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Home Publications Blogs Beat the Press It's Monday and Robert Samuelson Doesn't Like Social Security and Medicare

It's Monday and Robert Samuelson Doesn't Like Social Security and Medicare

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Monday, 12 November 2012 08:06

In case any Washington Post readers were unsure, Robert Samuelson used his column today to tell readers that he doesn't like Social Security and Medicare. The piece begins by telling readers:

"If you doubt there’s an American welfare state, you should read the new study by demographer Nicholas Eberstadt, whose blizzard of numbers demonstrates otherwise. A welfare state transfers income from some people to other people to improve the recipients’ well-being. In 1935, these transfers were less than 3 percent of the economy; now they’re almost 20 percent."

Samuelson goes on to tell us how awful this is because these transfers:

1) take money from other government programs;

2) undermine work incentives and thereby reduce growth; and

3) encourage gaming.

Let's take each of these one by one.

If we start with the biggest government transfer program, Social Security, it would be interesting to know how it takes money from other programs. It is financed by a designated tax. Maybe he thinks that people would be just as happy to pay their Social Security taxes to support the Pentagon, but that is not what polls show. In the case of Social Security, and likely most of the other transfer programs despised by Samuelson, the tax revenue is there because the programs are there. Most taxpayers don't like the things that Samuelson apparently wants to spend money on as much as he does.

Of course if it is possible to lie to people and use taxes designated for Social Security for other purposes, then there can be more money for Samuelson's agenda. But this is a discussion of how to deceive the public, not a debate over social programs.

Samuelson also claims that there is a tendency for these programs to expand over time. In fact over the last three decade Social Security has gotten considerably less generous. The age for getting full benefits has already been raised from 65 to 66 and in another decade will be 67. Also, changes to the way the consumer price index is constructed have reduced the annual cost of living adjustment by approximately 0.5 percentage point.

In the case of Medicare, benefits were extended to cover prescription drugs, but this only became an issue because government granted patent monopolies sent the price of drugs through the roof. Drugs were not included in the original program in 1966 because their cost was trivial, but patent monopolies for drug companies now allow them to sell drugs at prices that are close to $250 billion a year above the free market price. Serious people might worry more about all the waste associated with these patent monopolies than the fact that the government is helping seniors pick up the tab for their drugs.

As far as the second point, anything that makes people wealthier reduces work incentives. The fact that so many people on Wall Street are able to play financial games and make fortunes in their 20s and 30s undermines their work incentive by allowing them to retire early. Why should we be concerned if people opt for a modest Social Security benefit rather than working? After all, they did pay for it.

This raises another point that has Samuelson very upset. He tells us:

"The Wall Street Journal recently ran a story about a couple (he 66, she 70) touring the world. They’ve visited London, Paris, Florence and Buenos Aires. Their financial adviser sends them $6,000 a month from investments and proceeds from their home sale. They also receive Social Security."

This is likely true. They probably also receive some interest on government bonds. In both cases they previously paid in money to get their current income. In the case of Social Security, they paid Social Security taxes; in the case of their interest payments, they had to buy a bond. Odds are that they are getting a much better return on their bonds than their Social Security taxes because of the program's progressive benefit structure. So what exactly is Samuelson's problem here, he doesn't think rich people should be able to get interest payments on government bonds because they don't need it?

There is one other point with highlighting here. Social Security, and to a lesser extent Medicare, are insurance programs run through the government. (Social Security is self-financiing, Medicare would be much closer to self-financing if the government did not have so many protectionist restrictions that raise the cost of health care.) If these programs were run through the private sector, which they would be if the government programs did not exist, then there would be much more money wasted in administrative costs. 

In twenty years Social Security benefits will be roughly 6.0 percent of GDP. Privatized systems eat up 15-20 percent of the money paid into the systems in administrative costs, as opposed to 0.6 percent with Social Security. This means that a privatized Social Security system would mean throwing 1 percent of GDP (@$160 billion a year in today's economy) into the garbage in the form of resources being wasted in the financial sector. This prospect would concern serious people, but apparently not Samuelson. 

Finally, the concern about gaming is entirely reasonable, but this exists everywhere. Hasn't Samuelson ever heard of insurance fraud? Social Security's retirement program has a very good track record in limiting fraud and improper payments. Other programs are less effective. This is hardly a reason for eliminating programs that serve important social purposes. But hey, it's Monday and Robert Samuelson doesn't like Social Security and Medicare. 

 

Addendum:

I also should have mentioned, in reference to Samuelson's older couple on a world tour, there just are not enough of these folks to make a difference. If we start a means test for Social Security at non-Social Security incomes of $80k and above, it barely makes a difference in the program's finances. We can make some dent by starting it at $40k, but this gives a whole new meaning to the word "wealthy." 

Comments (18)Add Comment
Keep Up the Good Work
written by Scot, November 12, 2012 8:26
It's unfortunate that you have to waste your time rebutting Samuelson. I'm sure you must have better things to do. But, you do a great job at calling out his nonsense. Thanks for the effort and keep up the good work!
Transfers
written by David, November 12, 2012 8:38
. A welfare state transfers income from some people to other people to improve the recipients’ well-being. In 1935, these transfers were less than 3 percent of the economy; now they’re almost 20 percent."

The last I checked, the massive transfer of income began in about 1980, and transferred 20% to the upper 1%. This was done with complicit government condonement. Samuelson can suck eggs.
...
written by skeptonomist, November 12, 2012 8:41
Samuelson and other SS bashers keep bringing up how supposedly unfair it is that rich people get SS benefits. Of course this is hypocrisy, since they claim to be objecting to income redistribution. Actually, any real shortfall that SS faces over the next 40 years or so could easily be eliminated by bringing in some moderate downward income redistribution, especially raising or eliminating the upper limit on payroll taxes. Or how about taxing capital gains, dividends and interest income? Before his election, Obama was an advocate of raising the limit, but that has somehow disappeared. Now would be a good time to remind him of his campaign rhetoric.
...
written by Bart, November 12, 2012 9:34

On the wealthy couple receiving Social Security: Can you imagine the howls to be heard if those who paid into the program were deprived of the benefits?

Senator McCain gets a Social Security benefit of about 2K per month; twice the national average. He also surely receives a military pension and will get a Senate pension. Given his great wealth, which of those pensions might he be asked to refuse?
Faith Based Numbers
written by Last Mover, November 12, 2012 9:45
... whose blizzard of numbers demonstrates otherwise.


Uh oh. Is Samuelson trying to restore faith in numerate literacy to those who just lost an election for lack of it?
...
written by PeonInChief, November 12, 2012 11:07
But the number of SS recipients who have $6K in income per month in addition to Social Security is very small. Taking Social Security from all of them wouldn't make a tiny bit of difference.

And I think Dean enjoys going after Samuelson. The guy says the same stuff over and over, so it's something he can write up before breakfast.
Who is lying to whom?
written by Don Levit, November 12, 2012 12:02
"Of course, it is possible to lie to people and use taxes designated for Social Security for other purposes, then there can be more money for Samuelson's agenda. But this is a discussion of how to deceive the public, not a debate over social programs."
The excess taxes, particularly since 1983, have not been designated strictly for Social Security. And, the interest these excess taxes have earned, were not self-financed, for they were financed with Treasury securities, which represent not a current cash burden, but a future tax burden for taxpayers.
The entire trust fund (principal and "interest") has been loaned to the Treasury over the years, to pay for current expenses.
Is this what you call a designated tax for SS beneficiaries, a self-financing program?
There is a reason the $2.7 trillion in the SS trust fund is known as intragovernmental debt, rather than intragovernmental equity. The reason is that the money in the trust fund is no longer there. All that remains are promises to repay the borrowed money, promises that will be funded with new general revenues, the same way we pay for battleships.
That is exactly what has happened since 2010 when SS trust fund outgo exceeded its income.
Treasury interest was redeemed to replenish the cash shortfall, resulting in an immediate budget expense, and increased debt held by the public.
Don Levit
...
written by Donald B, November 12, 2012 3:09
It is clear to me that those people, like Samuelson, who never liked the Social Security and Medicare programs to begin with, try to use the so-called "fiscal cliff," engineered by extortionist Republicans in Congress, and the bugaboo of our alleged deficit "crisis" as excuses to gut these widely popular social programs. They never quite get around to explaining why seniors who are benefitted by Social Security and Medicare should pay the price of our recovery from the financial crisis and the collapse of the real estate bubble. What about the top 1 % who have made out like bandits over the past 30 years? What about the rent-seekers like dear old Mitt who pay ridiculously low tax rates? What about fairness?
...
written by fuller schmidt, November 12, 2012 5:13
I can't quite grasp what you are saying, Don Levit. That we shouldn't issue Treasury securities? Or not pay them off if we do?
Hey Don Levitt
written by Joe Emersberger, November 12, 2012 5:18
"There is a reason the $2.7 trillion in the SS trust fund is known as intragovernmental debt, rather than intragovernmental equity. The reason is that the money in the trust fund is no longer there. All that remains are promises to repay the borrowed money, promises that will be funded with new general revenues, the same way we pay for battleships. "

I see so owning billions in federal government bonds is equivalent to owning "worthless promises"?

Are you advising everyone to dump there worthless federal bonds?
Hey Don
written by Mark Jamison, November 12, 2012 8:01
And you seem to forget that while future generations bear the burden of paying for those Treasuries they also get the interest.
Dr. Baker has written about this fallacy that is too often portrayed as serious thought. It just doesn't add up.

On another note, I wonder if Doctor Baker would care to comment on an idea being floated by Robert Reich. He suggests that one way to assist those with lower incomes is to eliminate withholding taxes on the first $20,000 of income (making up the lost amount by extending the income on which those taxes apply). On face this seems a reasonable adjunct to the EITC and would make withholding more progressive but one could also find some difficulties. For example,how do you handle low income people with multiple jobs (which is often necessary to make ends meet) without creating an administrative nightmare?
...
written by urban legend, November 13, 2012 12:09
What are the changes in patent monopolies from 1966 to today that would account for these cost increases?
...
written by liberal, November 13, 2012 8:14
Don Levit wrote,
The entire trust fund (principal and "interest") has been loaned to the Treasury over the years, to pay for current expenses.


So? Private holders of Treasury bonds have also seen the government use their initial investment to pay for current expenses.

The only large difference between the two cases is that the private holders have a constitutional property interest in their debt, whereas SS beneficiaries do not. However, the fact that the loans to SS have to be repaid is backed up by law.

That's not to say I think it was a good idea to increase the holdings of the Trust Fund. But the idea that the bonds there are worthless is false.
Welfare State? For who?
written by FoonTheElder, November 13, 2012 9:58
I'd much rather provide welfare to those people who need it rather than continue to provide welfare to the wealthy and big corporations who don't need it, like the phony fiscal conservatives continue to promote.
SS Treasuries
written by Don Levit, November 13, 2012 9:58
I never said the Treasuries were worthless. I am simply saying that to redeem them requires new general revenues in cases of a budget surplus, or it requires additional debt held by the public to be issued in case of a deficit.
Is this how a reserve fund is to be run? Is this what Roosevelt meant by a self-sustaining fund, with no need for general revenues?
And, the "interest" that accumulates? It accumulates by issuing additional debt, with no current budget impact.
So, when the future generations "collect" the interest, they will do so by virtue of their own taxes, the same way the interest has been collected since 2010 to make up for the cash shortfall of the SS trust fund.
When an insurance company pays a claim it does so out of current revenues, and if necessary, by cashing in paid-up, intact investments from its reserve fund. It does not need to borrow from anyone to pay off the claims.
The government is an efficient way to pay off current expenses. It is apparently, a weak, and virtually impossible way to accumulate funds for future use.
Don Levit
...
written by Emersberger, November 13, 2012 11:59
Don,
The economy- hence the Gov’s capacity to pay interest - expands exponentially. Nothing “impossible” about that, nor is it “impossible” to find customers to buy government bonds. In fact it’s a piece of cake as Dean has repeatedly pointed out.

Also, since there is nowhere near perfect equality within the US economy, the extent to which people bear the costs and burdens of government debt- through taxes, interest and transfers or other spending - varies considerably. It is unwise to talk of “future generations” as if they were a monolithic group that wins or loses to the same extent or in the same way from decisions made today.
Is this true about the money paid in for FICA??
written by jumpinjezebel, November 16, 2012 8:50
'The actual money has been replaced with non-marketable government IOUs, called “special obligations of the Treasury.” These IOUs are not at all like the marketable Treasury bonds held by China and other U.S. creditors. They are nothing more than an accounting record of how much Social Security money was spent for other purposes.'
...
written by Joe Emersberger, November 18, 2012 10:13
jumpinjezebel wrote

'The actual money has been replaced with non-marketable government IOUs, called “special obligations of the Treasury.” These IOUs are not at all like the marketable Treasury bonds held by China and other U.S. creditors. They are nothing more than an accounting record of how much Social Security money was spent for other purposes.'

No. Social Security has a legal claim to principal and interest for the bonds purchased - as does anyone else who owns a government bond as does anyone who owns any type of bond issued by a private company. You can call them all "IOU's" is you want to disparage them.

You can try to argue the government is not able to pay - i.e that it should default - but your argument wouldn't stand up.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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