Why Isn't this News?
John McCain:
"Americans have got to understand that we are paying present-day retirees with the taxes paid by young workers in America today. And that's a disgrace. It's an absolute disgrace, and it's got to be fixed." [Transcript available from Congressional Quarterly]
What I don't understand is why reporters don't ask: If Senator McCain doesn't want payroll taxes to fund Social Security (as has long been the case), then how does he propose to pay for it?
Some have argued that payroll taxes should be scuttled and retirement funded from a carbon tax. Other plans abound. But what is John McCain proposing?
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You and Todd are both right on this. It is yet another McCain statement that should be a major focus of scrutiny and news coverage.
If newspapers want to understand one reason why their circulation is declining precipitously they need to ask themselves why anyone actually looking for value would bother to read them when they give one of the major party presidential candidates, who has reversed himself on issue after issue after issue, a free pass. Maybe if they do their, pardon me, f'ing jobs more people with choices about what they read will choose them.
Can it be that McCain does not understand that payroll taxes finance the benefits? I hope Todd's generous assumption on that is right. I bet even Bush knows that. Even if he does, his statement demands scrutiny.
July 9, 2008 10:01 AM | Reply | Permalink
In 1962, when America was at the very height of post-war prosperity and egality, Gabriel Kolko wrote a book titled "Wealth and Power in America". If you haven't read it, you should, and if you have, re-read it.
July 9, 2008 10:04 AM | Reply | Permalink
I haven't looked into McCain's position but I would imagine that what he's talking about is unfunded benefit creep.
When Social Security was first passed - back in the '30s - each retiree's benefits were paid by something like 17 workers because only about 5% of workers lived long enough to collect...and they didn't collect for very long.
Now only 2 or 3 workers are responsible for each retiree's benefits because 50%(60%?) of workers live past retirement age and many live on for 20 years.
July 9, 2008 10:11 AM | Reply | Permalink
Oh vey. And yes it is mildly offensivetome.
The reason you had a high ratio of workers to beneficiaries prior to 1950 is that the majority of retirees were drawing benefits under General Fund funded Social Security Title 1 rather than from payroll tax funded Title 2. Social Security was designed to transition from what was a federal/state welfare plan (Title 1) to an insurance plan (Title 2). If you adjust for the shift from funding the program from income taxes to payroll taxes that whole shibboleth about 10 or 16 or 17 to one dissolves into mush.
Nor is it particularly true that the demographics changed so much over that period or that people rarely survived long after 65. That is to confuse live expectancy at birth with mortality rates at retirement. I know that is a common mistake but it needs to be slapped down with vigor. Those are both simply right wing myths designed to undercut Social Security. Which is not to condemn people who repeat them, myths have power for reason, but they still remain what they are.
http://www.ssa.gov/history/briefhistory3.html
July 10, 2008 12:58 PM | Reply | Permalink
@ BruceWebb
I don't mind seeing errors corrected but I don't think you're the one to do it.
I don't know how many workers lived to collect on their contributions and I don't believe anything you say (that doesn't mean the numbers I quoted are right either).
What's relevant is life-expectancy at commencement of work, around 18, (so as to eliminate childhood deaths which were considerably higher back then). I can tell you from personal experience that that number will NOT support your claim. Everyone, and I mean EVERYONE, smoked 2 or 3 packs a day unfiltered, alcoholism was very common, etc., etc.
July 10, 2008 11:24 PM | Reply | Permalink
@ Bruce Webb
In 1935 half the 18 year olds could expect to see 65 and half the 65 year olds could expect to see 75. Those are the basics. I'm not sure how you go from there to figuring out how many workers support each retiree.
July 11, 2008 12:05 AM | Reply | Permalink
The point that McCain (and, to be fair, a lot of other people) doesn't get is that ANY retirement system, public or private, HAS to be paid for out of the pockets of today's workers. There's no other way to do it. It's not like we can buy all the goods and services we'll need after we retire, and then stick them in a warehouse until we turn 65. So future taxpayers will have to fund future Social Security benefits, and future workers will have to produce the profits to fund future private pension payments.
The real question is whether we as a nation are saving and investing enough to give tomorrow's workers the tools they'll need to do the job, or borrowing and spending our way into future bankruptcy. The answer, of course, is the latter, and THAT'S the real disgrace.
July 9, 2008 10:47 AM | Reply | Permalink
Spending on retirement is part of that spending...as is spending on health care. These programs consume huge amounts of money. Like it or not we have other committments so caps have to be placed on both.
July 9, 2008 10:59 AM | Reply | Permalink
Perhaps McCain is pointing out that many folks believe that their own payroll taxes are going into an account to pay their own retirement benefits. The issue is not payroll taxes, but pay as you go with large parts of the payroll tax being diverted from SS to current non-SS spending.
July 9, 2008 11:57 AM | Reply | Permalink
Yes, but to what condition is McCain applying the pejorative "disgrace"? lack of knowledge? or design of program?
July 9, 2008 12:17 PM | Reply | Permalink
More myths.
If you or the Chinese Central bank goes to the Treasury and buys a bond at the auction you give them money and they spend it on whatever they like. In return you get a promise of repayment. That is what buying a bond is about.
The notion that the Social Security surpluses have been inappropriately diverted to other uses in the end is just a part of the 'phony IOU' narrative. If the Special Treasuries held in the Trust Fund are real obligations than every single dollar ever sent to Social Security is exactly where it is supposed to be and there was no 'raid' no 'theft' no 'diversion'. Only if you fall into the trap of thinking that those obligations are not in fact real do you begin to justify language like "payroll tax being diverted from SS to current non-SS spending." Nothing was diverted anywhere, excess Social Security tax was used to 'buy' bonds, whereupon the Federal Government proceeded to use those dollars to pay for other government obligations. Which is what they do when they sell anyone a bond. That is not a Ponzi scheme, that is what almost every investment boils down to: you give someone money, they make you a promise to at least try to pay it back with interest set at a rate that offsets risk.
You can if you like (because many do) argue that on some technical grounds those bonds are not in fact real obligations and that some future government will simply prove to be thieves and liars who don't fear retribution at the ballot box. Well let me hand you a tin foil hat. Otherwise that $2.2 trillion in Special Treasuries is just as real as the dollar bill in your pocket and for the same fundamental reason.
Its called Full Faith and Credit of the United States. People who tell you the money has been stolen or that the bonds are not real is either been duped or it actively duping.
July 10, 2008 1:13 PM | Reply | Permalink
As I understand it, Mccain wants to privatize SS meaning every worker would fund his own retirement by investing a portion of his earnings in some manner...bonds, stocks, real estate, and Picassos or Pollocks perhaps.
July 11, 2008 4:46 PM | Reply | Permalink
You see retirees should all marry into money, that way they don't need to worry about surviving their retired years. They could have six houses fly around on private jets.
Of course McCain said this in what looked like a predominantly under 30 crowd.
July 9, 2008 12:28 PM | Reply | Permalink
First, McCain wants all Americans to adopt his retirement plan -- dump your poor disabled spouse and marry a hot young multi-millionaire.
Second, he wants you to forget that he and Bush are squandering the Social Security payroll taxes being paid in today to finance tax cuts for the rich and endless war in Iraq.
Third, How would we have kept the old people from starving to death during the Great Depression if our plan was for them to just start their own individual retirement accounts?
Fourth, What are the Baby Boomers suppose to do after supporting the previous generations? Start over with their own accounts?
Fifth, why is this nut job with dangerous ideas about one of America's most important programs even running for president?
July 9, 2008 12:37 PM | Reply | Permalink
@ ericAZ, Jonze
If you can't blame the rich it isn't a problem. And if you can't solve the problem by taking their money then it isn't a solution.
Great analysis.
July 9, 2008 1:04 PM | Reply | Permalink
Fix? Fix? How's about this, John?
After we polish off them "Eye Rain Eons," let's send every American over 65 some smokes. That'll cut down on them long term benefits, pronto. And even the press can understand how that works so they might cover it.
July 9, 2008 1:01 PM | Reply | Permalink
I'm sorry. I just read the already submitted comments. Folks, get your wonky butts in gear and start sending pithy sarcastic comments to MSM comment threads. Don't debate what "he meant" to say here. You have no idea. Make fun of what he did say and the mistake it represents. Shame the press for not covering it on their sites.
CBS did a whole comparison yesterday on Social Security without mentioning this absolutely outrageous statement. Bark at 'em. I already did.
July 9, 2008 1:08 PM | Reply | Permalink
The Obama campaign has to hit this and hit this hard because the press isn't going to pick it up themselves. It's a big fat tee-ball just sitting there. "John McCain calls Social Security as we know it a 'disgrace.'"
Swing, damn it! Swing!!
July 9, 2008 1:12 PM | Reply | Permalink
Great minds -- Todd's and Reed's -- apparently, think alike. Both point to the media's failure to test the accuracy of McCain's claim that Social Security is financially unsound.
I have long assumed there was no significant problem -- that the special-issue Treasury bonds held by the Social Security Trustees would, when needed after 2022c., be turned back to the Treasury and redeemed for cash to pay then current benefits. The Treasury would get the money to redeem the special-issue bonds by selling a like amount of ordinary Treasury securities in the open market -- that is, there'd be a wash (no change in total government debt) and no need to increase taxes.
But recently, I've begun to question this assumption which is based upon the presumption that there will be a strong demand for United States Treasuries at the time the special-issue Treasuries must be redeemed.
Total government debt has been rising rapidly over the past decade and shows no sign of leveling off. It has been supported by our current account deficit -- foreign central banks, for their own reasons, have soaked up the dollars their economies have earned and have invested them in U.S. Treasuries. But eventually -- when these countries turn for growth to home grown demand rather than to exports -- this happy circumstance will end.
Who, then, are we going to sell these replacement treasuries to? At what cost? Is the Social Security Trust Fund, which we are counting on through 2042c. or thereabouts, as secure as it seems?
Inquiring minds want to know.
July 9, 2008 1:12 PM | Reply | Permalink
I'd like to hear, say, Dean Baker or Krugman respond to your inquiring question, Ellen.
Wrecking our economy to an extent that we eventually can't sell Treasury bonds at less than, oh, 25% interest rates--this could prove to be the most creative right-wing "destroy the village to save it" strategy yet for blowing up Social Security if the voters keep them in power. I half expect the Heritage Foundation to have a policy brief out proposing this, probably by the end of the day today.
July 9, 2008 2:11 PM | Reply | Permalink
Back of the envelope -- our standing as of Q1/2008:
USG debt = $9,461,058,000,000
Of that total 43.4% was held as non-marketable securities by the USG itself (SSTF, Medicare Fund, etc.) and an additional 6.2% by the Federal Reserve Banks. The balance -- $4,771,033,000,000 -- is held by "private investors."
The class "private investors" includes "foreign holders" -- $2.6 trillion -- which includes "foreign official" -- $1.7 trillion.
Thus, of the amount due to investors 54.5% is owed to foreigners and of that amount, two-thirds is owed to foreign central banks.
As an aside, Bush's years, 2001 - Q1/2008, have witnessed the increase of the national debt by about 65% and debt held by foreigners (all types) by about 118%.
July 10, 2008 2:06 AM | Reply | Permalink
Ellen you have fallen into a common mistake. The dollar amounts needed come 2017 to start paying actual cash interest (as opposed to simply crediting the Trust Fund with more Special Treasuries) and then in 2023 to start actually paying down some of the principal are not in fact big dollars in context, particularly when adjusted for inflation.
Table VI.F7.—Operations of the Combined OASI and DI Trust Funds, in Constant 2008 Dollars, Calendar Years 2008-85 [In billions] There is a relatively brief period from about 2035 to 2041 where borrowing needs begin to approximate the combination of the current stimulus package and Iraq war funding. But the notion that the world credit market will not allow us to raise the equivalent of $76 billion in 2025 or $132 billion in 2030 seems faintly ridiculous when we simply snapped our fingers to commit ourself to a $158 billion dollar stimulus package.
The key is to understand that the Trust Fund will never be called upon to pay more than 22% of benefits in any given year, and given reasonable growth probably much less than that. It is why privatizers rarely quantify anything except Infinite Future liabilities, if you break the numbers down by year there ends up being little to nothing to worry about.
July 10, 2008 1:25 PM | Reply | Permalink
Good point, but to complete your argument I do think you should account for the competing demands the general budget will place on the credit markets over that same time frame.
And too, I don't think you can assume the 2008 funding experience will be replayed ten or twenty years from now. What the "world credit market" will look like in 2025 or 2030 may not be an unknown unknown, but it's certainly an unknown.
July 10, 2008 2:56 PM | Reply | Permalink
This is, indeed, the standard issue / question of/about "crowding out".
July 11, 2008 12:46 PM | Reply | Permalink
McCain would like to pay for Social Security with our winnings from Iraq and Afghanistan.
July 9, 2008 2:08 PM | Reply | Permalink
ca-ching!
July 9, 2008 5:20 PM | Reply | Permalink
@ellen
That's a problem for everything, not just social security. If the government were to default on its obligations, especially on a huge program like SS, it would fall.
So it won't default. Hello inflation or - if necessary - hyperinflation.
July 9, 2008 2:11 PM | Reply | Permalink
An alternative to inflation I've heard suggested ---
Foreign central bank holders of USTs would trade these obligations for an equivalent face amount of obligations issued by the International Monetary Fund, which would assume the role of insuring/securing these foreign non-dollar currencies.
America gets rid of a substantial portion of its debt and a chance to start anew, and foreign central banks get the monetary security they are, ostensively (remember the Asian Flu of 1998), seeking.
July 9, 2008 2:28 PM | Reply | Permalink
@Ellen
It sounds like complete hocus-pocus. Someone - in this case the United States government - gets into deep trouble by assuming far too much debt, debt which it can't possibly redeem.
You're saying some one else is willing to assume that debt and honor the obligations? Why? How?
July 9, 2008 2:48 PM | Reply | Permalink
Think about it a minute.
Suppose you're China. Other than earning interest in depreciating dollars, do you really expect ever to be repaid your principal? If you're still export driven, then, of course not. You'd be damaging your market, the American consumer who'd be paying higher taxes instead of buying your exports. And even if you'd turned to your domestic market for growth, you still wouldn't expect the U.S. to put up with your dumping your USTs on the market and driving interest rates through the roof.
It's a better deal to have the IMF pay you the interest and guarantee your place in the global economic community. In fact, you as China get some leverage with IMF member EU you didn't have before.
It's a win-win -- for everyone except the workers.
July 9, 2008 3:50 PM | Reply | Permalink
@ Ellen
I still don't get it. Who pays the retirees, those who are on Social Security? If it's the U.S. government then what obligations has China purchased?
July 9, 2008 4:17 PM | Reply | Permalink
The obligations I'm referring to are those held by foreign central banks. Take a look at Setser's charts, here. Those reserves could easily hit $2 trillion within a few years -- 20% or better of total U.S. government debt.
If those obligations were transferred (permanently, but mums the word) to the IMF, then, these reserves wouldn't overhang the UST market (that is, private investors wouldn't be scared away by the threat of dumping by foreign central banks and interest rates wouldn't rise due to that risk) and the Treasury would be able to finance post-2022 Social Security by selling USTs in order to raise the cash necessary to redeem the special-issue bonds held by the Trust Fund.
July 9, 2008 5:02 PM | Reply | Permalink
@ Ellen
Or, putting it another way, the IMF is assuming worthless US Treasury obligations and pretending they are not worthless. The IMF gets the money to pay the interest from who? How?
July 9, 2008 5:00 PM | Reply | Permalink
From its members -- and yes, it's all a question of trust, the financial world's ability to believe in belief.
July 9, 2008 5:06 PM | Reply | Permalink
All forms of credit and money are a matter of trust (or lack thereof). Even the gold-as-money people have to admit that one must trust and/or verify that the gold really is gold. :-)
July 11, 2008 12:48 PM | Reply | Permalink
repuglitards think the social security system is a disgrace
and the repuglitards have no shame about Iraq
ever get the idea that morallity doesn't mean what the repuglitards think it means
July 9, 2008 4:28 PM | Reply | Permalink
Aren't societies judged by how they care for their poor, sick and old. By the time I hit 80; will it be customary for the old and infirm to go out and expose themselves to the winter to die because they can no longer hunt for the tribe?
Given how we obtained this land in the first place, that would be particularly ironic even though it is my generation that will be the ones faced with doing it.
July 9, 2008 5:24 PM | Reply | Permalink
Yes.
Shortly after life-savings has been devalued by inflation.
July 10, 2008 9:40 AM | Reply | Permalink
McCain may very well not know how SS works.
After all, remember how during the 2000 campaign he showed that he didn't know the difference between Medicare and Medicaid?
Either he's an ignoramus, or he wants to replace SS with a defined-contibution retirement plan, like a mandatory 401k. Or both.
July 9, 2008 9:45 PM | Reply | Permalink
This isn't news because a Republican said it, instead of a Democrat. Liberal media, indeed!
July 10, 2008 11:10 AM | Reply | Permalink
Yep. Just another comfortably deregulated industry doing what it must do in order to stay that way. No surprises.
July 10, 2008 4:18 PM | Reply | Permalink