades shedding manufacturing jobs (8 million since 1979)? One obvious answer is that automation and other technological advances enable each worker to produce more. Another, less obvious answer is that we've spent the past few decades getting out of manufacturing goods with thin profit margins to focus on ones with fatter margins. Those big-margin products, such as medical equipment, often don't require as many people to manufacture.

(Report Comment)
Michael Williams July 27, 2011 | 12:09 p.m.

Mark: I agree with your comments about the heft of bank loans and derivatives.

I also agree with your chagrin about the need for glasses. In fact, I just put mine on.

JimmyB: I agree with your automation comments, but here's a couple of additional thoughts.

When tasks are automated, the machines are designed to be user-friendly. That is, to run the machine, all you have to do is train someone to run it. Automation is specifically designed to remove significant human decision-making from the process. Hence, someone with less expertise can be hired at a lower cost.

On average, the cost of wages/benefits/etc for a business runs about 45% of total expenses (yes, I know there is MUCH variation...I'm just trying to hit the average). All other expenses run an average 40-45%, bringing the profit level to ca. 10-15% before taxes. Larger companies tend to have lower profit margins than this, so ANY upward pressure on wages/benefits or other expenses causes risk to profits.

The way out? Automate, and take the automation to those with less expertise willing to work for lower wages. There are good capitalistic reasons shoes and shirts are made NOT in the good-ol'-USA.

People in the US want cheap Made-in_America goods and high wages. Ain't gonna happen for obvious reasons related to basic accounting math. But, if you buy American, you CAN have expensive goods and high wages....i.e., if you want shoes and shirts made in the USA, be willing to pay double or more.

(Report Comment)
Charles leverett July 27, 2011 | 2:16 p.m.

It's nice to hear a valid argument, or the reason why so much stuff is made in China and other countries. The fact is all I hear is people complaining about stuff being made in China and how we are sending jobs over seas. These are also the same people who complain about prices and would complain the loudest if the most basic commodities started to double or triple in price because we made them here. I got no problem buying stuff made in America, but those who spend all their time complaining about everything being made in China doesn't consider prices have to go up, and wages go down.
The fact is our economy is becoming more and more a service economy, where the true commodity is both knowledge and information.
The fact is, with automation, even in manufacturing knowledge and information is becoming more valuable then manufacturing experience and skill. After all someone has to build, program and maintain those robots and information systems.

(Report Comment)
Michael Williams July 27, 2011 | 2:52 p.m.

Charles: I agree completely.

Folks who say "I want cheap goods", "I want more wages", and "Damn jobs are going abroad"....all at the same time...just haven't thought things through. Such words can't be taken seriously because the words don't make sense.

I really like the conciseness of your phrase, "knowledge and information [are] becoming more valuable than manufacturing experience and skill." That phrase is packed with meaningful information about why-things-are-the-way-they-are.

Doesn't mean I like it; but it does mean I understand it.

(Report Comment)
Charles leverett July 27, 2011 | 3:02 p.m.

But unless we want to be the low paid worker pressing the button, we have to accept it.

(Report Comment)
Michael Williams July 27, 2011 | 3:22 p.m.

Charles: No one HAS to accept it.

Folks can continue to believe politicians who tell them "I'll bring jobs back" and "I'll get you higher wages" and "Prices are too high and I'll bring them down", and "All will be hunky-dory you'll live the fat life".

Of course, none of that will happen, folks will be disappointed, and they'll place blame in all the places it doesn't belong.

(Report Comment)
Charles leverett July 27, 2011 | 4:06 p.m.

Strange how that works. Everyone knows that most politicians are liars, just want votes etc. But then we expect them to fix the problems that they helped cause.
Its like hiring a con man to get back the money he stole from you.

(Report Comment)
Ellis Smith July 28, 2011 | 7:08 a.m.

Manufacturing is more diverse and more specialized than some imagine.

For example, it's possible in the United States to make a product with low unit cost (to the purchaser) while employing few workers, but employing a considerable amount of expensive equipment.

At least some of those workers must be skilled, well-paid labor. The expensive equipment MUST BE KEPT RUNNING. EVERY HOUR IT'S DOWN IS COSTING A LOT OF MONEY!

For example, a factory south of Indianapolis, Indiana can produce 20 million building bricks a year, with only about three dozen workers, and with a kiln (operators also skilled) running 24 hours a day and 365 days a year (fuel is pulverized low-sulfur coal).

Visit a modern cement plant. How many people do you see there? But the rotary kiln(s) and the mills need to be kept running 24/365, and that requires having skilled labor.

So, automation doesn't mean the labor force will be unskilled, but in any case the labor force is going to be rather small.

(Report Comment)

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