–Does this report from the Committee for a Responsible Federal Budget make you angry? Does it make you afraid? It should.

The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. If you understand the following, simple statement, you are ahead of most economists, politicians and media writers in America: Our government, being Monetarily Sovereign, has the unlimited ability to create the dollars to pay its bills.

Does this report from the Committee for a Responsible Federal Budget make you angry? Does it make you afraid? It should.

Analysis of the 2011 Social Security Trustees Report, May 13, 2011

Today, the Social Security Trustees released their 2011 report on the financial status of both Social Security and Medicare. The reports make clear that both programs are on unsustainable paths, and reforms will be necessary to make them solvent. This analysis focuses on the financial status of Social Security.

The latest Trustees report shows Social Security’s position has deteriorated since last year. The Trustees estimate that the 75-year actuarial imbalance has now increased to 0.8 percent of GDP (2.22 percent of taxable payroll) compared to 0.7 percent of GDP (1.92 percent of taxable payroll) in last year’s report. Over the coming decade, the Trustees project cash-flow deficits of about $490 billion (including $131 billion in 2021 alone), compared to about $380 billion in last year’s report.

The Trustees now estimate that the program will exhaust its dedicated trust funds (one for old-age and the other for disability) in 2036, a year earlier than the 2037 date projected in last year’s report. At that time, absent changes in law, all current and future beneficiaries would experience an immediate 23 percent cut in benefits.

Even more pressing is the state of the Disability Insurance trust fund, which (if not allowed to borrow from the rest of Social Security) will run out of money by 2018, only seven years from now.

According to the Trustees, making Social Security sustainably solvent would take savings equal to 0.8 percent of GDP (2.22 percent of payroll) over 75 years and 1.5 percent (4.24 percent of payroll) in the 75th year.

Well, did that make you angry or afraid? It should have, because it is based on a lie – a government lie – and having the federal government lie makes all of us especially angry and afraid.

The lie, very simply is the implication federal spending relies on federal taxes. Social Security and Medicare are federal programs. FICA taxes paid to the government are less than benefits paid. Based on this, the Trustees say these federal programs will “run out of money.” A lie.

Were it true, the entire federal government already has “run out of money,” because federal taxes, with very few exceptions, have been less than federal spending, every year in our nation’s history. So beginning in 1776, America has been on what the Committee for a Responsible Federal Budget would call an “unsustainable” path and insolvent. Yet here we are, 235 years later, still “unsustainable,” still “insolvent” and still the most powerful nation on earth. Amazing, isn’t it?

Well, it would be amazing if you didn’t understand the federal government creates the dollars you use. It would be amazing if you believed federal taxes pay for federal spending and FICA pays for Social Security and Medicare. They don’t.

The U.S. is Monetarily Sovereign. If all federal taxes, including FICA, were reduced to $0 or increased to $100 trillion, neither event would affect by even one dollar, the solvency of any federal agency, including Social Security and Medicare. There is no functional relationship between federal taxes and federal spending. The federal government always pays its bills, regardless of taxes collected.

(The situation is different for states, counties and cities, which are not Monetarily Sovereignty, , so they do use tax money to pay their bills. The situation also is different for Greece, Ireland et al, which also are not Monetarily Sovereign. And the situation is different for you and me. We too, are not Monetarily Sovereign. For reasons I cannot explain, the federal government, the media, and even most economists, do not know the difference between Monetarily Sovereign and monetarily non-sovereign, and therein lies the problem.)

So yes, be afraid. Be very, very afraid, especially with both the Democrats and the Tea (formerly Republican) Parties believing our federal social programs must be cut. Your future and the futures of your children and grandchildren are in the hands of people who do not know what they are doing.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com


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No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetary Sovereign, , and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.

Remember that the next time you’re tempted to ask a dopey teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it screwed up my future.”

MONETARY SOVEREIGNTY

15 thoughts on “–Does this report from the Committee for a Responsible Federal Budget make you angry? Does it make you afraid? It should.

  1. See Also John T. Harvey’s Forbes blogpost – Why Social Security Cannot Go Bankrupt

    It is a logical impossibility for Social Security to go bankrupt. We can voluntarily choose to suspend or eliminate the program, but it could never fail because it “ran out of money.” This belief is the result of a common error: conceptualizing Social Security from the micro (individual) rather than the macro (economy-wide) perspective. It’s not a pension fund into which you put your money when you are young and from which you draw when you are old. It’s an immediate transfer from workers today to retirees today. That’s what it has always been and that’s what it has to be–there is no other possible way for it to work.

    To explain this, let’s create a simple world. Say there has been some sort of terrible global calamity and we only have ten people left. Further say that these ten decide to make the best of it and set up a society, including an economy. Of course, much of humanity’s technology is now lost to us, so our level of productivity is very low. As a starting point, assume that each of us is only able to produce enough output for herself or himself to survive.

    How many people can retire under these circumstances?..
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  2. Clonal,

    Mr. Harvey is correct that Social Security cannot go bankrupt, but his reasoning is wrong.

    He says, “It’s an immediate transfer from workers today to retirees today.” No such thing. Today’s workers unnecessarily pay FICA which, like all federal taxes, instantly is destroyed upon receipt by the government. It is not transferred to today’s retirees. That is not how spending works for a Monetarily Sovereign government.

    If FICA were zero, indeed if all federal taxes were zero, this would not reduce by even one penny, the federal government’s ability to pay Social Security benefits. (See: https://rodgermmitchell.wordpress.com/2009/09/08/ten-reasons-to-eliminate-fica/)

    The fallacy in his 2nd paragraph is exemplified by these words: “. . . assume that each of us is only able to produce enough output for herself or himself to survive.” Our Monetarily Sovereign government has no such limitation. It can create unlimited numbers of dollars to pay any bills of any size at any time. That is one of the features of Monetary Sovereignty.

    Rodger Malcolm Mitchell

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    1. What do you think of the next paragraph: “This reality is inescapable and is the reason why the real determinant of the feasibility of Social Security (or any other type of retirement system, private or public) is productivity. If it falls short, then supporting a class of retirees is impossible, regardless of how much cash we have on hand; if it does not, however, financing it is trivial.”

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  3. I think he is saying, there has to be enough production of goods and services to supply everyone, including the retired people, and I agree with that.

    But I don’t see a solution in his comment. Is he suggesting the government not fund SS, and thereby force old people to go to work or starve? Is he suggesting that FICA be increased, thereby reducing the money supply?

    He is right that financing of SS is (or should be) trivial, but funding SS adds dollars to the economy, thereby stimulating GDP. Cutting SS benefits positively will reduce GDP.

    The nice thing about retired people is that although their productivity may (or may not) decline, they remain consumers, which helps business and the production he mentions.

    So no matter how you look at it, the federal government can and should fund SS, while FICA can and should be eliminated.

    Same for Medicare.

    Rodger Malcolm Mitchell

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  4. He assumes retirees don’t produce anything, they only consume. His solution is to “set a tax of 30% on the salaries of existing workers and give it directly to the retirees–right now, today, immediately.” What’s interesting is this guy also says “the federal government’s budget is unlike your household one, because it issues its own currency. It can fund spending without taxes or borrowing”.

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  5. I would like to set up a different thought experiment for Social Security. Suppose that instead of Social Security everybody had private retirement accounts and, thanks to good fortune, all retirees were rich. (I. e., heaven on earth for the anti-Social Security people.) Suppose also that the dependency ratio is 75%. (I. e., quite high by today’s standards.) Then the burden on the workers to produce goods and services for non-workers might be substantial. In fact, the burden might be worse than under a scenario with Social Security as we have it now, because the rich retirees might be able to demand more of the output of goods and services than the not so rich retirees under Social Security. An increasing dependency ratio is not an argument against Social Security vs. personal retirement accounts.

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  6. The purpose of Social Security is security. Personal retirement accounts do not provide security under all economic scenarios, i.e recessions, depressions and Madoff.

    Unfortunately, today’s Social Security does not provide enough security, and will provide even less, if benefits are cut.

    Needed: A retirement account that is guaranteed to provide a living income under all economic scenarios. Only the federal government can provide that.

    Rodger Malcolm Mitchell

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    1. But but if you invest in SPY, there is the Bernanke Put to provide ever higher returns under any circumstances.

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  7. I just found this blog recently. That makes perfect sense, the distinction between sovereignty and non-sovereignty. I have read similar things before, but this never gets into the public discourse. From my limited understanding, the risk is inflation if too much money is created. Some say we are already there. Since my house has dropped by 25% in value, I don’t think I agree. But, in the bigger picture, if FICA and/or income tax was suspended, how do we know when we are at the point where we are at risk of inflation? How would you respond to those who feel that the US has already created too much money via QE?

    Thank you

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  8. We are not in or near inflation, and since 1971 (the end of the gold standard), federal deficit spending has not been related to inflation (See: https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/)

    The debt hawks always feel we are “at the point” where inflation is a risk, but somehow we don’t seem to get there. The reason: The fed has excellent control over inflation via interest rate control.

    Here we are, struggling with an ongoing recession and unemployment and a weak housing market and rampant bankruptcies. The entire economy is in desperate need for money, and what do the debt hawks talk about? Inflation.

    The best money measure I know is called: Debt of Domestic NonFinancial Sectors (http://research.stlouisfed.org/fredgraph.png?g=u4) and it indicates money growth declines before recessions and money growth is low, today.

    Also notice that GDP growth generally parallels money growth.

    Rodger Malcolm Mitchell

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  9. The world didn’t end when the baby boomers were children, and neither will it end when their children and grandchildren have to care for them in old age. We’ll just need more full-time nurses and more staff for retirement homes. We’ll also have to make more geriatric vitamin supplements and Ensure, the flip side of the vitamins and infant formula they consumed decades ago. They were a burden on their parents, and they’ll be a burden on their children. C’est la vie. At least we’ll have plenty of work to do to earn our bread and butter. Idle hands are the Devil’s playground.

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  10. Hmmm. If the dwindling ratio of workers to non-workers is a problem, why is nobody proposing to increase the number of workers? For the U. S. there is a very American solution: immigration.

    “Give me your tired, your poor, your huddled masses, yearning to support our senior citizens.”

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  11. Anon has it right – dependency ratios are not a problem now or ever – outside a Black Death or Mad Max apocalypse. Since modern economies are demand constrained – and since this ignored by the morons in the universities and the government, who refuse to listen to simple facts expounded by people like Rodger – a baby boom or retirement bulge, an increasing dependency ratio can be a great boon, increasing demand and decreasing saving, if it is supported financially by programs like SS, which should be enlarged, made more generous and less “fiscally sustainable”.

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