The Payroll Tax Battle: Winning What We Don’t Really Want

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Monday December 19, 2011 · 1:08 PM PST

2011/12/19 · 13:08

Dean Baker
The Guardian Unlimited, December 19, 2011

The economy badly needs stimulus. The collapse of the housing bubble caused us to lose more than $1.2 trillion in annual demand. Residential construction collapsed when the bubble burst, falling by more than 4 percentage points of GDP, which translates into approximately $600 billion a year in lost annual demand.

The collapse of the bubble also led to the destruction of close to $8 trillion of bubble-generated housing equity. The wealth effect of this equity on consumption generated close to $500 billion in annual consumption demand. This also was lost when the bubble burst.

In addition, the collapse of a bubble in non-residential real estate cost another $100 billion or so in annual demand. Finally, the lost tax revenue from the collapse of the housing market and the resulting fallout have forced cuts of close to $150 billion a year on state and local governments.

In total, the economy has lost close to $1.3 trillion in annual demand as a result of the collapse of the housing bubble. This explains the economy’s weak growth and high unemployment. There is no simple way to replace this demand.

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Monday December 12, 2011 · 2:03 PM PST

2011/12/12 · 14:03

December 12, 2011

The Honorable Mike Johanns
404 Russell Senate Office Building
Washington, DC 20510-2705

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. Saying that these bonds are IOUs is the bonds currently trading at record-low rates are just IOUs. Saying this is a distortion of the facts.

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.

Best regards,

Dean Baker

Dean Baker, Co-Director, Center for Economic and Policy Research
Cc: www.cepr.net

Letter to Rep. Chaffetz: Social Security Has Dedicated Revenue Stream

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Monday November 14, 2011 · 11:40 AM PST

2011/11/14 · 11:40

November 14, 2011

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.

Best regards,
Dean Baker

Dean Baker, Co-Director, Center for Economic and Policy Research
Cc: www.cepr.net

Letter to Romney: Social Security Does Not Need Saving

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Tuesday November 08, 2011 · 12:44 PM PST

2011/11/08 · 12:44

November 8, 2011

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.

Best regards,
Dean Baker

Dean Baker, Co-Director, Center for Economic and Policy Research
Cc: www.cepr.net

Letter to Rep. Hensarling: Paying SS Benefits Does Not Mean We're Spending Money We Don't Have

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Monday November 07, 2011 · 8:05 AM PST

2011/11/07 · 08:05

November 7, 2011

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.

Best regards,
Dean Baker

Dean Baker, Co-Director, Center for Economic and Policy Research
Cc: www.cepr.net

Letter to Sen. Isakson: Budget Problems Stem From Health Care Costs, Not Social Security

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Tuesday November 01, 2011 · 1:54 PM PDT

2011/11/01 · 13:54

November 1, 2011

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 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.

Best regards,
Dean Baker

Dean Baker, Co-Director, Center for Economic and Policy Research
Cc: www.cepr.net

Letter to Gov. Perry: Bonds in Social Security Trust Fund Are Not IOUs

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Thursday October 27, 2011 · 1:13 PM PDT

2011/10/27 · 13:13

October 27, 2011

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.

Best regards,
Dean Baker

Dean Baker, Co-Director, Center for Economic and Policy Research
Cc: www.cepr.net

Letter to Rep. Ryan: Raising Cap on Social Security Payroll Contributions Could Close Funding Gap

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Tuesday October 25, 2011 · 12:57 PM PDT

2011/10/25 · 12:57

October 25, 2011

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.

Best regards,

Dean Baker

Dean Baker, Co-Director, Center for Economic and Policy Research
Cc: www.cepr.net

Letter: Governor Rick Perry is Wrong on Social Security Means Testing

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Thursday October 13, 2011 · 11:09 AM PDT

2011/10/13 · 11:09

The Honorable Rick Perry
Office of the Governor
State Insurance Building
1100 San Jacinto
Austin, TX 78711

Dear Governor Perry,

At a recent campaign stop in Iowa, you said that you are open both to raising the retirement age for Social Security and limiting benefits for upper-income people, or means-test the program. You summed up these suggestions by saying, “With no changes, [Social Security] won’t be there for [younger Americans] when they retire.”

A closer examination of Social Security and how benefits are distributed shows that these statements are not accurate. In fact, Social Security will be there for future generations even with no changes. And means testing the program for affluent beneficiaries would actually be an unnecessary cut in benefits for millions of retirees.

The facts are straight-forward. 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. Even if Congress never makes any changes to the program, Social Security will be able to pay slightly more than 80 percent of scheduled benefits from then on and will indeed be there for younger Americans.

Also worthy of consideration is that the vast majority of Social Security beneficiaries are lower- to middle- income people. The number of beneficiaries considered affluent is far too small to any significant amount of revenue through means testing and in the process, the program’s administrative costs would actually go up.

Social Security has continued to be a topic of debate during this campaign season. 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.

Best regards,
Dean Baker

Dean Baker, Co-Director, Center for Economic and Policy Research
Cc: www.cepr.net

Letter to Rep. Hastings on Social Security Comments

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Monday October 03, 2011 · 1:45 PM PDT

2011/10/03 · 13:45

October 3, 2011

The Honorable Doc Hastings,
1203 Longworth House Office Building
Washington, DC 20510

Dear Representative Hastings,

At a recent town hall in your district you said that Social Security needs “significant reform” and, among other things, that people are living longer and that the ratio of workers to beneficiaries has changed.

As a matter of fact, changes have already been made to Social Security. The recommendations of the National Commission on Social Security Reform in 1983 increased of the normal retirement age to 67 and raised Social Security taxes. This was done precisely because the commission recognized that people were living longer and the ratio of workers to beneficiaries was getting smaller. This in turn 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.

The result of these changes is that the Congressional Budget Office’s projections show Social Security will maintain full solvency through the year 2038 with no changes to the current system. Even after 2038, the program will still be able to pay about 80 percent of full benefits from then on.

As a member of Congress, I hope that you will be careful to present the situation more accurately in future statements to your constituency, and the general public. If you would like any additional background on the program, I would be happy to assist you.

Best Regards,
Dean Baker

Dean Baker
Co-Director
Center for Economic and Policy Research

Cc: www.cepr.net

Letter to Rep. Coffman on Social Security Comments

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Thursday September 22, 2011 · 1:34 PM PDT

2011/09/22 · 13:34

September 22, 2011

The Honorable Mike Coffman
1222 Longworth House Office Building
United States House of Representatives
Washington, DC 20515

Dear Representative Coffman,

During a recent radio interview, you agreed with Governor Rick Perry’s assertion that Social Security is a “Ponzi Scheme.” This comparison has little basis in fact.

At its most basic level, Ponzi schemes are based upon the deceptive premise that for a small investment, investors will receive enormous returns. The real outcome with such schemes is often no return at all.

This is clearly not the case with Social Security.

Social Security is not based on any deception. You can find all the information you want about the program’s past, current and projected future finances in great detail in the annual Social Security trustees report. You will never find this sort of transparency with a Ponzi scheme.

Social Security has provided substantial benefits for retirees since its inception. Moreover, 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. A program that will continue to provide retirement security for millions of people for years to come hardly fits the description of a Ponzi scheme.

As the discussion over Social Security continues, I hope that you will be careful to present the situation more accurately in future public statements. If you would like any additional background on the program, I would be happy to assist you.

Best regards,
Dean Baker

Dean Baker, Co-Director, Center for Economic and Policy Research
Cc: www.cepr.net

The Social Security Tax Cut and the Ignorance of Political Experts

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Wednesday September 21, 2011 · 2:07 PM PDT

2011/09/21 · 14:07

Dean Baker
Al Jazeera English, September 20, 2011

Political consultants have a well-deserved reputation as being some of the most incompetent human beings ever to walk the planet. Mark Penn, Hillary Clinton’s top aid in her 2008 presidential campaign, famously remarked that the American people will not elect someone named Barack Hussein Obama as president. Mr. Penn received several million dollars for his work on the Clinton campaign.

This background must be kept in mind when we have these people tell us that we should not worry about the future of Social Security just because President Obama has proposed extending and expanding the 2.0 percentage point cut in the payroll tax. Under President Obama’s proposal, the Social Security trust fund would be credited with the same amount of revenue as if the tax cut were not in place, just as is happening in 2011.

While there is nothing in principle wrong with financing Social Security in part out of general revenue for two or three years in the middle of a severe economic downturn, the question is what will happen when the economy recovers enough that we no longer need this tax cut as stimulus. In principle the tax should simply revert to its normal level.

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