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December 23, 2004

The Economic Policy Institute on Social Security

What the program is:

Social Security Issue Guide: Facts at a Glance: Facts about Social Security finances: To pay for benefits, Social Security receives income from three sources.
Most of the money that is needed to pay for benefits comes from payroll taxes. Currently, employees and employer each pay 6.2% to Social Security, for a combined tax rate of 12.4% of wages and salaries. Self-employed workers pay the full 12.4% out of their earnings. Taxes, however, have to be paid only up to an earnings ceiling, which is $90,000 annually in 2005. Earnings above the ceiling are not subject to the payroll tax. In 2003, Social Security received a total of $535.2 billion in payroll taxes.

As a result of reforms to Social Security in 1983, a trust fund was specifically set up as a savings account to pay for baby boomers. Since then, Social Security has taken in more money than it has paid out in benefits. Consequently, it has built up a trust fund over the years. Social Security earns interest on this trust fund. In 2003, the Old Age and Survivor's Insurance trust fund received 6.0% interest on its assets, earning $75.2 billion in interest, and the Disability Insurance trust fund received 5.9% interest, earning $9.7 billion in interest.

Finally, some Social Security benefits are subject to taxes, which are then paid to Social Security. In 2003, taxes on Social Security benefits amounted to a total of $13.4 billion.

>Social Security is building up a trust fund: Because income is currently exceeding expenditures, Social Security is building up a trust fund. Total income to Social Security was $632 billion in 2003. Its expenditures came to $479 billion, $471 billion of which was benefit payments. Consequently, Social Security managed to increase its trust fund by $153 billion in 2003. As a result, Social Security held a total of $1,531 billion in assets at the end of 2003. If Social Security faces a shortfall in income, the trust fund assets can be used to pay for the additional benefits.

Trust fund assets are invested in government bonds: Social Security trust fund assets, currently worth over $1.5 trillion, are invested in special, non-tradable government bonds. Each year the U.S. Treasury issues these government bonds, up to the amount of the Social Security trust fund surplus, to be added to the account. The bonds earn an interest rate comparable to the market interest rate for tradable government bonds. During 2003, the effective annual interest rate earned on all bonds held by the trust funds was roughly 6.0%.

Social Security is not going broke: Each year, in early spring, the trustees of Social Security release their report. As required by law, the trustees present what can be described as their best guesses for three different scenarios for the future of Social Security. In their annual report for 2004, the trustees project that Social Security will take in more in income than it will pay out in expenditures until 2018. Between 2018 and 2028, interest income earned on the trust fund assets is forecasted to make up the difference between income and expenditures. After 2028, Social Security is expected to draw down its trust funds to pay for the expenditures that are not covered by income. Finally, in 2042, the trust fund assets are expected to be gone, and income is projected to be less than expenditures. However, the trustees project that Social Security will still be able to pay 74% of its promised benefits from 2042 to 2078, and those benefits would still be higher in real (inflation-adjusted) terms than retirees are being paid today.

Social Security is not going broke. The trustees instead project a financing shortfall that may happen almost 40 years from now. The nonpartisan Congressional Budget Office doesn't project a shortfall until 2052.  The trustees' projections are based on pessimistic assumptions. Real growth is expected to fall to between 1.7% and 1.8% over the long-run, which has never been the case for an extended period of time during the post-war years. Similarly, the trustees assume that in the long-run the economy will settle on an average productivity growth rate of 1.6%, which is again too low by historical standards. Higher productivity and consequently faster real wage growth -- which have both historically been about 2.0%—would be more realistic and improve Social Security's finances.

Posted by DeLong at December 23, 2004 12:41 PM

Comments

There it is - the defnitive explanation, in easy to understand terms.

And just in time for Christmas, when I have to argue with my conservative relatives.

THANK YOU!

Posted by: paul at December 23, 2004 01:09 PM


Brad,

The problem with this essay on SS is it is technically correct, but wrong in practice. Yes, the SS is not broke and can pay its bills untill 2042 or later if the economy does well. I agree and I think the numbers are too pessimistic. However 2018 is the real date not 2042. Maybe it will be 2023 if things go well, but that is the issue. The reason is simple, if the trust fund has to be paid back the money has to come from somewhere. Those bonds have to be redeemed. The money will have to come from general tax revenues or new borrowing. That is where the budget crunch comes from. The money has to come from some tax whether we call it redeeming bonds or, as in 2042, a revenue shortfall.

I know you know this, so why post what you know is a misleading set of truths? The system is only solvent until 2042 or within a rather short period after that because we have a written promise to tax or borrow to pay for the bonds. After 2042 we will have to tax or borrow because the bonds are gone. What is the difference?

[2018 is only a problem because the General Fund is in trouble, yes? That would suggest that fixing the General Fund problems--which are much bigger than "where will we find the money to repay the Social Security Trust Fund?"--is where we should be focusing our attention.

And my latest sweeps through the productivity and migration data have convinced me that 2042 is probably not going to be a problem...]

Posted by: Lance at December 23, 2004 01:19 PM


Lance --

Because the scariest thing you can say is "renege on financial obligations".

The folks who buy the bonds fully expect that they will get paid back when the bonds come due. Imply otherwise, and you attack the reason that they have for loaning us money.

If we ever get to the point where we can't service our debts, Social Security will be the least of our worries.

Posted by: lightning at December 23, 2004 01:46 PM


If the bonds are not to be redeemed, that is defaulting on the bonds. If we default on the trust fund bonds, why not all the rest? If the trust fund bonds were really not bonds that would have to be paid back, then what was the purpose of the 1983 reform - just a regressive general fund tax increase?

Posted by: lagarita at December 23, 2004 01:51 PM


"As a result of reforms to Social Security in 1983, a trust fund was specifically set up as a savings account to pay for baby boomers."

Actually the trust fund was set up by the 1935 law, and didn't prevent SS from going broke in 1973 and again in 1982.

And to call it a "savings account" ... wow ... the asset value of the "savings" in this account -- which can be used by the gov't in lieu of taxes and borrowing to fund future SS benefits -- as reported on the Treasury's Consolidated Balance Sheet of the U.S. is, in dollars ... ?

Hey, why does that number look so much like $0???

And why do the Treasury's notes say those bonds are a _liability_ of the government? That can't be good!!

"In 2003, the Old Age and Survivor's Insurance trust fund received 6.0% interest on its assets, earning $75.2 billion in interest, and the Disability Insurance trust fund received 5.9% interest, earning $9.7 billion in interest..."

Hey, I'm impressed! The government collected $84.9 billion on those trust fund bonds in just one year.

But who did it collect that $84.9 billion from?

"Social Security held a total of $1,531 billion in assets at the end of 2003. If Social Security faces a shortfall in income, the trust fund assets can be used to pay for the additional benefits."

Yeah -- it's just too bad those SS assets are backed only by an unenforceable claim against another account at the Treasury which holds exactly $0 in assets with which to pay them off. ;-(

Pause ... so what is the point of this whole post? To show how calculatedly deceptive folks like EPI can be in political debate ... you know, so people somehow won't pay attention to the *government's own* description of the value of the trust fund and its bonds for financing SS, to wit:

Analytical Perspectives on the 2005 Budget, p.199

"At the time Social Security ... redeems these instruments to pay future benefits not covered by future income, the Treasury will have to turn to the public capital markets to raise the funds to finance the benefits just as if the trust funds had never existed.

"From the standpoint of overall Government finances, the trust funds do not reduce the future burden of financing Social Security."

http://www.whitehouse.gov/omb/budget/fy2005/pdf/spec.pdf

Hey ... "just as if the trust funds never existed" ... what could that mean? Does EPI report that?

BTW, I'll take it for granted that nobody here has reported the study by Prof Smetters (NBER, Wharton) that concludes the value of the SS trust fund for financing SS to date has been *negative* by a trillion dollars or so....

~~ quote ~~

We find that there is no empirical evidence supporting the claim that trust fund assets have reduced the level of debt held by the public. In fact, the evidence suggests just the opposite: trust fund assets have probably increased the level of debt held by the public....

... each dollar of Social Security surplus appears to have actually increased the debt held by the public in the past by $1.76.

At first glance, this dramatic overspending of Social Security surpluses seems entirely implausible. However, the next section presents a simple game theory model that is consistent with this result...

We show how this counterintuitive result can be explained by a simple "split the dollar game" where competition between two political parties exploits the ignorance of voters who don’t understand that the government’s reported budget surplus actually includes the "off-budget" Social Security surplus...
~~~

Let's see EPI report that, and I'll be impressed. ;-)

study:
http://irm.wharton.upenn.edu/WP-security-Smetters.pdf

background:
http://www.scrivener.net/2004/12/is-social-security-trust-fund-worth.html

Merry Christmas!

Posted by: Jim Glass at December 23, 2004 01:59 PM


Lance and lightning have isolated the crucial issue.

Lance believes in the tradition of private industry golden parachutes and such that the federal government must honor debt held by Chase Manhattan and Ross Perot. Further, he believes the federal government has the same obligation to itself as any self-respecting capitalist corporation in tough times to raid their workers pension fund.

Lightning thinks those vested in Social Security have the same claim on the federal government as debt holding wealthy private parties and foreign governments. Enacting legislation that says the Social Security bonds will be honored ahead of the much larger federal obligations outstanding in T-bills would end suggestions by the Right that Social Security is in crisis.

Posted by: CMike at December 23, 2004 02:20 PM


Lance: "However 2018 is the real date not 2042. Maybe it will be 2023 if things go well, but that is the issue. The reason is simple, if the trust fund has to be paid back the money has to come from somewhere. Those bonds have to be redeemed. The money will have to come from general tax revenues or new borrowing."

It is worth repeating that the 1983 plan to save SS had several aspects that are generally glossed over. Taxes were raised, and the surplus revenues were to go into a trust fund. The trust fund purchase of bonds was to be offset by a reduction in other federal debt (at that time, the national debt was about $1.5T). The rest of the government (that part dependent on the general fund) was SUPPOSED TO RUN A BALANCED BUDGET. When the time came for the SSA to redeem their bonds, the intent was to do so by external borrowing. About the time the boomers finished dying off, the overall debt situation would be just about the same as it was in 1983.

Despite the fact that the calculations were done over 20 years ago, the forecasts are really quite close. The economy grew faster than assumed, so the SS surplus will be somewhat bigger. Benefits went up more than forecast, so need to be adjusted somewhat. Even so, with no external debt, the US would have no trouble borrowing $2.5T (about the peak of the predicted SS surplus now that we're closer) over 40 years. Unfortunately, the higher tax rate made it into law and has been enforced. The balanced budget didn't and hasn't.

Posted by: Michael Cain at December 23, 2004 04:03 PM


But is it efficacious?

Posted by: cloquet at December 23, 2004 05:30 PM


Why not send the SS facts to NBC,CBS,ABC,CNN, FOX (well,try) etc. and see if any of these hos will incorporate them into their reporting instead of reporting only on the "crisis". Also, ask them if the budget reversals of the last 4 years are a "crisis" of epic proportions, and if not, why not. Why no reporting on the current crises? And bonds is bonds, so dey is all the same. Legally.

Posted by: TMCotter at December 23, 2004 06:03 PM


"Consequently, it has built up a trust fund over the years."

As Jim Glass and Lance have already pointed out, this is a joke. And a very bad one. About 2018 that will become apparent, as the government will have to either raise taxes or cut other spending to meet its promised SS benefits.

Which is exactly what it would have to do if there was no trust fund. Whoever wrote EPI's--Hi, Max--little piece of disinformation is an economic illiterate.

Posted by: Patrick R. Sullivan at December 24, 2004 07:04 AM


Jim and Patrick,

Seriously, please describe the scenario you have in mind wherein the government defaults on the Treasury issues held by the trust fund. Then, with all the fallout entailed by such a massive hit to the full and faith and credit, explain how/why SS continues to be you number one concern. Keep in mind that, at the height of the crisis, ongoing payroll contributions will still cover over 3/4 of current obligations.

I'm done being smarmy. I just really don't see where you're coming from on this.

Posted by: Julian Apostate at December 24, 2004 08:07 AM


For the record, I didn't write the piece. PS likes to make grand pronouncements about the abject ignorance of others, absent any indication of comparable knowledge. Or any knowledge, for that matter.

I am saddened to see the knowledgeable Jim Glass succumbing to Leninist-oligarchical expropriationism. Kind of like Communist China. This crass lapse in reverence to property rights can do the Nation no good. Anyone -- including the current regime -- who persists in denying the value of the assets in the Trust Fund is really calling for default on a basic obligation of the USG to future retirees. The Catoites are begging for a license to steal.

The Smetters piece goes to the economic impact of a Trust Fund in a PAYGO system. As such, it entirely glosses over the non-trivial matter of a USG financial obligation. More thievery afoot.

Posted by: Max at December 24, 2004 09:33 AM


Lance, it is not clear at all that the bonds will have to be redeemed. It is true that interest will have to be paid, but then again they borrowed the money.

From the piece posted "Higher productivity and consequently faster real wage growth -- which have both historically been about 2.0%—would be more realistic and improve Social Security's finances."

'Improve' is not quite the word here. How about 'fix for all time'. 2.8% growth in 2004, 2.1% in 2005 and 1.9% in the outyears produces result ( I ) per the Social Security Trustees. And this results only in a 16% paydown in the bond portfolio over a 20 year period (600% Trust Fund ratio down to 500%).
http://www.ssa.gov/OACT/TR/TR04/II_project.html#wp106217 2004 Report: Trust Fund Ratios under the Three Alternatives.

Growth rates above the Low Cost Alternative ( I ) will reduce the amount of redemption needed. And guess what: 2004 is rolling in at 4.0% and 2005 is projected at 3.5%. Plug those numbers into the model and that graph moves from flat to skyrocket and bonds will never have to be redeemed.

And this is just misleading: "Yes, the SS is not broke and can pay its bills untill 2042 or later if the economy does well." Social Security can pay its bills until 2042 even if the economic growth slips to 1.6%, not much over the natural population growth of 1.5%. "flatlines" would be more to the point than "does well" here.

http://www.ssa.gov/OACT/TR/TR04/V_economic.html#wp159107 Economic Assumptions under the Three Alternatives.

There is a serious amount of denial on this topic. A system that was at near death in 1982 (54 days of reserve), in ill health in 1996 (1.4 years in reserve) and is now robust (2.9 years at the end of 2003) still draws the same rhetoric all along. The numbers are moving, we are creaming even the "optimistic" numbers, and the narrative needs to move as well.
http://www.ssa.gov/OACT/TR/TR04/VI_cyoper_history.html#wp96419 Right hand column.

Posted by: Bruce Webb at December 24, 2004 10:01 AM


Lance -

Have you tried the same argument on your mortgage holder? You don't have the money to pay the mortgage so THEY should cut their expenses?

Posted by: Dave Johnson at December 24, 2004 12:17 PM