Social Security 101

Rich Hailey is dissin on my man-crush, Paul Krugman.

We’ll start with an easy target, Mr. Paul Krugman, who was featured on Fresh Air today. Mr. Krugman continually took President Bush’s administration to task for using bad math to back up their budget. In one part, he states that his first awareness of the inconsistency of the Bush Plan was during the campaign, when Bush proposed privitizing a portion of the Social Security program. According to Mr. Jrugman, Bush proposed allowing workers to put about 1/6 of their Social Security contribution into a private account, rather than in the general fund. The problem with that, according to him, is that current revenues are used to pay current recipients, and by taking out 1/6th of the total contributions, there wouldn’t be enough money left to pay the current recipients. He also claimed that Bush never answered questions about how the government planned to make up the difference.

Oddly enough, he had answered his own question about 30 seconds before, when he announced that the Social Security collections were running about 25% over disbursements. In other words, allowing people to keep control of 1/6th of their contribution would have reduced revenue for the general fund by 16.7%, meaning that collections would still exceed disbursement by 8.3%

For a guy who complains about Bush’s math abilities, he seems to have some glaring weaknesses himself. Must be that liberal blind spot. Interestingly enough, during the campaign, Bush did say, on more than one occasion, that the privatization funds would come out of the surplus collections. I guess Mr. Krugman played hooky that day.

You know, if you’re going to question the math of someone with a resume as impressive as Paul Krugman’s is, you’d better be right. But, I’m not convinced Rich paid all that much attention to what Krugman was saying:

The problem with the 1/6 private account diversion is not that current Social Security recipients won’t be able to be paid, nor is that what Krugman argued. He argues that the future recipients, which outnumber the current recipients by a large magnitude, thanks to the babyboom generation, will not be able to be paid.

This is where a fundamental understanding of social security comes in to play. My favorite quote from the whole interview: “It [social security] is not an investment fund.” Repeat after me: Social security is not an investment fund. It’s a tax/benefit system. As Rich correctly points out, current revenues are used to pay current recipients. Of course, working class to retirement class proportions are not always (read: never) 1-to-1. Thus, it would follow that any responsible fiscal policy would include running a surplus during times when the working class revenues exceed pay-outs so that there will be funds available to cover the next generation when pay-outs will exceed revenues.

As Krugman points out, there was a time when we discussed this publically, and acknowledged that a social security/medicare surplus was necessary and wise (and if anything, needs to be increased) to prepare for the impending boom of pay-outs that threaten to bankrupt the system. Al Gore wanted to put it in a “lock box”.

If only he had had a chance. Nowadays, since the rise of power of the “party of fiscal responsibility”, this logic is gone. The surplus is simply a pot of gold, waiting to be distributed. Tax cuts for the wealthy at the expense of our social system’s future.

You may not agree with Paul Krugman’s priorities. But, the man has a Ph.D. in economics from MIT. He’s a smart guy. His math is pretty hard to beat.