Below is a compendium of some fact-following and research I've done on the problems with Social Security and Bush's proposed solutions.
Brad DeLong puts it succinctly:
The Social Security Trust Fund may well not be in crisis--relatively minor changes will put it into 75-year expected balance, and there is good reason to think that the 'expectations' of the Social Security actuaries are pessimistic. [For more on this last point, see recent Drum here.--Paul]--DeLong makes the point visually--and powerfully--here.However, the General Fund--the non-Social Security part of the government--is in crisis. The General Fund is now in deficit to the tune of 5.5% of GDP. Within a generation General Fund taxes will have to go up (or spending will have to go down) by enough to (a) close this deficit, (b) cover cost growth in Medicare and Medicaid, (c) deal with other unexpected contingencies, and (d) produce a 2.5% of GDP surplus to pay back the Treasury Secretary's obligations to the Managing Trustee of the Social Security Trust Fund.
It's a crisis. It's a big crisis. It's just not a Social Security crisis per se...
--Here are a number of pertinent and perspicuous pieces on SS by Krugman: I, II, III, IV:
The Wehner memo talks of borrowing $1 trillion to $2 trillion "to cover transition costs." Similar numbers have been widely reported in the news media.--It is worth noting again, that borrowing now to fix a slow, slow-leak problem like SS has effects that proponents of SS "reform" won't tell you about. Here's the centrist Brookings Institution (pdf) on what the effects of just the deficits caused by Bush's tax cuts are doing to average families:But that's just the borrowing over the next decade. Privatization would cost an additional $3 trillion in its second decade, $5 trillion in the decade after that and another $5 trillion in the decade after that. By the time privatization started to save money, if it ever did, the federal government would have run up around $15 trillion in extra debt.
If nothing is done...The interest on this extra borrowing will cost the average household $3,000 a year [because of higher interest payments on, for example, mortgages], and the economic effects of the deficits will also lower its income by an estimated $1,800 [because of less growth in income]. (15)Why in the world would we want to do that to families, when SS can continue paying benefits, debt-free, for at least the next 40 years?
--Media Matters helpfully links to SS Board of Trustees report:
while "the financial difficulties facing Social Security" should be addressed "in a timely manner," the program is "considered financially adequate throughout the short range ... through the year 2013." The report estimated that Social Security "assets are projected to be exhausted in 2042," at which point, if left unchanged, "tax income would cover 73 percent of costs," and that the system could still pay out 68 percent by 2078.--And the CBO report:
"outlays are projected to begin exceeding revenues in 2019" but that "[t]he expected trust fund exhaustion date -- the year in which the trust fund balance (and thus the trust fund ratio) falls to zero -- is 2052 in CBO's projection."--This article cites J.P. Morgan Chase's senior U.S. economist James Glassman's doubts about the Trustees' projections:
[Those] projections are based on a dire view of the nation's economic future, one in which the growth in economic productivity crashes from the 3.4 percent rate of last year to 1.6 percent from 2012 on. Economic growth is anticipated to be cut nearly in half from historic trends, to 1.8 percent between 2015 and 2080.--Drum uses Congressional Budget Office charts to show just how bad Bush's proposal is compared to leaving the system alone; and more common sense from Drum here.
...
"Under the trustees' projections, growth is going to slow to half the pace we've been growing for 150 years," Glassman said in an interview. "That might be, but I don't know why I should believe that."
--DeLong offers a concise account of the problem, Bush's "solution", and some forward-looking proposals to fix the minor, slow-leak problem of social security.
--Matthew Yglesias makes an important point:
The true shell game only gets started, however, when the advocates of cuts get around to explaining that nothing's really being cut here because people can make up the difference with the earnings from their private accounts. As we've seen previously, the estimated level of stock market growth that could make this true depends on an underlying assumption of an economic growth rate that's high enough to keep Social Security fully solvent without any changes.When we assume changes in the future for the sake of a thought-example, we must recognized that we're thinking about a changed future.
The Social Security Trustees estimate that over the next 75 years the program faces a budget shortfall of $3.7 trillion. As we've noted previously and will again, the Trustees use a very pessimistic estimate of future economic growth to arrive at that figure. But, for the moment, let's stipulate to that amount.--Some Republicans are wary:$3.7 trillion is a lot of money. But how much will the president's Medicare drug benefit plan cost over the next 75 years? $8.1 trillion, say the Trustees of that program. And over the next 75 years how much will the president's 2001 and 2003 tax cuts cost if made permanent, as the president wants? $11.6 trillion. So you add that up and you get $3.7 trillion we need to cover Social Security's shortfall and $19.7 trillion we need just to cover the costs of the two major domestic policy initiatives of the president's first term. And yet Social Security, says the president, is in crisis and destined to chew through the rest of the federal budget.
"Why stir up a political hornet's nest . . . when there is no urgency?" said Rep. Rob Simmons (Conn.), who represents a competitive district. "When does the program go belly up? 2042. I will be dead by then."But remember, the 2042 date is the date the Social Security trustees say the trust fund will be depleted (CBO says the date is 2052, see above); even after the trust fund is empty, Social Security revenues will still cover 81 percent of the promised benefits. The Washington Post reports that CBO concludes that even after the trust fund runs out (whether in 2042, 2052, or later), SS checks will still be higher (in inflation-adjusted dollars) than they are right now:
Even after adjusting for inflation, that 27 percent cut in benefits [after the trust fund runs out] would leave monthly Social Security checks considerably higher than they are now. If nothing is done, a worker retiring in 2055 would receive first-year benefits totaling $16,700 in today's dollars, considerably less than the promised $21,600 but more than today, according to the Congressional Budget Office.Recall also that SS revenues come from a 12.4 percent payroll tax (half paid by worker, half (nominally) paid by employer), but that the tax is levied on only the first $90,000 of one's income. I'm doing a bit of off the cuff research right now to determine whether eliminating that cap would remove all of SS's problems. I have stumbled upon this post at NathanNewman.org, which seems competent and well-supported by evidence, arguing that eliminating the cap will do much of the needed work. And that seems to be the Social Security Trustee's judgement too (PDF):
In 2001, earnings in employment covered by Social Security that exceed $80,400 are neither subject to payroll tax nor considered for calculating benefits. This “contribution and benefit base” increases automatically each year with increases in the average wage. Currently, about 84 percent of all covered earnings are below the base, but this percentage has been falling from about 90 percent in 1983 and is projected to continue to fall to about 83 percent in 2010.--Atrios draws us to this analysis of the British experience with privatization:Making all earnings covered by Social Security subject to the payroll tax beginning in 2002, but retaining the current law limit for benefit computations (in effect removing the link between earnings and benefits at higher earnings levels), would eliminate the deficit. If benefits were to be paid on the additional earnings, 88 percent of the deficit would be eliminated.
Britain’s experiment with substituting private savings accounts for a portion of state bene?ts has been a failure. A shorthand explanation for what has gone wrong is that the costs and risks of running private investment accounts outweigh the value of the returns they are likely to earn. On average, fees and charges can reduce pension lump sums by up to 30 percent on retirement. The nation’s savings industry, which sells those private accounts, has already acknowledged this. Which brings us to irony No. 2: Just as the United States prepares to funnel untold billions to its private sector for the management of private accounts, back in 2002, many U.K. insurance companies, mindful of tough new rules against giving bad advice, began to write to their customers urging them to consider abandoning their private savings and returning to the state pension system -- something hundreds of thousands of Britons have done already.Here's Krugman on the British experience, and the New York Times on the failures of the Chilean experience.
--Here's an article from CBS MarketWatch (via Angry Bear) that pits Bush against the facts I've been laying out:
Bush vs. factsEPI economist Max B. Sawicky summarizes the findings of this CBO study, portions of which comprise a "Model 2", the plan the Bush administration currently seems to favor:Bush: "As a matter of fact, by the time today's workers who are in their mid-20s begin to retire, the system will be bankrupt. So if you're 20 years old, in your mid-20s, and you're beginning to work, I want you to think about a Social Security system that will be flat bust, bankrupt, unless the United States Congress has got the willingness to act now."
The facts: The Social Security system cannot go "bankrupt," for it has no creditors. By law, the trustees will continue to pay reduced benefits even if the trust fund is exhausted. Payroll taxes will continue to come in and benefits will continue to be paid.
According to the trustees' intermediate economic forecast (neither doom nor boom), the trust fund will be able to pay about 73 percent of scheduled benefits in 2042 and about 68 percent of scheduled benefits in 2078.
Future presidents and Congresses could also choose to fully fund scheduled retirement benefits from general tax revenue.
Bush: "Most younger people in America think they'll never see a dime."
The facts: Social Security says younger people will see a lot more than a dime. Their retirement benefits - even under a "flat-bust" system -- will be significantly higher than today's benefits in real terms.
For low-income Americans, currently scheduled benefits for those who retire in 2080 are $19,906 per year in 2004 dollars. If Social Security can pay only 68 percent of those benefits, that would be $13,536 per year, compared with benefits of $8,804 for low-income retirees who retired last year.
For the highest earners, Social Security is currently promising $53,411 per year for those who retire in 2080 (or $36,319 per year if Social Security can pay only 68 percent). Current maximum benefits are $21,891 per year for those who retired last year.
Bush: "In the year 2018, in order to take care of baby boomers like me and -- (laughter) -- some others I see out there -- (laughter) -- the money going out is going to exceed the money coming in."
The facts: According to the SSA, costs are projected to exceed income, including tax revenues and interest income from the trust funds' bonds, starting in 2028, not 2018. The 2018 date is when tax revenues alone no longer meet costs; workers have been paying extra taxes since 1983 to build up the trust funds' assets for just this eventuality.
In Table 2 of this study, we get estimates of benefits resulting from this ["Model 2"] approach. Since it's all about the kids, we should start with the impact on what's called the "10-year birth cohort starting in year 2000." Kids born after January 1, 2000. We focus on the middle of the middle, as far as income distribution goes ("median in middle household earnings quintile").So why does Bush say things like this:If Little Nell is this type of person, in retirement she would be due $26,400 a year in benefits annually under current law. This would require some kind of infusion into the Trust Fund after 2052 (when CBO says it runs a shortfall). With no such infusion, alas Little Nell can only be paid $19,900 (everything here is constant 2004 dollars). (The same type of person retiring today -- "the 1940 birth cohort" -- gets $14,900.)
Let's chew on that for a second. With no transfer of revenue into the Trust Fund after 2052 (as opposed to redemptions of its assets with general revenue), Little Nell still does quite a bit better than a retiree today.
This is a crisis? Surely we can do better. What about the excellent reform envisioned by G. Bush?
When you include the returns to the individual accounts and "price indexing" of benefits, Little Nell's benefit is . . . $14,600. SHE DOES WORSE THAN UNDER THE "BANKRUPT" TRUST FUND! Way worse! Can you hear me now? She even does worse than a current retiree.
The president looked at [27 year-old Josh] Wright approvingly. "At your age," he said, Social Security "will be bust by the time it comes for you to retire."He says it because he wants you to think about a SS system that will be bankrupt; that is, he wants you to think of a system utterly unlike the one we have."If you're 20 years old, in your mid-20s, and you're beginning to work, I want you to think about a Social Security system that will be flat bust, bankrupt...
--Drum's Dialogues on Social Security, and a good piece in the Christian Science Monitor.
And even looking into the science-fiction future of the Social Security Trustees' 75-year planning period, the projected shortfall is less than what we fixed in each one of the decades of the '50s, '60s, and '80s. In other words, according to the president's own numbers, Social Security is financially stronger today than it has been throughout most of its history. If we use the projections of the nonpartisan Congressional Budget Office, it's even better: Social Security is rock-solid for nearly half a century.Posted by Paul at January 9, 2005 09:00 PM
