Mike Kueber's Blog

December 8, 2012

Who has their head in the sand regarding Social Security?

Filed under: Economics,Issues,Politics,Retirement — Mike Kueber @ 2:13 pm

When Republicans urge that entitlement reform – Medicare, Medicaid, and Social Security – is desperately needed to get America out of its distressing financial situation, the Democrats respond that Social Security should be taken out of that discussion because it is not part of American’s fiscal problem.  Who is right?

The Democrats’ response is accurately reflected by the following so-called myth about Social Security published by Daily Finance:

  • “Here’s the source of the confusion: Historically, Social Security has collected more than it paid out. The extra money built up in a trust fund that collects interest. But due to demographic and economic changes (more on that in a minute), it’s expected that insurance payments will begin to exceed income in 2021. Around 2033, the fund will run out.  But even then, the revenue Social Security collects each year would still be enough to pay out about three-quarters of scheduled benefits as far as the eye can see

Upon closer examination, however, the Democratic response is revealed as a gross misrepresentation of Social Security’s effect on America’s solvency.  Most casual observers of Washington’s fiscal insanity know that a couple of years ago Social Security became a drain on the federal government – i.e., the program spent more in benefits than it was taking in on taxes.  So how does that gibe with Daily Finance statement that the negative cash flow begins in 2021?  This apparent contradiction is caused by the Daily Finance conclusion that Social Security trust fund “income” includes imaginary interest that federal government is paying on imaginary IOUs. 

Fiscal conservatives have argued for years that the concept of a trust fund and IOUs from the general fund is misleading because the health of the trust fund and the general fund are inextricably intertwined.  The fact is that Social Security is already a drain on the federal treasury, as the SS Trustees recently admitted it is annual report:

  • Social Security’s expenditures exceeded non-interest income in 2010 and 2011, the first such occurrences since 1983, and the Trustees estimate that these expenditures will remain greater than non-interest income throughout the 75-year projection period. The deficit of non-interest income relative to expenditures was about $49 billion in 2010 and $45 billion in 2011, and the Trustees project that it will average about $66 billion between 2012 and 2018 before rising steeply as the economy slows after the recovery is complete and the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Redemption of trust fund assets (IOUs) from the General Fund of the Treasury will provide the resources needed to offset the annual cash-flow deficits. Since these redemptions will be less than interest earnings through 2020, nominal trust fund balances will continue to grow. The trust fund ratio, which indicates the number of years of program cost that could be financed solely with current trust fund reserves, peaked in 2008, declined through 2011, and is expected to decline further in future years. After 2020, Treasury will redeem trust fund assets in amounts that exceed interest earnings until exhaustion of trust fund reserves in 2033, three years earlier than projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2086.

Incidentally, the Trustees also explained in the same report that the Social Security tax holiday did not damage the long-term solvency of the trust fund because of further artificial accounting:

  • A temporary reduction in the Social Security payroll tax rate reduced payroll tax revenues by $103 billion in 2011 and by a projected $112 billion in 2012. The legislation establishing the payroll tax reduction also provided for transfers of revenues from the general fund to the trust funds in order to ‘replicate to the extent possible’ payments that would have occurred if the payroll tax reduction had not been enacted. Those general fund reimbursements comprise about 15 percent of the program’s non-interest income in 2011 and 2012.

It’s time to jettison the never-accurate belief that Social Security is a retirement account that takes in our contributions, preserves and grows them, and finally returns them to us in our retirement.  It is time to recognize Social Security as a quasi-welfare program (its payout is much more generous to low contributors) that has already distributed most of our contributions (to overpay earlier recipients).  The result is that federal government, just like many public and private pensions, has trillions of dollars of unfunded liabilities that our children will have to pay while they receive diminished benefits. 

Failing to act now to correct this injustice to our children will only exacerbate it.  Who’s in favor of that?


1 Comment »

  1. Mike, I work with Fix Social Security Now. Our site http://www.FixSSNow.Org provides one-stop shopping for people interested in reform.

    The only thing that I would disagree with you on is that Social Security became a drain a long time ago. In the mid-1970s we created the EITC to offset the high cost of payroll taxes for lower wage Americans. It is a subsidy just like the payroll tax holiday.

    We are less optimistic about the system than you are. We don’t think that this problem is about our kids anymore. It is about us and the way our parents will live in retirement. Social Security is a political priority subject to change. You see our children paying the trillions of dollars for us, where as I think that they vote for politicians who reshape the system on much less favorable terms.

    I would disagree with you about making Social Security a welfare program. If you think it is bad now, wait until someone else pays for it. The payroll tax pain is the only pressure that exists to reform the system. By making it a welfare system, you only encourage people to arrive at retirement in poverty. This is what Social Security’s OAS was suppose to prevent.

    “Failing to act now to correct this injustice to our children will only exacerbate it. Who’s in favor of that?”

    The politicians are in favor of telling you that it isn’t a problem. Social Security is – you know – structurally sound. The only thing that will change them is an audience of people who want reform. That is what we are trying to create. Let me know if you want to help because without some pressure politicians will continue to do nothing.

    Comment by Joe The Economist — December 8, 2012 @ 3:36 pm | Reply

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