Tax cuts as a route to cutting Social Security

Conservatives are fond of saying that if you give a man a fish you can feed him for a day, but if you teach him how to fish you can feed him for a lifetime. This is supposed to tell us that social benefits, such as government programs, are bad for people. A much better example of conservative thought would be to say if I put a fence at the entrance to the pier and don’t let anyone else have access to the water, I can have all the fish for myself.

Let those peasants starve! Such a privatization of fish isn’t distant from the actual mechanics of class warfare as it is practiced, unfortunately.

Take the latest salvo in ongoing class warfare, United States edition: The coming assault on Social Security. Curious as to why the Republican Party’s mania for balanced budgets suddenly vanished? I mean, besides the mind-boggling hypocrisy we can expect from the Right. The immediate cause was to placate their billionaire donors who issued marching orders last June. A “donor retreat” at a Koch brothers’ compound in Colorado was attended by 400 people, and, as The Guardian reported, the “price for admission for most was a pledge to give at least $100,000 this year to the Kochs’ broad policy and political network. Donors decreed that Republicans must pass “tax reform” and reverse the Affordable Care Act (because health care is a socialist plot?) or their checkbooks would be shut.

That the Trump/Republican tax plan will be a bonanza for the wealthiest is well documented by this point, with the “Corker kickback” not only giving “dissident” Republican Senator Bob Corker a multimillion-dollar payday to ensure his vote but giving Donald Trump himself tens of millions of dollars thanks to the special rule benefiting real estate speculators. But lurking behind this devastating corporate offensive is the little matter of the extra $1.5 trillion to be added to the deficit. When Republicans (probably assisted by the more spineless among the Democrats) decide in the near future that deficits matter after all, social benefits will be in the cross hairs, with Social Security and Medicare likely to be the prime targets.

In advance of this, we will be treated to a rerun of horror stories designed to convince United Statesians that Social Security is unsustainable. The claim will once again be that either we’ll have to accept steep cuts to Social Security payments or privatize it, putting our retirements in the hands of Wall Street. This has been the wet dream of financiers for decades, and as an added bonus, Wall Street is another major beneficiary of the Trump tax cuts. “Heads I win, tails you lose” is always the way of Wall Street and here we have it again, pocketing untold millions from tax cuts and then taking away your Social Security when the ensuing deficit mounts.

One way of promoting privatization is to allege that there isn’t enough being paid into the system to cover future claims. It is true that in recent years Social Security has been paying out more than it is taking in, although it is far from broke. Concomitant with that argument is the claim that everybody takes out much more than they pay into it over their working lives. But that isn’t necessarily true — a Congressional Budget Office (CBO) report, issued in 2006, found that people earning near the median income get back about the same as they pay into the fund. Low-income earners do receive more than they pay, but conversely high earns get back less. But Social Security is supposed to be progressive. Indeed, the CBO’s report says, “The Social Security benefit formula is designed to provide beneficiaries who had lower life-time earnings with monthly benefits that are higher, as a percentage of their lifetime average earnings, than those received by higher-earning beneficiaries.”

The corporate interest in gutting Social Security

Those saddled with a lifetime of low or median earnings have spent a lifetime being exploited on the job, so whatever extras are received are pennies on the stacks of dollars extracted from them. Remember that profits come from the usually wide gap between what you are paid and the value of your work, and what financiers haul in is skimming off that pot collected by employers dealing in tangible services and products. There is a symbiotic relationship between financiers and industrialists and although there is much wrangling between them (which is why corporate press releases so often proclaim “enhancing shareholder value” as an important part of their mission), they have a mutual interest in exploiting employees.

That mutual interest extends to gutting Social Security, even if financiers have the more immediate interest. The challenge of funding Social Security isn’t a difficult one. An important reason why that is so is because Social Security taxes are only imposed on income up to $127,200. Anything above that is untouched. So why not raise the bar? Senator Bernie Sanders has introduced a bill that would apply this tax to all income above $250,000. This plan would eliminate 80 percent of the projected shortfall, according to an analysis from the Social Security office of the Chief Actuary. For whatever reason, Senator Sanders’ plan wouldn’t touch income in between. Taxing all income would raise still more money.

New York Stock Exchange (photo by Elisa Rolle)

Another method is suggested by Dean Baker of the Center for Economic and Policy Research. He argues that a payroll tax increase of four percent would be sufficient to fully fund Social Security and Medicare for another 75 years. He acknowledges that such an increase would be difficult for many workers, but he estimates that the loss of income from decades of upward distribution of income to be 40 percent — a loss ten times greater. That figures comes from the gap between the rate of earnings increases for working people and the rate of increases in productivity. He explains:

“[U]pward redistribution over this period has reduced wage growth by more than 40 percentage points. In short, our children are 40 percent poorer than they would otherwise be because of the money going to people like Bill Gates and Steve Zuckerberg rather than ordinary workers.

So by very conservative estimates, a typical person in their twenties or thirties has seen their income reduced by more than 40 percent because of all the money redistributed to those at the top. However, the generational warriors want young people to be upset about the possibility that a bit more than one-tenth of this amount could be used to pay for their parents’ and their own Social Security and Medicare. (This upward redistribution is also responsible for about half of the projected shortfall in Social Security, as more income going to profits and high-income workers escapes the Social Security tax.)

It is also important to understand that government action was at the center of this upward redistribution. Without government-granted patent monopolies for Windows and other Microsoft software, Bill Gates would probably still be working for a living.”

A trillion dollars for Wall Street

Privatizing Social Security would additionally cut benefits because financiers would take hefty cuts. The administrative costs of the retirement portion of Social Security (the bulk of the program) is 0.4 percent. In contrast, Dr. Baker reports, “even relatively well-run privatized systems, like those in Chile or the United Kingdom, are 10–15 percent of benefits.”

Such ratios were Social Security privatized would cost nearly $1 trillion in a decade, he calculates — $1 trillion taken from Social Security benefits and diverted into Wall Street’s bottomless pockets. Consider that the standard payment for hedge-fund managers is to receive an annual fee of two percent of the value of the total assets under management and 20 percent of any profits. The fee gets paid even when the fund loses money. In 2014, the top 25 hedge-fund managers hauled in $11.6 billion despite collectively underperforming the stock market.

Fees for ordinary money managers are not this high, and a privatized Social Security wouldn’t pay fees as exorbitant as those charged by hedge funds. But it would still be huge sums of money. That is why Wall Street has long lusted to get its hands on it.

U.S. Treasury Department under new management (photo by takomabibelot)

Then there is the matter of returns. Would gambling Social Security funds on the stock market really result in better results? Not necessarily. In studying the stock market’s long-term returns for an article I wrote a decade ago, not long after the 1990s bubble had burst, I found that you would have to time your retirement to the peaks of bubbles. When adjusted for inflation, the Dow Jones Industrial Average — the ultimate index of stock-market health and which has its components continually adjusted so as to replace low-performing stocks with high-performing ones — was below its 1929 peak as late as 1991. Here are some long-term results:

  • The Dow peaked at 995 in February 1965. Adjusted for inflation, that was 42 percent more than it was worth at its previous bubble peak in 1929, not so impressive when it took 36 years to get there.
  • The ensuring crash bottomed out in December 1974. At this point, the Dow, adjusted for inflation, was worth only half of what it was worth in 1929 and little more than one-third of its 1965 peak.
  • The most recent crash bottomed out in March 2009, at which point the Dow was three percent below its 1965 peak, adjusted for inflation.

The stock market is edging into bubble territory as we begin 2018, and stocks are priced high by historical standards. The basic measure of stock-price sustainability is the price/earnings ratio of the S&P 500, representing the largest companies on U.S. stock markets. The ratio’s average, calculated back to 1872, is 14. Prior to the 1990s bubble, the S&P 500 P/E ratio rose above 20 four times; each time it subsequently fell below 10. A standard measurement of the P/E ratio today is 26. One way to understand that number is that an investor is essentially paying $26 for each dollar of corporate profit, which is considered too high. It is true that the P/E ratio has been almost continually above the historic average since the 1990s bubble, but nonetheless this more recent rise indicates that a stock collapse is looming.

Goodbye retirement, goodbye disability payments

There aren’t any free lunches. A Center on Budget and Policy Priorities study notes that Social Security is not only a retirement program, but also an insurance program that could not be duplicated if privatized:

“Social Security is not only a retirement program but also an insurance program. About one-third of payroll taxes go to fund Social Security disability insurance and survivors insurance. Comparable insurance products would be extremely expensive to buy in the private insurance market, if one could even find such products. Social Security also provides an inflation-indexed annuity: Social Security benefits are adjusted each year for inflation and are paid until death, regardless of how long a beneficiary lives. These features of Social Security provide a valuable form of insurance against the risks of inflation and of outliving one’s savings.”

Nor would sinking funds into stock markets necessarily be a wise gamble, the Congressional Budget Office has said:

“Government investment in private securities does not offer a free lunch: although it would increase the expected value of budgetary resources, it would do so at the cost of exposing the government, future taxpayers, and beneficiaries of federal programs to greater risk. If that risk was taken into account, the returns on private securities would be no greater than the returns on government securities. … Using risky investment portfolios to finance spending by government agencies could weaken budgetary control of federal financial resources.”

That last item, however, is a lure of Republicans and their corporate masters. Create a larger deficit, cut social spending, repeat. This reduces lifespans, reducing payouts through Social Security and corporate retirement plans, for those lucky enough to still have one. Earlier deaths has already been declared a “silver lining” by U.S. corporations.

And let us not forget the sometimes bipartisan nature of Social Security cuts — Barack Obama had proposed a change to the way inflation is calculated for the determination of cost-of-living increases that would have resulted in lower adjustments for inflation, effectively a small yearly reduction. He did so as a bargaining chip in an effort to force Republicans in Congress to agree to modest tax increases. Ultimately, a Democratic Party revolt, spurred by grassroots opposition, forced an end to this plan, but this episode does serve as a reminder that social movements, not hoping for political office holders to do good, is the key to being able to retire some day.

In Chile, in 1998, the government actually asked workers not to retire because of a sustained economic downturn. (The Chilean retirement system was forcibly privatized under Pinochet). Think it can’t happen elsewhere? Keep in mind these words by Stephen Moore of the far right groups Club for Growth and Cato Institute: “Social Security is the soft underbelly of the welfare state. If you can jab your spear through that, you can undermine the whole welfare state.”

You’ll work until you drop, but Wall Street will profit.

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21 comments on “Tax cuts as a route to cutting Social Security

  1. nedhamson says:

    Reblogged this on Ned Hamson's Second Line View of the News and commented:
    Pseudo-religions – GOP right wing – are alike in deluding themselves that they are caring folks and not vultures feeding on those with less buying power than them.

  2. Alcuin says:

    I really wish you would stop using the word ‘conservative’ to describe those who claim to be conservative in the United States. They are anything but as even a perfunctory reading of Edmund Burke would amply reveal. “Conservatives” in this country are just greedy and selfish, in the worst sense of the word selfish. My prediction is that this is not going to end well. It’s already bad but it is going to get worse as it slowly dawns on those who voted for “conservatives” discover that they’ve been sold a bill of goods.

    • Burke might or might not recognize conservatism today, but there are undoubtedly continuities, which is why Burke continues to be seen as something of a father to conservative thought.

      True that Burke opposed force to keep the American colonies in British hands, but he did want the colonies to remain British through modest political concessions. Burke also opposed democratic reforms at home, such as more parliamentary representation, and made his name as a rabid opponent of the French revolution. The flavor of this opposition we can gather by his statement that the revolution’s participants were “at war with heaven itself.”

      Whatever term we choose to use — conservative, right-wing, reactionary — those of these persuasions in the U.S. have shown themselves more clearly than ever in the era of Trump.

  3. wideangle1 says:

    S C A R Y!

  4. There have been talks for decades about cutting Social Security of privatizing it and as each Administration has tried it, it did not go over so well because for one, the baby boomers are not going to just sit back and take this lying down. The older generation still has some pull and they’re not like the Millennials, who are hooked on the gadgets of their era. Baby boomers still have landline phones, still own their own homes and are set in their ways. Not to mention, they have AARP, and that organization has an extremely large membership and therefore, has much clout in the political arena.

    Baby boomers will not sit still for this. And I get so tired of Social Security being described as an entitlement since certain groups have made that a dirty word. People paid into Social Security their entire working lives and they EARNED that money for their retirement. They did not sit on their butts and have babies so that they could collect welfare! Let ’em use welfare when they want to dirty up a benefit by referring to it as an ‘entitlement’.

    A sad fact is that the Social Security Trust Fund is filled with worthless IOUs from past presidential administrations. Both Bush and Clinton raided or looted Social Security to balance their budgets as have others. Bill Clinton raided Social Security to the tune of $3 trillion while George Bush raided stole $1.37 trillion. But no one talks about the elephant in the room that IS the looting of Social Security by these administrations.

    Another fact, Black people put more in, but are the least likely to live to receive any benefits due to the fact that we are not prone to longevity. I rarely hear of a Black person that lived to be 89 while I hear of whites living into their 90s all the time. My own father died at age 62 and never saw a penny of Social Security, neither did his father or his two brothers. And I will get up off my ass and go to jail if I have to to protect my mother’s Social Security for she has surely earned it! And sadly, at 75, she’d rather still be working but because she’s got congestive heart failure and is riddled with arthritis and has diabetes and high blood pressure, there is no way that she can work. So, yeah, they’ll have one helluva fight on their hands over this one, that I can promise you!

    • Indeed Baby Boomers won’t stand for privatizing Social Security, and that’s the biggest reason it hasn’t already happened. More activism in the future is the only thing that will enable us to keep Social Security.

      You also bring up an important point — lots of folks work all their life but don’t collect (or maybe only a few years) because they die early. Given the inferior health care, poor diet, more difficult living conditions and stress that poverty produces, many folks won’t be around long enough to collect. As poverty is often a product of racism, it is possible that African-Americans collectively put in more than they get back. A study on this would be interesting.

      I hope you don’t have to go to jail to protect your mom’s Social Security, but if you do there will be many others doing the same for their families and themselves.

  5. I agree with Shelby. Baby Boomers are the wrong folk to pick a fight with. In my experience, we are far more militant than younger generations, there are an awful lot of us and with eating right and keeping fit we are living longer than ever.

    • I agree with you and Shelby. We have plenty of fight left in us. I suspect there are plenty of younger folks out there, too, who will fight; I just hope there will be enough of them who will do so.

  6. llbenjamin54 says:

    You’re spot on! When the IRA and 401(k)/403(b) plans came out to replace pensions, I had a bad feeling about it. It’s bad enough that we’re being pushed into the vagaries of the market for what we painfully saved (if we did). Nobody, not individuals, not companies they worked for, had the expertise to benefit those who tried to save. To privatize Social Security would put that last nail in.

    Conservatives tend to see the past in rosy tints. Do they not have any idea of the cost in human terms of boom/bust cycles? Even rich people failed miserably in them. Consider the steady drizzle of Wall Street millionaires during the Great Depression.

    This system is wired against most of us already. Why let them make it worse?

    The late great Terry Pratchett once wrote, “Build a man a fire, and he’ll be warm for a day. Set him on fire, and he’ll be warm for the rest of his life.”

    It’s us or them.

    • The effect of forcing people into 401(K) plans is to tie us to the stock markets. Privatize Social Security, and we’ll be entirely at the mercy of stock markets, which means at the mercy of Wall Street predators. As you correctly noted, financial markets are rigged — except for those lucky enough to retire at the peak of a bubble, the only winners will be financiers. who will scoop up unprecedented piles of money.

  7. David Green says:

    It’s important to note the difference between transfer payments and “investment,” which isn’t even guaranteed to expand the economy in valid ways. It’s important to argue for a system in which part of the GDP is transferred to those who no longer work, which is immediately spent to sustain the economy. “Investment” in the stock market has largely become a scam, even beyond the service charges. And beyond all of that, Social Security can be paid by simply printing money, and the debate surrounding “how to pay for it” is disingenuous.

    • Excellent point on “printing money” to pay for Social Security. The Federal Reserve spent about $4.1 trillion on “quantitative easing” programs earlier this decade — a program of buying U.S. government debt and mortgage-backed securities in massive amounts. The primary effect was to create a stock market bubble and secondarily to inflate real estate prices.

      What could have been done with such money instead? Two years ago, I looked into this and found that paying the entirety of U.S. student debt, modernizing and maintaining school facilities, maintenance of water systems, capital investment needs for wastewater and stormwater systems, providing necessary funds for cleaning Superfund sites, and repairing the more than 4,000 dams deemed to be deficient all together would cost $3.4 trillion. We could have accomplished all these projects, while creating huge numbers of jobs, for less than the cost of printing money to insert into the financial system in the hopes of indirectly boosting investment.

      The debate over how to pay for Social Security is indeed disingenuous.

      • Curt Kastens says:

        I agree with what you have said but unfortunately I do not think that it is the whole story. Increasing the budget deficit to increase government expdenditures to create full employment or repair infrastructure has consequences that extend outside of the USA, or any country that conducts such policies.

        Take your dam repair infrastructure proposal. You certianly know that it would require raw materials as well as labor to complete such a project. What you are no doubt assuming is that all of the raw materials would come from the USA. But what if that is not the case. I actually doubt that is the case. Take sand for example. There is a lot of it in the world. But all sand is not equal. Different kinds of sands have different qualitiies. Therefore some the kind of sand that is used for making glass is different from the kind of sand that is used to make cement.

        I saw a documentary on German tv recently. I do not remember where the program was produced. But, the main point of the program is that the world is running out of the type of sand that is needed for cement. Already terrible environmental destruction is occuring in order to meet the world’s demands for such sand. So if American construction firms get a big contract for repairing dams or any other infrastructure program I imagine that they are either going to get an advance payment which they will use to buy raw materials some of which will come from overseas. First of all American companies will have a capabilty to outbid construction firms from other countries for what both firms may want to have. Now if the other firm is Korean, or Chinese or German it may be able to just get what they want somewhere else. But this increase in demand for non renewable resources, such as sand, iron ore, nickel, chromium, and what have you will also raise the prices for these commodities. Yes that will help those countries that export them. But for those countries that are poor and must import them these price increases could cause them to cancel a developement project.

        Then in a next step as the money passes from the firms that carried out the project(s) to the workers, including management, and also to the owners of the firms consumer spending will follow. Say that is good isn’t it? Why in the heck do we go to work if not to enjoy the fruits of our labor. With that money, which was created by just a making a computer data entry and then used by the govenment to give a command (repair OUR dams) resources were diverted to the USA which could have been used in another country. Then to rub salt in the wound the workers now get to import consumer goods that also could have gone to consumers in another country. It could not go to those consumers though because American workers had more money than they would have other wise had if money would not have been created by making a computer data entry.

        OK I guess other governments could create more money in their economies to but why is that the USA gets to run a budget deficit of trillions of dollars and trade deficits year after year after year?

        Are other countries allowed to do this? What is the role of the IMF and World Bank in all of this?

        • The United States gets to run a budget deficit because that is a privilege of having the world’s reserve currency. When the world stops using the U.S. dollar as the major currency in which to conduct international transactions and ceases to buy up dollars as a safe haven whenever economic turmoil is about to hit, then the U.S. will no longer be able to run deficits.

          The trade deficit is also partly a consequence of the U.S. being the center of the world capitalist system and thus having to sometimes act as a buyer of last resort, and of course multi-national capital based elsewhere wants to sell in the U.S. as the world’s biggest market. There is also the matter of U.S.-based capital moving their production overseas in a bid to cut costs.

          The role of the IMF and World Bank is to enforce financial dictates of the most powerful capitalist entities, based in North America, Europe and Japan. Those institutions do not do anything to the economies of the biggest countries of the global North; they impose austerity, privatization and open capital markets on weaker countries, using debt as a weapon.

          The European Central Bank, the Bank of England and the Bank of Japan all had their own quantitative-easing programs; Japan’s is ongoing. The Federal Reserve is far from the only central bank pumping money into financial markets in a theoretical attempt to stimulate their economies by encouraging investment. A roundabout way of attempting that, and one that didn’t, and won’t work, but no matter because it stuffs money into financiers’ pockets and that what really matters to central banks. Better we put such money to good use, and repairing infrastructure is going to have to happen anyway. When a dam fails, the cost is far more than what it would have been to fix it.

          • Curt Kastens says:

            Yes I agree with what you said. There is a possible or probalble implication to these things though. How to clearly state it is not comming quickly to me. So my first attempt may not state it clearly. OK there are a lot of infrastucture problems that need to be done in the USA. These projects will make life better for Americans. But life has been better for many if not most Americans compared with most of the world for most of the last century. Part of this comparative advantage has been through the use of “dubious” means. How much or what percent of this wealth has been achieved as a result of these dubious means is more difficult to say exactly. The USA is after all a country with a lot of resources and a lot of hard working people. But to the extent that the success of Americans has been a result of dubious means non Americans, in particular those people of the third world are worse off than they would have otherwise been.
            So considering how easy it is for a government like the USA to increase economic activity in the USA for good purposes or not so good purposes what obligations if any do the leaders of the USA have, if they want ot act ethically, to delay or even refuse to do make improvements in the USA so that the resources that would be used for such improvements in the USA could be redirected for improvements in say Haiti or Nicaruaga or Iran or Burma, or Kenya, or Bulgaria?

  8. K. Bennet says:

    “Another method is suggested by Dean Baker of the Center for Economic and Policy Research. He argues that a payroll tax increase of four percent would be sufficient to fully fund Social Security and Medicare for another 75 years. He acknowledges that such an increase would be difficult for many workers, but he estimates that the loss of income from decades of upward distribution of income to be 40 percent — a loss ten times greater.”

    If I get 4% hacked off my income annually, how am I in any better shape than having seen a 40% cut after several decades?

    • Dean Baker’s point was that any general tax increase would be minuscule compared to what we’ve already lost with almost all productivity gains going to bosses, and why aren’t people up in arms about that massive loss. A reasonable point, although I would oppose a 4% across the board increase in taxes to stabilize Social Security. Better the cap on pay subject to Social Security taxes be abolished.

  9. Michael Elvin says:

    “… Nor would sinking funds into stock markets necessarily be a wise gamble, the Congressional Budget Office has said.”

    That ain’t the half of it. If a trillion or two dollars from SS funds gets injected into the stock market the massive transfer of funds to corporations will result in price inflation for stocks generally. It will further expand the stock bubble the same way the recent tax cuts (heavily weighted toward the investor class) enabled yet more buoyancy in stock prices. And people think the good times will never end.

    What goes up must come down, once people see that underlying fundamentals no longer support high stock prices. And when the inevitable adjustments come along, any SS fund that’s invested in stocks will shrink… along with the rest of our nest eggs.

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