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I was very confused by what I was reading about Social Security in the media. As described earlier, media reports vary widely in how they characterize the long - term health of the Social Security system. And much of what the media writes propagates some myths. Therefore, for my own understanding, I decided to dig into this issue, read three books and many web pages and reports on it, and engage in long discussions about it on various online message boards such as the alt.politics.economics newsgroup.
As others are no doubt also confused, I decided to share what I have learned by putting up this web site. I am especially concerned that media and government official portrayals of "no big problem" seriously understate the problem. (On the other hand, media and politicians loosely using words like "insolvency" and "bankruptcy" lead many to the polar opposite conclusion that these programs will automatically disappear when the trust funds run out).
Most of all, I am bothered when some government official or the media says or writes something that implies we are saving for our retirement by investing in government bonds and putting them away in the Social Security Trust Fund. (As explained many times in this paper -- see especially section non77, that sounds good, until the question is asked, "what happens when the annual Social Security surpluses turn into deficits and government bonds in the SSTF need to be redeemed in order to pay benefits? Where will the money come from to redeem the bonds?". It is the classic "half truth" -- talking about the SSTF bonds as assets to the SSTF while not mentioning that they are also a liability to the Treasury general fund, and thus a liability to future general taxpayers).
I am concerned that most media portrayals of the SS problem propagate the myth that the SSTF has real economic assets in it, and consequently only a 2.07 percentage point increase in SS payroll taxes (or some other equivalent mixture of benefit reductions and tax increases) is enough to make the SSTF "solvent" for at least 75 years, thus fixing the problem. And that a small favorable shift in general demographics and economics will make the SSTF solvent even without any increase in payroll taxes. But that is only half the story. The other half of the story is that the general taxpayers are going to have to come up with an extra $7.8 Trillion between 2014 and 2034 to pay back what the general fund has borrowed from the SSTF all of these years.
Another concern are portrayals that treat Medicare and Social Security separately as two relatively small problems. Whereas when one looks at the combined impact of Medicare and Social Security, it becomes a much larger problem. Add on federal and military pensions and Medicaid -- which pays for nursing homes for the elderly with no other resources -- and the coming senior entitlement problem becomes quite large.
On the other hand, media and politicians loosely using words like "insolvency" and "bankruptcy" lead many to the polar opposite conclusion that these programs will automatically disappear when the trust funds run out. This too is false. As section non21 points out: 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.
Based on optimistic media reports that say that we're building up assets for our future retirement in the SSTF, and only an additional 2.07 percent - of - payroll tax increase is needed to keep it going for 75 more years -- people are making decisions, such as retiring earlier and earlier and with less money saved, based on the belief that Social Security and Medicare will be there in the future for them, with similar (or better) benefits than today, and with only relatively small tax increases at most on themselves and the working - age generation.
I am also concerned that too many people are taking the good "new economy" of the last 3 or 4 years, and using it as a basis to forecast the future economically. Many of the more optimistic projections discount the possibility -- or should I say likelihood -- of long severe recessions and long periods of stagnation. Also, too many people are taking past real GDP growth and projecting it into the future, without realizing that a fast-growing labor force was a large part of the reason behind the past real GDP growth numbers. This can be seen in the table below, taken from Table T234.1:
Average Annual
Percentage Change
-------------------
Labor Real
Force GDP
1960s 1.7 4.4
1970s 2.4 3.5
1980s 1.7 2.7
1990s 1.1 2.5
2000 1.0 2.0
2010 0.6 1.8
2020 0.2 1.4
2030 0.2 1.4
2040 0.2 1.4
2050 0.1 1.3
2060 0.1 1.3
2070 0.1 1.3
2075 0.1 1.2
Source: Social Security Trustees March 1999 Report
(TR99), Table II.D1
As discussed in section non234, the Trustees project only a 0.2% growth rate in the labor force after 2020, and only a 0.1% growth rate in labor force after 2050. With the growth in the labor force nearing zero in the later years, the real GDP growth rates are expected to converge toward the forecasted productivity growth rate of 1.3% / year. (This is approximately the average productivity growth rate of the last 30 years -- see section non241 for a discussion of productivity.)
Not all agree that a continuation of the economic performance of the past means growing real wages in the future. Some claim that the last 30 or so years have been a period of real economic decline for the middle and lower economic classes -- see for example the discussion of the United for a Fair Economy "Shifting Fortunes" report at section non206. Thus any projections that show significant real wage increases -- such as all three of the Social Security Trustees' projections -- are suspect.
The budget surpluses, so-called "booming economy", and "no big problem" portrayals of Social Security (and relatively little serious discussion of the future needs of Medicare) are leading many to propose squandering the surplus by engaging in extra spending or tax cuts. However, that would leave us walking an economic tightrope, with a very large (and growing) national debt load, and not much room in the future for financing a major emergency like a major military conflict or a long severe recession or depression. Thus I put up this web site to provide a more detailed picture of Social Security, Medicare, the federal budget, and economics and demographics.
Finally, some of the misinformation or partial-truths in the media have led to uninformed proposals to fix the problem. Many of the proposals for "saving" Social Security and Medicare are less than what they appear. For example, some people think, gee, why don't we sell some of the government bonds in the trust funds, and then buy stocks and some higher yield corporate bonds? And why didn't we use some of the annual SS surpluses in the past to buy stocks etc.? They don't realize that the past annual SS surpluses were loaned to the general fund, and the general fund spent them on current general federal programs. (And that kept general taxes (mostly income taxes) lower than what they otherwise would have been). In other words, the Social Security surpluses in the past have been spent, and there are no funds sitting in the Social Security Trust Fund to buy stocks with. Social Security has been run as a pay - as - you - go program, with nothing being saved for investing in stocks or anything else.
Regarding the question of selling the bonds in the trust funds and buying higher - yield corporate bonds and stocks, almost all of the bonds in the Social Security and Medicare trust funds are non-marketable, per official government documents. See section non214.
Some people use the doom - and - gloom "bankruptcy" talk to argue that Social Security is broken, and only a radical overhaul, including privatization, is necessary. But that the problem isn't so bad that we shouldn't have big tax cuts now. See some excerpts from Minnesota Senator Rod Grams' web site in section non96 for more on the "its hopelessly broken" viewpoint. At the very same time, he is proposing big tax cuts, particularly for the wealthy. Go figure.
It is impossible to discuss fixing the problem without understanding what the problem is first. I hope this web site provides sufficient accurate and (mostly) unbiased information to at least understand the problem.
In section non94, "What About Privatizing, Or Investing Some SS Revenues In The Stock and Bond Markets?", the "low return" myth of Social Security is discussed. (It's true, but SS is not an investment program, it is a pay-as-you-go program!). Following that is a discussion of privatization, particularly of the very heavy transition costs of changing SS from a pay-as-you-go program to an investment program.
I don't plan to discuss solutions in detail. For some general ideas, see section non107. For more detail and some alternatives, the Concord Coalition Social Security primer volume 1 and volume 2 have a lot of discussion on proposed solutions on a "pro - and - con" basis.
For now, I'm happy to see the SS surpluses being used to reduce the national debt. After the publicly - held national debt is eliminated, then some surpluses should be used to invest in real assets like private sector stocks and bonds, and state and local government bonds. (The federal government writing IOUs to itself, and stuffing them in the SSTF, as it is currently doing, is not a form of saving or investments).
I've written this paper assuming that the Trustees' Intermediate forecast is the most likely case, and then tried to put it in perspective and explain what it means -- by assessing the impact on future taxpayers in various ways. I also assume that we will at worst have small budget deficits, and thus the publicly - held federal debt will not grow much in dollar terms, and will at worst grow less than the rate of GDP growth, and thus become smaller relative to GDP. Or hopefully the publicly - held debt will continue to decline. (Currently, in 1998 and 1999 anyway, we're running qualified unified budget surpluses now (thanks to the Social Security surpluses) and we are actually reducing the publicly - held debt for the first time in decades. And budget forecasts from the OMB and the CBO project a near - complete elimination of the publicly - held debt in 15 years.).
Given that situation (the Intermediate Trustees' forecast and small budget deficits at worst), tax rates will have to go up significantly. But even so, real take home pay will improve modestly. See section non32 for more on this scenario.
Another conclusion is that the Social Security Trust Fund (SSTF) will not help at all in lightening the burden of taxation on future taxpayers. The bonds in the SSTF are nothing more than promises being made to future Social Security beneficiaries. And it will be the future taxpayer that will have to come up with the real money to redeem these bonds. Thus, the SSTF is nothing more than a reservoir of promises to future SS beneficiaries that must be fulfilled by future general taxpayers. (The SSTF amount is included in the national debt for a good reason -- because in fact it is debt -- it is what the general taxpayer owes to the SS beneficiaries.)
Should we be so frugal and lucky that we continue running at least unified budget surpluses ( section non152 explains these budget terms ), then some or all of the SS surplus will be used to pay down the publicly held debt. This is important for three reasons:
{1} in a real sense, this means that we are saving those SS surpluses as we are using them to reduce debt incurred in earlier years,
{2} the publicly - held debt is the critical debt from the standpoint of the financial markets (as opposed to SSTF debt -- which is what one Treasury account owes to another Treasury account, a matter that the financial markets couldn't care less about) , and
{3} Lowering the publicly - held debt gives us the ability to later raise it back up again (and still end up no worse then we are now). We will likely have to raise the publicly - held debt in the future because the Social Security operating deficits of the future will be largely financed by selling bonds to the public.
But for the above modestly pleasant scenario to pass (real take home pay to increase a little), a degree of fiscal restraint and good fortune must occur that is greater than what we've experienced in the past several decades. We've had run-away budget deficits for 30 years, and have only exercised reasonable fiscal restraint in the last few years. (See section non23 above on how the national debt has gone up more than 11 - fold since 1975).
However, now that we have reached a qualified unified budget surplus section non3 (i.e. we've got a unified budget surplus thanks to the SS surplus; but the on-budget array (which excludes SS) is still in deficit), and are on track to reach an unqualified budget surplus (i.e. both the on-budget array and off-budget array having surpluses) in a couple of years, there is a lot of sentiment to declare victory and start major spending increases and tax cuts. So I'm concerned that the marginally good situation that I describe (a small increase in real take-home pay over the next several decades) could erode into the opposite -- a decline in real take - home pay.
The projected non-social security surpluses are quite fragile. They depend on all of the following assumptions being substantially met, per Concord Coaltion Director Robert Bixby's February 1999 testimony in section non137:
{1} The economy will indefinitely continue its now record peacetime expansion;
{2} Congress will adhere to the tight discretionary spending caps of the 1997 Balanced Budget Act; and
{3} All surpluses, including Social Security, will be used to reduce publicly-held debt, resulting in a virtuous cycle of lower interest costs and higher surpluses.
In his testimony he notes that Department of Defense increases proposed in the President's FY2000 budget will eat up 1/3 of the projected non-Social Security surpluses over the next five years. And if the Joint Chiefs of Staff spending requests are met, that would eat up nearly all of the non-Social Security surpluses for the next five years.
In July 1999, a few months after his testimony, there were announcements of new projections that there will be an additional $1 Trillion of surpluses over the next 15 years. However, I've read analyses at the Concord Coalition and the Center for Budget and Policy Analysis that indicate that the foregoing assumptions must still hold true in order for substantial non-SS surpluses to materialize.
It seems to me that we're precariously balanced between a situation that could almost as easily deteriorate as improve. I think it will work out O.K. if we remain fiscally responsible.
However, if we get fiscally sloppy, or end up in some expensive long-running military conflict, or have several years in recession or worse, then the budget situation will then almost certainly deteriorate to the point where we can't meet all of our entitlement promises as well as interest on the debt.
We've really blown most of our national debt safety margin (non25) in the last 25 years by unnecessarily running up a $5 trillion debt, and so we had better play our fiscal cards carefully.
Even given the pleasant scenario of the Intermediate Forecast with fiscal restraint in section non32 above, there is still one other concern -- the size - of - government issue. Even in the pleasant scenario, it is still true that the federal budget relative to GDP and the payroll tax rate (and/or income tax rates) will both become quite a bit larger than today. On top of that, entitlement spending will consume a large and ever growing share of federal spending, crowding out discretionary spending. See section non138 where Robert Bixby of the Concord Coalition says that entitlement spending in fiscal year 1998 was 57% of federal spending, and that entitlements will consume 73% of federal spending in 2009 (and this is before any baby boomers reach age 65!). (What Bixby calls entitlement spending is the Mandatory Spending budget category. It includes Social Security, Medicare, Medicaid, and retirement programs for both federal civilian and military employees, and many other programs. It does not include interest on the debt. See section non138 for the 73% number, and non145 for what the Mandatory Spending budget category is.).
I did a separate analysis where I added up a few items in the federal budget that most consider essential and uncuttable. These consist of what I call "hard - core entitlements" (primarily SS and Medicare), plus interest on the publicly-held debt, and defense. These few essential items come to 75% of federal expenditures in 1998. See section non146 for details. (For those who consider defense cuttable, I'm sure you could list a few subsitute programs, totaling the same amount as defense spending ($270 Billion in FY 1998), that you would consider uncuttable).
The point of this is that federal spending cannot be cut much (say by more than about 15%) unless we are willing to cut SS and Medicare. And that hard-core entitlement programs will continue to grow and eat up an even larger share of the federal budget and of the gross domestic product.
The Michael Hodges Grandfather Web Site is devoted to showing how federal spending and the tax burden have grown. I don't agree with his solution -- just cut taxes and hope this will force federal spending down (again, there isn't much that can be cut percentage-wise unless we cut SS and Medicare) -- and I'm no fan of Milton Friedman, but other than that, the web site is an excellent source of facts and analysis.
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