Thurow on social security: the "left" strikes again

Lester Thurow belongs to a minority group among U.S. economists - those who are even moderately left of center on the political spectrum. He often r" hackles among mainstream economists by writing books with broad, socially relevant themes that expose the narrowness of their research. In The Future of Capitalism How Today's Economic Forces Shape Tomorrow's World (1996), Thurow contends that 'the world's economic topography' has been altered by a shifting of five economic tectonic plates" - the end of communism, the global economy, the new "brainpower" technologies, "a multipolar world" with no dominant power, and the demography of "growing, moving, getting older."

These themes seem unexceptional, until one encounters the last, especially its "getting older" segment. At once what happened is evident: Thurow added a fifth tectonic plate" because he must have realized that he had to address the controversies swirling about the "welfare state" in capitalist nations since the 1970s. Hastily, and opportunistically, he reached out for the most common currency - the right-wing argument that the welfare state has caused government spending to spiral out of control and that a major culprit in the United States is Social Security. In Chapter five of The Future of Capitalism, this argument is rehashed. Portions of it were reprinted in the Sunday New York Times Magazine, May 19, 1996, "The Birth of a Revolutionary Class," which could prove more damaging to progressive economic policies than any other popular article published so far in the 1990s. Diatribes against Social Security are commonplace, but this one comes from a prominent liberal, an editorial contributor to Dollars & Sense and The American Prospect, and a founding scholar of The Economic Policy Institute in Washington. We can now expect to see Thurow's New York Times article cited regularly in campaigns to gut Social Security.

Thurow paints a lurid picture of "a large group of affluent, economically inactive, elderly voters" who are "bringing down the social welfare state, destroying government finances, altering the distribution of purchasing power and threatening the investments that all societies need to make to have a successful future." In blaming the elderly for this catalog of economic troubles, Thurow builds his case on inflammatory rhetoric and misuse of statistics, as this sentence further demonstrates:

Adjusting for things like household size, taxes and noncash benefits like health insurance and school lunches, the elderly have a median per capita income of a whopping 67 percent above that of the population as a whole.

In his book (p. 98), Thurow supports this claim by citing U.S. Bureau of the Census, Income, Poverty, and Valuation of Noncash Benefits. 1993, Table 10 (D15)-which includes, as income, "imputed return on equity in owned homes" and "medical programs." While noncash benefits like these are included in a definition of "income" which is useful for some purposes, they vastly overstate the economic well-being of senior citizens. For nonwealthy elderly who occupy homes worth more than they paid for them, there is no easy way to convert these paper gains into higher incomes. Medicare and Medicaid do not increase spendable income, but do for the elderly what should be done for everyone in any decent and rational society. Removing "imputed return" and "medical programs" from Thurow's figures cuts his 67 percent difference by more than half.

But Thurow's figures, no matter how adjusted, are irrelevant. They cover all households having any members sixty-five years of age or older, with many of these households also containing younger people who have higher incomes than most independently-housed elderly. In the Census Bureau publication Thurow cites, Table I shows that for households headed by a householder (in whose name the home is owned or rented) under sixty-five years of age, median money income in 1993 was $35,957, while for households actually headed by someone sixty-five or older, it was $17,751, including Social Security benefits. ("Median" income is the mid-point of the whole distribution: half of all income receivers get more, half get less. It is a better measure of economic status because, unlike a "mean" or an average, it is not affected by extreme values.) By these figures, per capita money incomes of the elderly appear to be about 7 percent higher than for the rest of the population-which includes fifteen to twenty-three year-old householders with median incomes half those of householders twenty-four to sixty-four years of age. Take out Social Security and the incomes of two-thirds of the elderly would drop 40 percent or more; a third of the elderly would lose 65 percent of their incomes or more (Social Security Bulletin, Summer 1995, p. 28).

When Thurow deals with wealth (or assets), he is equally unreliable: "Those 65 to 74 have an average net worth of $222,000 versus$66,000 for those 35 to 44." His source is an article by Edward Wolff in American Economic Review, May 1992. Thurow fails to inform his readers that Wolff's data are for 1983, that Wolff never makes the age-group comparison or presents the figures that Thurow does (and leaves unexplained), and that in 1983 average net worth peaked for age group sixty-five to sixty-nine (at $339,000 per household, including homes) and dropped by 40 percent for those aged seventy to seventy-four, putting that group well below net worth for the entire forty-five to sixty-four-age group. In Top Heavy, A Study of the Increasing Inequality of Wealth in America (1995, pp. 16-17), Wolff reports that for 1962 to 1989, the only households that increased their share of total assets were those in the forty-five to sixty-nine year-old category. Although they were wealthier than those below forty-five years of age, the seventy and over group lost the most ground of all.

Well, Thurow might reply, even if the elderly are not so "affluent" after all" they are "one-issue voters who exercise a disproportionate impact on the political process." The result is that "today, spending on entitlements plus interest payments on the national debt (most of it accumulated in recent years to make payments to the elderly) take 60 percent of total tax revenue."

To begin with, comparing spending on entitlements" alone with "total tax revenue" is an arithmetic trick that inflates the share of entitlements in the federal budget, because tax receipts are continually running lower than spending. For example, if total revenues are 100, total spending 125, and entitlements 20, the latter are 20 percent of revenues. But they are 16 percent of outlays, with which they should be compared in the company of other major budget outlays. In addition, Thurow's statement lumps all entitlements together as one huge problem, never distinguishing among them. Thurow is in fine company here: former Nixon Secretary of Commerce, Wall Street banker, and self-styled "Republican fat cat' Peter Peterson and his Concord Coalition partners are making careers out of this kind of Social Security bashing. The following figures, from The Budget of the United States Government provide the information that serious students of these issues need.

                              1975            1985            1995
Total Federal
Outlays (billions)           $332.3           $946.4        1,519.1
Percent of Outlays:
Major program groups
 Social Security               19.5%            19.9%          21.9%
 Medicare and Medicaid          5.9              9.3           16.2
 Means-Tested
 (except Medicaid)              5.6              4.6            6.1
 Military and International    28.2             28.4           19.3
 Net Interest                   7.0             13.7           15.3
 All other                     33.8             24.1           21.2

If Social Security spending is growing any faster than total outlays, the increases in the taxes that support it more than make up for rising benefits being paid to retirees. In 1995, Social Security payroll tax receipts were $399 billion, while Social Security benefits amounted to $339 billion, meaning that the system ran a surplus of $60 billion. Without it, the 1995 federal deficit would have been $224 billion instead of $164 billion.

Here Thurow makes a bad case worse: "advocates for the elderly argue that Social Security is running a surplus and, hence, needs no restructuring. But that is an illusion. If the Government is running an overall deficit, it is irrelevant if one sector has a 'surplus' because it is credited with collecting more taxes than it needs. What matters is what is driving the expenditure side of the budget." This is an amateurish evasion: if Social Security is in surplus, there is no way it could add to the deficit except to allow non-Social Security expenditures to be larger than otherwise. It is also a bizarre application of public finance. Apparently Thurow would cut Social Security benefits while leaving intact the structure of payroll taxes, which are specifically and legally dedicated to Social Security.

To this, Thurow delivers the standard response: Social Security's surplus will disappear once the "baby boomers" start retiring in 2012, so that "the current 15 percent Social Security tax rate would have to be boosted to 40 percent by 2029 to provide the benefits that have been promised." His source is purely second-hand - an article in Fortune (November 14, 1994). The author, Ann Dowd, predicts the demise of Social Security by referring to economist Laurence Kotlikoff's "generational accounting," which purports to measure the costs of government borne by each generation of people over their entire lifetimes, with Social Security supposedly responsible for imposing a crushing tax burden on generations born after 1980. Thurow seems unaware that the estimations required for such calculations are extraordinarily complex, often arbitrary, and can produce results that vary enormously from one economist to the next (see Dean Baker, Robbing the Cradle? Economic Policy Institute, 1995).

Thurow completely overlooks the more widely accepted way of estimating the future costs of Social Security. The 1996 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds forecasts that by its "best estimate of the future course of the population and the economy," the Social Security deficit (benefits exceeding tax collections) in 2030 will be 4 percent of the nation's taxable payroll (p. 108). This is the amount by which the payroll tax rate would have to be raised to establish "actuarial balance" for the next thirty-four years; the present tax rate of 12.4 percent (half on employees, half on employers) would increase to 16.4 percent now or in stages over the years. (Thurow's "current 15 percent" rate is wrong: it includes payroll taxes for Medicare.) In fact, the Trustees' "best estimate" is based on the assumption that over the next thirty-four years the economy, and its taxpaying capacity, will grow at a rate of 1.8 percent. per year - more slowly than in any other thirty to forty-year period in U.S. history and well below the historical trend of 3 percent per year. If the economy grows at the sluggish rate experienced during the past two decades, 2.5 percent per year, actuarial balance could be achieved by 2030 with a tax increase of only 1.3 percent of taxable payroll.

Even a 4 percentage-point increase in taxes hardly seems onerous in a rich country which has the smallest share of its gross domestic product going to taxes of any high-income nation (less than 32 percent). Nor would it be necessary to raise the tax rate for all workers. Actuarial balance might be achieved by removing the income ceiling on the payroll tax ($62,700 in 1996) and levying it on all incomes without upper limit. This solution certainly seems desirable in light of recent history: "No country not experiencing a revolution or a military defeat with a subsequent occupation has probably ever had as rapid or as widespread an increase in [income] inequality as has occurred in tile United States in the past two decades" (The Future of Capitalism, p. 42).

To borrow a term from Thurow, the "disconnect" between his eloquent writing on economic inequalities and his mindless assault on Social Security and the elderly who rely on it is gaping. Another example: "No public interest is served by making parents rich at the cost of making children poor." Thurow thus joins the ranks of those who blame Social Security for child poverty. In other words, the highest child poverty rate of all high-income nations by far (more than a fifth of all children living in poverty) is caused by Social Security benefits which are more modest than those of other high-income nations.

The disconnect is no less impressive for military spending. Unlike "expenditures on the elderly," Thurow states, military spending is not "squeezing government investments in infrastructure, education and research and development," because it is "down to less than 4 percent of gross domestic product, and even if America were willing to take defense spending down to zero, the day of reckoning would be postponed by only a few years." There will be no "day of reckoning" for Social Security unless politicians, helped by articles like Thurow's, act to dismantle it instead of taking the modest steps needed to preserve it. Furthermore, while the military's share of the federal budget has declined since the 1980s, its current level of $265 billion per year is at least three times as much as Russia spends, and twice as much as Britain, France, Germany, and Japan combined. That sum would appear to "squeeze' a wide range of desperately needed social outlays - especially since "there is no credible military threat to the United States that even the American military can imagine when justifying their budgets' (The Future of Capitalism, p. 64).

For all of Thurow's contributions to left-of-center publications and organizations, his moorings have never been firm. He is an example of what Paul Baran called "the intellect worker, whose work and thought is the particular job in hand," even if that job is more ambitious than most others ever take on. The intellect worker makes no attempt to "interconnect" with the historical process but questions the prevailing state of affairs ... within the framework of capitalist institutions" (The Longer View, 1969, pp. 5-8). In the United States, the corporate business counterattack against "big government" is now two decades old, but for Thurow the only problem raised by American corporations is how to make them "world class" competitors in the global economy. The only political force he recognizes is the elderly, and the only class war being, waged is the war of the old against the young.

Publication of Thurow's attack on Social Security in The New York Times is no accident. On August 27, 1995, the Sunday Times Magazine published a broadside similar to Thurow's in content and tone, by staff writer Elizabeth Kolbert - "who Will Face the Music?" of the "nearly broke Social Security system." Nine months later it solicited Thurow's article, which was not originally written for it. Going back to the 1980s the nation's flagship newspaper has published a nearly unbroken string of hostile, and bitter, articles on Social Security by an array of writers and columnists, "new Democrats" as well as right-wingers. Now they are joined by Lester Thurow, who has bestowed upon the neoconservative right a priceless gift - support, from a man widely associated with the American left, for its campaign to destroy the greatest single accomplishment of American social legislation.

If there is no struggle, there is no progress. Those who profess to favor freedom, and yet depreciate agitation, are men who want crops without plowing up the ground. They want rain without thunder and lighting. They want the ocean without the awful roar of its many waters. This struggle may be a moral one; or it may be a physical one; or it may be both moral and physical; but it must be a struggle. Power concedes nothing without a demand. It never did, and it never will.... If we ever get free from all the oppressions and wrongs heaped upon us, we must pay for their removal. We must do this by labor, by suffering, by sacrifice, and, if needs be, by our lives, and the lives of others.

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