Social Security & Medicare Notes

A Realistic Look at the Social Security Issue

Is Social Security on an inevitable course to collapse?

The scare rhetoric about the ultimate failure of Social Security is still flying thick and fast. The reality is that other than having a politician destroy it, Social Security will NOT become bankrupt or collapse. It is a strong system and probably will not face the alleged problems in 2041.

The severely oversold possible problem

The first piece of scare rhetoric is that about 2018 the Social Security System will begin paying out more money than it pays in because the baby boomers start retiring. True. But notice the caveat "about." That is an estimate and no one really knows when that will occur. It is also not a problem for the Social Security System.

The anticipated retirement of the baby boom generation was anticipated a long time ago. That is why in 1983 the FICA tax was increased. Since then the trust funds have built up to provide the benefits to the baby boomers from the excess taxes they have paid. The excess taxes - the trust fund - is invested in government bonds. Those bonds are the single most secure investment in the world today.

Those same government bonds are what the majority of George Bush's wealth is currently invested in. See Talking Points Memo and Bush's May 2004 financial disclosure form. (PDF document)] But he says they are just "paper promises." For some reason, they are good enough for him but not for the rest of us.
If they are worthless paper, then he is a fool to have his own money in them. Otherwise he is trying to fool the rest of us.

Those bonds will be paid when due if the US government and US Constitution still exist!. Anything else is criminal wrong-doing by our political leaders. The 14th Amendment to the Constitution states "Section. 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

Bush himself said in his Press Conference last month that if a person with one of the private accounts he is trying to sell wants a secure investment he could invest in US Treasury Bonds. Why would a reasonable person do that if, as Bush also says, the government wasn't going to pay the money when the bonds are cashed?

Bush can't even keep his lies straight. Are people supposed to switch to private accounts because the government won't pay the bonds it has issued, and then expect the government to pay the bonds we put into our private accounts because we want the security of a -- government bond -- ?

Bush calls those bonds "nothing more than paper promises to pay." So instead of Social Security which has its trust fund in those bonds, Bush wants everyone to save money in private stocks and bonds. But those are ALSO just "paper promises to pay". Those are promises by companies which can - and do - default on their promises as anyone who has put money into Enron, WorldCom, etc. will tell you. The only difference is that the government is a lot less likely to default on its promises.

The clawback

Of course, the money to put into private accounts cannot be taken from the FICA tax and still allow the Social Security System to continue to pay full benefits to the current beneficiaries. That means that the private accounts require massive federal borrowing to pay the CURRENT benefits that otherwise would be paid out of the FICA tax. Estimates of the necessary borrowing range somewhere between $3 trillion and $17 trillion over the next four decades.

Where does the money to pay this debt come from? Either increased taxes [That would solve the problem with Social Security, though, wouldn't it?] or make the people with the private accounts pay it back out of their earnings on the money they supposedly invested and they supposedly own. This is the "Clawback."

If you participate in the private accounts, and your account earns less than about 3% per year, you will have to pay extra just to participate, and your account will not grow. Instead, you wil pay just to participate.

That's not what Bush promises with his "Ownership Society", is it?

The more distant (vaguely possible) Social Security problem

If there is any problem with the Social Security System, it will be when the trust funds are exhausted in four or five decades. While there may be some problem for the government when it has to pay back the money it has borrowed, that is not a problem for the Social Secutity System. It may be a problem for the politicians who give the government's money to their wealthy friends in tax cuts, but it is NOT a problem for Social Security.

Politicians blowing smoke and contriving fear and threats don't want you to think about that. If you are sensible, you will vote them out of office. [That's probably the best solution to all the alleged problems Social Security System currently has.]

Even a lot of otherwise sensible people really believe that "no one, and I mean NO ONE denies that the system will one day collapse, there's just quibbling over the date when it will happen." This is proof of what Joseph Goebbels said. Tell a big enough lie and everyone will believe it. The people who think Social Security will inevitably collapse have been hoodwinked.

Just go look at Robert Ball's proposal (Century Foundation Issue Brief. (pdf)). While you are considering his paper, remember that Bob Ball is probably the most knowledgeable man alive today about the Social Security System.

The projections being used to show there is a problem are based on a number of assumptions. [See SSA's Performance and Accountability Report for Fiscal Year (FY) 2004.] Two assumptions in particular are overly conservative. First, the estimate of American economic productivity increases is about half the historical experience of the last 70 years. The assumptions of The amount of immigration are similarly very probably too low. Higher values on either assumption would produce projections that do not include a shortfall in payments with respect to revenue.

Then there is the likelihood of accuracy of the projection. Any projection of future revenues and benefits becomes less accurate as it reaches further into the future. The current projections will be swamped by reality after about ten years. The 75 year projections are designed to do nothing more than line up the possible future scenarios and identify possible trends in changes as time passes., Long term projections are not to be taken as serious predictions for the future. They have value only for actuaries and theoreticians.

Reasonable solutions if the problem does occur. Let's assume that the conservative assumptions do pan out and Social Security does have a shortfall in revenue. Robert Ball has offered a plan Century Foundation Issue Brief. (pdf) that accepts those assumptions and easily corrects for them, while placing Social Security onto a sustainable path into the infinite future. His are minor tweaks in what is a well-operating system. The plan (see Associated Press) offered by Congressman Robert Wexler (D - FL) the other day also totally solves the problem. It isn't as good as Bob Balls' solution either politically or tax-wise, but it is massively better than private accounts with a $3 to $14 trillion addition to the federal debt to finance the changeover.

Both plans (Bob Ball's and Wexler's) involve minor changes, a great deal less then the ones adopted in 1983, and set the program up for long-term sustainability at the future programmed benefit levels. those benefits are based on replacing a percentage of lost earnings.

But even if the worst assumptions in the projections (not predictions, by the way) come true and if no one does anything about the problems before the trust fund runs out the problem is already solved!

How? Present law requires that the Social Security benefits in any given year will automatically be reduced to match the revenue from taxes if the trust funds can't pay the full benefits.

Even if that were to happen, the benefit reductions are guaranteed to be smaller reductions than those proposed by Bush in last month’s press conference. Those reductions will also not start for four or five decades, if then. Bush wants to cut benefits by even larger amounts beginning now, four decades earlier than needed.

If the pessimistic assumptions end up being correct, that means approximately a 25% reduction (worst case) across the board in all benefits in about 2041 (or 2052 according to the GAO projections). This is the same as the Posner plan Bush just offered, except that the Bush/Posen plan cuts benefits by even larger amounts. He also cuts benefits by even more on high and middle income wage-earners.

What does Bush want?

To add insult to injury, Bush also wants to start the cuts immediately, even though the program still has a surplus of revenue coming. Why? This would make the trust fund even larger than under current plans. Bush would then happily raid it to give more tax cuts to the wealthy. Why should he wait until a shortage in revenue occurs when his real purpose is to destroy Social Security. The Bush plan is to cut benefits now and raid it for more money to give away while waiting for his poison pill plans to kick in and eliminate the program?

So Bush demands that - besides taking actions to reduce benefits and increase the trust fund as slush fund for the wealthy - America should borrow many $ trillions and switch to private accounts that do nothing to help the system and nothing to help America.

A review of the issue

Any reasonable person reading what I have written above and checking my sources will conclude that it is not very likely that there will be a major difficulty with the Social Security. If some difficulty does occur, it will be small and easily dealt with.

The people misreading the projections and predicting doom and gloom in the future is doing a "Chicken Little" impersonation. Why? They want to sell you some form of overpriced insurance that you will never need. They would also be glad to sell you a broken used car while they is at it.

In either case, they are asking you to pay now for a benefit in the far future you will never see. Don't buy it! Go read Robert Ball's Century Foundation Issue Brief. (pdf) to see what should be done in the worst possible case. His plan is a reasonable set of solutions for the minor problems that might (or might not) happen to Social Security in four decades if the Republicans can't destroy the program before then.

posted by Richard @ 5:23 PM