"Without Social Security benefits, 52.6 percent of elderly women would have had incomes below the poverty line in 1997. Social Security reduced the poverty rate for elderly women to 14.7 percent."
Last month the Center on Budget and Policy Priorities published a report called What the 2010 Trustees’ Report Shows about Social Security. To encourage Congress to improve the solvency of the agency, the Center compared the cost of the Bush tax cuts to the cost of the Social Security shortfall.
The 75-year Social Security shortfall is about the same size as the cost, over that period, of extending the 2001 and 2003 tax cuts for the richest 2 percent of Americans (those with incomes above $250,000 a year). Members of Congress cannot simultaneously claim that the tax cuts for people at the top are affordable while the Social Security shortfall constitutes a dire fiscal threat.
And they added a handy little graph.
Megan McArdle looked at the graph, presumably read the report, and went on a week-long assault on that little graph that has progressively grown both more complex and much more funny. McArdle doesn't like Social Security. She has stated that Social Security doesn't really exist because the government is only promising to pay it out and might just decide to stop paying out benefits at some time in the future, the little scamps. It and Medicare are just "meaningless accounting devices."
There's no evidence that public debt markets treat the social security bonds the way they treat debt held by the public, so in fact, they almost certainly could default without anyone much caring. But they don't have to. There's no mandate that the SSA spend the money on payments; they could slash payments right now, the SSA would technically continue to get its interest and lend it back to the government, and everything would be copacetic. Technically, anyway.
In fact, McArdle has many problems with SS. Fixing it will require a tax hike of 15% on the rich, she said, which will raise their tax rate to 55% and drive the rich to take their investment balls and Go Galt. Won't the liberals be sorry then! And the program is old anyway. How could work today when it was implemented in 1935? Not only is it old, it's going into deficit. McArdle mentioned the steps taken to compensate and said that the problems with Social Security are too large to correct.
Eliminate the ceiling on payroll taxes. Someone I was talking to recently informed me that this was "all we have to do". All? That's a 12.5% marginal tax increase on a whole lot of income. This is on top of the now-planned reversion to the Clinton tax rates of 39.5% for that income, and the various tax hikes on the rich that have been bandied about to pay for other things. Tack on state and local taxes in high-wage states, and you're looking at many people having marginal tax rates in the 60-65% range.
That's too high. To me, it's too high morally--no one should work more hours for the government than for themselves. It's also too high practically. I've long said that the Laffer Curve doesn't apply at US rates--but that's because we don't have people paying taxes at a greater than 60% rate. You'll get Laffer effects from people deciding to work less, but also because with a 65% tax rate, it really pays to shelter your income, transform it into capital gains, or move. You simply cannot hike tax rates by almost 20 percentage points in a few years with no war to stir the patriotic spirit, and expect it to go well.
McArdle does not mention that the tax rate was above 60% until Reagan took office. Ignoring contradictory evidence is one of her strongest persuasive techniques.
Oddly enough, McArdle also said that the funding problems aren't too bad, but it is politically impossible to overcome them.
I'll agree with the liberals on this: the numbers are large, but they are not, economically speaking, catastrophically large. It is theoretically possible to pay for the program.
But I'll disagree with them on this: Social Security is an immense problem. But the problem is not the cash outflow of benefits draining the economy; it is political risk, and structural inefficiency.
The political risk is that whatever the economic theory, we will not politically be able to continue benefits at planned levels. People who counted on those benefits will thereby be made much worse off, because they will have saved too little on the assumption that the benefits would be there.).
She did not explain why it would be politically impossible to pay lower benefits but it would be politically possible to eliminate all benefits.
Why does McArdle dislike Social Security so much? It steals from the young to give to the old.
Assuming, arguendo, that we believe in making social-justice-enhancing forced transfers, I'm not sure that this particular transfer meets the needs of social justice. One might argue that the transfer should flow to those whose need is greater, but as a class, the old and sick are wealthier than the young and healthy. They have more assets, many have a guaranteed income, and few have children to support. Moreover, a need-based transfer would argue for some sort of means-tested programme, not an indiscriminate giveaway to anyone who happens to be sick.
Moreover, as a class, the old and sick have some culpability in their ill health. They didn't eat right or excercise; they smoked; they didn't go to the doctor as often as they ought; they drank to much, or took drugs, or sped, or engaged in dangerous sports. Again, in individual cases this will not be true; but as a class, the old and sick bear some of the responsibility for their own ill health, while younger, healthier people have almost no causal role in the ill-health of others.
Perhaps they deserve it by virtue of suffering? But again, most of them are suffering because they have gotten old, often in high style. The young of today have two possible outcomes:
1) They will be old and sick too, in which case they are no less deserving of our concern than today's old and sick
2) They won't ever get to be old and sick, which is even worse than being old and sick.
As a class, the old and sick are already luckier than the young and healthy. Again, for individuals within that class--those with desperate congenital conditions, for example--this is not the case. But I'm not sure it's terribly compelling to argue that we should massively disadvantage a large group of people in order to massively advantage another, equally large group of people, all to help out the few who are needy, or deserving, or unlucky.
When McArdle was young she deeply resented being forced to spend her clothing and entertainment money on health care insurance.
As it happens, high deductible insurance is exactly what this consumer wants -- and what I am not allowed to get due to New York State's byzantine health insurance regulations. Instead, I must pay $350/month for a horrible HMO that I don't want and which will come nowhere near to paying for itself. While the New York Times no doubt politely applauds the state for protecting the sick, I have to live at home because half my take home must go to insurance and student loans -- insurance, by the way, that won't cover my pulmonologist or any of the services I actually want, like decent physical therapy.
So in her eagerness to trash Social Security, she made a foolish leap to criticize the CBPP report.
Similarly, while it is perhaps true that you could "pay for" the Social Security shortfall by rescinding the Bush tax cuts on the rich, that would leave a gaping budget deficit that would then have to be paid for in some other way. This is effectively exactly the same thing as, say, funding the Social Security shortfall with a massive new tax increase on someone else. In the face of the sizeable deficits we are projecting into the foreseeable future even after all the Bush tax cuts expire (not just the ones on the wealthy), the "point" made by this chart seems kind of actively misleading--especially for an organization that has spent the last decade criticizing Bush for the effect his tax cuts have had on the deficit. The CBPP is right to complain about Republicans arguing that extending the tax cuts is fiscally responsible; it isn't. But publishing a graph like this seems to simply urge the same fiscal irresponsibility, in the opposite direction: avoiding the unpleasant process of controlling our spending.
One of the authors of the report responded:
Despite what McArdle implies, the Center has not suggested that “you could ‘pay for’ the Social Security shortfall by rescinding the Bush tax cuts on the rich.” We have made quite clear that President Obama and Congress should let the upper-income tax cuts expire and devote the proceeds to deficit reduction. At the same time, as Kathy and I wrote, we have consistently argued that Congress should enact revenue and benefit changes that would place Social Security on a sound long-term financial footing.
In comparing the high-income tax cuts to the Social Security shortfall, we wanted to illustrate the hypocrisy of Members of Congress who argue that the tax cuts are affordable but Social Security is not, even though their cost is about the same.
McArdle responded by stating that the Center's mathematics is incorrect. We will not examine that argument because we are utterly confident that McArdle didn't understand the math. She also says:
The best you can say about presenting the numbers this way is that they represent an iffy sort of time arbitrage; the relative sums only match up because the coming tax increases generate relatively steady revenues, while the social security deficits don't start until 2017 and don't reach their full height until 2030. It is not true that at any given point in time, you can generate enough money with the one, to pay for the other--or rather, it is true for a time so brief as to be meaningless in the context of the 75-year forecast period that they chose.
The CBPP says it's not actually making that last claim--it's just trying to make a point about extending the tax cut versus "fixing" social security--about Republican hypocrisy. Well, I've already seen at least one blogger, and more commenters, take it to mean that the tax cuts could be used to pay for the shortfall. However they intended it, it's clearly misleading some people. Which is not surprising to me, given how its labeled. If you release a graph indicating that the social security shortfall is the same size as the Bush tax cuts, people are going to assume that we could therefore use the one to pay for the other.
Republicans are indeed being very silly and hypocritical about the tax cuts (just as many on the left are being very silly and hypocritical on the spending side. I believe I may have mentioned that almost nobody really cares about the deficit). But this graph does not seem like a good way to make that point.
McArdle used a similar method of obfuscation when assessing Elizabeth Warren's work. She iinsisted that Warren's report was misleading because it discussed the percentage of medical bankruptcies (which was rising) instead of the number of medical bankruptcies (which was falling). Since Warren discussed her point instead of McArdle's, that proved that Warren (and now the CBPP) are dishonest. The Center patiently responds again:
The Atlantic’s Megan McArdle has written another post about our comparison over the next 75 years of the Social Security shortfall and the cost of the Bush-era tax cuts for high-income taxpayers. The gist of Ms. McArdle’s argument seems to be that we’re not computing the present value of these two policies in the same way. That’s simply incorrect.
Our figure for the Social Security shortfall comes straight from the 2010 Social Security Trustees’ Report. The report estimates that the program’s shortfall over the long term (which the trustees define as the next 75 years) is equivalent to 1.92 percent of payroll subject to Social Security tax, or 0.7 percent of gross domestic product (GDP). (See Table IV.B5 on page 63 and Table VI.F4 on page 187.)
Note that the trustees don’t define the shortfall as simply the difference between the present value of the taxes Social Security will collect and the benefits it will pay out over the next 75 years. The trustees also take into account the current amount of the Social Security trust funds — something that Ms. McArdle has omitted.
We estimated the 75-year cost of the high-income tax cuts in a comparable manner. On Tuesday I listed the estimate’s three components, which total $837 billion (0.43 percent of GDP) over the 2011-2020 period and $120 billion (0.5 percent of GDP) in 2020 alone, according to the Treasury Department and Congress’s Joint Committee on Taxation.
We projected the cost of the tax cuts for another 65 years using their average rate of growth for 2017-2020, discounted the costs back to the present using a discount rate that averages about 5.25 percent, and expressed them as a percentage of GDP.
Ms. McArdle says that the tax law won’t stay the same for 75 years. That’s true, but Social Security law won’t stay the same for 75 years either. The whole point of projecting the long-term cost of policies is to help policymakers decide whether to continue or alter them. And our analysis showing that the Social Security shortfall is much smaller—and the cost of the high-income tax cuts is much larger—than they are often portrayed is designed to inform coming debates over the future of both policies.
Ms. McArdle also says that the Social Security shortfall eventually exceeds the cost of the high-income tax cuts. That’s true, too. But the cumulative amounts are about the same for the next 75 years, which is not “a time so brief as to be meaningless.”[quoting McArdle]
McArdle wisely did not try to correct their number again, handing over that task to the Committee for a Responsible Federal Budget. That Committee is funded by the Peter G. Peterson Foundation and Pew Charitable Trusts, among others. It is "housed" at the New American Foundation, which Peterson also funds, and which paid McArdle $25,000.00 for a fellowship and is fighting for debt reduction through eliminating Social Security. McArdle did not mention that both she and her source are being paid by Peterson organizations. No doubt she would say that there is no conflict of interest because everyone must be paid by someone.
Any attempt to make McArdle understand the point of the comparison of the Bush tax cuts and Social Security shortfalls were in vain. At this point McArdle was forced to walk back what she said about the dishonesty of the CBPP but once again insisted that the Center was attempting to encourage "more than one blogger to mistake the graph's message as "we could fix Social Security by repealing the Bush tax cuts on the wealthy".
And this simply isn't true. Imagine that we somehow magically made the whole rest of the budget balance, including the Bush tax cuts. Then imagine that we were simply deciding how to pay for our remaining Social Security deficit, and someone said, "Hey, I know! Let's repeal the Bush tax cuts on high earners, as outlined in this CBPP graph!" Would the budget balance?
Not even if the US government used every dollar from the tax increases to retire its debt; not as long as Treasuries yield less than 4% a year. Even in a best case scenario, our interest savings would be less than $30 billion a year, far less than the difference between the extra tax revenue in their scenario (1.1% of GDP) and the Social Security deficit (1.4% of GDP). And, of course if you use less optimistic forecasts of tax revenue, those numbers are even farther apart.
Given that fact, I don't see how it can be meaningful to call the two cash flows equivalent.
I don't mean to say that the CBPP was deliberately misleading. But I think it's clear that their graph did mislead some people, and also, that their result is heavily sensitive to their starting assumptions, the inclusion of the trust fund in a unified budget comparison, and their decision to compare present value rather than cash flows.
Now, this is where the fun started. Brad DeLong noticed what McArdle wrote:
Did this person really graduate from a business school?
Either she needs her tuition back because they did not teach her what present value is for, or the business school needs to revoke her degree to get its reputation back because its graduates do not know what present value is for, or both.
When you want to compare two streams of cash flows to see which is more valuable--to sum up how much you should be willing to pay for it in one number--you compute present values.
That is what they are there for.
That is what they do.
That is the only reason they were developed.
That is the only reason that they exist.
Why oh why can't we have a better press corps?
McArdle tried to paper over her errors in DeLong's comments with many, many arbitrary words that explained nothing but amused many. McArdle kinda-sorta replied to DeLong on her blog as well:
A last thought on my previous post: the CBPP could have made the case that the Bush tax cuts would be more expensive--if they'd limited the forecast period to ten years. Unfortunately, then the numbers wouldn't be the same size, because the cost of the tax cuts would be much, much bigger than this decade's relatively dainty Social Security deficits. I think our political discourse has an unhealthy fetish for comparing similarly-sized numbers, even when they have little to do with each other.
Meanwhile Paul Krugman did a little noticing as well.
Brad DeLong has some fun with Megan McArdle acting as if using present values to compare costs at different dates were some weird leftist idea. But it actually gets funnier: she asserts thatthe only reason the two numbers look even remotely similar is that they’re using a present value calculation and a very long time frame
which is right, but not in the way she thinks: if you use a shorter time frame, say 25 years, there isn’t any Social Security shortfall at all!
There’s also the bit about howthe government doesn’t really have any mechanism to save
except for, you know, running smaller deficits so that it doesn’t run up as much debt.
But there’s an issue here a lot broader than Ms. McArdle, involving time horizons and the convenient way they shift among those on the right.
The basic position here is that people on the right favor high-end tax cuts that will worsen the deficit, while at the same time demanding both immediate fiscal austerity and cuts to Social Security, in the name of deficit reduction.
They justify their tax cuts/austerity position by arguing that what’s important is holding down current deficit numbers, never mind the 10-year outlook.
Meanwhile, they declare that it’s urgent that we act now to lock in cuts in Social Security benefits that won’t take place for decades.
Why, it’s almost as if they’re grabbing any argument at hand to justify spending cuts for the middle class and tax cuts for the rich, regardless of the inconsistency.
McArdle's response was to say that Krugman misunderstand her becasue he didn't read what she wrote. The commenters unsuccessfully attempted to correct McArdle, but we already know those attemps will be futile. She is being paid far too much money to be dishonest to change now. She will never be old and poor, and that is all that matters.