To hear the media tell it, you’d think most Americans agree that this country must drastically reform its Social Security program. As Campaign Desk has pointed out, Social Security and the federal deficit have become Topic A in Washington, but so far the mainstream media haven’t had much of substance to say about it. Instead, they are taking their reportorial cues from the deficit hawks, while other voices have been shut out. This is the first in a series of occasional posts that will put the nation’s oldest and most successful social program into better perspective. I sat down for a conversation with Yale professor emeritus and social insurance expert Ted Marmor, who has written The Politics of Medicare and America’s Misunderstood Welfare State. A couple weeks ago, The Philadelphia Inquirer published his op-ed about what some deficit hawks are really after.
Trudy Lieberman: What is the federal deficit?
Ted Marmor: For any fiscal year, it’s the difference between government revenues and government expenditures when the latter is larger. We’ve had such a gap for most of the post Second World War period, and most economists believe that a deficit of one to three percent of GDP is perfectly okay, and compatible with price stability.
TL: What’s the difference between the deficit and the federal debt?
TM: The debt is the cumulative gap between revenue and expenditures at any one time. The cumulative debt is the aggregate of annual budget deficits; the projected federal debt is the amount estimated over some future period.
TL: What proportion of GDP does the deficit now consume?
TM: Present estimates are about eleven percent.
TL: Is this bad?
TM: At the moment, not a huge problem. The expected deficits can become a serious problem if left unaddressed over the next few years. The question is how long increased deficits can be tolerated to keep stimulating the economy. In short, we have an economy with high unemployment, which means wasted human capacity, lower tax revenues from our recession, and only modest economic growth. To stimulate the economy’s growth and to lower unemployment is the most pressing problem facing the country. That is the priority. But we have to anticipate lowering the deficit as a proportion of GDP when the economy is stronger.
TL: So what’s the problem right now?
TM: The Bush tax cuts, funding two seemingly endless, lingering wars, and the failure to increase taxes to pay for those wars have left the U.S. government with a current deficit that is a substantial but not intolerable portion of GDP. The continued unwillingness to project increased taxes in the future to reduce the anticipated deficits in, say, 2012, means projections of future deficits are growing sharply. At some point, such large deficits, if left unchecked, will balloon.
TL: If that happens, what are the consequences?
TM: The government can print money, which is inflationary, and the costs of borrowing to finance U.S. government bonds would increase if investors here and elsewhere were unwilling to buy them. At the moment, we do not face those circumstances because holders of U.S. government bonds are willing to accept low interest rates in exchange for what they perceive as the U.S. government’s future capacity to fund those bonds.
TL: Is this happening now?
TM: No. To repeat. Investors here and elsewhere are perfectly willing to hold U.S. bonds because the interest rates, while low, do not put off investors who are more interested in the security of the U.S. government future payments.
TL: Is this likely to happen soon?
TM: No, it is not. The present policy of stimulating the economy is perfectly sensible macroeconomic policy. The fact U.S. interest rates are quite low suggests that there are enough bond buyers who are not frightened by the alarmist deficit hawks.
TL: Then what’s all this fuss about?
TM: We are in the midst of an ideological battle between Keynesian ideas about the importance of fiscal stimulus during recessionary times and the contrary notions of conservative thinkers committed to reducing government expenditures as a means of calming the bond markets. The latter view prevailed in the mid-1930s and made continued economic recovery difficult, helping to produce a second recession then. There’s a debate now between the stimulus celebrators and deficit hawks. It’s a battle that’s been going on for decades. Some people have never liked Social Security or social insurance in general, and see Social Security pensions in particular as wasteful ways of helping the poor among the elderly and disabled.
TL: Why all of a sudden has the deficit emerged as a major problem?
TM: Last year, the fiscal policy effort was aimed at heading off a depression. Avoiding a fiscal disaster was more important than reducing deficits. It’s more of an issue now because of the experience of Greece and Ireland and the extraordinary level of current deficits these countries have faced. The threat of chaos in the Euro world because of those countries—as well as Italy, Spain, and Portugal—has prompted an appeal for fiscal austerity.
TL: Why is Social Security being attacked and blamed for the for the deficit problem?
TM: There are a number of critics who have firmly-felt objections to Social Security’s role in American public finance. There is a fundamental policy cleavage that is perfectly understandable, and it is appropriate that there should be public debate about whether Social Security ought to be made more substantial, adjusted slightly, or cut back in some measured way. But it’s not being debated the way it should be.
That’s so because of Social Security’s popularity. To avoid attacking its popularity, critics attack its affordability. That’s always been the case, whether the program is in surplus or in deficit. Opponents have said the same thing about Social Security for three decades and more, no matter what the numbers are. Orthodoxy trumps factual discussion.
TL: So then what does Social Security have to do with the deficit?
TM: When considering government fiscal policy at any one time, total revenues and expenditures are central considerations. In that sense, Social Security, Medicare, unemployment insurance, and hundreds of other programs are relevant to measuring the state of the government’s fiscal position. Total revenues versus total expenditures is the accounting issue in that sense. But it has nothing to do with Social Security’s contribution to the deficit. American workers have, over the decades, paid enough in their FICA taxes to fund their expected levels of pensions. There have been surpluses for decades, and hence Social Security is “owed” interest on the bonds that are credited to the institution’s accounts.
The fact that previous administrations have borrowed those surpluses to finance current government expenditures is true. That along with calls for repayment of the funds borrowed earlier does not bear on the legitimacy of those obligations. In short, the Social Security program has ‘paid for’ its expected benefits, but they will have to be financed by taxes paid by future workers.
TL: But what do people mean when they say it is the cause of the deficit? What are they conflating?
TM: The current payments are part of this year’s government outlays, simply put. Since government taxes overall are less than the outlays, all government programs, Social Security included, are ‘part of the deficit.’ The conflation is between that obvious truth and the claim that Social Security itself has not been in fiscal surplus and won’t be, given its expected FICA revenues and the repayment of its loans to other government programs.
TL: Can you explain the concept of the trust funds and the “lock box” idea in terms of the public’s perception that their contributions have used to finance other programs?
TM: Social Security has had a surplus. That surplus was used to finance other programs. The ‘lockbox’ idea was a metaphor to represent what Social Security’s finances would be if no borrowing had taken place. But that image is unnecessary. The Social Security accounts are what they are, and the reality of the surpluses—and the expected payments on these repayments—mean Social Security has not itself contributed to the deficit.
TL: Is Social Security broke, or are the terms “broke” and “bankrupt” meant to scare people?
TM: Social Security in 2010 reduces the deficit from what it otherwise would be; more FICA taxes are taken in than pension benefits paid out. But then revenues will be less than taxes paid until 2016. But that doesn’t mean people won’t get their benefits. The suggestion that it’s insolvent is an absurd way of talking about the program. This is not a private household. The U.S. government is not a person, so analogies to individuals and their own budget problems are not appropriate. Governments can tax. People can’t. Governments can reduce the level of benefits, or adjust who receives them. Private citizens have no such capacity. The analogy to personal finances, when addressing Social Security (or government altogether) is a mother lode of nonsense.
Another element of the insolvency claim is the notion of unfunded liabilities. That’s an expression appropriate for private pension plans, where the promise to pay a future benefit must be balanced by holding adequate financial reserves now. That’s not the case with Social Security. The government has the authority to raise taxes and adjust benefits. Private trust funds do not. Failing to understand that is the cause of much confusion and mischief.
TL: Are such words part of a scare tactic on the part of the program’s detractors?
TM: The short answer is yes. As I said, the popularity of Social Security means critics turn to affordability rather than attack the program’s desirability. And that has been especially the case since the economic stagflation of the 1970s.
TL: What happens after 2016?
TM: The current FICA taxes of 2016 will no longer be enough to finance the expected pensions of that year. That means Social Security will draw down on its claims against the U.S. Treasury. When you add in the interest payments on Social Security bond holdings, there is more than enough to pay for those pensions. The critics want to treat that as a threat to the program, but that is propaganda.
There is no case to be made to reduce forecasted benefits for seniors in 2016. Past generations of workers from the 1980s on have taxed themselves (through their contributions) to sufficiently fund their pensions until the early 2040s or late 2030s, depending on the CBO projections or projections from Social Security actuaries. The money is adequate to fund estimated benefits in full until 2039. After that, there is enough to fund three-fourths of projected benefits until 2042.
TL: What changes will be needed to pay full benefits after that?
TM: Then, relatively small adjustments need to be made. Small increases in taxes or small decreases in benefits would easily address any gaps out as far as the eye can see.
TL: Can you name some of these?
TM: Social Security is indexed to the cost of living. So a small adjustment downward in the COLA formula would be one remedy, one that would have to be justified as measuring inflation in a more accurate way. Increasing the FICA tax revenues by slightly increasing the wage base (the amount of wages subject to Social Security taxes—now $106,800) is another. We could also modestly increase the tax rate itself, which is 6.2 percent on both employees and employers. None of these methods call for hand-wringing today.
TL: How does raising the wage base fit in with the income redistribution that goes on with Social Security?
TM: Social Security is based on two competing concepts—the adequacy of benefits and the fairness of the benefits in light of the contributions made. Those who have earned lower incomes get a higher portion of their pre-retirement income and a higher portion of their contributions (what they paid into the system). Those at the top of the income distribution get a higher benefit in absolute dollars. But their benefits are a lower proportion of their previous wages and salaries than is the case for lower income pensioners.
Raising the wage base will produce additional revenues, of course, but the net effect on Social Security’s finances will depend on whether benefits are proportionately raised. To the extent they are not raised, this would redistribute income from higher wage and salary earners to lower wage and salary earners while reducing Social Security’s projected gap between revenues and benefits. A few decades ago, Social Security’s wage base covered about 90 percent of Americans’ wage and salary income. Today it covers 84 percent. To return to that proportionate coverage of wage income would be another step we could take.
TL: What’s the rationale for this redistribution?
TM: In any insurance, private or social, there’s always redistribution from those who don’t suffer a risk to those who do. It’s pooling on the financing of insurance and paying out when the risk is experienced. In a private pension plan, someone who paid in twice as much would get twice the benefit. But that is not so with Social Security.
Simply put, paying more in Social Security taxes than someone else means generally you will receive a higher pension. But it does not mean your higher pension will be proportionately increased by the percentage difference in contributions. Social Security pensions, as noted above, are more generous to the less wealthy, and in that sense redistribute income in the name of more generous pensions for the less lucky. Since we don’t know how our incomes will turn out at the end of our careers, Social Security compensates at the end for those whose incomes have been in the lower half of the distribution. The idea behind Social Security is to insure a more adequate insurance benefit to those at the lower part of the income scale, but at the same time not to reverse the rank order of the income of pensioners.
TL: Doesn’t everyone get Social Security disability and survivors’ benefits? How does the redistribution work here?
TM: Every family with a worker who has worked at least ten quarters is eligible for benefits if the worker becomes permanently disabled or dies.
TL: Would means testing be one way to address the projected gap after 2039?
TM: The short answer is no. If those with incomes over $250,000 were denied benefits, you could not find that effect in the accounts of Social Security. It would make no difference in the program’s future fiscal circumstances, because such a small proportion of American families enjoy incomes that high.
TL: What would means testing ultimately do to the program?
TM: It would reduce the interest of upper income Americans in the fate of Social Security, and in that respect reduce its political support.
TL: Is means testing a way to privatize the system through the back door?
TM: I don’t think this is a useful way of evaluating means testing. Means testing is the opposite of Social Security’s principles. Tests of means suggest that one receives benefits if and only if one is in trouble. Benefit promises of pensions—with public support so strong—are much more like a secure guarantee, one closer to a platform than a safety net. Safety nets have holes, large or small, and their level can be lower or higher from the ground. Social insurance, when widely supported, is much closer to an assurance rather than a charitable gift.
TL: Are there groups who do not believe in social insurance?
TM: Yes, there are two groups, broadly speaking. One group includes people who believe in a libertarian role for government. Government should be limited to things like enforcing contracts, maintaining roads and national defense. The second group believes in a more expansive role for government, but [one that is] limited nonetheless. They believe the government’s role in social policy should be limited to helping those who experience misfortune. This is the safety net group that believes in testing a peoples’ resources and assets before they can qualify for help.
TL: What’s the case for raising the retirement age?
TM: The obvious positive argument is the shift in longevity for some people. But that doesn’t mean raising the age is the appropriate response to Social Security’s fiscal future. There are other ways to adjust benefits and revenues. Longevity gains are unequally distributed. Americans with lower incomes benefit less. This solution doesn’t address one of the serious problems in the U.S.—the different ages at which workers become retired. Manual laborers leave the workforce far earlier than college professors. If anything, the benefit needs augmentation rather than reduction. And raising the retirement age is a benefit reduction.
TL: How does the idea of raising the retirement age fit in with the movement among European countries to increase their retirement ages?
TM: You need to look at this in context. The age for full benefits in Europe is lower than in the U.S. Many countries lowered their retirement ages to deal with persistent unemployment, and their benefits are typically more generous. We haven’t had that generosity in the first place. Small decreases in benefit levels in generous systems abroad is a poor object of comparison with the more modest level of Social Security pensions in the U.S.
TL: What do you say to young people who believe that Social Security won’t be there for them?
TM: They are being misled. If the proportion of Americans living beyond sixty-five is rising, as is the case, and if their voting strength will increase, as will be the case, why should their promised pensions be endangered? Put another way, if Social Security is a sacred cow, why will it be sacrificed when its worshippers are more numerous?