The Honorable Tom Cole
2458 Rayburn House Office Building
Washington, DC 20515-3604
Dear Representative Cole:
In a recent column calling for entitlement reform, you wrote that Social Security is “…closing in on bankruptcy.” This is not true. The latest projections from the Congressional Budget Office (CBO) show that Social Security will be able to pay full benefits through the year 2038 and will be able to pay almost 80 percent of full benefits for decades afterwards.
As you point out in your column, the CBO noted that higher projected costs for Social Security, Medicare, and Medicaid stem partly from aging and partly from “rising costs for health care.” In fact, it is easy to show that the latter – our broken private health care system – is the main problem. The United States pays more than twice as much per person for health care than the average in other wealthy countries. If Americans paid the same for health care as people in other countries, we would see budget surpluses over the long term, not deficits.
As a member of the House Appropriations and Budget Committees, it is crucial that you accurately describe vital programs like Social Security and its relationship to debt and deficits. If I can provide you with further information or background on this, I would be happy to do so.
The Honorable Newt Gingrich
3110 Maple Drive
Atlanta, GA 30305-2650
Dear Speaker Gingrich:
I have seen you refer to the privatized Social Security system in Chile several times as a model for the United States. I believe that you would not hold this view if you were more aware of the details of the Chilean system.
First, you have often claimed that the Chilean system is voluntary. This is not quite right. The system is mandatory for workers in the formal sector. However like most countries in Latin America, Chile has a large informal sector where participation is de facto voluntary. (The Chilean military and policy forces are an exception to this rule. They were allowed to remain under the traditional defined benefit system. This presumably was in part due to the fact that the program was put in place under the Pinochet dictatorship.)
The second point is that the system is not simply a defined contribution system that does not require funding from the government. The system guarantees workers who have participated for at least 10 years a minimum benefit. To get this benefit workers turn over the money they earned in their accounts and then get the minimum benefit from the government, with the government making up the difference.
In fact, most workers in the informal sector go this route. They effectively vote with their feet for this government-guaranteed benefit, generally participating in the system only long enough to qualify for the minimum benefit. Part of the reason is likely that they fear the volatility of financial markets and also they resent seeing 20-30 percent of their contributions siphoned off by the financial industry.1 (The corresponding figure for administrative costs for the U.S. Social Security system is roughly 0.5 percent.)
The privatized system was in fact not popular with the Chilean people. Reform of the privatized system was the major issue in the 2005 presidential campaign. Both major candidates promised to reform the privatized system, including Sebastian Pinero, the current president and brother of Jose Pinero, the designer of the reformed system under Pinochet.
Finally, it is difficult to understand the possible basis for your claim that we would reduce inequality in wealth by 50 percent with this system. Since the payback structure of Social Security is quite progressive, low-income earners would almost certainly be losers under a privatized system, which would make inequality greater not lower.
I would be happy to discuss this background more with you or your staff.
1 For more background on the privatized system in Chile and other Latin American systems, see Gill, Indermit, Truman Packard and Juan Yermo, 2004. Keeping the Promise of Social Security Reform in Latin America. Stanford, CA: Stanford Economics and Finance.
In Ross Douthat's response in the New York Times to last night's State of the Union address, he summarizes the shortcomings of Obama's populist approach to his re-election campaign, specifically the emphasis on politics over policy. In particular, Douthat points out: "Raising taxes on the richest 1 percent will not cover the projected cost of Medicare and Social Security once the baby boom generation has retired." By the "projected cost" of Social Security, does he mean these projections? Because as Dean Baker points out over at Beat the Press, the Congressional Budget Office's projections show Social Security will be fully solvent for almost three decades, with no changes whatsoever, and it will be able to pay more than 80 percent of scheduled benefits after that date for the rest of the century.
Of course if you lump anything in with Medicare, like muffins (thanks, JSeydl), you can make it look like that second item is also experiencing explosive growth. Magic!
Dear Senator Santorum,
While campaigning recently, you said that the nation must act immediately to save Social Security. You suggested, among other things, raising the normal age of retirement for Social Security. In defending your statements, you asserted that ”… Americans over the age of 65 were society’s poorest age group in 1937, when Social Security was created. Now that group is the wealthiest.”
In fact, there is no need for immediate cuts to Social Security. Both CBO projections and the reports of the Social Security trustees show that the Social Security trust fund will be able to pay full benefits for the next 25 years. And even if Congress makes no changes whatsoever to the program, it will still be able to pay about 80 percent of full benefits from then on. As it stands, the normal retirement age for Social Security is scheduled to gradually increase to 67. Needlessly raising it further would result in significant cuts in benefits (raising the normal retirement age by an additional year amounts to roughly a 6 percent cut per year).
Also in contrast to your claim that Americans of 65 are now the wealthiest age group in the nation, the collapse of the housing bubble led to an enormous loss of household wealth for current and near retirees, leaving most with little other than their Social Security benefits to depend on in their retirement. The government’s supplemental poverty calculations, which include the value of government non-cash benefits, show that the elderly have a somewhat higher poverty rate than the adult population as a whole.
As your campaign for the Republican presidential nomination continues and you speak to potential voters about Social Security, I hope that you will have the opportunity to review the finances of this vital program. If I can provide you with further information or background on this, I would be happy to do so.
Dear Senator Johanns,
After a recent vote on the extension of the payroll tax cut, you said "...the Social Security trust fund is filled with IOUs to begin with, and moving money around [to pay for the extension] will only make it worse." You went on to say that you would prefer direct payments to stimulate the economy rather instead.
I appreciate your position on direct stimulus checks and hope that more members of Congress consider this option. However, the idea that the Social Security trust fund is full of IOUs is not true. The recommendations of the Greenspan Commission in 1983 led to the growth of a large surplus in the Social Security trust fund that has since been used to buy U.S. bonds, widely considered to be among the world's safest investments. The government sold these bonds to the Social Security trust fund, just as it sells bonds to individuals and private corporations every day of the week. Just as with any funds that come from the purchase of bonds, the money is borrowed by the government, but repaid at the end of the term of the bond. While any bond can be called an “IOU” this is not the normal term used in either business or political discussions. By referring to the government bonds held by the trust fund as IOUs you are misleading your constituents and others who hear your comments.
While it is commendable that you recognize the need to further stimulate the economy, I hope you and your staff will have the opportunity to further review the design and finances of Social Security as you prepare future public statements on the topic. If you would like any additional background on the program, I would be happy to assist you.
The Honorable Jason Chaffetz
1032 Longworth House Office Building
Washington, DC 20510
Dear Representative Chaffetz,
While announcing your new Social Security proposal, you said that “…while some argue that the Social Security trust fund will keep the program solvent, that trust fund is simply additional funding that the government must borrow and the government is spending more than it takes in.”
This is not an accurate statement. Under the law, Social Security is paid for by its own dedicated revenue stream: the Social Security payroll tax, the Social Security trust fund, and the interest generated by the trust fund. It only makes sense to talk about Social Security as being solvent or insolvent because it has this legally dedicated stream of revenue, which includes the bonds held by the trust fund. If Social Security is viewed as being just another government program like the defense budget or the education budget, then it would not even make sense to talk about it being insolvent.
The latest projections of the Congressional Budget Office show that the program will remain fully solvent through the year 2038. The program will continue to pay a substantial benefit – about 80 percent of the full benefit—from 2039 onward, even if no changes are made to the program.
Characterizing Social Security as a program on the brink of insolvency as a basis for reform is a misrepresentation of fact. As a Congressman, it is important that your public statements on this be as accurate as possible. If you would like any additional background on Social Security, I would be happy to assist you.
Governor Mitt Romney
Mitt Romney for President
585 Commercial St
Boston, MA 02109
Dear Governor Romney,
At the Americans for Prosperity “Defending the Dream Summit” last week, you discussed the future of Social Security. You began discussion of the program by saying:
“I believe we can save Social Security with a few commonsense reforms. First, there will be no change for retirees or those near retirement. …Second, for the next generation of retirees, we should slowly raise the retirement age. And, finally, for the next generation of retirees, we should slow the growth in benefits for those with higher incomes.”
Actually, Social Security does not need saving. According to the Congressional Budget Office, Social Security will remain fully solvent through 2038, a full 17 years after the latest date you could possibly leave office if elected and re-elected president. From that point on, Social Security would still pay a substantial benefit – about 80 percent of full benefits from 2039 onward – even if Congress makes no changes whatsoever to the program. Because the scheduled benefit is projected to rise through time, even in this unlikely scenario where Congress never did anything to address a shortfall, retirees would always be able to get a higher benefit than what current beneficiaries receive.
You went on to propose raising the age of retirement for Social Security benefits because of increased longevity. I assume you know that there has been little increase in life expectancy for the bottom half of the wage distribution. And I assume you also know that almost half of all older workers have physically demanding jobs. These are two of the reasons that the vast majority of the public is opposed to raising the retirement age beyond the increase to 67 already scheduled under current law. Apparently you view the situation differently.
As a candidate for President of the United States, it may be worthwhile to consider the impact of these proposals on retirees. I hope that you will be careful to present the facts more carefully in the future. If you would like any additional background on the program, I would be happy to assist you.
CEPR Co-Director Mark Weisbrot sent the letter below on Nov. 5 to Washington Post Ombudsman Patrick B. Pexton regarding Pexton's defense of a story published on Oct. 29 that portrayed Social Security as "cash negative."
In your defense of Lori Montgomery's article, you wrote that you "spent a couple of days last week talking to Social Security experts across the ideological spectrum." I'm betting you didn't talk to any actual experts who have spent some time defending Social Security against the misleading claims that have been part of the almost daily assaults on the system for the past 20 years.
If you had, you might have learned that the overwhelmingly most often repeated piece of verbal and accounting trickery used by right-wing opponents of Social Security is this one, from Montgomery's article:
"The $2.6 trillion Social Security trust fund will provide little relief. The government has borrowed every cent and now must raise taxes, cut spending or borrow more heavily from outside investors to keep benefit checks flowing."
Of course the fact that Social Security has loaned its surplus funds to the Treasury, instead of investing it somewhere else, is irrelevant to the program's finances. But millions of Americans believe that the "trust fund provides no relief", and it is because of massive public ignorance — not the relatively small projected shortfall in Social Secuity's finances over the next 75 years, which will surely be taken care of long before 2036 — that the majority of the public thinks that they will not see their benefits. The Post article contributed to that ignorance.
I don't know Lori Montgomery, but my guess is that she didn't write this kind of article — which contains a number of other misleading statements and inaccuracies that you did not address (see Dean Baker's post on Beat the Press ) — because she doesn't like Social Security or is trying to undermine it. My guess, from talking to journalists for many years about this subject, is that she talked to people with a certain political agenda and got suckered. Too bad for her, the Post, and the public.
The Honorable Jeb Hensarling
129 Cannon House Office Building
Washington, DC 20515
Dear Representative Hensarling,
In an interview with Newsmax.TV you said that the problem with Social Security is its rate of growth, adding, “You cannot spend money you do not have. Otherwise you are borrowing from future generations.”
This is not an issue of spending money on Social Security that we do not have. Social Security is funded by a dedicated source of revenue, namely the Social Security payroll tax. As long as new workers continue to enter the workforce as projected, the program will continue to be funded.
You also mention the solvency of Social Security. There is relatively little cause for concern here, either. The recommendations of the Greenspan Commission in 1983 led to the growth of a large surplus in the Social Security trust fund that has since been used to buy U.S. government bonds. The government sold these bonds to the Social Security trust fund, just as it sells bonds to individuals and private corporations. Just as with any funds that come from the purchase of bonds, the money is borrowed by the government, but repaid at the end of the term of the bond. Along with payroll taxes, the proceeds from these bonds are used to pay Social Security benefits.
In fact, the projections of the Congressional Budget Office (CBO) show that Social Security will be fully solvent for the next 27 years (through 2038) and will continue to pay a substantial benefit from 2039 onward even if no changes are ever made. This means that when your 8- and 9-year-old children retire at the normal retirement age and assuming they have been as successful in their working lives as you have, they will receive benefits of $47,567 and $47,048 (in 2011 dollars) each year for the rest of their lives. According to CBO, the amount of revenue necessary to allow the program to pay full benefits over its 75-year planning horizon is less than one-tenth the size of the upward redistribution to the richest 1 percent over the last three decades.As the Republican co-chair of the Congressional “super committee” on the deficit, it is vital that your statements about Social Security are accurate and factual. If you still are unsure on this issue, I would be happy to discuss the background further with you and your staff.
The Honorable Johnny Isakson
131 Russell Senate Office Building
United States House of Representatives
Washington, DC 20515
Dear Senator Isakson:
During a recent talk at the Athens Country Club, you called for reform of entitlements saying, “…the real debt culprits are Medicare and Social Security.” You went on to predict that Social Security would begin to see benefit reductions as early as 2025.
In reality, neither of these statements is true. Social Security was created with a dedicated source of funding, Social Security payroll taxes, and because of this dedicated revenue stream, Social Security, by law, cannot contribute to the national deficit since it can only spend money taken in through this tax or from the bonds government purchased with surplus tax revenues in prior years.
Concerning future benefits, the legislation adopted based on the recommendations of the National Commission on Social Security Reform in 1983 led to the growth of a large surplus in Social Security. This surplus was used to buy bonds and now Social Security holds more than $2.6 trillion in government bonds. As a result, the Congressional Budget Office’s projections show that the program will maintain full solvency through the year 2038, a full 13 years beyond your prediction. After 2039, even if Congress makes no changes to the program whatsoever, Social Security will still be able to pay a substantial benefit. For example, if your children, now in their 30s, do as well as you have in your working years and retire at the normal retirement age, they would receive benefits of over $33,000 (in 2011 dollars) each year for the rest of their lives.
The real “culprit” that a serious plan would address is the soaring cost of healthcare. We pay twice as much per person for health care compared to other developed nations yet have no better outcomes and shorter life expectancies. If we were able to rein in health care costs then there would be little problem balancing the budget in future decades.As you continue to discuss Social Security and the national debt, I hope you and your staff will have the opportunity to further review the design and finances of the program as well as the factors that actually contribute to national deficits. If you would like any additional background on these topics, I would be happy to assist you.
The Honorable Rick Perry
Office of the Governor
State Insurance Building
1100 San Jacinto
Austin, TX 78711
Dear Governor Perry,
The transcript of a speech touting your “cut, grow, and balance plan” features several statements that misrepresent the Social Security program. The most egregious example is your statement that “… the [Social Security] trust fund is full of IOUs, without a single dime of money left over from what workers have paid in. The politicians have borrowed against it for years. And in order to redeem the IOUs in the fund, they will have to either raise taxes or cut spending on other programs to replenish it.”
This is not an accurate statement. The recommendations of the Greenspan Commission in 1983, led to the growth of a large surplus in the Social Security trust fund that has since been used to buy U.S. bonds, widely considered to be among the world’s safest investments. The government sold these bonds to the Social Security trust fund, just as it sells bonds to individuals and private corporations every day of the week. Just as with any funds that come from the purchase of bonds, the money is borrowed by the government, but repaid at the end of the term of the bond. Saying that these bonds are IOUs is like saying the $100 savings bond for a newborn grand-daughter is just an IOU or the bonds currently trading at record-low rates are just IOUs. Saying that they are IOUs is a distortion of the facts.
While it is commendable that you recognize the role that Social Security plays in the lives of our seniors and in the retirement security of all Americans, I hope you and your staff will have the opportunity to further review the design and finances of the program as you prepare future public statements on the topic. If you would like any additional background on the program, I would be happy to assist you.
The Honorable Paul Ryan
1233 Longworth House Office Building
Washington DC, 20515-4901
Dear Rep. Ryan:
At a recent town hall in Racine, WI, a constituent asked you why people who earn millions of dollars pay the same in payroll taxes as the typical middle-class American. You replied that “… when you run the numbers … it gets you about six years of solvency in a 75-year problem, the problem is it doesn’t get you that much savings.”
In fact, raising the cap on Social Security payroll contributions just on those who make more than $250,000 would raise close to $7 trillion in revenue over the next 75 years, enough to close the Social Security funding gap while only raising taxes on 6 percent of working Americans. And even if Congress makes no changes at all to the program, the latest CBO projections show that Social Security will remain fully solvent through 2038 and would pay about 80 percent of full scheduled benefits from then on, indefinitely. It is quite difficult to make the case that a system that pays full benefits for the next 27 years is problematic or not working.As the Chairman of the House Committee on the Budget you will almost certainly be deeply involved in any prospective changes to Social Security. I hope that you will take the time to better familiarize yourself with the program’s finances. I would be happy to assist in any way I can.
With the release of the September price data, we now know the 2012 cost-of-living adjustment (COLA) for Social Security and Supplemental Security Income benefits. From the third quarter of 2008 to the third quarter of 2011, the Consumer Price Index for Urban Wage Earners (CPI-W) rose 3.6 percent. That means a retiree receiving $1,115 each month would receive an additional $482 in annual benefits in 2012.
Recently, some on the campaign trail and in D.C. have proposed calculating the COLA based on the chained CPI (C-CPI-U) rather than the CPI-W. Proponents argue that the CPI-W overstates inflation, making the switch to the chained CPI a merely technical change. The purpose of the switch, however, is to reduce benefits.
If this policy were in place today, beneficiaries would receive only a 2.8 percent COLA next year. Compared with current law, a retiree who received $878 per month in 2001 would, in 2012, see his/her annual benefit decrease by $462 (3.3 percent) under the chained CPI. A CEPR report back in September found that these changes would mean a decrease in benefits of 3 percent in 10 years, 6 percent in 20 years and 9 percent after 30 years of retirement. If the COLA had been calculated for the last 11 years using the chained CPI, it would effectively wipe out the 2012 increase.
The Honorable Kay Bailey Hutchison
284 Russell Senate Office Building
Washington, DC 20510-4304
Dear Senator Hutchison,
A recent opinion piece you authored argues that we must act immediately to save Social Security. In the column, you suggested a course of action based on the DSSS Act — legislation you introduced earlier this year — in order to avert the 23 percent cut in benefits that would happen in 2036 if nothing is done in the next quarter century and the Social Security Trustees projections prove correct. (The Congressional Budget Office (CBO) projections imply cuts of 18 percent in 2038.) The column also claims that the situation will get much worse after the projected date of depletion. In fact, both the Social Security trustees and CBO projections show that after initial depletion of the trust fund, the picture for payout of benefits actually gets slightly better over the following decades.
Also, you should realize that the cuts implied by DSSS Act are comparable in size to the cuts that would occur after the projected date of depletion if nothing is done. Specifically, the proposed 1.0 percentage point reduction in the annual cost-of-living adjustment translates into roughly a 10 percent cut in lifetime benefits for a person who collects benefits over a 20-year retirement. Raising the retirement age by an additional year amounts to roughly a 6 percent cut.
Taken together these policies would reduce benefits by roughly 16 percent for near-retirees, as opposed to the 18 percent reduction in benefits that CBO projects would occur in 2038 if Congress does nothing. I hope that you are aware of these numbers, but it is difficult to understand how you could view an 18 percent reduction in benefits for workers who will retire a quarter of century in the future to be unacceptable, while advocating a 16 percent cut in benefits for near-retirees.
I recognize your important role in being one of the leaders in the Senate on this issue. If I can provide you with further information or background on the program, I would be happy to do so.