May 21, 2017

Sina-cism: McGovern peddling Social Security snake oil

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Debate often quickly runs aground on the hotly contested question of whether the Social Security Trust Funds are real or an accounting trick. Liberals insist every penny goes where it should. Conservatives argue “there’s no ‘there’ there.”
Chris Sinacola

Chris Sinacola

U.S. Rep. James P. McGovern, D-Worcester, was at the Worcester Senior Center last week with fellow Democratic congressman John Larson of Connecticut to peddle the “Social Security 2100” bill.

Like traveling salesmen, this pair promised the world.

Their bill would increase benefits, hike annual cost-of-living adjustments, help elderly workers, ensure Social Security remains solvent into the 22nd century, and cost individual contributors less than the proverbial cup of coffee each week.

Perhaps they meant kopi luwak, Vietnamese weasel coffee, which is produced by civets ingesting and defecating coffee beans and sells for hundreds of dollars per pound.

In my opinion, Social Security’s solvency can be extended in one of two ways.

One way is by adopting a chained Consumer Price Index, raising the retirement and early retirement ages, investing some of the Social Security Trust Fund in stock indexes, and slowly reducing payroll taxes so younger workers can boost contributions to their 401(k) and IRA plans, which offer higher yields.

The other way is to raise taxes.

The difference is that only the first approach solves Social Security’s problems in the long term.

The Democrats’ plan, as Andrew G. Biggs explains in the Wall Street Journal, aids Social Security in the short term, but creates sharply higher tax rates that would eventually hurt all wage earners, erode work incentives and undermine Social Security revenues.

Office of Congressman Jim McGovern

U.S. Rep. Jim McGovern

“Social Security 2100” will never pass a Republican-controlled Congress. After all, about the only thing the two sides agree on is that, without reform, the Social Security Trust Funds will be depleted by about 2034, forcing Americans to choose between lower benefits or higher taxes.

To be sure, real reform of Social Security is hard, which is why it has long been the “third rail” of U.S. politics. Many presidents have tried and failed to enact even modest reforms.

Debate often quickly runs aground on the hotly contested question of whether the Social Security Trust Funds are real or an accounting trick. Liberals insist every penny goes where it should. Conservatives argue “there’s no ‘there’ there.”

The Center on Budget and Policy Priorities, for example, declared last August that all “payroll taxes and other earmarked incomes are deposited in the trust funds, and all of Social Security’s benefits and administrative expenses are paid from the trust funds.” Their sanguine conclusion: A modest shortfall of about 1 percent of GDP over 75 years.

The Heritage Foundation claims the system has a $14 trillion public debt, equal to about 75 percent of GDP, and growing.

Some of the vast gulf between right and left can be explained by ideology, politics or different assumptions about growth and demographics.

But there is a more fundamental split.

The budget center’s rosy outlook ignores that the Social Security Trust Funds don’t hold deposits the way you or I do when we put money in our bank accounts. In exchange for payroll tax deposits, the funds instead receive federal government debt obligations, Treasury bills.

As Thomas Sowell writes in “Basic Economics,” these are “…promises to pay money collected from future taxpayers” and not the same as tangible assets.

Sure, former Federal Reserve Chairman Alan Greenspan told Congress in 2001 that those promises are nonetheless claims on real assets. And it’s true that Uncle Sam has never defaulted on Treasurys.

But conservatives are essentially correct that the Trust Funds are little more than pleasant fiction, with the relatively anemic rates of return that bonds offer.

Sowell and others argue we’d be better off ending the Trust Funds, the better to focus lawmakers’, taxpayers’ and retirees’ minds on the need for long-term reform of Social Security in the face of a demographic tsunami.

The elements of real reform are nicely outlined in that Heritage Foundation article referenced above, and seem to me better for the working poor and the elderly, as well as more likely to reduce inequality — outcomes I should think both left and right would cherish. Yes, reform entails risk. But there are far fewer workers supporting each retiree today than in the past.

Risk is necessary if Social Security is to keep its promises.

McGovern, Larson and the other Democrats pushing “Social Security 2100” won’t get into details. Why bother? Surveys consistently show most Americans have trouble calculating their Social Security benefits, never mind grasping how the system actually works.

But do your homework and you’ll soon realize that “Social Security 2100” has nothing to do with real reform. It’s just another in the endless line of tax hikes taken from the Democratic Party’s playbook.

Chris Sinacola is a Worcester Sun columnist. His observations on politics, current events, history and more appear every Sunday.

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