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The Truth Behind the Social Security and Medicare Alarm Bells
What are we to make of yesterday's report from the trustees of the Social Security and Medicare trust funds that Social Security will run out of assets in 2037, four years sooner than previously forecast, and Medicare’s hospital fund will be exhausted by 2017, two years earlier than predicted a year ago?
Reports of these two funds' demise are not new. Fifteen years ago, when I was a trustee of the Social Security and the Medicare trust funds (which meant, essentially, that I and a few others met periodically with the official actuary of the funds, received his report, asked a few questions, and signed some papers) both funds were supposedly in trouble. But as I learned, the timing and magnitude of the trouble depended a great deal on what assumptions the actuary used in his models. As I recall, he then assumed that the economy would grow by about 2.6 percent a year over the next seventy-five years. But go back into American history all the way to the Civil War -- including the Great Depression and the severe depressions of the late 19th century -- and the economy's average annual growth is closer to 3 percent. Use a 3 percent assumption and Social Security is flush for the next seventy-five years.
Yes, I know, the post-war Baby Boom is moving through the population like a pig through a python. The number of retirees eligible for benefits will almost double to 79.5 million in 2045 from 40.5 million this year. But we knew that the Boomers were coming then, too. What we didn't know then was the surge in immigration. Yet immigrants are mostly young. Rather than being a drain on Social Security when the Boomers need it, most immigrants will be contributing to the system during these years, which should take more of the pressure off.
Even if you assume Social Security is a problem, it's not a big problem. Raise the ceiling slightly on yearly wages subject to Social Security payroll taxes (now a bit over $100,000), and the problem vanishes under harsher assumptions than I'd use about the future. President Obama suggested this in the campaign and stirred up a hornet's nest because this solution apparently dips too deeply into the middle class, which made him backtrack and begin talking about raising additional Social Security payroll taxes on people earning over $250,000. Social Security would also be in safe shape if it were slightly more means tested, or if the retirement age were raised just a bit. The main point is that Social Security is a tiny problem, as these things go.
Medicare is entirely different. It's a monster. But fixing it has everything to do with slowing the rate of growth of medical costs -- including, let's not forget, having a public option when it comes to choosing insurance plans under the emerging universal health insurance bill. With a public option, the government can use its bargaining power with drug companies and suppliers of medical services to reduce prices. And, as I've noted, keep pressure on private insurers to trim costs yet provide effective medical outcomes.
Don't be confused by these alarms from the Social Security and Medicare trustees. Social Security is a tiny problem. Medicare is a terrible one, but the problem is not really Medicare; it's quickly rising health-care costs. Look more closely and the real problem isn't even health-care costs; it's a system that pushes up costs by rewarding inefficiency, causing unbelievable waste, pushing over-medication, providing inadequate prevention, over-using emergency rooms because many uninsured people can't afford regular doctor checkups, and spending billions on advertising and marketing seeking to enroll healthy people and avoid sick ones.
Reports of these two funds' demise are not new. Fifteen years ago, when I was a trustee of the Social Security and the Medicare trust funds (which meant, essentially, that I and a few others met periodically with the official actuary of the funds, received his report, asked a few questions, and signed some papers) both funds were supposedly in trouble. But as I learned, the timing and magnitude of the trouble depended a great deal on what assumptions the actuary used in his models. As I recall, he then assumed that the economy would grow by about 2.6 percent a year over the next seventy-five years. But go back into American history all the way to the Civil War -- including the Great Depression and the severe depressions of the late 19th century -- and the economy's average annual growth is closer to 3 percent. Use a 3 percent assumption and Social Security is flush for the next seventy-five years.
Yes, I know, the post-war Baby Boom is moving through the population like a pig through a python. The number of retirees eligible for benefits will almost double to 79.5 million in 2045 from 40.5 million this year. But we knew that the Boomers were coming then, too. What we didn't know then was the surge in immigration. Yet immigrants are mostly young. Rather than being a drain on Social Security when the Boomers need it, most immigrants will be contributing to the system during these years, which should take more of the pressure off.
Even if you assume Social Security is a problem, it's not a big problem. Raise the ceiling slightly on yearly wages subject to Social Security payroll taxes (now a bit over $100,000), and the problem vanishes under harsher assumptions than I'd use about the future. President Obama suggested this in the campaign and stirred up a hornet's nest because this solution apparently dips too deeply into the middle class, which made him backtrack and begin talking about raising additional Social Security payroll taxes on people earning over $250,000. Social Security would also be in safe shape if it were slightly more means tested, or if the retirement age were raised just a bit. The main point is that Social Security is a tiny problem, as these things go.
Medicare is entirely different. It's a monster. But fixing it has everything to do with slowing the rate of growth of medical costs -- including, let's not forget, having a public option when it comes to choosing insurance plans under the emerging universal health insurance bill. With a public option, the government can use its bargaining power with drug companies and suppliers of medical services to reduce prices. And, as I've noted, keep pressure on private insurers to trim costs yet provide effective medical outcomes.
Don't be confused by these alarms from the Social Security and Medicare trustees. Social Security is a tiny problem. Medicare is a terrible one, but the problem is not really Medicare; it's quickly rising health-care costs. Look more closely and the real problem isn't even health-care costs; it's a system that pushes up costs by rewarding inefficiency, causing unbelievable waste, pushing over-medication, providing inadequate prevention, over-using emergency rooms because many uninsured people can't afford regular doctor checkups, and spending billions on advertising and marketing seeking to enroll healthy people and avoid sick ones.
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I think the issue goes beyond the costs alone.
Both SS and Medicare were set up with very different eligibility requirements. What happened was that the criteria under which people were accepted into both have been changing at the same time as the costs were rising.
The real issue is that the model under which SS and Medicare were conceived doesn't work, it's a patchwork of various entitlements that were supposed to be small and not a comprehensive flexible system that can be scaled in line with population growth. The issue of cost is evidence that the model itself has become obsolete.
To say that SS is a tiny problem is only pushing a comprehensive healthcare reform to backburner.
But maybe it's a logical conclusion from someone who was a trustee 15 years ago, knew there was a problem but insted simply "asked a few questions, signed some papers". The Pelosi Torture Syndrome.
May 13, 2009 9:26 AM | Reply | Permalink
If you didn't read what you said, may I suggest that this would be a good time to do so? I think you left something out, or mistyped a few lines?
May 13, 2009 11:29 AM | Reply | Permalink
Gee, I wonder who knows more about this. Someone who used to be a trustee, and has seen the system from the inside. Or someone who pontificates without offering any proof, and spins a tale about how the system doesn't works like it's supposed to.
May 13, 2009 11:29 AM | Reply | Permalink
Social Security has been a living program that has been adjusted over time by the political system to meet the needs of the population (most recently in 1977, 1983 and 1994). The idea that is is some kind of fossil, created in a bygone era is inaccurate. There is no reason why a pay-as-you-go, universal, defined benefit public pension system cannot be the cornerstone of social insurance for our population ad infinitum. The problem (due almost entirely to demographic factors) is that over the long term the current schedule of benefits and revenue is out of balance. The fix is straightforward: to realign income and cost by a couple percent of GDP. The question is merely what are we willing to pay for a system of retirement security. We could choose to enlarge or shrink it, but the issue is not of structure but of the will to fund it.
Medicare of course is a total different animal and it makes little sense to talk about them together except that they are the two largest claims of our nations fiscal resources into the future. Changing the way Medicare creates incentives for the delivery of health care is complex but entirely doable. The only thing outdated is our unwillingness to implement changes.
May 14, 2009 12:19 PM | Reply | Permalink
The problem is that the driver of the costs increasing is not delivery mechanisms or budgets. The BIG cost driver is (just like SS) the aging of the baby boomers.
More and more people are going to want life saving and life improving medical treatments. Hip replacements are costly. Period. The 20 somethings are not the major consumers of hip replacements.
BTW, negotiating with drug companies cannot reduce the cost of drugs. The cost of a drug is determined by the kind of talent you have to hire to design it and produce it, the cost of plant and equipment, as well as the cost of testing and approval, among others. So far no one seems to be offering a plan to reduce any of those costs.
May 13, 2009 9:49 AM | Reply | Permalink
This is great news! Advertising costs corporations nothing at all! You heard it here first.
May 13, 2009 11:31 AM | Reply | Permalink
You are confusing the cost to produce, with the cost to the end-user. They don't live in the same universe.
Cost to end-user includes all R&D, production, marketing (including billions of free samples given to doctors), distribution and a tidy profit.
Less than 10%(closer to 5) is R&D, for big firms.
May 13, 2009 12:55 PM | Reply | Permalink
So tell us ...what medications are you currently trippin' on? I heard a lot of chatter in the news before I left the USofA, 5 years ago, about people heading for the borders, both north and south to get their prescriptions filled. The way I heard it, the costs of the drugs were IMMENSELY cheaper in Mexico and Canada. And they're the same drugs, by the same drug manufacturers,we have in the USofA. And in Europe, drugs are relatively cheap too! Excpt for the USofA were everyone pays out their noses.
May 13, 2009 1:17 PM | Reply | Permalink
what medications are you currently trippin' on?
Are they any good, and will you share them? That's what I want to know...
May 14, 2009 4:33 AM | Reply | Permalink
No, that's not the BIG problem, you tool. Where do you get this crap from? Rush Limbaugh?
The rate at which the population is aging is more than offset by growth in a healthy economy. Even with the worst economy since the Great Depression, programs are in decent shape and can only get better with reduced healthcare costs and a after the baby boomers.
The aging demographic is due to the baby boomers and is a temporary problem. A boomer born in 1949 is already 60. Overall our population growth is about flat, and we've more than enough space to immigrate labor, meaning we'll have no problems maintaining these programs in future.
May 13, 2009 4:09 PM | Reply | Permalink
Aging is not the biggest driver of excess cost growth. This is simply inaccurate. Here's a good source for you: http://www.cbo.gov/doc.cfm?index=8758.
Aging is part of the nature of the imbalances in Social Security but that is as much a result of smaller birth cohorts (the "baby bust" that followed the "baby boom"), and earlier retirement ages as it is improved longevity. After the major bump in the aging of the population occurs over the next 20 years or so, the cost structure remains pretty constant well into the future at around 5.8-6.0 percent of GDP.
May 14, 2009 12:27 PM | Reply | Permalink
"BTW, negotiating with drug companies cannot reduce the cost of drugs."
So why does the U.S. pay so much more for drugs than the rest of the world, including Canada, for the same drugs?
Why did the Medicare Prescription Drug bill explicitly bar the government from negotiating drug prices, and why did Billy Tauzin, the key author of the bill, resign and take a multi-million dollar lobbying gig with PhRMA, the pharma lobbying group?
Our politicians would rather cut Medicare services and raise our taxes than cut into the profits of Big Pharma, who contribute so much to campaigns.
It's really quite simple, and similar to the handling of the financial industry and Israel.
All are severely detrimental to the average U.S. citizen, but the bribes and threats to stop bribing outweigh the U.S.'s national interests.
May 13, 2009 10:17 AM | Reply | Permalink
The poster who uses the funny A-rab name has opinions that are based on his own opinion and little else.
The fact is that drug companies spend almost twice as much on advertising than they do on research:
the U.S. pharmaceutical industry spent 24.4% of the sales dollar on promotion, versus 13.4% for research and development, as a percentage of US domestic sales of US$235.4 billion.
link
Also, NIH has funded all or part of research on most new drugs at university research centers but gets little or nothing back for the government if the research leads to a new drug.
May 13, 2009 10:57 AM | Reply | Permalink
In part you are confusing price with cost. In part the cost of liability is not the same between any two countries and the US is the world leader on that score.
The cost to develop those drugs is the same. The testing and approval costs may be different.
As an example, the cost of hip replacement surgery would be much lower if the person performing the surgery only needed an associates degree from a diploma mill. The outcome may not be so nice, however. OTOH, if the taxpayer picks up part of your tab the cost has not changed, only who pays.
May 13, 2009 11:10 AM | Reply | Permalink
Oh BS. It's not the "cost of liability" you orange jumpsuited clown. In fact Pharma has the most liability problems with highly profitable drugs they've pushed on the market, which are often redundant and less safe compared with existing generics. But which they market the hell out of at enormous cost.
Canada buys our drugs in bulk and negotiates their price down, and it tends not to buy the redundant, high markup, patented drugs Pharma likes to push on consumers. Medicaid will be doing the same thing soon enough. Drug companies have been terrified of that for decades and lobbied against it.
Also, studies have shown only about 25% of Pharma's budget goes into drug R&D and manufacturing. The rest is bureaucracy, advertising, and executive compensation.
May 13, 2009 3:59 PM | Reply | Permalink
Claritin - a great example of fraudulent improvement. I never use it, won't recommend it, and always recommend this article to its victims/suckers.
This NYTimes mag article from 2001 was great.
http://www.nytimes.com/2001/03/11/magazine/the-claritin-effect-prescription-for-profit.html
May 13, 2009 4:31 PM | Reply | Permalink
you orange jumpsuited clown
Ok, I surrender.
Kozmik may be a rude sonofabitch, but he is our sonofabitch...
May 14, 2009 4:42 AM | Reply | Permalink
The date we should be focusing on is not the date when the "trust fund" runs out. There isn't any trust fund. It's a fiction. The date we should be focusing on is when outlays exceed collections. This will happen in about 10 years. At that point the only way to finance the deficit is with higher taxes somewhere, and they won't be small increases.
May 13, 2009 11:00 AM | Reply | Permalink
In February of this year, outlays exceeded collections. Even if this is an anomaly, it's not good. The problem with SS and Medicare is not costs, it's the structure of funding.
Unless we change how these entitlements are conceived and funded, we're going to be running from one problem to another, exactly as Reich is proposing.
May 13, 2009 11:05 AM | Reply | Permalink
Medicare and SS are separate issues. If you want to be taken seriously you can begin by not conflating them falsely.
May 13, 2009 11:32 AM | Reply | Permalink
No they didn't. that was a deliberate lie planted in the WaPo by AEI.
It took some work to track down but it turns out that the Treasury only credits Social Security for accrued interest twice a year: in June and December. It also only credits Social Security for tax on benefits four times a year, in January, April, July, & October. And since Social Security is paid in equal amounts monthly while February is a short month and so collects less from hourly workers it turns out that the combination understated February's actual share of annualized earnings by $9 billion dollars.
Maybe it was a pure accident but if so they happened to pick the month which is structurally always the weakest of the year. You can see the whole story with snapshots of the relevant official tables here:
http://angrybear.blogspot.com/2009/04/vanishing-surpluses-yet-again.html
When it comes to opponents of Social Security I don't believe much in coincidence, this has all the hallmarks of cherry-picking.
May 13, 2009 3:05 PM | Reply | Permalink
Also, these numbers do not include federal government payment of the employer side of the payroll tax. That amounts to another $15-20 billion of revenue.
May 14, 2009 12:35 PM | Reply | Permalink
We need to change the structure of Social Security funding (higher or broader taxes, or lower benefits) but I do not see why changing how the system is "conceived" is necessary at all. Pay-as-you-go is a perfectly reasonable conceptually basis for a pension system provided people realize what the schedule of costs are and agree to pay them.
May 14, 2009 12:33 PM | Reply | Permalink
Pay-as-you-go is illegal under ERISA - the same politicians who claim that pay-as-you-go is a good way to run Social Security would put you in jail if you tried to run a pension plan using the same structure.
And no one is getting the opportunity to "agree" to paying the costs of Social Security. We either pay, or we go to jail.
May 14, 2009 3:24 PM | Reply | Permalink
And, the earth doesn't orbit the sun! That is a true statement, because I just said it.
Of course it is also true that there is no bank account. The true measure of your cash on hand is what is in your wallet. We need to change the meaning of "cash" so it only includes green pieces of paper in your wallet.
May 13, 2009 11:35 AM | Reply | Permalink
Imagine, for a moment, that I have a new baby and I decide to start saving for his college education. Every week I'm going to put $100 in a shoebox. By the time he's ready for college, I'll have a nice little nest egg. After one week, true to my word, I put $100 into the shoebox. But I'm running a little short that week, so I take the $100 back out and put in an IOU. Next week, same thing. And the next, and the next...until the kid turns 18 and I have $93,600 in IOU's. Theoretically, those IOU's are assets, but of course, they're MY IOU's, so they're worthless. If you're an accountant, I have and equal liability on the other side of the ledger, so the net value is zero.
The SS trust fund is exactly like this. It's nothing but a bunch of IOU's, but they're OUR IOU's. Sure, we can pay SS benefits by redeeming the IOU's, but the money to do so can only come from tax revenues, which is no different from if they didn't exist at all.
May 13, 2009 11:44 AM | Reply | Permalink
Congratulations on the new baby!
You just can't compare how our government treats money with how any other entity treats it. Remember, we all donated $2300 each to give to the big bankers so they wouldn't take their vaults and go home. But, I never did get around to actually transferring my $2300 to the banks. And, I doubt that anyone else did either.
The government tells us what a dollar is. They tell us how many exist in the world. They spend as many as they deem necessary. They don't ever bother to check their bank account to see if any numbers there agree with what they are saying and doing.
I'm not an economist, but I seem to know a lot more than those who claim to be one know.
May 13, 2009 2:55 PM | Reply | Permalink
Sigh. You didn't pay the $2300 today the same way you did not pay the entire balance of your mortgage the day you took it out. Borrowing is a way of DEFERRING consumption. Eventually taxes will have to go up or other spending will have to fall. No one expects this to happen instantly.
May 14, 2009 1:05 PM | Reply | Permalink
[[The date we should be focusing on is when outlays exceed collections. This will happen in about 10 years.]]
And it's something we planned for. In 1983, as a result of recommendations from a panel headed by Alan Greenspan, the government increased the FICA (SocSec/Medicare) withholding rate for the express purpose of building up a surplus that could be tapped when the Baby Boomers started drawing SocSec.
SocSec needs only minor fixes to become stable out to the 75-year horizon. IT IS NOT IN CRISIS. THOSE WHO SAY IT IS ARE MISINFORMED OR TRYING TO SELL YOU SOMETHING.
Medicare, on the other hand, is indeed in a world of hurt.
May 13, 2009 12:58 PM | Reply | Permalink
"In 1983...the government increased the FICA (SocSec/Medicare) withholding rate for the express purpose of building up a surplus that could be tapped when the Baby Boomers started drawing SocSec."
The problem is that the surplus can't be tapped because it doesn't actually exist. There's nothing behind it but IOU's. Consider two cases:
No SS trust fund: Benefits must be paid for out of tax revenue.
With SS trust fund: Benefits paid for by redeeming government bonds in "trust fund". Where does the money to redeem these bonds come from? Tax revenue.
A moment's reflection will reveal the two cases to be exactly the same.
May 13, 2009 1:12 PM | Reply | Permalink
Except for that whole "full faith and credit of the US government" backing of the SS bonds.
May 13, 2009 1:40 PM | Reply | Permalink
What's "full faith and credit" got to do with it? In either case, the money comes from tax revenues. There is no difference between them.
May 13, 2009 2:41 PM | Reply | Permalink
How much did your tax rate go up when the government gave $700 billion to the big banks? I think the answer is zero. So, when the government pays out Social Security benefits in 2040 or whenever, that will affect your tax rate the same amount.
It should be painfully obvious by now that government spending is in no way tied to tax payments. If it was tied to tax payments our tax rates would have more than doubled over the past 6 months.
And, don't tell me we only loaned that $700 billion to the big banks. We are very unlikely to ever see any of it returned to the...whatever they call the place where dollars are manufactured.
We just finished 8 years of the government constantly cutting its revenue, constantly increasing its spending. The connection between government revenue and government spending is non-existent.
May 13, 2009 3:01 PM | Reply | Permalink
In the short run, government can run deficits to cover spending and so it is with TARP and any number of short-term programs. But sooner or later the piper has to be paid. The government can't just keep piling up debt at a rate faster than GDP growth. When SS starts running in the red, it's going to be for a long time and we're talking big dollars.
Besides, I can take what you're saying and flip it around. If a SS deficit isn't real money, how is the surplus (i.e. trust fund) real money?
May 13, 2009 3:44 PM | Reply | Permalink
That is exactly the case. When it is the government doing the spending it isn't real money at any time, since they control the number of dollars in circulation, the value of those dollars, and virtually everything else about the money supply. When the national debt gets to be too big, whatever that means, a few years of moderate inflation will bring that back to a reasonable level.
May 13, 2009 6:04 PM | Reply | Permalink
So then why do we need a SS surplus? Or put another way, why isn't SS on a pay-as-you-go basis? SS taxes, I'm sure I don't need to point out, are regressive. There's no good reason for SS to be running a surplus.
As I've said in other comments, the real reason for the surplus was to enable Reagan and the R's to paper over the large (and politically unacceptable) budget deficit created by their desired reduction in the top tax brackets. It amounts to a shift in the tax burden from a progressive tax to a regressive one.
This is my beef with Social Security. Not that we should dismantle it, but that it has been hijacked as a vehicle to make the tax system less progressive. The surplus is a fraud and Social Security should be put back on a pay-as-you-go basis. When outlays rise to the point that increasing SS taxes are no longer acceptable, the deficit should be financed in the same way they're going to be financed anyway, which is from general revenues.
May 13, 2009 6:54 PM | Reply | Permalink
Very nice discussion of the trust fund facade.
You said it succinctly in your comment: "A moment's reflection will reveal the two cases to be exactly the same."
They are not exactly the same. In theory the trust fund principal can be sold on the open market for cash. That's slightly different from just borrowing/taxing more at the time.
What the trust fund does is to establish a link from the general fund into SS. SS is supposed to be self-funding. The trust fund allows/requires use of general tax revenues to supplement SS tax (payroll and SE taxes) shortfalls. That means that non-SS tax sources will be used to pay for SS benefits.
May 14, 2009 1:01 AM | Reply | Permalink
"Selling the trust fund" IS issuing debt. The current holding of the trust fund, however, are not marketable.
The interest payments on the debt are current year budget expenses and come out of general revenue.
May 14, 2009 12:43 PM | Reply | Permalink
-- "Selling the trust fund" IS issuing debt. The current holding of the trust fund, however, are not marketable. --
Oh? Both sentences seem odd. But if you're saying that when push comes to shove the Government cannot start selling off the "endowment" to the private sector, that might be true. I don't know the fine print and it doesn't really affect my point either way.
But generally, selling a bond is not the same as issuing debt in the first place. The similarity might confuse some folks.
May 14, 2009 4:33 PM | Reply | Permalink
Think about it for a minute. It's good enough for the Chinese. It's good enough for the most conservative of US investors. It's the most highly regarded financial guarantee we've got. Where else would you put money you want to keep safe? A bank?
May 14, 2009 1:48 AM | Reply | Permalink
From Social Security's perspective, it can call on the interest and then principal of the bonds in the trust fund that were built up since 1983. However, from the government wide perspective, or from the taxpayer perspective, repayment of interest and principal have to come from general revenues, or borrowing. So someone has to pay for it.
i think for most people and surely for our political leaders it is important to take the broader perspective.
May 14, 2009 12:38 PM | Reply | Permalink
Seems to me that the real problem with Social Security is that there really is no "trust fund".
THERE IS NO TRUST FUND!
There are a bunch of paper "IOUs" stashed in a filing drawer somewhere. These IOUs are backed by the full faith and credit of the US government. But how will the US government make good on these debts?
It seems to be a natural knee jerk reaction on the left to assume that any/all discussion about the solvency problems of SS or Medicare are right-wing attempts to dismantle these programs. I am pretty far to the left, but I think we should make room for a discussion here.
How can we avoid rasing taxes in the future? There are two options: (1) resume stronger growth, or (2) create inflation. Based on demographics, option 1 does not seem likely. So I expect we'll inflate our way out of this. That is the politically cowardly way to effectively cut SS benefits to future retirees, without ever having to vote to do so. So it seems like the natural path.
Unless someone like Obama has the political courage to face the issue now and make some changes.
My main point is that we on the left should have a little faith and open our ears, rather than automatically ascribe nefarious motives to anyone who speaks about entitlement reform. (Unless there's an "R" next to their name, in which case it is reasonable to assume they are full of crap and talking out of a related oriface.)
-- ARG
May 13, 2009 11:16 AM | Reply | Permalink
"There is no trust fund" and, equally true, there are no bank accounts, stock portfolios, bond portfolios, mutual fund accounts, or any other piece of paper that promises to pay money on demand. What a disfunctional society we live in huh?
May 13, 2009 11:38 AM | Reply | Permalink
Hi, Hoppy.
I think I get your point. You are (perhaps sarcastically?) pointing out that we live in a world where not all money exists in true physical form. So what's the difference between the Social Security "trust fund" and these other examples, right?
Well, I'm not an accountant, but I know that there are no assets behind the government's IOUs for the SS trust fund. There are just IOUs.
My bank has actual physical money in it. Yes, it lends more than it has, and if everybody asks for their money at the same time there could be a problem, but in the end, the bank is owed more money than it owes. So I'll be able to get mine.
The Social Security "trust fund" has no physical assets. And the US government owes more than it is owed, by a large margin. If the US government had to do its books the way a company does, it would already be bankrupt.
So, if General Motors says that its Buick division will keep making money until 2019, does that make the overall company any less bankrupt? And after June 1, will all the suppliers who make parts for Buicks get paid, while the others won't? I don't think so.
Social Security payments come out of the same bucket as the rest of our government's spending. So it's great to hold this notion that there is a "trust fund" and that it's okay until 2037. But where will all the money actually come from? That's all I'm asking.
-- ARG
May 13, 2009 12:46 PM | Reply | Permalink
I understand your question very well. When dealing with government spending, up is down, and left is right. "We" gave the banks $700 billion dollars a few months ago. "We" being about 300 million of us citizens. Divide 700 billion by 300 million and you get $2300. So, each of us gave those banks $2300 - do you feel that loss? I don't because, in fact, none of us contributed a penny to that gift. It was all borrowed from the Chinese, in all probability, and is highly unlikely to ever be paid back.
So, any discussion of assets backing up an IOU is inapplicable where the government is concerned. How could it be possible for any entity to have more assets than the US government, which can manufacture as much money as they wish? Their assets are essentially infinite.
May 13, 2009 2:50 PM | Reply | Permalink
How long do you think the government can sustain that little trick?
Suppose the Chinese say, "thanks, but no thanks" some day.
Not that I'm advocating it now, but the government could, actually, ask taxpayers to pay for the bank bailout or any/all other spending.
Someday, I believe, they'll be forced to ask.
-- ARG
May 13, 2009 10:46 PM | Reply | Permalink
You don't think we are making interest payments on that debt every year? Maybe you should read the budget sometime.
The fact that you borrow more than you have is irrelevant. You still have to service the debt. Or maybe you are just too old to have to worry about it and figure you will be dead long before your kids will be paying higher taxes.
Yes, you can inflate away your debt, but that also has a severe cost to it.
May 14, 2009 12:48 PM | Reply | Permalink
Money doesn't even exist in physical form for the most part. Your bank at any given time only holds a small fraction of "your money". Your right to demand that they produce it is in the end only back-stopped by their credit-worthyness and the willingness of the US to stand behind your deposit up to the statutory limit.
Which is also true for the banknote in your wallet. It has no more intrinsic value than a Special Treasury Bond in the Trust Fund. You simply are counting on the government operating in a way that will preserve that piece of paper's exchange value.
In the end the value of almost anything is dependent on, wait for it, True Faith and Credit of the United States. Why people think that promises by the FDIC make bank account dollars real, but promises by the SSA don't make Special Treasuries real is pretty much the result of not thinking about what money means since we came off various metal standards.
I am not suggesting rushing out and joining the lunatics of the Austrian School and converting all your Benjamins to gold. But maybe that is because I still believe in the True Faith and Credit of the United States. Those Special Treasuries in the Trust Funds are as good as Money because they have the same backing.
May 13, 2009 3:17 PM | Reply | Permalink
Of course I understand all the concepts you describe. You hit the nail on the head here:
The reason I'm questioning assumptions is that I want to ENSURE that the government operates in a way that preserves the value of the pieces of paper (and electronic bits of promisory note) that I've already accumulated.
As I stated elsewhere, the US government is already bankrupt, if it had to do its accounting the same as a company would. And we simply won't be able to run huge deficits forever.
I hasten to add (again) that I'm as left-leaning as nearly anybody I know. And I know that we need to do serious stimulus spending right now. And I expect (hope) to live well past 2050. But I don't want to wait 'til then for things to improve.
In the context of Social Security of Medicare, I'm not saying "they're insolvent, we need to dismantle the programs". I'm saying, let's make a correction now, to be absolutely sure we can sustain the programs. (And my prefered solution is to tax the very wealthy among us to pay for these programs!!)
-- ARG
May 13, 2009 11:02 PM | Reply | Permalink
Bruce, the value of money is that you can exchange it for real goods not that the government will give us the value of the denominated currency in gold if we demand it.
The question of whether the trust fund is "real" or not is really beside the point--it is an accounting system. By current law the non-social security part of the government has to pay the social Security trust fund. But the money all comes from the same place anyway--from taxpayers.
If tomorrow we abolished the payroll tax and said from here on out all the obligations of the Social Security system will be paid out of general tax revenues then it would not change the financial situation of the federal government one but. it would not change the total number of tax dollars needed to fulfill those obligations one bit. It would only change the name of the tax used, and who pays it. The amount of cash needed is exactly the same.
May 14, 2009 1:00 PM | Reply | Permalink
This is probably going to shock you, but I agree entirely with this post. And, I certainly agree that FICA is a regressive tax scheme, which should be corrected in some way. But, the way to correct it will never, in my opinion, include "investing" some of the FICA in the stock market. I don't think you disagree with that either.
May 14, 2009 6:22 PM | Reply | Permalink
It always amuses me that nobody wants to hold the politicians accountable for squandering God only knows how much money paid in Social Security taxes since 1983 that they spent on tax cuts for the rich and war. I am 50. My entire working life I have been paying "extra" into Social Security so that there would be plenty in the fund for my generation. The baby boom's existence, you may recall, was not a surprise that we just found out about. Everyone knew what was coming and so Reagan and Tip O'Neill fashioned a solution that both raised the retirment age and imposed higher social security payroll taxes. Under the leadership primarily of the Republican Party, all of the additional funds have been squandered. Raise taxes on the rich and the problem is solved. We "little" people have already paid enough.
May 13, 2009 11:21 AM | Reply | Permalink
Yes!
Someone ought to be going to jail behind the ripoff of the extra funds we've all been paying since Ronnie the magnificent rode in and saved the day.
May 13, 2009 11:34 AM | Reply | Permalink
I'll let you in on a dirty little secret. The SS "trust fund" is nothing more than a transfer of tax burden from the wealthy to the middle class. It worked like this. In the early 80's Reagan and the R's wanted to reduce the top tax rates. Despite the happy talk about supply-side economics, everyone knew that doing so would blow a giant hole in the budget. The solution? Raise taxes on the middle class. Of course, they could never sell such a plan in the open, so they hatched a stealth plan to do it, i.e. the SS trust fund. Under the guise of "saving" SS, they raised the SS tax rate, generating a large surplus that offset the revenue shortfall created by lowering the top tax rate.
The SS trust fund doesn't exist. It never existed. It's a fraud perpetrated on the middle class.
May 13, 2009 11:36 AM | Reply | Permalink
Nobody said anything about a trust fund. The Reagan SS tax increase was meant to be put toward SS. It wasn't. As you point out it was used for tax cuts for the rich and as I pointed out: for war. Many forget that the biggest difference between Bush and Gore in 2000 was Gore wanted to use the surplus (created by all the extra tax we were paying) for SS and Medicare. Instead? More tax cuts for the rich. More war.
May 13, 2009 12:52 PM | Reply | Permalink
Holy crap. I am by no means adverse to Reagan bashing but this displays total ignorance of how Social Security works.
Social Security is mandated to target having one year of reserves at all times. Those reserves are routinely held in the form of Special Treasury bonds. If Social Security projects to have one year of reserves in the Trust Fund in each of the next ten years it is said to be in Short Term Actuarial Balance. If it projects to have one year of reserves in each of the next 75 years it is said to be in Long Term Actuarial Balance. The measure used is called Trust Fund Ratio which is the ratio of projected balance to projected cost, meaning that a 100 TF ratio represents different dollar amounts but still the same relative solvency.
Social Security combined TF balances fell below 100 in 1971, despite some corrective measures in 1977 they continued to fall until Reagan entered office at which point the TF ratio was down to 25. Without some interfund borrowing in 1983 the TF ratio would have hit 0.
http://www.ssa.gov/OACT/TR/2009/VI_cyoper_history.html#159726
The 1983 compromise was designed to get the TF back to a 100 ratio which it ultimately did by 1993. Neither Reagan or Bush 1 did anything wrong to Social Security, instead they built it back to minimal actuarial soundness using the legally mandated instrument to do that, i.e. Treasury Bonds.
Friends think. What happens when you or the Chinese Bank buys a regular Treasury? The government takes your money and spends it on whatever the hell it wants. All you get is a promise to repay it with interest. That is not theft, that is not diverting money to inappropriate purposes, that is called 'Buying a bond'.
This isn't Raiders of the Lost Ark or Gringott's Bank, there never was supposed to be a huge warehouse or vault with your excess FICA contributions tucked away, you all have just fallen into some false framing crafted by people hostile to Social Security.
Every penny ever paid to Social Security is precisely where it is supposed to be. You need to break the spell that Cato has been casting for the last 25 years.
May 13, 2009 3:38 PM | Reply | Permalink
You miss the point by a mile, but whatever.
May 13, 2009 4:22 PM | Reply | Permalink
That's all very nice, but you completely sidestep the main issue: Does the Trust Fund make any sense? Since it's nothing but IOU's anyway, tapping the trust fund to pay benefits is no different from paying them out of general funds. You can raise taxes or you can run bigger deficits, but in either case having the trust fund is indistinguishable from not having it.
May 13, 2009 4:38 PM | Reply | Permalink
Well done, Bruce.
Social Security is not a savings account. As a savings account it is a lousy deal. That is exactly why the CATO folks want you to think of it that way.
It is an inter-generational transfer that provides an extraordinary amount of security in retirement.Try buying an inflation protected life annuity with survivorship, dependent and spousal benefits, as well as disability insurance wrapped in one with your savings account or 401(k).
May 14, 2009 1:11 PM | Reply | Permalink
dependent and spousal benefits
And it is worth noting that these are really in the form of a "power of appointment"--at age *110, I intend to marry a 20 year old and adopt her five children age 2-10-if I die on the day after our marriage, she and the kids will cruise on for another 20 years of government money.
*(let's be frank, even I, at 110, will probably have to adopt as opposed to conceive...)
May 14, 2009 6:55 PM | Reply | Permalink
Now it's your turn to think, Bruce.
When you or the Chinese government buys a Treasury bond, the interest and principal payments made to the bondholders by the US government are guaranteed by the full faith and credit of the US government. It is also true that the Treasuries held by the SS Trust Fund are guaranteed by the full faith and credit of the US government.
However, the benefits received by American workers from Social Security aren't guaranteed at all. The SS Administration's website acknowledges that based on the US Supreme Court's 1960 decision in Flemming v. Nestor, NO ONE HAS ANY CONTRACTUAL RIGHT TO ANY BENEFITS FROM SOCIAL SECURITY.
http://www.socialsecurity.gov/history/nestor.html
If we actually bought Treasuries with our payroll taxes and owned them ourselves, it would be a completely different story. But as it stands today, American workers are not legally entitled to anything in return for their payroll taxes.
May 14, 2009 3:42 PM | Reply | Permalink
The money we all paid as FICA taxes was not wasted, unless you also believe that the money you deposited in the bank was wasted when the bank made loans to others, using that money. Money in today's world is a number listed in a "ledger" somewhere. Almost all spending is done by having that number changed on a computer, in favor of someone else.
Watch: $1,000,000,000 See, I'm a banker!!
May 13, 2009 12:03 PM | Reply | Permalink
Yes, but if the government just "prints" (or enters into a ledger) all the money that it owes (to Social Security, or China, or...), then we'll have some serious INFLATION, thus reducing the actual value (buying power) of any savings, including the Social Security payments that we may be counting on for retirement.
That was the point of my original post, upthread.
-- ARG
May 13, 2009 12:51 PM | Reply | Permalink
But "printing" money (entering digits on its checking account at the FRB) is the only thing the government ever does -- in good times and bad; in times of deficit or of surplus.
If the government sees that "printing" as being excessively inflationary, it acts to pull "money" back out of the system by
1) increasing taxes and/or
2) having the FRB sell notes and bonds to the banks.
Now, if you were to say that the 25-45 demographic likes inflation and is, therefore, at political odds with the 45-65 and retiree demographics who don't, I'd have to agree with you.
But in the end inflation and deflation are political choices.
May 13, 2009 2:05 PM | Reply | Permalink
You've put your finger on exactly why the Federal government can't actually operate a trust fund. They can't hold money in trust when they're the ones who print the money.
May 13, 2009 2:44 PM | Reply | Permalink
No, that's not right. The problem is that one cannot be a trustee for oneself. The other problem is that IOUs to oneself are not money in any real sense.
May 14, 2009 3:02 AM | Reply | Permalink
Well, printing money is NOT the only thing the government ever does. As you pointed out, the government also collects taxes, and spends money on various things.
I'll agree that inflation/deflation are "choices", to the extent that the governmental Masters of the Universe can actually "control" these phenomena.
Taxes in the near term could be used to avoid taxes -- or inflation -- in the longer term. That's the trade I'm interested in. (And I'm saying tax the sh*t out of the rich bastards now, and avoid eroding my spending power in retirement.)
-- ARG
May 13, 2009 9:38 PM | Reply | Permalink
Wealth taxes are very tempting. They don't directly hit the GDP to first order because they don't take away from profits (interest or rent payments), they take away from principal (rich folks have to sell of houses, stock, bonds, or just pay out of cash/deposit holdings). While there is a secondary hit on GDP, I would guess it's much less than the effect of deficit debt service.
How about 1% of value for all individual or corporate wealth over $500K (not net value, so a $1M house with an $800K mortgage counts as $1M here - but 1% of $200K would be the tax for the house alone). And then 2% of everything over say $5M for individuals or trusts and flat 1% for most corporations?
That should raise about $1T/yr or more.
May 14, 2009 4:43 PM | Reply | Permalink
Reich's analysis and commentary is the sanest I've seen so far. As a beneficiary of both SS and Medicare I shudder to think of what will happen in this country if they vanish and, since I contributed to both funds during my working days, I also vastly resent the notion that they are "entitlements", as though I was receiving a benefit to which I did not contribute.
I am increasingly convinced that a great deal of the publicity these funds are currently receiving is a calculated tactic to instill fear and distrust to prepare the way for a dismantling of these major supports for the aged in our country.
May 13, 2009 11:24 AM | Reply | Permalink
Any money you "contributed" has long ago been "spent."
I put "spent" in quotation marks, because the government doesn't need your money -- or anyone else's -- in order to spend. The money was taken away from you for one reason, only -- to prevent inflation. That was your "contribution," and you get the good citizenship award -- but that's all you get.
There are no "funds"!
May 13, 2009 2:20 PM | Reply | Permalink
That's a bit perverse and not quite right either. Taxes don't only "prevent" inflation, they also fund programs and grow government. They might be said to "prevent" deficits, or more accurately to reduce deficits to some extent.
If we don't pay enough taxes and the government also cannot borrow enough, then monetary inflation is probably inevitable.
May 14, 2009 3:12 AM | Reply | Permalink
Taxes . . . fund programs . . . .
Uh, no. They don't.
The USG utilizes a unified budget. Programs with dedicated taxes are political Thimblerigs.
May 14, 2009 10:06 AM | Reply | Permalink
Uh, yes they do, via the budget and tax process which contains them both.
Grow up.
May 14, 2009 4:10 PM | Reply | Permalink
As I said . . . .
May 14, 2009 5:14 PM | Reply | Permalink
You are being obtuse.
Past Social Security contributions were used to pay off past beneficiaries. They are a fulfillment of a social contract between generations. The next (working) generation has to choose whether it wants to make good on it's commitments to those who already did their part.
May 14, 2009 1:17 PM | Reply | Permalink
"Kitchen table economists" shouldn't throw contumelies.
May 14, 2009 3:10 PM | Reply | Permalink
I am turning 59 in July. I am tired of being jerked around on this. I have worked my whole adult life.
We Baby Boomers have been here since 1946. We are real flesh and blood.
Perhaps we should just all kill ourselves and solve the whole problem.
May 13, 2009 11:41 AM | Reply | Permalink
Hey DD,
I'll be 40 in a few weeks, I've been contributing to SS since I was fourteen(14).
And I'll be damned if I let the Boomers get the short end of the stick - if for no other reason than my parents would be disappointed in me.
May 13, 2009 12:58 PM | Reply | Permalink
Proffessor Reich, is it rational to expect a return to the historical average growth rate of 3%, when the population is likely to decline?
Isn't it the case that economic growth closely tracks population growth? Isn't the corellation best if tracking the 40-50 year-old demographic? And isn't that segment of the population going to shrink in size over the next couple of decades?
So should we really expect 3% growth anytime soon? Or even 2.6%??
What if growth slows to something like 1.5% over the next 10 years? What do the actuaries say about our "trust fund" then?
-- ARG
May 13, 2009 12:56 PM | Reply | Permalink
ARG why do you expect the population to decline? Nobody I know predicts such a thing, certainly the Trustees don't. They do project some shifts in demographic cohorts as Boomers die off but really the Millenials are coming in quite close to Boomer numbers, one reason why things are projected to start improving after mid-century. The Trustees project that there will be almost exactly 100 million more people living in the US in 2050 than live here today.
Table V.A2.—Social Security Area Population as of July 1 and Dependency Ratios, Calendar Years 1950-2085
http://www.ssa.gov/OACT/TR/2009/VI_cyoper_history.html#159726
As to the growth question, the Trustees present three different growth models a more optimistic Low Cost, a more pessimistic High Cost and a supposedly median Intermediate Cost. If the economy does slow to 1.5% you will get results very close to High Cost which has the OAS (retirement) component of Social Security going to depletion in around 2032 and the DI (disability) component around 2016.
In order for SS to fully self-fund without changes we need productivity at 2.0%, Real GDP at 3.0% and Real Wage at 1.5%. Those are not crazy numbers.
May 13, 2009 3:55 PM | Reply | Permalink
Between 2013 and 2025, the number of 45-54 year olds will decline steadily. In about 2032, the number will return to about the level of the year 2000. (These numbers are known in advance, of course, because it takes half a century to make a 50-year-old.)
Historically, the stock market and/or the economy as a whole has corellated well with the size of this 45-54 year-old demographic. They ar the strongest producers and biggest consumers.
So, by that historical measure, we should expect the economy to actually contract for a decade or more. I hope that turns out not to be the case. But what if it does?
-- ARG
May 13, 2009 10:39 PM | Reply | Permalink
I think you have a legit issue. I hope someone else is taking notice.
May 14, 2009 3:32 AM | Reply | Permalink
Bruce it is population growth, or more accurately labor force growth, not total size that matters. GDP growth is a function of the growth of the labor force.
Also, why do you constantly cite the economic assumptions in the various scenarios without acknowledging that those scenarios are a *combination* of economic and demographic factors. We could experience robust economic growth, but low birth rates and increased longevity would completely offset any financial benefitts. Why is that not perfectly plausible?
May 14, 2009 1:34 PM | Reply | Permalink
"We could experience robust economic growth, but low birth rates and increased longevity would completely offset any financial benefit[s]. Why is that not perfectly plausible?"
Static population with robust growth would not result in per capita wealth increases?
What exactly are you trying to get at?
May 14, 2009 4:27 PM | Reply | Permalink
Can we get Frank Luntz to re-brand "Entitlements" as "Earned Paybacks" or something catchier?
May 13, 2009 1:43 PM | Reply | Permalink
It's not only Reich's point but the demographics will also be wrong given what has happened to peoples retirement savings and many more will either not retire or put off retiring swelling the numbers previously assumed who would be contributing. Bottom line, there is no crisis, period.
May 13, 2009 4:13 PM | Reply | Permalink
Knowing that 70-somethings will still be working in the 2030s, because they can't afford to retire, is not much comfort to me. I'll be one of them.
-- ARG
May 13, 2009 10:49 PM | Reply | Permalink
not much comfort
On the contrary--best thing for you. Retirement kills ya.
May 14, 2009 4:46 AM | Reply | Permalink
It's work that's killing me now, Jolly.
If you're telling me I'm going to have to work forever, just to stay alive, then you might as well just shoot me now!
-- ARG
May 14, 2009 10:05 AM | Reply | Permalink
If you tell me how much you make, I will galdly tell you whether your suicide would help or hurt the Trust Funds.
May 14, 2009 1:36 PM | Reply | Permalink
how much you make
You will also need actuarial info: his age, and his parents heath histories.
May 14, 2009 4:28 PM | Reply | Permalink
what about cleaning up the sham "reform" of Medicare introduced in the W Bush years? That must be a huge problem, and fixing it would probably make a major difference.
I would be interested (from anyone who can explain it) to know how the Obama health plan could be adjusted to make it easier for (a) future shift over to a national single-payer system and (b) for states to opt to have single-payer systems without prejudice or harm to their financial status. Both of these would go a long way to transitioning to national single payer, in a circumstance where apparently a bought-off Congress has written it off despite widespread public support
May 13, 2009 7:47 PM | Reply | Permalink
Sorry, haven't read through the comments yet, but in czase no one has mentioned it, the one thing illegal immigrants do is to contribute to Social Security with no home of ever getting any return, as things stand now. They can claim all sorts of deductions in order to minimize all their other tax burdens, but not Social Security.
May 14, 2009 12:16 PM | Reply | Permalink
Don't be confused by these alarms from the Social Security and Medicare trustees. Social Security is a tiny problem we all know that Auto transport brokers has never been a problem in having their cars transported. Medicare is terrible, but the problem isn't really Medicare; it's quickly rising health-care costs.
June 25, 2010 1:39 PM | Reply | Permalink