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Mar 1, 2004 8:13 pm

Dean Baker: The Media's Mistakes About Social Security

Economist Dean Baker, commenting in his weekly newsletter on several articles in the media touching on Social Security (March 1 2004):

To Trim Deficit, Greenspan Urges Social Security and Medicare Cuts
Edmund L. Andrews
New York Times , February 26, 2004, Page A1 USERLAND

Fed Chief Urges Cut In Social Security
Nell Henderson
Washington Post, February 26, 2004, Page A1 html

These articles report on Alan Greenspan's testimony before Congress in which he urged that Social Security and Medicare benefits be cut as a way to keep deficits under control. It would have been helpful to readers to note that Mr. Greenspan had publicly endorsed President Bush's tax cuts in 2001, because he said that the budget surpluses at the time were too large. In Congressional testimony given in January of 2001, Greenspan told Congress that the projected path of surpluses would cause the country to quickly pay off the entire national debt, and then the government would begin to own private assets. He told Congress that a tax cut would be an effective way to lower the size of the surpluses, so that it would longer to pay off the national debt.

It also is would be helpful to mention that Mr. Greenspan chaired a commission in 1982 that designed the last set of Social Security tax increases. These tax increases were intended to build up a large surplus, which would then be drawn down to pay for the retirement of the baby boom generation. If Congress follows Greenspan's current recommendations for cutting Social Security, the large surplus built up by the Social Security trust fund (more than $1.7 trillion presently) will not be used for Social Security. Instead, the money collected through Social Security taxes will be used to pay for farm subsidies, defense, and other categories of general government spending.

The Times article reports that there is a “widespread view that the only solution [to the funding problems for Medicare and Social Security] is to either cut benefits or raise taxes by huge amounts.” It is worth noting that if U.S. health care costs, adjusted for demographic change, only grew in step with per capita GDP growth, then paying for Medicare over the next forty years would present no greater problem than it did over the last forty years. In the case of Social Security, the trustees' report shows that the tax increases needed to fund the program over the next seventy five years are approximately the same size as tax increases that were put in place in the decade of the fifties, the decade of the sixties, the decade of the seventies, and the decade of the eighties. Anyone who believes that the tax increases needed to maintain full scheduled Social Security benefits are “huge” must also believe that the tax increases put in place in each of those four decades are huge as well.  

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