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Home Publications Blogs Beat the Press Peter Orszag and the Drive to Cut Social Security

Peter Orszag and the Drive to Cut Social Security

Thursday, 04 November 2010 04:02

Peter Orszag, President Obama's former budget director, seems determined to cut Social Security. Like most people involved in this quest he is prepared to leave the facts behind and is quick to resort to name calling.

He begins his column by telling readers:

"The budget deficit figured prominently in much of the discussion surrounding yesterday’s election."

This is partly true since the media tend to prominently feature the views of people who discuss the budget deficit in all contexts, but it is absolutely false insofar as the implication is that the deficit was an important factor in the Democrats' defeat. All the polls show that high unemployment was the major factor in the Democrats' loss; the deficit was at most a minor issue. 

Orszag goes on to tell readers that progressives should be happy to see Social Security reform on the agenda since:

"the key issue progressives had been concerned about — individual accounts within Social Security — has been definitively won in their favor (for now)."

It might have been helpful if Orszag had used names, since I don't know any progressives who have this as their "key issue." The progressives who are most visible on this issue have been concerned about a Social Security benefit that is already small by international standards being made still smaller.

This issue of accounts divides progressives, since many support some form of government managed saving accounts as a supplement to Social Security. If Social Security is cut and, as a separate matter accounts are established to supplement Social Security income, it is logically identical to an outcome in which a portion of Social Security is explicitly replaced by private accounts. It is not clear whether Orszag is simply confused here or is deliberately trying to mislead readers.

The next item on Orszag's list of reasons for early cuts is:

"acting now would allow changes to take effect more gradually, cushioning the blow."

It is important to understand this argument, since it is unlikely that many who do understand it would endorse it. Given the 75-year planning horizon, if we cut benefits for people who are retiring in the near future, then we will have to raise taxes and/or cut benefits less for people who are working/retiring in later years. In other words, if we squeeze some money out of the current cohort of near retirees, we will have to get less money out of people in 2050 and 2060.

Is this a good idea? Well, we know that the vast majority of near retirees will have almost nothing other than Social Security to support themselves in retirement. The reason is that the people who always talk about budget deficits were too ignorant of the economy to recognize the dangers of an $8 trillion housing bubble. Since these people were controlling economic policy, middle class workers saw much of the wealth they had accumulated as home equity or in their 401(k) disappear. In other words, the deficit hawks who want "changes to take effect more gradually" want to kick again the people whose wealth was destroyed due to the incredible economic mismanagement of these deficit hawks.

By contrast, the Social Security projections show that workers and retirees will on average be about 40 percent richer in 2040 than they are today and about 70 percent richer by 2060. Why exactly is it important to cut benefits from retirees in 2015 or 2020 who will have very little income, so that their far richer children and grandchildren end up with an income 50 years from now that is only 69 percent higher net of taxes rather than say 70 percent? Orszag obviously feels this redistribution from the relatively wealthy to the relatively poor is important, but he certainly doesn't explain why.  

Orszag concludes by referring to "the left's strident opposition to any serious discussion of Social Security reform." So, the people who disagree with Orszag are "strident." The name-calling might be more warranted if Orszag had a better argument.


Comments (10)Add Comment
I go, you go, POGO
written by Ron Alley, November 04, 2010 6:43
We have met the enemy and his is us -- or at least one once thought to be included in the us.
written by izzatzo, November 04, 2010 6:47
Why exactly is it important to cut benefits from retirees who will have very little in 2015 or 2020, so that their far richer children or grandchildren end up with an income that is only 60 percent higher net of taxes rather than, say 61 percent?

Because it's bait and switch. Private retirement plans are presented as a supplement bait to SS, then switched as a privatized substitute, which reaps far higher gains to Wall Street than the one percent differential.

"acting now would allow changes to take effect more gradually, cushioning the blow."

Contrary to popular opinion, the right does believe in euthanasia, but just at the aggregate, generational level. Boiling lots of older frogs slowly at one time with fading memories is more efficient.
written by skeptonomist, November 04, 2010 8:32
It should also be pointed out that the rest of the federal budget is going to grow as well. Social Security (off-budget) is a small part of total federal receipts and outlays:


While the retired population will increase somewhat relative to the total, this will peak around 2035 and there is no reason to think that SS will be much more important with respect to deficits than it is or has been - which is hardly at all. What has determined and will determine deficits is the difference between receipts and outlays in the rest of the budget. On-budget receipts - mostly income taxes - are now much lower with respect to GDP than at any time since WW II. The recent stock-market and housing bubbles boosted these receipts only temporarily.

The time from WW II to around 1970 when on-budget receipts were over about 15% of GDP was generally prosperous so there is no reason to think that the tax regime in place then was or would be harmful to the economy. When economists claim otherwise they only demonstrate the irrelevance of their assumptions and models.
Hey Pete, that's my savings you're confiscating!
written by Joe K, November 04, 2010 9:48
Getting awful near the golden years & here is one argument from the perspective of a near-term pensioner (teat sucker according to Senator Simpson) that I (don't recall) having seen.

Namely, for social security, I've been saving (on average through payroll taxes) about 10% of my salary since I first started working at the local supermarket during high school in the mid 1960's. And now Mr young buck Pete you want to confiscate 15-20 % of my savings to cover the budget deficit? Well, up yours Pal!!

But, I'll make a deal. You give me my share (with interest, natch. Oh sorry, in your lingo, the PV of my expected benefit) in a personal account and I'll consider us even.

Oh, won't work? Doesn't cut the deficit? (duh). Ok, how about you confiscate 5% of ALL of my savings: SSO, 401-k, IRA's, market investments, net house equity, etc. You know of my net worth AND everyone else!! That should cover the deficit. I mean, after all why should my savings in SSO be any different than my saving in the stock market?

What did you say? Am I crazy? Well no. I'm just trying to be serious and face the hard choices, that you and your bozo buddies keep telling us we're not willing to face.

Have a nice day Pete
written by Arista, November 04, 2010 10:03
Where Mr. Orzag stands may be revealed in his language. When reactionaries first called for privatization of Social Security, they spoke of "private accounts." Testing then showed a more marketable term, "individual accounts," the phrase used my Mr. Orzag.

For that matter, it's interesting that President Obama now lets "tax relief" slip into his vocabulary--another term reactionaries chose because it was more effective than "tax cuts."

Of course, it may be that people like Orzag and Obama simply are not aware of what their ostensible opponents are doing. Right?
written by MarkJ, November 04, 2010 10:17
Mr. Orzag's bias and understanding of the impact of reducing any Social Security benefit is telling with the statement "acting now would allow changes to take effect more gradually, cushioning the blow."

He clearly understands and has measured the impact of Social Security cuts by describing the reduction of Social Security benefits as a "blow" to Social Security recipients.
Sorry to say it ain't so Joe. SS (payroll) taxes are not saving
written by pete, November 04, 2010 10:23
Our government is funded through a progressive income tax on all income and a flat income tax on the first $104K or so of wage income, about a 12.5% rate. Government liabilities, including social security payments, defense spending, medicaid and medicare) are subject to the whim of congress (bold print on your SS booklet). They changed both the payroll tax and the liabilities big time in 1985, and they are probably going to do it again. And of course, as before they will use the ruse, which Dean Baker believes in, that there is a social security fund. If we would stop believing in this ruse, they could stop cutting the liabilites....the fraudulently rhetorical linking of payroll taxes and ss payments only encourages the cutting of liabilities.
A Simple Change Fixes All
written by Benedict@Large, November 05, 2010 12:25
Due to the time horizon before there is a payment problem, it is quite easy to apply a fix that will not only make the fund sound off to an infinite horizon, but also will allow benefit increases to truly reflect the inflation which presents itself to seniors, especially those for whom Social Security provides most and often all of their post-retirement income.

If I am not mistaken, the trust fund receives 2% (or thereabouts) interest annually. In order to fix the fund then, we need only change the interest rate to 3%. With this simple change, there would be full funding as well as funds to better reflect inflation.

At this point, you're probably thinking I'm either joking or crazy, but I assure you I am neither. Watch.

(1) I suspect you are asking where I am going to get that extra 1% from. Answer? The exact same place the 2% came from; the US Treasury will simply create a ledger entry that is 50% higher than the one they would have created. Same procedure, different number, no additional effort.

(2) At this point, of course, critics would point not to my 1%, but rather to the 2%, saying it also is fictional, and it is the greater number. And they would be right. This however would be a good thing.

It would be a good thing because it would lead to a REAL discussion of the TRUE nature of a sovereign, non-convertible, fiat currency, something that brain-dead monetarists have been hiding for the last three decades, nearly destroying the most economically powerful country in the history of the world. It's high time we beat their economic alchemy into the dirt where it belongs, replacing it in the process with real economic SCIENCE.

Yes, MMT.
Strident is right
written by FGS, November 06, 2010 2:58
When it comes to being left holding the bag after paying 50 years worth of payroll tax, you're damn right I'm stridently against it. Given $40,000 and a choice between flying an F-22 jet for an hour or paying someone 3 years worth of Social Security benefits, I'm stridently in favor of paying the pension.

Interest rate adjustments
written by AndrewDover, November 06, 2010 8:10

Your theory about raising the interest rate paid on the SS trust fund has two problems:

1) The average interest rate is currently 4.485%

2) The trust fund is not that large, nor lasts that long for the interest rate to dominate the calculations. For example, the acturaries at social security calculated what would happen if the average rate for 40% of the trust fund went to 6.4% at http://www.ssa.gov/OACT/solven...un201.html It increased the date when the trust fund emptied a few years.

The current trust fund is only $43,000 per current beneficiary since there are 58 million SS beneficiaries and the trust fund is $2.5 trillion.

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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.