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Fisking DeFazio (and Cuniff while I’m at it)

As the holder of an economics degree that WWB consulted for this by now blogosphere-famous post, I figured I ought to toss in my own two-cents. Unfortunately, Don Luskin already made all of the substantiative points I was going to make. The only thing I’d add is that it’s pitifully easy to beat the long-term bond rate. I can get a CD with a rate higher than three if I shop around a little. Further, bond interest rates are inversely proportionate to prices, which is something to keep in mind.

None of this matters, of course, to Peter DeFazio of the House (D-OR) and Meghann Cuniff of the ODE (PAPER-UO). DeFazio and Cuniff get so many things wrong it’s hard to know where to start. So I’ll start from the top of this lovely piece. ODE text in plain, my own in trixy italics.

President Bush’s plans for revamping the Social Security system, still being unleashed, have raised questions about the future of the system under the proposed changes and have sparked a flurry of debate across the country about the state of the current system.

Still being unleashed? Shouldn’t that be “unveiled” or “introduced” or any number of other less loaded verbs?

Bush touted his reform plan during his Feb. 2 State of the Union address, and this past weekend wrapped up a brief five-state tour dedicated to promoting the plan.

This paragraph is right.

Under Bush’s proposal, workers would have the option of diverting up to two-thirds of their payroll taxes into a private account that could be invested in stocks and real estate rather than contributing to the Social Security trust fund.

One, workers cannot divert up to two-thirds of the FICA to a private account. The FICA is 12.5%, half is paid by one’s employer. The proposal calls for up to four percentage points of the FICA into a personal account, which is about one third of 12.5%. It’s two thirds of one’s own contribution, true, but that’s not what the article says. I think we’ll cover the bit about the “trust fund” in a minute.

Created in 1935, the Social Security system was designed to provide an assured retirement fund to all workers. All employees and their employers in the United States pay a 6.2-percent tax that goes to the trust fund.

This entire sentence is factually false. First of all, as it was conceived by FDR in 1935, SSI wasn’t supposed to be a retirement benefit for all workers. It was originally designed as a Widows’ fund and for those of extremely long age. The life expectancy in 1935 was 64 years, benefits started at 65. The system never anticipated the growth of life expectancy, nor that the ratio of workers to retirees would fall so dramatically. Secondly, any surplus in the FICA is not “paid” into any trust fund. That money goes into the general fund and is used to prop up other spending. The “trust fund” is an accounting fiction, a tally of all the surplus money owed to Social Security by the rest of the federal budget. Plus a modest (3%) interest rate. The surpluses that Social Security has collected over the years are not anywhere, that money is long since spent.

The Congressional Budget Office predicts the trust fund will be depleted by 2018, leaving a pay-as-you-go system that, by 2052, will only have enough funds to provide about 73 percent of the promised benefits. The Social Security Board of Trustees predicts that will come in 2042.

Social Security is currently a pay-as-you-go system. Current workers pay for current retirees, the whole pay-as-you-go thing is why we’re having this big damn problem in the first place.

“With each passing year, fewer workers are paying ever-higher benefits to an ever-larger number of retirees,” Bush said in his Feb. 2 address. The administration claims the current system is in crisis, and the only way to salvage it is through reform.

Rep. Peter DeFazio, D-Ore., refuted this claim during a town hall meeting Saturday morning at the Eugene Water and Electric Board Training Center and Community Room, saying Bush’s proposal will do nothing to the Social Security system except “accelerate its depletion time.”

DeFazio held a series of town hall meetings Saturday and Sunday across Oregon to give citizens a chance to ask questions about Bush’s proposal and hear DeFazio’s own proposal for Social Security.

DeFazio’s plan for Social Security would lift the tax cap from $90,000 to $94,000, meaning anyone making less than $94,000 would have to pay Social Security taxes. The increase in taxes would be more than enough to cover the projected shortfall.

The main problem here is the last paragraph, the others are purely informational. Everyone, regardless of income, pays the FICA. The system is capped such that only the first $90,000 of income from anyone is subject to the tax. DeFazio’s proposal makes the first $94,000 subject to the FICA.

“The power elite does not like my idea,” DeFazio said in a phone interview.

More than 300 people attended the meeting and about 100 were turned away because the room was filled to capacity.

DeFazio fielded questions and urged attendees to write letters to the White House voicing opposition to Bush’s Social Security outlook, which he said is based on the most pessimistic of economic assumptions.

More like realistic assumptions that don’t rely on continued growth in immigration. Also, DeFazio doesn’t realize that the current promises are only going to get larger, in real terms, as SSI benefits are wage indexed.

DeFazio’s argument is that the Congressional Budget Office’s statistics do not signify a crisis, and the shortfall that has been projected to happen in about 40 years could easily be quelled with minor changes to the existing system.

DeFazio had various charts and a packet of handouts explaining his view on Bush’s Social Security proposal and detailing his own.

DeFazio said Social Security is a crucial program in the United States: “That’s why I want to, beyond a doubt, provide assurance that it will be there.”

Of course you do, gnome, but do you want to make Federal Employees subject to it? What’s that? No? Very interesting

Eugene resident Charles Fischer called a chart DeFazio used to explain the reduction in benefits that would occur under Bush’s plan misleading because it fails to take into account the amount of money that would be diverted to the proposed personal retirement accounts.

Fischer, an investment adviser with IMS Securities Inc. in Eugene, said in an interview that he feels both political parties have been misleading the public with distorted information about the Social Security system and the different reform proposals.

“We need to have a real honest debate and pull ideas from both parties,” Fischer said Monday.

Fischer said it is wrong to say the system is not in crisis when the trust fund will be depleted in less than 15 years. The assets needed once the trust fund is gone are not there, Fischer said — they only exist in the form of government “IOUs.”

“The federal government has taken all the money out and spent it,” Fischer said. “To claim that the money is there is wrong.”

DeFazio said the claim that the money is not there fails to consider the true meaning of a government bond.

Right, an investment professional misunderstand the nature of government debt…uhuh. Where is the goddamn money to pay back those bonds going to come from? A bond is an IOU, and if the government is going to have to start doing a major pay-down on bonds issued to SSI in order to keep the system afloat, the money is going to have go come from someplace. Eventually, that’ll be in the form of taxes, all sorts of taxes.

“If you believe the United States is still going to have a government, that the U.S. is still going to exist in the next 40 years, then there should be no doubt in your mind that Social Security will be there,” DeFazio said in a phone interview.

Actually, I have a lot of doubt that SS will be there by the time I retire, but I’m glad of that. Today’s young workers have virtually no expectations of the system, and those who will retire after 2052 are mostly children. Now is the time to reform while we can.

University political science professor Joel Bloom said the claim that a depleted trust fund will put the Social Security system into a crisis is an erroneous one that ignores reasonable thinking.

“If you can’t count on government bonds, then the entire national debt is worthless,” Bloom said.

In a way, that’s true, but it still ignores that the money to pay back the bonds has to come from somewhere. Read: general fund. Also, why in the hell is a poli-sci prof (an adjunct, at that) the one to be interviewed for this? Bloom does mostly public opinon and survey studies, and despite is work in that area I doubt he knows much about the sorts of projection models used by the CBO and SS Trustees. Why not somebody in Economics or Finance whose work is more related? Say, Mark Thoma about projections (easily the best econometrician at the UO, and that’s saying something because we’ve some good ones), maybe Chris Ellis or Peter Lambert about the public choice and taxation aspects? Why this guy?

DeFazio said the methods used by supporters of Bush’s proposal to explain the crisis the system will undergo are illogical and aimed at manufacturing a crisis when one does not exist.

Illogical? To use numbers and data? For shame!

Fischer said DeFazio’s plan to raise the tax cap is not an adequate way to tackle the problem and ignores the fact that if the economy does grow, wages will increase, which will subsequently increase Social Security benefits and accelerate the trust fund’s depletion rate.

That’s exactly right, with wage indexing real benefits grow over time. If the economy expands, so do SS benefits, which could make the system even more likely to become insolvent.

But opinions on the state of the system differ greatly, as some say that, with inflation rates and economic growth considered, the amount of benefits that will be available in the system will never fall below inadequate levels.

“Even without a trust fund in 2042, even with only getting 70-something percent of the promised benefits, you guys, your generation, is still going to get more money than your grandparents are getting right now, and that’s supposed to be a crisis,” Bloom said.

Oh, they quoted this guy because he’ll say the right thing. More money in what sense? Will 70% of promised benefits in the future be more or less than real benefits today? Well, that depends on a lot of factors, like the interaction of benefit growth and inflation. Will 70% of the future wage-indexed benefits be more than 100% of benefits today? I’ll tell you when I can borrow Prof. Bloom’s magical economic prediction ball. Furthermore, will the difference between what we pay in and 70% benefits in the future, in real terms, be more or less than the difference between our grandparents’ contribution and benefits in real terms? It’s goddamn impossible to tell. And people say Monetarism is “voodoo-economics”. Sheesh.

The President said last week his plan would not solve the Social Security system’s projected financial problems but added that doing nothing would do even more harm.

Fischer said many people have been disillusioned by the seemingly corporate control of the stock markets and are worried Bush’s plan for private, personal accounts would benefit investment advisers like himself. But Fischer said the accounts would be controlled by the government, leaving no room for investment advisers to benefit from them.

However, Bloom said the problem with investing money rather than contributing to the Social Security trust fund is that it will accelerate the fund’s rate of depletion and allow for risky investments that could jeopardize an individual’s retirement savings.

“It’s inherently more risky. Nobody knows what the stock market is going to do between now and four years from now,” Bloom said.

First of all, I trust a Certified Financial Planner a hell of a lot more than I trust some DC bureaucrat to run my retirement. I can meet, talk with, and explain my objectives to a Financial Planner. Can I call up the SS office in DC and talk to them about the P/E ratio of their funds? I thought not. That aside, so what if Financial Planners benefit from being able to help more people with their retirement? That’s a good thing, it both reduces the size of government and helps folks plan for the future. Furthermore, only a complete idiot will lose an entire portfolio barring fraud or complete meltdown of the financial system. Fraud from your Planner or Broker can be a problem, if you don’t use reputable servicers. Schwab, Fidelity, JP Morgan Chase, American Express, AIM, AIG, and a host of the other big names are about as likely to commit fraud as the Pope is to commit apostacy. Those institutions are highly regulated and watched by the most anal-retentive auditors ever to have sticks in their asses. Expecially after a bunch of foolish Enron employees invested their entire 401(k)s in Enron stock and lost their shirts. That’s a lesson, never put any of your own 401(k) contribution in own-company stock because the company match will be own-company anyway. So as long as you deal with reputable people and companies, barring complete economic collapse you’d have to be a moron to lose everything. Bloom is also only talking about stocks, there are other places to put money: Bonds (federal, state, municipal, corporate, international, etc), money market funds, CDs, mutual funds, futures, index funds, commodities…there are any number of investment options with varying levels of risk and reward. When you’re young, invest aggressively for growth; as you accumulate assets shift the approach to modest growth and asset maintenance; and when you retire concentrate on maintaining your assets exclusively.

The cost of setting up these private accounts is also up for debate. Critics have also questioned how private accounts will affect those dependent on Social Security for disability and survivor benefits. Bush has not said how diverting money from the fund will affect the amount of benefits available to those dependents, DeFazio said.

Private accounts will have beneficiaries like IRAs or 401(k)s do. If you die, your stated beneficiary will recieve the full benefit of your personal account in addition to the SS benefit that is still being paid by the government (You know, that 9.5 percentage points of the FICA everyone is forgetting to say is still going to go to traditional SS).

The debate over Social Security is expected to rage for many months as the President continues to unveil his plan. DeFazio vowed to hold more town hall meetings after Saturday’s meeting drew more attendees than any previous town hall meeting.

Fischer said he is hopeful both parties can forgo their political ideologies to examine the state of the system and form a game plan for the future.

“Instead of Bush out there supporting the PRAs at this point and DeFazio saying we don’t have a problem, we need to start from square one,” Fischer said.

Wow, the truest thing in the whole article comes at the very end, I am not surprised.

  1. lefty says:

    Okay, little m(mind? man? moron?). If you say so.

  2. Little M says:

    DeFazio is a crook, and has very little intelligence.

    I should know, I used to work for the guy.

  3. lefty says:

    DeFazio has more intelligence in his earlobe than the whole lot of you have collectively.

    But you keep tinkling on his ankle – you’re really doing a good job!

  4. Timbo says:

    My personal favorite option for paying back the bonds is to raise the FICA cap. And from what I’ve heard on the radio, 66% of polled Americans agree. But Bush has taken that option off the table under the umbrella ‘we will not raise payroll taxes in any way.’ Does anyone know why the administration refuses to consider this option? I’m giving the benefit of the doubt and looking for a _good_ reason — I really hope there’s more to it than that they’re shills for the wealthy.

  5. JS says:

    The “trust fund” that you hear so much blathering about really is just an accounting fiction.

    Kevin Drum says it better than I could:
    The trust fund consists of U.S. treasury bonds. These bonds have been purchased with excess payroll taxes collected since 1983.

    Fine. But what is a treasury bond? Easy: it’s a call on the future general fund revenue of the United States. People who buy bonds are receiving a promise that they will be repaid (with interest) by U.S. taxpayers in the future.

    Who then are the purchasers of the bonds in the trust fund? Answer: the people who paid payroll taxes between 1983-2018.

    And who is required to pay them back? Answer: the bonds will be redeemed by the general fund between 2019-2042 (on current estimates, anyway). Since the general fund is financed mostly by personal and corporate income taxes, that means that the people required to pay back the bonds are income tax payers between 2019-2042.

    So: are these bonds merely IOUs from one branch of the government to another? Not really. They are IOUs between one set of citizens (payroll tax payers between 1983-2018) and another set of citizens (income tax payers between 2019-2042).

    What this means is that the United States really does have a moral obligation to pay back those bonds. Bonds are always paid back by future taxpayers, not all of whom had any say in selling the bonds in the first place. The fact that it’s a burden on these future taxpayers is not reason enough to pretend the bonds don’t need to be repaid or don’t exist at all.

    And make no mistake: redeeming the trust fund will be a burden on future taxpayers in the same way that paying excess payroll taxes is a burden on current workers. There’s no free lunch. The only way to pay back the bonds is either to increase the federal deficit or to increase taxes. My approximate guess is that it will require a phased increase in income taxes totaling about one-fifth. In other words, beginning in 2019, someone paying a 15% tax rate will see their rate slowly increased to 18%.

    The bottom line is this: the trust fund is not an accounting trick. It’s a genuine obligation, both morally and legally. At the same time, it’s not a stack of gold bars, either. Redeeming it will require some kind of tax increase. (It doesn’t have to be an increase in personal income taxes of course. It could be anything: corporate taxes, inheritance taxes, carbon taxes, whatever.) There’s no point in pretending this tax increase won’t be a burden, but equally, there’s no point in pretending that our obligation to devote tax revenues to paying back the trust fund bonds is just a fiction.

  6. Timbo says:

    Would you like to come to the pants party?

  7. Melissa says:

    “The most exciting part of this whole social security thing: the SS board of trustees is using a (very conservative) 1.8% growth figure to come up with 2042 as the crisis point for social security.”

    Wow! That is exciting! We should have a party!

  8. Timbo says:

    The most exciting part of this whole social security thing: the SS board of trustees is using a (very conservative) 1.8% growth figure to come up with 2042 as the crisis point for social security.

    On the other hand, Bush’s goal of halving the deficit by 2009, his (ridiculous) new budget proposal, and the projected benefits of privatized SS accounts use a (somewhat optimistic) 3.5% growth figure.

    If the economy grows at 3.5%, social security is, according to NY Times columnist Paul Krugman, solvent “as far as the eye can see.”

    If the economy grows at 1.8%, the stock market will be in dire straits. Private Social Security accounts will tank, dogs and cats living together… mass hysteria!

  9. Timbo says:

    Re: Social Security as Widow’s Fund

    Also keep in mind that since 1935, the number of dual-income households has exploded.

  10. Anonymous says:

    Coke mules, no. Coke whores, maybe, as long as I don’t have to make half their goddamn FICA contribution. They must be real women too, none of this “hir gender-queer” crap.

  11. Josh M. says:

    Tony M., are you hiring any coke mules?

  12. Tony M says:

    I don’t pay FICA because I am self-employed in sunny south Florida, and I have a sweet accountant. And of course, by sweet accountant I mean money launderer, and by self-employed I mean cocaine kingpin, and by sunny south Florida, I mean, well, sunny south Florida.
    P.S.- You guys should run the DeFazio/Garden Gnome comparison again.

  13. Timothy says:

    ko: Tell me this getting out of the FICA trick, tell me now! Let me guess, self-employed? Federal employee? And about that CD, I work at a bank, so I’ll probably be using my employer for my non-retirement savings in addition to the 401(k) and the Fidelity Roth IRA I just started. Others should take ko up on the offer, however.

    Josh/M: You know, I really didn’t like that movie very much, but I will admit there were some pretty choice lines. Especially the bass one, damn, that was funny.

  14. ko says:

    Two points: Yes, you can easily find a cd paying over 3%. I can get you one paying 5.15 APY. Just let me know if you’re interested. And not everyone pays FICA–I haven’t for five years now.

  15. M-Dog says:

    Heh. I caught you a delicious bass.

  16. Josh M. says:

    Sorry about that, just had to get a Napoleon Dynamite quote in here somewhere.

  17. Josh M. says:

    Timothy, she said she doesn’t want you here when she gets back because you’ve been ruining everybody’s lives and eating all our steak.

  18. Timothy says:

    I thought I was going to make it through one econ-related post without doing it, oh well.

  19. Olly says:

    OK, Tim has mentioned Steve Verdon. Everyone take a shot.

  20. Timothy says:

    Also, there’s Tyler Cowen (at least a billion times smarter than me) on SS today, and you can find more by running a search on Social Security over at Verdon’s place.

  21. Timothy says:

    Facts included in my initial post, for readers who have a hard time picking them out of the mess:

    1) The bond interest rate is inversely proportionate to bond prices. And while the “special issue bonds” held by SS have interest rates determined by formula, that formula is based on the interest rates of long-term government bonds.

    2) The “trust fund” that you hear so much blathering about really is just an accounting fiction. Surplus money collected by the SSI system goes into the general fund where it is spent willy-nilly like any other money the government gets ahold of. This “trust fund” is just a running tally of that, with compound interest. The “special issue bonds” in the trust fund really are just IOUs from congress, and the process of paying benefits involves redeeming some of these on a monthly basis. Interest, in the form of more IOUs from congress, is paid semi-annually. If all of those bonds could be sold to the public (they can’t) or be redeemed immediately (not likely) we wouldn’t have the transition cost issue with Bush’s plan. Think of it this way: for a long time there have been way more workers paying in than people getting benefits and SS collected more than it paid out, congress has used that to prop-up the rest of the budget by constructing this so-called “trust fund”; at some point in the not-too-distant future SS benefits will become more than the amount that SS is taking in, meaning that the rest of the budget will have to start supporting SS.

    3) Most who will retire after 2052 are indeed children today, or haven’t been born. Children and hypothetical children definitely have no expectations of SS.

    4) All workers pay the FICA on the first $90,000 of income, it’s not just workers with incomes under $90,000 who pay.

    5) Social Security benefits are indexed to wages, and as such real benefits grow over time. Higher wage growth through economic expansion would mean a higher growth rate in SS benefits. Which will grow at a faster rate than the intake of SS if taxes aren’t raised.

    6) It is, in fact, impossible to tell whether or not 70% of future benefits will have the same or greater real value than 100% of current benefits. Wages grow faster than inflation, ’tis true, but it’s also impossible to predict wage growth over a 50 year period. It’s also impossible to know if wages will grow more or less than they did in the last 70 years, meaning that nobody knows if the net gain from SS for our generation would be the same as the net gain our grandparents experienced. The CBO, SS Trustees, and Dept. Of Labor have very smart people doing trying to project this stuff, but over such a long period so far removed from the sample space predictions become decreasingly meaningful. So, unless Professor Bloom has a magical economics eight ball, he’s just guessing. Unless he meant “more” in nominal dollars which, while factually true, is utterly meaningless.

  22. Ian says:

    Is it just me, or does Defazio look absolutely terrible in the Daily Emerald’s picture? It looks like he splattered a couple of bottles worth of tanning lotion on himself and the ODE photographer applied some nasty saturation filter to the picture.

    As for the article, I do believe the Social Security creation paragraph is incorrect. Most of the rest seemed fine to me, though, as it appears to be simply reporting what different parties said.

    Social security, or Youth Tax as I like to call it, is one of the biggest scams the DC beaurocrats have going right now. Timothy’s paragraph about intelligent financial planning is spot-on. I trust myself and certified financial planners far more than I do career politicians. Privatizing elements of the Youth Tax is a damn good idea.

    Now what we need is for Bush to push legislation removing his previous Medicare legislation. God I hate that fucking Medicare bill.

  23. Big M says:

    Dan! You hit it on the head!

    However, I do have respect for Meghann. Especially with the handling of that RHA story yesterday.

  24. Danimal says:

    You’re all wrong! And so am I!

  25. Anonymous says:

    Actually, after checking some things, I’ve concluded that you’re wrong on a whole slew of shit. Email me if you’d like to continue this conversation.

  26. Meghann says:

    Hmmm….except for the part about what SS was created for, all I read was more opinions. Thanks though.

  27. ken says:

    you are wrong. defazio is totally correct. the rich have been trying for years to destroy ss.

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