Context -- The Problem: Our Unsustainable OVERALL Long-term Fiscal Imbalance
There is nearly universal agreement among economists and budget policy experts that under current spending policies, and at anything anywhere close to our current level of taxation, we are on an unsustainable fiscal course, with deficits (and, debt-to-GDP ratio) growing out of control and eventually devastating our economy. Long-term projections are obviously debatable, but, as CBO put it in the CBO Long-Term Budget Outlook, December 2007:
Significant uncertainty surrounds long-term fiscal projections, but under any plausible scenario, the federal budget is on an unsustainable path—that is, federal debt will grow much faster than the economy over the long run. In the absence of significant changes in policy, rising costs for health care and the aging of the U.S. population will cause federal spending to grow rapidly. If federal revenues as a share of gross domestic product (GDP) remain at their current level, that rise in spending will eventually cause future budget deficits to become unsustainable. To prevent deficits from growing to levels that could impose substantial costs on the economy, revenues must rise as a share of GDP, or projected spending must fall—or some combination of the two outcomes must be achieved. http://www.cbo.gov/ftpdocs/88xx/doc8877/Chapter1.4.1.shtml#1045449
There are obviously many ways we can reduce this fiscal imbalance to sustainable levels, or beyond merely sustainable to healthy levels, including raising taxes (and thus projected revenues), reducing projected spending anywhere in the budget to lower projected overall spending, or (most likely to occur) a combination of the two. And of course, the dynamic effects on GDP and on revenues will also have to be taken into consideration, but they don’t alter the fundamental reality that we will need to spend substantially less than is projected, raise substantially more revenues are projected, or both. Again, there is nearly universal agreement among experts on this point. (Highly recommended reading http://www.brookings.edu/~/media/Files/rc/papers/2008/04_fiscal_future/04_fiscal_future.pdf and highly recommended viewing http://www.cbsnews.com/stories/2007/03/01/60minutes/main2528226.shtml )
...and Partisan Nonsense:
Obviously, if we reduce projected overall spending as a % of GDP, and keep projected overall revenues as a % of GDP unchanged, we will reduce this projected overall fiscal imbalance as a % of GDP. One would think that that would be so obvious that it didn’t need to be pointed out. Yet, believe it or not, there are those in the blogosphere who contend otherwise. These people oppose any reduction in projected Social Security (abbreviating as “SS” henceforth) spending, and they actually claim that reducing projected SS spending could NOT reduce our overall fiscal imbalance – one blogger even contending that doing so could only worsen our long-term fiscal imbalance.
Here’s their (obviously NONSENSICAL) argument:
- Their premise: Under current SS FICA tax rates and applicable income, SS will be fully “solvent” (or very close to it) forever (or at least for many decades). That is, projected SS FICA revenues (at current SS FICA tax rates and applicable income) plus repayment of the Trust Fund bonds, with interest, are sufficient to cover projected SS spending under current policies covering benefit levels and eligibility. (Those bonds resulting from prior SS surpluses being spent on non-SS budget items – in effect, loaned by future SS recipients to the nation, to be paid back by taxpayers later)
- Another premise, which is valid: SS FICA revenues must ultimately spent on SS benefits, whether directly (in the same year) or, in the case of surplus revenues, when Trust Fund bonds are paid off.
- Therefore (their argument goes), if we reduce projected SS spending, the only possible result is that the balance of the Trust Fund will grow perpetually, with the SS FICA revenues constituting that balance never being used for their intended purpose (SS benefits), nor helping to reduce our overall fiscal imbalance (since that balance cannot be used for other spending except via loan, which represents additional debt – an unfunded liability placed on future taxpayers). Apparently these folks think that in such a scenario, the only possible outcomes would be either a growing Trust Fund balance that is never used, or increasing SS spending to use up that Trust Fund balance (which would mean taxpayers would have to pay higher taxes to pay – again demonstrating why, per this argument, reducing projected SS spending could not reduce our overall long-term fiscal imbalance).
- So, they conclude, reducing projected SS spending cannot be part of our efforts to reduce our projected overall long-term fiscal imbalance. SS “solvency”, they contend, implies that reducing projected SS spending could not lead to a reduction in our overall long-term fiscal imbalance. And, they contend, SS “solvency” means that projected SS spending is totally unrelated to our overall fiscal imbalance, not something that should be viewed as a contributor to this imbalance, since projected SS FICA revenues cover projected SS spending.
- So just to bottom-line this absurd argumentation: We should not even consider reducing projected SS spending as part of our efforts to reduce or projected overall long-term fiscal imbalance, because there’s just no way doing so would have that effect.
- Also, some of them contend (falsely) that the only way we could reduce projected SS spending would be to default on Trust Fund bonds.
Here’s why their argument is obviously nonsensical: First, the Trust Fund balance today is only about $2 trillion, only enough to cover a couple of year’s worth of SS spending. Projected spending over the next several decades is obviously many, many times this amount. No one disputes that fact. Even those who project full, infinite SS solvency do so based on the assumption of SS funding coming primarily from FUTURE SS FICA taxation. So projected SS spending over the next several decades obviously can be reduced very, very substantially without getting anywhere close to defaulting on the Trust Fund bonds – i.e., without getting close to spending only $2 trillion. OK, that myth is out of the way.
Second, although official projections do NOT support their contention that SS, under the aforementioned current policies, will be fully “solvent” forever, I grant them this premise arguendo (i.e., just for the sake of argument), because my point holds even if I grant them this premise.
So let’s assume, arguendo, that they are correct that, under current policies, SS will be fully “solvent” forever.
Now, what would happen if we decided to reduce projected SS spending as part of our efforts to reduce our projected overall long-term fiscal imbalance -- (or at the very least COULD happen, and would be very highly likely to happen if the whole purpose of these reductions were to reduce our overall fiscal imbalance)?
Well, under the assumption of full, infinite SS “solvency” under current policies, the immediate effect would be what they point to – a projected increase in the Trust Fund balance, as I’ve described in their argument. But the obvious next move would be to lower SS FICA taxation (eliminating the unneeded SS surplus), and offset that revenue reduction with increases in other taxes, resulting in lower projected overall spending, unchanged projected overall revenues, and therefore a lower projected overall fiscal imbalance. Just algebra and common sense.
Let me illustrate why my point is just common sense. As a note, there may be some who get hung up on extraneous imperfections in this analogy (and some may use such extraneous imperfections to create diversions from the key point). All I can say is: Try to focus on what is relevant.
The Apartment Illustration:
Joe rents an apartment for $1,000/month and plans to continue doing so for the foreseeable future. Joe has a "policy" of taking $1,000 out of his first paycheck of each month and putting that $1,000 into a separate bank account, his Apartment account, that he will only withdraw from to pay rent.
Suppose it Joe projects that he will be facing some OVERALL financial shortfall next year (or further down the road, or over his lifetime, etc.). He will have more than enough income to cover his $1,000/month rent (i.e., under his current policy of putting $1000/month into that bank account, his "apartment program" will be "solvent" forever), but he won't be able to afford other things that he values highly and that he wants and plans to purchase -- and if he does purchase those things his debt level and debt service expenses will rise to an unsustainable level.
Now, I (“Brooks”) tell Joe that one option for him, if he wants to free up some funds to cover non-apartment expenses and reduce his OVERALL financial shortfall, is to move to an apartment that rents for only $900/month.
Joe’s neighbor, Barry, doesn’t want Joe to move. Barry says to Joe “Hey Joe, don’t listen to Brooks. He’s wrong. You have a policy of putting $1,000 each month into your Apartment account. If you move to a cheaper apartment, all that will happen is that you’ll keep building up a balance in your Apartment account. So it won’t help you cover other expenses. Oh, and if you loan the extra money from your Apartment account to your other (general use) account and use it to cover other expenses, you’ll just owe money to your Apartment account, so your overall long-term financial balance won’t be helped at all. So moving to a cheaper apartment cannot help reduce your long-term financial imbalance. So you shouldn’t even consider moving to a cheaper apartment as one way to reduce this overall financial imbalance.”
I then tell Joe (if he hasn’t immediately realized this on his own and smacked Barry like Moe slapping Curly) that Barry’s argument is obviously ridiculous. If Joe moved to that cheaper, $900/month apartment in order to cover non-apartment expenses and reduce his projected overall long-term financial imbalance, he obviously would NOT continue to put $1,000 into his apartment account each month, but rather would put $900 into that account, and put an incremental $100 into his other account to use for other expenses. To use a technical term, “Duh!” Sure, Barry is technically correct that the IMMEDIATE effect of ONLY moving to the cheaper apartment while KEEPING his policy of depositing $1,000/month into the Apartment account would only result in a growing balance in the Apartment account. But for Barry to insist that moving to a cheaper apartment cannot possibly reduce Joe’s projected overall financial imbalance because of this -– and ignoring the obvious (or at the very least POSSIBLE) accompanying policy change of reducing his monthly deposit into the Apartment account -- is beyond ridiculous. It’s kind of like someone telling you not to have surgery to remove a tumor, because the immediate effect will be that, during the actual surgery, at the exact moment the tumor is removed, you will have a huge open wound (from the surgeon’s incision, etc.), which will probably lead to dangerous and possibly deadly infection…ignoring the possibility that the surgeon just might, well, close up the opening as his next move!
Well, it’s just as ridiculous for anyone to contend that, because under a full, infinite SS “solvency” scenario, that reducing projected SS spending could not reduce our projected overall long-term fiscal imbalance, but could only result in a perpetually growing Trust Fund balance…ignoring the possibility that we just might, well, lower SS FICA taxation if that were the case, and offset that revenue reduction with increases in other taxes, thus lowering projected overall spending, keeping overall revenues unchanged, and thus lowering the overall projected long-term imbalance...which just happens to be the whole friggin' purpose of reducing the projected SS spending in the first place (or at least COULD be the purpose, and most likely would be).
One more illustration, with apologies to anyone to whom my point was painfully obvious from the start (believe me, there are people who are just not getting this, despite much effort on my part).
The "Defense Tax" Illustration:
Let's assume, arguendo, that you favor cutting Defense spending as part of the solution to our long-term fiscal imbalance. Now let's assume that tomorrow a "Defense Tax" is put in effect, with revenues dedicated to the Defense budget, projected to fully provide for a continuation of the current level of Defense spending, and let's assume that some other taxes that go into the general fund are lowered such that all the changes end up revenue-neutral. Now, all of a sudden, presto! -- Defense is "solvent". Would you now say "Well, it doesn't make sense to look at cutting Defense spending as part of the solution to our fiscal imbalance, because Defense is "solvent" ????? Hopefully you would NOT say that, because that would be nonsensical. We can adjust the Defense Tax rate up or down as we wish, in accordance to any increases or decreases we choose to make in Defense spending, and if we choose to reduce projected Defense spending, we can reduce “Defense taxation” and offset that revenue loss with increases in other taxes, thus lowering projected overall spending, keeping projected overall revenues unchanged, and thus reducing the projected overall fiscal imbalance. And the same applies to SS.
Just in case it isn’t clear to anyone, my point here does NOT constitute policy advocacy. It has nothing to do with what we SHOULD do – whether or not we SHOULD reduce projected SS spending as part of our solution to the enormous problem of our overall long-term fiscal imbalance. I happen to think we should (via some form of means testing), but that has nothing to do with the merits of my conceptual/analytical point here. If someone thinks he can consume two cakes of 1000 calories each and will only have consumed 1500 total calories and I correct him and tell him it would actually be 2000, that doesn’t constitute a suggestion that he go on a diet, whether or not I think he should. Same thing here.
A shift in argument that came along the way -- Shift #1
As you’ll read below, someone on another blog, who had for a long time claimed that my point was invalid, shifted to calling it "true, but trivial” (rather than "meaningful" or "important"), though offering no explanation, no argument to support that characterization of my point as "trivial". I have explained to this person (as if it needed explaining) that my point is a correction of a fundamental conceptual error on which some people are basing their position on an extremely important issue (our unsustainable long-term fiscal imbalance and how to deal with it). Hardly trivial.
Another attempted shift -- Shift #2
Another argument that someone came up with recently* (perhaps as a result of my dogging him for months on the invalidity of the bullet-pointed argument above) is that if we cut projected SS spending, ostensibly (the argument goes) to reduce our overall long-term fiscal imbalance, and if the immediate effect is projected perpetual SS surpluses, instead of actually fulfilling the stated purpose of these spending reductions by changing tax rates as I've discussed above (lowering SS FICA, offsetting that with increases in other taxes) to lower the overall imbalance, the politicians certainly will instead just use ALL of that incremental amount of SS surpluses to either lower taxes that much more or to spend that much more on other budget items (e.g., Defense) than they would otherwise, so the result could not possibly be a reduction in the overall long-term fiscal imbalance. (* Obviously I don't know for sure that he never raised this issue before recently, but in my 7 months of sharing threads on which he has posted and commented on this matter, I hadn't seen him raise it until recently.)
Well, first of all, this argument really just came up as it (apparently) dawned on this person that his arguments (the bullet points above) may just be invalid (and they ARE indeed obviously invalid).
Second, this argument is obviously exceedingly presumptuous. He asserts CERTAINTY that Congress, upon telling seniors and soon-to-be seniors that at least some of them (and perhaps all of them) will receive less in SS, will keep taxing workers just as much as before (via SS FICA payroll taxation), even though it would be agreed by all that this payroll taxation is unnecessarily high (i.e., it will produce more revenue than necessary to cover future SS benefits) and even though that would create that much more of an unfounded SS liability, just to use ALL the extra cash for that much higher spending elsewhere or lower taxes. In other words, the argument goes, we can be certain that politicians (regardless of which party is in power, by the way) will do perhaps the toughest two things in politics – taking benefits away from seniors and openly maintaining unnecessarily high payroll taxes -- with the stated rationale that such difficult measures are necessitated by our unsustainable long-term fiscal imbalance, but use ALL of the gains that result for purposes other than the stated purpose of reducing our long-term fiscal imbalance. I can’t completely rule out the possibility that that could occur (and it’s certainly plausible that SOME of this effect could occur, with SOME of the gains used, in effect, for purposes other than reduction in our overall fiscal imbalance), but it is unlikely that it will happen with ALL the gains, and more importantly, it is ridiculous for anyone to believe with certainty (or anything close to certainty) that this WILL occur – again, to be CERTAIN that ALL the gains would be squandered on incremental spending or incremental tax cuts.
And notice that this argument could be made against ANY reduction in spending (or tax revenue increases) in our efforts to reduce our fiscal imbalance. Why bother, the argument goes, if it will certainly only lead to that much higher spending elsewhere or that much lower taxes, thus erasing any potential benefit? To illustrate the flaw in this argument by taking it to an extreme, this argument seems to imply that, if we almost eliminated SS spending altogether, limiting our total spending on SS between now and eternity to only the amount we are obligated to spend due to Trust Fund bonds (about $2 trillion) rather than the much, much higher amount we are projected to spend under current policies over the next several decades, this huge spending reduction (the argument goes) could not possibly reduce our overall long-term fiscal imbalance. Seem silly? It is.
Also, why assume that the reduction of projected SS spending and the reduction of SS FICA taxation would have to occur sequentially and in that order? Obviously a new policy containing both could be agreed to at the same time, as could offsetting that SS FICA revenue loss with increases in other taxes.
And the most recent arrival -- an attempted bait & switch -- Shift #3
One of the most persistent perpetuators of the nonsensical argument I've described in the bullet points above is Bruce Webb. Bruce is not an economist nor anyone who deals with SS policy in any official capacity, just a blogger who focuses on SS from a partisan perspective. I’m not an economist either, nor do I deal with SS policy in any official capacity. I do not focus on SS in my blogging, and Bruce undoubtedly knows more about the details of SS than I do. For months I have asked Bruce to engage me substantively on the conceptual/analytical point I have made above, but he has refused, merely contending (most of the time) that my point was invalid, or on some occasions characterizing it as “true, but trivial” with no argument behind the “trivial” claim. During these months, Bruce has presented essentially the argument I’ve described above (that reducing projected SS spending could not reduce our projected overall fiscal imbalance because all that would happen would be a growing Trust Fund balance). He recently offered to debate on HIS blog, but the last time he made that offer and I took him up on it, some debate took place, but then he deleted the whole thread. For that reason, plus my even greater concern that he would selectively delete or edit comments of mine (or of his) on his blog, I pressed him (publicly, on another blog) to debate me on neutral ground – here at Forvm, and finally (and publicly) he agreed to do so.
I mention the above history not for it’s own sake, but to note a curious development. Faced now with having to actually engage me substantively and seek to refute my argument or support his claim that it is “trivial”, out of nowhere Bruce, just yesterday, brought up an entirely new argument: that reducing projected SS spending would lower GDP so much that it would not improve our overall long-term fiscal imbalance (something of a Keynesian argument, I suppose). If I have to contend with this entirely new straw that Bruce Webb has grasped, so be it, but it should be known that that has NOT been his argument all along. Rather, it is an attempted bait & switch.
The Bottom Line
Obviously part of our solution to our unsustainable overall long-term fiscal imbalance COULD be reducing projected SS spending. This is true even if, under current policies (benefit levels, eligibility, and SS FICA tax rates and applicable income), SS would be fully "solvent" forever. All we'd have to do in that case is to reduce SS FICA taxation and offset that lost revenue with increases in other taxes. The result would be lower projected overall spending, unchanged projected overall revenues, and thus lower projected overall deficits and overall long-term fiscal imbalance. Whether we SHOULD do this or not is another debate, but anyone who disputes the above and contends that SS "solvency" means that reducing projected SS spending could not help reduce our overall long-term fiscal imbalance is being nonsensical, and the implication of this nonsense -- that we should not even consider reducing projected SS spending as part of our efforts to reduce our overall fiscal imbalance -- is not just nonsensical, but potentially harmful insofar as it (like any irrational approach to any problem) may lead to suboptimal policy with trade-offs that do not fit with our priorities and values.