Topic: Social Security

Personal Accounts for Social Security an Election Killer — Not Quite

You can tell its election season because Democrats are once again attacking Republican’s for daring to propose reforms to Social Security.  These attacks come despite the fact that Social Security is already running a temporary deficit, and that deficit will turn permanent in just five years.  Overall, the amount the system has promised beyond what it can actually pay now totals $18.7 trillion.

But the latest Pew Poll suggests that attacking Republicans for wanting to “privatize” Social Security might not be such an effective tactic after all.  According to the poll, Americans support proposals to “allow workers younger than age 55 to invest a portion of their Social Security taxes in personal retirement accounts that would rise and fall with the markets” by 58 – 28 percent.   Younger voters supported personal accounts my an astounding 70-14 percent margin, but every age group except seniors was supportive.  Seniors split evenly.   Independents, widely believed to be the key to the upcoming election, supported personal accounts by 61-27, and even Democrats favored the idea by 50-36.

Maybe this will finally give the Republicans some courage on the issue.

A Birthday Gift from Paul Krugman

I turn 41 this summer (thank you for the condolences). Along with the well wishes of family and friends, I received an unexpected gift from NY Times writer Paul Krugman: this column in which he bashes people who are critical of Social Security in its current form or who worry about its ability to deliver expected benefits.

At first glance, the column hardly seems like a gift: it’s long on pointless insults, short on thoughtful discussion, and misleading. But it offers such a poor defense of the Social Security status quo that I suspect readers will be more skeptical of the program after seeing the column, not less. Hence, Krugman’s gift.

He writes:

Social Security has been running surpluses for the last quarter-century, banking those surpluses in a special account, the so-called trust fund. The program won’t have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted, which the program’s actuaries don’t expect to happen until 2037 — and there’s a significant chance, according to their estimates, that that day will never come.

OK, 2037 — no worries. Except that, as I said, I turn 41 this summer, which means I’ll turn 67 and qualify for full Social Security benefits in mid-2036. The very next year, the Social Security trust fund will be exhausted, according to the “intermediate” scenario contained in the most recent Social Security Trustees Report, available here (see Section IV-B and Appendix E). The program will still pay out some benefits — but less than 3/4s of what it now promises. So what happens then? That’s not a good question if you’re my age or younger.

But suppose you’re not my age or younger. Suppose you’re 10 years older than me, and will have collected 10 years of benefits by 2037. Don’t feel smug — you’ll be asking “So what happens next?” when you’re 77. That’s not a good question at your age, either. 

In fairness to Krugman, the Trustees Report considers different Social Security cost scenarios, the most optimistic of which projects that the trust fund will not be fully exhausted over the 75-year period the report considers. Krugman says there’s “a significant chance” this will be the case, but my (admittedly quick) skim of the report suggests it’s more just “a chance.”

One quick aside about the 2037 exhaustion date: when Krugman wrote this column in 2005, the Trustees’ intermediate scenario projected that the trust fund would last until 2042. In five years’ time, that date has grown 10 years closer. Not good.

Krugman writes that, if the trust fund does run out, Social Security can maintain its benefits using money transferred into the program by Congress from elsewhere in the federal budget. In fact, Congress will have to direct money from elsewhere to Social Security much earlier than 2037. Under the Trustees’ intermediate scenario, beginning in 2018 the amount of money Social Security pays out in old-age benefits each year will be greater than what the public pension program takes in in payroll taxes. (The Disability Insurance component of Social Security is in even worse shape, according to the Trustees, such that the program overall will go in the red in 2015.) To cover the difference, Congress will have to begin paying off the treasury bonds that currently comprise Social Security’s trust fund in order to provide the promised benefits. (In fact, Congress will have to do that this year because, as a product of the recession, Social Security obligations are greater than revenues. Hopefully, the economy will rebound and give the program a few years’ respite before transfers become an annual necessity, though the pessimistic scenario predicts no such respite.)

Krugman is unconcerned by these transfers, dismissing those who worry about them as engaging in “three-card monte.” His column doesn’t acknowledge that these transfers would need to occur at a time when Congress will be scrambling to cover other growing costs: similar deficits in Medicare, obligations to the ever-growing federal debt, and Medicaid’s increasing burden on federal and state governments. I worry that future taxpayers will not be amenable to having so much of their tax money directed to retirees (who refused to reform Social Security when they could have done so at relatively lower cost) rather than to government services for current taxpayers.

Krugman ends the column criticizing the proposal to reduce Social Security’s cost by raising the age at which retirees become eligible for full benefits. As part of an adjustment that began in 2002, retirees must now wait until age 66 to receive full benefits; beginning in 2021, the age requirement will slowly be raised until it reaches 67 in 2027. (Retirees will still be able to take reduced benefits at 62.) Some have suggested raising the full-benefit age to 70. Krugman says that would be unfair:

America is becoming an increasingly unequal society — and the growing disparities extend to matters of life and death. Life expectancy at age 65 has risen a lot at the top of the income distribution, but much less for lower-income workers. And remember, the retirement age is already scheduled to rise under current law. So let’s beat back this unnecessary, unfair and — let’s not mince words — cruel attack on working Americans.

There is something to what Krugman says. From 1980 to 2000, life expectancy at birth for the poorest decile (i.e., 10%) of the U.S. population increased from 73.0 years to 74.7 years, while life expectancy for the wealthiest decile increased from 75.8 years to 79.2 years. (The disparity in life expectancy between the top and bottom decile groups does decline to 1.6 years at age 65, which is up from 0.3 years in 1980. H/T to Dr. Daniel Coyne at the Washington University in St. Louis School of Medicine.)

But inequality in Social Security benefits would exist whether the eligibility age is 65, 66, or 70. Because Americans are required to participate in Social Security, and because all Americans become eligible for full retirement benefits for the rest of their lives at a single threshold age, then the longer-lived wealthy will receive more in benefits than the shorter-lived poor no matter what that threshold is. This is the product of having a one-size-for-all public pension plan (with lousy benefits). The way to address this inequality problem is through Social Security choice.

As I wrote at the beginning, Krugman’s column should leave thoughtful and informed readers more concerned about Social Security, not less. He couldn’t have given me a better present.

The Washington Post Misleads Readers about Medicare & Social Security Funding

Here’s a poor, unsuccessful letter I submitted to the editor of The Washington Post:

The Post’s economic reporters need to convey to readers that the Medicare and Social Security “trust funds” contain zero funds [“Medicare Funds to Last 12 Years Longer than Earlier Forecast, Report Says,” August 6].

This is not up for dispute.  When those programs’ revenues exceed outlays, Congress puts the excess in general revenues and spends it.  Congress marks the event by leaving an IOU to itself in these “trust funds.”  Those IOUs are not “funds,” any more than an IOU that you write to yourself is money.  These so-called “trust funds” therefore have no bearing on the (in)solvency of Medicare and Social Security.

Yet every year, the trustees for these programs claim that they do, making the Medicare and Social Security trustees reports an annual, ritualized lie that the U.S. government broadcasts to the American people.

Properly educating reporters, editors, and politicians about the Medicare and Social Security “trust funds” is a decades-long project.

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.

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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.

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!