FDR signing the 1935 SS Act (click image for person key)

Sunday, December 19, 2010

If this is the Defense, Who is On Offense?

Well like Santa I'll be "making a list and checking it twice" and then naming names. Because one function of this project is to act as a clearinghouse to push back on the organized groups and think thanks that are leading the charge for 'reform' of Social Security. But in this post I just want to call out some categories. Because the motivations are not all the same even as they overlap and if you had to call out some key words it would be the three 'S's: socialism, simoleons, sustainability.

Socialism: There are a number of folk who simply oppose government run social and economic programs. Throwing out some labels this would include many Burkean Conservatives, Constitutional Originalists, Libertarians of all stripes and particularly those who ally themselves with the Austrian School. Their objects range from the purely philosophical to operational 'slippery slope' arguments (The Road to Serfdom (by Friedrich von Hayek), but mostly their argument boils down to a simple equation: Socialism = Redistribution. This is often but not always overlayed with an argument with Calvinist roots, that charity should be voluntary and directed to the 'deserving' poor, and not the 'undeserving' poor who we could identify as Marx's Lumpenproletariat. But there are plenty of atheists in this group as well, it is here that you will find followers of Randian Objectivism.

With this group two typical push back methods are totally ineffective, one being appealing to that brand of Christian and other faith thought that finds an exemplar in the Sermon on the Mount and the other any argument that the cost of saving Social Security as is, or following Prof. Jamie Galbraith, the late Bob Ball, and others of enhancing its benefits. On the religious front they are either indifferent or have it covered via voluntary charity to the 'deserving' and on the economic front their problem is not that Social Security is going broke or that its benefits are too skimpy but that the program exists at all. Now theoretically you can get to this group by proving that current methods for original distribution of the gains from productivity are unfair and that methods to redress that are akin the governments power to enforce property rights. And in taking this approach you could take advantage of the fact that a substantial sector of this group has always been distrustful of Central Banking and bankers in general. By and large though this is a hard headed lot and have combined elements of Calvinism, Horatio Alger, and Milton Friedman into a belief that Capitalism works if you do, that in almost all cases you can and should provide for your own economic well being through savings and investment. Which is why they generally favor a transition away from traditional Social Security to some form of personal/private retirement accounts.

Simoleons. One school of thought among the defenders of Social Security believe that in the end this is all being driven by Wall Street, that the Masters of the Universe are driven to near madness seeing a huge stream of money flowing over which they have no control and for which they would love to charge fees. Often this is posed in the form that they covet the $2.6 trillion in assets in the Social Security Trust Funds. Personally I have never put much stock in this theory. For one thing it relies on a misunderstanding of the nature of those assets, and ignores the projected state of cash flow going forward.

Now there was a time when this was a viable strategy. In 1993 the changes to Social Security implemented pursuant to the Greenspan Commission compromise had restored the system to its official measure of short-term solvency, a Trust Fund Ratio of 100, meaning reserves of Treasuries equal to one year of projected cost. (The following table from the 2010 Report is worth extended study, I will be returning to it again and again: Table VI.A4.— Operations of the Combined OASI and DI Trust Funds, Calendar Years 1957-2009). 1993 market the point when Social Security entered what was projected, and eventuated, as a 20+ year series of primary surpluses, meaning receipts from contributions and taxation and excluding interest, i.e. actual cash flow, in growing excess of cost. This window was always projected to close as the large demographic cohort of Boomers reached Early Retirement eligibility starting in 2008, and Full Retirement eligibility starting 2012, but in the meanwhile there was an opportunity to invest those primary surpluses in other asset classes with returns that under some optimistic forecasts would exceed those of interest on Treasuries sufficient to justify the fees extracted by account managers. Whether this would have actually worked has been a subject of on-going debate since then but the operative words are 'was' and 'would', not only has that window largely closed the current downturn made the cloture a little faster, for all practical purposes the days of primary surpluses are over and with them the possibility of extracting large fees from Personal Accounts. Which explains why most of the current pressure on Social Security for private accounts is not being led from Wall Street, but from ideologically driven think tanks and individuals. The Cash Cow has dried up.

Sustainability. Historically Social Security has been extraordinarily popular among the population at large, so much so that it gained the appellation of "The Third Rail of American Politics": touch it and you die. This meant that direct attacks on it along the lines suggested in 'Socialism' above mostly did not resonate except among the true believers. And the argument for Privatization outlined in 'Simoleons' collapsed in the course of the 2005 Bush's 'Social Security Tour's failure in the light of the There is No Crisis, and was sealed with the economic collapse starting in 2007-2008. Which has required an almost total shift among opponents of traditional Social Security to what was a primary line of attack all along, that however popular and well-intended Social Security might have been, its benefits were over generous looking back and unaffordable going forward. Well both of those propositions are doubtful on examination, and the good will of those pushing them are to say the least suspect, it being pretty clear that most people in the 'Unsustainable' camp are really driven by one or the other of the two 'S's above. Subject of future posts.

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