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March 26, 2008

Social Security: Still Alive and Kicking

Bernard Wasow

With the mistakes of private speculators and public regulators spectacularly on display in financial markets, this might not seem like the best time to sing praises of privatizing the safety net. This year, as happens every year, when the Trustees' Report on Social Security and Medicare is released, commentators seized on the forecasts to proclaim imminent disaster and called for privatization of Social Security.  In fact, the official forecasts, released yesterday, differ only marginally from those of 2007. The report underlines that we need to solve problems in these safety net programs.  But there is no imminent Social Security crisis; in fact, the outlook is marginally better than it was a year ago.

Here is an example (by Martin Crutsinger, Associated Press economics writer) of the misleading coverage of the entirely predictable information in the report.

"President Bush, who wanted to make overhauling Social Security his top domestic priority in his second term, ...has been unable to forge a consensus with Democrats, who took control of Congress in 2006... Bush [wanted] to allow younger workers to direct their payroll tax contributions into private accounts, an idea that went nowhere in Congress.

"While the Social Security trust fund will have resources until 2041, the more critical date in terms of government revenues will occur in 2017. That is the date that Social Security will have to pay out more in benefits than it collects in payroll taxes. At present, Social Security is running large surpluses that are going to fund the rest of government.

"However, in 2017, the situation will be reversed and the government will have to start filling the gap between what Social Security will be collecting in payroll taxes and what it must pay out. Technically, it will do that by redeeming the non-marketable Treasury securities that are held in the trust fund. However, those bonds are simply government IOUs."

Let’s look at two central claims one at a time:

1. It is true that "Bush [wanted] to allow younger workers to direct their payroll tax contributions into private accounts, an idea that went nowhere in Congress."  The reason for Congressional reluctance is twofold.  First, the money directed into private accounts would be taken from the resources available to pay benefits to retirees, thus increasing the need for additional source of finance over the next 50 years.  Second, by reducing promised benefits to future retirees (who would have private accounts), partial privatization would shrink the safety net, guaranteeing that some future retirees would be worse off. Social Security is so popular exactly because it is a safety net that everyone can count on.  And, by the way, privatization plans were going nowhere even before the Democrats took control of Congress.

2. The claim that "the Social Security trust fund will have resources until 2041, [but] the more critical date in terms of government revenues will occur in 2017," is utter rubbish, although this claim is repeated endlessly. Another related claim, "[Trust fund] bonds are simply government IOUs" is equally spurious. 

This year, Social Security (including insurance against disability) will have income of $785 billion and expenditures of $595.  The $190 billion surplus will be used to buy US Treasury bonds, since our total deficit in 2008 will be much larger than $190 billion, we will also rely on the Chinese government and Japanese investors and OPEC countries to pay for our fiscal deficit --the fruit of tax cuts and wartime spending --along with the Social Security Trust Funds.

The Social Security Trust Funds own more than $2 trillion worth of Treasury bonds.  That is, they hold more than 20 percent of the national debt.  These assets are projected to continue growing until 2017, after which the Social Security system will begin to cash them in.  Either these bonds are as good as the rest of the national debt -- the part held by central banks throughout the world, by private mutual funds, and by wealthy individuals -- or they are junk paper.  Of course they are paper promises, IOUs.  But so are the bonds underwritten by investment banks like Bear Sterns.  What does Mr. Crutsinger imagine they should be, box lunches for the elderly?  Recent events, in which investors flocked to buy Treasury IOUs because they are safe, suggests that investors throughout the world are confident that these debts will be paid.  The notion that 2017 is the critical year for Social Security implies that the Social Security system somehow is responsible for managing the federal budget, or that the government in 2017 will announce to retirees 'we will not keep our promises to you because we need the money to keep our promises to Prudential Insurance and the central bank of China.' 

We have known for decades that Social Security does face problems in the long-run.  2041 is a critical date for Social Security (unlike 2017) because that is the year in which the Trustees forecast the exhaustion of the Trust Funds.  We do need to ensure the long run sustainability of the system; the sooner we start, the better.  The entire deficit of the Social Security system over the next 75 years is forecast at 1.7 percent of the taxable payroll, down by an eighth from last year’s estimate (due to higher, more realistic, assumptions about future immigration). 

This long run deficit is quite manageable.  Various combinations of tweaking benefits for retirees with the most income, extending payroll taxes to all wages and salaries, and perhaps increasing slightly the revenues from other sources can solve the problem for at least a century. We know how to solve this problem.  The sky is firmly in place for at least another three decades.


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Frank Stricker

Am happy with most of what Mr. Waskow says. Couple of things bother me.
1. 2041 may or may not be a critical date. If the trustees' long-term growth projections are wrong, D-Day will be later. They have had to make many adjustments. In the 1990s I believe that D-Day was 2029. We have gained 11 years.
2. Mr. Waskow is confident that politicians will not find a way to keep paying debts to China and Japan while not repaying the SS Fund. I am not. I could see Clinton or McCain telling us that in order to keep faith with important countries around the world we must pay them what we owe them. And to solve fiscal problems at home, we must cut SS benefits. We cut them in 1983. We just need a crisis atmosphere.

Pension Guy

Sticking your head in the sand won't work. The "Social Security Trust Fund" is US Government borrowing from itself to fund the current budgets. There is no pool of funds set aside for Social Security. Once outflows exceed inflows, the government will have to start repaying those IOU's. Where do you think the money would come from.

If anyone other than the government was running Social Security, they would have been arrested long ago for running a pyramid scheme. My father is currently receiving social security. He is receiving larger benefits than I will ever receive (even though my income is higher) and only paid a small fraction of the social security taxes I will pay. Just as with pyramid schemes, it all falls apart when you run out of new suckers to add.

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