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January 16, 2005

Joshua Micah Marshall Is Annoyed at Stephen Hess

Marshall writes:

Talking Points Memo: by Joshua Micah Marshall: January 16, 2005 - January 22, 2005 Archives: Has Stephen Hess, government affairs mandarin and resident quote-meister at Brookings, gotten out of the office recently? Read a paper? Chatted with a Democrat? Here's what he told the Baton Rouge Advocate about the future of Social Security: "Nobody denies that it's a serious question and future train wreck. The debate itself is worthy."

Nobody denies it's a future "train wreck"? If I'm not mistaken, whether Social Security is headed for a budgetary "train wreck" is precisely what's being argued about right now.

I would put this more strongly: Stephen Hess hasn't even been visiting the Brookings cafeteria and listening to the chatter there. Brookings has the finest group of policy economists in Washington D.C. They have views--informed views--about issues of economic policy. Two of them, Peter Orszag and Bill Gale, have written:

The Budget Outlook: Projections and Implications: [T]he unified budget deficits [over the next decade] will reduce annual national income a decade hence by 1 to 2 percent... and raise average long-term interest rates... by 80 to 120 basis points. Looking out beyond the next decade, the budget outlook grows steadily worse.... [T]his nation’s fiscal gap amounts to about 7 percent of GDP. The main drivers of this long-term fiscal gap are, in order, the spending growth associated with Medicare and Medicaid, the revenue losses from the 2001 and 2003 tax cuts, and increases in Social Security costs. The nation has never before experienced such large long-term fiscal imbalances. They will gradually impair economic performance and living standards, and carry with them the risk of a severe fiscal crisis...

Stephen Hess should have said Social Security is not our most urgent or our largest fiscal problem. And no, the debate is not worth having as long as it is composed of misinformation.

I think it's time for a memo from Brookings CEO Strobe Talbott to his senior fellows, telling them that keeping up with the work of other senior fellows is a minimal condition of employment at Brookings.

Posted by DeLong at January 16, 2005 09:28 AM

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http://www.nytimes.com/2005/01/16/magazine/16SOCIAL.html?oref=login&pagewanted=all&position=

A Question of Numbers

Since the establishment of Social Security in 1935, government actuaries have been crunching data and projecting the future of the system. Why don't they see a crisis looming?

http://www.nytimes.com/2005/01/16/magazine/16TAXES.html?pagewanted=all&position=

Breaking the Code

Deftly, year by year, step by step, the Bush administration has been reinventing the American system of taxation. And the story of this revolution is not over.

Excellent in depth article....

Posted by: anne at January 16, 2005 11:05 AM


Well, after throwing money at think-tanks for three decades, the Rich may justly reap their due, with the pride of successfully inculcating into the Mob a convincingly-complicated yet ridiculous Notion, which goes, that the marginal taxrate --> investment --> growth Linkage OUTRANKS ALL OTHERS within the compartment-model of the market; and further, as a bonus, promulgating the Watt-Nortonian "vision," that "freedom" means "plunder of the public resources" [--and you should already KNOW just how much you're getting back for THAT, o dirtclod of the red-lands!--we mean to say ZERO!--], and also clearly indicates the "secret" plunder of said resources; --because, despite their appearance to make rational comparisons, and even graduating from schools and winning awards, these "freemarket libertarian" goofballs really have no brains, since they can't use their "God-given entrepreneurial creativity" TO FIND ANOTHER WAY TO MAKE A BUCK. Why, just last week I came upon a typical scene of one of these poor forsaken creatures (he had fallen out the window of his limousine, near Santa Monica and Wilshire, and was laying there gibbering at the curb) who had one thumb in his mouth and the other up his ass, and his fellows were trying to re-teach him left from right, so he wouldn't poison himself, when he started to try to make words, and we bending low, barely caught his babble that "maybe" there was "too much brain damage in the mercuries of my hemoglobins,--" then he started to slobber from the crease in his lips, and then from an incoherent low murmur revved his voice up-and-up to a rhythmic scream, chanting "tax cuts, tax cuts," so vituperative his face turned puce, his productive drool jarring the passersby out of their dreams, and startled we having jumped away, ran back quickly to inject a hypodermic, and thus under our coos and restraints he finally calmed down, sobbing and blowing snots on his cuffs.

Posted by: Lee A. Arnold at January 16, 2005 11:20 AM


I feel stupid asking this in such an exalted context, but don't we already have private investment accounts for retirement? Couldn't these accounts be easily expanded without touching Social Security?

Both IRA (Keoghs, etc) and 401Ks have ridiculously low limits on contributions. Wouldn't removing or relaxing these restrictions eliminate the "argument" for the Bush program of destruction of Social Security? I know that in my own case, rising into a new income bracket only a few years before retirement, I would have put a lot more into my IRAs and 401K if they'd have let me.

Posted by: Tom Parmenter at January 16, 2005 11:35 AM


Tom Parmenter

Yes. We could well enhance personal pension accounts. But, remember that stock dividends are taxed at 15% as are capital gains. Capital gains on stocks are only paid when a stock is sold by us or within a mutual fund we may own. So, essentially investing in the S&P Index or Total Stock Market Index there is minimal taxing of dividends and no taxing of capital gains until we sell funds. I consider my index fund holdings another retirement account even though they are not formally sheltered.

Posted by: anne at January 16, 2005 11:45 AM


I'm glad Tom Parmenter asked that question -- I've been wondering, too. And leave Social Security alone. And maybe lower the tax brackets on income from all sources for people over 65 -- up to a sensible limit?

Posted by: PW at January 16, 2005 12:00 PM


"Both IRA (Keoghs, etc) and 401Ks have ridiculously low limits on contributions. Wouldn't removing or relaxing these restrictions eliminate the "argument" for the Bush program of destruction of Social Security?"

Prof. DeLong has argued against mandatory contributions to IRAs, at least, because of at least two particular factors.

One, you can invest in almost anything. At least in my IRA, I can do pretty much anything except buy individual stocks on margin and short individual stocks. I know I can buy funds that short indices, I can buy 3-month CDs in foreign currencies, I can buy funds with outrageous fees, and so on.

Two, you can borrow against the account. You can withdraw any or all monies at any time you are willing to pay the taxes and penalties. These are not good characteristics for an account that's supposed to be the foundation part of a pension.

Posted by: Michael Cain at January 16, 2005 12:40 PM


In Breaking the Code (thanks, Anne, for the link) there is a reference to winners and losers. Peter Orszag and Bill Gale mention the possibility of impaired living standards or worse. But what do these things really mean? If you are wealthy being a loser or having your standard of living impaired means you replace the Mercedes and the Jag every other year instead of every year. For the lower and middle class these things mean something else entirely. So who is running the real risks as our brush-clearing-vacation-president tampers with both our economic viability and the safety net?

Posted by: Dubblblind at January 16, 2005 12:54 PM


Michael Cain says "One, you can invest in almost anything. At least in my IRA, I can do pretty much anything except buy individual stocks on margin and short individual stocks."

My experience with a 403(b)'s, which is apparently true for 501(k)'s as well, is that one is limited to stock and bond funds. I've viewed bond funds as bad investments as there is a high risk of principal loss especially when interest rates are low, and fees overwhelm low interest rates. I've seen (on someone else's 403(b)) a financial adviser move money back and forth between stock and bond funds, increasing the risk from bond funds and the overall loss).

Posted by: Ken at January 16, 2005 01:47 PM


I think the shear number of these articles is showing that Republicans are "winning" the argument that Social Security is in crisis. We find a lot more experts saying it is than it isn't. People who want to preserve Social Security need to get more visible.

Posted by: Unstable Isotope at January 16, 2005 01:57 PM


Ken

I use Vanguard for bond indexing and low fees, and I avoid timing unless I wish to use the asset allocation fund and have the manager try.

Posted by: Ari at January 16, 2005 02:03 PM


Judging from his books, Strobe Talbott couldn't be troubled to write a memo to a crocodile if it were about to bite his ass off. If he DID, though, and the croc read even the first few lines of it, it would be fast asleep in no time.

Posted by: Frank Wilhoit at January 16, 2005 03:14 PM


Anne,

In fact, under the new tax rates it is far from clear that it makes sense to hold stocks in a retirement account at all, given the choice of holding them in a regular account.

Posted by: Bernard Yomtov at January 16, 2005 04:29 PM


Paul O'Neill in NYT on SS -- I would love to hear some thoughts on this. Sounds fairly sensible to me, but I'm neither economist nor social policy wonk.

----

Pittsburgh — THIS is what we should do about Social Security: At the same time we acknowledge that it is the most successful domestic program in American history, we should also admit that Social Security, in its present form, is unsustainable. And then we should come up with a plan that is different than what President Bush and most of the pundits are proposing.

We should ask ourselves what would be a worthy aspiration for the financial security of retired Americans in the years ahead. My answer is that we should establish a process that will produce a substantial annuity for every American at retirement age.

By substantial, I mean at least $1 million. In order to create a real, fully financed annuity of this size, people must begin saving when they enter the work force. The saving needs to be continuous, and it needs to be left intact so that compound interest can work its magic.

We can do this. We already have a process in place that requires that we give the government 12.4 percent of our income in the name of Social Security.

The problem with the current arrangement is that our contributions are a tax, not savings. So we should begin by agreeing that we are going to require all Americans to save, individually, to provide for their financial security in old age. After all, if we don't save on our own for our retirement needs, who will do it for us? Our neighbors? Our children? In a civilized society we have a responsibility to take care of our own needs so as not to be a burden on others.

Yet we can also recognize that some people may work hard during their lifetimes, and save 12.4 percent of their income annually, and still not produce enough for a $1 million annuity when they retire. The federal government could then make annual, supplemental deposits to their accounts from its general revenues to make up the difference. Those of us who are more fortunate can help those who are not. (It is useful to remind ourselves that the federal government is "we the people" - and the federal government doesn't have any money unless it takes it from "us the people.")

Let me define what I mean by financial security. Financial security begins with ownership of real assets; so the money saved each year in this plan would be the property of the person who saved it. I would use the existing Social Security collection process because it is already in place, everyone understands it and its costs are relatively low.

The money would then be invested in broad-based index funds with an objective of matching the overall rate of return for all investments in the United States. These funds typically have very low costs because they're not actively managed. That means there would be no windfall profit for stockbrokers in this system.

Further to the definition of financial security: it means enough money in retirement for all needs - food, clothing, shelter - and including medical needs like prescription drugs.

If we could work toward this idea, we could reduce our current dependence on the political process for these necessities. When Congress passed and the president signed legislation last year expanding drug coverage in the Medicare program, many politicians acted as though they were granting us some great beneficence. But they don't have any money (or the benefits they pay for) to bestow unless they first take it away from us in taxes.

As I write this I can imagine the chorus of pundits saying, "This isn't politically possible." Why not? Because it is too complicated for people to understand? Or because the only way to approach change in our society is through small incremental steps, like the president's tepid notion of a limited, voluntary diversion of Social Security taxes into small private accounts?

Baloney, I say. What stands between a truly worthy aspiration for our society and its realization is political leadership with the courage to dream big.

The social policy technocrats will have a more legitimate concern: how do we get from where we are to this new and better condition? While I was secretary of the Treasury, the Federal Reserve chairman, Alan Greenspan, and I worked on an idea to jump-start the changeover by borrowing enough money to put money into individual accounts now, beginning with the youngest workers. We did some very rough calculations that showed for $1 trillion, we could transfer the population from age 18 to the mid-30's into this new arrangement.

The value of doing this is twofold. First, it hastens the transition to the new program for society overall. Second, the $1 trillion of borrowing now (to be paid from general revenues over the next 20 years) makes a substantial dent in the unfinanced liability of the current program.

As to the current program, everyone above the age of 35 could keep their current relationship with Social Security and their benefits intact. Their children, though, would have a better life. And that, after all, is the promise on which this nation has been built.

So there it is. Do we have political leaders who are interested in surpassing Franklin Roosevelt's achievement of 70 years ago?

Posted by: AD at January 16, 2005 04:48 PM


AD:
Anything that starts with:
"we should also admit that Social Security, in its present form, is unsustainable."
is bulloks.

The current NY Times Magazine has an actually pretty good piece on Social Security. Now if only they make their staff read it, and stop parroting lies as if they were reasonable opinions...

(See the earlier posting on Eliazbeth Bumiller and "A Better Press Corps).

Posted by: Jonathan Goldberg at January 16, 2005 07:45 PM


Tom:

As proposed, private SS accounts would be capped at $1,000 per year of contributions. IRA's allow three times that amount, and 401K plans 12 or so times that.

$1K a year is enough to blow a big hole in Social Security financing if that is money carved out from payroll taxes. But it is trivially small compared with the existing limits on tax-deferred retirement savings plans.

Not to mention that we're heading towards phasing out taxes on capital, leaving the income tax to be paid by more or less the same people as pay payroll taxes.

Posted by: Charlie at January 17, 2005 12:38 AM


Bernard Yomtov

"In fact, under the new tax rates it is far from clear that it makes sense to hold stocks in a retirement account at all, given the choice of holding them in a regular account."

An interesting point to think about.

Remember that retirement account savings are not taxed at all till withdrawal, but they are taxed at our marginal income tax rates when withdrawn. The Vanguard Total Stock Market Index or S&P Funds will lead to taxes on dividends at 15% a year, but there will seldom be a capital gains tax till shares are sold. The problems are employers may contribute directly to retirement accounts, and households simply do not in general save much.

Posted by: anne at January 17, 2005 03:38 AM


An aside:

Paying for the Past in 2005
By Joseph E. Stiglitz

"High oil prices are a drain on America, Europe, Japan, and other oil importing countries. The increase in America’s oil import bill over the past year alone is estimated to be some $75 billion. The effect is just like a huge tax that transfers wealth to the oil-exporting countries.

"If there were any assurance that prices would remain permanently above even $40 a barrel, alternative energy sources (including shale oil) would be developed. But we are now in the worst of all possible worlds—prices so high that they are damaging the global economy, but uncertainty so severe that the investments needed to bring prices down are not being made."

Posted by: anne at January 17, 2005 05:01 AM


Why is there no serious thought being given to raising or eliminating the top income at which payroll taxes stop? Given the totally obscene amounts of MY money that Bush has given to the top 2% of the taxpayers, the least they can do is have payroll taxes taken out on all that money.

I agree that all this talk in the media, and even on sites like this one, tend to give the impression that the social security system is in dire need of a jumpstart. We should be recommending to people unaware of the history of the current "crisis" Allen Smith's excellent book, _The_Looting_of_Social_Security_, which names what has been done to the system exaclty what it is, EMBEZZLEMENT, starting with Reagan right on down through the current thief, and including Bill Clinton.

This is another case of the republicans being allowed to frame the debate and to fearmonger their way to getting what they want: the complete dismantling of the New Deal, and any programs which might allow members of the working class to retire at some point instead of working themselves to death just to keep their heads above water.

I remember in grad school having to read _Showdown_at_Gucci_Gulch_ which chronicled the tax cuts that Reagan inflicted on the country. The fact that a special commission headed by Greenspan had to be created to find ways to ensure that the trust fund would be of a sufficient size when the boomers began retiring shows that some people in government knew that there needed to be special money set aside for regular people.

Too bad someone let a member of the Bush family know the money was there; following in Reagan's footsteps, Daddy Bush began plundering the money almost immediately. Such nice people, those Bushes, always thinking of, well, themselves.

Posted by: matt at January 17, 2005 07:29 AM


Forgive the repetition, but this New York Times article on Social Security is terrific, and should be studied along with the accompanying article Anne suggested on changes in the tax code.

http://www.nytimes.com/2005/01/16/magazine/16SOCIAL.html?oref=login&pagewanted=all&position=

A Question of Numbers

Since the establishment of Social Security in 1935, government actuaries have been crunching data and projecting the future of the system. Why don't they see a crisis looming?

http://www.nytimes.com/2005/01/16/magazine/16TAXES.html?pagewanted=all&position=

Breaking the Code

Deftly, year by year, step by step, the Bush administration has been reinventing the American system of taxation. And the story of this revolution is not over.

Posted by: lise at January 17, 2005 08:41 AM


Anne,

I am not suggesting that anyone not fund their retirement account for this reason, though it is probably worthwhile to work throught the arithmetic carefully.

What I am suggesting is that, given a combination of retirement accounts and regular accounts, it makes sense to hold equities in the regular account and debt securities in the retirement account. Of course if you want to hold more equities than that scheme allows you can do so in the retirement account.

Posted by: Bernard Yomtov at January 17, 2005 07:23 PM


AD, re: O'Neill

At the extremely optimistic 6% real return per year, one would have to invest $4,700 each year for 45 years to accumulate 1 million in today's dollars. Lower the rate of return assumption to 4% per year, and the amount necessary becomes $8,260 per year. How would somebody who earns $20-30 thousand a year be able to make such investments is beyond my wildest imagination, and how will the government give them the difference between what they accumulate and a million bucks is beyond the imagination of heavy drug users in Utopia.

O'Neill also fails to address the risk (would Uncle Sam step in - and spend - if investments perform much worse?) or the disability portion of Social Security (which is responsible for almost 40% of the projected shortfall). This is all rhetoric and zero substance.

Posted by: enfant terrible at January 18, 2005 12:46 PM


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