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Home Publications Blogs Beat the Press Peter Peterson Wants to Cut Social Security

Peter Peterson Wants to Cut Social Security

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Tuesday, 11 May 2010 14:32

That could have been the title of this CNNMoney.com piece that touted the idea of "fixing" Social Security. The peice begins by quoting Robert Bixby, the director of the Concord Coalition, an organization that was founded by Peter Peterson and is still partially funded by him. Mr. Bixby described fixing Social Security as "low-hanging fruit" when it comes to deficit reduction.

The piece then went on to Mr. Peterson himself:

"While a Social Security fix would cure only a small part of the country's long-term fiscal shortfall, it could pay big dividends in terms of the U.S. standing internationally, deficit hawks say. 'It would be a confidence builder with our foreign lenders,' said Pete Peterson at a recent fiscal summit organized by his foundation, the Peter G. Peterson Foundation.

That could lessen the risk of a big rise in interest rates and buy the country more time to handle other debt-related issues, such as tax and budget reform and further changes in Medicare."

Mr. Peterson's ability to assess what builds confidence with foreign investors or anyone else is somewhat questionable. He managed to somehow completely overlook an $8 trillion housing bubble, the collapse of which gave us the worst downturn in 70 years.

Mr. Peterson's logic is also somewhat confused. If foreign investors lose confidence in the United States then the value of the dollar would fall relative to other currencies. This will make U.S. exports cheaper to foreigners and make foreign imports more expensive to people in the United States. The result would be that we would export more and import less. This improvement in the trade balance would increase employment and reduce the deficit. If the reporter has spoken to someone other than Mr. Peterson and his employees, she may have caught Mr. Peterson's mistaken logic and pointed it out to readers.

The rest of the piece is devoted to misrepresenting Social Security's financial situation. It notes that the program is projected to pay out more in benefits than it takes in as SS taxes this year. It then tells readers:

"When the system takes in less than it has promised to pay out, the government will need to make up the difference by paying back the surplus revenue that has been paid into Social Security over the years, but which Uncle Sam spent on other things."

This is true in the same way that if Mr. Peterson spends the interest from government bonds that he owns or cashs in bonds that hit their expiration date -- rather than reinvesting the money in government bonds --  the government will need to make up the difference by paying back the money that Mr. Peterson has lent over the years, but which Uncle Sam spent on other things.

In other words, the article is implying that there is something sinister about a normal business practice. The Social Security trust fund bought government bonds with its surplus, just like private pension funds do, as well as wealthy individuals. Under the law, this money will be paid back to Social Security  -- that is what governments do with their debts -- they pay them back -- unless they default.

 

Comments (14)Add Comment
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written by izzatzo, May 11, 2010 5:40
When up to one's derriere in alligators, always worry about the flies first before fending off the alligators. It's only rational. Take care of the pennies and the dollars will follow.

It builds character, confidence and stamina for the real battle ahead. Practice deep breathing, exhaling each each time with Kill SS, Kill SS, It's the Alligators or Us, Kill SS.
The Peterson quote in context
written by AndrewDover, May 11, 2010 6:17

"I believe that there are approaches to reforming Social Security that are compassionate, fair and reasonable. If we act before a crisis occurs, effective reforms can be implemented that are sensible and which will preserve this indispensable social safety net for those who depend on it.

For example, we would suggest for consideration some combination of gradually increasing the retirement age, indexing it to longevity, and reducing benefits for the well off through what I call an affluence test or progressive wage indexing. Then one could also lift the payroll tax cap.

If we could address Social Security reform, it would provide a much needed confidence builder with our valued foreign lenders and so they don't lose faith that we can manage our own fiscal affairs.

However, addressing Social Security only solves a small part or about 10%, of the overall fiscal problem. Healthcare costs in the U.S., on a per capita basis, are double those of the rest of the developed world with no appreciable differences in outcomes. It's as though we are in a medical arms race. Healthcare costs are the big elephant that could bankrupt our economy. They deserve the highest priority on the fiscal agenda.

In order to really have a major impact on the newest cliché, "bending the cost curve", we believe we must address many basic health care cost drivers that have not been reformed at all.

Take the fee for service payment system. If you hired a roomful of economists and told them to come up with a highly effective incentive to inflate costs, I doubt they could come up with something this perverse.

There are other largely ignored health care cost drivers: end of life, where a disproportionate amount of spending occurs, and our counterproductive malpractice system, to name a couple ... not to mention that we're the only major developed nation on earth with no healthcare budget.

The recent health care legislation put in place two mechanisms that have the potential to both foster much needed implementation for those which have been tested and provide much needed research and experimentation for those that haven't -- the Independent Payment Advisory Board and the Innovation Center.

But the real question is, will we have the political will to utilize them to tap this potential? Can the culture of health care in America be transformed to one focused on value?

There are a few other reforms that should be on the table for consideration:

* A progressive consumption tax that not only increases revenues but also increases savings. Increasing our savings is a national imperative.

* An energy or carbon tax, to reduce our dependence on foreign oil and foreign lending, and respond to the environmental challenge.
So-called tax preferences which aggregate to about $1 trillion a year.

* I can also understand why the American people believe that there are significant savings to be found in a defense budget that is larger than Europe's, China's Russia's, Japan's and much of the rest of the world combined.

* Finally, budget controls, like the Pay-Go rules and spending caps of the 1990s, work.

Once this recession is behind us and more Americans are back to work, we need to immediately begin to implement these kinds of reforms."

Opening Remarks by Peter G. Peterson, April 28, 2010
http://www.pgpf.org/newsroom/oped/fiscalsummitopeningremarks/
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written by Tao Jonesing, May 11, 2010 7:06
We're supposed to believe that, Peterson, a man who hates the government and believes only in serving his own self interest cares about the government running a deficit? Why? Particularly when every time he promotes austerity for others, he makes money off the deal?
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written by Queen of Sheba, May 11, 2010 8:23
Peterson is correct about two things: medical costs have the potential to sink the country's economy if costs of services are not reined in, and the military budget is bloated. So where was Mr. Peterson when Washington was deliberating a health reform bill that did not cut the costs of services, did not cut the costs of prescription drugs and left the for-profit insurance companies untouched (except to feed them 30+ million new customers)? And I must have missed Mr. Peterson's lecture to congress on limiting military spending the last time the DOD budget came up for review. The military budget of the country this year is larger than the payouts for Social Security.

Also it's odd that Mr. Peterson's prescriptions for deficit reduction didn't mention a transaction tax for Wall Street or an increase in the tax levied on investment income - which was cut during Bush the Younger's term in office - yet managed to include a VAT tax on consumption, the most regressive of taxes. Now I'm not an economist, but I fail to understand how instituting a VAT tax which will raise the price of everything (with a possible exemption for food or drugs) can possibly increase savings. Someone will have to explain to me how that works.

Mr. Peterson also fails to prescribe applying the Social Security tax to higher earned incomes - much higher - or doing away with the cap altogether.

This is what happens when a billionaire suggests budget cuts - the really painful ones land on someone else's household.
Response to Queen Sheba
written by AndrewDover, May 11, 2010 10:01

RE: "it's odd that Mr. Peterson's prescriptions for deficit reduction didn't mention a transaction tax for Wall Street or an increase in the tax levied on investment income ..."


"Of course, expenditure cuts must play a major role but some have a tax aversion syndrome. They have never met an increase they didn't hate – and do everything in their power to stop.

To me, that is simply an untenable position, both fiscally and politically. Given the sheer magnitude of the imbalances that we face, addressing these without any revenue increases simply doesn't add up. Doing so would devastate important social insurance, and other important governmental programs. Though there needs to be adjustments to it, the social contract is part of the fabric of our society, and any set of solutions should recognize that the core of these programs must remain intact, particularly for those who need them."



RE: "Mr. Peterson also fails to prescribe applying the Social Security tax to higher earned incomes - much higher - or doing away with the cap altogether."

"For example, we would suggest for consideration some combination of gradually increasing the retirement age, indexing it to longevity, and reducing benefits for the well off through what I call an affluence test or progressive wage indexing. Then one could also lift the payroll tax cap. "
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written by vorpal, May 12, 2010 12:21
you would think they would give up on the social security thing. it's as if rich people are addicted to getting all the money and like gamblers, won't quit when enough is enough.
3 out of 6 solutions
written by Bruce Webb, May 12, 2010 1:00
AndrewDover citing Peterson suggests there are only three solutions to Social Security possible:

1) Gradually raise retirement age
2) Means test Social Security
3) Raise the payroll cap

All of which would be straight give-aways from the baseline and all serve to undercut support for Social Security, particularly among the upper middle class who SURPRISE could actually make PRAs work.

But there have been other possibilities fronted:
4) Change from wage indexing to price indexing to establish initial benefits
5) Change the CPI index used to adjust continuing benefits

Both of which would undercut any calculation of ROI and so make Soci Security seem like a worse deal for current workers.

But what the Peterson people NEVER discuss is what a straight out plan that would fix SS under a phased in system of payroll tax increases that would leave retirement age alone, not additionally means test SS (because tax on benefits is already a means test), leave the cap formula alone, not change the indexing for either initial or continuing benefits.They just leave you to assume that any such tax increase would be comparativly crippling.

Well it wouldn't be. A payroll only fix would be cheap. Unbelievably cheap. Something the liars around PGP know full well which is why it was taken off the table. The only question is why people who insist there are only three or perhaps five solutions while refusing to quantify solution six are knaves or fools, or more harshly liars or those who just bought the lies.

I'll just suggest that Mr. Dover was not born yesterday.
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written by Eric, May 12, 2010 11:01
Better to do nothing to Social Security for a decade or so I think. Any action at all contemplated while the nation feels like it is in some kind of a crisis opens the door too much for monkey business. Let's just say that, with the Trust Fund balance where it is, we can easily afford to work on more serious budget problems, such as health care and a better long-term general tax structure, for at least a decade. I much prefer letting the general revenue side of the budget get a decade or more of experience net redeeming Trust Fund debt before we look at tweaks. Peterson says a lot of reasonable sounding things, but I would rather redeem a good chunk of the Trust Fund before we start taking his advice. If Pete is still around in 2024 (and if I am!) I'll be sure to consider his ideas then.
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written by AndrewDover, May 12, 2010 11:28
My point was that when you read the Peterson quote in context, it is clear that his main concern was medical health care spending, not "cutting social security". The CNN article, and Dean too, omitted the next paragraph:

"However, addressing Social Security only solves a small part or about 10%, of the overall fiscal problem. ... Healthcare costs are the big elephant that could bankrupt our economy. They deserve the highest priority on the fiscal agenda. "

p.s. I believe Bruce will convince more people of the merits of increasing payroll taxes if he omits the name calling.
Baby Boomer Backlash?
written by KJMClark, May 12, 2010 3:17
What is it with people bashing Peterson? The guy's spent decades trying to get the country to show some fiscal discipline. He's always left everything on the table, except more borrowing, yet somehow my fellow Democrats get foaming at the mouth mad whenever the guy talks, and only hear about a third of what he says.

Look, I'm a GenXer, and it sure looks to me like our long-term obligations are going to ruin us. As Peterson says, the biggest problem is healthcare, but Social Security is on the list too. I get *really* tired of baby boomers whining about cutting social security but then being OK with the bill falling on me and my kids.
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written by liberal, May 12, 2010 4:39
KJMClark wrote,

The guy's spent decades trying to get the country to show some fiscal discipline.


No he hasn't. Give me one iota of evidence he's come out against the carried interest exemption, a corrupt tax break that benefits him directly.
intergenerational transfers
written by TFK, May 13, 2010 12:42
I'm with KJM - why should my children and I be expected to bear the entire cost of any fix through future taxes, to pay for the profligacy of the boomers by maintaining the benefits that they didn't tax themselves enough to support?
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written by Roger L. Duba, May 17, 2010 10:21
In response to TFK, who claims that the boomers are profligate in maintaining benefits that they didn't tax themselves enough to support. In fact, the boomers did tax themselves enough to support their benefits. In 1983, the Greenspan Commission almost doubled Social Security Taxes. The idea was that these increased taxes would not only pay ongoing benefits for those who were already on Social Security, but more importantly, it would build up a Trust Fund which could be used to pay benefits to the Boomers when they were eligible for benefits. It worked perfectly! The Trust Fund is there and will fund Boomer benefits for the next 25 or 30 years. Of course, the money in the Trust Fund was invested in U.S. Government bonds. Where else could it be invested? But now, politicians and people like Peter Peterson want to welsh on paying the money which is rightfully due the Boomers.
Pay it back!
written by David Knuttunen, December 03, 2010 9:42
The debate over the trust fund is exactly this: the Federal Govt. borrowed money from working Americans, now some rich folks think they shouldn't have to pay it back. Suppose the Fed Govt repudiated the debt it owes to, say CitiCorp or Bank of America (by refusing to repay the bonds these institutions hold). This would undoubtedly be viewed by the financial industry as a "bad thing". But apparently when the debt is owed to the working people of the United States, it is a different thing altogether.

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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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