Bruce Webb asked “Does Social Security contribute to the Debt? To the Deficit?” in "Deficits, Debt, Social Security: Building your Conceptual Toolkit" (here). My response to this question was a resounding “NO”. The reason I feel strongly this is the case is that Social Security is not government spending.
You can find out why after the squiggle.
In my response I made the following points:
(1) Social Security and Medicare are not government spending. They are transfer payments, made within the private sector by employers to pay for the cost of labor.I’m going to define terms. If you disagree with my definitions, your mileage may vary, but at least you’ll know my assumptions.
(2) These programs are there to require businesses to pay the complete costs of labor, so that they can't externalize it onto the government or the charity of others. They are a part of the minimum wage system.
(3) They prevent employers from exploiting workers.
(4) The revenue should come from a fee levied on each hour worked so that it is directly related to the quantity of labor used.
(5) Funding has been slashed for these programs.
(6) Workers are making literally one-half what we should be making, and the percentage of business revenue going to workers has declined from 60% to 50%.
(7) The way to strengthen retirement plans (that is, to increase funding for Social Security and Medicare) is to increase the number of jobs and their compensation.
Social Security Is Not Government Spending
By “government spending” I don’t just mean that the government collects the money and then writes a check. I mean that the money is spent on government items. For example, if the government collects a dollar and spends it on the military, it is no longer spent on a consumer item. In economic terms, taxing and spending that money on the military changes the guns-to-butter ratio of spending in the economy.
Social Security spending does not change the nature of the money. The money passes through the government but it is still spent on consumer items. This is a transfer payment. It takes the money from one group (at one time in their lives) and gives it back to that group (at a different time in their lives), but what those people spend it on isn’t changed from consumer items to government items.
In my view, Social Security is fully within the private sector. It is a requirement for businesses, in the aggregate, to pay the natural costs of labor. It can therefore not add to the federal deficit because it isn’t part of government spending. (Lyndon Johnson was reported to have added Social Security to the federal budget, in part to hide the federal deficit, since Social Security was running a surplus. The fact that it wasn’t even a part of the federal budget until the 1960s suggests that when it was set up it was not considered government spending.)
Requiring Business to Pay for Labor
Social Security is part of our minimum wage system. For most workers, especially low-wage workers and any worker without a union to represent them, it is very difficult to get an employer to pay enough for that worker to put away money for retirement. The labor market makes that an economic impossibility. The only practical way to make employers, in the aggregate, pay this part of what the worker needs to live on is for the government to take that money when the worker is working and give it to them when they are retired. That system of transferring money from actively working workers to retired workers is called Social Security. As a requirement to pay the minimum necessary for the lifetime living wage of the worker it is a form of minimum wage.
Beyond that, it’s very difficult for workers to know how much to put away for retirement. So, there’s an additional benefit of making this a broad program for all workers. Each worker would have to put away more than they actually needed when they retire to cover the risk that they may need vastly more than they estimate. By spreading the risk among all workers, not nearly as much has to be put aside. This creates a huge economic benefit that is often hidden in discussions of Social Security.
Preventing Employers From Exploiting Workers
A minimum wage is intended to prevent employers from exploiting workers. Without a minimum wage, employers would be free to get people to work while paying them less than is required for them to live (except when they are actually working). To see this you have to think about the law of supply and demand. Wages are the price of labor. They are therefore subject to this law, which states (among other things) that as supply goes up the price drops. For most jobs there is a larger supply of workers than the demand for them. If the supply goes up enough (or the demand drops off enough), the price point will decline. There’s nothing in the law of supply and demand that says that a worker can actually live on the wages offered.
If an employer offers a wage too low, no one will take it because they would starve to death on that wage. However, if the wage goes up enough that they can cover their necessities while they continue to work, then they will take the job and hope that in the future they can make more. But this does not pay them enough for them to live when they can’t work.
This is what I mean by “exploiting workers”. An employer can offer enough to keep the employee alive while they are able to work and then discard them when they can’t. This exploits the worker because it does not satisfy their lifetime living wage needs. A job is only valid in a moral sense if it pays enough for the worker to live on the wages for both when they are working and when they can’t work. In particular, the wage needs to be high enough for them to live on when they are too old to work or if they are disabled. The Social Security program provides this added wage requirement that prevents employers from exploiting workers using simple market forces to extract their labor but not pay for all the real costs of it.
What happens if we don’t have this kind of minimum wage built into their wages? The employer discards the worker when they can’t work and then society has to pick up their cost or let them die. This allows businesses to externalize the cost of labor to government programs (like food stamps), to charities, or to the worker’s families. This is why I say that Social Security prevents employers from exploiting workers.
Revenues Should Be Directly Related to Hours Worked
It is important that revenues be directly related to hours worked. Otherwise it causes a distortion in the economy because the employer is not then paying in proportion to the labor used.
From a business perspective, this is part of the cost of labor. So, if it isn’t directly related to hours worked business will change how they use labor to reduce this cost. This results in inefficiency in the labor market. (The current system also makes it proportional to the base wage rate, up to a cap. I frankly don’t know whether this is a good idea or not, economically, but I think it’s fair for the worker. Someone smarter and with better information than me will need to address that issue.)
What’s not a good idea is paying any part of this out of the general fund. That’s why I opposed the “payroll tax holiday”. Yes, we needed to pump money into the working part of the economy. Yes, this was an expedient way to do it. But, it comes at the cost of separating Social Security a little bit from its basic funding. Now we have the precedent that we can change the funding, which makes the situation that much more political.
Is a payroll tax regressive? Does it discourage the creation of jobs?
I don’t think the system is regressive. The system would be regressive except for the fact that benefits are limited and only those paying in are eligible to draw on Social Security. So, if you get all your income from investments and never pay in then you are not eligible for payments when you retire. And if you pay in but are very rich, the payments you get are strictly limited when you do get them, so they are not proportional to what you’ve earned. If there were no limit on payments then the fact that the rate is flat would be very regressive, but since payments are not simply proportional to income the difference is negligible.
And, yes, tying the fees to hours worked with a payroll tax does discourage the creation of some jobs. However, the jobs it discourages are the ones that would exploit workers. It does not discourage any job where the value of the work exceeds the lifetime living wage for that work. If the job can’t pay enough for the worker to get a lifetime living wage, then it isn’t really a job. It’s a form of charity that the worker is giving to the employer.
When you think of Social Security as being part of the minimum wage it is clear that funding for it should be directly related to hours worked.
Funding Has Been Slashed for Social Security and Medicare
By this I don’t mean that current payments to retirees have gone down or that the rates have been lowered. What I mean is that revenue for these programs has been cut because wages and work hours have not kept pace with economic expansion. This is because (1) workers make less than they did, (2) they should be making far more, and (3) unemployment rates have risen.
To understand why, you have to know a few basic facts.
(1) Throughout the early twentieth century, until the 1970s, wages rose at the same rate as worker productivity.Since the late 1970s, wages for typical workers have gone down over 8% but worker productivity has gone up 83%. (This information is readily available from the Bureau of Labor Statistics. I am using their inflation-adjusted numbers for worker productivity and non-supervisory wages.) As I say in point #6, “workers are making literally one-half what we should be making”. This is based on the fact that wages would be twice what they are today if we had continued to see wages rise in lockstep with worker productivity.
(2) From 1880 to 1980 the percentage of money taken in by businesses that went to workers was about 60%, but since then it has declined to 50%.
(3) Wages for non-supervisory workers have declined.
(4) Worker productivity has gone up dramatically since the 1970s.
(5) Since the 1970s the U.S. has indulged in increasing levels of “free trade”.
(6) Manufacturing peaked in the U.S. in the late 1970s.
There are two caveats to that, of course. One is that prices would also be higher. The other is that if we had maintained this relationship, worker productivity might have not climbed as much. However, what it also means is that Social Security has been robbed of the additional revenue. The revenue going into Social Security has been radically slashed because wages have been suppressed. If they had actually gone to twice what they are today (other things being equal) the amount of money coming into the Social Security fund this year would be double what it is.
This is another way of saying that Social Security funding is a marker for wages (and jobs). The fact that it is down compared to our needs is a reflection of the fact that wages are down and unemployment is up. (By my calculations, our trade policies have added almost 1% to the unemployment rate since the 1970s.) That Social Security funding seems to be inadequate to meet long-term needs is a sign that workers have been, in a word, screwed, for thirty years or more.
The other fact here is that manufacturing has declined. This isn’t just an interesting factoid. Manufacturing represents production. It is where goods are produced. Production is where wealth is created. The product “produced” has a higher utility than the resources that go into it. This increase in utility is what creates wealth.
So, if you take production (manufacturing, for example) and you ship it overseas then you also ship wealth production overseas. This impoverishes the country. That’s why we are faced with a fiscal crisis and an economic crisis. We moved our wealth production overseas. And now the people in the capital are standing around asking “How do we deal with the deficit? Should we raise revenue or cut spending?” Well, you wouldn’t have to do either if you hadn’t impoverished the country with “free trade”. You shipped the wealth production elsewhere. Now you have to pay the piper.
Which leads us to point #7.
Increasing Jobs and Compensation
If the fundamental problem is, as I say, that wages are down and there are not enough jobs, then how do you solve that problem? I assert that the fundamental cause of this is our trade policy. (There are other factors, of course, such as automation. Chrystia Freeland has a good discussion of this in her book, Plutocrats. But I think the dominant factor is trade.)
For one thing, we can see that the decline in wages relative to worker productivity basically started at the same time we started devaluing jobs. Jobs were first moved to “non-union states” and then to non-states to lower wages. This moved wealth production out of the country. It put pressure on wages. Over a period of only a couple decades the number of competitors each American saw for their job increased twenty-fold. Remember the law of supply and demand? If the supply doubles, the price will drop. If it goes to 20 times as much, it will plummet. There’s no practical difference between 20 times and an infinite number of times. If the number of workers available for a job doubles, the price will go down a bit. If it goes up twenty-fold the price will go to zero.
This is why, in my opinion, we see the percentage of business revenue going to wages drop from 60% to 50%. This is why we see workers earning one-half what they should be. The only reason it hasn’t gone to zero for everyone is that it is physically impossible to move all jobs out of the U.S., even all production jobs. Frying a burger at McDonalds is a production job, and it isn’t going to move to another county, because your burger would be cold by the time you got it.
I have made a number of proposals here on Daily Kos for how to address this. One is to establish an international minimum wage. Another is to institute higher and uniform tariffs.
But more broadly we need to link the Social Security debate to jobs generally and demand that our government take action on increasing the number of jobs, the number of production jobs, and the remuneration for those jobs. So, for example, a counter proposal to the Republican call for cutting social spending should be to increase the domestic minimum wage. If Republicans want people off government assistance then there’s a very easy and efficient way to get them off assistance: Make it unnecessary for them to go to the government to meet their needs. Raise the minimum wage and fewer people will need SNAP. Fewer people will need basic assistance.
Or, pass the Employee Free Choice Act. That will increase the number of people covered by unions, and therefore raise wages generally, and get more people off assistance.
Every additional dollar paid to workers in this country results in over 10 cents going into Social Security. If you want to strengthen retirement plans for workers in this country then the most effective way to do that is to increase aggregate wages paid.
A side note on Medicare: What I say here about Social Security generally applies to Medicare. However, Medicare has additional complications. A larger share of it has been covered by transfers from the general fund than for Social Security. One big reason for this is that medical costs are out of control in this country. I’ve discussed this extensively in comments and diaries on Daily Kos, especially concerning healthcare issues. To put it briefly, we pay about 50% more than our primary competitors in Europe (Germany, France and the UK) and about three times more than our primary competitors in Asia (China and India). That rate of overpaying must end to balance our trade. The only feasible way to get costs down to near-European levels is to end private, for-profit health insurance, which sucks up hundreds of billions of dollars each year in unnecessary costs. Increasing wages in the U.S. would go a long way toward solving the Medicare crisis, but a full fix requires making public the one-half of the U.S. healthcare system currently handled by for-profit healthcare payers and rolling them into a comprehensive, publicly-funded healthcare system.
Social Security is part of the minimum wage system. It forces employers, in the aggregate, to pay the lifetime living wage costs of labor. It is not government spending because it does not change the nature of the money used—it simply transfers it from one set of workers to another set, where they spend it on the same kinds of things.
Social Security is underfunded because we’ve let wages radically decline in the U.S. This is primarily the effect of unmanaged trade on our economy, which has reduced the percentage of money going to workers and depressed wages, as well as causing a higher level of unemployment.
To correct the chronic underfunding of Social Security and Medicare we need to focus on increasing wealth-production in the U.S. and bringing production back to this country. Doing so will automatically increase funding because funding is (and should be) directly related to wages paid.
I appreciate feedback on what I’ve presented here.
Also, please read and contribute to the Social Security framing page on Dkosopedia. Dkosopedia is the wiki for Daily Kos. This is part of a larger framing project intended to provide progressives with ongoing thinking about how to frame political topics to our advantage. You can learn about that project here and specifically about the mechanics of doing it here.