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This section deals with accounting changes to the Social Security and Medicare systems. I'm sure there are more accounting procedure changes and gimmicks than these that have been used in the past to make the situation look better without really improving anything, but I'll have to dig deeper and spend more time on this.
This is an example of one way the government will make a trust fund (the HI Trust Fund) last longer without really doing anything -- by cost - shifting to general revenues. According to US News magazine, 4/12/99: "To help stave off insolvency [of the HI trust fund], Congress and Clinton agreed to shift home health care services to Part B, adding new costs ($12.7 billion in 1998) to part B, while making Part A look better. But higher Part B costs will eventually gobble up other parts of the federal budget.
(According to the SMI Trustee's March 1999 Report, p. 3 {10}, in calendar year 1998, SMI, also known as Medicare Part B, is financed 73% from general revenues, 24% from premiums, and 3% from interest and miscellaneous).
This is another way the government is proposing to make a trust fund (the Social Security Trust Fund) last longer, without really doing anything. The Clinton proposal sounds good -- crediting the Social Security Trust Fund with some portion of the Social Security surpluses. But we've been doing that all along, so it is plain unabashed double-counting! The excuse for beginning to double-count now is that the Social Security surpluses over the next 10 or so years will be used to reduce the publicly - held debt (whereas in the past, when there were no budget surpluses of any kind, the SS surpluses were simply loaned to the general fund and spent on general federal programs).
Under the Clinton proposal, for every dollar of Social Security surplus that reduces publicly - held debt, two dollars worth of SIT obligations will be put into the SSTF. All of these additional SIT obligations will have the impact of extending the "solvency" of the SSTF out to 2055 -- but this does not do anything to strengthen Social Security (as SIT obligations are not real economic assets that the federal government can draw upon to pay benefits. Nor do the SIT obligations affect the obligation of the federal government to pay benefits -- see section non131 for one of many official quotes about that.). In short, Clinton has found an excuse to stuff more bonds into the SSTF. But these bonds are practically meaningless.
However, in Clinton's proposal, the part where 62% of the surplus is used to pay down the publicly - held debt is good. But it would be better to use ALL of the surplus, not just 62% of the surplus, to reduce the publicly - held debt. Under current law, all surpluses are used to reduce the publicly - held debt. So in this regard, Clinton's proposal is a step backwards.
There is much more to be discussed about the Clinton proposals, but time is short, and things will change, so I refer you to the Concord Coalition policy brief on the President's January 1999 Social Security Proposals. See also excerpts from CBO Director Dan Crippen's testimony (non131) which includes some similar criticisms.
This isn't a change or a proposed change. But this topic belongs here, as the broader subject area is partly about "Questionable Accounting Procedures".
The Trust Funds Accounting Procedure In General refers to the whole idea of the trust funds lending their money to the general fund, and the general fund spending the money and crediting the trust funds with Special Issue Treasury obligations (SIT obligations). And particularly media and government official portrayals of the trust funds building up reservoirs of assets that can be drawn upon later to pay benefits. Without mentioning that all trust fund assets are general fund liabilities. This is all discussed in many places in this paper, but most intensively in section non77
Here are some ways that benefits have been cut in the past (this is by no means a complete list, just things I've noticed in looking for material on other topics). The list, though short, does prove that it is possible to cut benefits.
** Raising the age of normal retirement to 67 -- It used to be that the normal retirement age (the age when one was eligible for full benefits) was 65. I don't recall what year the law was changed to begin increasing the retirement age, I think it was in the 1980's, and maybe part of the 1983 overhaul of Social Security. Here is the current law, according to the March 1999 SS Trustee's Report on page 182 {198}: "The normal retirement age is currently 65 and is scheduled to increase to age 66 during the period 2000-05 (at a rate of 2 months per year as workers attain age 62) and to age 67 during the period 2017-22 (also by 2 months per year as workers attain age 62)."
** Taxing up to 85% of SS benefits. Per the March 1999 SS Trustee's Report on page 34 {50}: "Beginning in 1984, up to one-half of an individual's or couple's OASDI (Social Security) benefits was subject to Federal income taxation under certain circumstances. Effective for taxable years beginning after 1993, the maximum percentage of benefits subject to taxation was increased from 50 percent to 85 percent."
I consider this more of a benefit cut than a tax increase, as on net, one is getting a reduced benefit.
This topic does not really fit under the general subject of cutting benefits. But it is kind of related, so I put it here anyway.
Here are some tax increases that have occurred in the past, other than the major ones of increasing the payroll tax rates:
** The Social Security Maximum Taxable Wage has been increasing at a far more rapid rate than average wages have increased. See section non70 for more details. Section non70 also has tables showing the Social Security and Medicare Part A (HI) payroll tax rates from 1937 onward.
** The Medicare HI Program: The Maximum Taxable Wage Eliminated: the HI program (Medicare Hospital Insurance, also known as Medicare Part A) maximum wage ceiling was partially eliminated in 1991, and totally eliminated in 1993.
** Note that I've put the "Taxing Up to 85% of SS Benefits" topic into the benefits - cut category rather than the tax increase category above, since on net it cuts what a beneficiary receives.
In Europe, particularly in Britain, old-age entitlements have been substantially cut. See the 1999 book, Gray Dawn.
See also section non201 on Changes and Questionable Accounting Procedures, such as Medicare: Shifting Home Health Care Costs From Part A (HI) to Part B (SMI).
The below is a view of the economy by United For A Fair Economy. They are a left-wing group advocating greater economic equality through a more "progressive" tax structure and various other measures like that. In support of their agenda, they have a bias towards reporting dismal economic news about the economic progress (or backsliding) of the middle and lower classes, and towards emphasizing how the rich are getting richer.
The view that the middle and lower classes are economically stagnant, or even declining, is a common view. (See also the Economic Policy Institute web site at http://www.epinet.org). We've all heard someone lament that "30 years ago the income of one wage earner was sufficient to support a household, but now it takes two people working full time to support a household". Frequently, higher tax rates are blamed for this. But some say that in addition to higher tax rates, before-tax income is declining for most people.
In the Introduction, section non32, I reported the Social Security (OASDI) Trustee's Report projection that productivity will continue to grow at levels similar to those experienced on average over the last 30 years (about 1.3% / year), and that the growth in the labor force will be an anemic 0.1% to 0.2% after 2020. Thus real GDP growth will tend towards the productivity growth rate of 1.3% per year. Real wages will increase 0.9% a year, thus resulting in a significant increase in real take - home pay, even after paying higher Social Security and Medicare taxes.
The United For A Fair Economy's "Shifting Fortunes" report below gives a gloomier view of the past, and by extension the future.
See the press release for this report and an overview of this report, both released March 29, 1999.
Here are some of the conclusions of the report, in verbal terms:
====================================================** Weekly wages for average workers in 1998 were 12 percent below 1973, adjusting for inflation. Productivity grew nearly 33 percent in the same period.
** Middle 20 percent: Between 1983 and 1995, the middle fifth of Americans lost over 11 percent of inflation-adjusted net worth.
** Middle 80 percent: Lester Thurow: It is also a discussion about what is happening to middle Americans -- those who are neither in the top 10 percent of the population nor the bottom 10 percent of the population. As you are about to see, they are big losers over the last 25 years. Their wealth and earnings are falling as a share of the total wealth and earnings in the United States. More disturbingly, their wealth and earnings have been falling absolutely in inflation-corrected dollars. They have less than they used to have despite an economy that has dramatically increased the per capita Gross Domestic Product.
** Most households: Most households have lower net worth (assets minus debt), adjusting for inflation, than they did in 1983
** Median household: net worth: Adjusting for inflation, the net worth of the household in the middle (the median household) fell from $54,600 in 1989 to $45,600 in 1995, before rising again to a projected $49,900 in 1997. That's still $4,700 lower than the median net worth a decade ago.
** Median financial wealth has fallen from $13,000 in 1989 to a projected $11,700 in 1997.
** Bottom 40 percent: Between 1983 and 1995, the bottom 40 percent of households lost an astounding 80 percent of inflation-adjusted net worth. Their net worths shrunk from $4,400 to an even more meager $900.
** the U.S. homeownership rate hit a record 66 percent in 1998,
** but for people under age 55, homeownership rates were actually lower in 1998 than in 1982.
** Household debt as a percentage of personal income rose from 58 percent in 1973 to an estimated 85 percent in 1997.
** The below table gives summarizes the above statements in a tabular form:
Table T209.1 United For Fair Economy, Shifting Fortunes Report, March 1999 ======================================================================== What Result Period Sector Additional Information =============== =============== ========== =============== ======================= Weekly Wages Declined 12% 1973-1998 Average workers Net worth Declined 11% 1983-1995 Middle 20% Wealth Declined 1973-1998 Middle 80% Lester Thurow foreward Earnings Declined 1973-1998 Middle 80% Lester Thurow foreward Net worth Declined 1983-1998 Most households Net worth Declined 9% 1989-1997 Median household From $54,600 to $49,900 Financial Wealth Declined 10% 1989-1997 Median From $13,000 to $11,700 Net worth Declined 80% 1983-1995 Bottom 40% From $4400 to $900 Homeownership Record high 66% 1998 Overall Homeownership Declined 1982-1998 People under age 55 Household Debt From 58% to 85% 1973-1997 Overall As a percentage of personal income More details on Median Household Net Worth: 1989-1995-1997: ---------------------------------------------------------- Net worth Declined 16% 1989-1995 Median household From $54,600 to $45,600 Net worth Gained 9% 1995-1997 Median household From $45,600 to $49,900 Net worth Declined 9% 1989-1997 Median household From $54,600 to $49,900 All quantities, e.g. net worth, wealth, financial wealth, earnings, and weekly wage quantities, are inflation adjusted.====================================================
There are many more conclusions in the Press Release and the Overview, such as how the top 1%, 5%, and 10% are doing (gaining in real terms, and grabbing an ever larger slice of the pie. For example, the top 1% have more wealth than the entire bottom 95%. Also, they contain information on black, Hispanic, and white households. The statistics on black and Hispanic median household net worth and financial wealth are shocking:
** In 1995, The median white household had a net worth of $61,000
** In 1995, The median black household had a net worth of just $7,400 -- about 12 percent of the median wealth for whites.
** In 1995, The median Hispanic household had a net worth of only $5,000 -- just 8 percent of whites.
** In 1995, Median white financial wealth was $18,000
** In 1995, Median black financial wealth was just $200 -- a mere 1 percent of the median financial wealth for whites.
** In 1995, Median Hispanic financial wealth was actually zero.
Here's one other relevant conclusion from the report, that I didn't include above because it didn't fit the tabular format above:
** The percentage of households with zero or negative net worth (greater debts than assets) increased from 15.5 percent in 1983 to 18.5 percent in 1995-nearly one out of five households. That's nearly double the rate in 1962, when the comparable figure was 9.8 percent-one out of ten households. [overview]
Its all quite gloomy. And remember, the wages and earnings are before taxes. The after - tax wages and earnings would show even sharper declines, per the conventional wisdom that tax rates -- especially state and local -- have been generally increasing over the last 20 and 30 years. (For the "taxes aren't so bad, and in fact they have been going down for the median household" viewpoint, see The Center on Budget and Policy Priorities
One hint that things might not be so bad is that Median Household net worth gained 9% from 1995 to 1997. So perhaps other figures have also been improving in the last few years, and may continue to improve.
According to Kenneth Apfel, Commisioner Of Social Security, in his February 23, 1999 Senate testimony:
[Begin Apfel quote:] Indeed, OMB calculations indicate that the decline in government interest payments will provide sufficient resources so that the combined government expenditures on interest and Social Security benefits will be below current levels as a share of the economy until 2050 and beyond. [End Apfel quote]
I don't yet have any clue where to look for more information on the OMB calculations, other than to try the OMB (Office Of Management and Budget) home page. Or to dig around the Social Security Administration (SSA) web site home page, or to email the OMB or SSA. But I decided to make a quick check with some figures I had on hand.
====================================================
1998
Calendar Year (actual) 2040 2050
Federal Net Interest, B$ 243 0 0
(Fiscal Year)
SS Net Operating
(Cash) Expenditure, B$ -58 1116 1732
Total Of Above
Two Items, B$ 185 1116 1732
GDP (Gross Domestic
Product), B$ 8509 58640 78930
Total As % of GDP 2.2% 1.9% 2.2%
Federal Net Interest comes from the CBO, The Economic and Budget Outlook: Fiscal Years 2000-2009, January 1999, E&B0199.pdf. Federal net interest is approximately the interest on the publicly - held debt. (See section non161 for more on net interest, and how it differs from gross interest). It is fiscal year rather than calendar year, but I'd expect the fiscal year and the calendar year figures to be pretty close in this case. (Fiscal year 1998 is Oct 1, 1997 to Sept 30, 1998, i.e. 3 months earlier than the calendar year). The assumption is that the publicly - held debt is completely paid down, which is projected by about 2015 if fiscal discipline is maintained (no tax cuts and no new spending).
SS Net Operating (Cash) Expenditure is from the SS Trustees March 1999 Report (TR99). It is all Social Security Trust Fund (SSTF) expenditures less all SSTF income, excepting interest. So what the table above says is that in calendar year 1998, the SS system actually had a cash surplus of $58 Billion (taxes collected exceeded expenditures by $58 Billion). But in 2040 and 2050, the SS system will have a cash deficit of $1116 Billion and $1732 Billion respectively. See the table at non80 for more on the SS trust fund operations. It is called Operating (Cash) Net Income in that table.
GDP (Gross Domestic Product) comes from Table III.B1 in the SS Trustees March 1999 Report (TR99)
====================================================
One can see that -- given that the publicly - held debt is reduced to zero by then -- the assertion is indeed correct. It kind of puts a new perspective on the Social Security situation.
However, one must factor in Medicare. (Always remember that a common strategy of the "no-big-problem" people is to present the Social Security, Medicare, Medicaid, and federal pensions problems separately as four large but manageable problems, rather than combined as one huge and unsustainable problem. It is like presenting a seriously indebted person's financial situation as separate and manageable subproblems -- the mortgage isn't that big of a problem. The credit card payments aren't that large. The medical bills aren't that large. The food expenditures aren't that large. Etc. But when one adds them all up, one finds that the person is heading for bankruptcy.)
Medicare expenditures are expected to rise from 2.53% of GDP in 1998 to 5.26% of GDP in 2040 and in 2050 (see section non30). That's an increase of 2.73% of GDP (5.26 - 2.53 = 2.73). So if one looks at Federal Net Interest plus Social Security + Medicare, we can expect to be paying about 2.4% more of GDP in 2040 and 2.7% more of GDP in 2050:
====================================================
From 1998 From 1998
to 2040 to 2050
Increase in Federal Net Interest +
SS Net Operating Cash Expenditure
As % of GDP -0.3% 0.0%
Increase in Medicare Expenditures
As % of GDP 2.7% 2.7%
Total Increase in Federal Net
Interest, SS Net Operating
Cash Expenditures, and
Medicare as % of GDP 2.4% 2.7%
====================================================
A note of caution: in the above, for the Social Security component, I am using the change in Net Operating Cash Expenditure. That's because I have the figures. (Net Operating Cash Expenditure = expenditures - tax revenues. It excludes interest). Whereas for Medicare, I am using the increase in expenditures, rather than the increase in net expenditures. That is because most (about 75%) of the funding for the Medicare Part B program (SMI) comes from general revenues rather than dedicated revenues. So net operating cash expenditure is not comparable, because it just sucks whatever revenue it needs from the Treasury general fund.
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