Arnold Kling  

Payroll Tax Holiday and the Trust Funds

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Megan McArdle writes,


Politically, this has one major drawback: it's going to put huge holes in the Social Security and Medicare trust funds. Since I think those trust funds are meaningless accounting devices, I don't think this has any practical relevance. But as you will be able to see in my comment section about twenty minutes after I hit "post," people have a very deep emotional attachment to the idea of the trust funds, which politicians cannot easily trifle with.

Really? I have a proposal. Suppose the holiday costs the trust fund $400 billion. Just transfer that $400 billion from the general budget to the trust fund.

In fact, we could immediately put $100 trillion gazillion dollars in the trust funds from the general budget, and then they would have enough money to pay Social Security forever. Supposedly.

The trust fund is a measure of what we are promising to pay future Social Security recipients. To me, it is nothing more than that. But what is going to fund Social Security down the road is not the promises that we pour into it today. It is the taxes that people will pay in the future.

I have tried to explain Social Security for a long time. See here, for example. But Megan is probably right. I honestly thought that among trained economists it was understood that the trust fund has no real significance. I thought that anyone who went to a respectable graduate school learned the overlapping generations model, which sometimes gets taught as a model of money but is most evidently a model of Social Security. However, Paul Krugman at least pretends to act as if he never learned that.


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CATEGORIES: Social Security



COMMENTS (14 to date)
Scott Sumner writes:

I'm pretty sure Krugman understands all this. He's merely saying there's two ways of thinking about Social Security; the "so-called" trust fund means something, or it doesn't. Then he claims the program's not short of money either way. I don't completely agree with him--I think the costs will rise faster than he anticipates--but surely he must understand the accounting nonsense.

He's not dumb.

Mercer writes:

"The trust fund is a measure of what we are promising to pay future Social Security recipients. To me, it is nothing more than that. But what is going to fund Social Security down the road is not the promises that we pour into it today. It is the taxes that people will pay in the future."

People have been paying higher FICA taxes since 1983 based on the premise that the trust fund is a legitimate entity. If they are now told that the trust fund is worthless the AARP will mount a protest movement that will dwarf the Tea Party. Any congressman who states that the trust fund is worthless and the higher FICA taxes paid since 1983 don't matter will endanger his future.

Steve writes:

I think the trust funds are an example of what Thaler and Sunstein call "mental accounting" in Nudge. They are technically meaningless, but they do affect the way people think and the way people manage money (this could certainly include Congress).

Mike Rulle writes:

I laughed out loud at your suggestion re: "transferring" funds to the SS trust fund. But why not? We can create yet another "off budget" line item so it does not show up in the on budget deficit. Is it any more stupid than how it is currently done? It is pretty weird that these thoughts can even be contemplated.

But we can still have tax rates cut, despite MM's readers reaction, through some other "mental construct". If such mental constructs were used for bad purposes, perhaps we can devise other for positive purposes.

Hyena writes:

The Social Security trust fund isn't "technically meaningless" or "merely accounting". The bonds held by Social Security obligate Congress to provide those monies to the program by removing it from the normal ebb and flow of the budget process.

So, yes, they're a bit more than just an accounting note. They're fungible, but not easily so.

Dan Weber writes:

The bonds held by Social Security obligate Congress to provide those monies to the program

How so?

Congress writes the benefit formulae that are used to determine Social Security payouts. What constraint do those bonds place on those formulae?

Yancey Ward writes:

Arnold will be a key witness called before Congress to support the new plan to save SSA in about 4 years.

Eric Falkenstein writes:

scott sumner: "[Krugman]'s not dumb"

In the realm of policy proposals for the macro economy, I am unimpressed by people merely because of their IQ and education. Marx was highly educated, and highly intelligent. He was also profoundly wrong about what policies would best help society, and tendentiously ignored facts available to him contrary to his thesis (eg, the rising wages of the proletariat in his own lifetime, the lack of a decline in profits).

I get the sense a couple of fancy models buys too much deference by economists who were all at some point trying to do the same thing. Why not give the keys to those who all aced their economics preliminary examinations? Krugman has an end game--more regulation, more redistribution--which he thinks is consistent with prosperity and freedom, but he's wrong, just as Marx was wrong thinking under socialism the state would whither away.

John Goodman writes:

Arnold, good explanation of Social Security, but not very good on the trust fund. The SS trust fund is not a trust fund, of course. It serves only an accounting function and no economic function. In this respect, it is like almost every other US government trust fund -- highway fund, unemployment insurance fund, etc. None of them hold assets. Never have.

The only real difference between what Bernie Madoff did and what Social Security does, is that Bernie is in jail and we permit the SS folks to continue misleading everybody.

Which brings us to economists who apologize for all of this and act as Bernie Madoff-type shills without even getting paid for it!

Why pass up the obvious opportunity to say that Krugman is an example of Murphy's Law of economic policy, which states that economists gain attention only when they take unreliable, controversial positions?

AC writes:

Krugman has long written about the trust fund as if he either doesn't understand it, or is misleading his readers, I suppose to try to provide a rhetorical defense of Social Security. I have to assume it's the latter.

Jim Glass writes:

In fact, we could immediately put $100 trillion gazillion dollars in the trust funds from the general budget, and then they would have enough money to pay Social Security forever.
No, no, no, not "dollars" from the general budget, no way, we don't have it, where would it come from?

You must mean we could contribute a $100 trillion gazillion worth of T-bonds to the trust fund. But that would be bad too -- it would increase the official national debt to over a 100 trillion gazillion dollars. Ouch.

Much better: Just increase the interest rate on the T-bonds in the trust fund. Doing so sufficiently would fund SS forever -- without increasing the national debt at all!

Then we could do the same thing with the bonds in the Medicare trust fund to fully fund Medicare, and all our problems will be over forever. Happy days here again!

(Paul Zrimsek, where are you?)

Jim Glass writes:

People have been paying higher FICA taxes since 1983 based on the premise that the trust fund is a legitimate entity.

The trust fund is entirely an accident. There was never any intent on the part of Congress or the Greenspan Commission that the SS Reform of 1983 fund future benefits for future retirees through "the trust fund" -- and they never pretended that the trust fund does any such thing. The SSA.gov history section explains this, as does any decent history of SS.

The religious-like belief to the contrary on the part of so many has to be the greatest urban legend in US politics.

If they are now told that the trust fund is worthless the AARP will mount a protest movement that will dwarf the Tea Party.

Well, they may as well launch a mighty protest movement defending the Flat Earth, or the value of Confederate dollars.

The cost of servicing the Trust Fund is going to run about 2% of GDP, or a 15% across-the-board income tax increase to pay down those bonds.

When that income tax increase lands on retirees -- on their fixed pensions, IRAs, life savings, and *Social Security benefits*, to pay for their Social Security benefits -- what will AARP say about how real the Trust Fund is *then*?

Any congressman who states that the trust fund is worthless and the higher FICA taxes paid since 1983 don't matter will endanger his future.

And so the urban legend continues ... until the bills come due.

Benjamin Cole-Growth Hawk writes:

It'll never happen, but we could have a payroll tax holiday, and then make it up with a gasoline tax later on. There are many, many perfectly good classic and global reasons to raise gasoline taxes, and unless we do, OPEC might raise prices anyway.

Structural improvements are fine; we could also try to pare back the ethanol program, the military, the minimum wage, wipe out the home mortgage interest tax deduction etc etc etc.

But right now the Issue #1 is Fed Policy.

The Japan Wing of the Fed is ascendant. Central bankers are pettifogging and issuing sermonettes about inflation, even as the economy sags and we face deflation. That is why we have a feeble Fed in the midst of our worst recession since WWII.

The Bank of Japan still issues proclamations about the importance of "price stability." They have had 17 years of zero inflation, a very strong yen, 0.8 annual percent GDP growth (less than France!) and 75 percent declines in property and equity markets.

Yes, tight money is so nice.

Small business and real estate depends on credit--in deflation, there is little credit--who will lend on depreciating assets? No job growth. No investment returns.

We need some Growth Hawks on the Fed to counter the Japan Wing.

PS the best commentator right now on monetary policy is Scott Sumner. By far.


Hugh Watkins writes:

I too was absolutely shocked by Krugman's comments on Social Security. It was especially painful to read some of the comments on his entry from retirees who evidently trust him.

It takes years to build a reputation, but only a few poorly thought out blog entries to destroy it. (I need to remember that too).

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