The next big battle in Washington is shaping up to be cuts to Social Security. Reports are that the President is on board with cuts and will propose them in the SOTU.
As a basic resource, I’ve completely revamped the Social Security framing page on Dkosopedia. This page provides the basic talking points and statistics to make changing Social Security the new third rail in politics. If progressives use these talking points then touching Social Security will end your political career.
In researching Social Security and the economics around it, I learned just how much globalization has been costing us. By my calculations, globalization is taking a minimum of $2 billion a year out of the Social Security Fund. Fixing the jobs problem is the key to strengthening retirement for American workers. Cuts to Social Security are unwarranted and detrimental to our society. More details below.
Okay, I know that Social Security has been the third rail in politics for some time. But, unfortunately, it’s been losing some of its charge. So, I’m connecting a new power supply to it that I’ve connected to the mains and I’m charging it up again.
Here are the essential findings of my study:
- There are no significant financial problems with the current Social Security system. Whether you believe it will run out of money in the future or not is purely related to how well you can predict the future. Some models predict no shortfall ever.
- However, Social Security and Medicare suffer from lower wages and increasing unemployment, probably due primarily to unrestricted globalization.
- Nevertheless, the remarkable increase in worker productivity over the last few decades has provided lots of money to fund Social Security.
- Regrettably, this additional money has been scooped up by employers in the form of higher profits, rather than going to strengthen retirement.
- Baby boomers are not responsible for shortfalls. This problem was fixed by Congress in 1983 and the changes were signed into law by President Reagan.
- Social Security is part of the private sector. When our opponents count it as part of government spending they are lying to make the government appear larger than it is.
- The recent tax changes moved money from government spending to the private sector (by funding Social Security partly from the general fund and decreasing payroll taxes). This decreases the size of government, putting Democrats in a bind of either borrowing the money or cutting government programs.
- Payroll taxes are taxes on employers. As such it does not matter whether they are regressive as long as the residual take-home pay is above a living wage.
- Social Security is an example of successful collective bargaining on the part of workers by the government; it is not a socialist program.
- Private accounts are not an adequate substitute for Social Security because they do not provide a guaranteed benefit.
- It is a legitimate function of the government to protect the citizens of the country. Using democratic means to set the terms of wages is a proper function of government when it protects workers from exploitation by those with illegitimate economic power.
The framing page in Dkosopedia presents these findings and provides the statistics to back them up. For example:
Wages Have Fallen
Industrial capacity in the U.S. peaked in 1978. Since then it has declined about 25%, despite a significant increase in population. There are obviously many factors involved in this decline, but one salient one is unrestricted globalization, which has allowed large companies to move their manufacturing overseas (let’s call that “China”) while still selling those goods here. These companies have been profiting from what I call “wage arbitrage”. This is earning money from the differential between producing where wages are low and selling the product where wages are high.
Real wages have fallen about 8% since 1978, and about 6% since the 1960s. The minimum wage has also declined in real terms, by about 30% since 1978.
Declining Employment
In addition to the decline in wages, the number of jobs in the U.S. has fallen. The average unemployment rate in the 30 years prior to 1978 is about 0.9% lower than it was in the 30 years following 1978. This is a long period of time in each case, which means that this is not due to normal economic fluctuations or some kind of anomaly. It is clearly the result of decline in industrial capacity. Since 1978, the U.S. has steadily shipped these jobs overseas.
Industrial jobs are “wealth-producing” jobs. A wealth-producing job is one that makes a product the utility of which exceeds the resources consumed in its production. A country must have a sufficient number of wealth-producing jobs or it slips into decline because it is not producing enough wealth to support its standard of living. As wealth-producing jobs have left the U.S. it has created increasing shortfalls of money that must be made up by other means. Americans have primarily sold off assets or borrowed against them (let’s call them “houses”) to support their standard of living because they could not find well-paying jobs.
The 0.9% additional unemployment that I claim is caused by unrestricted globalization equates to 1.4 million persons out of work. At a minimum wage of $7.25/hour (the federal minimum wage today), this amounts to $2.2 billion of lost income to the Social Security Fund every year. Added to the billions of dollars lost because of the decline in wages, unrestricted globalization has been systematically eating away at funding for our retirement for years and should be viewed as the primary problem underlying our retirement system.
Increased Productivity
Over this same period of time, worker productivity in the U.S. has climbed by 80%. Why hasn’t this translated into higher wages? The primary reason (again, IMO) is that wage competition due to unrestricted globalization has kept wages down, allowing employers to soak up this additional productivity and increase their profits.
How to Strengthen Retirement
There are a number of things we can do to strengthen retirement in this country:
- Implement an international minimum wage that is a substantial and growing portion of our domestic minimum wage.
- Create a strong industrial policy coordinated with educational policy and funding.
- Support unions and the domestic minimum wage.
- Eliminate the cap on contributions based on income level.
- Increase the employer contribution.
We have to regain control of our trade policy. Since we can’t do that through tariffs (without wrecking the international economy), I strongly suggest we implement an international minimum wage. This allows us to control the outsourcing of jobs by moving this value up or down to regain wealth-producing jobs in the U.S. without unacceptable damage to the world economy. Congress should direct the President to renegotiate our international trade treaties to include a suitable minimum wage and set a two-year limit on this negotiation.
Once we have set this as a policy, the capitalist system will get to work building production capacity in the U.S. because multinational companies will know that this will be the only way going forward to serve our market. Combined with a good environmental policy that would support cleaning up and using “brownfield” areas (industrial areas that have fallen into disrepair or disuse), this will kick off a building boom (let’s call that “good paying jobs”) followed by an increase in industrial capacity (let’s call that “good paying jobs”), which will not only help our economy but will provide increased wealth with which to fund Social Security (and incidentally other government programs, not to mention a lot of private companies and jobs).
It should be illegal to sell any product in the U.S. not made to our workplace and environmental standards. Setting and enforcing a suitable international minimum wage is a fundamental and key step in reaching that goal.
Fixing our trade policy is just a key part of a plan for revitalizing our economy and fixing the jobs crisis. Other key elements are a strong industrial policy, proper funding, a sustainable environmental policy, a coordinated educational/training policy, and many other changes. This is a tall order, but it is a necessary order to fix the problem. The debate about Social Security is just a symptom of a larger problem that goes back to the fundamental questions of “How do we create enough jobs” and “Will those jobs pay enough?”
On the purely financial side, we should also remove the cap on contributions to payroll taxes and increase the employer contribution.
One reason we should remove the cap is simply that the mix of jobs has changed. As production jobs have moved overseas much of the wage capacity in the country has moved upscale. Recently, financial managers were given a salary hike from $200,000 a year to $400,000. This means that about half their salary was previously above the cap, but now 3/4 of it is exempt. This shift has put increasing amounts of money out of reach of the Social Security system. And, given the uncertainty in the economy, there is no guarantee that someone making $400K a year will have any money in their personal accounts when they reach retirement age. In today’s economy they could be laid off at 50 and have to spend through their “retirement savings” for fifteen years or more before getting access to Social Security.
Employers should also be tapped to help pay. They have benefitted for years from increases in productivity, but worker’s wages have fallen. The balance of taxes should therefore be shifted from the employee side to the employer side. In the recent tax changes it would have made sense to decrease the employee payroll taxes by 2% if that had been balanced by increasing the employer share by 2%. But frankly, employers have been getting far more out of the productivity increase. The employer share should be raised by at least 50%, from 7.65% to 12%, let’s say. This would radically increase funding for Social Security and Medicare. Given the 80% jump in productivity, this is entirely warranted, and should be affordable to businesses.
Conclusions
Part of my goal here is to shatter “conservative” arguments about Social Security (and entitlements in general). You may not agree with every one of these points. However, we are now faced with attacks on the most fundamental parts of The New Deal and progressive accomplishments from the last century. We need to take a strong stand or we will see these institutions swept away at a time when they are most needed. Please take a look at these arguments and use any and all that you can in your daily conversations.
We can reframe the issue of Social Security so that no sensible politician will reduce benefits from the program or tamper (further) with its financing. But time is short and we must act immediately to do so. If enough progressives understand the basics and use consistent and cogent framing, we can stop this train wreck in time. Otherwise, you may be eating that cat food!