State of the debate over Social Security

2-16-09
The Guardian
Saving social security--Here's a cheap and effective form of economic stimulus – tell America's baby boomers that their welfare benefits are safe...Dean Baker
http://www.guardian.co.uk/commentisfree/cifamerica/2009/feb/16/obama-social-security-economy
The stimulus bill approved by Congress last week - and due to be signed into law by President Obama tomorrow - is a very good first step toward slowing the economy's decline, but it clearly is not large enough to accomplish the job. The US economy will be seeing a loss of close to $2.6 trillion in demand over this year and next due to the collapse of housing and commercial property bubbles.
To counteract this collapse, Congress gave President Obama just over $700bn in real stimulus. President Obama will have to make further requests from Congress to close the gap between what the economy needs and the stimulus package approved last week.
However, there is one step that President Obama can take to boost the economy without going through Congress: he can reaffirm his support for social security, and assure the baby boomers nearing retirement that he will not allow their benefits to be cut. If this huge cohort - now in their late 40s, 50s and early 60s - know that they can count on getting their promised benefits, they will feel more comfortable spending and supporting the economy at a time when it badly needs a boost.
The impact of social security on boosting consumption has long been touted by economists, most importantly Harvard economics professor Martin Feldstein, who had been Ronald Reagan's chief economist and is now an advisor to President Obama. (We will ignore the fact that his early results on this topic were driven by a programming error and that his later results disappeared with government data revisions.)
Feldstein claimed that workers spent more money during their working years than they would have otherwise because they expected to receive social security benefits when they retired. Therefore they had less need to save for retirement.
However, many workers may not be expecting to receive their social security benefits because there has been a concerted effort over the last quarter of a century to undermine confidence in the programme and to cut the level of benefits. If workers question whether they will get the social security benefits they have paid for, they will feel more need to save rather than spend.
Workers are likely to be especially fearful about the prospects of getting their social security benefits now due to an all out assault on the program financed by billionaire banker Peter Peterson. Peterson has spent much of the last two decades trying to cut social security, Medicare and other benefits for the elderly. He recently contributed a billion dollars to a foundation bearing his name that is primarily committed to this goal.
Peterson's investment has paid off both in exposure from the media and more importantly attention from many members of Congress and their staffers. There are now dozens of senators, congress people and their staff running around Capitol Hill crafting creative new ways to cut social security. Baby boomers are right to fear that Peterson and his crew will take away their benefits.
While the idea of taking away benefits for which workers had already paid was always outrageous, it especially outrageous at a time when these workers have just seen much of the wealth in their homes and their retirement savings disappear in the housing crash and the collapse of the stock market. Making matters even worse is that fact that Peterson's friends in the financial industry, along with many of the economists who would like to cut Social Security, were the primary culprits in this disaster story.
But, President Obama can quickly get us beyond this attempted heist to the benefit of both older workers and the economy. He can simply assure the baby boomers that he will not allow the Peter Petersons of the world attack their benefits.
In fact, he should assure the baby boom cohorts that their social security benefits are safer than having money in the banks (even the government insured ones) and that they can plan accordingly. This may not lead to a huge burst of new spending, but baby boomers will spend more confidently through time knowing that they can count on getting the benefits they have earned.
President Obama will clearly have to take other steps to get the economy fully back on its feet, but a simple speech assuring baby boomers that social security is safe will be an important step in the right direction. This speech also has the additional advantage that, unlike other forms of stimulus, it doesn't cost anything. As we all know, talk is cheap.
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2-11-09
The Nation
Looting Social Security...William Greider
http://www.thenation.com/doc/20090302/greider
Governing elites in Washington and Wall Street have devised a fiendishly clever "grand bargain" they want President Obama to embrace in the name of "fiscal responsibility." The government, they argue, having spent billions on bailing out the banks, can recover its costs by looting the Social Security system. They are also targeting Medicare and Medicaid. The pitch sounds preposterous to millions of ordinary working people anxious about their economic security and worried about their retirement years. But an impressive armada is lined up to push the idea--Washington's leading think tanks, the prestige media, tax-exempt foundations, skillful propagandists posing as economic experts and a self-righteous billionaire spending his fortune to save the nation from the elderly.

These players are promoting a tricky way to whack Social Security benefits, but to do it behind closed doors so the public cannot see what's happening or figure out which politicians to blame. The essential transaction would amount to misappropriating the trillions in Social Security taxes that workers have paid to finance their retirement benefits. This swindle is portrayed as "fiscal reform." In fact, it's the political equivalent of bait-and-switch fraud.
Defending Social Security sounds like yesterday's issue--the fight people won when they defeated George W. Bush's attempt to privatize the system in 2005. But the financial establishment has pushed it back on the table, claiming that the current crisis requires "responsible" leaders to take action. Will Obama take the bait? Surely not. The new president has been clear and consistent about Social Security, as a candidate and since his election. The program's financing is basically sound, he has explained, and can be assured far into the future by making only modest adjustments.
But Obama is also playing footsie with the conservative advocates of "entitlement reform" (their euphemism for cutting benefits). The president wants the corporate establishment's support on many other important matters, and he recently promised to hold a "fiscal responsibility summit" to examine the long-term costs of entitlements. That forum could set the trap for a "bipartisan compromise" that may become difficult for Obama to resist, given the burgeoning deficit. If he resists, he will be denounced as an old-fashioned free-spending liberal. The advocates are urging both parties to hold hands and take the leap together, authorizing big benefits cuts in a circuitous way that allows them to dodge the public's blame. In my new book, Come Home, America, I make the point: "When official America talks of 'bipartisan compromise,' it usually means the people are about to get screwed."
The Social Security fight could become a defining test for "new politics" in the Obama era. Will Americans at large step up and make themselves heard, not to attack Obama but to protect his presidency from the political forces aligned with Wall Street interests? This fight can be won if people everywhere raise a mighty din--hands off our Social Security money!--and do it now, before the deal gains momentum. Popular outrage can overwhelm the insiders and put members of Congress on notice: a vote to gut Social Security will kill your career. By organizing and agitating, people blocked Bush's attempt to privatize Social Security. Imagine if he had succeeded--their retirement money would have disappeared in the collapsing stock market.
To understand the mechanics of this attempted swindle, you have to roll back twenty-five years, to the time the game of bait and switch began, under Ronald Reagan. The Gipper's great legislative victory in 1981--enacting massive tax cuts for corporations and upper-income ranks--launched the era of swollen federal budget deficits. But their economic impact was offset by the huge tax increase that Congress imposed on working people in 1983: the payroll tax rate supporting Social Security--the weekly FICA deduction--was raised substantially, supposedly to create a nest egg for when the baby boom generation reached retirement age. A blue-ribbon commission chaired by Alan Greenspan worked out the terms, then both parties signed on. Since there was no partisan fight, the press portrayed the massive tax increase as a noncontroversial "good government" reform.
Ever since, working Americans have paid higher taxes on their labor wages--12.4 percent, split between employees and employers. As a result, the Social Security system has accumulated a vast surplus--now around $2.5 trillion and growing. This is the money pot the establishment wants to grab, claiming the government can no longer afford to keep the promise it made to workers twenty-five years ago.
Actually, the government has already spent their money. Every year the Treasury has borrowed the surplus revenue collected by Social Security and spent the money on other purposes--whatever presidents and Congress decide, including more tax cuts for monied interests. The Social Security surplus thus makes the federal deficits seem smaller than they are--around $200 billion a year smaller. Each time the government dipped into the Social Security trust fund this way, it issued a legal obligation to pay back the money with interest whenever Social Security needed it to pay benefits.
That moment of reckoning is approaching. Uncle Sam owes these trillions to Social Security retirees and has to pay it back or look like just another deadbeat. That risk is the only "crisis" facing Social Security. It is the real reason powerful interests are so anxious to cut benefits. Social Security is not broke--not even close. It can sustain its obligations for roughly forty years, according to the Congressional Budget Office, even if nothing is changed. Even reports by the system's conservative trustees say it has no problem until 2041 (that report is signed by former Treasury Secretary Henry Paulson, the guy who bailed out the bankers). During the coming decade, however, the system will need to start drawing on its reserve surpluses to pay for benefits as boomers retire in greater numbers.
But if the government cuts the benefits first, it can push off repayment far into the future, and possibly forever. Otherwise, government has to borrow the money by selling government bonds or extend the Social Security tax to cover incomes above the current $107,000 ceiling. Obama endorses the latter option.
Follow the bouncing ball: Washington first cuts taxes on the well-to-do, then offsets the revenue loss by raising taxes on the working class and tells folks it is saving their money for future retirement. But Washington spends the money on other stuff, so when workers need it for their retirement, they are told, Sorry, we can't afford it.

Peter Peterson, a Republican financier who made a fortune doing corporate takeover deals at Wall Street's Blackstone Group, is the Daddy Warbucks of the "fiscal responsibility" crusade. He has campaigned for decades against the dangers that old folks pose to the Republic. Now 82 and retired, Peterson claims he will spend nearly one-third of his $2.8 billion in wealth--he ranks 147 on the Forbes 400 list of richest Americans--alerting the public to this threat (leave aside the fact that old people have already paid for their retirement or that Social Security's modest benefits are equivalent to minimum-wage income). The major media treat him adoringly. Most reporters are too lazy (or dim) to check out the facts for themselves, so they simply repeat what Peterson tells them about Social Security.
It is a frightful message. Peterson describes a "$53 trillion hole" in America's fiscal condition--but the claim assumes numerous artful fallacies. His most blatant distortion is lumping Social Security, which is self-funded and sound, with other entitlements like Medicare and Medicaid. Those programs do face financial crisis--not because the elderly and poor are greedily gaming the system but because the medical-industrial complex has the profit incentive to drive healthcare costs higher and higher. Healthcare reform can solve the financing problem only if it imposes cost controls on private players like the insurance and pharmaceutical industries.
Peterson is financing a media blitz. His tendentious documentary--I.O.U.S.A.--opened in 400 theaters and was broadcast on CNN with appropriate solemnity. Last September Peterson bought two full pages in the New York Times to urge the next president to create a "bipartisan fiscal responsibility commission" once he was in office (Peterson was for John McCain). This group of so-called experts would be authorized to design the reforms for Congress to enact. But Peterson does not want Congress to have a full, freewheeling debate on the particulars. The reform package, he suggests, should be submitted to a single "up-or-down vote by Congress, as is done with military base closings." That's one of the gimmicks intended to give politicians cover and protect them from their constituents. It is profoundly antidemocratic. But that's the idea--save the government from the unruly passions of citizens. Peterson's proposal also resembles the notorious fast-track provision, which for years enabled presidents to steamroll Congress on trade agreements, no amendments allowed.
Peterson's proposal would essentially dismantle the Social Security entitlement enacted in the New Deal, much as Bill Clinton repealed the right to welfare. Peterson has assembled influential allies for this radical step. They include a coalition of six major think tanks and four tax-exempt foundations.
Their report--Taking Back Our Fiscal Future, issued jointly by the Brookings Institution and the Heritage Foundation--recommends that Congress put long-term budget caps on Social Security and other entitlement spending, which would automatically trigger benefits cuts if needed to stay within the prescribed limits. The same antidemocratic mechanisms--a commission of technocrats and limited Congressional discretion--would shield politicians from popular blowback.
The authors of this plan are sixteen economists from Brookings and Heritage, joined by the American Enterprise Institute, the Concord Coalition, the New America Foundation, the Progressive Policy Institute and the Urban Institute. "Our group covers the ideological spectrum," they claim. This too is a falsehood. All these organizations are corporate-friendly and dependent on big-money contributors. No liberal or labor thinkers need apply, though the group includes some formerly liberal economists like Robert Reischauer, Alice Rivlin and Isabel Sawhill.
The ugliest ploy in their campaign is the effort to provoke conflict between the generations. "The automatic funding of Social Security, Medicare and Medicaid impedes explicit consideration of competing priorities and threatens to squeeze out spending for young people," these economists declared. Children, it is suggested, are being shortchanged by their grandparents. This line of argument has attracted financial support from some leading foundations usually associated with liberal social concerns--Annie E. Casey, Charles Stewart Mott, William and Flora Hewlett. Peterson has teamed up with the Pew Trust and has also created front groups of "concerned youth."
Trouble is, most young people did not buy this pitch when George W. Bush used it to sell Social Security privatization. Most kids seem to think Grandma is entitled to a decent retirement. In fact, whacking Social Security benefits, not to mention Medicaid, directly harms poor children. More poor children live in families dependent on Social Security checks than on welfare, economist Dean Baker points out. If you cut Grandma's Social Security benefits, you are directly making life worse for the poor kids who live with her.
The assault sounds outrageous and bound to fail, but the conservative interests may have Obama in a neat trap. Their fog of scary propaganda makes it easier to distort the president's position and blame him for any fiscal disorders driven by the current financial collapse. He will be urged to "do the right thing" for the country and make the hard choices, regardless of petty political grievances (words and phrases he has used himself). Obama's fate may depend on informing the public--now, not later--so that people are inoculated against these artful lies.
The real crisis, in any case, is not Social Security but the colossal failure of the private pension system. Most people know this, either because their 401(k) account is pitifully inadequate, or their company dumped its pension plan, or the plummeting stock market devoured their savings. Obama can protect himself with the public by speaking candidly about this reality and proposing a forceful, long-term solution. He should expand the guarantees that ordinary people need to get their families through these adverse times. Instead of taking away old promises to people, the president should make some new ones. Healthcare reform is obviously an important imperative, but so is retirement security.
The solution to retirement insecurity is the creation of a national pension, alongside Social Security, that would be the bedrock social insurance. Improving Social Security benefits is one step, but it cannot possibly restore what so many middle-class families have lost. Tinkering with the 401(k) would be doomed, because it is basically a tax subsidy for the middle and upper classes, another way to avoid taxes that failed utterly to produce real savings [see Greider, "Riding Into the Sunset," June 27, 2005].
The new universal pension would be mainly self-financing--that is, funded by mandatory savings--but the system would operate as a government-supervised nonprofit, not manipulated by corporate executives or Wall Street firms. A national pension would combine the best qualities of defined-benefit plans and individual accounts. Each worker's pension would be individualized and portable, moving with job changes, but the savings would be pooled with others for diversified investment.
There is nothing radical about this approach. It follows the form of the government's thrift savings plan for civil servants and members of Congress, TIAA-CREF for college professors or other union pension plans jointly managed by labor and management trustees. The crucial difference is that since the new universal pension would be nonprofit, nobody would get to play self-interested games with the money that employees are storing in it for retirement. People could check their accumulated balance at any time.
Washington would set the performance standards and enforce proper behavior, but the operations of retirement programs could be widely decentralized among many private organizations or sector by sector. Other nations, like Australia, have proved this can be both democratic and reliable. Economist Teresa Ghilarducci of the New School has designed a promising and plausible plan (available at the Economic Policy Institute's website, epi.org, or in her book When I'm Sixty-Four: The Plot Against Pensions and the Plan to Save Them). With payroll savings of 5 percent and government-guaranteed returns on investment, average workers could count on pensions that would replace 70 percent of pre-retirement earnings when combined with Social Security. Low-wage earners could be subsidized by government to make up for inadequate pay. Private retirement plans that collect a higher percentage of pay and provide higher benefits could continue, so long as they exceed the federal standard. One great virtue of this approach is that nobody gets left behind, dependent on charity, the predatory instincts of the financial system or the magic of the marketplace.
Another great virtue is that a national pension would confront the country's glaring economic weakness--the collapse of national savings. As the economy digs out of its hole, restoring household savings will be crucial for ultimate recovery and for reduction of our dangerous dependence on foreign capital. Obviously, any system that adds a new payroll tax cannot be introduced at the depth of a recession, but the work of constructing it can begin right now, with the new system phased in gradually, as economic conditions permit. Instead of second-guessing the past and destroying its accomplishments, this reform would look forward and create conditions for a more promising future. Nobody gets a free lunch, and everybody has to take personal responsibility. But unlike what the governing elites are attempting, nobody gets thrown over the side.
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The Peterson Foundation Responds
February 13, 2009
http://www.thenation.com/doc/20090302/peterson
William Greider's essay, "Looting Social Security" (March 2 issue), grossly misrepresents Pete Peterson and the Peter G. Peterson Foundation's views on Social Security reform and overlooks some large and inescapable truths.
Both Republicans and Democrats in Washington have charged everything to the nation's credit card, including tax cuts and spending increases, without paying for them. Washington's imprudent, unethical and even immoral behavior is facilitated by a lack of transparency and accountability. As of September 30, 2008, the federal government was in a $56 trillion-plus fiscal hole based on the official financial consolidated statements of the US government. This amount is equal to $483,000 per household and $184,000 per American. Left unchecked, this burden rises every year by $6,600 to $9,900 per person, even with a balanced federal budget.
The nation's bedrock social safety programs, Medicare and Social Security, are not in danger of being looted--they already have been looted. The federal government already has spent any related surplus and replaced it with non-marketable IOUs that aren't even considered liabilities by the federal government. In addition, Medicare is already drawing down on these IOUs and Social Security will start doing so within ten years.
Mr. Greider is correct in saying that the government will have to repay what it borrows from Social Security--but how will it do so, and what level of tax burdens will be required to meet our growing Social Security, Medicare and Medicaid obligations without fundamental reforms?
As a former Comptroller General of the United States from 1998 to 2008 and a former public trustee of Social Security and Medicare, I share Pete Peterson's deep commitment to preserving a strong, sustainable safety net for all Americans, including seniors. And contrary to the impression that one could draw from Mr. Greider's essay, Pete and I both support the concept of a sound, defined-benefit program for Social Security supplemented by additional automatic savings accounts for individuals.
At the same time, Pete and I also believe that the process one employs is critically important when transformational changes are needed. We have sadly concluded that the "regular order" in Congress is broken and that achieving progress on multiple fronts within a short timeframe is not possible on a piecemeal basis.
What does this mean? The president and the Congress need to work together to establish a "Fiscal Future Commission" (or task force) which, unlike most Washington commissions, would be designed to accelerate action and get the ball across the goal line rather than punt it down the field. Ideally, this bipartisan commission would be created by statute to ensure buy-in from both the Congress and the president. It should include selected and diverse members of Congress and of the administration as well as non-governmental officials. It should engage the public outside Washington's Beltway, including by leveraging digital technology and the web. Everything, including budget controls, entitlement reforms, spending constraints and tax increases, would be on the table. After engaging the public and key stakeholders, it would make a range of recommendations that would be subject to an up-or-down vote in Congress.
Mr. Greider is incorrect in claiming that such a commission would be a back-door attempt to cut benefits or "dismantle the Social Security entitlement." A commission, and ultimately the Congress and the president, would be required to look at many alternative solutions to these structural fiscal challenges and make recommendations designed to put us on a more prudent and sustainable path.
It is disappointing that Mr. Greider and The Nation in its misleading cover pictorial seem to have used hyperbole to falsely impress upon readers that Pete Peterson is trying to "loot Social Security," or that he is alone in trying to address Social Security's financial challenges. Indeed, a growing number of prominent individuals spanning the ideological spectrum support the need for dramatic and fundamental reforms of several of our nation's current programs and policies.
Why is a diverse coalition supporting this growing movement? Because there is a increasing consensus that our policy of ignoring our fiscal realities, by spending the Social Security surplus, ignoring out-of-control healthcare costs, running operating deficits and relying increasingly on foreign lenders, serve to threaten our collective future.
In my view, our country is deeply fortunate that Pete Peterson is willing to dedicate a significant portion of his net worth to help keep America strong and the American dream alive for future generations.
Sincerely,

David M. Walker
President and CEO
Peter G. Peterson Foundation
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William Greider Responds...William Greider
February 13, 2009
http://www.thenation.com/doc/20090302/greider_response
David Walker is offended but, if you read his letter closely, he more or less confirms what I wrote about the establishment's assault on Social Security and other entitlement programs.
I said they want to loot Social Security. He says it's already been looted. I said they are trying to evade the regular processes of representative democracy. He says Congress is "broken" and so cannot be trusted to make sound decisions in a timely manner.
Do they want to whack benefits for Social Security recipients, as I claimed, or don't they? Walker declines to answer the question. Readers may decide for themselves whom to believe.
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Peterson Institute for International Economics
http://www.petersoninstitute.org/institute/peterson-bio.cfm
Peter G. Peterson

Peter G. Peterson is senior chairman and co-founder of The Blackstone Group. He is founding chairman of the Institute for International Economics, chairman of the Council on Foreign Relations, and founding president of The Concord Coalition. Mr. Peterson was the co-chair of The Conference Board Commission on Public Trust and Private Enterprises (co-chaired by John Snow, former secretary of the treasury). He was also chairman of the Federal Reserve Bank of New York from (2000–04), chairman and CEO of Lehman Brothers (1973–77), later chairman and CEO of Lehman Brothers, Kuhn, Loeb Inc. (1977–84), and chairman and CEO of Bell and Howell Corporation (1963–71).
In 1971 President Richard Nixon named Mr. Peterson assistant to the president for international economic affairs. He was named secretary of commerce in 1972 and assumed the chairmanship of the National Commission on Productivity and was appointed US chairman of the US-Soviet Commercial Commission. Mr. Peterson was chairman of the US Council of the International Chamber of Commerce in 1978–79. President Ford appointed him chairman of the Quadrennial Commission on Executive, Legislative, and Judicial Salaries in 1976, and in 1994 President Clinton named him as a member of the Bipartisan Commission on Entitlement and Tax Reform.
Mr. Peterson is the author of several books, including Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It; Gray Dawn: How the Coming Age Wave Will Transform America—and the World; Will America Grow Up Before It Grows Old?; and Facing Up: How to Rescue the Economy from Crushing Debt and Restore the American Dream. His Atlantic Monthly cover article, “The Morning After,” received the National Magazine Award for Best Public Interest Article of the Year in 1987. He has been awarded honorary degrees by Colgate University, Georgetown University, George Washington University, Northwestern University, New School University, the University of Nebraska, the University of Rochester, and Southampton College of Long Island University. He is married to Joan Ganz Cooney, creator of Sesame Street.