Committed Funding Streams and Public Support
Does committed funding — as in the Social Security and Medicare payroll taxes — protect programs from cuts ? It is often argued (sometimes here) that the committed funding makes it harder to cut Social Security OASDI pensions. Certainly recipients stress the (perceived) fact that they just want their money back and that it isn’t like welfare.
How could we manage an experiment to test this hypothesis ? It seems to me that the best approach would be to have two similar programs with the same name some of which had committed funding and two of which didn’t. Quick pop quiz: of Medicare plans A, B and D, which is funded how (answer after the jump).
Now lets see how this affects public opinion. Is it true that cuts to the programs without committed funding are considered more legitimate than cuts to the program with committed funding ? Has policy shifted so that only one set of programs is cut ? Which set ?
I think it is clear that this is a perfect experiment testing the relevance of completely committed funding compared to funding or partial funding from general revenues. In particular, I think that anyone who argues that the payroll tax cut (under which the Treasury just sends bonds to the SSA OASDI trust fund instead of selling the bonds to it) tends to undermine social security must bet his or her reputation on the results of the experiment (after the jump)
OK I know angry bear readers are even better informed that Daily Show viewers so most of you probably knew that plan A (hospital insurance) has committed funding and that plan B (office care) and D (pharmaceuticals) don’t.
Also you probably know that the PPACA had Medicare plan A specific cuts (payments based on the assumption (OK lie) that labor productivity increases as fast in health care as in the economy as a whole). In contrast, not specifically funded plan D was expanded (the doughnut hole was closed).
IIRC the fact that a program with committed funding was specifically cut while one with uncommitted funding was expanded had no role whatsoever in criticism of the bill.
I don’t think that there could be stronger evidence against the committed funding is guaranteed funding hypothesis.
Finally, look, angry comments just encourage me. My aim is to get lots and lots of comments. I don’t care if half of them are indignant. Also I think it is good for the blog if there are debates between angry bears (including angry debates).
update: Two danmed typos corrected.
update2: Two more typos corrected.
I was not aware that reputation was at stake every time differing views were discussed. This is a much more dramatic world than I’d have imagined. I was of the apparently mistaken view that holding a non-toxic debate of issues, even if one did not prevail, would tend to add to one’s reputation, or at least do no harm.
kharris – We would love to hold non-toxic debate here, but have you tried reading through the comments recently?
I will say to you specifically what I have implied before. I don’t think most of your post stimulate much thought. I still drop by for spencer and for Rebecca, who both offer good value. Otherwise, AB has gone from an economics blog written by people who know a good bit about economics to a mostly an opinion blog at which the opinions don’t do much to inform.
When the substance seems often to boil down to “Obama disappointed me: Discuss”, it’s hard to find the time to read the initial post, much less the comments.
“…testing the relevance of completely committed funding compared to fudning or partial funding from general revenues.”
Robert,
It is not the commitment of the funding alone that sets Social Security and part of Medicare apart from most other government programs. It is the source of that committed funding, a completely separate and identified payroll deduction. Note that I don’t use the word tax. FICA is not a payroll tax. The Federal Insurance Contribution Act sets funds from both employees and their employers aside for the sole purpose of funding the Trust Fund. Those funds are invested in Special Treasury notes, lent to the government. Those funds do not start off as government tax receipts, but instead are part of the borrowing that the Treasury does for the purpose of funding the general budget. To describe the Social Security finds in any other way is simply bogus. Again, it is not the commitment of the funds alone that sets Social Security apart, and in large measure Medicare, but the source of those funds. It is clearly spelled out in the legislation that is currently on the books, and which has been the law for many years.
buff
my “plan” assumes the Trust Fund will be honored.
i am not sure i understand your comment about “reduce payouts” … that seems to be what ALL the plans on the table are.
and please try to get straight the difference between SSi and SSA. i make these kinds of mistake all the time myself. but it still helps if we get it right.
jack
is largely correct. robert not so much.
it’s not the “dedicated tax” that counts, but the promise that people paying the tax were paying for their own retirement. yes you can play games with words, in which case you should enjoy talking to to…. well the persistent word gamers who show up on this sight to sow confusion.
and if kharris will permit me, i think robert is playing games here while the big liars are cutting the balls off social security. it would be nice it the liberals could get serious.
ken
have you tried reading though kharris’ comments lately. this pains me because mostly i agree with harris’ substantive opinions, but he can be relied upon to throw a hissy fit when someone violates his rules of grammar of acceptable discourse.
of course i have the same problem with some regular contributors, but i like to think i can tell the difference along a wide range of moderately informal opinion/”fact” and determined sabotage of any hope of understanding the issue.
There should be dedicated taxes and linked bonds sold to finance the “security” scam.
Old age poverty versus profits in the “security” scam. SS taxes in excess of annual outlays accumulated and were “invested” in the “security” scam (war bonds, so to speak). Now the protectors of the “security” scam and their co-conspiring – anti new dealers – want to say the SSTF should look like a Yalee’s daddy’s trust fund and never to be touched other than what the “market” scams pays out.
The SSTF is filled with war bonds that the “tax cuts during “security” growth” eras beneficiaries refuse to pay back.
And since coberly likes to toss in character slurs when he disagrees with others, he has been the target of my “grammar” rules at times. Yes, I have high standards. What kind to you have?
coberly,
I don’t see much effort to actually reduce payments (except for raising the age limit). I mostly see desperate attempts to not pay back the Trust Fund. YMMV.
I’ll try to keep them distinct!
Islam will change
Not absolutely sure but believe if you have SS Part B you must pay close to $100.00 a month for it and this is taken from your SS check. I would call this funded.
Coberly
Even you, a dedicated proponent of the sanctity of the SS program, are being dragged into the misuse of terms. The benefit aspect of the program is not a “promise” from your benevolent government functionaries, they should all croak as soon as they take a political donation. Nor are any taxes involved in the process. Taxes are what we all pay to fund the general budget. We have all been making contributions (that’s the legislation’s own term) to the program that was designed to function as an insurance investment plan without the risk or costs associated with private plans. No, no even those two words (promise and tax) aren’t part of the conversation, unless one is attempting to deceive the public.
Misty
You mean Medicare Part B.
buff
i don’t know what “much effort” means in your perception. most people argue that raising the retirement age is a benefit cut… and miss the point entirely. SS has value because it allows people to retire after paying enough into the system to pay for their own retirement. Peterson can’t stand the idea of people “being idle” even if they have paid for the privilege themselves, so he wants to kill social security. if they can’t kill it “honestly” they can kill it effectively by denying retirement until people are too old to work… for Peterson.
I suspect you are right about the not paying back the Trust Fund. congressmen seem to be pretty short sighted.
but yes, sigh, you don’t see my plan on anybody’s table.
ilsm
good point if i understand it. if those SS bonds were bought by individuals… like war bonds… there would be NO talk about them as “worthless iou’s”, but because they were bought, for the same purpose, under a government program… but not “by” the government… then of course we can say anything we like about them.
including once a year getting hysterical because the Trust Fund is running out of worthless iou’s.
harris… no character slur intended. maybe a bit of a mirror. as i said, i usually agree with you about substantive issues. but you do get excited about your own high standards that us lazy people can’t live up to. and of course you think i called you a racist, which is so far from anything i might say that i have to wonder where you get these ideas.
Misty
so would I. I think Robert goes wrong because he thinks that everyone knows what part of Medicare is “funded” and what part is not. The confusion in Medicare is what we are going to get if some “liberals” have their way with Social Security (partly fund it through general taxes). This confusion will be enough to weaken the “I paid for it myself” idea that keeps SS strong… and sane.
Robert does something here that “logical” people do all the time. He imagines that the universe is parsed according to his understanding of reality, and if he can show a “logical” discrepancy, then he has “disproved” a common idea.
That, my friends, was not well said (on my part), but I’m working on it.
jack
you are exactly correct. i am sorry that “promise” was misunderstood. i only meant that when you give someone money and he promises to pay it back, that is somewhat different from the promises a politician might make to “protect the aged and infirm.”
The thing that makes part B funded is the fact that the premium is enough to cover the costs, which it is. Arguably, part B is more funded (by a dedicated stream) than part A, since part A may not be funded by the correct amount – no mechanism to increase revenue and inadequate mechanism to control costs.
Not quite the intended topic, but:
As a dedicated stream, or even part of a dedicated stream, taxes on capital gains are too highly variable to fund programs. In good years (from 1995-2000 and from 2005-2008) income tax revenues were up significantly, but it was due to capital gains.
Responding to the post: it takes an adequate dedicated stream to make a program safe as opposed to just a dedicated stream and I am just going to proceed with that bias.
I would like to separate and exclude capital gains as a source for programs which need sustained funding. This means dedicating capital gains to programs which do not need sustained funding, which seems to imply programs which often run under deficit.
Paying for the wars comes to mind. But would that lead to an incentive to go to war when we have a boom? Would that create an incentive to create a bubble to finance a war?
In our local school district we have a philosophy that using one time funds for continuing programs is a bad plan. We have enough deferred maintenance to use up one time funds, but maintenance should not be treated that way.
Optional infrastructure is another bad way to use capital gains taxes. The money becomes available in a boom. That would be the wrong time to compete for construction resources.
I am left with using such a stream to pay down our debt. As a portion of income taxes, capital gains has varied from about 5 percent to 15 percent over the last couple of decades (IIRC). This is way to much variation even for something as large as paying down our debt, but it feels like there should be a something workable in there.
Yes, the cash building to $2.6T current in special treasuries in the SSTF (some more in medicare) would have been raised elsewhere such as taxes or selling war bonds and rationing to pay for the wars’ profiteers; scrap and rework planes, ships, vehicles and other war materials as well as tax cuts for the rich.
When the wars are over, other than under perpetual mobilization to pillage the productive economy, the war bonds were to be paid as in the administrations of Truman, Eisenhower, and Carter.
Not paying off these war profiteers’ accumulated federal debt in the SSTF is in tune with ruining the safety nets and being generally anti new deal.
MG,
What does FICA, an acronym stand for?
If another acronym is used, did it change the”I” in FICA?
Send a cite.
MG, if Jack says there are no black swans, the appropriate response is to look for one and report back if one is found. He said that legislation does not refer to FICA as a “tax” and you ask him to list all legislation dating back to the 1930s that refers to Social Security so we may verify that?
Well, it took me just a few minutes to find current US Code (26 U.S.C. ch. 21, which you can read at http://uscode.house.gov/download/pls/26C21.txt ), which refers to FICA a “tax,” and I suppose that means that Jack wrong on this.
I haven’t looked for the word “promise” but I suspect Jack is correct about this one–that is not a word typically found in legislation.
Part B premiums cover only 25% of it’s cost. I hardly see that as ‘funded’
JS-Kit giveth and taketh away. My last comment vanished.
Buff there are three major proposals out there that reduce the cost curve for Social Security:
1. Changing to Chained-CPI
2. Gradual change in retirement age
3. Less prominent but in play: change in initial benefits from Wage Indexing to Price Indexing
Whether any or all of those meet the definition of ‘benefit cut’ depends on how you deploy the concepts of ‘nominal’ ‘real’ and ‘baseline’. Me, I am a baseline guy and so think they all qualify. YVMV.
I like kharris and always did from days and fora far removed in time and place from our respective arrivals at Angry Bear.
That said I only recall two commenters from a left of center position that were ever even temporarily banned from AB. And kharris made that near unique cut. Let’s just say that the epitaph “Suffered fools gladly” will not be appearing on knarris’ tombstone. Even as many of us work from a different definition of “fools”.
If AB supported avatars a good choice for kharris would be a chunk of steel wool. And I say this as an ideological ally.
MG complaining about “know-it-all” claims.
Boy Irony is not only alive and well but comes equipped with a titanium spine and an Iron Man set of armor.
Oy. Signed: Webb the Inveterate Liar. (Just ask MG)
Arne
i don’t quite agree about “consistency”, the world is a complex place. And even a “tax” can be “not a tax.” I often tell people the payroll tax is not a tax. The idea is to get them to think. But that is a vain hope in most cases.
I talked to my dogs about this. They were puzzled. A deer, they said, is a pretty rare catch, but none of us would turn down a meal of venison.
It is amazing to me that people work themselves into paralysis by insisting the universe follow some “rules” they made up in their own heads.
I think Arne is thinking that “dedicated” means something like… oh, we decided to dedicate the fish tax to the maintenance of national monuments.
This could, i suppose be done. And if done it the right way it could become a solemn part of the national religion.
But when people talk about the payroll tax as a dedicated tax, they are not talking about an arbitrary assignment. They mean that the payroll tax is designed for the specific purpose of allowing the workers to pay for their own retirement. The “dedication” is part of the organic structure of the program.
And it’s one reason why i say that it isn’t a tax at all. It’s people paying for their own retirement. Of course it has aspects of a tax (money collected by the government under threat of legal sanction) but its an unusual tax that you get back, effectively “with your name on it”, with interest.
As always, I invite people to think about what it is they are talking about and not trap themselves in the words to their own songs.
Bruce, of course,
is right.
If there is a tax that is highly variable, it would be perfectly reasonable to use it to retire debt created by, oh, say, the occasional need for “stimulus” spending. One might even expect that capital gains would tend to be high in periods when “stimulus” is not needed.
Please see my reply to kharris. I thought my reputational bet proposal would not be controversial. I think it is just the way that science works. My view is widely shared among historians of science.
Given the content of Kharris’s first comment on this post, this discussion is very interesting.
Jack: A committed funding stream” is the standard way of describing a source of funding (FICA) which can be spent only on one program. Your disagreement is purely semantic and my semantics is absolutely standard. It is the three word version of your comment explaining funding.
Coberly: I don’t see how Jack could be right and I could be wrong. We don’t disagree. Jack just said that I was wrong to use the phrase “committed funding stream” because the real issue is, what is called a “committed funding stream” in the debate.
Notice that Jack doesn’t distinguish Medicare plans A and B. Nor does he conclude anything from the fact that Medicare is partly funded by a specific contribution and not completely funded.
Jack: A committed funding stream” is the standard way of describing a source of funding (FICA) which can be spent only on one program. Your disagreement is purely semantic and my semantics is absolutely standard. It is the three word version of your comment explaining funding.
Coberly: I don’t see how Jack could be right and I could be wrong. We don’t disagree. Jack just said that I was wrong to use the phrase “committed funding stream” because the real issue is, what is called a “committed funding stream” in the debate.
Notice that Jack doesn’t distinguish Medicare plans A and B. Nor does he conclude anything from the fact that Medicare is partly funded by a specific contribution and not completely funded.
I too think that Bruce is absolutely right. I would go much further and have the Federal Government buy risky assets so that it had capital gains and losses and not just tax on realized capital gains. The advantages are the same. By bearing risk (really hiding it) the FedGov reduces risk premia. This is good for everyone say Mehra and Prescott (who sure didn’t understand that he was advocating partial public ownership of the means of production).
My error, I read about the annual increase in premiums and thought it covered all of it, but Table II.B1 shows you are right.
Arne – “I am left with using such a stream to pay down our debt. As a portion of income taxes, capital gains has varied from about 5 percent to 15 percent over the last couple of decades (IIRC). This is way to much variation even for something as large as paying down our debt, but it feels like there should be a something workable in there.”
I like your idea, but the fiscal year federal budget(s) would have to go to balance or surplus in most cases to realize a net reduction in federal debt held by the public. Otherwise, any payments on the federal debt held by the public would only be reducing the rate of growth in such debt or minimizing some portion of interest payment obligations as public debt obligations rollover in the U.S. Treasury.
Those who don’t think that the fiscal year federal revenues and outlays would have to go to balance or surplus should try to explain how federal debt held by the public would be reduced with the exception of Treasury rollover of securities and perhaps potential reduction in net interest payment obligations.
There are other revenues sources that could be employed as well to reduce the rate of growth in the federal debt held by the public. The fiscal year federal budget still needs to go to balance or surplus to start reducing the federal debt held by the public.
I guess my hope is that by being careful with terminology we can hold a consistent frame of thought long enough to prevent some of the cognitive dissonance in the world. When you are not careful about mixing ideas that come from different perspectives, you can easily hang onto things that don’t make sense.
I saw this recently in some of the complaints from the right. It is simply true that if you focus on federal income taxes, 50 percent of filers pay none. But if you actually sitck to that focus, then you should accept the view that government is really much less than 18 percent of GDP. In fact as a percent of GDP, federal income taxes have decreased significantly snd continually (except during bubbles) since WW2.
Under the SS is taxes perspective, the reality becomes that high income taxpayers pay a lower percentage than low income taxpayers.
Either perspective is valid, but switching between them is not. It is “inconsistent”.
I am not sure what coberly is thinking since I was not talking about payroll taxes or venison in my comment.
I think Bruce is seeing the same “solution” as I, but I am interested in trying to anticipate more of the unintended consequenses. Robert’s expansion seems to worsen the instability.
It is pretty well accepted that there is more need for government spending during a downturn. However, there is certainly less capital gains tax available during a downturn. We need to disconnect the highly variable income from the less variable (and even countercyclical) spending. Dedicating (in a way that is not what the original post was really talking about) the capital gains tax to the debt and therefore not to current annual expenditures would create that separation.
Consequences:
Now the whole raise taxes or cut costs politics becomes harder. (more deficit to make up)
On the upside (IMO) it should be harder to add new spending based on overly optimistic view of funding.
What do you do when the debt is paid?
You need whole new policies around when to add to the debt.
The whole concept is actually inherently unstable. It would require active interventions by people who don’t seem to understand it.
I might actually have to figure out whether the reason this appeals to me is because I think that the increases in debt since 1980 have been instigated by the same people who have most of the capital gains.
Thanks Bruce – your way more up on this than I am. I was just giving my thought from my limited veiwpoint.
But I still think the desired goal is to avoid repaying the trust fund.
Islam will change
MG, thank you! Your dose of reality defining the baseline function seemed missing with the prior discussion.
“The fiscal year federal budget still needs to go to balance or surplus to start reducing the federal debt held by the public.”
Of course. On top of that, if you want sustained debt reduction, it cannot happen only when you have increased capital gains from a bubble. The switch from surplus in 2000 to deficit in 2001 came more from loss of capital gains taxes than from loss of income due to unemployment.
Whether your favorite program is Medicare for all or tax cuts for all, funding it from capital gains is unsustainable. (As a corallary, managing rainy day funds is really difficult. Same for a balanced budget.)
No MG you could combine versions of Gore’s lockbox in respect to Social Security surpluses, my proposal as to Capital Gains, and a version of Gramm/Hollings or contra wise Cantor Rules about offsetting even disaster spending with fresh cuts to avoid the trap you see.
Of course to achieve the net you might need increases on top marginal rates that would require warmongers to pay for their wars of choice. Like this country did in most wars in the past.
It seems you are trying to elevate accounting identities to laws of policy when in practice and even theory that doesn’t have to be true at all. Not everything about government finance is fungible, not every Chinese Wall is fictional.
That is you could disaggregate borrowing needed for roll-over from borrowing needed to fund current gaps between GF spending and income. We know precisely which parts of borrowing are due to each from top line numbers, we don’t need to fire up the Supercomputers.
Response to your second comment. Bruce, I’m not sure what point you are trying to make here. Tracking revenues, outlays and borrowing is what Treasury does every day. Rolling over amounts are well known and part of their everyday operational role.
Robert
if you are still around. your claim would definitely be proven if it wasn’t hopelessly confused by confounded variables and poorly defined concepts.
also, i don’t think reputations need to be at stake. Einstein made some mistakes. didn’t affect his reputation. i don’t think real science is quite as cutthroat as the average University department.
basically what hurts your “proof” is that most people…as you observe yourself… don’t know what part of Medicare is “committed funding” and what part is not. nor is it clear that the “cuts” you cite are perceived as cuts… certainly not be the people who would have to object.
it would be too much of a leap to go from this “experiment in my own head” to draw a conclusion, say, about the value of the perceived fact that “i paid for it myself” makes it harder to cut social security than it was to cut welfare as we knew it.
Robert
just for the record “history of science” is not science. neither is “philosophy of science.”
Robert
that’s why i said you appeared to be suffering stress. a kind of rigidity of thinking. trust me, when you get to “it must be either A or B, and since it’s not-A, I must be right” you have passed your sell by date as a scientist.
Arne
switching between the two and either not realizing you are doing it, or doing it to be deceptive is inconsistent and likely to lead to invalid conclusions. but insisting, as i do, that insisting that a thing must either be black or white, tax or not tax, leads to a paralysis of thinking.
the answer is not to be “careful with terminology” but to try to be careful that we understand each other and what we are talking about… behind the words.
Arne
you dont read poetry much, do you?
my dogs understood the point about venison perfectly. you tax the tax you have, not the tax you want to have.
as for the payroll tax, it is the “dedicated tax” that poor Robert was talking about that started this whole thread.
Arne
said, “It is pretty well accepted that there is more need for government spending during a downturn. However, there is certainly less capital gains tax available during a downturn. We need to disconnect the highly variable income from the less variable (and “
that’s the point. you deficit spend during the downturn and use the capital gains tax to pay off the debt during the upturn.
Coberly you definitely got it backwards. My point is that people don’t know how Medicare is funded. The way in which something is funded can’t have political implications if no one knows about it. The way in which Social Security and Medicare are actually funded have minor implications because the vast majority of people don’t know about them. There is no conceivable basis in my post for your assertion that I believe in the absurd proposition that people know about how Medicare is funded. I asserted the opposite.
Now in this thread we find two radically inconsistent claims. That Medicare plan B premiums are about $100/mont (roughly right) and that Medicare plan B is funded by such premiums. How can anyone imagine that ambulatory care for someone over 65 is funded by roughly $100 per month is totally beyond me. I did not think such ignorance was possible.
In fact the premiums partially fund plan B which is mostly funded from general revenues. I don’t know but I think the estimate of roungly 75% of money from the general fund is about right. That spending is almost entirely politically untouchable (untouched by the PPACA among other things).
Robert
too hard to explain A and B in your case. general idea was that the “logician” divides the Universe into hard categories, claims that he has disproved an incidence of one category and that therefore all incidences of that category are invalid. even this is not much of an explanation. just put it down to by hard earned impatience with people who claim to be logical without allowing for the possibilities they haven’t thought of. in the present case, as i have mentioned elsewhere, the “haven’t thought of” is whether the “dedicated funding” means the same to you as it does the the people who vote, or the people who are afraid of the people who vote. and to be even more specific, i am a frequent claimer that “i paid for it” is the strongest thing SS has going for it. Even Medicare, which as you have noted is only partly “I paid for it” has a certain resilience from it’s partial “dedicated funding.” Most people, as you noted, don’t know the difference between those parts that are “i paid for it directly” and “I only paid for it indirectly.” but the intention of the bad guys, with lots of support from the good guys who can’t think in any terms other than “welfare”, is to rob SS of its “i paid for it” protection.
i am not much of an intellectual. i could only get so far into the philosophy of science where i would have started giggling if i hadn’t been so damn bored. it all looked like B.F.Skinner telling me about logical positivism.
but i was a tolerably good mathematician back in the day. the first trick is to not get attached to the labels. use x until you need another one, then y is okay, as is z, theta, or john.
and to push too far, i think what i am saying in all of this is that the label is not the thing. the word is not the thing. the “logical” argument is not the thing. look at the thing.
Robert
if people don’t know what is funded and what isn’t funded how can your argument possibly hold? if you are saying that it “doesn’t matter” what is funded and what isn’t because people don’t know what is and what isn’t…. i have to say, tell them what is and what isn’t, and see what happens to the political resistance to take it away from them.
you may have a point, though i dont’ think it is an important one…. hey the people are ignorant, lets keep them that way and we can do what we want to them…. but your stridency about your “logic” is not warranted. wouldn’t be warranted even if your were right.
as for the ignorance of not knowying that 100 bucks a month can pay for “ambulatory care”… i don’t suppose you ever heard of insurance and how it works. i personally don’t know what the incidence of “ambulatory care” is among people over 65, which i guess puts me among the ignorant who could beleive, unless forced to examine the numbers, that a 100 dollar premium paid by 50 million people might be enough to cover the costs of a smaller number of people who need the care.