SENTIENT TIMES February/March 2005
Social Security Is The Least of Our Problems
The budget, the decline of the dollar, and healthcare are the really big issues.
Interview with paul Krugman by Amy Goodman
New York Times columnist and Princeton economics professor Paul Krugman discussed President Bush’s Social Security plan, the devaluation of the dollar, and the healthcare debate with Amy Goodman on Democracy Now! in this interview which aired last December. Krugman’s latest book, The Great Unraveling: Losing Our Way In The New Century, is a collection of his New York Times columns.
Amy
Goodman: What is your response to President Bush’s plan for Social
Security?
Paul Krugman: The important thing to say here is that Social Security
is way down on the list of problems we have. If you were going to take
a look at just the budget, we have a huge, immediate problem on the deficit
about which Bush intends to do nothing, really. We have a very serious
problem on Medicare and Medicaid, which is a big issue. Social Security
is the bright spot. It has maybe some mild financial problems, several
decades out, but he wants a crisis there partly to distract from the very
real crises in other places.
Can
you explain how Social Security works? Because if President Bush was raising
questions about it with a little megaphone on the steps of the White House,
it would not have the kind of effect it was having without all of the
media, it seems, amplifying the idea that Social Security is broke, bankrupt.
Right. And of course, that’s really a question about the media, not
about Social Security. Social Security is a program which has been traditionally
run. It looks like a retirement fund, and it is not exactly. What it really
is is a government program with a dedicated tax. We take the payroll tax
and it’s used to pay benefits to retirees. And 20-plus years ago,
the commission led by Alan Greenspan said we are going to have this problem
as the baby boomers reach retirement age. We will have a higher ratio
of retirees to workers, and we better get ready for it, so the Social
Security payroll tax was increased.
There were some other things, a small rise in the retirement age was set in motion so that Social Security would run a surplus which would be used to accumulate a trust fund, and this would tide us over some ways into the aging of the population. And that on its own accounting is working just fine. I mean, one of the things that we need to know is that the estimates of the day at which the trust fund runs out, just keep on receding further into the future, because the program is doing so well at running surpluses. So, ten years ago, people said it was going to run out in 2029. Now the official estimate is 2042.
Realistically, it’s probably going to go well into the second half of the century. How does this become a crisis? Well it becomes a crisis by changing the rules. By saying, oh, well, actually, that surplus that we’re running because of the tax increase that was designed to prolong the life of Social Security, that’s not real. Because it’s invested in government bonds which are a perfectly good asset, for anybody else, but not for the Social Security administration. And so, there was a real crisis that people saw in the 1980’s. They dealt with it. The solution worked very well, but the Republican party doesn’t want Social Security to remain. They have always wanted to get rid of it, since Franklin Roosevelt, so they have decided to redefine the rules so as to call it a crisis when realistically we have a huge budget problem, but that has nothing to do with Social Security.
You
talk about the real problem with the budget—I want to get to that—but
what about the issue that this is really a problem with how Social Security
is being conveyed, not so much with President Bush as with the media?
This is an issue where at the very least there is great dissension among
people who actually know something about the subject. This is a front
burner issue. But if you get your news from TV or, to a large extent,
even the newspapers, you’d never know that the reporting has simply
bought into the White House spin, and people who offer a different point
of view are simply not considered, are just not part of the discussion.
It’s kind of like the threat from Iraq, to take a random analogy.
So,
how does that change?
Certainly what I will be doing is keep on hammering at what the realities
are and also on the fact that other countries have actually gone down
the road that the Bush administration wants us to go down and the results
have not been happy. To point out this is a phony solution to a phony
crisis, and hope that at least we can get some traction. But I have to
say it’s pretty frustrating. You cannot get the alternative view—which
happens to be the majority of view that people who have actually studied
the subject—on the air.
What
about the devaluation of the dollar and its impact?
The United States is running huge twin deficits. The federal government
is borrowing $1 billion a day or so for the operations. The United States
as a whole is borrowing $1.5 billion to pay for imports. Those can’t
go on forever. It’s a law that says that things that cannot go on
forever don’t, and it appears that the world is finally looking at
it and saying, “Gee, we don’t see this changing,” and so,
the money flows are starting to dry up. The dollar is falling. We don’t
know how it plays out. If this was a Third World country, and you had
the numbers we have, you would say, “Oh, my God, start stocking up
on canned goods,” because we look by many of the numbers worse than
places like Argentina or Indonesia. But it is the United States. We get
a lot of the benefit of the doubt. The debts are in dollars, which is
some protection, having the debts in our own currency. But it just adds
to the difficulties.
Overall,
where do you see that the crisis with the budget really is?
If you look at why we have gone from surpluses to deficits the answer
is about one-quarter, roughly, is extra defense spending. Three-quarters
is a plunge in revenues. And the plunge in revenues is to a large part
directly the result of the Bush tax cuts. A lot of the rest we don’t
quite understand. It’s capital gains that were a big thing in the
late 1990s that dried up. Probably an increase in tax evasion and avoidance
because the political climate is favorable to that. We don’t really
know. But the point is, what’s really happening is we’re just
not bringing enough tax revenue to pay for the operations of government
right now—but that’s off the table. Doing something to enhance
revenue is clearly, from the point of view of this White House and this
current ruling party, something you just don’t do. And there is really
no way that I can see that the spending is going to be cut enough. So,
we have a deficit which our political system is now unwilling to be realistic
about, and unwilling to contemplate doing what has to be done to bring
it down significantly.
Vice
President Cheney, among others, has called for Bush’s tax cuts to
be made permanent. Your response to that?
Well, then the question is, is he prepared to be honest and say that “And
we’re going to slash Medicare benefits, slash Social Security benefits,
not for people 30 years from now but people in the near term”? Because
you can’t run deficits this size indefinitely, and you can’t
cut these deficits significantly without either raising taxes or making
big cuts where the money is, and the federal government is basically,
as a number of people have said, a big insurance company with a side business
in national defense. Aside from Medicare, Medicaid, Social Security and
national defense, there just isn’t much there. So the only way you
can really pay for bringing the deficit down significantly is with big
cuts in the programs that people have come to count on in their lives.
What
is the effect of the invasion and occupation of Iraq on the budget in
this country?
Roughly speaking, it’s about a third of a Vietnam, although it may
be getting up to half of Vietnam, given some of the later cost estimates.
It’s a big expense. It’s dwarfed in importance as a source of
lost revenue by the tax cuts. This past fiscal year the tax cuts were
responsible for about $270 billion of lost revenue, and the cost of the
Iraq war probably was $70 billion or $80 billion. It’s a little bit
hard to figure out. It’s a big thing, just adds to the fire, adds
to the problems, but I know people, particularly people who are horrified
by the war, would like to make it the root of all evil, but the truth
is that on the fiscal side, it’s a secondary source, compared with
big tax cuts for people with very high incomes.
Can
you talk about—and this goes back to Social Security—exactly
who profits right now from this debate?
Since we don’t have specifics, we don’t know. I mean, what the
Social Security privatization would do probably in the first place is
it would probably end up removing a lot of the security features in Social
Security. As it stands now, Social Security is much more than just a retirement
program. It’s a disability program. The way the benefits are structured
tends to protect people against poverty. So, the worst off would tend
to be hurt and people who would have been fine without Social Security
will do better, probably, as a result. Then the big question is, if we
get these private accounts, how are they going to be handled? They are
now saying, “Oh, well, we’ll put them in index funds which will
generate almost no business,” but now we hearing that will be for
starters and then they’ll relax the rules. There will be enormous
lobbying pressure to relax the rules so that Wall Street gets a piece
of the action, so it generates commissions. It is worth saying, as I wrote
in the Times, if you look at privatized systems, they generate large commissions
for the investment industry. The operating costs are typically around
20 times as high as the operating costs of Social Security. And that all
represents business for Wall Street.
Can
you talk more about what happens in other countries, that we could look
to as examples, that have gone through privatization?
The country that people like to point to is Chile. But we’re told
a myth about Chile, that they privatized their retirement system and lived
happily ever after. The reality is that the returns on accounts of not
been very good considering that the fees have absorbed a large part, about
probably 20% of the money put in. The other thing is that the system doesn’t
do the job of protecting people against poverty. Now, the good news for
Chile is that from the beginning, they had a clause in there that said
that the government steps in and supplements pensions if people don’t
have enough income to live on, and that’s what happens. The government
ends up paying a lot of support. So, they privatized it in part but it
turned into a big expensive poverty support program in addition. So it
just isn’t doing the things that people claim it did. Britain has
had a system of private pensions, and the Pensions Commission in Britain
released a study in October saying that they’re going to have a lot
of poor older people, that poverty among the elderly—which, in Britain
as in the United States, had been greatly reduced by social insurance
programs—is staging a comeback, and they’re going to need to
do a lot to help them out. So again, the fees to investment companies
eat up a lot of the returns. These systems don’t have the virtues
that people claim for them, and they actually turn out to do a lousy job
of providing for people’s retirement.
What
about looking north to Canada, on the issue of health insurance? How often
in the media it is talked about as a complete failure, and what do you
think of that?
Well, the Canadians don’t think so. Their health system is very popular.
What is true is that the very best medical care in the US is the best
in the world. If you have a very good insurance program, if you are covered
through your company in a way that’s generous, then, the US probably
has somewhat better health care for you than you would get in Canada,
although the system that seems to be terrific on all dimensions is France.
But the Canadian system at the very highest end is maybe slightly worse
than ours. But large numbers of Americans don’t get the best we can
offer. In fact, the system of company-provided health insurance is cracking.
The number of people in it is steadily declining. And so, we actually
don’t get very good coverage for many Americans. And that shows in
really lousy health returns. The other thing, it’s incredibly expensive.
There’s the myth about the efficiency of the private sector, which
is true in some things, but it isn’t when it comes to health insurance.
In fact, the US system is about twice as expensive per person as anyone
else’s, and we get worse results because we have basically insurance
companies spending a lot of money in an effort not to cover people. All
of which is wasted effort from the view of society. When you have a single-payer
system, like in Canada, that doesn’t happen.
The French have a single-payer health care system. A lot of the details are different, but basically it’s national health insurance. The difference between them and most other advanced countries is they actually fund it better. The British system is the one that people say provides poor care, and apparently it largely does because the British don’t spend enough money on it. The French do spend enough money on national health care and it’s excellent. Infant mortality is much higher in the US than it is in other advanced countries. Life expectancy is lower than it is in other advanced countries. And here we are claiming, saying, “Yes, we have the best system in the world and look at how bad those other guys are.” Let me tell you, when it comes to life and death, we don’t do very well.
This interview originally aired on Democracy Now! (democracynow.org). See the ad on page 3 for radio and TV stations in Oregon and Northern California with daily broadcasts from Democracy Now!
We must end Social Security as we know it, the Bush administration says, to meet the fiscal burden of paying benefits to the baby boomers. But the most likely privatization scheme would actually increase the budget deficit until 2050. By then the youngest surviving baby boomer will be 86 years old … The US news media have provided readers and viewers with little information about how privatization has worked in other countries. Now my colleagues have even fewer excuses: there’s an illuminating article on the British experience in The American Prospect, www.prospect.org, by Norma Cohen, a senior corporate reporter at The Financial Times who covers pension issues.
Her verdict is summed up in her title: “A Bloody Mess.” Strong words, but her conclusions match those expressed more discreetly in a recent report by Britain’s Pensions Commission, which warns that at least 75 percent of those with private investment accounts will not have enough savings to provide “adequate pensions.”
The details of British privatization differ from the likely Bush administration plan because the starting point was different. But there are basic similarities. Guaranteed benefits were cut; workers were expected to make up for these benefit cuts by earning high returns on their private accounts.
The selling of privatization also bore a striking resemblance to President Bush’s crisis-mongering. Britain had a retirement system that was working quite well, but conservative politicians issued grim warnings about the distant future, insisting that privatization was the only answer.
“Britain’s experiment with substituting private savings accounts for a portion of state benefits has been a failure,” Ms. Cohen writes. “A shorthand explanation for what has gone wrong is that the costs and risks of running private investment accounts outweigh the value of the returns they are likely to earn.”
Many Britons were sold badly designed retirement plans on false pretenses. Companies guilty of “mis-selling” were eventually forced to pay about $20 billion in compensation.
American privatizers extol the virtues of personal choice [but] their promises aren’t credible. Even if the initial legislation tightly regulated investments by private accounts, it would immediately be followed by intense lobbying to loosen the rules. This lobbying would come both from the usual ideologues and from financial companies eager for fees. Meanwhile, there is a growing consensus in Britain that privatization must be partly reversed. The Confederation of British Industry has called for an increase in guaranteed benefits to retirees, even if taxes have to be raised to pay for that increase. And the chief executive of Britain’s National Association of Pension Funds speaks with admiration about a foreign system that “delivers efficiencies of scale that most companies would die for.”
The foreign country that, in the view of well-informed Britons, does it right is the United States. The system that delivers efficiencies to die for is Social Security. - Paul Krugman, New York Times, 1/14/05
Is Social Security Going Bankrupt?
The Bush administration claims: “If we do nothing to fix Social Security, we will eventually need to raise Social Security payroll taxes on Americans by about 50 percent.”
In truth, only a 3.5% increase would be necessary to shore up Social Security.
If you define “bankrupt” as not being able to pay your obligations in full, then you might argue Social Security will be bankrupt come 2042, using projections from the Social Security trustees, or 2052, using estimates from the Congressional Budget Office. That’s when they project the system will have exhausted its surplus, which it will begin tapping in 2018 when there is less revenue than needed to cover promised benefits. By that logic, though, you also might argue that the US government—with its roughly half-trillion-dollar deficit—is or will be bankrupt. According to government estimates, the system still will be taking in enough revenue to cover 75 percent to 80 percent of what is currently promised. What’s more, even if benefits were reduced to that level, they still would be higher in today’s dollars than what current retirees are getting, according to CBO estimates.
$11 trillion is the number President Bush often uses to illustrate why he considers the system to be in crisis. It is based on projections from the 2004 Social Security Trustees report, a measure in today’s dollars of the projected shortfall over an infinite time horizon … So what’s the problem? A shortfall measured over an infinite time horizon has limited value to policymakers, according to the nonpartisan American Academy of Actuaries. The health of Social Security is typically measured over 75 years. (The estimated shortfall over 75 years is $3.7 trillion.) “Many observers question the reliability or usefulness of calculating Social Security’s unfunded obligation over 75 years. Calculations over an infinite period are even less reliable,” an Academy report noted. A more digestible way to express long-term shortfalls is as a percentage of taxable payroll. That’s the portion of your wages paid into the system. Currently, it’s 12.4 percent—half paid by you and half paid by your employer. Using assumptions made by the Social Security trustees, to bring the system into actuarial balance over the next 75 years, the payroll tax would need to increase today by 1.89 percentage points, to 14.29 percent. Over the infinite time horizon, it would need to increase by 3.5 percentage points, to 15.9 percent.
Under the
system’s current structure, it’s projected to be able to pay
benefits in full as promised for at least another 37 years.
- Jeanne Sahadi, CNN/Money 1/13/05
Bush Allies Raising Millions to Promote Private Social Security Accounts.
Several GOP groups close to the White House are asking the same donors who helped reelect Bush to fund an extensive campaign to convince Americans—and skeptical lawmakers—that Social Security is in crisis and that private accounts are the only cure.
Progress
for America, an independent conservative group that backed Bush in the
campaign, has set aside about $9 million to support the president’s
Social Security plan as well as other White House domestic priorities
in the new year. But their contributions are likely to be dwarfed by those
from corporate trade associations, spearheaded by the National Association
of Manufacturers. Other likely contributors include the financial services
and securities industries and other Fortune 500 companies, GOP officials
say. White House officials, led by Karl Rove and Charles P. Blahous III,
the president’s policy point man on Social Security, are helping
to shape the public relations campaign, said the officials, who talked
about private discussions with the White House on the condition of anonymity.
“It could easily be a $50 million to $100 million cost to convince
people this is legislation that needs to be enacted,” Moore said.
- Jim VandeHei, The Washington Post, 1/1/05
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