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March 09, 2011

Five Social Security Non-Myths

Greg Anrig

Eric Schurenberg, the editor-in-chief of BNET and CBSMoneyWatch.com, is a good friend of mine going back to the 1980s, when we worked together at Money magazine. We generally get along great -- as long as we stay away from the subject of Social Security. But since Eric has just written a piece for The Fiscal Times describing five purported myths about the program that are actually facts, and since Eric and I both started as fact-checkers, I have little choice but to set the record straight.

The confusion in the article arises from an inadequate presentation of the 1983 Social Security reforms that were signed into law by President Reagan. At the time, the program was genuinely on the verge of a crisis, with the payroll taxes financing the system months away from falling short of the amount needed to pay beneficiaries. The bi-partisan solution entailed accelerating  payroll tax increases, a six-month delay in the annual cost-of-living adjustment, a phased-in hike in the retirement age (which amounts to across-the-board benefit cuts), and the imposition of income taxes on some Social Security benefits.  

In addition to covering the immediate shortfall, those changes greatly strengthened the financing of the program so that it would be sustainable decades into the future as the large cohort of Baby Boomers retired. Under the reforms, working age Baby Boomers started paying taxes in excess of benefits owed to current retirees. The surplus revenue was credited to the Social Security trust fund in the form of U.S. Treasury securities. That committed the government to fully paying retirement benefits to the boomers in the future by supplementing payroll taxes with general revenues -- the interest and principal owed on the trust fund securities. In exchange for the higher payroll taxes, the creation of a large and growing trust fund would ensure that those workers received benefits after they retired. That trust fund now amounts to about $2.6 trillion and will continue to grow until 2025, peaking at $4.2 trillion. Those figures come from the latest report of Social Security’s Board of Trustees, which is written by non-political professional actuaries.     

The basic deal with the American workforce in 1983 was this: the government would raise taxes on them in exchange for a binding mechanism to ensure that they would receive adequate Social Security benefits in the future. Here is what Reagan said at the signing ceremony: “This bill demonstrates for all time our nation's ironclad commitment to Social Security. It assures the elderly that America will always keep the promises made in troubled times a half a century ago. It assures those who are still working that they, too, have a pact with the future. From this day forward, they have our pledge that they will get their fair share of benefits when they retire.”

Now that the context is clear, let’s turn to Eric’s “myths:”

1.      Social Security didn’t create the deficit.

That’s a fact, not a myth. Since 1983, the Social Security surplus has actually reduced overall federal deficits far below what they otherwise would have been. The surplus payroll tax revenue, after being credited to Social Security’s trust fund, was used to finance other governmental operations. So in the absence of that surplus, the federal government would have had to either borrow more to finance the same level of non-Social Security expenses, raise taxes from other sources, or spend less than it did.

The federal government’s overall balance sheet shifted from surpluses to deficits during the early years of the George W. Bush administration because of his huge tax cuts, increased defense and homeland security spending with the launching of two wars, and the unfunded Medicare drug benefit. Then, the Great Recession caused tax revenues to crash, which made already large deficits much deeper. But throughout that period and continuing to this day, federal deficits would have been much worse if Social Security had not been collecting substantially more in payroll taxes than it paid in benefits. The federal debt would be much higher than it currently is. So, no, Social Security didn’t create the deficit.  

The year 2010 was the first one since 1983 in which the program’s total expenses (for benefits and administrative costs) exceeded its income from payroll taxes plus the income taxes collected on some Social Security beneficiaries. That temporary imbalance of $41 billion was a consequence of reduced revenues attributable to the economic downturn. The gap was covered by a small slice of the interest owed on the Treasuries in the trust fund, which is payable from general revenues. That interest would have been owed by the general fund whether or not current payroll tax revenues fell short of benefit commitments.

It is worth noting that the temporary payroll tax cut enacted at the end of last year to help boost the economy will indeed add to this year’s deficit. But as long as it expires as scheduled at the end of this year, its impact on the overall governmental balance sheet will be negligible in the future.

The actuarial projections show that aside from the temporary payroll tax cut, the Social Security gap will shrink in 2011 and return to surplus in 2012. Then in 2015, revenues from payroll taxes and income taxes owed by retired beneficiaries on their Social Security income will fall short of benefits of owed and continue to fall short going forward. That will again require some of the trust fund’s interest income to cover the gap. But even still, according to the actuaries, the trust fund will continue growing for another 10 years because it will be earning more than enough interest to finance benefits owed.

The amount of interest that the federal government pays on the Treasury securities in the trust fund is relatively easy to project for the future, like many other categories of spending. To say that Social Security is “creating” deficits and causing them to become much larger in the future when all that is happening is that some of the trust fund interest is going to beneficiaries rather than the trust fund itself is deeply misleading. Just as planned in 1983, the added cost of the retiring baby boomers will begin to be financed by general revenues to supplement payroll tax income. Nothing about that long expected evolution requires a change in policy, including cutting benefits.       

2.      Social Security benefits are earned; reducing them amounts to confiscation.

Social Security benefits are, in fact, directly connected to past wages based on a long established formula that was tweaked in 1983. Because workers throughout their careers have financed the program through an earmarked payroll tax, they have a legitimate basis for believing that they will receive benefits when they retire that are connected to their past earnings. They also have reason to believe that a high political cost should be paid by elected officials who change the terms of that arrangement. Given the near disappearance in the private sector of  old-fashioned defined benefit pensions, which also were based on past wages, Social Security is an even more necessary bedrock against the risk of facing an economically insecure retirement.

3.      Social Security is funded until 2037.

Again, there’s nothing mythological about the forecasts of Social Security’s actuaries, which first mention the year 2037 as the depletion date for the program’s trust fund on page 3 and many times thereafter in their 235-page report.  Here Eric quotes another former colleague from Money named Allan Sloan, an otherwise astute financial writer who has been railing for years about Social Security and the trust fund:  “…the U.S.  government ultimately has to pays its bills with cash, not with its own IOUs. In the long run, you need cash—real money-–not funny money.”

Listen to the similarity between Sloan today and Alf Landon, the Republican who ran against Franklin Delano Roosevelt in 1936. Calling Social Security a “cruel hoax,” Landon’s platform stated, “The so-called reserve fund is no reserve at all, because the fund will contain nothing but the fund’s promise to pay.” In reality, Social Security has paid all promised benefits in full in the 75-years since, even as the program greatly expanded throughout that period, and there’s no basis for believing the “funny money” argument is any more credible now that it was then.

Backed by the full faith and credit of the U.S. government, the interest and principal on the Treasury securities in the trust fund will be paid back in full by taxes collected in the future -- just as the government has paid back interest and principal on all securities that the government has ever been issued. No additional burden is placed on future taxpayers due to Social Security beyond the commitment that was already made through the reforms in 1983.

We know that Social Security’s burden is going to rise very gradually, from just below 5 percent of GDP today to just over 6 percent by 2030, and remain at that level indefinitely thereafter. That’s a relatively modest and manageable increase, particularly compared to the anticipated explosion in health care costs. Medicare and Medicaid combined also amount to about 5 percent of gdp today, but are expected to roughly double to 10 percent by 2030 and continue to grow inexorably beyond that date.   

4.      The trust fund is invested in bonds, the most secure investment in the world. To suggest that the trust fund wouldn’t pay is blatant fear-mongering.

This is basically the same non-myth as item three. Eric writes, “The issue is whether taxpayers think it’s so important to maintain Social Security benefits that they will gladly absorb the burden of paying off those bonds on the current schedule. Remember Congress (that is, you know, taxpayers) can cut benefits – and thus postpone the need for Social Security to redeem any bonds – just by passing a law.”

Social Security is far and away the most popular government program, and virtually every cross-section of the public -- including Tea Party supporters –- by large margins supports the statement that “the costs of Social Security are worth the benefits.” Given that decisive and highly consistent public opinion, efforts to cut Social Security benefits in Washington would run counter to the preferences of average citizens. It is plausible that because our political system has become highly dysfunctional, that could still happen -– particularly when wealthy donors who are ideologically hostile to the program carry so much sway. But that scenario would not be an outgrowth of the will of the people.

5.      Social Security is an easy fix.

Nothing is easy in Washington, but relative to a multitude of other public policy challenges, preventing a shortfall in Social Security after 2037 is a relatively manageable task. The projected 75-year gap between promised benefits and resources committed to the program is 0.7 percent of gdp. By way of comparison, rescinding the Bush tax cuts on only taxpayers earning over $200,000 (single) and $250,000 (married) would generate the same 0.7 percent, according to the Center on Budget and Policy Priorities. Another way to fill the gap entirely would be to remove the $106,800 cap on each worker's earnings that is subject to the payroll tax.     

I’m looking forward to seeing Eric soon for lunch or a drink, and catching up on everything except the condition of Social Security.


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Some other pertinent points.
1. The reason there is still a shortfall in the 75 year projections is because the 1983 commission failed to predict the large increase in inequality we now have. Because so much wealth is concentrated in the top income earners, a smaller proportion of total income is taxed by the $106,000 tax cap. Raising that cap to capture the appropriate level of income would solve that problem.

2. Because baby boomers paid into the trust funds and paid current beneficiaries they essentially paid for the retirement if previous generations and pre-funded much of their retirement. Using the trust fund for tax cuts for the rich would be the most massive theft in history. But because it would be taking from the poor and giving to the rich our media and politicians love the idea.

3. Al Gore was right about the lock box.

Allen W. Smith, Ph.D.

You have left out of your discussion the fraudulent looting of Social Security that has been taking place for the past 25 years. The surplus revenue, generated by the 1983 payroll tax hike, was supposed to be SAVED and used to purchase pre-existing marketable Treasury bonds in the open market, thus temporarily paying down the public debt. Then, when the baby boomers retired, the S.S. trustees could have resold those marketable bonds to raise cash with which to pay benefits to the boomers. THIS WAS NOT DONE!

When the first surplus showed up in 1985, instead of saving the money and investing it in real marketable bonds, the government diverted the money to the general fund where it was spent on general government operations. That practice has continued to this day. Every dime of the $2.6 trillion in surplus Social Security revenue has been run through the general fund and spent on wars and other government programs. None of it was saved! Money can be spent or it can be saved. If it is saved, it can also be invested. But once money is spent, there is nothing left to invest. Anyone can verify that none of the Social Security money was saved or invested by looking at the federal budgets for the past 25 years. The total spending by the federal government, including payments of Social Security benefits, greatly exceeded the total revenue,including payroll tax revenue. The government spent all of its general revenue, plus all of the Social Security surplus revenue, plus a great deal of additional borrowed money. The spent money was replaced with non-marketable IOUs which have no real economic value. The government has made no provisions for repaying the looted money.

As for your reference to Allan Sloan, he is one of the true giants in the field of business writing. He is an independent thinker who has done more than any other journalist to expose the awful truth about the Social Security trust fund. I know a little bit about the subject, myself. I have dedicated the past ten years of my life to researching and writing about Social Security funding, and I have published four books on the subject. The latest is "The Looting of Social Security: New release of the book "they" didn't want you to read."

Allen W. Smith, Ph.D.
Professor of Economics, Emeritus
Eastern Illinois University

Allen W. Smith, Ph.D.

"will be paid back in full by taxes collected in the future -- just as the government has paid back interest and principal on all securities that the government has ever been issued."

The statement that the government has always paid back money it owed to Social Security is meaningless. The government never borrowed any sizeable ammount from Social Security prior to the 1983 legislation because Social Security did not run sizeable surpluses in the past. If a person had borrowed $100 from a bank in the past, and repaid it, the bank would not consider that prior record as proof they could loan $100,000 or $100 million to the person without risk. The $2.6 trillion was supposed to be saved and invested in marketable bonds. The very fact that the government betrayed the public trust and used that money for general revenue purposes tells us just how little we can trust the government.


"You have left out of your discussion the fraudulent looting of Social Security that has been taking place for the past 25 years."

Actually, he covered it right here:

"The surplus payroll tax revenue, after being credited to Social Security’s trust fund, was used to finance other governmental operations. So in the absence of that surplus, the federal government would have had to either borrow more to finance the same level of non-Social Security expenses, raise taxes from other sources, or spend less than it did."

Emeritus? Indeed.

Joe T Economist

"That’s a fact, not a myth. Since 1983, the Social Security surplus has actually reduced overall federal deficits far below what they otherwise would have been."

You are cheating and Eric isn't. You are only looking at the positive of side of the unintended consequences. If FICA didn't exist the 12.4% would able directed to the general fund in the form of taxes greatly reducing the deficit. We have a country where a 1/3 to 1/2 have no income tax obligation. That is in some part caused by the fact that tax burden created by FICA leaves nothing left over to tax.

Joe T Economist

I am not sure whether you are playing with words or don't understand the law.

"Social Security is funded until 2037."

Social Security is primarily a PAYGO system - interest covers about 20% of the benefits. Without ongoing contributions the system would be funded for 5-10 years. To call contributions that have not even been made 'funded' stretches the imagination.

"Social Security has paid all promised benefits in full in the 75-years since, even as the program greatly expanded throughout that period"

Whenever Social Security couldn't pay its benefits, Congress redefined the benefits so that it could. The retirement age has been increased. Income taxes have been applied to benefits. The only thing that has expanded greatly is the cost. What increase are you talking about?

Joe T Economist

Actually the worst myth you are supporting is that the fix isn't easy. WWW.FixSSNow.Org lists an easy fix.

The idea that you can raise taxes or lower benefits is crazy. The problem with Social Security is the economic return for younger workers. It is terrible, and you are suggesting that the way to fix the system is to make it worse. If you continue to lower benefits and raise taxes, you will only ensure that future voters vote the whole thing away.

As for strong support for the system, I think you don't get out enough. Our research suggests that there is virtually no support for the system in the under 45 age bracket once they look at the problems that the system is causing. That is zero.

Here is what I hear : 1/2 of my taxes go to pay for the retirees and the debt that they created. You can say how SS has lowered the deficit all you want. People understand that Boomers chose to not pay income taxes. They understand that the Boomers chose unfunded government spending. When it comes time to choose between the boomer retirees and the interest on that debt - it will be a easy choice. Well for the voters anyway.

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