{"id":14880,"date":"2011-06-10T17:34:02","date_gmt":"2011-06-10T07:34:02","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=14880"},"modified":"2011-06-10T17:34:02","modified_gmt":"2011-06-10T07:34:02","slug":"the-time-has-come-to-tell-the-american-people-the-truth","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=14880","title":{"rendered":"The time has come to tell the American people the truth"},"content":{"rendered":"

\t\t\t\tOn May 17, 2011, the US Social Security Trustees Report<\/a> and the US Medicare Trustees Report<\/a> were released. The releases set the conservative deficit terrorists into a tail spin. They would have been better making a nice cup of tea, relaxing with a book and generally chilling out. In fact, the most interesting part of the US government’s Social Security Administration Home Page seems to be its Popular Baby Names<\/a> search engine which allows you to plug in a name and find out how popular it has been over x years and its ranking by the year. My parents chose a name for me that remains popular. I don’t know whether that is good or bad. But playing around with that little toy is much better fun than reading the Trustees’ Report and the resulting hysteria in the media. The point is that these Trust Funds are just elaborate accounting smokescreens that ultimately mean nothing if one comprehends the financial capacity of the US government. They represent a case of a government creating a farcical structure to administer some program and then elevating the structure to a false level of importance that actually leads them to introduce policies which undermine the initial purpose of the program – and all without any basis. The time has come to tell the American people the truth.
\n
\nAs an aside – I note that the Greek economy has contracted further and as the austerity plans undermine spending and the labour force data released by Statistics Greece<\/a> yesterday revealed an unemployment rate of 16.2 per cent generally but among the 15-24 year olds the unemployment rate is now 42.5 per cent rising from 29.8 per cent in 2010. For 25-34 year olds the unemployment rate is 22.6 per cent. Female unemployment was estimated to be 19.5 per cent.<\/p>\n

There is no relief in sight as the EU elites continue to grind the nation into the ground and so a whole generation of Greek youth may spend their formative years unemployed.<\/p>\n

The future for that nation will be severely diminished as a result. If I didn’t know it was happening it would seem like a science-fiction horror story.<\/p>\n

42.5 per cent!<\/p>\n

The smokescreen erected in the EMU can be cleared if the nations take back their currency sovereignty and abandon the Euro. There would be some dislocation associated with this decision but as things get worse in Greece and elsewhere I cannot believe that they will be better off in 10 years or so by staying on in the EMU. It is likely that some of those teenagers who are unemployed now will still be so in 2020.<\/p>\n

But today we are talking about elaborate (voluntary) accounting smokescreens in a nation that has full currency sovereignty – the US. As noted in the introduction the release of the Trustees’ Reports for 2011 has sent the conservatives into a lather.<\/p>\n

As background, each “fund” has six trustees – including the current Secretary of the Treasury (the Managing Trustee), the Secretary of HHS, the Secretary of Labor, and the Social Security Commissioner. Two Public Trustees are added (one Democrat and one Republican) to provide scrutiny on the conclusions of the other four.<\/p>\n

The Trustee’s Reports are annual legal requirements under the US Social Security Act and aim to report on the “financial status” of each of the “trust funds” to the US Congress. <\/p>\n

They provide elaborate projections of the revenues and outlays expected of each the funds based on actuarial and economic assumptions and modelling.<\/p>\n

These construction of these Trust Funds beggars belief for a fiat currency issuing nation such as the US. Should there not be a positive balance in the funds then the attaching social security programs are unable to pay benefits.<\/p>\n

The US government allocates payroll tax and income tax revenue to the revenue side of these Funds. Should the current revenues be insufficient to match current obligations then the prior Trust Fund balances are used (which mainly represent past surpluses). These past surpluses were then invested in Treasury bonds.<\/p>\n

It looks to be an elaborate mechanism for the government lending to itself and pretending to raise revenue that is necessary to “fund” pension and medicare entitlements. Looks do not deceive.<\/p>\n

In fact, the US government (via the Congress) can always pass legislation which transfers “General Funds” into “Trust Funds”. A stroke of the pen funding increase.<\/p>\n

What gets the conservatives (and faux progressives) in a spin is the so-called Trust Fund exhaustion date which indicates when the Funds go broke (that is will not be able to make full benefit payments.<\/p>\n

You can imagine the mindless reactions that follow the publication of one of these reports.<\/p>\n

In the 2011 Social Security Trustees’ Report the following graph appeared (Figure II.D2):<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

The accompanying text said:<\/p>\n

\nUnder the long-range intermediate assumptions, annual cost for the OASDI program is projected to exceed non-interest income in 2011 and remain higher throughout the remainder of the long-range period. The … Trust Funds are projected to … become exhausted and unable to pay scheduled benefits in full on a timely basis in 2036 … For the combined OASDI Trust Funds to remain solvent throughout the 75-year projection period, the combined payroll tax rate could be increased during the period … scheduled benefits could be reduced during the period in a manner equivalent to an immediate and permanent reduction of 13.8 percent, or some combination of these approaches could be adopted.\n<\/p><\/blockquote>\n

The US Old-Age, Survivors, and Disability Insurance (OASDI) program “makes available a basic level of monthly income upon the attainment of retirement eligibility age, death, or disability by insured workers”.<\/p>\n

So the report notes that within the logic (which is not questioned) of the elaborate accounting system adopted to accompany social security provision, the Social Security system is running a more or less permanent deficit which will grow in magnitude over time.<\/p>\n

The current tax-sourced revenues have collapsed given the appalling state of the US economy and because stimulus packages allowed for a temporary reduction in payroll tax rates.<\/p>\n

The reason that the Trust Fund continues to grow even though there are deficits is because of interest payments on the investment assets it holds. But they are just a transfer from one US government bank account to another – the net effect on overall fiscal situation is zero.<\/p>\n

The Report says that by 2035, social security benefits will be about 13-15 per cent of taxable dollars. The Report says that the Trust Fund will be exhausted by 2036 whereupon the projected incomes would only match 77 per cent of scheduled benefits.<\/p>\n

In this Wall Street Journal article (May 18, 2011) – Trustees Show Permanent Deficits for Social Security<\/a> – which was written in response to the release of the Trustees’ Report we read:<\/p>\n

\nThe debate about whether Social Security faces a problem and needs to be fixed is over. The 2011 trustees report, which was released this afternoon, shows that the program already faces massive permanent annual deficits. In 2010, Social Security spent $49 billion more in benefits that it took in from its payroll tax. This year, that deficit will be approximately $46 billion.\n<\/p><\/blockquote>\n

To which a Modern Monetary Theory (MMT) specialist would yawn.<\/p>\n

The author is from the US Heritage Foundation<\/a> which tells us that it:<\/p>\n

\n… is a research and educational institution – a think tank – whose mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense.\n<\/p><\/blockquote>\n

I loved that description. Research is about finding things out. Education is about explaining the things that research finds out. Neither is about promoting conservatism per se<\/em> although “conservative” policy outcomes might be indicated by research.<\/p>\n

The Heritage Foundation is in fact a political lobby group that provides little by way of research and education.<\/p>\n

It lies to the American people to advance its own sense of ideological purity. It is no better than a Stalinist or Nazi propaganda machine that serves to cover up crimes against humanity.<\/p>\n

The WSJ article “horrifies” the numbers presented in the Trustee’s Reports – sort of like – wow, revenue is this but spending is soooo much greater and the whole thing is going broke.<\/p>\n

Here are some lies in the article:<\/p>\n

1. “Congress would have to invest $9.1 trillion today in order to have enough money to pay all of Social Security’s promised benefits through 2085” – no it wouldn’t – it could pay all of the benefits in each year with the stroke of a computer key. The only question would be if the nominal transfers were possible in real terms – that is, will there be enough real goods and services for older Americans to enjoy in 2085? There is no mention of that in the article (or the Trustees’ Reports by the way.<\/p>\n

2. “Any reform that eliminates deficits over the 75-year window must also solve the program’s problems beyond then” – no they don’t. There is no need to eliminate any deficits now or later.<\/p>\n

3. “These new projections should end the claims that Social Security’s impending financial crisis can be resolved with modest changes to the current system” – there is no impending financial crisis. The US government can always fund any entitlements at any time.<\/p>\n

4. “The billions that go to Social Security each year will make it harder to find money for other government programs or require large and growing tax increases” – not it won’t. The US government is not financially compromised in meeting spending on Y by spending on X. It might be politically compromised but that is nothing to do with the underlying features of the monetary system and the capacities that the US government enjoys as the monopoly issuer of the currency.<\/p>\n

5. “… by the time the trust fund runs out. Congress will have to do this through some combination of other spending cuts, new taxes, or additional borrowing” – no they will not – see response to the previous lie.<\/p>\n

6. “Unfortunately, younger workers have a great deal to worry about. Even though their parents’ and grandparents’ benefits are fairly safe, theirs are not” – that is also a lie. The largest problem facing younger workers is the entrenched unemployment and rising duration of unemployment brought upon by the failure of the US government to expand its deficit enough to support appropriate levels of job creation. This unemployment will cause intergenerational disadvantage and trying to cut spending now to “fix up social security” will worsen the situation for younger workers.<\/p>\n

Peter G. Peterson hatchet man David Walker also waded into the discussion when the Reports were released. He claimed in a press release<\/a> (May 11, 2011) that:<\/p>\n

\nThe release of the 2011 Social Security and Medicare Trustees’ Reports serves to re-enforce the need to take steps to address the huge structural deficits that lie ahead for these important social insurance programs and the federal government as a whole. This year’s Trustees’ Reports included only bad news for both programs … <\/p>\n

The time has come to tell the American people the truth regarding Medicare and ACA. The federal government has promised far more than it can reasonably be expected to deliver in connection with these health programs. Both Medicare and ACA are in need of fundamental reform in order to rationalize the related promises and control health care costs. Washington policymakers should also take steps to make the Social Security program more solvent, sustainable, secure and more savings oriented\n<\/p><\/blockquote>\n

My arguments apply to both so lets just consider Social Security – that is, the US pension system.<\/p>\n

I think it is time to tell the American people the truth. But that truth would not include any statement along the lines proposed by Walker.<\/p>\n

Some might get confused by the the accounting structure that a particular government overlays on the spending and taxing flows that support a social security scheme. For example, the US Social Security Administration has two separate funds which underpin its social security system. First, the Old-Age and Survivors Insurance Trust Fund is the accounting device that the US government uses in relation to the payment of future retirement benefits. Second, the Disability Insurance Trust Fund is the accounting device that the US government uses in relation to the payment of disability support pensions.<\/p>\n

The US system is referred to as pay-as-you-go system because employed workers pay into the funds during their working lives and retirees etc draw payments from the fund when eligible.<\/p>\n

So while there are spending and taxation flows occurring, this accounting overlay creates an illusion that the two (the workers’ contributions and the social security payments) are causally related. They are not.<\/p>\n

The contributions are just taxes that the US government levies. They don’t actually fund anything. They drain disposable income and result in net financial assets held by the private citizens being destroyed forever. The fact that they are recorded against the Social Security Trust Fund for accounting purposes is irrelevant. The fund is just an accounting record of the payments. There is no store of dollars sitting somewhere as a result of the taxation flows.<\/p>\n

The fact that the fund might hold financial assets which seem to be bought with the excess receipts over outgoings is another source of illusion (and confusion). The financial assets it holds are purchased with US government spending, which of-course, is not revenue-constrained.<\/p>\n

Additionally, the social security payments are just another type of US government spending. The spending comes from political decisions to provide a certain level of social welfare in the US and involves the Government crediting bank accounts of recipients on a regular basis in US dollars.<\/p>\n

It is crucial, if you want to understand the underlying monetary economics involved, not to get seduced by the illusions created by the accounting structures which sit on top of the essential monetary operations.<\/p>\n

As background, please read this blog – Social security insolvency 101<\/a>.<\/p>\n

Here is a restatement of some of the rudiments of MMT which bear on this debate:<\/p>\n