Yesterday, the Trustees of the Social Security program released their annual report. The recession has taken a toll on the program’s finances: the system will run deficits beginning in 2016 rather than 2017 and the program’s trust fund will run out in 2037 rather than 2041. (I’d guestimated something close to this in an earlier post.) Due to the recession and to faster-than-expected increases in life expectancies, the long-term 75-year deficit increases from 1.7 percent of payroll to 2.0 percent of payroll. That’s an 18 percent increase in the long-term deficit, which is a pretty big deal.
A shortfall of 2 percent of payroll implies that if the 12.4 percent payroll tax were immediately and permanently increased by 2.0 percentage points (or benefits were cut across the board by 13 percent), the system would remain solvent through 75 years. In the 76th year, however, it would once again become insolvent. This means that workers who paid a full career of tax increases wouldn’t receive their promised benefits. To make the system sustainably solvent would require an immediate increase in the payroll tax of 3.4 percentage points, to 15.6 percent of wages. That gives the scale of the problem.
So unless our view of the future changes radically, Social Security needs reform. But why should we fix Social Security today? Three reasons:
- First, fairness: Social Security’s treatment of different generations of Americans is declining, such that those who retire in the near future will receive much higher benefits relative to their taxes than those who retire later. For instance, this study shows that a typical couple retiring today will receive around a 2.3 percent rate of return from Social Security, while a typical couple retiring in 2050 will receive around a 1.7 percent return. Compounded over a full career of paying taxes, these differences amount to a lot. By acting today, we can lower returns a little for near-retirees so we don’t need to hit future retirees as hard.
- Second, efficiency: The necessary tax increases or benefit cuts I cited above are if we act today – and only if we act today. If we wait, the necessary changes will be larger. If we waited until the system became insolvent in 2037, we would need to increase taxes by around 3.9 percentage points, with further increases to come. It’s a standard finding in economics that the “deadweight loss” of a tax rises with the square of the tax rate. Whatever we’re going to do, it hurts the economy less if we do a little to every generation than to hit certain generations a lot harder.
- Third, uncertainty: people planning for retirement know that something will happen to Social Security, but they don’t know what, when, or to whom. The sooner we act, the sooner people can adjust their plans to account for those changes.
In a break from Democratic orthodoxy, House Majority Leader Steny Hoyer last week argued that Social Security reform discussions should begin in the fall. The Obama administration yesterday pledged to take on Social Security after they finish health care, but their record of standing up to the Democratic left, who strongly oppose even discussing reform, hasn’t been good to date. Another option, endorse by Hoyer, is a bipartisan entitlement reform commission. Legislation to form a commission has been sponsored in the House by Reps. Frank Wolf (D-VA) and Jim Cooper (D-TN) and in the Senate by Sens. Kent Conrad (D-ND) and Judd Gregg (R-NH). AEI held an event on the idea of an entitlement commission last week.
6 responses so far
1 barker13 // May 13, 2009 at 10:16 am
“…the programs trust fund will run out in 2037…”
WHAT “trust fund…?!?!”
There is no “trust fund…!!!” Everyone knows this!
How dare you even use the term “trust fund” in the context of a contribution to this site concerning Social Security without noting that this “trust fund” concept is total smoke and mirrors – a “trust fund” filled with IOU’s based on… yeah… you know… the federal government’s taxing authority – i.e. “IOU’s paid out of future tax revenues.”
My God… this REALLY annoys me and it should annoy each and every one of you regardless of where you picture yourself on the ideological or partisan spectrum.
JEEZ… at least let’s have a little HONESTY with our debates here.
BILL
P.S. – And what really, REALLY gets me steamed…
Sure. I’m fairly confident that everyone who reads this post knows EXACTLY what I’m referring to in the sense of the “mechanics” of our pay as you go social security system; but I’m ALSO confident that out of more than 300 million of our fellow Americans, probably 70%-90% of “average” Americans actually believe there is a “trust fund” stuffed with “savings” from decades of excess “contributions” to social security.
Folks… how many millions upon millions of our fellow citizens – adults – probably think there’s actual MONEY – cash or gold… silver… whatever – being stored by the government out of social security “contributions” waiting to be distributed to its “rightful owners?”
2 agbiggs // May 13, 2009 at 10:35 am
Barker13: Let’s talk a little about what it means to say “What Trust Fund?” We know there is a fund in some sense, in that there are pieces of paper out in West Virginia that say how much money is owed to Social Security. We also know that when the system starts running deficits, it will redeem those pieces of paper with the Treasury. (Paying them off will mean higher taxes, lower spending elsewhere, or a bigger deficit.) Come 2037, the Trust Fund will run out of pieces of paper.
If there’s no Trust Fund — meaning, just piece of paper instead of say, cash or gold — why does this matter? Because once the Trust Fund is exhausted then, by law, Social Security benefits must be cut by almost one-quarter, to the level payable by payroll tax revenues alone.
So while the trust fund doesn’t have any economic significance, it has a ton of legal significance. From 2016 through 2037, taxpayers bear the cost of Social Security’s deficits; from 2037 onward, beneficiaries do, through benefit cuts. So even though we don’t disagree substantively, but the trust fund still matters.
3 barker13 // May 13, 2009 at 11:03 am
Re: Agbiggs; wrote 17 minutes ago –
“Barker13: Let’s talk a little about what it means to say “What Trust Fund?”"
Fine. But first…
http://www.heritage.org/Research/SocialSecurity/wm2439.cfm
OK. Back to you, Andy.
“We know there is a fund in some sense, in that there are pieces of paper out in West Virginia that say how much money is owed to Social Security.”
Yeah, yeah… that’s what I said.
Here… hang on for just a second…
(*WRITING MYSELF AN IOU FOR SIX MILLION DOLLARS PAYABLE 2016*)
Sorry. You were saying…???
“We also know that when the system starts running deficits, it will redeem those pieces of paper with the Treasury. (Paying them off will mean higher taxes, lower spending elsewhere, or a bigger deficit.)”
Again… I believe that’s what I said… abet perhaps more colorfully.
“Come 2037, the Trust Fund will run out of pieces of paper.”
Andy. Forget 2037. Let’s stick to 2016/17. That’s when the system (the main system – retirement) is set to go upside down. We agree on that… right?
“If there’s no Trust Fund…”
There is no Trust Fund. Not “if.” There is no Trust Fund. Not in the sense of actual savings. It’s a bookkeeping/accounting gimmick.
You KNOW all this, Andy. Com’on… YOU KNOW ALL THIS! What game are you trying to play…???
“…once the Trust Fund is exhausted then…”
Andy. Forget this “once the Trust Fund is exhausted” stuff. Forget 2037. The date to focus on is 2016/17. That’s when the system goes upside down.
YOU…
KNOW…
THIS…
(*SHRUG*)
Let’s not muddy the waters.
Assuming we’re both basically on the “same side,” don’t you think the best way to wake up the American People to the reality of how the Social Security Ponzi Scheme works is to… er… actually explain it HONESTLY in terms folks can understand… pushing the IMMEDIACY of the coming crisis… not babbling on about 2037 or 2050 or 2073 but focusing on 2016/17?
I do.
BILL
4 barker13 // May 14, 2009 at 7:15 am
I’ll take your silence for an admission I’m correct.
(*SHRUG*)
You know what’s sad, though, Andy… you write a post concerning a vital issue – I respond – and so far… I’m it.
As I often note, the folks who “hang” at blogs like this one tend to be (hold the laughter – it’s sad but true) the most knowledgeable and “plugged in” segment of the American public when it comes to politics, economics, foreign affairs, etc.
But look at the popular threads… the thread topics which get the most comments… it’s the same old crap: Abortion, Homosexual Rights, Guns, Scandals…
(*SIGH*)
Besides the occasional posting do you “lurk” here much, Andy? If so you’ll note that even here… even at a blog that’s relatively serious and sophisticated… a good half of the posters are… er… fairly knee-jerk in their reactions and posts and either unwilling or unable to really argue the merits of a complicated discussion at a level much beyond what you’d expect of a fairly intelligent undergrad.
My point…??? We’re screwed. Lazy and stupid is a bad combination. Add crooked – i.e. the political class – and you’ve got one hell of a problem.
What I (and others… certainly while I have a high opinion of my own “understanding” of the issues I freely admit I’m quite a few notches down from the “brightest of the bright”) see and recognize for what it is… the vast, vast majority of the American voting public turns a blind eye to and in fact even when it’s thrust in their face they just don’t have the intelligence to recognize for what it is – the path of societal decline.
We can chat… we can debate… we can “entertain” ourselves here and on other blogs… but final analysis… there’s no “saving” this country.
BILL
5 barker13 // May 14, 2009 at 2:52 pm
Oly Oly Oxen Free!
(You there, Biggs…?)
(*SNORT*)
OK. Let’s continue – even if it’s only me providing info to non-posting readers…
Any other Concord Coalition fans out there…???
(Speak up!)
From my Concord Coalition’s weekly Washington Budget Report (written by Charles Konigsberg) the following points to ponder:
By 2025, the equivalent of all federal revenues will be consumed by Medicare, Medicaid, Social Security and Interest on the accumulated public debt.
By 2035, the equivalent of all federal revenues will be consumed by Medicare, Medicaid, and Interest on the accumulated public debt.
Anyway…
Hey… folks… I’m as happy as the next guy to chat about hamburger and hot dog garnishes and Rush Limbaugh… (*SHRUG*)… but a great deal of the “news” we debate here at NM and elsewhere is… er… designed to draw our attention from IMPORTANT matters.
Just saying…
(*SHRUG*)
6 barker13 // May 14, 2009 at 3:00 pm
Hey… Andrew… you taking notes?
(*SMIRKY SMILE*)
Just a few more morsels from the latest Concord Coalition emailing:
Despite the attention focused on when the Social Security and Medicare Part A trust funds become insolvent, The Concord Coalition again warned that trust fund solvency is a poor indicator of the fiscal outlook for these programs.
For too long, efforts to reform these programs have been minimized by references to trust-fund accounting. Use of this indicator not only misleads the public about the timing and magnitude of the looming fiscal burden, but it says nothing about these programs’ impact on national savings and generational equity. The trust funds are an accounting device for keeping track of the programs’ claims on general revenues. Their existence does not, therefore, ease the burden of paying future benefits. What matters fiscally and economically is their total cost. Under current projections, both programs will become increasingly reliant on general revenues as a source of funding. This in turn will put enormous pressure on all other government programs, (Executive Director of The Concord Coalition Robert L. ) Bixby said.
Hey, Andrew… notice the deliberate use of the term “MISLEADS?”
I don’t “get” you, man…
(*SCRATCHING MY HEAD*)
…one would think you’d be JOINING me in outlining what we both know is the dirty little secret (one among many) of Social Security.
(*SHRUG*)
BILL
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