Thought I would hit you with a previous post of mine on one of my (least) favorite topics. I find it really sad that a really obvious crisis looms, and no one wants to take any of the hard steps now. Sheesh people, I understand procrastination (notice the time I post most of my articles on my home board) but taking steps now will be much easier than dealing with it later, and denial isn’t helping anything:
Over at Calpundit I see a post on what Kevin calls the Social Security Non-Crisis. I’m not going to dispute the data he uses, not because I think that the Trustee’s have perfect data, but because even the numbers he is using suggest that there is a crisis.
The Social Security crisis is really a budget crisis with three major components that are Social Security-related. For purposes of this post I am using data from the same report that Kevin uses. But first you have to understand something about Social Security. It is common knowledge, but I want to make it explicit. Social Security is not a retirement fund. It is principally an age-based income subsidy which uses a special tax system to ear-mark funds to support it. For quite a few years, the revenues raised by the ear-marked funds have exceeded the mandated benefit levels. The US government spends that money and issues Treasury bonds to the Social Security Trustees. From the point of view of the Social Security System these bonds are investments. From the point of view of the US government as a whole they are not investments. They are not investments because the US government is both payor and payee of the same bonds when the Social Security trustees hold the bonds.
The above paragraph is completely uncontroversial. Seriously, the politically charged stuff doesn’t come in till below. Also for the purposes of this post I am assuming that not one single non-Social Security budgetary item increases over the next 20 years. (A ridiculous assumption if you have heard of Medicare)
The Social Security crisis has three major components, all of which are based on the fact that the baby boomers are retiring very soon.
First the current ear-marked tax will not cover ear-marked expenditures in the fairly near future. In order for the Social Security expenditures to be met with the incoming revenue stream Kevin notes that we will probably have to do all of the above: cut the cap on the tax, raise the minimum retirement age, and engage in means testing. That is fine, and I agree with all of it (though I want far more extreme means testing) but it only solves the first part of the crisis. Also, considering the extreme (though in my mind inexplicable) Democratic aversion to means-testing I don’t find even the easy fix that likely.
Second, the Treasury Bonds ‘owed’ to the Social Security Trustees have to be paid back in order for the above solutions to be enough to allow expenditures to equal the incoming revenue stream. In Table II.B1 of the link above, you will see in the Total Income section of the report a $71.2 billion entry labeled “Interest”. From the point of view of the US Government as a whole, this is not income at all. It is a liability to be paid through taxation. I have been unable to find data indicating likely interest payments in the future. These interest payments have to be paid out of new taxes. Furthermore in order for Kevin’s supposedly easy plan to work, Social Security will be cashing out the principal of these bonds. If I am reading the chart correctly that totals out to $1.07 trillion dollars. This too will have to be covered by new taxes.
Third, Social Security cash has been used for decades to support the general budget. In 2002 Net Contributions (the ear-marked tax) were $455.2 billion. Total expenditures were $393.7 billion. That is $61.5 billion in cash that has to be replaced in the budget, every single year. (And before someone mentions Iraq, please realize that the Iraq expenditure is in the $80 billion range over multiple years (I believe 20)).
In short there is a Social Security budget crisis. And that doesn’t even touch on the other demographic bombs waiting in our future: the effect of baby-boomer retirements on the economy (slower growth as experience leaves the market), Medicare (so scary I don’t even want to touch it right now), unexpected expenditures (who would guess), or medical advances which make the Social Security expenditures dramatically increase as people live even longer while causing ballooning Medicare expenses (likely I would think).
It’s good to see Kevin finally realizing there is a problem. Good post, here are some more numbers from a good source Concord Coalition.
I don’t see how we get out of this without very, very stringent means testing. The same will have to be applied to Medicare as well. As for the politcs, I suspect gradually tougher means testing over time is more politically palatable than tax increases. Strangely, I think a Dem prez is better able to deal with this “because only Nixon could go to China.”
Whatever the problems with SS, the fact that the government is using it to cover operating expenses does not indicate a “SS crisis”. It indicates a crisis in the general budget.
Whatever the problems with SS, the fact that the government is using it to cover operating expenses does not indicate a “SS crisis”. It indicates a crisis in the general budget.
Not true. Look at the numbers. Even if all SS revenue had been put in a “lockbox,” the system is still insolvent.
The unfunded liabilites from SS and Medicare dwarf the problems in the general budget.
“The unfunded liabilites from SS and Medicare dwarf the problems in the general budget.”
Far as I understand, SS is tweaks away from permanent solvency – politically difficult but not that painful for the country. While Medicare needs extensive surgery – societal-level reengineering.
“It’s good to see Kevin finally realizing there is a problem.” This seems either wrong or unreasonably snarky – Kevin has posts consistent with the one just referenced going back at least a year.
Far as I understand, SS is tweaks away from permanent solvency – politically difficult but not that painful for the country.
Quite. Exceedingly painful, however, for the people to whom the Bush tax cuts are targetted (those with an income of over $130K a year). Because it will mean giving up their wonderful tax cuts. (Not under Bush, of course. Sheesh, Bush doesn’t even want people in his income bracket to help pay for the war in Iraq.)
While Medicare needs extensive surgery – societal-level reengineering.
Medicare needs to be replaced by a universal single-payer health scheme. This is also obvious, though very painful for those who make such enormous profits out of the current broken-down system.
I know that the majority of the right-wingers who cling so stubbornly to the tax cuts and the failed US health “system” don’t actually benefit from them: there just aren’t that many people in the country who do. To quote Teresa Nielsen Hayden: “Just because you’re on their side, doesn’t mean they’re on your side.”
Oh, man, oh, man. Warnings like this about SS have been floating around since I was (cue Cartman voice) a g’dd’m hippie. I’ve always believed it, and always marvelled at how the powers that be tend to ignore it (or offer up superficial solutions.) Well, the distant future in which the system finally, undeniably goes belly-up is nearly upon us. Hopefully, some politician(s) will have the cohones to fix it… and not at the cost of their jobs or campaign prospects (I’m not convinced there won’t be pain, but I’m no economist). Oh, well, I’ve never expected to get any of that SS tax money back, anyway… born after the baby boom, you see. As for health care, I’ve spent a few years under socialized medicine (the Japanese variety). The paperwork’s a royal pain, but I never have to worry about health problems (even chronic ones) becoming such a financial liability that I literally get left out in the cold… and the docs can somehow still afford to drive nice cars. (Oh, I almost forgot, end Cartman voice… like that was hella obvious, you guys.)
While several fixes to social security are mentioned frequently (raise/abolish FICA max, raise retirement age, means testing) there’s another one that’s rarely mentioned: increase the base. There are too many workers exempted from paying FICA. And the number is growing.
I think the best fix would be to exempt a large number of people from receiving Social Security checks. I don’t think the government needs to be paying retirement money to rich and middle class people who are perfectly capable of (and in fact do) preparing for their own retirement. Make it more of a minimum income for retirees. Tinker with how it phases out so that there isn’t an incentive for people near the border to blow their money, and move on.
“Whatever the problems with SS, the fact that the government is using it to cover operating expenses does not indicate a “SS crisis”. It indicates a crisis in the general budget.
Argh. Ok, call it a crisis in the general budget triggered by demographic changes which were not forseen when Social Security was first designed but which are linked to the method of Social Security payments when comparing receipts with outlays. Calling it a ‘general budget’ crisis changes precisely zero of the problems I outline in the post.
In a nutshell the problem is that Social Security taxes have been used as a slush fund for decades. That money will soon not be available. Either the programs they are paying for will have to be cut, or taxes will have to be raised to cover it, or both. Additionally this money was ‘borrowed’ from Social Security with Treasury Bills. These are assets on the Social Security books, but in any useful accounting structure for the government as a whole they are debts which are repayed through higher taxes.
Rilke,
Kevin’s prior efforts IIRC uniformly claimed only a raise in FICA was necessary to “fix” SS. In his latest piece he adds means testing and benefits reductions as well. That’s a significant shift in position in my book.
Sebastian, so do you now agree that Bush’s tax cuts, targetted to benefit the very rich, were appallingly stupid and ought to be reversed?
Sebastian: your point #2 is incorrect. My post was based on the assumption that all of Social Security’s treasury bonds are never redeemed. If you assume that the bonds are redeemed, the problem is way smaller. (I did this partly for the reason you suggest, and partly just to avoid the aggravation of nitwit arguments about whether the trust fund is “real” or not.)
spc67: if you take the trust fund into account, raising the FICA cap is all that’s necessary. In fact, I think it’s more than is necessary. The post Sebastian links to is the only one I’ve done where I don’t take the trust fund into account. (See above for reasons.)
As Sebastian notes, even aside from SS we have a pretty well known fiscal problem. SS surpluses cover up a small part of the deficit right now, which means the deficit is really a bit worse than it seems. However, solving this is a whole different subject.
I should add that this whole thing is only a “crisis” if you think that any proposal that raises taxes constitutes a “crisis.” Conservatives have been extremely successful at pushing this idea, but that doesn’t make it true.