Normative Narratives


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Economic Outlook: Funding The Social Security Trust Funds

Social Security reform always receives a lot of attention from politicians on both sides of the political spectrum. On one hand, we cannot continue to finance future social security obligations with our current system. On the other hand, privatized retirement plans are susceptible to market fluctuations, and therefore make poor backstops for retirement. Perhaps we can shore up Social Security Funds by lifting the social security “cap”, and limiting benefits to those who truly need them:

Under Social Security’s “Old-Age, Survivors and Disability Insurance” program, an annual limit based on changes to the national average wage index determines the maximum amount of taxes that can be taken out of an individual’s salary for Social Security.

For 2014, the cap is 6.2 percent of $117,000, or a little over $7200. Once that amount has been reached, an individual has satisfied the annual requirement and will no longer pay into the country’s Social Security trust fund.

There are 9.63 million U.S. households with a net worth of $1 millon or more, according to a recent study by financial firm Spectrum Group. Many will reach the tax cap before the majority of working-class Americans.

“Most workers have Social Security contributions withheld from their paychecks every week for 52 weeks of the year,” said Nancy Altman, co-director of Social Security Works. “If you’re a millionaire, you stop paying right around now. For someone like Warren Buffett, you’re done paying Social Security taxes in January.”

When the cap was established in 1937, 90 percent of annual salaries were subject to paying Social Security tax year round.

But in recent years, pay has risen faster for wealthy Americans than it has for the working class. In some instances, workers have seen their salaries decrease. Today, only about 70 to 75 percent of annual salaries are subject to paying the tax year round.

Marilyn Moon, senior vice president of the American Insitutes for Research, said that the Social Security tax cap will eventually need to be lifted in order to keep the system afloat.

It’s not unprecedented, she said. In 1993, the federal government lifted the cap for Medicare.

“Social Security and Medicare are two of the most successful federal programs and I don’t think that we will let it lapse,” she said. “Most of us are not wealthy enough to make it through the rest of our lives without some form of help from either program,” so eventually the cap will have to be lifted or modified she said.

Altman agrees, arguing that requiring wealthy Americans to pay year round is an issue of fairness.

“Social Security works extremely well, but its benefits should be increased and expanded. A fair way to pay for benefit improvements is to require millionaires and billionaires to pay Social Security contributions on every dollar of their salaries, just as typical Americans do.”

Lifting the social security cap and restricting benefits to those who need them is sure to be a divisive idea; it stops those who have contributed the most into the Fund (the wealthiest) from receiving any benefits. The threshold for not receiving benefits would have to be a very high level of wealth, to ensure people who have worked hard and are fiscally prudent (yet still need social security benefits to enjoy their retirements) are not penalized for such laudable lifestyles.

However, if the goal is to ensure that social security funds exist for those who need them, to the benefit of individuals and the economy as a whole, then lifting the cap and restricting benefits to the richest people is an idea worth exploring.

I have not attempted to put any exact numbers to this proposal, as it is more of an ideological question at this point. Is the purpose of Social Security to get out (part) of what you pay in, or is it to ensure people can survive their latter years in dignity and comfort? Is Social Security an investment (a retirement account), or is it a safety-net?

This question touches on a larger point about “contributing” and “taking” in America’s social welfare model. In the context of widening inequality and a disconnect between wages and productivity, in a country where money = free speech = political influence = exorbitant wealth, is it so unfair to ask those who milk this system to fund a dignified life for those who make it run with their hard work (at least until a more radical re-democratization of America’s political economy takes root)?

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Economic Outlook: “American Winter”`

Yesterday a friend of mine, Adam Blejer, pointed me towards an HBO documentary, “American Winter”. He thought, rightfully so, that the message conveyed in the documentary was one that I may be interested in and have some insight on. Always eager to learn from my followers and get them involved, I looked into the documentary.

I should say now that I was unable to actually watch the documentary, as I do not have HBO on demand. What I was able to do was read the summary of the documentary by the producer, which can be found here. This actually helped me analyze the documentary more clearly for two reasons. One, I have the meat and potatoes of the documentary spelled out in front of me, I did not have to watch and take notes or worry about missing anything, it is all there for me to go back and check on. Second, I was able to see the underlying argument without getting emotionally wrapped up in the struggles of the people in the documentary. This would have made an unbiased critique difficult if not impossible.

Without further ado, an analysis of the documentarian’s message:

The first thing I analyzed was any message conveyed based on economic indicators. In the first paragraph, I saw something that could not look right. “Yet 46% of this country is living in poverty, or near poverty, and today we have the highest number of poor since we began keeping records.” This is a slight of word, as the official U.S. poverty rate as of 2011 was 15%–31% of that 46% may be living “near poverty”, but are not actually living in poverty.

One has to be careful, as poverty rates are based on a benchmark rate; set that rate too high and everyone is in poverty, set that rate too low and some people who are truly struggling to survive will not be counted. The census bureau is very transparent about how they find their numbers; an explanation can be found here. I will leave it up to you to determine whether the numbers are too high or too low, but that 46% was an obvious shock value number—many of those 31% living “near poverty” have much much more than even the “wealthy” in less developed countries.

Which brings me to my next point, about inequality in the U.S.: “The Gini coefficient is commonly used as a measure of inequality of income or wealth and is accepted as a fair method to compare income inequality in different countries.  According to America’s Gini coefficient of 0.450, the U.S. ranks near the extreme end of the inequality scale, comparable with Cameroon, Madagascar, Rwanda, Uganda and Ecuador.  China is significantly more equal than the U.S. with a Gini coefficient of 0.415, and India is leagues ahead of the U.S. on income inequality, with a Gini coefficient 0.368.  Even Russia is less unequal than the U.S., at 0.422 Gini.”

The Gini coefficient ranges from 0-1; the closer to 0 the more equally a countries income is distributed.The .45 number checks out, although it is significant lower once you account for taxes and transfers. There are structural issues that have lead to this inequality; low investment in social programs, preferential tax rates on capital gains and other subsidies which disproportionately go to the wealthy, and the decline of union power are all common examples.

However, there are notorious shortcomings for comparing Gini coefficients between countries. For one thing, the same Gini coefficient for two countries can mean different things. Whenever you aggregate numbers, information gets lost in that aggregation. Also, in some countries such as China and India, the most impoverished experience “extreme poverty”. While relative poverty of course exists everywhere, extreme poverty exists only in the developing world. For these reasons, it is irresponsible to say “The Gini coefficient…is accepted as a fair method to compare income inequality in different countries.” This is far from a consensus amongst academics and policy makers.

Next I examined the ethical argument over the welfare state, the “makers vs. takers” argument if you will. Paul Krugman has done a great job of highlighting how transfer programs tend to amount to inter-generational consumption smoothing; you borrow when you’re young, work and contribute when you’re in the prime of your life, and then retire and take from the system again. This formula has underpinned political economy and tax philosophy for decades if not centuries, and it works. In fact, there is really no alternative that works remotely as well in creating the opportunity for social mobility.

Here’s the filmmakers take on the subject:

“How can nearly half of our country be in such dire circumstances and yet our politicians chose this time of the most need in 80 years to cut budgets and social services all across the country?  It’s because there are such pervasive myths and stereotypes about those families who need help—they are lazy, they are takers, they are incapable, they made bad decisions—so we don’t need to care about them.  But as we made American Winter we found a very different story.  The families who we followed for this film are struggling, yet they are just like our friends, neighbors and members of our own family.  They are hardworking, loving folks who have had a bit of bad luck, a job loss, a health issue, a death of a parent, a handicapped child.  These events have set them back and then life becomes an uphill battle to get back on their feet again.”

This is a problem I tend to have with documentaries, is that they cherry pick information. Certainly some people who need help actually need it temporarily to help them get back on their feet. But you can be equally certain that there are some lazy people who rely on handouts their whole lives, people who “game the system”. It is because people see the world as black and white that it is so hard to work on reforms that can strengthen the welfare state and make it work more effectively. This is why politicians talk past each other, instead of deliberating and debating in order to come to reasonable compromises that work for the American people.

Another issue the summary touches on is the inter-generational nature of poverty; what economists refer to as poverty traps:

“In making American Winter we saw firsthand how stressed and scared these parents are everyday by the prospect of losing their homes, and by the daily struggle to pay their bills.  However, the most overwhelming part was seeing the kids who have lost hope for their future.   These kids see their parents work extremely hard, and the kids say to themselves, “we’re barely getting by everyday, how am I going to make it when I grow up?”  And losing that sense of optimism and hope does not bode well for a child’s future.”

“Studies show that it is cheaper to help families before they become homeless.  And it is cheaper to help families before the kids are traumatized by living with food and housing insecurity, because those kids don’t do as well in school and they are more likely to wind up on drugs or in the prison system.  Those costs to society will affect all of us for ten, twenty, thirty years to come.  Yet even though it is cheaper to help families, to get them to a place where they are stable and productive, we seem to turn a blind eye and tell these families that they are on their own.

Every one of us needs help at some time in our lives.  But the idea that families who need social services are “takers” is one of the most destructive myths of all.  The perception is that our tax system and our government disproportionally helps the less affluent at the expense of the wealthy.  In fact, the U.S. government spends $400 billion a year on tax policies intended to help families save and invest.  In 2010, the wealthiest 5% of taxpayers averaged a net benefit of $95,000 each, while the bottom 60% received an average benefit of $5 each.”

I have written about poverty traps many times here at NN, just search poverty traps in the search bar and you will see in how many different contexts poverty traps exist. I fully agree that it is cheaper and more effective to attack the root causes of poverty before they become a problem. I do not know the methodology the filmmakers use to come to their conclusion, but it fits into a general philosophy I have on the subject; that any money saved in the short run by cutting social programs will be dwarfed by increased future spending in the welfare and penal systems.

So while some of the figures and concepts the documentary pronounces may be a bit stretched (as is common with documentaries, as they are meant to have shock value), the overall message is one that I cannot (and do not wish to( refute. Income inequality is too high in America, and it is this way due to structural flaws in our fiscal and tax policies. Sequestration and other short term budget cuts are like putting a Band-Aid on a gunshot wound, it may stop the bleeding for a little but in the long run the problem will be worse.

Capital gains taxes remain too low, even as they have risen from 15 to 20% following the “fiscal cliff” deal. Joseph Stiglitz explains quite eloquently how this perpetuates financial bubbles and takes talent away from more sustainable fields (such as medicine, teaching, manufacturing; basically anything not associated with capital gains).

Meanwhile, no meaningful financial reform has taken place since the financial crisis. The same concept of “securitization” is beginning to rear its ugly head again. We must learn as a country from our past failures, and demand our elected officials enact policies that our in our best interests as a nation (I have often said that the only special interest group Congress should be worried about is the American people).

It is the job of the American people to hold their elected officials accountable, and vote for the politicians that support the policies that we as a nation know are right (or at least vote against politicians who support policies that have been tried and failed).