Hiding in plain sight: Republicans sharpen knives for retirement program cuts

Traditionally, U.S. politicians avoid talking about cutting Social Security and Medicare close to election time.

Midterm elections are around the corner, but Republicans are making no secret of their plans to go after these critical retirement programs. It is the flip side of their plan to expand the federal deficit by $1.5 trillion through tax cuts for corporations and the wealthy. Cutting spending by these programs might be used to offset some of the cuts.

U.S. House Speaker Paul Ryan has been clear on where he wants to go after tax reform. Late last month he told a televised town hall meeting that Congress must cut “entitlements” to reduce the debt. Likewise, President Donald Trump recently said he wants to focus on “welfare reform” after tax legislation is signed into law.

And Senator Marco Rubio told a Politico conference last month: “We have to do two things. We have to generate economic growth which generates revenue, while reducing spending. That will mean instituting structural changes to Social Security and Medicare for the future.”

If tax overhaul legislation is signed into law, should workers and retirees expect changes to these programs anytime soon? Probably not. Any damage Republicans might do would be phased in over time. Moreover, some of their proposals would have difficulty getting through the Senate without significant support from Democrats – and that appears very unlikely.

But a look at the GOP’s long-range plans for Social Security and Medicare show where they hope to take us. Learn more at Reuters Money.

Comments

  1. John Dewey says:

    I think most Republican leaders understand very well that Social Security and Medicare are right now, today, adding to the federal debt. They understand that if changes are not made to these programs now – not in 2030 or 2034, but now – the federal debt will reach unsustainable levels very quickly.

    On the other hand, many Democrats cling to the lie that Social Security has assets. Those Democrats believe, apparently, that the special purpose government bonds in the Social Security Trust Fund are not IOUs.

    Why is it, Mark, that Democrats cannot understand basic finance? Cannot understand that all bonds are exactly IOUs?

    The difference between a corporate bond – or IOU – and a government bond – also an IOU is very simple. Corporate bonds have an identified source for funding payback of the IOU: the operating profits of the corporation’s business units. The government bonds in the SS trust fund – which are exactly IOUs – have no identified source for funding payback. Congress will either have to increase taxes or reduce some other government program or borrow from the public in order to pay back the IOUs held in the SS Trust Fund.

    By making changes to SS and Medicare, Republicans are trying to prevent a $2.4 trillion increase in taxes or a $2.4 trillion reduction in other government programs or a $2.4 trillion increase in borrowing from the public.

    If SS or Medicare are not going to be changed, Mark, how is the U.S. Treasury going to pay back the IOUs (the bonds) which are held in the Social Security Trust Fund?

  2. Mark Miller says:

    Thanks for writing, John. A few quick thoughts/ questions for you:
    1) Why is the payroll tax a less reliable source of funding payback than corporate profit? Tax revenue backs all sorts of bonds in the U.S. and the bond market regards those as reliable sources of revenue to repay the notes.
    2) The special issue Treasury notes held by the SSTF are assets, no different than a Treasury note I hold in portfolio, or those held by foreign governments (e.g. the Chinese). The SSTF notes are “full faith and credit obligations” of the government back to the SSTF. That is stated plainly every year in the trustee report. Calling them “IOUs” implies that they might be paid back, or they might not. I doubt you are suggesting that the US government will default on its obligations to the Chinese, for example. So, why would it default on its obligations to the SSTF?
    3) A number of manageable options exist for fixing Social Security’s exhaustion problem, which is in itself the result of lower fertility rates in the U.S. softness in wage growth and a rising share of income outside the payroll tax cap (income inequality). On the revenue side, these include lifting the taxable earnings cap until it covers
    90% of all earnings, gradually raise the tax rate for workers and employers, adding a new source of revenue, such as the estate tax, or by allowing the SSTF to invest a portion of reserves in equities. I have written about all these topics and you can find links on the site (https://retirementrevised.com/tag/social-security/).

  3. John Dewey says:

    Mark,

    Thank you for responding to my comment.

    “ Why is the payroll tax a less reliable source of funding payback than corporate profit? ”

    I never made that claim. The problem is that the payroll tax does not completely fund today’s Social Security benefits. Since 2010, the Treasury has been forced to start redeeming the special purpose government securities held in the Trust Fund. They could have done that by allocating a portion of other government taxes, such as personal or corporate income taxes. But the federal government was already running huge deficits even before the Social Security cash flow shortfall. So the Treasury was forced to borrow even more billions from the publc in order to redeem a portion of those special purpose government securities.

    The Social Security cash flow shortfall will grow sharply in the next few years. Congress has three choices for the years 2018 through 2034:

    – Increase payroll tax rates;
    – Reduce SS benefits;
    – Increase debt held by the public by $90 to $100 billion each year.

    2. “The special issue Treasury notes held by the SSTF are assets, no different than a Treasury note I hold in portfolio”

    Well, they are different. First, the Treasury note you hold in a portfolio can be sold to someone else to provide you cash. Second, that Treasury note has a defined payback date.

    In any case, all bonds, public or private, are essentially IOUs. The reason that federal government bonds are considered risk free is because the federal government can always pay them back simply by printing more money. But that really means that the government could inflate the currency in order to pay back its bonds. That would mean that government bond holders – including the government itself – faces inflation risk.

    Inflating the currency might temporaily work for other government bond holders, but it won’t work for the SS Trust Fund. That’s because SS benefits are indexed for inflation, and so benefit requirements would increase sharply and cancel the effects of inflating the currency.

    As I have noted before, Congress and the Treasury have so far mitigated the SS cash flow shortfall by increasing debt held by the public. The idea that the federal government can continue to add trillions more to the publicly held federal debt is incorrect. A day of reckoning is coming, and coming soon. As soon as interest rates rise, the interest on the publicly held debt will consume a much larger portion of total federal tax receipts. Congress will be forced to reduce expenditures somewhere.

    Where I believe you are mistaken is in arguing that SS Trust Fund bonds are an asset. Those bonds are technically an asset for SS but also a liability for the Department of the Treasury. The net for the overall Federal Government is zero.

    The same would be true for any corporation. Suppose a corporation used all its pension assets for other purposes, and deposited an equal amount of its own bonds back into its pension funds. Any auditor would quickly point out that the corporation’s pension liabilities are unfunded. Employees would be informed that its pension was unfunded.

    Do you not see that the Federal Government has deposited its own bonds – its own IOUs – into its pension fund? And that like auditors would declare a corporate pension’s future labilities to be unfunded, SS’s future liabilities are likewise unfunded beyond the cash receipts from the payroll tax. Please remember that since 2010, SS expenditures have exceeded SS payroll taxes.

  4. John Dewey says:

    Mark Miller: “ by allowing the SSTF to invest a portion of reserves in equities.”

    There are no reserves to invest. The so-called assets of the SS Trust Fund are only accounting entries. They are exactly balanced by the corresponding liabilities of the Department of the Treasury. In order for the SS Trust Fund to use those special purpose securities, the Trust Fund must ask Treasury to redeem them. But our Federal Government has for two decades run deficits. So there is no cash available for redeeming the special purpose securities held by the Trust Fund.

    For the SS Trust Fund to invest in equities, Treasury would need to borrow dollars from the public in order to redeem the bonds held by the Trust Fund. That would be in addition to the billions of dollars Treasury is already borrowing to fund the SS cash flow shortfall.

  5. Mark Miller says:

    John,

    I think you did claim that Social Security lacks a reliable funding source:

    “The difference between a corporate bond – or IOU – and a government bond – also an IOU is very simple. Corporate bonds have an identified source for funding payback of the IOU: the operating profits of the corporation’s business units. The government bonds in the SS trust fund – which are exactly IOUs – have no identified source for funding payback.”

    Can we agree that you made that claim?

  6. John Dewey says:

    Yes, Mark, I did say that there is no identified source for paying back the government bonds in the Social Security Trust Fund. Since 2010, the Treasury has increased borrowing – that is, increased the debt held by the public – in order to redeem a portion of the bonds held in the Trust Fund. However, there are currently legal limits to how much Treasury can borrow in total.

    I don’t understand what point you are trying to make by highlighting the sentence I wrote. Please explain.

  7. Mark Miller says:

    John, I’m going to respond to your question very frankly. I am a freelance writer, and I don’t make a living spending time engaging in long debates online with readers. If we can’t agree on something so basic as whether Social Security has a sound, dedicated funding source – and that this is every bit as reliable a funding source as corporate profits, in my judgement it’s not a good use of my time to debate the numerous other points you’re raising. I can debunk every one of them, but I have three story deadlines to meet before the end of the month.

  8. John Dewey says:

    More to the point, I did not claim that Social Security lacks a reliable funding source. Current payroll tax collections are the reliable funding source for Social Security benefits. But those taxes are insufficient to fund current Social Security benefits. The shortfall must somehow be funded. Since 2010, Treasury has made up the difference by borrowing more from the public. In my opinion, and in the opinion of many if not most economists, continuing to increase the government debt heldby the public is not sustainable.

  9. And a good solution to this, John, is to cut benefits that seniors have been promised and are counting on to fund their retirements?

    How ’bout we skip the huge corporate tax giveaways, both newly minted and longstanding? Oil companies spring immediately to mind, as do big ag and big pharma, all of which post enormous profits for their share holders, and do so on the backs of individual taxpayers who are forced to pick up the slack.

    Couldn’t hurt any.

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