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This isn't exactly new news, since the report in question came out last October, but I saw that it came up in Ezra Klein's post today "Have Seniors Really Paid for Medicare and Social Security?".
Anyway, the first link is to a PDF of an analysis by the Urban Institute that compares the real present value of payroll taxes paid versus entitlement benefits received (or to be received). It is useful both as general background and as an illustration of how political narratives can infect otherwise objective pieces of analysis. It's the latter that I find most interesting.
Here's my problem: As explained elsewhere on the Institute's website this analysis awards a 2% real rate of return to the "taxes paid" side of the ledger. That serves both to encourage a technically incorrect understanding of the linkage between payroll taxes paid and benefits received as well as inflate the apparent taxes paid.
The proposition is that payroll taxes paid into the system might alternatively have been saved at a real 2% rate of return, so that the future returns on that hypothetical investment may be counted as having been “paid as taxes” by future beneficiaries of the entitlement system. I object to this on the basis that the entitlement programs are structured as pay-as-you-go programs rather than investment/savings programs, and the Supreme Court found in Flemming v. Nestor (1960) that payment of payroll taxes does not establish an individual contractual right to receive benefits. A reasonable interpretation is that current payroll taxes are spent to support current retirees, do not supply revenue from which to pay future benefits, and do not establish a contractual right to receive future benefits (as they would if the government was actually accepting such revenue “in trust” for the contributors). Since there is no financial or contractual relationship between the money one pays in as taxes and the money one receives as benefits, applying a real positive rate of return when calculating the net present value of past tax payments seems like an ideological attempt to create a linkage where none exists. After all, the notional 2% real return was never received by the Treasury’s coffers, so it seems specious to count those returns as “taxes paid” into the system; I don’t think the IRS would approve if I tried to settle some of my taxes this year by referencing the notional opportunity cost of my past tax payments. In my view, payroll taxes are what workers pay to trip over fewer elderly paupers in the streets and to reduce the burden they face caring for their elderly relatives -- in general, it is a good and humane thing, but it is all about the present: present tax-payers paying the expenses of present retirees. One can argue that there is a moral contract between generations, or that the law presently links payment of payroll tax to receipt of benefits (Flemming v. Nestor established that Congress has the power to unilaterally change or eliminate that linkage by changing the law), but the Urban Institute’s 2% real rate of return perpetuates a factually inaccurate view of the entitlements as some sort of individual savings program. The widespread misconception that payroll taxes establish a right to receive benefits – and that the taxes we individually pay play a role in funding the benefits we individually receive – is politically useful in defense of those benefits. So is inflating the amount paid into the system through taxes. But politics aside, neither of these things is accurate in a wonkish legal/numbers sense.
At the end of the day, there's the question of what we *ought* to do. Everyone is entitled (ha!) to their vote. But distorted accounts of what we're *actually* doing and what we *actually* did, to cast one's own interests in the best (or at least self-righteous) light, is dirty pool.
Anyway, the first link is to a PDF of an analysis by the Urban Institute that compares the real present value of payroll taxes paid versus entitlement benefits received (or to be received). It is useful both as general background and as an illustration of how political narratives can infect otherwise objective pieces of analysis. It's the latter that I find most interesting.
Here's my problem: As explained elsewhere on the Institute's website this analysis awards a 2% real rate of return to the "taxes paid" side of the ledger. That serves both to encourage a technically incorrect understanding of the linkage between payroll taxes paid and benefits received as well as inflate the apparent taxes paid.
The proposition is that payroll taxes paid into the system might alternatively have been saved at a real 2% rate of return, so that the future returns on that hypothetical investment may be counted as having been “paid as taxes” by future beneficiaries of the entitlement system. I object to this on the basis that the entitlement programs are structured as pay-as-you-go programs rather than investment/savings programs, and the Supreme Court found in Flemming v. Nestor (1960) that payment of payroll taxes does not establish an individual contractual right to receive benefits. A reasonable interpretation is that current payroll taxes are spent to support current retirees, do not supply revenue from which to pay future benefits, and do not establish a contractual right to receive future benefits (as they would if the government was actually accepting such revenue “in trust” for the contributors). Since there is no financial or contractual relationship between the money one pays in as taxes and the money one receives as benefits, applying a real positive rate of return when calculating the net present value of past tax payments seems like an ideological attempt to create a linkage where none exists. After all, the notional 2% real return was never received by the Treasury’s coffers, so it seems specious to count those returns as “taxes paid” into the system; I don’t think the IRS would approve if I tried to settle some of my taxes this year by referencing the notional opportunity cost of my past tax payments. In my view, payroll taxes are what workers pay to trip over fewer elderly paupers in the streets and to reduce the burden they face caring for their elderly relatives -- in general, it is a good and humane thing, but it is all about the present: present tax-payers paying the expenses of present retirees. One can argue that there is a moral contract between generations, or that the law presently links payment of payroll tax to receipt of benefits (Flemming v. Nestor established that Congress has the power to unilaterally change or eliminate that linkage by changing the law), but the Urban Institute’s 2% real rate of return perpetuates a factually inaccurate view of the entitlements as some sort of individual savings program. The widespread misconception that payroll taxes establish a right to receive benefits – and that the taxes we individually pay play a role in funding the benefits we individually receive – is politically useful in defense of those benefits. So is inflating the amount paid into the system through taxes. But politics aside, neither of these things is accurate in a wonkish legal/numbers sense.
At the end of the day, there's the question of what we *ought* to do. Everyone is entitled (ha!) to their vote. But distorted accounts of what we're *actually* doing and what we *actually* did, to cast one's own interests in the best (or at least self-righteous) light, is dirty pool.
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