The most interesting thing you don’t know about the deficit

Washington scaremongers talking about the deficit have put the fear of China into the American psyche, but does China really “own” the U.S. deficit?

In a revealing article, former Senator Don Riegle and Social Security expert Lori Hansen Riegle let us in on a secret — the largest debt owed by the federal government to any one entity is to Social Security.

We owe it to ourselves. Literally.

Here’s how that works: when the federal government needs to borrow money, it issues Treasury bonds — a special form of IOU. Treasury bonds are considered a very safe investment; many Americans hold them in their retirement accounts. As Riegle and Riegle show with numbers from the U.S. Treasury Department, the largest single holder of Treasury bonds is Social Security. And Social Security is earning interest on those bonds, just like any other investor would. That’s the Social Security “trust fund” you’ve heard so much about.

So, what’s with all the talk about the “bankrupt” trust fund? And what does Social Security have to do with the deficit?

Imagine if you suddenly didn’t have to pay your house mortgage anymore. Wow, that would erase a large chunk of debt from your personal finances. It’s a lovely dream, but that’s all it is — wishful thinking. The bank is relying on you to make good on your loan, and as the foreclosure debacle has shown, you’ll face dire consequences if you don’t.

I can only assume that there are some politicians who are engaging in wishful thinking about the Treasury bonds held by Social Security. Gee, wouldn’t it be great if we didn’t have to make good on those loans… After all, no one less than Timothy Geithner pointed out that “that’s where the money is.”

Well, yes, that’s where it is and a good thing, too. The American workers have been paying into Social Security, their money was invested in Treasury bonds, and when it comes time to retire and rely on their Social Security benefits, that money will be there.

And the interesting thing is, while Social Security doesn’t contribute to the deficit — by law it can’t pay out more money that it has — it holds a large chunk of the debt owed by the federal government.

So, perhaps the deficit hawks are confused. Or maybe they want us to be confused.

Here’s what Riegle and Riegle have to say:

Another argument made by Social Security opponents to raise fear about the national debt is how much our government has borrowed from China. They never mention how much our government has borrowed from Social Security. In fact, the government has borrowed more from the Social Security surplus than it has from any other source in the world, including China. As a result, Social Security now “owns” nearly 18 percent of the federal debt, making it the largest single holder of US debt. The government owes almost twice as much to Social Security as it does to China and Hong Kong.

Why aren’t the opponents worried about paying back Social Security — why aren’t they talking about repaying this debt to the American people?

According to the U.S. Treasury Department’s “Monthly Statement of the Public Debt of the United States” (9.30.10), the total debt was $13.562 trillion and was held as follows:

US Holders of Debt

42.1 % — US Individuals and Institutions

17.9 % — Social Security Trust Fund

6.0 % — US Civil Service Retirement Fund

2.1 % — US Military Retirement Fund

Foreign Holders of Debt

11.7 % — Oil Exporting Countries

9.5 % — China and Hong Kong

6.3 % — Japan

1.4 % — United Kingdom

1.3 % — Brazil

1.6 % — All other foreign countries

The deficit is a concern. All U.S. debt must be covered. There’s no question about that. But let’s be clear. We can’t make China the bogeyman here.  The federal government has overspent in the last decade, thanks to two wars, a huge tax cut for the wealthy, and an unregulated banking industry that led to a global recession. The deficit came about because of a schism between two views of what the government’s (i.e. the people’s) responsibility is. As President Obama said in his speech yesterday:

Part of this American belief that we are all connected also expresses itself in a conviction that each one of us deserves some basic measure of security. We recognize that no matter how responsibly we live our lives, hard times or bad luck, a crippling illness or a layoff, may strike any one of us. “There but for the grace of God go I,” we say to ourselves, and so we contribute to programs like Medicare and Social Security, which guarantee us health care and a measure of basic income after a lifetime of hard work; unemployment insurance, which protects us against unexpected job loss; and Medicaid, which provides care for millions of seniors in nursing homes, poor children, and those with disabilities. We are a better country because of these commitments. I’ll go further – we would not be a great country without those commitments.

Riegle and Riegle close their article with a view from the other side:

 House Republican Majority Leader Eric Cantor (R-VA) provided some insight to their Social Security views in a recent NPR interview when he was talking about Social Security and said, “We are going to have to come to grips with the fact that these programs cannot exist if we want America to be what we want it to be.”

Luckily, poll after poll shows that Americans of all political persuasions do not want Social Security to fail. Let’s be vigilant and make sure that tax investments that each and every one of us pays at work into the Social Security system are well managed and cashed in for full value as mature U.S. Treasury bonds.

Holding Social Security hostage

A report on Politico today tells of 22 GOP senators who have signed a letter to the president threatening to vote against raising the debt ceiling unless he “concedes to cuts in Social Security, Medicare and Medicaid in the current budget negotiations.”

Social Security has nothing to do with the current deficit. It is self-financing and currently has a more than $2.4 trillion surplus. It is true that this year, due to the financial hardships of workers and a resulting increase in beneficiaries who are forced to take early retirement, the program will pay out more than it takes in in payroll taxes. However, the surplus will more than cover the difference, and has been set up for just that purpose. Actuaries estimate that the program has total financial stability through 2037, after which, with no adjustments, it would be able to pay out at a rate of approximately 78 percent of promised benefits. Experts suggest that, with small, relatively painless modifications such as raising the salary cap to its original level (covering 90 percent of paid wages), the program could be extended far into the future.

Yet there continues to be this obsession with cutting benefits, fueled by misinformation coming from huge Wall Street interests (who just can’t bear to see all that money and those potential fees not flowing their way) and policy wonks who are simply opposed to the idea of social insurance and government programs. These well-financed Social Security foes speak with weighty pseudo-authority, claiming all the while that they are “saving” Social Security. (As if, in order to “save” it, they must eviscerate it.) Luckily, the vast majority of Americans know that Social Security works for them and for the country’s economy, as is shown in poll after poll.

The list of Republican senators signing this letter includes Dan Coates (Indiana), Lindsey Graham (S.C.), John Cornyn (Texas), John Ensign (Nev.), Jim Risch (Idaho), Mike Crapo (Idaho), Mike Lee (Utah), Lamar Alexander (Tenn.), Rand Paul (Ky.), Richard Burr (N.C.), Kelly Ayotte (N.H.), Ron Johnson (Wisc.), Tom Coburn (Okla.), Marco Rubio (Fla.), Kay Bailey Hutchison (Texas), Mike Enzi (Wyo.), Bob Corker (Tenn.), Richard Lugar (Ind.), Saxby Chambliss (Ga.), Pat Roberts (Kan.), Roger Wicker (Miss.) and Mike Johanns (Neb.).

Let’s hope they feel some electoral pain for their attack on this hugely successful government program.

Politicians 1 – Press 0

When it comes to Social Security and the deficit, you just can’t believe what you hear on the news. And sometimes you can believe what you hear from politicians.

Trudy Lieberman, in her piece, “The Budget Narrative: the press goes astray on Social Security” in the Columbia Journalism Review, spells out just how wrong some of our most respected news sources can be.

NPR:

On Marketplace, after commenting that the president’s 2,500 page budget explanation is “kind of a big yawn,” host Kai Ryssdal turned the program over to John Dimsdale, who noted that the budget freezes domestic spending for five years, cuts help for the poor to pay for heat, and raises interest on student loans. Then he lamented that “there’s no fix in this budget for the big deficit generators like Medicare, Social Security or tax loopholes.” At another spot in the segment, he said Obama’s budget director Jack Lew was asked “why the budget doesn’t reflect some of the dramatic entitlement and tax reforms recommended by the president’s deficit commission.”

And The New York Times:

The New York Times got into the swing of it, too, with a piece by Jackie Calmes. In the fourth graph of her story, she wrote: Neither party has put forward specific proposals to begin grappling with the most pressing long-term budget problem: the huge costs in Medicare, Medicaid and Social Security programs as the population ages and medical costs rise, a bill that could overwhelm the government and crimp the economy if not addressed.

But guess who got it right this week? The politicians–both right and left:

…at his [the president’s] budget press conference when Ben Feller of the AP asked: “Your plan does not address the long-term crushing costs of Social Security, Medicare, Medicaid—the real drivers of long-term debt. Can you explain that?” The president explained: “The truth is that Social Security is not the huge contributor to the debt that the other two entitlements are.” Then it was Wisconsin congressman Paul Ryan’s turn, and he said pretty much the same thing. Paul Ryan, the hawkish, influential chair of the House Budget Committee? In an interview with Politico, Ryan said, with a bit of garble: Social Security is a big part of the problem of future debt. Now as people know—now Social Security is not a contributor to our deficit of any material right now. Social Security is not a big driver of our debt problems. Medicare and Medicaid are the biggest drivers of our future debt problems. Maybe this is one time when the media should be taking their cues from the pols as they craft their stories.

Poll results are consistent: Don’t cut Social Security. Washington, are you listening?

The results of a new New York Times/CBS News poll mirror those found in other polls: Americans are concerned about the deficit but they do not want to cut Social Security. This is true for all respondents, whether they called themselves Democrats, Republicans, or Independents.

Here’s a snapshot of the crucial question:

Now, that should shock the “conventional wisdom” in Washington.

On another positive note, the pollsters found that “aid to the unemployed and poor” ranked just after education as the domestic program respondents were LEAST willing to cut.

Read all the results here: http://www.nytimes.com/2011/01/21/us/politics/21poll.html

Link to our statement on the Deficit Commission Report

FPC on DeficitCommissionReport

Unemployment extensions — no; tax cuts for the wealthy — yes?

Today Congress voted down an extension of unemployment benefits for the long-term unemployed. Since 1970, whenever the unemployment rate has exceeded 7.2 percent, the benefits have been extended. No more.

As the Center for American Progress’s Progress Report states in an excellent piece:

…the Republicans of the 111th Congress have waged a two-year, all-out war against extending benefits, regardless of who it may hurt. The GOP’s chief defense of its position is the $12.5 billion cost of a three-month extension, or $60 billion for a full year. Such feigned concern for the deficit is made all the more deceptive when considering the same Republicans are simultaneously demanding that Congress extend the Bush tax cuts for the wealthy. And, while these tax cuts for the rich provide very little economic stimulus, the unemployment benefits they obstruct have provided a vital economic boost to struggling families and businesses. By prioritizing the pocketbooks of the privileged over the needs of the American worker, Republicans are turning their back on their two alleged priorities: the American people and the economy.

It makes no sense.

Not when we’ve faced the worst economic downturn since the Great Depression.

Not when we’re still in a dire housing slump.

Especially not when the holiday season is upon us.

Even Scrooge would be appalled.

Graph shows proposals’ impact on Social Security benefits

From http://StrengthenSocialSecurity.org

The important thing to notice is that ALL options result in lowered payments — precisely at a time in our history when housing values have plummeted and employer-sponsored pensions have all but disappeared. The conversation should not be about how to cut Social Security; it should be about how to make Social Security more robust.

You can decrease the deficit without cutting Social Security

The New York Times’s David Leonhardt came out with an interactive online widget called Budget Puzzle: You Fix the Budget over the weekend. While it does show some bias — it’s not as progressive as many would like (see criticism below), it’s better than most similar interactive attempts. You get a list of possible changes–both spending cuts and tax increases–and can keep track of your total.

Felix Salmon’s critique of the device centers on the lack of choices. He concludes with:

In general, the NYT options on both the spending-cut and the tax-hike side tend to hit the poor and the middle classes more drastically than the rich; what’s missing here is the option to implement something much more progressive, in both senses of the word. It’s a missed opportunity, and a shame.

[And, in actuality, Social Security shouldn’t even be part of the puzzle, since it’s a separate program that is wholly funded through its own income stream that doesn’t impact the deficit.]

Even so, give the Budget Puzzle a try. You will quickly see that (1) if rational people like us ran the budget, getting our financial house in order would not be that difficult but (2) when one places the decisions we can make so cavalierly into a political context, it becomes much harder.

How the budget is constructed is a huge political issue; it’s naive to think otherwise.

That’s why it’s so important that all of us think about the choices and weigh in with our opinions. Otherwise, those who have something to gain from the system and the money to game the system (through lobbying and campaign contributions) will rule the day.

Two important documents released today

The co-chairs of the president’s deficit commission made a surprise announcement of a press conference today. During the press conference they released a preliminary report–the “Co-Chairs’ Proposal”–on the commission’s potential recommendations, which have not been endorsed by commission members (or the president). The report calls for changing the way Social Security benefits are indexed, tying them to inflation rather than wages. Since the tax is on wages, it seems logical to tie the benefits to wages. A change to inflation would create significant cuts in benefits, particularly as many seniors’ expenses result from items such as prescriptions, which increase in cost far faster than the general inflation rate.

The report was leaked to Bloomberg and as a result, Bloomberg reported:

* Nobody but Bowles and Simpson endorses this

* The plan “will propose cuts to Social Security and Medicare, as well as reductions in income tax rates in exchange for curbing tax breaks,” according to a GOP aide who attended the meeting.

* Jan Schakowsky says “this is not a package I could support.”

* Durbin says there is not going to be “an up or down vote” on this.

You can read the document here:
http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/CoChair_Draft.pdf.

It is odd that this press conference was held without prior notice and while the president is out of the country. Here’s the president’s press office response:

—————–

THE WHITE HOUSE
Office of the Press Secretary
___________________________________________________________
For Immediate Release                                           November 10, 2010

Statement on the Initial Bowles-Simpson Bipartisan Fiscal Commission Proposal

“The President will wait until the bipartisan fiscal commission finishes its work before commenting. He respects the challenging task that the Co-Chairs and the Commissioners are undertaking and wants to give them space to work on it. These ideas, however, are only a step in the process towards coming up with a set of recommendations and the President looks forward to reviewing their final product early next month,” said White House spokesperson, Bill Burton.

——————-

Note: This is certainly no endorsement of the proposal.

Exit polls from last Tuesday elections released today showed that the vast majority of voters do not want to cut Social Security benefits: http://tpmdc.talkingpointsmemo.com/2010/11/poll-voters-would-rather-tax-the-wealthy-than-cut-social-security.php

Finally, perhaps lost in the hullabaloo around the chairs’ draft report is this OTHER report, released today by the National Academy of Social Insurance (NASI), “Strengthening Social Security for the Long Run.” Janice Gregory, president of NASI, had an excellent OpEd in The Hill today, discussing some of the points of the report. Check out the report as well as a useful PowerPoint presentation from the NASI presentation this morning: https://www.nasi.org/events/126/event-presentations.

Sure seems as though it would be better to have the nonpartisan experts at NASI figuring out how to ensure Social Security’s longevity than the two chairs of the deficit commission, both of whom approached their work from a “we must cut Social Security” perspective.

Privatization — Been there, done that — in Chile

It’s no secret that Wall Street would like to get its hands on all the retirement funds that currently go to Social Security. After all, there is currently a $2.5 trillion surplus. Imagine what Goldman Sachs could do with that…

But what really happens when a social insurance system is privatized? Chile provides a great lesson, enumerated today by a blogger on DirigoBlue.com. Here are some points:

Because the service providers are competing for the business, administrative costs (read: advertising and sales commissions) have been far higher than in the US Social Security system, where administrative costs have been at .07% of distributions, or lower, since 1990. To put this another way, during the 1990s the US Social Security Administration was paying $18.70 per year to administer a claim; at the same time Chile’s various providers were paying an average of $89.10 to do the same thing.

Many Chileans, despite living in a system that has, for almost 30 years, required them to manage their own money, actually know very little about that money.

Less than half know that the contribution rate is 10%, only 1/3 know how much (within 20%) is in their accounts, and, according to work done at the University of Chile, “few” actually know what they pay in fees and commissions.

Those who end up in the welfare program are guaranteed 75% of the poverty level; that suggests that if you’re elderly and on welfare, you’re living in poverty. Because of limited funding, there are qualified elderly poor in Chile who do not receive any benefit.

Today, in the US, about 12% of the elderly live in poverty. Without the current Social Security system in place, it’s estimated that 49.9% of the elderly would have been living in poverty in 2002.

Doesn’t sound like a advertisement for changing our system, does it. And the kicker is that it costs real money to make the transition. In Chile, the transition costs have been 6.1% of GDP in the 1980s, 4.8% in the 1990s, and 4.3% until 2037. As the blogger explains:

If we were to duplicate the Chilean experience in the US economy, 6% of the 2008 GDP (about $15 trillion) means about $900 billion annually in transition costs for the first ten years, and something north of $600 billion annually for the last 37 years of the exercise.

Ok. Now, can anyone explain why people are talking about privatizing Social Security as a way of reducing the federal deficit???