Tuesday, August 8, 2017

How Not to Save Social Security

We haven’t ranted about the problems in the Social Security system for a while, but an article struck our eye a couple of weeks ago.  As soon as we got back from the ophthalmologist, then, we decided to do a blog on the subject.  After all, none of us is getting any younger, and the government doesn’t have forever to fix the thing.

Feldstein: "Maybe I didn't think this thing through. . . ."
The article?  “How to Make the Tax System Fairer and Save Social Security” by Martin Feldstein.  Feldstein was Chairman of the Council of Economic Advisers under President Reagan, and is currently a Harvard Professor.  The article appeared in the July 20, 2017 issue of the Wall Street Journal.  Page A17 if you want to read it.  We don’t advise it.
Why not?  Because it’s the Same Old Thing.  In brief, the federal government has a budget deficit.  Add to that the fact that Social Security is in trouble.  How does Feldstein say to fix it?
Tax healthcare benefits.  That will add an extra $135 billion to tax collections, while fiddling with the age to start receiving full benefits will add more.
We hate to do this to a Harvard professor and an adviser to President Reagan, but —
Blah, blah, blah.
"Marty, I listened to you, but you should have listened to me!"
There are so many things wrong with Feldstein’s solution that it’s difficult to know where to begin.  That being the case, we’ll just jump right in and hit some of the high points.
Tax healthcare benefits, and what happens?  Unions start demanding more pay to make up the difference.  One of the reasons employers have been willing to assume the cost of health benefits is that the employee gets a full dollar of benefit for every dollar paid.  If benefits were taxed, employees in, say, a 33% tax bracket, would receive only 67¢ of benefit for every dollar paid.
Raise labor costs and there are fewer jobs.
And where is the employee going to get the cash to pay the tax on the non-cash healthcare benefits?  From the employer, of course.  For the employee in a 33% tax bracket to receive $1 of benefits, the employer will have to pay the employee $1.50.  Labor costs just went up by half.  Start looking into automation or cheaper labor elsewhere.
Oh, but Feldstein says that this will be included in the payroll tax.  The employer picks up half of that . . . which means the employer pays one half of the tax directly, and the other half indirectly.  The cost of labor has still increased, albeit less than the regular rate, but still giving employers an incentive to get rid of workers.
Now, about those increased taxes deposited in the Social Security Trust Fund. . . .
We’ve mentioned this before, but it bears repeating: There is nothing in the Social Security trust fund.
Read that again:
Do you know what that nothing is in the Social Security trust fund?  By “nothing,” of course, we mean $00.00, not “nothing” as in “non-existence.”  We’re not going to violate the first principle of reason on this blog if we can help it.
Government debt.  Lots and lots of government debt.
And who runs the trust fund?
The government.
And what does that mean, exactly?
"Don't tell anyone. I'm just borrowing it."
It means that the government borrows every cent that comes in to the trust fund, and replaces it with an IOU.  In other words, the government borrows money from itself and spends it.
When it comes time to pay a dollar out of the trust fund, then, the government has to go find another dollar to redeem one of its IOUs.  Every dollar put into the trust fund is not a tax savings, but a future tax liability.  Thus, for every single dollar paid out of the Social Security trust fund, the government had to collect more than $2.00 in taxes.
More than $2.00 for every $1.00?  Are we sure about that?
Absolutely.  The Social Security system is not cost-free.  It has to pay people, and come up with the cash for operating expenses.  It costs money to collect money and pay it out.  How much, we don’t know, but we do know that it’s going to be more than what is collected, borrowed, and repaid — remember, this is the government lending to itself out of money that doesn’t belong to the government in the first place, being allocated to pay Social Security benefits, not make up for shortfalls in other revenues.
The weird part is that the money doesn’t belong to the people who paid it in, either.  There was a Supreme Court case about that back in 1960, Flemming v. Nestor.
Who does it belong to?  The only answer to that question is another question: Who does what belong to?  There’s nothing in the trust fund to belong to anybody!  That’s what happens when somebody borrows money from himself and spends it.
At least Feldstein agrees there is a problem with Social Security.  Unfortunately, his solution for fixing the tax system and saving Social Security only perpetuates a very bad system, and — worse — gives the illusion that something is being done.
Is there anything that can be done?  Tune in tomorrow.


Steve Whelan said...

Well, there are a few generalizations and misrepresentations.
I suggest a deeper dive on SSA operations. I won't address the critique of the 'tax healthcare' proposal since I haven't viewed the projections. Just focusing on the claim of an empty trust fund that has been raided.


Michael D. Greaney said...

As per SSA regulations, the alleged assets in the trust fund consist exclusively of government debt. Period. The cash paid in was immediately replaced with an IOU that is backed with the government's promise to redeem with other cash, i.e., another IOU, backed either by future tax collections — which do not yet exist — or additional IOUs. Thus, what is in the trust fund is what used to be called "fictitious bills" as they do not represent real assets as "real bills" do.