One of the highlights of the President’s compromise on the tax bill is a temporary payroll tax “holiday”—something we have long advocated along with others such as Jamie Galbraith and Warren Mosler. The proposed deal would cut the tax by two percentage points (from the current 6.2% applied on employment income up to $106,800). The beauty of a payroll tax holiday is that it can take effect immediately, raising weekly take-home pay and totaling about $112 billion in fiscal stimulus annually. Since the vast majority of Americans pay more in payroll taxes than in federal income taxes, it provides broad-based tax relief (unlike the original Bush tax cuts that were skewed to high income earners in part because they pay most of the federal income tax). The payroll tax, itself, is regressive because high income earners escape FICA taxes on most of their employment income, so reducing federal government’s reliance on this tax should be celebrated. In other words, a payroll tax holiday is a progressive’s dream come true.
Instead of cheers, however, the liberal left is jeering tax relief for workers. For example, Heidi Hartmann argues that it puts Social Security at risk because it will be difficult to end the “holiday” by restoring the two percentage points later. (See here) She also offers a quite convoluted alternative that would achieve essentially the same tax relief through tax rebate checks, thereby leaving the payroll tax alone. This is offered as a lower risk alternative because it is easier to stop the rebates than to restore payroll taxes—which will be seen as a tax hike. Her defence of the payroll tax is touching but fundamentally and fatally misguided.
Indeed, it looks to us like yet another deficit dove out-of-paradigm defence of the indefensible along the lines of candidate Al Gore’s promise to lock up the budget surplus in a Social Security Trust Fund safe, to be tapped later when baby boomers retire. We know how that turned out—Gore’s plan was incomprehensible nonsense that was rejected by the population who preferred candidate Bush (who, amazingly, was the candidate who made at least some sense on the issue), while the budget surplus killed the economy and restored a budget deficit before the little electrical charges on computer tapes that recorded those surpluses could be safely rounded up and stored for later use. This time around we have liberals defending regressive employment taxes on the argument that they build political popularity for Social Security. Right. Please sell us a bridge, or perhaps some toxic Magnetar CDOs.
Let us step back from the fray and try to understand just what Social Security is. In truth, it is an intergenerational assurance plan. Working generations agree to take care of retirees, dependents, survivors, and persons with disabilities. Currently, spouses, children, or parents of eligible workers make up more than a quarter of beneficiaries on OASDI. A large proportion will always be people without “normal” work histories who could not have made sufficient contributions to entitle them to a decent pension. Still, as a society, we have decided they should receive benefits.
Further, the program is not means tested. One need only meet statutory requirements to receive benefits. Indeed, the Supreme Court has twice ruled Social Security does not make intergenerational promises to the dead, but, rather, only to their survivors. (See here; here; and here)
Most discussions of the program get all hung up on the relation between payroll tax receipts and Social Security benefits—with those receipts said to be necessary to “pay for” the benefits. This then leads to “money’s worth” calculations (the “return” an individual “receives” on his payroll tax “investment” in Social Security—as if the program were like an IRA) as well as the “day of reckoning” when total payroll tax receipts will fall short of Social Security spending. Intergenerational warriors love to calculate that Social Security is a bad deal for most of today’s workers—who would be much better off if they took their taxes and invested them in Wall Street (whoops, maybe not such a great idea right now). And they read each annual report of Social Security’s Trustees to find the precise year for Armageddon: when payroll tax revenues are expected to first fall short of Social Security benefit payments—even without the crisis and recession that would have happened later this decade. Defenders of the program then trot out their own numbers, proclaiming that Social Security is indeed a great deal for a worker who loses a leg in an industrial accident rendering her unable to ever work again—a not entirely successful counterclaim for the average worker who prefers not to think about such a scenario.
Defenders also point to the supposed cushion offered by the precious Trust Fund—with trillions of safe treasury bond assets to keep the program solvent. While it is widely claimed that interest receipts and then Trust Fund bond sales will maintain the program for a couple more decades, Social Security’s enemies argue that the program faces calamity much sooner, because its Trust Funds are a fiction. As we’ve long argued, the Trust Funds cannot provide external financing for one of the government’s own programs, because this is a case of the government “owing itself”, an internal accounting procedure. To repeat a point we have made many times in the past: any sovereign government such as we have in the US does not face a financial constraint. This means that: (a) its spending does not need to be financed in the conventional sense; (b) that any debt instruments (bonds) that mature can be easily retired by the government crediting relevant bank accounts for the coupon value (face value of the bond) plus interest owed; and (c) that neither of these actions has any necessary implications for future tax rates, interest rates, or to the point here, benefits for Social Security recipients.
So the only relevant question to pose in regard to Social Security is whether the rising dependency ratio (the ratio of those too young or old to work divided by those of working age) will outpace production of real goods and services in the future and therefore reduce material standards of living for society as a whole. In the 1960s, when the youth dependency ratio was higher, our population was growing fast and required private and public investment in the infrastructure needed for the care of the young.
Of course, very few young people die in a rich nation—so almost all of the young grew up to be working age adults, and will become an elderly “bulge” as they retire. That will raise the elderly dependency ratio—more elderly people relative to workers. At the same time, the youth elderly ratio has fallen considerably since the 1960 as families downsized from 3.7 kids to about 2 per family. Yet much of the infrastructure we built to take care of the baby boom is still with us, and will be with us for years to come, including houses, hospitals, schools, dams, highways, and public buildings. As the baby boomers age, we may have to convert schools to senior citizen centres and hospitals to aged care facilities. However, we took care of the baby boomers with relatively few workers in 1960, and common sense implies that we ought to be able to take care of them when they are elderly.
The mainstream debate chooses to focus on the “financial” aspects of these projected changes arguing that they will imply rising budget deficits which they define as being unsustainable. The “budget costs or outlays” are financial not real constructs. Public policy cannot prepare for a retiring baby boom bulge through “advance funding”—that is, by accumulating a large trust fund. Nor does it need to do so. What will matter in the future is our capacity to produce real goods and services. Accumulating paper money or electronic charges on computer tapes does not in any way help to take care of the elderly. And when the time comes, government can always make the monetary payments as they come due.
To reiterate, when Social Security runs a deficit and turns bonds back to Treasury, the Treasury will credit the Trust Fund’s account—but the overall balance of the federal government will not be affected at all. In, say, 2050 when payroll tax revenues fall short of benefit payments, the trust fund will redeem treasury debt. To convert those securities into cash would require the Treasury to either issue new debt or generate tax revenue in excess of what will be required for other government spending in order to make the cash payment to the trust fund without increasing general budget deficits. This is exactly what would be required even if the Trust Fund had no “financial holdings”. Government cannot financially provision in advance for future benefit payments.
Indeed, attempts to do so via the encouragement of deficit cuts today will simply exacerbate the “dependency” problem implied by ageing demographics. Maximizing employment and output in each period is a necessary condition for long-term growth. The emphasis in mainstream intergenerational debates and adverse demographics suggests that we have to lift labour force participation by older workers. Perhaps, but this is contrary to current government policies which reduces job opportunities for older male workers by refusing to deal with the rising unemployment.
Supporters of Social Security will have more success if they ignore the fairly esoteric financial numbers and focus on the “real burden” of providing for an ageing population. An ageing population will require choices to be made in relation to real resource trade-offs. Will there be enough real resources available? This is not a financial matter – it is a matter of whether there will be real goods and services produced in sufficient volumes for us and the government to buy in the future. If there are real goods and services produced in sufficient quantity to allow for adequate health care and pension entitlements (the former using resources, the latter commanding them) then the sovereign governments will always be able to afford to purchase them and provide them to our advantage.
How these real resources are distributed in the future becomes a political issue. The outcomes in the future will be resolved by political means in similar ways to now. But financial constraints will never be binding on a government with a political mandate to pursue high quality health care etc. Finally, and most importantly, improving Social Security finances does not relieve the real burdens that may be placed on future workers to provide for retirees.
This article was originally posted on New Deal 2.0
— Marshall Auerback and L. Randall Wray
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