Tag: social security trustees

The 2011 Social Security Trustees Report — Harbinger of Bad News

The just-released 2011 annual report of the Social Security Trustees shows a significant worsening of the program’s finances.

Last year we were told that we would see payroll tax surpluses over benefit expenditures for a few more years — until 2015. That won’t happen according to the 2011 report; the program will now add to federal deficits in every future year — and increasingly so, which will ramp-up financial pressure to downsize other federal programs, increase taxes, or create yet more debt.

Note that both Republicans and Democrats negotiating over how to reduce federal deficits and the national debt have resolved to leave Social Security untouched for now.  That leaves the program’s finances to fester and worsen — increasing the costs of future adjustments and burdens on future generations.

Many people, especially those who favor early reforms, say that the Social Security trust funds “don’t matter.”  Note, however, that they lock up future federal revenues for Social Security benefit payments — on par with future dedicated payroll taxes.

The lock-up effect of the Social Security trust funds  is demonstrated by the fact that the program’s cash flow deficits today are not forcing any benefit cuts or payroll tax increases.  This can continue until the year 2036 according to the 2011 report.

But if we allow the situation to continue for that long, fixing the program will require a permanent benefit cut of at least 25 percent or a payroll tax increase of at least 40 percent of payrolls in 2036 and beyond.

Most left-leaning politicians and analysts are unwilling to entertain any benefit cuts today.  They favor tax increases today.  But those will fall on today’s and future workers, destroying their incentives to work and ability to save for the future.

Retirees, on the other hand, can continue to enjoy Social Security benefits that are much more generous compared to what they paid in when working.  So to hold all, including well-off, retirees harmless from a “shared sacrifice” approach to fixing Social Security’s finances seems unfair.

The trust fund also “matters” because it provides fodder to the argument of left-leaning politicians that the program’s finances are sound, backed by $2.6 trillion in Trust Fund treasury securities.  That $2.6 trillion sounds like a lot of money to the average Joe on the street. But consider that past and current generations, who together contributed an extra $2.6 trillion to Social Security, are now owed much more under the program’s current laws — a whopping $18.8 trillion according to the 2011 report.

The program’s long-term actuarial deficit (over 75 years) is now 2.2 percentage points of payrolls.  That’s 30 basis points larger than was the case in last year’s report, by far the largest increase in recent memory . That’s surely because of poorer prospects today compared to last year of experiencing a rapid recovery of productivity, output, and payroll tax revenues.

Finally, Mark Warshawsky, my friend and colleague on the Social Security Advisory Board, notes that this year’s Trustees’ report has been released on a Friday during the afternoon — the right day to release bad news because policymakers and the public are usually busy planning or traveling for weekend activities.

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Social Security: Debating the Ostriches

Over at Salon, Michael Lind takes me to task for raising the alarm about the latest Social Security Trustees report showing that a) Social Security’s insolvency date is growing closer, and b) the system’s unfunded liabilities have increased dramatically since last year’s report.

Like most of those who resist having an honest debate about Social security’s finances, Lind relies on a combination of economic flim-flam and political sophistry to obscure the true problem. For example, Lind points out that when I quote the Trustee’s assertion that the system’s unfunded liabilities currently top $17.5 trillion, that “assumes there are no changes made between now and eternity.” Well, duh! All estimates of US budget deficits assume that spending won’t be cut or taxes raised enough to eliminate the deficit. In fact, when I get my Visa bill and it shows how much I owe, it doesn’t tell me anything about whether I will or can pay that bill in the future. Obviously, if we raise Social Security taxes, cut Social Security benefits (or create personal accounts), we can reduce or even eliminate the program’s unfunded liabilities.

Lind then returns to the hoary idea of the Trust Fund. He objects to my characterization of the Trust fund “contains no actual assets. Instead, it contains government bonds that are simply IOUs, a measure of how much the government owes the system.” This, he says, is the same as saying “government bonds backed by the full faith and credit of the U.S. government, a government that has never defaulted on its obligations in its entire existence since 1776, are not actual assets?” He points out that millions of Americans invest in government bonds through their retirement programs and consider them assets. “Are U.S. government bonds “actual assets” when they are part of IRAs but not “actual assets” when they are owed to the Social Security system?” he asks.

That’s right. If I write you an IOU, you have an asset and I have a debt. If I write an IOU to myself, the asset and debt cancel each other out. I haven’t gained anything, else it would be a whole lot easier to pay my bills. When Lind invests in a government bond, he has an asset and the government has a liability. But when the government issues a bond to itself (ie. Social Security), the asset and liability cancel each other out. There’s no net increase in assets.

But don’t take my word for it. This is what Bill Clinton’s budget had to say about the Trust Fund in FY2000:

These Trust Fund balances are available to finance future benefit payments…but only in a bookkeeping sense….They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of Trust Fund balances, therefore, does not by itself have any impact on the government’s ability to pay benefits.

Lind then switches course and says, ok, forget about the Trust Fund. Think about Social Security like we do about defense spending. “Why do we never hear of the “unfunded liabilities” of Pentagon spending – the third of the big three spending programs (Social Security, Medicare, defense) that take up most of the federal budget? Defense spending comes out of general revenues, not a dedicated tax.”

Actually, that is a valid comparison. Both defense and Social Security spending for any given year are ultimately paid for out of that year’s tax revenue. The composition of the tax revenue is largely irrelevant. And, when taxes don’t equal expenditures, we get budget deficits. Those deficits will eventually have to be paid for by raising taxes or cutting spending.

Current projections by the Congressional Budget Office suggest that unless we reform entitlements programs, government spending will reach 40 percent of GDP by mid-century. Paying for all that government will be a crushing burden of debt and taxes for our children and grandchildren.

No amount of obfuscation by defenders of the status quo can obscure that fact.

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