Do You Believe Social Security Will Go Bankrupt?

 

In a recent comment in a thread on Open Salon, one of familiar right-wingers described Medicare as a “fiscal disaster.”  My first inclination was to ask him to back up that statement.  That, after all, is what he would have said to me had I made a similar assertion with an opposite slant.

My second was to recognize it as another one of those well-worn buzzwords used ad nauseum to describe anything President Obama tries to do.

I thought how often I have heard “entitlement” denigrators insist that our Social Security system is headed for bankruptcy.  I’ve seen predictions of such bankruptcy ranging anywhere from next week to 2032.

So I did a little research and found what I consider some pretty strong information that debunks two common beliefs about Social Security:

1) That the Social Security Trust Fund (a fund containing tax revenues collected that were not used immediately to pay eligible retirees) was set up to be raided by the federal government by something done during the Lyndon Johnson administration, and

2)That the Social Security Trust Fund will go bankrupt and add to the budget deficit.

For those interested in learning information with a little more heft to it than knee-jerk buzzwords, I have posted both in their entirety.

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FROM FORBES.COM, JANUARY 7, 2013

John T. Harvey Contributor

Leadership 1/07/2013 @ 1:13PM 14,037 views

Why Social Security Can't go Bankrupt: Rerun

My very first Forbes.com post almost two years ago explained how Social Security could not fail simply because it ran out of money. As Social Security funding is once again in the news and there appears to be concern that it could, indeed, go bankrupt or in some way contribute to the budget deficit and debt, I’d thought I’d do a rerun!

It is a logical impossibility for Social Security to go bankrupt. We can voluntarily choose to suspend or eliminate the program, but it could never fail because it “ran out of money.” This belief is the result of a common error: conceptualizing Social Security from the micro (individual) rather than the macro (economy-wide) perspective. It’s not a pension fund into which you put your money when you are young and from which you draw when you are old. It’s an immediate transfer from workers today to retirees today. That’s what it has always been and that’s what it has to be–there is no other possible way for it to work.

To explain this, let’s create a simple world. Say there has been some sort of terrible global calamity and we only have ten people left. Further say that these ten decide to make the best of it and set up a society, including an economy. Of course, much of humanity’s technology is now lost to us, so our level of productivity is very low. As a starting point, assume that each of us is only able to produce enough output for herself or himself to survive.

How many people can retire under these circumstances? Obviously, none. Anyone who stops working, starves. It is irrelevant how many people over 65, disabled, or otherwise deserving there are, no one can quit because our level of productivity is too low. Nor is it helpful to have a pile of cash somewhere. No amount of money can change the fact that one person can only make enough goods and services for one person. If there are ten people to feed, clothe, and shelter, then ten people must work. This reality is inescapable and is the reason why the real determinant of the feasibility of Social Security (or any other type of retirement system, private or public) is productivity. If it falls short, then supporting a class of retirees is impossible, regardless of how much cash we have on hand; if it does not, however, financing it is trivial. This will be shown below.

Now let’s say it’s been several years and we have been able to increase our productivity. To make the math simple, double it. This gives us some options:

We could all keep working and just double our standard of living.
Five people could keep working and share half of their stuff with the other five, giving us each the same standard of living as at the start.
We could adopt an intermediate position with more than zero but fewer than five retirees, allowing us both a chance to retire and a higher standard of living.

The third would probably be the most attractive, and it is what we have actually experienced. Productivity growth has been such that, not only have people been able to retire, but we are each better off, too. Assuming we follow this path, what is the next step?

First, we would need to agree on how many people get to retire, what the criteria are, and what their share will be. As that’s more politics than economics, however, I won’t say too much about it other than to say that there is no reason to assume that the retirees should get exactly the same cut as the workers. We could decide they get more, less, or the same. The possibilities are determined by productivity, while the specifics are a function of our sense of justice and our national philosophy (and, if we are realistic about it, the distribution of power).

To make the example concrete, say we decided that three of our survivors qualify for retirement (leaving seven workers) and that we will all get equal shares. This would mean that each worker would get to keep 70% of what they produced, passing the remaining 30% to the retirees (if you grab a calculator, you’ll see that gives everyone the same share–however, understanding this is not important to the rest of the story). And that’s it–we are done. With only ten people, it doesn’t need to get any more complicated. We have a retirement system and we don’t need to talk about money at all. We just say stuff like, “Hey, Bob! I caught ten fish today–which three do you want?”

In the real world, however, there are more than ten people and thus the coordination of this effort becomes much more complex. And this is where money comes in. Its function is to enable the transfer of output from current workers to current retirees in a world where we are not all neighbors. Money does not, to reiterate, have anything whatsoever to do with whether or not we can support retirees, how many they can be, or how much they can have. That is 100% a result of productivity. Money is only the mechanism we use to make sure Bob gets his three fish.

To give it a more realistic feel, change the numbers from 7 workers and 3 retirees to 70 million and 30 million. Now what to do? Even if we have unanimous agreement on our plan, how can we make sure that retirees get their cut if it is no longer as easy as picking three fish from a basket full of ten? The most obvious and straightforward means is this: set a tax of 30% on the salaries of existing workers and give it directly to the retirees–right now, today, immediately. Have the money come straight out of your paycheck and right into your grandmother’s bank account. This accomplishes the goal neatly and directly–and it’s exactly what we do in real life. This is how Social Security actually operates. As you can see, this needs no prior financing or savings, nor would that appear to be particularly helpful. At the national level, maintaining a class of retirees (whether via Social Security or private pensions) means redistributing existing output, not putting money under your mattress. Although you can run out of money for retirement, we, as a nation, cannot.

What, then, you may ask, is the Social Security Trust Fund, the pool of money that people say will dry up and make it impossible for anyone to receive their Social Security payments? It is the surplus that resulted from having collected more in taxes than was necessary to pay out to retirees. Let me say that again: it is how much existing workers were overtaxed relative to the need to pay retirees in the past. It was never the source of the money we’ve been paying to Social Security recipients all these years. Strictly speaking, it’s completely unnecessary if we are able to precisely and continuously match tax revenues and pay outs.

We cannot do that, of course, partly because we are dealing with millions of people in a complex economy. In addition, while the payments to retirees are fairly formulaic and change in a predictable way (we can figure how many people are about to reach eligibility and how much they will draw), the revenues fluctuate with the state of the economy. They rise during expansions and fall during recessions. The trust fund can therefore serve as a place to park excess revenues when taxes exceed expenditures and from which additional funds can be drawn when the reverse occurs. It’s a buffer, sort of like that give-a-penny-take-a-penny tray at the local convenience store. As always, however, productivity and productivity alone determines our ability to support a class of retirees. This is only about how we coordinate that system.

There is another trust fund issue and it is the one related to the expected increase in the ratio of retirees to workers over the next couple of decades. This would presumably cause a net drain on the fund since payments to retirees might increase relative to tax revenues. This is actually the specific phenomenon to which many people are referring when they say that Social Security is going to go bankrupt. However, a) there is no guarantee this will occur since rising productivity could drive up wages sufficiently to compensate (although our trend of stagnating wages relative to profits is frustrating this) and b) even if that did occur, this hardly means that Social Security is kaput. Any shortfall can always be addressed in a very straightforward and supremely logical fashion: raise taxes or lower benefits (and it is exceedingly like that even if this occurs, we aren’t talking about anything drastic). It bears emphasizing, however, that such changes would still be a function of productivity and have absolutely, positively nothing to do with how much money we have or haven’t saved up. Funding, finances, money, taxes, etc. are part of the coordination mechanism, not the feasibility.

The lesson from this is that if we want Social Security to “be there” when we retire, our efforts must be focused on increasing productivity and making sure in particular that these increases get passed on to workers in the form of higher wages. But raising the value of the trust fund is, in this respect, pointless. Even if we had an infinite amount of money in it such that we could reduce all workers’ taxes to zero and still pay retirees, the exact same thing is still happening: Bob is getting three fish from the basket of ten, leaving seven for the original fisherman. Whether we accomplish this via direct taxation or from a pool of funds is absolutely, totally irrelevant in terms of the underlying economic impact (except for the fact that paying retirees from a fund is likely to cause inflation–explaining why is a little complicated so I don’t pursue it here). We are fooling ourselves if we think that taking money from the trust fund is giving us a free lunch. If there are only ten fish, there are only ten fish. Nothing other than changing productivity can affect that. The trust fund is worth having as a buffer, but it has zero to do with the feasibility of the system. If it runs out tomorrow, we can still have Social Security because we still have ten fish.

Incidentally, there appears to be every indication that productivity increases should be sufficient for the Baby Boomers to retire AND allow the rest of us enjoy even higher standards of living (assuming the compression of wages ends). That’s good news. In fact, it’s the only news that’s important.

In closing, I’m not telling you whether you should be for or against Social Security, but the argument that it is going bankrupt is a non-starter.  It is much ado about nothing.

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FROM SOCIALSECURITY.GOV

Debunking Some Internet Myths- Part 2

(See also, MYTHS AND MISINFORMATION ABOUT SOCIAL SECURITY- Part 1)

MYTHS AND MISINFORMATION ABOUT SOCIAL SECURITY- Part 2

Myths and misstatements of fact frequently circulate on the Internet, in email and on websites, and are repeated in endless loops of misinformation. One common set of such misinformation involves a series of questions about the history of the Social Security system.

One Common Form of the Questions:

Q1: Which political party took Social Security from the independent trust fund and put it into the general fund so that Congress could spend it?
Q2: Which political party eliminated the income tax deduction for Social Security (FICA) withholding?
Q3: Which political party started taxing Social Security annuities?

Q4: Which political party increased the taxes on Social Security annuities?
Q5: Which political party decided to start giving annuity payments to immigrants?

THE CORRECT ANSWERS TO THE FIVE QUESTIONS
Q1. Which political party took Social Security from the independent trust fund and put it into the general fund so that Congress could spend it?
A1: There has never been any change in the way the Social Security program is financed or the way that Social Security payroll taxes are used by the federal government. The Social Security Trust Fund was created in 1939 as part of the Amendments enacted in that year. From its inception, the Trust Fund has always worked the same way. The Social Security Trust Fund has never been "put into the general fund of the government."

Most likely this question comes from a confusion between the financing of the Social Security program and the way the Social Security Trust Fund is treated in federal budget accounting. Starting in 1969 (due to action by the Johnson Administration in 1968) the transactions to the Trust Fund were included in what is known as the "unified budget." This means that every function of the federal government is included in a single budget. This is sometimes described by saying that the Social Security Trust Funds are "on-budget." This budget treatment of the Social Security Trust Fund continued until 1990 when the Trust Funds were again taken "off-budget." This means only that they are shown as a separate account in the federal budget. But whether the Trust Funds are "on-budget" or "off-budget" is primarily a question of accounting practices--it has no effect on the actual operations of the Trust Fund itself.

Q2: Which political party eliminated the income tax deduction for Social Security (FICA) withholding?

A2: There was never any provision of law making the Social Security taxes paid by employees deductible for income tax purposes. In fact, the 1935 law expressly forbid this idea, in Section 803 of Title VIII.

(The text of Title VIII. can be found elsewhere on our website.)

Q3. Which political party started taxing Social Security annuities?
A3. The taxation of Social Security began in 1984 following passage of a set of Amendments in 1983, which were signed into law by President Reagan in April 1983. These amendments passed the Congress in 1983 on an overwhelmingly bi-partisan vote.

The basic rule put in place was that up to 50% of Social Security benefits could be added to taxable income, if the taxpayer's total income exceeded certain thresholds.
The taxation of benefits was a proposal which came from the Greenspan Commission appointed by President Reagan and chaired by Alan Greenspan (who went on to later become the Chairman of the Federal Reserve).

The full text of the Greenspan Commission report is available on our website.

President's Reagan's signing statement for the 1983 Amendments can also be found on our website.

A detailed explanation of the provisions of the 1983 law is also available on the website.

Q4. Which political party increased the taxes on Social Security annuities?

A4. In 1993, legislation was enacted which had the effect of increasing the tax put in place under the 1983 law. It raised from 50% to 85% the portion of Social Security benefits subject to taxation; but the increased percentage only applied to "higher income" beneficiaries. Beneficiaries of modest incomes might still be subject to the 50% rate, or to no taxation at all, depending on their overall taxable income.

This change in the tax rate was one provision in a massive Omnibus Budget Reconciliation Act (OBRA) passed that year. The OBRA 1993 legislation was deadlocked in the Senate on a tie vote of 50-50 and Vice President Al Gore cast the deciding vote in favor of passage. President Clinton signed the bill into law on August 10, 1993.
(You can find a brief historical summary of the development of taxation of Social Security benefits on the Social Security website.)

Q5. Which political party decided to start giving annuity payments to immigrants?
A5. Neither immigrants nor anyone else is able to collect Social Security benefits without someone paying Social Security payroll taxes into the system. The conditions under which Social Security benefits are payable, and to whom, can be found in the pamphlets available on our website.

The question confuses the Supplemental Security Income (SSI) program with Social Security. SSI is a federal welfare program and no contributions, from immigrants or citizens or anyone else, is required for eligibility. Under certain conditions, immigrants can qualify for SSI benefits. The SSI program was an initiative of the Nixon Administration and was signed into law by President Nixon on October 30, 1972.

An explanation of the basics of Social Security, and the distinction between Social Security and SSI, can be found on the Social Security website.