Cutting Social Security and Not Taxing Wall Street
Wednesday, 15 May 2013 12:53
Traders on the floor of the New York Stock Exchange after New York City Mayor Michael Bloomberg rang the opening bell, Oct. 31, 2012. (Photo: Robert Caplin / The New York Times)
As we move towards the fifth anniversary of the great financial crisis of 2008, people should be outraged that cutting Social Security is now on the national agenda, while taxing Wall Street is not. After all, if we take at face value the claims made back in 2008 by Fed Chairman Ben Bernanke and former Treasury Secretaries Henry Paulson and Timothy Geithner, Wall Street excesses brought the economy to the brink of collapse.
But now the Wall Street behemoths are bigger than ever and President Obama is looking to cut the Social Security benefits of retirees. That will teach the Wall Street boys to be more responsible in the future.
Most people are now familiar with President’s Obama’s proposal to cut Social Security by reducing the annual cost of living adjustment. While the final formula is somewhat convoluted, the net effect is to reduce benefits by an average of roughly 3.0 percent.
Since Social Security benefits account for more than 70 percent of the income of a typical retiree, this cut is more than a 2.0 percent reduction in income. By comparison, a wealthy couple earning $500,000 a year would see a hit to their after-tax income of just 0.6 percent from the tax increase that President Obama put in place last year.
While President Obama is willing to make seniors pay a price for the economic crisis, his administration his unwilling to impose any burdens on Wall Street. Specifically, it has consistently opposed a Wall Street speculation tax: effectively a sales tax on trades of stock and derivatives. The Obama administration has even used its power to try to block efforts by European countries to impose their own taxes on financial speculation.
If the idea of taxing stock trades sounds strange, it shouldn’t. The United States used to impose a tax of 0.04 percent until Wall Street lobbied to eliminate it in the mid-1960s. Many countries, including the United Kingdom, Switzerland, China, and India already impose taxes on stock trades.
The tax in the UK is 0.5 percent on stock trades (0.25 percent for both the buyer and the seller). It dates back more than 3 centuries. The country raises more than 0.2 percent of GDP ($32 billion in the United States) from the tax each year. The tax has not prevented the London stock exchange from being one of the largest in the world.
There are currently two bills in Congress for a similar tax in the United States. A bill by Minnesota Representative Keith Ellison would impose the same tax as the UK on stock trades and would apply a scaled rate to options, futures, credit default swaps and other derivative instruments. It could raise more than $150 billion annually or more than $2 trillion over the ten year budget window.
A second bill has been put forward by Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio. This bill would apply a 0.03 percent tax to trades of stock and a wide range of other financial assets. According to the Joint Tax Committee, the bill would raise close to $40 billion a year or over $400 billion over a ten-year budget window once it is implemented.
Unfortunately the administration has consistently opposed both bills. It claims that it is concerned about the incidence of these taxes – that ordinary investors would see large burdens from the tax. It also claims to be worried that the taxes will disrupt financial markets by making trading more costly.
Neither of these stories passes the laugh test. Ordinary investors don’t trade much, and therefore are not going to feel much impact from the tax. If someone with $100,000 in a 401(k) (this is much larger than the typical 401(k)) turns it over at the rate of 50 percent annually, they would pay $15.00 each year as a result of the Harkin-DeFazio tax.
Furthermore research shows that investors reduce their trading as costs increase. This means that if the tax increases trading costs by 20 percent, then investors will reduce their trading by roughly the same amount (in this example, turnover would fall to 40 percent annually). That means that the net cost of turnover in a 401(k) will barely change for a typical investor as a result of the tax. Wall Street would just see much less business.
So the Obama administration wants us to believe that it is willing to cut the Social Security benefits of retiree living on $15,000 a year in Social Security by $450 but it opposes a Wall Street speculation tax because it is concerned that investors with $100,000 in a 401(k) may pay a few dollars a year in additional trading costs. Only a reporter with the Washington Post would believe a story like that.
The other part of the Obama administration’s story is equally laughable. The cost of financial transactions has plummeted in the last four decades because of computers. Even the Ellison tax rate would just raise costs back to their mid-80s level. The Harkin-DeFazio tax rate would probably still leave costs lower than they were in 2000.
The country certainly had a vibrant capital market and stock exchange in the 1980s, taking costs part of the way back to this level will not prevent Wall Street from serving its proper role of transferring capital from savers to borrowers. It will just clamp down on speculation.
The basic story is very simple. Wall Street bankers have a lot more political power than old and disabled people who depend on Social Security. That is why President Obama is working to protect the former and cut benefits for the latter.
Cutting Social Security Benefits Not the Way to Go
Wednesday, May 8, 2013
Since President Obama released his budget last month, I’ve heard from constituents throughout the Central Coast with comments and concerns, especially about one specific provision: the President’s inclusion of the Republican proposal to change how Social Security cost of living adjustments are made by using a benefit calculation called “chained CPI.”
The President has said he would only be willing to consider this change in conjunction with a balanced plan of revenue increases and other spending cuts to bring our deficit in line. While I appreciate his willingness to once again go the extra mile in an effort to find compromise, this proposed change to Social Security is just a bad idea.
First, Social Security is not the cause of our record deficits. In fact, excess Social Security taxes have been used to cover the actual size of the deficit for years.
Second, and most importantly, switching to chained CPI would actually lead to benefit cuts for seniors, persons with disabilities, and veterans on the Central Coast and around the country. There is no reason to cut benefits in a program that millions depend on when that program—Social Security—is not responsible for our deficit.
Proponents of switching to chained CPI claim that it’s a more accurate way to calculate cost of living because it takes into account consumers’ decisions to substitute similar but cheaper products when prices change. For example, rising prices of beef may cause consumers to switch to chicken, pork or to forego eating meat altogether to save money.
But there is a huge debate about whether “chained CPI” is more accurate for seniors. In fact, many economists believe we currently understate seniors’ cost of living because the elderly spend a much higher percentage of their incomes on utilities, housing and, of course, health care. These expenses are much harder, if not impossible, to substitute for than food. In addition, health care costs, a large share of the average senior’s budget, regularly increase faster than other products and services.
Since its inception, Social Security has lifted millions of seniors out of poverty, allowing them to live independently and with dignity. While Social Security has been a wildly successful anti-poverty program—it’s helped reduce the poverty rate for the elderly to less than 10 percent—its benefits are not especially generous. In fact, the average Social Security benefit is about $13,000 per year. And for seniors on the lower half of the economic ladder, Social Security benefits represent 80 percent of their total income.
It is also unsettling that proposals to cut Social Security benefits are happening while most Americans face more uncertainty in planning for retirement. Many financial planners used to talk about retirement savings as a “three-legged stool,” with the legs representing pension benefits, private savings like 401(k)s and IRAs, and Social Security benefits. But the reality today is that two of the three legs on the stool are increasingly less sturdy.
For example, far fewer employers offer defined benefit pension plans today, opting instead to offer 401(k) plans. In 1980, approximately 40 percent of private-sector workers had a guaranteed pension from their employer. But by 2006, that figure had fallen to just 15 percent.
And while 42 percent of American workers today are covered by a 401(k) plan, the average value of a private retirement plan for a person nearing retirement is only $30,000, which experts say is not nearly enough.
In addition, unlike pensions and Social Security, private savings like IRAs and 401(k) plans carry substantial risks. That includes savers not starting early enough either because they didn’t make enough money or faced other important financial challenges in life. And IRAs and 401(k) plans are also subject to the vagaries of the stock market, as we have seen during this past half dozen years as financial markets melted down and took retirement savings with it.
This challenge makes Social Security more, not less, essential for retirees and those nearing retirement. And this is especially true for women, who live longer and frequently have fewer savings because they don’t earn as much as men and often move in and out of the workforce to raise and care for their families.
We need to bring our deficit under control, but cutting Social Security benefits is the wrong way to go. Social Security is a lifeline for millions of seniors at or near retirement. There are better ways to address our deficits than by weakening that lifeline.