March 23, 2002
From the desk of Jane Galt:Krugmanwatch: Social Security
Warning: Long column with more numbers than commentary. Not for the faint of heart or those with narcoleptic disorders.
In reading Paul Krugman’s latest piece, I’m reminded of a story.
A long, long time ago, in a galaxy far, far away, when Jane Galt was just another computer consultant in the vast swamp of the New York financial community, I was working on a project that involved duct-taping together the technology infrastructure of two firms that had merged. My firm had produced a new design; it had been signed off on; and yours truly was about to implement it, when wait! A technology manager whose job was about to go bye-bye saw a golden opportunity to save his career by putting himself in charge of the project. To that end, he fashioned an alternative proposal and put it forward.
Now, I am the first to admit that there may be many ways to solve a single design problem, and that many of the variables hinge on value judgments, hazy priority assessments, and aesthetic considerations. Too, I have made my fair share of boneheaded design moves, the stupidity of which, in retrospect, seemed blindingly obvious. So I feel that I am on solid ground when I say that this was the single worst design of anything that I have ever seen, and I include Pepsi Clear.
This fellow was an old mainframe chap, and he took one look at our distributed, high-availability, high-redundancy plan and shuddered. Instead he proposed an enormous NT 4.0 server, the largest then made, maxed out with every bit of memory and hard drive space that any company would sell you. Actually, he proposed two of them, using server mirroring software called Octopus. One server. Running all the file, print, and auxiliary services, excluding market data, for a user base of between 500-1000 users. It was expensive, slow, and it provided a lovely, large single point of failure for the entire firm.
Friends to whom I showed this design were awestruck by its stupidity. “It’s breathtakingly idiotic,” said one. “It has its own weird logic that makes me wonder if I’m missing something.”
“This man needs help,” said another. A third, my most trusted mentor, called me ten minutes after I emailed him the proposal.
“I hope you’re not letting this man near your servers,” he said.
We pointed out all the design flaws in a long letter, and ultimately I ended up in a meeting where we were supposed to discuss the merits, or lack thereof, of the proposal. I started by pointing out some of the more pressing concerns, like the way a bad disk sector could take down the single, enormous volume on which his design depended. And he began to lie.
He made technical claims for his system and its software that were not only untrue of this particular system, but unavailable in any Intel-based system anywhere. No matter what I said, he had a refutation. Which is easy, of course, if the board doesn’t know a NIC from a knicknack, and you have no compunctions about making up features that violate the laws of physics. I gave up when he claimed that the motherboard was hot-swappable. How do you answer that? “My system is not only faster and better than yours, but also shines your shoes and dispenses ice cold beer” would have been the only rational response, but I felt uncomfortable advancing such claims in the presence of other sentient beings.
And now I feel it all again: the tingling on the back of my neck; the icy chill in my veins; the helpless rage forming an aching knot in my stomach. That’s right, Paul Krugman is talking about Social Security.
Remember the "bring out your dead" scene in "Monty Python and the Holy Grail"? It's the one where the old man declares, "I'm not dead!" "Yes, he is," insists his younger companion, who persuades the undertaker to hit the old man over the head and cart him away.Now you understand the Bush administration's policy toward Social Security.
Makes me feel kinda dumb for running the numbers, when all I really needed was a Blockbuster card.
Ordinarily, the annual trustees' report on Social Security is released at a morning press conference, and simultaneously posted on the Web; this gives reporters a chance to read the material and discuss it with outside experts before filing their articles. Last week, however, the first copies were made available late in the afternoon, leaving hardly any time for analysis. One wag joked that the information was being closely held to keep it out of the hands of terrorists.But the real reason was surely to avoid too much attention to the report's unwelcome conclusion: that Social Security is in very good shape. True, the rest of the government is running big deficits, and borrowing heavily from the retirement fund — but Social Security isn't the source of that problem.
How does he do it? He knows exactly what went on in the minds of the Bush Administration without talking to a single person in it – knows to virtual certainty. Now I know how he performs his statistical wonders – he reads our innermost thoughts by remote control.
The introductory summary — which, unlike the report itself, is mainly a political document — does its best to make the worst of a good situation. But the bottom line is that the long-run sustainability of Social Security looks better than ever. The staff of the Social Security Administration, using conservative assumptions, now says that the system could operate without any changes at all — no cuts in benefits, no additional revenue — until 2041, three years longer than it projected last year.
I'm sure that 2041 sounds comfortably far off to Krugman; in all likelihood, he'll be dead. I, on the other hand, will be just entering my golden years when -- oops! -- there will only be enough money to pay 73% of current benefits.
I hope this satisfies readers who, when I criticize bogus arguments for privatizing Social Security, demand to hear my answer to the crisis. There isn't any crisis: the system looks good for 40 years, and with a bit of extra resources can survive indefinitely.
And this is where he says “the motherboard is hot-swappable and I don’t have to worry about electrostatic shock because this server won’t run on electricity” and my eyeballs begin to sizzle.
How in hell do you get that from this (or for the hard core numbers fans, this)?
While Federal law designates the Social Security and Medicare accounts as "trust funds," the accounts are not "trusts" in the private accounting sense in which funds of one party are held by a second party as a fiduciary. Rather, the Social Security and Medicare trust funds are financial accounts in the U.S. Treasury into which all income to these programs is credited and from which all benefits and administrative costs of the programs are paid. These accounts are established by Social Security and Medicare legislation. This legislation names the Secretary of the Treasury as the "Managing Trustee" with responsibility for overseeing the trust fund accounts. All revenues into the system not required to pay current expenses are used by the U.S. Treasury for general government expenses or to reduce the outstanding publicly held debt. In return, the Social Security and Medicare trust funds are issued special non-marketable U.S. Treasury bonds that by law carry an interest rate equal to the average market yield on all medium and long-term marketable Treasury securities. Interest on these bonds is paid through the issuance to the trust funds of additional special non-marketable U.S. Treasury bonds.As financial accounts, these Federal trust funds have income, expenditures and assets. The 2002 Social Security Trustees Reports show the Social Security trust funds, for example, as having $1,213 billion in assets at the end of last year, and anticipated Social Security and Medicare surpluses over the next 10-15 years promise to further increase the assets in the trust funds by a substantial amount. These non-marketable U.S. Treasury securities are properly entered under "assets" on the financial accounting balance sheets of the Social Security system, and are available to the system to meet future obligations. It is this availability to meet future program obligations that results in this year’s Trustees Reports identifying 2041 as when the Social Security trust funds will be exhausted, even though under current law Social Security tax revenues are projected to fall short of expenditures beginning in 2017.
Unified Budget Viewpoint of Trust fund Surpluses
While the bonds held by the trust funds are assets from the vantage point of the Social Security and Medicare programs, from the viewpoint of the unified budget they are liabilities of the U.S. Treasury. No one doubts the U.S. Government will honor the bonds. But since the U.S. Treasury is the ultimate payer of the programs’ benefits and the trust fund assets are also debts of the U.S. Treasury, neither the interest paid on the bonds, nor their redemption, provides any net new income to the U.S. Treasury. When annual revenues from earmarked taxes for Social Security and Medicare begin to fall short of annual expenditures, such shortfalls inevitably must be made up by increased taxation, increased borrowing (i.e., the sale of more U.S. Treasury bonds to the public) and/or a reduction in other government expenditures. This fact is the basis for the view that trust fund assets have no "real" economic value. From a unified budget viewpoint, the trust fund surpluses are a budget accounting device and make no meaningful contribution to funding future Social Security or Medicare expenditures. They simply reflect the fact that in the past, surplus Social Security and Medicare revenues have been used by the U.S. Treasury to fund other government programs or to reduce outstanding Federal debt.
Actually, that's a trick question. I know where he got it: he cribbed it from two reports (found here and here) from the Center on Budget and Policy Priorities, which is, you’ll be shocked to hear, a liberal think tank opposed to Bush’s tax cuts. Paul Krugman’s column is a rehash of their talking points.
More specifically: The long-run actuarial shortfall of Social Security is less than half the revenue that will be lost due to last year's tax cut. The common perception that the tax cut was no big deal, but that Social Security faces a terrible crisis, is completely upside down. But the powerful forces that want to dismantle Social Security won't take yes for an answer; they insist that the system is doomed.
Those numbers are a little funny, given that the CPBB itself estimates the cost of the tax cut at $2.5 Trillion, and the shortfall at $4.9 trillion -- how does he get them? By projecting the "Bush tax cuts" out for 75 years. But wait a minute, I hear you say; those tax cuts expire in 2010. Well, yes, technically that's correct. But if we pretend that they don't, you can see that the Social Security crisis is really all Bush's fault. You do see, it don't you?
Never mind trying to imagine the accuracy of a tax revenue forecast for this year from 1927; Krugman is telling us that the current problem with Social Security is a tax cut that hasn’t been enacted yet.
It isn’t. This is the problem:
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Which is what’s causing this:
How do you call plain numbers “political”, except in the sense that the real world is getting in the way of your ideals? I’m sure Mr. Krugman would like to ignore that bit about outlays exceeding intake in 2017, 24 years earlier than the date that Krugman tells us we’ll be “just fine”, but it’s hardly a political statement; it’s a mathematical extrapolation from numbers we can guess relatively well, at least compared to tax revenues: the number of people in the labor force, and the number of retired people.
Let’s go over it one more time. There is no trust fund, any more than you can start a “trust fund” by writing yourself IOU’s due in 2017 and spending the hell out of all your income now. Come 2017, you're gonna have exactly the same annual income whether or not you take those IOU's out of the "lockbox". Now I'm sure that 2017 sounds comfortably far away. But remember how awfully far off the year 2000 used to sound? It is later than you think.
The system is broke the minute outlays begin exceeding intake; that’s when we have to cut spending, raise taxes, or start borrowing. In 2017. Actually, we’ll feel the pinch even before, as the Social Security Surplus that’s been masking our deficit disappears and we have to make hard choices about spending. Hard choices Krugman doesn’t want us to make – a lightbulb goes off -- that’s why he’s using Social Security to campaign against the tax cut now, even though he knows that restoring every bit of those taxes won’t save us.
2041 is the year when it becomes a total frigging catastrophe. Best summed up in this email I received from Mindles H. Dreck:
Look at the table on page 67 of the report.I added at the bottom a line that indicates the percent of payrolls that the
"balance" is deficient in the year the "trust fund" disappears:Intermediate (2041) =4.5%
Low Cost = NA
High Cost (2029) = 15.4%So, in those years, taxes or debt, of one sort or another, might have to be
raised by 4.5% or 15.4% of total payrolls just to fund that year's retirees. And
that deficit persists.
As Mindles points out, saying that we’ll be fine until 2041 is like saying that people who jump off the Empire State Building will be fine – until they hit the ground.
Krugman also conveniently leaves out Medicare, which itself has an unfunded liability of $8.9 trillion (unfunded liabilities are what we call "Promises we've made to give people money at some date in the future without setting aside the money now to cover those promises". Like, for example, when you promised little Johnny you'd send him to the best college he got into.) That unfunded liability is how much we're gonna owe Medicare benificiaries after we subtract the imaginary trust fund.
Notice Krugman likes to discuss Social Security and Medicare separately, never in the same column – that way he can blame the shortfalls in both programs on the Bush Tax Cut, with room left over for The Poor Condition of Our Public Parks and The Disgraceful Behavior of Young People Today. Now, Paul, you have to pick. Either the tax cut is responsible for the Medicare deficit, or it could cover Social Security. Even if the Evil Bush Administration makes the cut permanent and throws in a free week at the Palm Beach Hilton for all its billionaire buddies, it can’t be responsible for both.
No, no, no! Says Paul. It’s not the fault of demographics – it can’t be! Not my beloved welfare state! It must be the Bush Administration, eager to starve the old people so their rich friends can use the bodies as mulch on their diamond ranches.
Never mind the rhetoric about retirement security; the real reason for the attack on Social Security is ideology. Here's what Edward Fuelner, president of the Heritage Foundation, wrote to supporters: ". . . today's policies are a product of the Great Society of the 1960s, which grew out of the New Deal of the 1930s, which was an assault on founding principles articulated in the 18th century. . . . Connecting the historical dots is no small task." For Great Society, read Medicare; for New Deal, read Social Security. And the real task is to connect the contemporary dots.For Heritage is the intellectual engine driving today's conservative movement. The foundation's Web site proudly quotes Karl Rove: "We stole from every publication we could; we stole several key staff persons; we want to steal more of your ideas." Indeed, before Elaine Chao became secretary of labor — and hence a trustee of Social Security — she was a fellow at Heritage. And the influence of Heritage spreads far and wide, from employees like Virginia Thomas (wife of the Supreme Court justice) to the stable of columnists featured on its opinion site TownHall.com, most notably Ann Coulter ("We need to execute John Walker in order to physically intimidate liberals, by making them realize that they can be killed too").
Honey, get the torches -- the freemasons are poisoning the wells!
And it won't surprise readers of my last column to hear that Heritage was founded with financial backing from Joseph Coors and Richard Mellon Scaife.But I digress. The important thing is to understand what's really going on here. The ideological powers behind the current administration want to do away with Social Security — not to offer retirees a better deal, but because they are opposed to the program in principle. Unfortunately, that's an argument that won't work in the political arena; Social Security is very popular. So the strategy they have adopted is to declare that the program is already dead, or nearly so. If the facts say, on the contrary, that Social Security is very much alive, the administration doesn't want to hear about it. And it doesn't want you to hear about it, either.
The important thing is not to address our demographic crisis. It is certainly not to look at the actual numbers and try to fix things.
No, the important thing is to make sure that we all know that Joseph Coors and Richard Mellon Scaife and their friends in the Bush Administration are trying to kick the old people out of their condos and make them live on the street so that all the billionaires can use them as slave labor in their yacht factories. The ones where Johnnie Walker Lindh’s dead body will be hung on the wall as a visible reminder of what can happen if you cross the Bush Administration.
Hell, I don't have to tell anyone, Democrat or Republican. You can add -- go look at the report. Then look at what Krugman says about it. You tell me whether he's being up front or lying through his teeth.
I’m reminded of another story. Actually a quote. From my economics textbook: “Economic value (wealth) is created when resources are moved from lower-valued to higher valued uses.”
I don’t know about you, but I’m sure glad Paul Krugman’s moved from writing books on international monetary theory to this.