Congressman Adam Smith's letter on Social Security and Medicare

[eridani]

Our responses in italics.

Thank you for contacting me with your concerns about Social Security privatization, retirement age, Medicare, and cuts to benefits. I appreciate you taking the time to share your thoughts with me.

Especially at a time when seniors and all Americans are feeling the pressure of a struggling economy, Social Security is a critical program that must be preserved and protected. It was originally designed to guarantee all retirees in our nation a basic, minimum income, and the need for such a social safety net is just as great today as it was then.

Social Security is a "pay-as-you-go system" in which today's workers pay taxes to cover the money paid to today's beneficiaries. The current structure is dependent upon each generation paying into the system to support future generations. Given this structure, we need to recognize that we face serious budget challenges.

This is wrong! Baby Boomers have prepaid our own retirement! http://blog.buzzflash.com/hartmann/10015

Coincidentally, the actuaries at the Social Security Administration were beginning to get worried about the Baby Boomer generation, who would begin retiring in big numbers in fifty years or so. They were a "rabbit going through the python" bulge that would require a few trillion more dollars than Social Security could easily collect during the same 20 year or so period of their retirement. We needed, the actuaries said, to tax more heavily those very persons who would eventually retire, so instead of using current workers' money to pay for the Boomer's Social Security payments in 2020, the Boomers themselves would have pre-paid for their own retirement.

Reagan got Daniel Patrick Moynihan and Alan Greenspan together to form a commission on Social Security reform, along with a few other politicians and economists, and they recommend a near-doubling of the Social Security tax on the then-working Boomers. That tax created - for the first time in history - a giant savings account that Social Security could use to pay for the Boomers' retirement.

This was a huge change. Prior to this, Social Security had always paid for today's retirees with income from today's workers (it still is today). The Boomers were the first generation that would pay Social Security taxes both to fund current retirees and save up enough money to pay for their own retirement. And, after the Boomers were all retired and the savings account - called the "Social Security Trust Fund" - was all spent, the rabbit would have finished its journey through the python and Social Security could go back to a "pay as you go" taxing system.


According to current estimates, in 2010 and 2011 Social Security will operate with a cash flow deficit during which yearly revenues generated through payroll taxes will not be enough to pay the benefits owed. This should be followed by cash flow surpluses in 2012 to 2014. However, cash flow deficits are projected to re-emerge in 2015 and continue through the remainder of Social Security Trustees' 75-year projection period (through 2085). Demographic changes which increase the average age of our society are among the primary reasons for the system's projected funding shortfall. The first of the post-World War II baby boom generation began retiring in 2008, fertility rates continue to be lower than those experienced during the baby boom era (1946-1965), and life expectancy is projected to increase. Between 2010 and 2030, the number of people aged 65 and older is projected to increase by 76 percent, whereas the number of workers whose taxes will finance future benefits is projected to increase by 8 percent, resulting in a decline in the number of workers supporting each Social Security recipient from 2.9 today to 2.1 in 2035.

This is a totally bogus “problem.” By that logic, we should all be starving because of the dramatic reduction in the number of farmers as a percentage of the population over the past 70 years. Non-farm productivity has dramatically increased as well. According to the Bureau of labor statistics ( http://www.bls.gov/lpc/prodybar.htm ), 1947-1973 productivity gains were 2.8%/year, 1973-1979 gains were 1.1%/year, 1979-1990 gains were 1.4%/year, 1990-2000 gains were 2.1%/year, 2000-2007 gains were 2.6%/yearand 2007-2009 gains were 2.3%/year. Taking 1947 as a baseline year of 100, a quick spreadsheet calculation gives an increase to 396 over 62 years! Given the distinct possibility that there will not have been a single net job added to the economy between the years of 2000 and 2015, how can anyone possibly say that the main problem facing our economy is that we don’t have enough workers?

Besides which, the ratio of total number of dependents (retirees plus children) to workers will actually be significantly lower in 2030, the year Social Security is supposed to melt down, than it was in 1960, before the baby boom entered the work force. http://www.fair.org/index.php?page=1381

In addition, the increase in longevity is not a persuasive reason for raising the retirement age. Most of the increase is due to lower death rates at very early ages. Moreover, the increase is very unevenly distributed. For lower income women, longevity is actually decreased. Needless to say, low income women are by far more likely to have Social Security provide most of their income in old age.
http://www.newscientist.com/article/dn13746-no-southern-comfort-as-life-expectancy-falls.html

http://www.cdc.gov/nchs/data/hus/tables/2002/02hus030.pdf On average, life expectancy at 65 years (the only number that matters—not life expectancy from birth) is up 3.5 years for males and up 4.2 years for females.

Since 1984, Social Security revenues have exceeded benefits every year, creating a surplus. Unfortunately, these surpluses will not help solve the cash flow deficit problem because all of the surplus money generated in past years has been spent to cover other federal expenses and reduce federal deficits. According to the Social Security trustees, the trust fund balance is projected to continue to grow, ending in 2023, when the surplus will be drawn down to pay for Social Security benefits no longer covered by incoming revenues. The trust fund is projected to continue to have a positive balance and pay for all benefits now covered under current law until 2037 when the Social Security trust fund is exhausted. After that time, Social Security payments would simply have to come out of the rest of the budget, which is currently burdened by substantial deficits. It is true that the trust fund will have "IOUs" in the form of Treasury bills that can be "cashed out," but doing so would require additional federal borrowing for the federal budget to repay these loans to the trust fund, thus further increasing our national debt.

The IOU analogy is just nonsense. If FICA tax is part of the general revenue stream, why is it listed separately on our tax statements? This assertion was first made in1939. It was just as ridiculous then, but luckily the people who hated the idea of Social Security were not able to prevent it from becoming America’s most successful social program. In 1959, trained actuaries thoroughly shredded the argument yet again. http://www.huffingtonpost.com/rj-eskow/cold-case-file-who-shot-d_b_762185.html. James K Galbraith has done so this year in testimony to the deficit commission. http://www.newdeal20.org/wp-content/uploads/2010/06/deficitcommissionrv.pdf

If it is a crime for private companies to raid their pension funds and not replace the money, why should the government be allowed to default on its T-bills? To even label this as a problem is nothing but an admission that no one intends to do anything about the real causes of the deficit, namely the financial meltdown and putting two unnecessary wars on the national credit card. The general population has been making devastating sacrifices for the last two years, and it’s way past time for the parasitic financial sector to make some.

For the program to continue in a sustainable way, some changes will be required. Dealing with Social Security's long-term solvency problem now will be much easier while we have the time and flexibility to consider numerous options rather than waiting until later when our options for reform are limited. However, I am not supportive of the suggestion by some, to allow wage earners to divert a portion of their payroll taxes to fund private retirement accounts rather than to Social Security, which would actually make the problem worse. This alternative would greatly increase the amount of money our government would have to borrow from outside and foreign sources, because Social Security Trust Fund surpluses are used to reduce the overall federal deficit. Additionally, privatization would reduce the amount of money paid into the Social Security program by diverting those funds to private accounts, and would significantly hasten the time when Social Security would become insolvent. Finally, diversion of funds to private account would require dramatic benefit cuts, particularly for younger workers who open these accounts, and cuts to traditional benefits would likely not be made up for by any gains from private accounts.

Thank you for this firm stand against privatization. However, you have failed to discuss two options for the “changes that will be required.” The most obvious is lifting the cap on contributions to the Social Security fund or at least adjusting upwards. What is your stand on this?

The second option is changing Social Security from an insurance program to a welfare program by means testing. There is simply no justification for saying that some people who paid into the program should not be able to collect. If you total your car, your insurance company is not allowed to review your assets and refuse to pay on the grounds that you currently have enough savings to replace it without their help. (We understand that initial benefits calculations are weighted in favor of people with lower lifetime incomes, and do not regard such adjustments as true means testing. Further adjustments of this nature are perfectly acceptable.)

As you may be aware, President Obama has also indicated that he opposed to privatization and in his Fiscal Year 2011 Budget Request to Congress wrote that he is "strongly opposed to privatizing Social Security and looks forward to working in a bipartisan way to preserve it for future generations." Further, on February 18, 2010, President Obama issued an executive order establishing a National Commission on Fiscal Responsibility and Reform, charged with identifying policies to improve the fiscal outlook in the coming years, and to achieve fiscal sustainability over the long run. The commission is exploring many options to address the current fiscal problems facing Social Security and other programs, and will issue a report of recommendations to balance the budget by 2015, due out in November 2010. While it is currently unclear what these recommendations will be with regard to the Social Security program, I do understand the importance of Social Security to millions of older Americans and will carefully evaluate all findings as well as any legislation that may evolve out of their recommendations.

Even if the commission actually comes up with some useful proposals, we urge you to reject the recommendations in their entirety if ANY of the following proposals are included—
1. Any attempt to privatize Social Security, in whole or in part
2. Any recommendation to raise eligibility ages for Social Security or Medicare
3. Any recommendation involving means-testing Social Security or Medicare
4. Any recommendation of benefit cuts for current or future Social Security or Medicare beneficiaries
Genuinely helpful recommendations for reducing the deficit can always be addressed in separate legislation in the next session of Congress.

As the public debate surrounding solutions has progressed, some have advised that the retirement age should be raised from the current age of 67 for those born in 1960 or later, and 65 for all others. One immediate concern that I have had with raising the retirement age as a solution is the impact such an option may have on those people working manual labor such as construction workers and longshoremen. As the son of a baggage handler at Sea-Tac Airport, I understand first-hand the impact that physically strenuous jobs can have on a person's body over time and the implications that changing retirement age can have on these and other Americans.

We are assuming that this means you will strenuously oppose any attempts to raise the retirement age further, and express our deep appreciation.

Social Security can be preserved by choosing any number of options. If we wish to give Americans more private investment options, we can do so without taking the money out of Social Security. We could increase the amount individuals can put in Individual Retirement Accounts (IRAs), offer greater tax incentives for 401(k) plans, or take any number of actions that would not harm Social Security. In fact, I strongly support initiatives to encourage individuals to save and create wealth outside the Social Security system to improve retirement security. I have supported increased IRA limits and 401(k) limits as well as making long-term care insurance tax deductible. I also believe we should provide incentives for low- and middle-income workers to save and invest.

The biggest incentive for low and middle income earners to invest would be to change tax policy to make the wealthy pay a lot more. More discretionary income is the first requirement for an incentive to invest more. The diversion of income upward over the past 40 years has massively destroyed demand, and unless that changes, the economy will never add jobs in excess of population growth again. We are all out of bubbles, and any cuts to Social Security or Medicare will suppress demand even further.

In addition to concerns about privatization of Social Security, some are also concerned about privatization of Medicare. I agree that we should preserve the benefits for Medicare beneficiaries, continuing the program in a sustainable way. We should also find ways to allow Washington State doctors to continue to serve Medicare beneficiaries. To maintain the benefits of Medicare, we can recover billions of dollars by combating Medicare fraud and implementing cost control reforms. While some have expressed concern over the Medicare Advantage program, a program that allows private insurers to cover Medicare beneficiaries for premium rates equal to those charged by Medicare, the program offers a choice for Washington State seniors and allows doctors to participate in Medicare when they would otherwise be unable to provide for Medicare patients. Currently, because of the inefficient Medicare payment formula, which does not reward low-cost, efficient services, Medicare provides very low reimbursement rates for Washington State's Medicare participants. Thus, many providers in our state have chosen not to participate in Medicare, limiting choice for our seniors. I support and will continue to support measures that improve the Medicare reimbursement formula so more Medicare beneficiaries will have a greater choice in choosing their providers.

Those are useful things to advocate, but the basic problem with Medicare costs is exactly the same as the problem with escalating health care costs in general—there are no cost controls in the health care reform bill that can work. (Fifteen states have tried to regulate costs through mandated medical loss ratios, and have abjectly failed. This is because the insurance companies are in total control of the information necessary to calculate MLRs, and they can fiddle the numbers any way they want.) Turning Medicare into a Medicaid-style welfare program requiring major asset stripping for basic eligibilty, or imposing more out of pocket costs on Medicare beneficiaries, would be totally devastating for seniors. So would raising the eligibility age to 67, as Clinton’s deficit reduction commission proposed. We would like your commitment to vote down any such proposal.

Please know that I will continue to fight to make the Social Security and Medicare programs safe for current and future workers and I will be sure to keep your thoughts in mind as I evaluate proposals. Please do not hesitate to contact me with any future questions or comments.

Adam Smith

[eridani]

1. Kick for Tuesday n/t