Tag: Social Security

The Social Security and Medicare ‘Trust Funds’ Are a … What’s the Word?

Yesterday’s New York Times editorialized:

It’s the time of year when the trustees of Medicare and Social Security release their annual reports on the programs’ financial health. And that means Americans are likely to be bathed in a fog of political rhetoric that makes it hard to sort out fact from fiction.

Here’s the bottom line…

The Times then proceeded to bathe its readers in fog:

According to the reports, the date of insolvency for Medicare’s hospital fund was pushed back, from 2017 to 2029, because of cost-saving measures in health reform. As for Social Security, without any changes, it will be able to pay full benefits until 2037 and partial benefits after that, the same estimate as in last year’s report, despite temporary setbacks from the recession…

A lot of attention will be paid to the finding in the Social Security report that payouts will exceed revenues in 2010 and 2011…That doesn’t endanger benefits, because any shortfall can be covered by the trust fund.

No.  It.  Can’t.  Because there are no funds in the Social Security “trust fund.”  There are no funds in the Medicare “trust fund.”  As Fortune magazine’s senior editor-at-large Allan Sloan explains in today’s Washington Post, those “trust funds” contain nothing but “funny money.”

In a 2006 blog post titled, “Sometimes, Governments Lie,” I offered the following proposition:

If the government knows that there are no assets in the Social Security and Medicare “trust funds,” and yet projects the interest earned on those non-assets and the date on which those non-assets will be exhausted, then the government is lying.

That still seems correct to me: the whole idea of the Social Security and Medicare “trust funds” is a lie.  An institutionalized, ritualized lie that the U.S. government tells the American people. Perpetuated by both political parties, and others with an interest in hiding the reality of these programs’ unfunded liabilities from voters.  One that many journalists uncritically repeat.

The State of Social Security: Maybe a Little Better, Maybe a Little Worse?

The Social Security Trustees released their annual report yesterday, showing a small improvement in the system’s finances over the long-term.  That’s rather surprising given that the recent recession has reduced the program’s revenues and brought forward the date when the program begins to drain money from the general budget — from 2016 last year to 2015 in the new report.  The Trust Fund exhaustion date is 2037, the same as it was in last year’s report. 

The new health care law is likely to increase the program’s revenues as employers reduce payroll-tax-free health insurance coverage and offset the reduction in employee compensation through higher wages that would be subject to payroll taxes.  This sets up a competition between the health care law–induced increase in Social Security revenues and declines in revenues and increases in outlays for other reasons — a sluggish economy, improving longevity, the addition of another year at the end of the 75-year projection horizon, and changes in economic and demographic data, assumptions, and methods.

The positive revenue effect of the health care law (14 basis points) more than offsets the negative effects of all of the other factors (6 basis points) on the system’s long-range actuarial balance. That yields a total improvement of the program’s actuarial balance from –2.00 percent of taxable payroll to –1.92 percent.  In next year’s report, however, this year’s “legislative” effects may be folded into changes from technical adjustments and incoming data. We may never know whether today’s assumptions on the revenue effects of the health care law are correct or not. 

It could be that those assumptions are too large, especially if Congress postpones the tax on Cadillac health care plans because of pressure from unions. It could also be too small if many employers decide to eliminate health insurance coverage and opt to pay the less costly penalty.  On balance, I’ve concluded that, faced with such wide uncertainty about future outcomes, the Social Security trustees have chosen to be relatively conservative in their estimates of the health care law’s revenue effect. 

Another curious item is that the program’s long-range imbalance increased from $15.1 trillion to $16.1 trillion. However, the report states that “the near-term negative effects on employment of the slightly deeper recession than assumed last year are offset by higher than expected real growth in the average earnings level” (Section D: Projections of Future Financial Status).  As a result, the program’s total (infinite-horizon) imbalance ratio declines from 3.4 percent in 2009 to 3.3 percent today.

Note that a deeper recession and higher unemployment than was assumed last year does not necessarily justify a correspondingly faster recovery, with unchanged long-term equilibrium unemployment and earnings growth rates.  The trustees are discounting the possibility that the unemployment rate may remain higher than was assumed last year and that, therefore, earnings may not rebound any faster compared to last year’s assumptions.  It appears that that incoming data on unemployment and GDP growth played little if any role in informing assumptions about future earnings growth rates. 

Finally, it should be noted that this year there were no public trustees to oversee and modulate the report as it was being produced.


The Two GOPs

As the fall elections approach, two factions within the congressional GOP have emerged. The first faction, which generally controls the Republican leadership, is short-term oriented and just wants to return the GOP to power in Congress. Riding the wave of voter discontent over the government’s finances is a means to an end – the end being power.

The second, and considerably smaller faction, is more ideas driven and views the upcoming election as an opportunity to push for substantive governmental reforms. Whereas the “power first faction” offers platitudes about smaller government, the “ideas first faction” isn’t afraid to offer relatively bold suggestions for confronting the federal government’s unsustainable spending.

The ideas first faction is willing to publicly recognize that runaway entitlement spending must be reigned in and offer solutions to address the problem. Representatives Ron Paul, Michelle Bachmann, and Paul Ryan, for example, aren’t shying away from advocating a phase-out of the current Social Security system, which is headed for bankruptcy. In contrast, the power first faction lambasted Democrats for wanting to “cut Medicare” during the recent legislative battle over Obamacare.

In Ryan’s case, he has given the power first faction heartburn by pushing his “Roadmap for America’s Future,” which confronts the entitlement crisis head-on. Although Ryan’s Roadmap is not the ideal from a limited government standpoint, it’s a credible offering with ideas worth discussing. Even though the Ryan plan has received some favorable notice by the mainstream media, the power first faction would probably prefer Paul and his Roadmap went away.

From the Washington Post:

Of the 178 Republicans in the House, 13 have signed on with Ryan as co-sponsors.

Ryan’s proposals have created a bind for GOP leaders, who spent much of last year attacking the Democrats’ health-care legislation for its measures to trim Medicare costs. House Minority Leader John A. Boehner (R-Ohio) has alternately praised Ryan and emphasized that his ideas are not those of the party.

Ryan has not helped to make it easy for his leaders. He is a loyal Republican, but he is also perhaps the GOP’s leading intellectual in Congress and occasionally seems to forget that he is a politician himself.

At a recent appearance touting the Roadmap at the left-leaning Brookings Institution, someone asked Ryan why more conservatives weren’t behind his budget plan. “They’re talking to their pollsters,” Ryan answered, “and their pollsters are saying, ‘Stay away from this. We’re going to win an election.’”

His remarks illustrate the tension among Republicans over their fall agenda. Some strategists say the GOP should focus on attacking the Democrats; others want the party to offer a detailed governing plan.

Ryan’s ideas can be contrasted with those of the House Republican Conference Committee, which is a key power first organization. The HRCC just released a platitude-filled August recess packet for Republican House members to recite in talking to their constituents. Entitled “Treading Boldly,” the cover prominently features Teddy Roosevelt, which should immediately send chills down the spines of anyone believing in limited government.

The document is not “bold.” Take for example the five proposals to “Reduce the Size of Government”:

  • Freeze Congress’ Budget. This has populist appeal but does virtually nothing to reduce the size of government. The legislative branch will spend approximately $5.4 billion this year. That’s less than the federal government spends in a day.
  • Eliminate Unnecessary or Duplicative Programs. This proposal is so vacuous that even House Speaker Nancy Pelosi supports it. If the GOP isn’t willing to name a dozen or so substantial “unnecessary” programs to eliminate, then this promise can’t be taken seriously.
  • Audit the Government for Ways to Save. Yawn. Isn’t that what the $600 million Government Accountability Office does? The document says “Congress should initiate a review of every federal program and provide strict oversight to uncover and eliminate waste and duplication.” Nothing says “not serious” like calling for the federal government to eliminate “waste.” Waste comes part and parcel with a nearly $4 trillion government that can spend other’s people money on pretty much anything it wants to.

To be fair, there are sound proposals contained in the document such as privatizing Fannie Mae and Freddie Mac. But on the issue of entitlements, the HRCC punts:

The current budget process focuses only on about 40 percent of the budget and just the near-term – usually the next twelve months. We know that we have significant medium and long-term fiscal challenges fueled by the demographic changes in our country. The Government Accountability Office estimates that we have $76 trillion in unfunded liabilities. Rather than simply ignoring these challenges, Congress should reform its budget process to ensure that Congress begins making the decisions that are necessary to update our entitlement programs to secure them for today’s seniors and save them for future generations.

Had the Republicans not swept into office in 1994 on a promise to reduce government only to make it bigger, the power first faction’s “trust us” argument might be more credible. However, given that it already views the GOP’s ideas first faction as skunks at the party, voters who are expecting a new Republican congressional majority to downsize government might not want to hold their breath.

Social Security Bloviate-fest

The annual bloviate-fest on Social Security has begun, even before the Social Security Trustees’ report has been released this year.  Apparently the report is to be released next week — after a three-month delay from its statutory release deadline of April 1. 

There’s concern from groups interested in preserving Social Security that President Obama’s National Commission on Deficit Reduction will propose changes to the program involving benefit cuts. These groups, which include the AFL-CIO, MoveOn.org, NOW, and the NAACP have issued and allegedly rebutted five “myths” about Social Security.  But their selection of myths and myth-busting arguments are weak and involves questionable arguments.

Below is a list of the twisted logic that these groups are using to convince voters that all’s well with Social Security’s finances and that we should not worry and just be happy. Also below are my reactions to the “faux-myth-busters” arguments.

Myth #1: Social Security is going broke.

Reality: There is no Social Security crisis.  By 2023, Social Security will have a $4.6 trillion surplus (yes, trillion with a ‘T’).  It can pay out all scheduled benefits for the next quarter-century with no changes whatsoever. After 2037, it’ll still be able to pay out 75% of scheduled benefits — and again, that’s without any changes. The program started preparing for the Baby Boomers’ retirement decades ago.  Anyone who insists Social Security is broke probably wants to break it themselves.

Real Reality: We’re in a vortex, and these folks refuse to extend help. Yes, I also don’t like the “crisis” terminology.  A better descriptor is “vortex,” the upper reaches of which can seem calm, for a time.  But eventually, we’ll realize that what we thought was a good place to be is really an inexorable path to the doom of being spun around super fast.

Yes, Social Security will have a surplus (of Treasury IOUs) of $4.6 trillion by 2023. But, notwithstanding the “T” attached to that sum, all’s not well.  By 2023, the program’s net liabilities (the shortfall of future revenues relative to future benefit commitments under existing laws) will exceed $20 trillion (note, also with a “T”).  Last I checked, 20 exceeds 4.6 by about four fold.

The fact that Social Security “will be able to pay” 75% of scheduled benefits after 2037 means we would have to impose a 25% benefit cut at that time if no adjustments are made earlier.  It’s said that the natural human instinct for justice emanates from a simple thought experiment — of placing oneself in the shoes of the victims. In this case, it’s those poor future souls who would have to acquiesce to a 25 percent benefit cut.  But they would be forced to do so only because the faux-myth-busting authors shrieked in horror when confronted with a much smaller benefit cut that would be required now to place the program’s finances on a sustainable course.

Myth #2: We have to raise the retirement age because people are living longer.

Reality: This is a red-herring to trick you into agreeing to benefit cuts. Retirees are living about the same amount of time as they were in the 1930s. The reason average life expectancy is higher is mostly because many fewer people die as children than they did 70 years ago. What’s more, what gains there have been are distributed very unevenly — since 1972, life expectancy increased by 6.5 years for workers in the top half of the income brackets, but by less than 2 years for those in the bottom half. But those intent on cutting Social Security love this argument because raising the retirement age is the same as an across-the-board benefit cut. 

Real Reality: Longer life spans, earlier retirement trends, a sharp decline in fertility that ended the baby-boom in the 1960s, and our failure to prepare for boomer retirements by saving adequately have all combined to expose Social Security (and our living standards) to a high risk of insolvency.

The “myth-busting” authors argue that infant mortality reductions caused most of the gains in longevity, but also that high earners benefitted more.  But the fact is that American longevity rates, as calculated by the National Center for Health Statistics, place life-expectancy at age 15 to be about 51 years in 1940 (through age 66).  Today (using 2006 life tables), it is 63.4 years (through age 78.4).  Combined with the fact that retirees beginning to collect Social Security benefits earlier (at age 62 rather than age 65), we have witnessed a very significant increase in retirement life spans.  

Skewed distributions of longevity gains by earning levels are not surprising. Higher earners are generally better educated, they know how to adopt healthy lifestyles, and have the incomes to do so.  The solution is not to take benefit cuts off the table, but to reform the system’s structure by eliminating statutory age eligibility rules AND providing stronger incentives to work longer — say, by gradually reducing payroll taxes with age and improving benefit replacement rates as incentives for working longer and beginning benefit collection later.  Incentives for such conservative choices on resource disposition (working longer and saving) would be especially enhanced the more “retirement benefits” are financed out of workers’ own resources compared to maintaining dependency on a regular government check.

Myth #3: Benefit cuts are the only way to fix Social Security. 

Reality: Social Security doesn’t need to be fixed. But if we want to strengthen it, here’s a better way: Make the rich pay their fair share.  If the very rich paid taxes on all of their income, Social Security would be sustainable for decades to come. Right now, high earners only pay Social Security taxes on the first $106,000 of their income.  But conservatives insist benefit cuts are the only way because they want to protect the super-rich from paying their fair share.

Real Reality: The system is badly in need of a structural fix.  Increasing taxes won’t strengthen Social Security, but only increase government spending as short-term Trust Fund surpluses increase.

The system was designed to be fair to everyone by not extending Social Security to the upper reaches of earnings for high earners. The program is intended to provide social insurance against the “loss of income due to old age,” not against the “loss of high income due to old age.”  High earners could self-insure against those losses if they wish by appropriately saving more for retirement. 

Under the current system, upper earners already pay more than their fair share for the appropriate level of social insurance. The Social Security benefit formula replaces only 15 cents to the dollar of their average wages above a certain threshold, whereas 90 cents are replaced for each dollar of average wages at the low end of the earnings scale. 

Moreover, increasing payroll taxes on high earners, many of whom are self employed small business owners, may push them into cutting back on business investments and hiring—precisely the activities needed to revive a sluggish economy.   

Myth #4: The Social Security Trust Fund has been raided and is full of IOUs

Reality: Not even close to true. The Social Security Trust Fund isn’t full of IOUs, it’s full of U.S. Treasury Bonds. And those bonds are backed by the full faith and credit of the United States.7 The reason Social Security holds only treasury bonds is the same reason many Americans do: The federal government has never missed a single interest payment on its debts. President Bush wanted to put Social Security funds in the stock market—which would have been disastrous—but luckily, he failed. So the trillions of dollars in the Social Security Trust Fund, which are separate from the regular budget, are as safe as can be.

Real Reality: We cannot really say one way or the other. 

We cannot observe how much the government would have spent if no Trust Fund surpluses had ever accrued. 

Two academic studies on the time trends of government spending and Trust Fund surpluses conclude that government spending increased more than dollar-for-dollar when Trust Fund surpluses increased compared to when those surpluses did not increase — suggesting (not proving) that exactly the opposite conclusion might be true.

But if we maintain that we truly don’t know whether Trust Fund surpluses are dissipated or saved — the likelihood that Trust Fund surpluses are spent must be placed at 50 percent: A very high gamble that we are dissipating Trust Fund surpluses — and odds that I would not recommend, especially for Social Security surpluses meant to be sequestered for future benefit payments. We need a better “lock box” than the Trust Funds provide in order to take Social Security fully and truly off budget.

Myth #5: Social Security adds to the deficit

Reality: It’s not just wrong—it’s impossible!  By law, Social Security’s funds are separate from the budget, and it must pay its own way. That means that Social Security can’t add one penny to the deficit.

Real Reality: By law, they are intended to be separate but, in fact, Social Security payroll-tax surpluses are no different from any other federal revenues.

Saying that Social Security must pay its own way does not preclude benefit cuts as a means of payment.  In reality, reforms to the program that are adopted eventually are likely to be pre-announced well in advance to allow affected participants to adjust their personal finances to the reality of smaller future benefits (through whatever channel) or higher taxes (of whatever kind).

But if people react by revising their expectations of smaller government retirement support and adjust their behaviors by working longer and saving more, then (a) they must be the rational, forward-looking types of individuals (whose existence is vehemently denied by defenders of Social Security), and (b) when it comes to direct changes to individuals’ resources via Social Security reforms, there’s really not much difference between tax increases and benefit cuts that are announced well in advance. To individuals, both approaches would appear as a reduction of future resources and would provoke a behavioral response. 

But a vast difference would arise in terms of the types of private behavioral response that the two alternatives would produce.  Pre-announced reductions in scheduled benefits would induce longer working lifetimes, more pre- and post-retirement saving, and larger transfers of human and physical capital to forthcoming generations of workers, which would increase their productivity. Tax increases, on the other hand, would provoke withdrawals from the work force, disincentives to saving, capital flight to low-tax countries, and reduced worker productivity. 

The faux-myth-busters need to be exposed for what they are: proponents of preserving their share of the national economic pie at the expense of our children and grandchildren. They are opponents of policies that would sustain faster economic growth and living standard improvements for successive generations.

Fiscal Commission Testimony

I testified to President Obama’s National Commission on Fiscal Responsibility and Reform today on Capitol Hill. The Commission is tasked with creating a package of specific budget reforms by December to be considered by the House and Senate.

I suggested that the Commission propose cuts to Social Security, Medicare, Medicaid, farm subsidies, transportation subsidies, education subsidies, aid to the states, and many other activities.

Fiscal responsibility is pretty easy really–you just need to cut programs. I advised Commission members to study the recommendations on www.downsizinggovernment.org.

And I said that other countries have ditched farm subsidies and privatized Social Security, so why the heck can’t we?

My written testimony is here. The hearings are on CSPAN and being streamed at the White House website.

Fiscal Imbalance and Global Power

Over at National Journal’s National Security Experts blog, this week’s question revolves around the health of the U.S. economy, and its relationship to U.S. power. 

The editors ask

How serious a threat is the mounting debt to the nation’s standing as the world’s only superpower? Can the U.S. continue to spend more than all other countries combined on its military forces given burdensome debt levels? In what other ways does the mounting debt undermine the country’s strategic position? […]

My response:

Our long-term fiscal imbalance, which increasingly amounts to a massive intergenerational wealth transfer, is clearly a sign of our decline. But it is a decline that has been a long time coming. (I first wrote about the insolvency of the Social Security system as a college sophomore, 23 years ago.) As such, it is tempting for people to assume that we’ll figure our way out of this mess before a complete collapse. Let’s call them, at the risk of a double negative, the declinist naysayers. And, even if they are willing to admit to the problem in the abstract, the naysayers can point to the more serious, and urgent, imbalances between pensioners and those who pay the pensions in Europe or Japan and say “At least we aren’t them.”

That is a pretty shoddy argument, but it seems to be ruling the day. We can talk about the obvious unsustainability of using taxes on current workers to pay benefits for retirees until we’re blue in the face. And my second grader can do the math on a system that was designed when workers outnumbered beneficiaries by 16.5 to 1, and in which, by 2030, that ratio will fall to 2 to 1. It simply doesn’t add up. (For more on this, much more, see my colleague Jagadeesh Gokhale’s latest.)

But this isn’t a math problem; this is a political problem. The incentive to kick the can down the road is overwhelming. The pain in attempting to deal with the problem in the here and now is, well, painful. It is hardly surprising, therefore, that members of Congress / Parliament / Bundestag / Diet, etc, have become very good at avoiding the issue altogether. And many of those who have chosen to tackle it are “spending more time with their families.”

What does all this mean for the United States’s standing as the world superpower? Less than you might think. Our difficulties in two medium-sized countries in SW/Central Asia have done more to puncture the illusion of American power than our political inability to deal with domestic problems. Our fiscal insolvency might convince other countries to play a larger role, if they genuinely feared for their safety. But other countries, especially our allies, are cutting military spending, while Uncle Sam continues to bear the weight of the world on his shoulders. In other words, our ability to maintain our global superpower status isn’t driven by our economic problems. But it is strategically stupid.

It is here that I take issue with Ron Marks’s contention that we spend less today than during the Cold War. While technically accurate, measuring military spending as a share of GDP is utterly misleading (as I’ve argued elsewhere.) If the point is to argue that we could spend more, I agree. But the measure doesn’t address whether we should do so.

We should think of military spending not as a share of the American economy, but rather relative to the threats we face. In real terms (constant current dollars), we spend today more than when we were facing down a nuclear-armed adversary with a massive army stationed in Eastern Europe and a navy that plied the seven seas from Cam Ranh Bay to Cuba. We spend more than during the height of the Vietnam or Korean Wars. Today, terrorist leaders are hunkered down in safe houses somewhere in, well, somewhere. In other words, what we spend is utterly disconnected from the threats we face, a point that is easily obscured when one focuses on military spending as a share of total output.

We spend so much today not because we are facing down one very scary adversary, but because we are facing down dozens or hundreds of small adversaries that should be confronted by others. After the Cold War ended, our strategy expanded to justify a massive military. Since 9/11, it has expanded further. Our fiscal crisis alone won’t force a reevaluation of our grand strategy. It will take sound strategic judgement, and a bit of political courage, to turn things around.

In the cover letter to his just-released National Security Strategy, President Obama acknowledged that it doesn’t make sense for any one country to attempt to police the entire planet, irrespective of the costs. Unfortunately, the document fails to outline a mechanism for transferring some of the burdens of global governance to others who benefit from a peaceful and prosperous world order. We should assume, therefore, that the U.S. military will continue to be the go-to force for cleaning up all manner of problems, and that the U.S. taxpayers will be stuck with the bill.

Heating Up the Covert Generational War

My latest book Social Security: A Fresh Look at Reform Alternatives (available here) argues that it’s not just labor quantity — the number of employees who are accruing future Social Security benefits — that will determine the size of Social Security’s future imbalances (and, incidentally, those of Medicare, and the size of deficits for all of government), but also the quality of that labor — the value of the work those employees are doing. 

Declining labor quality (as experienced baby boomers retire) will reduce taxable payrolls faster than is being projected by the Social Security Administration and the Congressional Budget Office.  The result is even more beneficiaries receiving Social Security checks, and lower-wage workers who will be funding those checks.

In the book, I construct a detailed simulation of U.S. demographic and economic forces over the coming decades to estimate how much of a drag declining labor quality will exert on labor productivity, countering the effects of capital accumulation and technological advance.

Now James Heckman has coauthored a study suggesting that the same thing is happening in Europe, traceable in part to public policies promoting less use and low maintenance of worker skills through the early retirement incentives of their public pension, welfare, and health systems. 

So it is quite clear how the developed world (Anglo-Saxon and mainland Europe) will spiral downward.  We’ll all vote to “strengthen” social insurance systems (the U.S. health care “reform” this year being the latest example), only to further weaken incentives for the young to acquire skills, further erode the tax base, which in turn will promote the further “strengthening” of social insurance protections … and so on. 

My old idea of a “covert generational war” is playing out before our very (but fully blind) eyes.

Two months ago, EU officials were even flirting with the idea of a cross-country crisis insurance institution — a European Monetary Fund. 

One ironic element in the ongoing European crisis: Remember how the EU’s erstwhile Stability and Growth Pact included penalties on nations who exceeded the 3 percent fiscal deficit rule?  Turns out, penalties must now be paid by the “successful” countries — mainly Germany and France — by coughing up the aid packages!