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The Angry Old People Are Back

November 18th, 2012 . by economistmom

village-people-aarp

I’ve long thought of AARP as an “old people’s” organization, which might be enough reason to resist joining despite the attractive discounts and other benefits.  (Who wants to admit they’re now a card-carrying “old person,” after all?)  But for most of my adult life I have also thought of AARP as an “angry” old people’s organization, because I’ve found quite unappealing the “age-ist” attitude that they seem to promote–a sort of “us against them” (”them” being all the non-old people) demeanor that comes through in their emphasis on how special old people and old people’s benefits are.

I first received an invitation to join AARP in the summer of 2011 when I was still 49.  (I think the official floor is still 50.)  Coincidentally, I got my invitational membership card at the same time that AARP’s then-policy director, John Rother, had seemingly brought AARP to its senses on Social Security reform. That led me to post this pat on AARP’s back and a more serious contemplation of my personal relationship with AARP–that I might actually join.  But I thought about it long enough that within a few months John Rother was leaving AARP and (probably not coincidentally) the association had reversed course and launched an angry ad campaign to oppose Social Security and Medicare reform, which I was not too pleased about.  Inching closer to age 50, I continued to avoid committing to membership.

Then a few weeks before I turned 50, I posted about how I was (still) “Not AARP”–challenging the organization to better live out their mission statement:

If today’s AARP is really about helping those “50 and over [to] improve their lives” but also to encourage in the 50+ crowd the kind of “independence, choice and control” that could be “beneficial and affordable” to “society as a whole,” then AARP needs to break out of their old habit of automatically demanding that the retirement-age federal benefit programs not be modified to reflect the new characteristics of their no-longer-so-retired membership…

Bottom line is that with all of us living longer, at least some of us will choose to work longer.  As tough as it is to generalize with one-size-fits-all eligibility rules, does it really make sense to keep our rules fixed at where they were decades ago, back when 50 or 65 was a lot closer to being “almost old” or “old” than it is now?  I know many AARP members view their roles as parents or grandparents as their proudest achievements, and their kids’ and grandkids’ well being as what they care most about.  That makes me wonder if the AARP leadership even recognizes that and knows what the organization is doing when it simultaneously claims to have a mission to benefit “people age 50 and over” and “society as a whole” and opposes reforms to benefit programs that would raise eligibility ages.

So, I turned 50 on March 2nd and still did not join AARP.

Nine months since, and we’re fretting about the “fiscal cliff” and hoping we get a “grand bargain” for some “go big” solution to the longer-term fiscal (un)sustainability problem, and AARP wants us to know they’re holding firm on their age-ist stance, according to an article in today’s Washington Post with a title (in the print version) “AARP flexes its muscle in debt talks.” According to the article (written by the Post’s Michael Fletcher and Zachary Goldfarb):

Under the slogan “You’ve earned a say,” the group has been building opposition to entitlement changes. A recent poll by the organization found that 70 percent of Americans 50 and older think Medicare and Social Security shouldn’t be part of the upcoming fiscal debate.

“We’re fighting to stop cuts to Medicare and Medicaid that will hurt beneficiaries,” said AARP’s top lobbyist, Nancy LeaMond. “We want to ensure that Social Security is not part of this deficit discussion.”

Defending themselves against the critique that they’re engaging in intergenerational warfare that pits current retirees against future generations, the article goes on to explain (emphasis added):

AARP argues that it is protecting benefits vital to both current retirees and younger Americans. With the demise of guaranteed pensions in the workplace and the inability of many workers to save enough for retirement, Social Security and Medicare are increasingly indispensable.

“You have people in their 40s and 50s who are cascading toward a terrible retirement,” said Eric Kingson, a Syracuse University professor who co-chairs Strengthen Social Security, a coalition that has joined AARP, organized labor and others in opposing any benefit cuts in the program.

But “protecting” benefits has to include figuring out a way of actually paying for them, not just lending moral support for them.  If AARP disagrees with approaches within the Social Security and Medicare programs to reduce overall federal budget deficits (even over the longer term), does the AARP endorse alternative spending cuts or specific ways of raising revenues?  The obvious implication of resisting reforms to Social Security and Medicare is that tax reform will have to carry even more weight and raise even more revenue than otherwise.  Which is at least mathematically possible and a fine stance to take for some people who support both larger government and the higher taxes to pay for it, but are we sure that AARP–and all 37 million of its members–overlaps much with this (I suspect small) subset of people?  If AARP does support certain kinds of tax increases that would make reforms to Social Security and/or Medicare unnecessary, they should speak up about those tax proposals and use their powerful lobby (which both Democrats and Republicans aim to please) to break the current impasse on the fiscal cliff and longer-term fiscal sustainability issue which is largely hung up on tax policy, after all.  (Note that absolutely none of the current fiscal cliff debate is over what should be done with Social Security–so it seems what AARP is really trying to say is “yeah, you all better keep NOT talking about Social Security reform.”)

If AARP members don’t really like the idea of tax-only solutions, maybe AARP needs to be careful about what the basic math applied to their absolute “hands off Social Security and Medicare” position implies.  They may be implicitly endorsing tax increases that not even a majority of their 37 million members would support.

The Post article goes on to mention John Rother’s post-AARP perspective, consistent with the position he (bravely, or naively?) took while there (emphasis added):

[Rother] says it’s important for AARP to advocate for its position but also to be flexible.

“You want to be perceived as being a strong advocate, but at the same time your long -term interest is in solving a problem,” he said in an interview. “The art, if you will, is to make sure that you are operating and messaging in such a way as to get the best possible results for your members within the context of solving the problem.

It’s been my opinion that AARP has to do better than take a “just say no” position on Social Security and Medicare reform.  There has to be something that actually solves the fiscal problem that they’re willing to very clearly say “yes” to.  (And saying “yes” to “economic growth” and “yes” to “slowing the growth in health-care costs”–as many of the “Strengthen Social Security” folks typically “recommend”–do not qualify as proposed solutions without the specific policy recommendations that would lead to those good outcomes.)  Otherwise, what AARP is really saying is to just let our kids figure it out, because it’s really going to be way more their problem than a problem for any of us “old people.”

I’m still not joining AARP.

32 Responses to “The Angry Old People Are Back”

  1. comment number 1 by: AMTbuff

    But “protecting” benefits has to include figuring out a way of actually paying for them, not just lending moral support for them.

    Their support of ObamaCare showed the world that the leadership of the AARP has been taken over by people of the left. This happens to most initially non-partisan organizations which deal with political issues. This process never operates in the other direction.

    AARP membership will dwindle as disillusioned members quit. I confidently predict that the AARP leadership will never take a position that the Democratic Party firmly opposes, regardless of the financial interests of members.

    As to Diane’s question, the position of the AARP on the fiscal gap is the same as that of the Democratic Party: Maintain promised benefits to seniors as much as possible by raising taxes as much as possible.

    If and when the Democrats decide to support curtailment of any promised benefits, the AARP’s leadership will dutifully follow. Their loyalty is to their party, not to their membership.

  2. comment number 2 by: SteveinCH

    As to Diane’s question, the position of the AARP on the fiscal gap is the same as that of the Democratic Party: Maintain promised benefits to seniors as much as possible by raising taxes as much as possible.

    Small correction…raising taxes on 2% of Americans as much as possible.

  3. comment number 3 by: Brooks / Gordon

    AMT,

    Your comment reminded me of a quote I like (actually, apparently a misquote, but close enough*), despite it’s extreme cynicism:

    “Every great cause begins as a movement, becomes a business, and eventually degenerates into a racket.”

    ? Eric Hoffer, The Temper of Our Time*

    * From Wikiquote:
    “Up to now, America has not been a good milieu for the rise of a mass movement. What starts out here as a mass movement ends up as a racket, a cult, or a corporation.”

    Frequently misquoted as “Every great cause begins as a movement, becomes a business, and eventually degenerates into a racket.”

    (I don’t know the origin/evolution of the misquote, but if I were to paraphrase it, I would have said “Every great cause becomes a business and eventually a racket”, which I think is crisper.)

  4. comment number 4 by: Vivian Darkbloom

    “Their support of ObamaCare showed the world that the leadership of the AARP has been taken over by people of the left. This happens to most initially non-partisan organizations which deal with political issues. This process never operates in the other direction.”

    I could read “this process” in one of two ways:

    1. Most non-partisan organizations end up leaning left (rather than right);

    2. Partisan organizations rarely become non-partisan.

    There are echoes of Tolstoy there somewhere.

    I would agree with either interpretation; however, I think the “problem” is more fundamental.

    The whole idea that an organization can be “non-partisan” is unrealistic to begin with. It would be difficult to name more than a few organizations that are truly “non-partisan” to begin with, particularly those that enjoy tax-exempt status under section 501 of the Revenue Code. The AARP is a prime example. The Code ostensibly denies tax exempt status to organizations that engage in “political activity”, but this is a charade. One can make a tax deductible contribution to AARP, but not to the Democratic National Committee or the Republican National Committee. It is also a charade to try to reasonably distinguish “political speech” from other types of speech (and to advocate protecting it when it is exercised by “media corporations” and to deny it when exercised by another type of corporation).

    As for as tax policy is concerned we should simply do away with the idea altogether and deny tax exempt status to any organization. Many of those that operate as tax exempt policy “think tanks” are nothing more than holding tanks for shadow governments. For the real size of “government” one should really add the tax exempts to the official total spending and headcount or at least tax effect the spending.

    The solution is to deny tax deductions/exclusions for contributions to them (for income, gift and estate tax) and to tax these organizations on any net income (e.g. on net income from contributions and investment income less “charitable expenses”). I suspect the revenue estimates on charitable contributions vastly underestimate the revenue effects because they do not take into account the loss of revenue on future income that is often indefinitely lost when it escapes the taxable solution.

    That would not only be good policy; the “math” would show that it would be a terrific contribution to reducing our federal deficit. The only thing preventing it is the political will to overcome these incredibly powerful entrenched lobbies.

  5. comment number 5 by: Vivian Darkbloom

    “The solution is to deny tax deductions/exclusions for contributions to them (for income, gift and estate tax) and to tax these organizations on any net income (e.g. on net income from contributions and investment income less “charitable expenses”).”

    I should refine this by saying that if tax exempts are treated as anyone else for gift/estate tax purposes, those gifts or bequests would not need to be treated as “income” for purposes of the income tax. Subject to the normal standard exemptions for the donor or testator’s estate, those contributions would be subject to gift or estate tax.

  6. comment number 6 by: ST Dog

    Instead of the AARP, perhaps AMAC (http://amac.us/).

    I haven’t read the full plan, but the highlights look to be going in the right direction.
    http://amac.us/social-security

  7. comment number 7 by: Jim Glass

    AARP is a nonprofit organization looking out for the welfare and interests of seniors just as the NCAA is a nonprofit organization looking out for the welfare and interests of student athletes.

    http://www.smbc-comics.com/index.php?db=comics&id=2778#comic

    http://www.southparkstudios.com/clips/387407/stu-dent-ath-o-leets

    Personally I fully agree with Vivian that this country’s tax and legal rules for nonprofit organizations are long overdue for a major rewrite, but I guess that’s another story.

  8. comment number 8 by: Bill Boak

    Explain to me how reducing Social Security benefits is going to help the federal deficit. Social Security benefits are payed for out of the Social Security trust. This does not contribute to the deficit. Nor does Medicare.

  9. comment number 9 by: SteveinCH

    Bill,

    It’s really rather simple. There’s no money in the SS trust fund, just IOUs. So the SS trust fund runs a deficit every year, in other words, we use general fund revenue or borrowing to make good on current SS payments.

    Both SS and Medicare contribute to the deficit. Today, it is much more Medicare than SS but SS will be a larger and larger contributor going forward unless benefits are cut.

  10. comment number 10 by: Vivian Darkbloom

    “Nor does Medicare” (add to the federal deficit):

    According to PolitFact Medicare was financed as follows in 2011:

    According to the 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and the Federal Supplementary Medical Insurance Trust Funds, Medicare expenditures came to $523 billion in 2010.

    Here’s a breakdown of the revenue side of the equation:??•
    Payroll taxes, $182 billion?•
    Premiums, $61 billion?•
    Taxation of benefits, $13.8 billion?•
    General revenue, $205 billion?•
    Transfers from states for prescription drug benefits, $4 billion

    http://www.politifact.com/truth-o-meter/statements/2011/jun/01/tim-pawlenty/pawlenty-says-half-medicare-deficit-spending/

    Hey, and if PolitFact says it’s so, it must be so!

    And, following the trend, the amount coming from “general revenue” will only get higher.

  11. comment number 11 by: Vivian Darkbloom

    Make that 2010. The question marks were not intentional, but due to that happy coincidence known as serendipity, they may be appropriate.

  12. comment number 12 by: Vivian Darkbloom

    Jim,

    Thanks for the cartoons. We needed a little levity around here.

    Apropos the NCAA, here’s an interesting article on the shakedown many colleges undertake in the allocation of football season tickets. Of course, if those season tickets were priced normally, there would be no tax deduction for this hidden premium. And, I thought “substance over form” was the law of the tax land.!

    Those who think that subsidizing college football through tax deductible contributions is a good idea must have engaged in quite a bit of “head bricking” in their time.

  13. comment number 13 by: Vivian Darkbloom

    Oops, here’s the link:

    http://www.nonprofitquarterly.org/policysocial-context/21269-is-tax-incentive-for-college-football-season-ticket-holders-fair.html

  14. comment number 14 by: Brooks / Gordon

    Bill,

    Here’s another response to the assertion that “This does not contribute to the deficit” and an answer to that question of “how reducing Social Security benefits is going to help the federal deficit”.

    Social Security is simply part of the whole — part of overall taxation and part of overall spending, and having a dedicated tax doesn’t change that fact.

    That is true mathematically, conceptually and economically.

    Mathematically, our deficit (the one that matters) is the unified budget deficit, which is simply the excess of overall spending vs. overall tax revenues. Lowering SS spending would reduce this deficit.

    Economically, lowering the unified deficit is key because that’s the amount we have to borrow, and thus money we need to later pay back, plus a source of upward pressure on interest rates (more so in the future) and thus a drag on the economy (i.e., jobs, incomes, and living standards).

    Conceptually and economically, therefore, we have an incentive to contain these deficits over time. We do this by reducing spending and/or increasing tax revenues, and increasing tax revenues sufficiently will eventually require raising tax rates (and probably also reducing tax deductions, etc., to raise effective tax rates further). But we also have an incentive against raising tax rates (and for that matter, against cutting spending that would be more investment-oriented than SS spending), because that is a drag on the economy as well.

    So, other things equal, anything that reduces any area of spending reduces overall spending, which in turn reduces the deficit, and in turn reduces the needed overall tax burden to generate a given size deficit, and in turn reduces the drag on the economy, jobs, incomes and liviing standards.

    It so happens that SS spending now exceeds SS-dedicated tax revenues, and that gap is projected to continue and increase in the future, and Steve is correct about the Trust Funds and correct that the aforementioned gap is funded from the general fund (i.e., non-SS taxes). If SS spending were lower those funds would otherwise fund other spending and deficits would be lower.

    But even if SS-dedicated revenues were projected to be equal to SS spending forever, lowering SS spending would still lower deficits. Sure, the result would be indefinite SS surpluses, but presumably if that were the expectation, and if we didn’t want that situation (meaning promised SS spending that we never expected to deliver), we could just lower that SS-dedicated payroll tax and offset that reduction with an increase in other taxes, resulting in no change in revenue, a reduction in overall spending, and thus lower deficits. And doing this would NOT mean defaulting on Trust Fund bonds, if that is/were even possible (which it may not be anyway, if they can be perpetually rolled over, as I think Jim Glass once explained could be done). If you have the interest and the patience for a longer explanation of this point, along with illustrations, see my 2008 post at http://ww.theforvm.org/diary/brooks-and-b-rational/social-security-solvency-and-irrational-partisan-rhetoric.

  15. comment number 15 by: Jim Glass

    About the Social Security Trust Fund once again…

    The simplest way to put it is just to note that as the TF holds no money, only govt bonds, any money that is paid out of the Trust Fund via the redemption of its bonds first has to get into the Trust Fund by way of either being currently collected through income taxes (general revenue, not payroll tax) or, if the govt is collecting insufficient general revenue to cover its cash needs, being obtained by borrowing, deficits, that run up the debt.

    As the government is running far short of the general revenue needed to cover its cash needs, Trust Fund “financing” of Social Security benefits increases the deficit and national debt. QED. Period.

    I hope if Mr. Boak returns here to read this, he takes this as the explanation he requested. :-)

    Beyond this, I’ll also note (but without the full nth time re-hash):

    1) By far the Greatest Urban Legend of US politics is that the SS Trust Fund as we know it was created by 1983 Reform Act to “save” the SS surplus to finance benefits for future retirees. This is absolutely false.

    There is not one word in the Act or the Greenspan Commission report saying any such thing. Members of the Commission and its Executive Director, Robert Myers (SSA’s long-time chief actuary) have explicitly said “it’s just not so.”

    Yet, disregarding plain obvious fact, people everywhere believe it with the same certainty that people used to believe the Earth sits at the center of the Universe. Mr. Boak believes it. Commentators and politicians unanimously pronounce it as fact. Professional economists and actuaries of left and right calculate new plans “to extend the solvency of Trust Fund financing for SS”.

    Amazing. Human beings are strange. We will believe anything we want to, plain reality be damned.

    2) The value of the Trust Fund’s financing of benefits can easily be quantified.

    In future years promised benefits will exceed payroll taxes collected, say in a particular year by $200 billion. In that year…

    * Without the Trust Fund, to get the additional money needed to pay the benefits the government would have to increase taxes and/or borrowing (deficits) by a total of $200 billion.

    * With the Trust Fund, to get the additional money needed to pay the benefits the government will have to increase taxes and/or borrowing (deficits) by a total of $200 billion (redeeming $200 billion of Trust Fund bonds in the process).

    The difference between the $200 billion the govt would have to raise without the Trust Fund and the $200 billion it will have to raise with the Trust Fund represents the value of the Trust Fund.

    I leave that math exercise to the reader. :-)

    Finally, as Brooks mentioned, the Trust Fund and bonds in it do nothing to secure the payment of future benefits via the “America will never/can never default on its bonds” mechanism, because even if future benefits are slashed– ended completely! — default on those bonds will always be utterly impossible.

    3a) The Trust Fund bonds differ greatly from other bonds issued by the govt in a number of important ways, not least being that they roll over automatically if not redeemed — which means they never default! They are 15-year bonds that have been filling the fund for 28 years so far, with none ever being redeemed, and none have defaulted yet.

    All the people who claim “the Trust Fund bonds are just like those we sell to China” really can face conviction on a charge of overt lying, unless willing to enter a plea of “ignorant dupe”.

    3b) Social Security participants have exactly zero legal interest in the bonds. Rather, the bonds are issued by the govt to itself, and you can’t default on a debt you owe to yourself.

    Try it and see! Write a legally enforceable note (IOU) for say $100,000, meeting all the requirements of law, fully witnessed etc., … except make it payable to yourself. Then don’t pay yourself! Refuse! See what happens. Do you think your credit rating will be destroyed? :-)

    The US government is in exactly that position with the Trust Fund bonds.

    If it fails to pay them off to itself, it would have to sue itself, which even it can’t do, to obtain a declaration of default and resulting damages, which would total $0.00. Which is the amount that those trillions of dollars of bonds are valued at on the Treasury’s Consolidated Balance Sheet of the USA. Because since they are simultaneously an asset and a liability to the Treasury, their asset/liablity value to it nets to exactly $0.00. (Which, coincidentlly, is the answer produced by the math exercise in #2 above).

    So this legally impossible event (one can’t sue oneself) threatening all of a $0.00 financial effect on the US government is supposed to endanger the credit rating of the US govt and its bonds, and thus enforce the payment of promised SS benefits … how?

    And that is pretty much the full story of the substance of the Social Security Trust Fund.

  16. comment number 16 by: Brooks / Gordon

    Jim — thanks for that explanation.

    Bill (if you’re still around) — I assume Jim is correct regarding the rolling over of those bonds, and about the (at least technical) impossibility of default of a debt to one’s self (the government to the government). That said, my point regarding the “trust funds” in the last paragraph of my prior comment (in which I explain that, even if SS-dedicated revenues were projected to be equal to SS spending forever, lowering SS spending would still lower deficits) is that even if Jim’s point weren’t valid, or if for some reason we wanted to avoid the perception by some of a de facto default, we could still use the “trust fund” balance on SS benefits as intended while cutting projected SS spending very substantially. That balance amount is far, far short of projected spending on SS in coming decades, or over 15 years if that’s the relevant period of redemption without them rolling over. Most of the “funding” for SS benefits will come from ongoing SS taxation (FICA SS payroll taxes), not from redeeming those bonds (i.e., not from the general fund that gets money via all other [non-SS] taxes and from borrowing). So we could cut projected spending on SS very substantially while still spending the current “trust fund” balance amount plus more from ongoing SS taxation, but as I said, even if SS-dedicated revenues were projected to be equal to SS spending forever, we could lower deficits by lowering SS spending, and we could do this while still spending the “trust fund” balance on SS (we’d could just lower SS-dedicated taxation and offset that with raising other taxes so that more revenue went to the general fund rather than growing the balance of the “trust funds”).

  17. comment number 17 by: Arne

    Bill’s perspective is clearly that the general fund and the trust funds should be treated separately. The responses are clearly from a different perspectives.

    Steve’s answer is useless since it comes from an incoherent perspective in which the fact that the trust fund contains IOUs takes on some special meaning even though all debts are IOUs.

    Vivian’s answer is at least helpful since is clarifies that the Bill’s perspective about trust funds is based on incorrect facts as far as Medicare is concerned.

    Brook’s is incapable of accepting Bill’s perspective, so there will never be any meaningful communication there.

    Jim’s perspective prevents him from seeing that he has come up with the same answer as Bill. He says the amount by which the trust fund reduces future income taxes needed to pay off the debt is zero. If the debt were not held by the trust fund, it would be held by some other entity. The amount by which the trust fund increases future income taxes is also zero.

    Social Security is a big compromise. It is designed to be acceptable to people with different perspectives even though it cannot be ideal to any of those perspectives. Some people complain about giving benefits to people who could get by without. Others complain that benefits do not return the taxes to wealthier people as much as to poorer. The fact that this contradiction is irresolvable does not prevent SS from working overall.

    The compromise nature of SS enables a wide variety of perspectives. It is possible to believe that you should get something out because you put something in. Mechanically, it does not actually work that way, but for some purposes it is a workable perspective. The reality is that the money we pay out supports our parents and grandparents. Even so, by contributing, you are part of a compact that can be made to work indefinitely, just as if that mechanical linkage existed. Still, it is also flawed for some purposes. Trying to calculate a return on investment produces meaningless results because there is no endowment earning interest over a working career. The cash flow equates to the cost of some other way to support the no longer working generation if there were no SS.

    As Jim intimates the fact that the trust fund is so much larger than is was (other than in the 1940s) also leads to the skewed “pre-funded” perspective. The TF is not there to provide a method for Boomers to save; it is there because that is how much had to be “saved” in order to create long-term solvency back in 1983. Any perspective that focuses too closely on the TF is going to make people miss what goes on with the rest of SS (or with how it relates to the general fund).
    Jim is right that TF bonds are different from bonds sold to China, but in his focus he has missed that it is no longer true that they have not been redeemed and that redeeming TF bonds is as automatic as rolling them over. SS has the authority to simply spend, whereas China must actually sell bonds. 30 years from now, when the TF is back to holding a one-year reserve in special treasuries, the minor difference in perspective will not matter.

    It does matter whether our representatives modifying SS for the next 30 years can understand other’s perspectives. In order to maintain a program that is acceptable, they need to know what people mean by acceptable.

  18. comment number 18 by: SteveinCH

    Arne,

    My answer is entirely coherent. The trust fund is meaningless. The trust fund would need to have independent assets to matter. It doesn’t and therefore it’s meaningless.

  19. comment number 19 by: Brooks / Gordon

    Arne,

    I put in a LOT of time discussing this topic with you, most notably at http://swordscrossed.org/node/1720#comment-88296, and found it not at all worthwhile, to say the least. I don’t wish to do it again. Anyone interested in what you (amusingly) call our “different perspectives” (as if correct vs. incorrect algebra and logic were just “different perspectives”) can go to that link.

  20. comment number 20 by: Vivian Darkbloom

    I have tried to understand the logic of people who take the position that “Social Security does not add to the deficit”. The following argument is the best I can come up with. I suspect that this might represent Bill’s “perspective” as Arne has put it. Perhaps Bill will come back and explain his perspective further.

    Let’s assume that we have a diversified company (Company A) with 3 divisions each representing different products. Company A, like many diversified companies, keeps internal accounts as to the profitability of each division. Each division has its own revenue stream and expenses and the separate divisions don’t compete with each other for business Let’s assume (big assumption) that the internal accounting is appropriate and accurate. Divisions B and C of Company A are chronic losers. Division D (perhaps analogous to HP’s Printer Division) , however, is quite profitable and in most years is able to offset the losses of of B and C, (albeit D never gets an “IOU” from those other divisions although D’s personnel likely remind Company A of this come bonus and option granting time). In essence, D helps keep Company A and indirectly Divisions B and C afloat at least for the time being. Overall, however, Company A is still losing money and needs to raise additional capital through the debt market to finance its ongoing activities. The internal accounting for “divisions” is an attempt to create a fiction that such divisions are truly third parties vis a vis each other and therefore acting at arm’s length with each other.

    It would be, I think, both logical and accurate to argue that Division D is not adding to Company A’s deficit. I suspect that this is the sort of thinking that people who argue Social Security does not add to the deficit are coming from. Social Security has its own stream of dedicated revenue and expenses and that revenue includes interest on the funds it has previously lent to the general revenue fund. One might argue that if Division D has a bad year and actually loses money in that year, it has “contributed to the deficit” for that year, but otherwise “adding to the deficit” would not strike me as an accurate description.

    While this analogy is tempting, like most analogies it fails, I think, on a couple of fronts.

    First, while we’ve assumed that Company A’s internal accounting is appropriate and accurate, I doubt we could say the same about Social Security. Company A, as required by law and “Generally Accepted Accounting Principles” keeps its books on the accrual basis. Those who argue that Social Security does not “add to the deficit” are apparently using cash accounting (or use accrual for interest and cash for disbursements and payroll taxes), something Company A is not allowed to do because it would not accurately reflect its true financial situation. If Social Security were required to accrue for its future expenses, it would clearly be “adding to the deficit” Nevertheless, thus far (i.e. in this line of argument and temporally until about last year as to the finances), one could argue that Social Security does not “add to the deficit” if one uses cash accounting. Alternatively, the argument would need to rest on the idea that the solvency of the system can be ensured by “asking” customers to “contribute a little more” in premiums if the expected returns don’t materialize, but that is inappropriate.

    It is inappropriate because we’ve assumed that the three divisions of Company A are not competing with each other for revenue. The fact that one division might be profitable does not detract from the profitability (or potential profitability) of other divisions. People voluntarily buy Division D’s products at a quantity and price that will ensure Division D a profit and this does not detract in any material sense with the ability of the other divisions to attract willing and paying customers. In other words, as far as Company A and its divisions are concerned, this is no “zero sum game”. I don’t think Social Security (and the other “divisions” of government) can make that claim. If Social Security were truly a voluntary program, Social Security would ask (without quotation marks) potential customers to purchase the annuity product based on representations of expected returns on investment. Instead, taxpayers are “asked” to contribute premiums (aka taxes) to the system subject to civil and criminal penalties if they don’t comply. In essence, the ability to *tax* is finite and *tax revenues* are fungible to the overall profitability of government.

    Third, there would normally not be any common identity between Division D’s customers and Company A’s shareholders and/or creditors. On the other hand, there is an overwhelming commonality between Social Security’s “customers” and the Government’s “shareholders” and about a 50 percent commonality between the “customers” and the Government creditors. That is one reason why the “Trust Fund” is largely illusory: In the analogy with Company A, it would be as if all of Division D’s customers were shareholders in Company A and about half were unsecured creditors.

    Fundamentally, I think the “Trust Fund” is largely a red herring. The fundamental facts are that Social Security taxes are generally indistinguishable from general revenue taxes because they are each compulsory. Also, Social Security is not, and never was, a pure annuity scheme that would enable one to argue that it is truly a “separate division of government”. Instead it is a combination annuity and income redistribution scheme (the latter both per generation and income hierarchy). That is why we tend to refer to Social Security “taxes” rather than “premiums”. Had Social Security been established as a purely voluntary annuity scheme sponsored by the government, financed solely with *premiums*, entailing no income redistribution, and operated in the same fashion and subject to the same rules that private insurers are subject to, I would be more inclined to say that it does not “add to the deficit”. Alas, none of the above is true with the exception of “sponsored by the government”.

  21. comment number 21 by: Brooks / Gordon

    Vivian,

    Bill’s ultimate point, as is typical of those with his confusion, is not just that SS is not adding to the deficit, but that reducing SS spending cannot reduce the deficit. (He says rhetorically, “Explain to me how reducing Social Security benefits is going to help the federal deficit.”) Even leaving aside his misunderstanding regarding the “trust funds” this assertion is as nonsensical as saying that increasing the profit of your Division D (without affecting profits of B or C) would not increase overall profit of Company A. That isn’t a “different perspective”; it’s incorrect algebra.

  22. comment number 22 by: Vivian Darkbloom

    Let’s let Bill explain his logic, if there is any. He may come back and say, for example, that reducing Division D’s spending (while leaving Division D’s revenues the same) would increase Division D’s profit on a separate accounting basis. But, I’m interested in learning what Bill’s perspective and rationale is with respect to his contention that Social Security “does not add to the deficit”. I obviously don’t agree with him, but I am interested iin what he (and others like him) might have to say.

    Bill might also say, for example, that increasing Division D’s profits, while improving the overall results of Company A, would still not put Company A in a profitable position—its loss would only be smaller (not an unrealistic comparison to the situation with the US government), so there would be no question of “increas(ing) the overall profit of Company A”, and, for the foreseeable future, there is little chance of that Company returning to profit.

    The specific quote you cited may leave one to suspect that Bill thinks Social Security is not only a separate division but an entirely different entity; however, I’d prefer that he explain himself specifically on that point. Absent that quote, one might linguistically argue that Social Security “does not add to the deficit”; but, for all the reasons stated, I would not agree that assertion holds water as a matter of fact and of logic. If you want to convince Bill and others who may hold similar views to his, it is perhaps more constructive to try to find out further what their “perspective” on this actually is—that is the point I think Arne might have been making.

  23. comment number 23 by: Brooks / Gordon

    Vivian,

    Sure, Bill (if he returns) and Arne can express whatever they wish, and I’m all for listening to different perspectives, but FWIW, again, the typical thinking behind the kind of argument from Bill (other than the misconception some have about what the “trust funds” really are, and other than some who think of SS as completely separate from the rest of government finances, period) is that, if the “trust funds” plus ongoing SS taxation would make SS fully solvent over the long term (or close to fully solvent), then the only way to reduce the deficit by reducing projected SS spending would be to never spend the current “trust fund” balance on SS as intended.

    As I’ve explained, this is an invalid premise. In such a scenario (full long-term “solvency”), we could spend all the current “trust fund” balance on SS, plus much more, and still cut projected SS spending very substantially. The direct result would be ever growing “trust fund” balances that would never be expected to be spent on SS, so presumably we’d just lower SS taxation and, if the objective is deficit-reduction, offset that reduction in SS taxation with an increase in other taxes, all of which would result in no change in overall revenue, a reduction in overall spending, and thus a reduction in deficits, and all while spending the current “trust fund” balance on SS.

  24. comment number 24 by: Brooks / Gordon

    I’ll paste here two illustrations I offered in my 2008 post at Forvm to which I linked earlier.

    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).

    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.

  25. comment number 25 by: Vivian Darkbloom

    Bill just sent me an urgent mental telepathy message. His message indicates that my analogy is somewhat off. A better analogy, his message indicates, is that of separate subsidiaries within a consolidated corporate group—not unincorporated divisions, per se. Thus, replace Division with “Subsidiary” and assume each Subsidiary files consolidated financial statements within Company A. Bill’s point seems to be that the consolidated return concept is in fact a fiction and that we should look at each separate subsidiaries results to determine if Subsidiary D is “adding to Company A’s deficit”. That’s a good point and I don’t know why I didn’t think of that earlier because failing to do so may not have done justice to Bill’s argument.

    I agree that Bill’s amended analogy is somewhat better. Although Bill argues that Subsidiary D is “not contributing to Company A’s deficit (at least on the basis of the cash method of accounting) this position is still not convincing to me, for all the reasons stated in my earlier example.

  26. comment number 26 by: Jim Glass

    I have tried to understand the logic of people who take the position that “Social Security does not add to the deficit”.

    The way it was explained to me back in the days when I used to visit the AARP message boards was:
    ~~~~

    During the years when SS was running a surplus the govt spent, say, $X in a given year. That includes spending the cash SS surplus, of course, in amount of say $Z. This spending of the surplus is represented by the bonds issued to the trust fund in the amount $Z.

    *If* instead the govt had saved the surplus in real investments — such as S&P index shares, German bonds, whatever — *then* for the govt to spend $X in the same year, without using the surplus of $Z, it would have had to issue bonds to the public in the amount $Z, increasing the deficit and debt held by the public by that much.

    Those bonds issued to the public in amount $Z would equal the bonds actually issued to the trust fund in the amount of $Z, and both are included in the “national debt”. As $Z=$Z, Social Security has added nothing to the national debt in total.

    Thus spending the surplus has simply reduced the annual deficits and accumulating debt owned by the public dollar-for-dollar by the increase in the intra-governmental debt. No change in the total national debt has resulted.
    ~~~~

    Of course there are so many holes in this thinking that it makes Swiss cheese look like neutronium in comparison. To start with…

    1) It makes the bizarre assumption that politicians don’t *at all* respond to unanticipated cash flow by spending it! Instead, they pull their chins, decide on a fixed amount to spend, and the amount of revenue they find available to spend has no effect at all on their spending budget!

    Who believes politicians don’t spend free cash they find at hand, just like everybody else does? Raise your hand! Then explain why they don’t. ( E.g., tell us how George Bush’s tax cuts *weren’t* influenced by the surplus coming in then.)

    Of course, to the extent Congress *increased* current spending in response to the surplus — because it could buy votes via spending the free money without losing votes by increasing taxes to get it — it certainly *did* increase the “national debt”, by this argument’s own terms.

    2) It factually ignores the explicit repeated statements and testimony of Sen Moynihan — who was both a top Democrat on the Greenspan Commission and Senate Majority Leader, and thus the man in position to know — among many other people, that when the surplus totally unexpectedly arrived as a big surpirse, Congress simply ramped up spending to consume it. Thus increasing the “national debt” as per #1.

    3) In very simple terms, whatever one contends happened in the past, the Social Security trust fund bonds are $2.7 trillion of the national debt, which must actually be paid off (unlike the other debt which merely need be serviced) to pay benefits, with resulting cash cost of $2.7 trillion to the fisc in the future.

    To say a program that is responsible for $2.7 trillion of the national debt has never added to the debt or deficit is utterly bizarre on its face. No?

    4) In reality, contra to the bizarre assumptions of the denialists in #1, Congress reacts to an unexpected “free money” increase of income just like anyone else does: not merely by spending it but also by increasing its borrowing to spend even more, because higher income provides a higher credit line.

    E.g, Kent Smetters of Wharton and the NBER on the impact of the trust fund, in http://www.nber.org/papers/w9845

    “We find that there is no empirical evidence supporting the claim that trust fund assets have reduced the level of debt held by the public. In fact, the evidence suggests just the opposite: trust fund assets have probably increased the level of debt held by the public….

    “… each dollar of Social Security surplus appears to have actually increased the debt held by the public in the past by $1.76.”

    Those #1, #2, #3, #4 are just for starters!

    So much for “SS hasn’t added to the deficit or debt”.

    As to Mr. Boak’s “Nor does Medicare”… well, I’m at a pure loss as to how the AARPers figure *that*! :-)

    Do they believe defense spending doesn’t either?

  27. comment number 27 by: Vivian Darkbloom

    “The way it was explained to me…”

    I’m not sure it has ever been explained to me; however, my assumption as to the line of argument is pretty much the same.

    I guess, to play Devil’s Advocate, one might argue that the fact politicians choose to spend the Social Security “surplus” on other stuff is not the fault of the Social Security Program any more than if I purchase a Treasury Bond I’m contributing to the deficit. Of course, the Social Security Program is directed by the same folks who make the rules for every other federal taxing and spending program (corporations are people, you know) so in that sense Social Security is not responsible for anything.

    I tend to agree with the argument that having all that ready cash available from a captive lender is just too tempting to resist. The issue here is quite similar to the “Starve the Beast” theory. But, Bruce Bartlett just proclaimed via the Economix blog that “Starve the Beast” is “dead” (meaning it never worked as conservatives thought it would). Difficult to prove, those counterfactuals, but one has to wonder what the level of spending (and general borrowing) would have been absent those SS “surpluses”. Would cutting them off from the Social Security Trust Fund have curbed their appetites?

    I think the problem with arguing either side of the “does Social Security add to the deficit” issue is the fact that Social Security is conveniently a hybrid animal. It has elements of a welfare program (supported by general progressive taxes and spending), but it also has an element of insurance. Both sides probably like to keep that ambiguity alive.

    I could avoid that issue altogether and simply point out (as I have) that if Social Security were required to use “normal” accounting (that is, accruing for anticipated liabilities) as normal businesses are required to do, it would definitely be adding to the deficit. I guess the issue would then become “which deficit”.

  28. comment number 28 by: Jim Glass

    Bruce Bartlett just proclaimed via the Economix blog that “Starve the Beast” is “dead” (meaning it never worked as conservatives thought it would)

    Saying “starve the beast doesn’t work” is saying “the level of revenue has no effect on the level of spending” and thus “feed for the beast, increasing revenue, doesn’t increase spending”.

    Does Bartlett really believe that? Does anybody?

    If that’s true, why is Krugman ranting on about the need for tax increases, especially at the same time as he is saying the debt is no problem?

    Here’s a favorite of mine on the subject, via Brad DeLong from back in the days before Bush Derangement Syndorme struck him down. DeLong speaks to Rudy Penner, recent CBO head…

    http://www.j-bradford-delong.net/movable_type/archives/000071.html

    Brad praises how well and honest the budgetary process worked in the early and mid-1990s, and what an important role the Budget Enforcement Act [BEA] and its Pay-As-You-Go restrictions [PAYGO] played…

    Rudy: …One substantive point: You rightly praised how the BEA worked from 1990 thru 1997. But then it broke down completely…

    Brad: … the rapid dissolution of the effectiveness of the process after 1997 puzzles me greatly…

    Rudy: Legislation involving mandatory accounts “had to be deficit neutral”, but it wasn’t after 98. PAYGO rules were routinely violated…

    Brad: Yeah … So what happened at the beginning of 1998 to change things so completely? That’s still not clear to me…

    Rudy: I believe it was the surplus. PAYGO was originally designed to stop tax and entitlement policy from increasing the deficit. (Really, to preserve the gains from the 1990 budget agreement.) After 1997, it had the effect of preventing any reduction of the surplus and that didn’t make much sense…

    Now really, if that wasn’t the head of CBO describing “starve the beast” as working — deficits constrained spending until the unexpected arrival of a surplus caused restraint to suddenly be abandoned and spending to explode, because restraining spending when there was no deficit “didn’t make much sense” — then what the heck was it?

  29. comment number 29 by: Brooks / Gordon

    What I found re: economists’ respective views on “Starve the Beast” a few years ago.
    http://economistmom.com/2009/12/two-evil-santas/#comment-6178

    And a recent article:
    http://www.weeklystandard.com/articles/gorging-beast_663547.html?nopager=1

  30. comment number 30 by: Vivian Darkbloom

    An Op-Ed today in the WSJ from former Fiscal Commission members Cox and Archer:

    “The actual liabilities of the federal government—including Social Security, Medicare, and federal employees’ future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion. Nothing like that figure is used in calculating the deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure.”

    http://online.wsj.com/article/SB10001424127887323353204578127374039087636.html?mod=opinion_newsreel

    Imagine that, $7 trillion in accrued expenses and those programs don’t contribute to “the deficit”!

    As I said, it’s all about the accounting.

  31. comment number 31 by: Vivian Darkbloom

    And, from the NYT:

    “While a potential change in calculating Social Security increases was part of the talks with Speaker John A. Boehner last year, the White House press secretary, Jay Carney, made clear on Monday that the administration was not considering changes to the retirement program as part of the deficit talks.

    “We should address the drivers of the deficit, and Social Security is not currently a driver of the deficit,” Mr. Carney said.”

    http://www.nytimes.com/2012/11/27/us/politics/politics-in-play-over-safety-net-in-deficit-talks.html?hp

    Well, one can argue that “not currently a driver of the deficit” and “not adding to the deficit” are different things; nevertheless, Jay seems to be clearly in Bill’s camp.

  32. comment number 32 by: Jim Glass

    Social Security is not currently a driver of the deficit,” Mr. Carney said.”…

    Well, one can argue that “not currently a driver of the deficit” and “not adding to the deficit” are different things; nevertheless, Jay seems to be clearly in Bill’s camp.

    The only way you can argue it is by using cash basis accounting — measuring “deficit” by cash flow instead of accruing liabilities — which is explicitly illegal in the private sector for any business with inventories, or which operates on a much larger scale than a local pizzeria. As the US govt is both significantly larger than a pizzeria and has substantial inventories, under the rules that apply to the private sector Jay would be heading to jail for pushing that policy. With the “Occupy” crowd cheering the jail door slamming behind him, for his pushing such a massive financial scam.

    It’s worth noting that there is a Federal Accounting Standards Advisory Board (FASAB) which advises on rules for federal accounting (corresponding to the FASB which prescribes accounting rules for the private sector).

    And it’s also worth noting that back in 2006 a majority of the members of the FASAB — *all* of its private sector and academic members, unanimously — sought to apply the standard private-sector rules to the federal government’s accounting for Social Security, Medicare, unfunded federal pensions, etc.

    But the govt members of the FASAB, representing Congress and the Executive, told the majority that they would not only veto the change, but if the majority made it an issue the FASAB would be gutted or killed outright.

    That was the end of that.

    Note well, this was an entirely bipartisan action by the govt members, there was zero objection by anybody on any side of any political aisle. There was nary a fiscal “reformer” in sight.

    Who says the two parties can’t cooperate when they deem it is in their interest to do so?