Radical Reform of Social Security requires starting at the root, and that root is its real purpose and goals today, in 2010.  What are we really trying to accomplish with this program?  What are the basic problems for which we should supply social safety nets, and how do we best supply and sustain them?

2010 is more like the 1935 of Social Security’s birth during the Great Depression than any other time in American history so far.  It is a time of Great Recession, when macroeconomic events have created new poverty and exacerbated old.  Unemployment has destroyed wage income, and plummeting stock markets have devastated savings from earlier and other incomes.  Nonetheless, asking this root question of purpose yields distinctly different appropriate approaches from those we’ve been following, only slightly tweaked, for almost 75 years.

In 1935, FDR was responding to the ruination of nest eggs through collapse of the stock market.  He was particularly interested in the suffering of people who were too old to replace these losses through years of extra work and saving.  They had become poor too late to help themselves, and Society stepped in to provide this help.

Today, even as FDR’s Social Security system approaches bankruptcy, it does only a mediocre job providing financial ease in old age.  Even worse, the very structure of social security causes harmful effects to the economy in general and the working poor in particular.

According to the Social Security Administration, Social Security checks only provide 39% of a retiree’s income.  American workers must not only pay their Social Security taxes, but put money away at the same time if they want to avoid poverty in old age.  Needless to say, there is not much “security” in such a system.  Most people will not be able to survive on $1100 or  $1200 per month.  The current Social Security System does not successfully protect against poverty in old age.

Furthermore, Social Security has a number of negative indirect effects. The program may actually make a substantial number of people poorer in many of the years before retirement. “Contributory financing” is attractive to Americans who like to think that other people have paid for what they’re getting from the government.  But in the case of Social Security, this translates into the practice of early forced “saving” through payroll taxes to replace earned income for the elderly after retirement.  The result is more poverty, less employment, and higher underemployment in hopes of less poverty tomorrow — a tomorrow far, far away for many and never reached for those who die early.

Payroll taxes are a noxious form of taxation at all times, but particularly when high rates of unemployment are a national concern, as they are today.  These taxes discourage employment by creating a wedge between what businesses have to pay to hire or keep workers and what workers get to keep.  From 1937 to 1948, this difference was relatively small.  To finance Social Security benefits, employers and employees were each taxed 1.0% of the wages they paid out or took home. Medicare had yet to be invented, so its payroll taxes didn’t add to the total.  Social Security now taxes all workers at a rate of 6.2% of all their earned income up to $106,800, and employers have to match withholding with another 6.2% of their own. (Medicare adds another 1.45% to each side, for a total burden of 15.3%.)

The poor, it is often said, don’t pay income taxes.  The Earned Income Tax Credit has certainly made this true for some.  But the income ceilings for eligibility are pretty low, and everyone with a job paying above that level sends at least 7.65% of his or her earned income to the government.  “At least” because “writing the check” is different from “paying in a true economic sense.”  If businesses can get away with lowering wages in response to payroll taxes, they will.  Their total costs (wages plus their share of taxes) then go up by less than the taxes, and labor’s income (wages minus their share of taxes) go down by more. Business has then shifted some of the tax burden to Labor.  For workers earning minimum wage, the results can be even more draconian.  Employers can’t shift any of the burden to these employees, but they may lower their wage to zero, firing or never hiring people whose productivity is regarded as less than the total of minimum wages plus payroll taxes.

The situation gets even more deplorable.  Social Security may be part of what traps the poor in an even deeper sense.  The payroll tax not only causes poor people to lose income today by reducing employment and after-tax income.  It also causes losses in future income.  Entry-level jobs don’t just provide current income. Part of their rewards are hidden and deferred — on-the-job training, investment in human capital that can lead to better jobs and entry into the middle class.  Investing in human capital doesn’t just occur through formal education.  And it’s every bit as important a source of economic growth and prosperity as investing in machinery.

Growing the economy requires getting out of this Great Recession and increasing investment in equipment as well as in people.  Investment in extra capital tends to increase labor productivity even when the new equipment is just like the old.  The effect is even more positive when new capital embodies new technology.  Unfortunately, Social Security is probably holding back recovery and holding back growth.

To hire new workers, employers have to be very optimistic about economic recovery and not too concerned about future tax increases and other changes in the rules.  Reverse Keynesianism may actually be taking hold today. Deficit spending may actually be holding back private spending. Businesses may be cutting back as all that “job creation spending” previously known as “stimulus spending” raises anxiety about exploding deficits and debt and how they’ll be financed. Social Security plays a negative role here, too. Not only does it require current taxes that discourage employment, it has future unfounded liabilities that reduce entrepreneurial confidence and optimism as we all anticipate future tax hikes.

Few, if any, of these negatives are offset by the salutary effect of all the forced “saving” driven by payroll taxes. More saving, absent recession, means more investment, and more investment means more growth.  But none of that payroll revenue has actually been saved.   Our government is saving nothing for the elderly. It has never saved anything for the elderly.

What we have is a pay-as-we-go program, with a pledge to support today’s and tomorrow’s elderly by imposing payroll taxes on today’s and tomorrow’s workers.  Demographic change has put us on a frightening trajectory of massive and accelerating unfounded liabilities.  In 1950, 16.5 workers supported each retiree. Because of the baby-boomer bulge and increased life expectancy, this number has fallen to 3.1 today, and within 20 years it’s expected to drop to a mere 2.1.

The horror story of unfunded promises has received a lot of publicity of late. Less acknowledged is what has happened to earlier surpluses in the system: they were diverted to the payment of other government programs.  In 2008 alone, the Social Security surplus was $180 million, with a cumulative total of $2.4 trillion.  No wonder Mark Brandly urges us to “[t]hink of it as an exponentially larger version of Bernie Madoff’s Ponzi scheme.”  (See  “The Social Security Scam”.)Trillions of dollars of regressive payroll taxes can’t even be justified as “contributory financing”.  This is shameful diversion and warrants more exposure from the press.

While Social Security has done nothing directly to increase savings, the program has at least two indirect consequences for private savings.  On the one hand, people with jobs and therefore mandatory contributions to Social Security are likely to save less because this program “guarantees” defined benefits for their retirement years.  On the other hand, they may not believe this guarantee and increase savings not just because Social Security is insolvent but also because most efforts to improve its balance sheet are likely to include increased income taxes.  Small solace, this, because the extra savings will go ultimately to debt and deficit reduction, not to new ideas and the equipment that embodies them.

Poverty at all ages is our real problem, and the Social Security program as it exists today should accordingly itself be retired.   It’s certainly old enough, it’s not properly structured, and its goals are insufficiently wide.  Created in a crisis, it’s worsening today’s crisis.  Even in times of prosperity, it has created  poverty in efforts to avoid poverty.  Well intentioned, Social Security deserves a proper memorial service, but buried it definitely should be.

The next column will discuss alternatives to the current social security system.

Economic doldrums, of course, helped make it possible for a newcomer to become President against the odds and the insiders. Now they make it harder for him to govern, even though they also contributed to creating strong Democrat majorities in both House and Senate. Immediate concerns over rising unemployment and vanishing nest eggs in recession trump longer-term interests in getting expensive healthcare and environmental reforms right.

Nonetheless, Obama has pressed forward on several fronts. What grades has he earned, this first year in the White House? And how does President Obama compare to Candidate Obama?

Candidate Obama sounded and acted like a natural leader. When he promised us Change, followed by Change We Can Believe In and then Change We Need. Many of us believed him and agreed that we needed a new way of governing. Business under his administration, Candidate Obama said, would not be business as usual. Vested interests would lose their vesting, anti-trust regulation would be better enforced, and any bill with earmarks would be vetoed. Candidate Obama also promised us transparency. Not just the results but the process would improve.

Candidate Obama’s promises and pledges provide a standard for grading his programs. The grades do not suffer from inflation, but they do cut the President a little slack. When programs address recession rather than long-term needs, it’s hard to know what would have happened in their absence. Further, most of the programs are still works in progress. The healthcare bills that passed the House and Senate have yet even to be reconciled and implemented, but given the prominence they hold in Obama’s agenda and as 1/6 of the economy, they must too be evaluated.

However carefully caveated, the grades below remain bold. All readers are encouraged to voice their agreement or disagreement by submitting comments to CenterMovement.org. Please visit the archives, too, for columns providing more details about the programs as they are and as they could be.

Stimulus Package: C-, so far. Nobody knows what “the multiplier” is — macroeconomists haven’t really studied Keynesian economics empirically for years, and surely there are several multipliers depending up the kinds of spending. “Shovel ready” is a stupid concept. Very few projects can be implemented quickly to increase overall demand and employment, and even fewer are valuable for society as a whole. Lags plague all stimulus efforts – lags in predicting, or even recognizing, recession, lags in deciding what to fund, lags in getting the programs up and working. Tax cuts are quicker, and arguably fairer, if the designs are right. Maybe even better is just letting the economy right itself.

These, though, are generalities. What’s particularly disappointing about President Obama’s package is that he let the House’s Nancy Pelosi and the Senate’s Harry Reid determine so much of it. As easily predicted, it’s more about pork and parochialism than national in vision. And vested interests are likely to gather quickly around the “temporary” spending and make it permanent. Would that Obama had taken leadership of this program. He certainly put together the team to address and ameliorate the situation. Instead, business has continued as usual. And while the stock market has soared almost 60% since its March nadir, unemployment remains at miserably high levels. [See “The Road Untraveled: Obama and the Middle Road” for a visionary alternative.]

TARP: C, so far. Part of the stimulus package and inherited from Bush 43, this program has aided Wall Street more than Main Street and appears particularly attentive to Goldman [a.k.a. Government] Sachs. It’s not clear that TARP unfroze lending by its recipients, but maybe matters would have been even worse without it. At least it was fast. Billed as a sort of taxpayer investment that would actually generate a positive return for us, it keeps re-investing any returns in new or repeat losers. With the third round of aid to GMAC, it’s now more involved with the auto industry than with the banks. The bill was passed in haste and without restraining detail by Bush 43, and Obama didn’t insist on making it transparent when he took office. [See “Is Goldman Sachs the New Halliburton” for more on the problem of vested interests and conflicts of interest.]

GM and Chrysler Bailouts: D-. They went bankrupt anyway. Bankruptcy, by the way, doesn’t destroy “real assets” – it destroys financial assets – all stockholder equity and some unpaid bills of suppliers. Why not an F? Because it’s possible that delaying bankruptcy prevented or reduced investor and consumer panic. The gain was a short grace period during which some of us felt the government was in charge and taking paternal care of us. How do we measure this gain, and the cost immediately thereafter of considerable loss of faith in that government and enhanced worries about deficits and future tax increases? And then there’s the $30 billion for which taxpayers are ultimately responsible. Hm. The program was further off the mark because lots of foreign companies make their cars in the United States, employing American workers. The distinction between “American” and “foreign” production is porous indeed. Just how valuable are the GM and Chrysler labor unions to the Democrats? Enough to justify more than $30 billion? Plus more than $16 billion, so far, to GMAC ? Plus $3 billion for Cash for Clunkers?

Cash for Clunkers: F. This program itself is a clunker. For $3 billion, it hurt the environment and clumped sales rather than increasing them. It contained no provisions for buying “American” and trading in “foreign”. Only two of the top ten models purchased under the program were manufactured by the corporations once known as the “Big Three”, while none of the top ten models traded in was “foreign”. Increasing miles per gallon didn’t even help the environment on net. New Guzzlers could still be purchased – they just had to guzzle less than the old ones. More importantly, destroying functioning engines is environmentally unsound. Surely the savings in foreign oil, gasoline and carbon imprints pale in comparison to the waste of resources in replacing and discarding cars before their time was really due.

Cap and Trade: Incomplete – so far, a C. Using market forces to trade carbon emission permits is a good idea: it encourages competition and efficiency. But who sets the cap, and how? Is it based on those now seriously questionable climate-warming data? Why are only 15% of the permits sold at auction, while the other 85% have apparently been gifted to utility companies, petroleum interests, refineries, and other businesses that must have political presence in Washington? It looks like business as usual within the Beltway. What about the implications for international trade and relations? Was it wise to raise costs during a recession? President Obama has a window of opportunity to answer some of these questions and right some of these wrongs. If he closes the window without doing so, his grade is D.

Financial Reform: C-, so far. Barney Frank, Chair of the HSFC, is working on tightening up bank regulations so that there’s more risk retention and less playing with subprime loans. This looks good, at least on the surface. After all, if some banks are too big to fail, they must not be allowed to embrace too much risk. The result would otherwise be to socialize the risks while keeping the returns private. At the same time, inspite of this insight, as part of the stimulus package, the FHA has already raised the ceiling for the amount of mortgages it will insure, and it’s still accepting minimal down payments of a measly 3.5%. It appears that DC insiders don’t understand that Main Street got in trouble largely because of feckless federal policies for mortgages. With Main Street, down went Wall Street, and the private sector as a whole. The private sector’s still down. Growth in jobs has been in the government sector and the semi-government sector of healthcare. Another problem is that we cannot understand the effects of regulations simply by reading them. Who’s going to enforce the complicated new strictures? More Goldman Sach exes? Who’s going to regulate the regulators? [See “Rolling the Dice with Congressman Barney Frank” for more on this topic.]

Healthcare Reform: D, so far, and likely to decline. It looks as if a healthcare bill will be passed this year. Both the House and the Senate managed to pass bills, and they’re likely to be reconciled. Access to care will be increased – in good measure by overturning Campaigner Obama’s pledge not to force Americans to buy health insurance. Obama didn’t squawk about this development. It doesn’t seem to bother him that additional coverage is being accomplished by following a goal that was Clinton’s, not his, when they campaigned against each others. He has said he wants to improve quality and access to care while controlling costs, and will veto any bill that’s not “deficit neutral”. The alleged neutrality of the Senate version of this bill is fake: it’s an artifact of projecting out only 10 years, before many of the expenses kick in. This is not reform, it is program expansion and cost explosion. Wyden-Bennett should have been given wide publicity and deep consideration. [See “RX for Healthcare Reform” for real change and real benefits.]

Not just the results so far but the process by which they were obtained keep the grade low. As with the stimulus package, President Obama gave too much power to Pelosi and Reid rather than leading from the White House. Transparency was negligible. The bills were so lengthy and voting followed their dissemination so quickly that it’s hard to believe that many of our reps read, much less understood, what they were voting for — or against. Doors were closed and people, corporations and other organizations with opposing views were denigrated and threatened rather than heard. Obama cut deals with Big Pharma and Big Insurance, although the latter’s cooperation appears to have faltered. Our second Louisiana Purchase and the buying of Nebraska’s Ben Nelson should be included in the costs along the perks awarded to other political holdouts. What were the rewards for early support and loyalty? What are the details? Where are the devils?

These are not the kind of grades one would expect for a former Editor of the Harvard Law Review. Most of them are modified by “so far”’s, some of which are modestly hopeful. Perhaps the tincture of time will reveal underlying wisdom and what now looks like cowardice will be seen as practical compromise. What’s already clear, however, is that President Obama has not been the leader Campaigner Obama seemed with such ease to promise. What’s also clear is that special interests aren’t being silenced and restrained, they’re being thrown juicy chunks of that other white meat commonly known as pork.

Not just Big Banks but Big Interests appear too big to fail, perhaps more for political than economic reasons. Until we change the system, no President is going to get good grades unless he or she leads instead of just coordinating and cooperating with elements within it. Mr. President, you can lead; please do lead. The House and Senate, the car industry, financial industries and other sectors of political and economic life see only their parts of the picture. You’re the one elected to represent the nation.

“Hardest hit?”

Over-60’s in America have the highest net worth of any age group in the entire world. In addition, seniors can’t be fired because they’ve already retired. It’s people in younger demographics who have lost their jobs and suffer as earned income has been reduced all the way down to zero. The more you have, of course, the more you can lose; perhaps President Obama was thinking about total financial losses, not relative loss and absolute suffering, when he continued, “This additional assistance will be especially important in the coming months, as countless seniors and others have seen their retirement accounts and home values decline as a result of this economic crisis.” This kind of thinking does not comport well with progressive values.

The subsidy for seniors is likely to be regressive for other reasons as well. As a group, seniors tend to follow investment rules that urge them to hold a smaller percentage of their portfolios in stocks the older they get. Seniors with relatively large holdings of T-bills, bonds and other fixed income did not suffer the huge losses of younger cohorts with portfolios more heavily weighted in stocks and new-fangled instruments like derivatives.. In any event, the stock market has already recovered an almost absurd percentage of its losses. Yes, housing values have fallen dramatically pretty much across the board, but seniors, at least, tend to have old mortgages, still worth substantially less than the market value of their homes. Among seniors, in other words, net worth in this asset is likely to remain positive.

The case for the $250 giveaway is less weak when the conversation shifts from assets to income. The fall in interest rates has also been dramatic. To the degree that seniors have owned bonds that were called or came due, they have suffered from significant declines in income. But America’s expansionary monetary policy will soon raise interest rates back to or above the old rates to compensate for expected inflation, and financing so much additional debt will force real interest rates to new highs as well. Runaway debt will help seniors recoup their losses sooner than other groups.

If hardship is the real criterion here, government gifts should be handed to the poor. There’s nothing “needs based” with the current proposal. It’s simple age discrimination in a positive direction for our seniors. Surely increasing the bank accounts of the elderly is not the best use of additional government funds.

Obama’s proposal and pitch for the second stimulus spending package for seniors occurred the day before the government announced that there would be no increase in individuals’ Social Security monthly checks next year. The reason for no raises is not fiscal constraint and stinginess but formula. And the asymmetric way the formula works – automatic compensation for inflation, no charge for deflation – has already guaranteed recipients increased real benefits in 2010.

2010 is the first year Social Security benefits have not increased since 1975, when Congress passed Cost of Living Adjustment (COLA) provisions for Social Security. Some have argued that the index Congress chose overcompensates elders because its weighted basket of goods was designed to reflect the spending patterns of the urban employed, not the urban and rural retired. Whatever. Last January, following this formula, Social Security payments increased by 5.8%. Not since 1982 had so substantial an adjustment occurred, and the spike in energy costs was the driving factor. As we all know, one of the few benefits of this recession has been the fall in energy prices – 30% in gasoline alone and 23% in energy as a whole. Accordingly, the index for 2010 payments showed a decline of 4%. Holding monthly payments steady actually represents a significant increase in real benefits and purchasing powers. The American Enterprise Institute calculates this gain at $725 per person.

Are all seniors grateful for the asymmetric application of COLA that precludes any decline in nominal benefits even though the COLA turned negative? No, they are not. Is their discomfort assuaged by Obama’s $250? No, it is not. At least some seniors fail to understand or refuse to accept the formula for their benefits and the fact that 2010 benefits do increase their welfare. The Senior Citizens League (TSCL) reports rather angrily that people retiring in 2009 (maybe the first of the baby boomers, taking slightly early retirement) will each lose $10,134 over 20 years. TSCL, a soi-disant “nonpartisan” group of 1.2 million seniors, sources this sum in its projection of the compounding effects of 3% average annual benefits over two decades. Few of us know where that 3% figure came from, but we all know that $250 is chump change compared to $10,134.
Okay. Seniors are probably less hard hit by the recession than other worthy subsets of the population, and they’ve already been promised a reward in 2010 by experiencing no decline in their monthly checks from Social Security.

The ethics of additional $250 gifts are dubious. Maybe the lump-sum payment still has some economic justification as a delayed addition to the stimulus package? Perhaps. But this motivation is also shaky. People tend to save some of the relatively small lump-sum payments they’re doled out on a non-recurring basis from the government. A program like this doesn’t provide a large stimulus bang for the buck. It doesn’t increase consumption and investment as much as direct government spending or reductions of current and future taxes on marginal income. Has anyone actually studied the stimulus effects of the first $250?

Any other explanations for this gift? How about politics? Obama needs more support for healthcare reform. Elders are not lining up to sing the praises of any Democratic plan, nor are they promising votes and sending money. Rather, they worry about what happens to their Medicare and Medicare Advantage benefits when $500,000,000 in “waste” moves from these programs to expanded healthcare for the previously uninsured.

$250 given to 57 million people costs $14,250,000,000. But don’t worry: it won’t add to the record federal fiscal-year deficit of $1,420,000,000,000. That budget year is already over, and only the first $14,250,000,000, doled out starting last February, made it into the record books. September, usually a surplus month, ended the fiscal year by adding $46,000,000,000 to the mind-boggling total.

One can only conclude that the proposed $250 handout to the elderly is designed to win their political support for Obama’s extensive agenda. Everyone knows that seniors vote in disproportionately large numbers. But perhaps they’re not so easily bought. To imagine that checks for a mere $250 will assuage the fears surrounding proposed Medicare and Medicaid cuts assumes a high degree of senility among American seniors. Wisdom comes with age, and often people nearing the end of their lives are more likely to choose principles over expediency.