PART 1, p1, INTRODUCTION, U.S. Federal Budget, Social Security and Medicare Funding (fb-20.html)

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Table Of Contents for Part 1, Introduction

[A1] Information, Not Propaganda. But a Bias to the "Big Problem" Point Of View (15)

[A2] The Trust Funds "Assets" Are Just Promises That Future Taxpayers Will Pay (16)

[A3] Statements from the OMB and the CBO About the Social Security Trust Funds (17)

[A4] Where Will The Treasury Get The Money To Redeem The Trust Fund Bonds? (18)

[A5] Money Will Have to Be Found to Redeem $7.8 Trillion Of Social Security Trust Fund Bonds (19)

[C] No, The Social Security System Is Not Going to Go "Bust", "Bankrupt", Or "Insolvent" (21)

[-] The Social Security Trustees Are Using Pessimistic Demographic and Economic Assumptions ??? -- See Appendix E

[D] But Fixing SS Will Take More Than A 2.07 Percent Of Payroll Increase In Payroll Taxes -- It Will Also Require About $7.8 Trillion From The General Taxpayer by 2035 (22)

[E] The National Debt Matters (23)

[E1] Interest on the Federal Publicly-Held Debt Costs Over $930 per capita in higher taxes (24)

[E2] A Higher National Debt Lowers The Fiscal Safety Margin (25)

[E3] But Aren't The Interest Payments On The Debt Just A Redistribution? (26)

[G] 7.8 Trillion In Perspective (More Like $1.5 Trillion Today) (28)

[H] The Combined Cost Of Social Security And Medicare (29)

[H1] A Near Doubling Of The Payroll Tax Rate Needed? (30)

[H2] But Even So, Real Take Home Pay Will Increase (32)

[H3] On the other hand, some consider the Intermediate forecast optimistic (33)

[H4] While others consider the Intermediate forecast pessimist (34)

[H5] Real GDP Growth Rate - More On (35)

[I1] Media Reports Are Confusing At Best, Misinformation Or Deliberate Deception By Half-Truth At Worst (37)

[I2] On The Other Hand, Loose Usage Of Words Like "Insolvency" and "Bankruptcy" Mislead In the Opposite Direction (38)

[I3] Based On Misinformation, People Are Making The Wrong Decisions (39)

[I4] There Is The Belief That Today's Booming Economy Means There Is Not a SS and Medicare Problem (40)

[I5] Misinformation Is Leading To Bad Legislation (41)

[I6] It Is Impossible To Fix The Problem Without First Understanding What The Problem Is (42)

[K] Summary Conclusion (44)

[K1] Assumptions (45)

[K2] Real Take Home Pay Will Increase (46)

[K3] The Social Security Trust Fund Assets Are Of No Help (47)

[K4] Surpluses Pay Down The National Debt (48)

[K5] We Must Maintain Fiscal Restraint For The Pleasant Scenario To Occur. The Non-SS Surpluses Are Very Fragile (49)

[K6] Unexpected Events Can Also Derail The Pleasant Scenario (50)

[K7] The Size Of Government (Taxes and Spending as Percent Of GDP) Will Grow. And Entitlement Spending Will Crowd Out Other Federal Spending (51)

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[A] Preliminary Remarks (14)

The purpose of this web site is to discuss concerns about the U.S. federal budget, with the primary focus on Social Security (SS) and Medicare. More emphasis will be placed on Social Security than on Medicare. That's because SS is currently the larger of the two programs, and is easier to describe. And there is considerably less uncertainty in the future costs of Social Security than of Medicare. (Both programs share uncertainties in demographics (life expectancy, fertility rate, immigration, growth of labor force, ratio of workers per beneficiary) and general economics (productivity growth, inflation and interest rates, real GDP growth, and real wages growth). But Medicare also depends on health care costs, which long have been increasing far faster than inflation, thanks to a number of factors including rapidly improving medical technology.

This introduction assumes some literacy in Social Security and Medicare matters. That is to keep it short and still indicate what this web site is about in general. However, the main body will later explain things in much more detail.

Note: If you haven't read it already, the main index page (fb-index.html) has a much shorter summary of this web site than the one on this page. In particular, you might want to read the section on navigational aids and "non" numbers.  

[A1] Information, Not Propaganda. But a Bias to the "Big Problem" Point Of View (15)

This site is meant to be informative, and not propaganda for one point of view or another. In particular, regarding Social Security, there are wildly divergent understandings and opinions on the future of Social Security. Even people who accept the government projections on the future of Social Security end up with wildly different understandings of what it all means. That is primarily because media reporting on the Social Security situation is so uneven and confusing.

I wrote this site with the purpose of clearly explaining the situation as I understand it, having read a number of books and articles and government reports. Most of all, I want it to be the truth.

Trying to keep this site objective made it much harder to write than if I wrote it from one point of view or another. I'll admit to giving more weight to the "big problem" side than the "no big problem" side, because that's how I see it.

In the other Parts of this report, you will see plenty of tables excerpted from official government documents, like the March 1999 Social Security Trustees Report (TR99) and annual budget reports produced by the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). Links and page numbers are amply provided, so that you can see for yourself the original government documents if you wish. I don't throw out any numbers in this web site without describing where they came from or how they were calculated. Thus I hope people who don't share my biases will still find this web site valuable.  

[A2] The Trust Funds "Assets" Are Just Promises That Future Taxpayers Will Pay (16)

On the "big problem" side of things, there is no way to avoid saying flat - out that the trust funds (e.g. the Social Security Trust Fund (SSTF) and the Medicare Part A HI trust fund) have no real assets in them. The government bonds in the trust funds are just IOUs whereby the Treasury general fund (that means future taxpayers) owe to the trust funds -- to pay back what the general fund has borrowed from the trust funds previously. This is stated clearly by the Congressional Budget Office (CBO), the Congressional Research Office (CRS), the Office of Management and Budget (OMB), the Government Services Administration (GSA) and a former Social Security Administration commissioner, among others.

Even the SS Trustees allude to this problem in the March 1999 Social Security Trustees Report (TR99) by saying that the problem of where the Treasury general fund is going to get the revenues to redeem the bonds is "not within the scope of this report".

See section non122 for quotes by official government sources and section non129 for quotes by others regarding the nature of the trust funds' assets. Below I include a small excerpt from the OMB and the CBO:  

[A3] Statements from the OMB and the CBO About the Social Security Trust Funds (17)

The "Analytic Perspectives" document from the Office Of Management and Budget (OMB) states that the Social Security Trust Fund are not real economic assets that can be used to pay benefits. Congressional Budget Office (CBO) Director Dan Crippen also makes the same statement, and he additionally states that the trust fund assets do not affect the obligations that the federal government has to the program's beneficiaries.

The below quote about the funds in the Social Security Trust Fund is from the "Analytical Perspectives, Budget of the United States Government, Fiscal Year 2000", by the Office Of Management and Budget, Feb 1, 1999.

[Begin Analytic Perspectives quote, p. 337:] "These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, have any impact on the Government's ability to pay benefits." [End Analytic Perspectives quotes.]

The below is an excerpt from the Testimony of Congressional Budget Office (CBO) Director Dan Crippen before the Senate Budget Committee February 23, 1999 regarding The President's Social Security Framework.

[Begin Excerpt from Crippen Testimony, p. 8: ] "Although there is no money in the Treasury to pay for future obligations, the obligations to people eligible for Social Security benefits are real. And most important, those obligations are a direct result of federal law, not a consequence of whatever may or may not be credited to the trust funds. In particular, the size of the balances in the Social Security trust funds -- be it $2 trillion, $10 trillion, or zero -- does not affect the obligations that the federal government has to the program's beneficiaries. Nor does it affect the government's ability to pay those benefits.

"This fact is explicitly recognized in the President's budget for fiscal year 2000 in the same words used in previous budgets. To quote page 337 of the Analytical Perspectives volume: 'The existence of large trust fund balances, therefore, does not, by itself, have any impact on the government's ability to pay benefits.' The fact that trust fund balances are unrelated to the government's obligation or ability to pay benefits needs to be recognized before any proposals to address the Social Security and Medicare trust funds can be analyzed." [End Excerpt from Crippen Testimony]

[A4] Where Will The Treasury Get The Money To Redeem The Trust Fund Bonds? (18)

If you have trouble believing that the bonds in the trust funds are not real assets, imagine that it is 2014, the first year when SS tax revenues are expected to fall short of meeting payments to SS beneficiaries. The person in charge of the SS payments and the SSTF must therefore raise some cash somehow. So he/she takes one of the bonds in the SSTF and hands it over to an employee in charge of the Treasury general fund, and says, "redeem this bond. I need some cash now to pay some Social Security beneficiaries. There isn't enough Social Security tax revenues to pay all of the Social Security benefits this year".

Imagine that you are the Treasury general fund employee. You have this bond that the SSTF employee gave you, and somehow you are supposed to convert it to cash. How are you going to do it? Well, if there is a large enough real surplus, you use some of the surplus money. If there is not a large enough real surplus, then you will have to raise some money by selling bonds to the public. That increases the publicly - held part of the national debt, and increases the interest costs that taxpayers must pay in the future. In effect, this debt-financing is a tax increase on a deferred basis.

So when somebody tells you that the SSTF consists of government bonds backed by the full faith and credit of the U.S. government, say that's nice, but where is the money going to come from to redeem the bonds? The taxpayer, right?  

[A5] Money Will Have to Be Found to Redeem $7.8 Trillion Of Social Security Trust Fund Bonds (19)

Generally, the media and government officials portray the trust funds as a reservoir of savings. The magnitude of the trust fund deception is breath-taking. The Social Security Trust Fund (SSTF) assets, currently about $800 billion in mid-year 1999, are expected to continue to grow for another 22 years (until 2014 because SS tax revenues exceed outgo, and from 2014 to 2021 because SS tax revenues plus earned "interest" -- another phony item -- exceed outgo). See section non59 for the basics of the SSTF operations, and section non80 for a more detailed look at the SSTF operations. These numbers and dates are from the March 1999 Social Security Trustees Report (TR99).

Between 2014 and 2034 more than $7.8 Trillion worth of bonds will be redeemed (non86), according to the SS Trustees' Intermediate projection. That's $7.8 Trillion worth of bonds that supposedly represent savings, but in fact it is $7.8 Trillion of additional taxes that will have to be paid by the general taxpayers during that period in order to redeem those bonds. Then, mercifully, in 2034 the trust fund runs out of bonds, and the trust fund artifice finally ends. (Though, nobody is going to be fooled about the true nature of the trust fund after 2014 when the general taxpayers will have to begin to redeem some of the bonds.). (In fairness, the $7.8 Trillion is much smaller when expressed in today's dollars -- $1.5 Trillion in year 2000 dollars (non28). It amortizes out to $108 Billion/year over the 34 year period 2000-2034.).

One can also read the Summary Conclusions (non44) to get some more of my biases, which tend towards fiscal conservatism. But most of all, I desire much more honesty and straight-talk from public officials and the media than we have been getting.  

[B] Widely Different Views Given The Same Data and Assumptions (20)

Many people think Social Security will "go bust" and won't be there for them when they retire in 20 or 30 or whatever years. They make much out of the official Social Security Trustees' projections that the Social Security Trust Fund will "become insolvent" in 2034. And they cite frightening demographics -- for example that the number of workers per SS beneficiary is projected to decline from 3.4 in 2000 to 3.1 in 2010, 2.1 in 2030, and 1.9 in 2075. (See section non53 and section non55 for more on this demographic, which I believe is a reasonable forecast).

Others think there is only a minor problem -- e.g. they've heard the Social Security Trustees say that all that is needed to make the Social Security trust fund solvent for at least the next 75 years is to raise payroll taxes by only 2.07 percent of payroll (non71) (1.035 percent of payroll for the employer share, 1.035 percent of payroll for the employee share). And even that won't be necessary if the future general economic environment turns out to be a little more favorable than the "dismal" SS Trustees forecast.

The truth appears to be between these two viewpoints.  

[C] No, The Social Security System Is Not Going to Go "Bust", "Bankrupt", Or "Insolvent" (21)

To moderate the most pessimistic view: the Social Security system is not going to go "bust" just because the Social Security trust fund (SSTF) runs out of bonds (as it is projected to do in 2034, according to the SS Trustees' intermediate scenario, and assuming that nothing is done before then to improve the situation. Remember though, the bonds in the trust funds are irrelevant anyway, as they are not resources that the federal government can use to pay beneficiaries. And the bonds in the SSTF -- or lack thereof -- do not at all affect the government's obligation to pay SS benefits. Those obligations are fixed in law, and have no relationship to the status of the SSTF).

In 2035, when the SSTF is no more (not that that matters), the current Social Security payroll tax (12.40% evenly split between employer and employee) is projected to be sufficient to fund 71% of promised Social Security benefits. Even as far out as 2075, the payroll tax will be sufficient to fund 67% of promised Social Security benefits. See section non61 for the 71% and the 67% numbers.

Note: what I call the Social Security Trust Fund (SSTF) is really made up of two funds: the OASI (Old-Age And Survivors Insurance) Trust Fund and the DI (Disability Insurance) Trust Fund. These are funds maintained by the Treasury Department. The Social Security Trustees Report refers to the combination of the two funds as the "OASDI" funds.

So, even if nothing is done to fix Social Security (i.e. given that the combined employer - employee payroll tax rate remains at today's level of 12.40% and assuming that the Trustees' Intermediate Projections hold), retirees as far out as 2075 will receive at least 2/3 of the benefits (inflation-adjusted) as they receive today.

This information puts another perspective on the Social Security "crisis" -- if beneficiaries on average can do with 67% to 71% of today's benefits (inflation-adjusted), then the Social Security funding crisis goes away. Reducing benefits on average by 1/3 would of course means that benefits for the more affluent elderly would be cut substantially, so that benefits for the most impoverished elderly could be maintained. (The danger of this being that it might erode support by the middle and upper classes for Social Security. Also, the "affluent elderly" only consist of about 20% of the elderly population. The other 80% depend at least in part on their SS checks). ((Source of the 20% and 80% numbers?))