Social security - Samuelson

Lots of Gain And No Pain

By Robert J. Samuelson

Wednesday, February 16, 2005; Page A19

You've probably never heard of Flemming v. Nestor, but it's a 1960 Supreme Court decision that demolishes the Bush administration's case for borrowing vast amounts to pay for its proposed "personal" Social Security accounts. The White House has crafted a clever bit of intellectual camouflage to do what's politically convenient: create a new government benefit at no obvious cost. True, borrowing is a cost, but it's largely hidden from the public. It's not as conspicuous as a tax. What we have here is an exercise in mass deception that, in a weird way, is encouraged by a public that prefers to be deceived rather than face the difficult choices posed by Social Security or the government's budget.

If personal accounts are worth having (they're not), then they're worth paying for through taxes or cuts in other government spending. Perish the thought. The administration created a massive Medicare drug benefit (estimated 2006-15 cost by the Congressional Budget Office: $795 billion) without new taxes, and why shouldn't it do the same for personal accounts? The White House estimates the needed borrowing at $754 billion in the next decade. Democrats on the House budget committee put the first full decade of borrowing at $1.4 trillion. Regardless of amount, the administration's justification is the same: The borrowing simply replaces one debt (future Social Security payments) with another (borrowing now for personal accounts). As Joshua Bolten, head of the Office of Management and Budget, testified last week: "The transition financing [of personal accounts] does not represent new debt. These are obligations that the government already owes in the form of future [Social Security] benefits." Sounds reasonable. It isn't.

A bond is a legal debt; Social Security is not. When the government sells a bond -- that is, borrows -- it assumes a legal obligation to pay the lender interest and to repay the principal. If the government defaulted, creditors would go to court to demand repayment. Social Security does not involve this kind of debt; Congress can raise or lower benefits at any time. This is both common sense and the law -- Flemming v. Nestor.

Ephram Nestor came to the United States from Bulgaria in 1913. In 1956 he was deported because he'd been a Communist Party member for six years (1933-39) and was also stripped of his Social Security benefits -- both acts following congressional law passed in the prevailing anti-communist climate. Nestor had paid payroll taxes for 19 years; he sued to get his Social Security. The court rejected his claim. The court said that, generally, Congress could alter Social Security as it pleased. It needed to have "flexibility" to adjust Social Security to "ever-changing conditions."

It may shock most Americans to know that Congress could legally cut or eliminate their Social Security benefits tomorrow. But that's also the White House position. Dig deep into its budget documents, and here's what you find: "Future Social Security . . . benefits may be considered as promises or responsibilities of the Federal Government, but these benefits are not a liability [debt] in a legal or accounting sense. . . . There is no bright line dividing Social Security . . . from other programs that promise benefits to people." Well, this flatly contradicts the administration's logic that Social Security is a future debt that must be paid. If it can borrow tons of money for personal accounts, it can borrow tons for future food stamps or Medicaid.

In a sense, this has been happening, because the federal budget has run deficits in all but five years since 1960. The new Bush budget envisions deficits seemingly forever. Yet there is little public appetite for anything else. Bush's budget proposes cutting 150 programs with savings of $20 billion in 2006. The response: The sky is falling. "President Offers Budget Proposal With Broad Cuts," headlined the New York Times. Not really. The cuts amount to eight-tenths of 1 percent of proposed spending of $2.57 trillion. The media criticize deficits -- and also spending cuts that might trim deficits.

In an expanding economy, Bush should have proposed a balanced budget, and his projected deficits are understated because they exclude some Iraq war costs and borrowing for Social Security. Still, closing the unrealistic deficits would require unpopular measures. The projected deficit for 2009 is $233 billion. In that year a 10 percent income-tax surcharge, raising about $125 billion, and repeal of the Medicare drug benefit, saving $66 billion, would cover most of the deficit.

Americans dislike deficits but dislike them less than the alternatives -- higher taxes or lower spending. There's a quiet clamor for hypocrisy and deception, and pragmatic politicians respond with massive borrowing schemes that seem to promise something for nothing. Please, spare us the truth.

It's More Than Social Security

By Robert J. Samuelson

Friday, January 14, 2005; Page A19

"We have a problem, and the problem is America is getting older and that there are fewer people to pay into the system to support a baby boomer generation which is about to retire. Therefore, the question is, does this country have the will to address the problem?"

-- President Bush, Dec. 9, 2004

The answer seems to be "no," starting with the president. Language matters. How we discuss something -- the words and phrases we select -- determines whether what we say makes sense. The fact that both Bush and his opponents have chosen to debate only Social Security, highlighted by the president's "personal accounts" proposal, betrays a lack of seriousness that promises failure. The nation's problem is not Social Security. It is all federal programs for retirees, of which Social Security is a shrinking part. Admit that and the debate becomes harder, but it also becomes more honest and meaningful.

Our national government is increasingly a transfer mechanism from younger workers (i.e. taxpayers) to older retirees. In fiscal 2004 Social Security ($488 billion), Medicare ($300 billion) and Medicaid ($176 billion) represented 42 percent of federal outlays. Excluding spending that doesn't go to the elderly, the Congressional Budget Office crudely estimates that these programs pay an average of almost $17,800 to each American 65 and over. By 2030 the number of elderly is projected to double; the costs will skyrocket.

It makes no sense to separate Social Security from Medicare. Most Social Security retirees receive Medicare. Similarly, it is the total cost of these programs that matters for the budget, taxpayers and the economy. By itself, Social Security is almost irrelevant. Indeed, the big increases in future spending occur in health care. The actuaries of Social Security and Medicare project that Medicare's costs will exceed Social Security's in 2024 -- and then the gap only widens. (The projections don't include Medicaid, which pays for some nursing home care. Including Medicaid would widen the gap further.)

Look at the numbers. From 2004 to 2030, the combined spending on Social Security and Medicare is expected to rise from 7 percent of national income (gross domestic product) to 13 percent. Two-thirds of the increase occurs in Medicare. To add perspective: The increases in Social Security and Medicare represent almost a third of today's budget, which is 20 percent of GDP. Covering promised benefits would ultimately require a tax increase of about 30 percent; that assumes today's budget is balanced (dispensing with the issue of Bush's tax cuts). In current dollars, the needed tax increase would be about $700 billion annually.

The central budget issue of our time is how much younger taxpayers should be forced to support older retirees -- and both political parties and the public refuse to face it. What's fair to workers and retirees? How much of a tax increase (never mind budget deficits) could the economy stand before growth suffered badly? How much do today's programs provide a safety net for the dependent elderly, and how much do they subsidize the leisure of the fit or well-to-do? (About 15 percent of elderly households have incomes exceeding $75,000.) How long should people work?

We need a new generational compact to reflect new realities. In 1935, when Congress passed Social Security, life expectancy at birth was 62; now it's 77. In 1965, when Congress passed Medicare, the 65-and-over population was 9 percent of the total; by 2030, it's expected to be 20 percent. The generational compact includes Social Security, Medicare and Medicaid. If this year's debate focuses only on Social Security, it will be an exercise in deception. Unfortunately, both the White House and congressional Democrats have a stake in that deception.

Democrats argue that "the Social Security problem" can be fixed with tolerable tax increases and benefit cuts, imposed mostly on the upper middle class and the rich. True. The long-term gap between promised benefits and present taxes equals 1 to 2 percent of GDP. Though large, the needed changes in taxes and benefits probably wouldn't be crippling. There's no "crisis," say Democrats and supporting pundits. What they omit is Medicare. Adding that, tax increases would be huge -- and hard to limit to the wealthy.

The focus on Social Security also suits the White House. For starters, it avoids the reality that until now many Bush policies have favored the old over the young. In 2030 the new drug benefit raises Medicare spending by an estimated 36 percent. The tax cut on dividends and capital gains (to 15 percent) benefits the old -- particularly the wealthy elderly -- because they own a disproportionate share of stocks. Elderly households with incomes exceeding $100,000 will receive 27 percent of the benefits of these cuts (worth about $6 billion) in 2005, estimates the Tax Policy Center. As for personal accounts, they would involve immense practical problems. Why run the risks if, because Medicare has been ignored, the real problem of federal retirement spending remains largely unaddressed? Good question. The White House isn't asking.

What's discouraging is that, along with most Republicans and Democrats, many "experts" and pundits also evade the hard questions. Their purpose is mainly to condemn or cheer George Bush. The debate we need involves generational responsibility and obligation. Anyone who examines the outlook must conclude that, even allowing for uncertainties, both Social Security and Medicare benefits will have to be cut. We can either make future cuts now, with warnings to beneficiaries, or we can wait for budgetary pressures to force abrupt cuts later, with little warning. That's the problem, and to answer Bush, no one wants to address it.

 The Bigger Problem

    THE PROGRAM NOW consumes one-eighth of the federal budget; in 10 

years that share is expected to grow to one-fifth. It will consume more 

money this year than enters the Treasury through payroll taxes. By 2019, if current spending patterns hold, the trust fund that finances the biggest part of the program will be out of cash. 

 The program is not Social Security but Medicare. Those frightening 

figures emerged during what might be called the Medicare Moment of 

President Bush's economic summit -- an official pause to recognize the problem and then crisply move on. "My role is to say: 'Remember health care, remember Medicare,' " said Dr. William Roper, dean of the University of North Carolina School of Medicine. Indeed, the figures tell the story. Medicare is a bigger problem than Social Security: its hospital care trust fund is on track to go bust two or even three decades before the Social Security surplus runs out; its unfunded liabilities dwarf those of Social Security -- $27.7 trillion over the next 75 years, compared with $3.7 trillion liability for Social Security. 

 So why is the administration devoting its attention to Social Security 

rather than grappling with the bigger problem? One answer may be that, 

as ambitious as the administration's plans for private accounts may be, 

"fixing" Social Security is by far the easier task. Medicare faces the 

same relentless demographic pressures as Social Security -- plus the 

burden of rapidly rising health care costs. Another may be that grappling with Medicare will require thinking about the nation's irrational health care system as a whole, a task for which the administration and Congress appear to have little stomach.

 Indeed, the gaping Medicare hole was dug even deeper last year with 

the adoption of a new prescription drug plan for seniors. The 

administration initially sought to link moves to constrain Medicare costs with the  prescription drug benefit, but the legislation ended up with a supersized new benefit and slimmed-down cost-containment measures that mostly take effect -- if they work -- years down the road. The Government Accountability Office estimated earlier this month that the drug benefit will cost $8.1 trillion over the next 75 years -- and that's if politicians resist the temptation to fill in the "doughnut hole" gap in coverage. 

Comptroller General David M. Walker called the drug plan "one of the 

largest unfunded liabilities ever undertaken by the U.S. government." 

  You wouldn't know it from Mr. Bush, though, and that's the truly 

scary part as he presses for Social Security reform. "We did take on 

Medicare, and it was the Medicare reform bill that really began to change 

Medicare as we knew it," he said at his news conference Dec. 20. "It 

introduced market forces for the first time, provided a prescription drug 

coverage for our seniors, which I believe will be cost-effective. I 

recognize some of the actuaries haven't come to that conclusion yet, but the 

logic is irrefutable." 

 Actually, none of the actuaries have come to that conclusion; their 

only disagreement is about how mammoth the cost will be. And while the 

president is right that in some cases paying for prescription medication 

saves money down the road, we disagree in suggesting that the drug 

benefit will even come close to paying for itself overall. Mr. Bush's rosy 

scenario notwithstanding, Dr. Roper's admonition -- "remember Medicare" 

-- is precisely on point.