What’s Wrong Today:
If you
want to preserve Social Security, you have to take on the deficit scolds.
The “Fix
The Debt” people, plus Messrs. Bowles and Simpson and their fellow travelers, try
to mislead us on Social Security, which they conflate with the growing costs of
Medicare and Medicaid.
They have
been very successful in bringing their message to the main stream media. For
example, Fareed Zakaria wrote an essay for Time,
The Baby Boom and
Financial Doom.
Here is what Zakaria says:
1 in 25 Americans was over the age of 65. In 2030, just 18 years from now, 1 in
5 Americans will be over 65. We will be a nation that looks like Florida.
Because we have a large array of programs that provide guaranteed benefits to
the elderly, this has huge budgetary implications. In 1960 there were about
five working Americans for every retiree. By 2025, there will be just over two
workers per retiree. In 1975 Social Security, Medicare and Medicaid made up 25%
of federal spending. Today they add up to a whopping 40%. And within a decade,
these programs will take up over half of all federal outlays.
Well, those facts may seem hard for Mr.
Zakaria to dispute, but they don’t have much to do with Social Security, and
Social Security doesn’t have much to do with the deficit. Zakaria says:
“In 1900, 1 in 25 Americans was over the age of 65. In 2030, just
18 years from now, 1 in 5 Americans will be over 65.” This could mean that many senior citizens are in need of saving money for daily living, that is why senior discounts are highly important in this area.
This sounds like “Gosh, the population of old people is soaring. It’s going to
cost me five times as much to pay for “the old” if we don’t do something.”
Maybe not. In 1900, people had large
families because a lot of their kids died. This by itself would tend to make
the ratio of under 65’s to over 65’s larger than today. Also, back then, people
over 65 died earlier. But Zakaria doesn’t really want us to return to higher
infant mortality and a shorter old age. Maybe he’s only pointing at the
problem: “How are we going to support
all these old people?”
“In 1960 there were about five working Americans for every
retiree. By 2025, there will be just over two workers per retiree.”
Did you know that today, the ratio is 3.1 working Americans for
every retiree? Perhaps that makes the jump to “2 (really 2.1) working Americans”
seem less scary. Perhaps that might make you ask “how are only three of us
supporting each retiree? The answer is that “we” are not supporting those
retirees. They paid for their Social Security themselves. Here is the
Wrongologist’s personal example:
SS
Paid
in by Wrongo: $127.3k
Paid
in by employer: $120.6k
Totals $247.9k
At 66½,
the Wrongologist began drawing Social Security @$ 2.2k per month. At that rate per
month, his social security account will go into deficit when he turns 81. By 90, he would have cost the government $190k, assuming he pays the government
approximately 20% in taxes due. So, there can be some real deficit creation,
assuming he lives a long life. But, not every Social Security recipient lives
to 80, much less 90.
But, as in the example, Social Security
is paid for by the people who get the benefits. It is their money. It has nothing to
do with the federal budget. The population numbers sound scary because they are
meant to sound scary, but the fact remains that workers can continue to pay for
their own Social Security by simply
agreeing to increase their payroll taxes.
A few more
facts: The Social Security Administration projects Social Security
outlays to rise from around 5% of GDP today to around 6% of GDP in the mid-2030s
and then fall back below 6% (when the Baby Boom bulge disappears).
That 1%
gap can be closed by modest increases in taxes, increases in the level of income
taxed, more aggressive means testing of the benefit, further delaying the age
of eligibility, without resorting to cuts in benefits. For example, a 2% increase
in payroll taxes would entirely close the expected funding gap. Extending the eligibility
age is the only oppressive option.
Is
Social Security adding to the Federal Deficit?
The Social
Security program currently has a cash deficit. That is, the payroll tax
that finances it is not generating sufficient revenue to pay current
benefits. As a result, the federal government is borrowing money to pay
Social Security benefits.
On its
face, it sounds like the Social Security program is contributing to the
nation’s debt. However, that is not the way Social Security is financed.
The
Congressional Budget Office (CBO) explains that our nation
has two types of debts; that owed to the public and that the government owes
itself. Debt to the public is owed to investors who have purchased
Treasury securities. Debts the government owes itself are IOU’s held by
various government trust funds that have had surplus revenues in the
past.
Social
Security ran a surplus from 1984 through
2009 (taking in more payroll tax revenue than was paid out in benefits).
Of the estimated $16.3 trillion of accumulated federal debt through the end of
2012, the Social Security Trust Fund is owed $2.7 trillion by the US government.
So, this is money the government owes
itself.
The Social Security Trust Fund is an asset on the books of the Social Security
Administration. That is, this part of the government has a legitimate claim
on the US government.
When the
Social Security program runs a cash deficit, the Social Security Trustees
request repayment of some of the Treasury securities they purchased when the
program was in surplus. Because the federal government is currently in
deficit, the Treasury Department must borrow the money to make these repayments
to Social Security.
However, the new borrowing will not
increase total debt. This transaction is more like refinancing existing
debt than accumulating new debt. If you owe a $5,000 credit card bill and you
take a home equity loan to pay off the credit card, your total debt has not
changed; you have refinanced the debt, transferring it from one financial
instrument (and one creditor) to another.
The same is
true when repaying the Trust Fund. The fund’s assets are composed of
debts already accounted for as part of the nation’s total debt. When the
Treasury borrows to pay current Social Security benefits, the debt owed to the
Social Security Trust Fund is repaid, refinanced, and transferred to whoever
purchases Treasury securities.
So, the
current cash deficit in the Social Security program is not contributing to the
nation’s debt or its deficit. This will be true so long as the Social
Security Trust fund holds Treasury Securities that are already counted as part
of the debt (current forecasts suggest
this will be true for 20 more years).
So, a 66 year old person can collect
Social Security for 14 years (until 80) without
adding to the federal deficit.
The Social Security Administration can
fund its current shortfall between Social Security receipts and payments without adding to the federal deficit
for another 20 years.
Let’s also consider Medicare. Here is more
from the Wrongologist’s personal example:
Medicare
Paid
in by Wrongo: $66.3k
Paid
in by employer: $65.2k
Totals $131.5k
Despite
what he paid in, just one serious illness with hospitalization will easily blow
through $131k of Medicare reimbursements, so it is partly on the budget and the unfunded portion of cost will add to the deficit.
Medicaid,
however, is entirely on the budget;
it is welfare. Medicare
and Medicaid expenditures are projected to rise to 7.4% of GDP from current
levels of about 5.5% by the mid-2030s, mostly because of rising health care
costs. But, unless we want
to go back to higher infant mortality and more homeless people dying in the
streets, this is a problem we must address.
The way to address these uncontrolled
costs is not by cutting the programs and throwing sick people onto the streets.
Sensible deficit hawks shouldn’t mix
Social Security with the health programs; they should focus their efforts
instead on reducing the growth in health care costs.
That
simply has not been a focus of either political party: Democrats are now the
party of smallish government and tax cuts for most people, while Republicans
are the party of limited government and tax cuts for everyone.Deficits have to be faced.
And neither party is committed to preserving
the social safety net.
Simple, rational
arguments are required in order to carry the day for Social Security.
Excellent points. It is especially important to separate Social Security from all the rest. Especially since the govt has a large moral obligation to all the wage earners who payroll taxes (and employer share) kept our debt down to a fair level – that is, these taxed were used (borrowed) to fund things like starwars.
Re both medicare and medicaid, we can either simply cut benefits, but maintain current fee for service (as Republicans want – and as many providers want) or we can try to do a better jobs, starting with ending fee for service and also paying strict attention to end of life care (for which was pay an inordinate amount). My mother, for example, could have had hospice care in her last hospital admission. Same with my mother in law. Both were very old, and had no special interest in aggressive medicine. But — republicans sadly don’t really want to reform Medicare/caid, only cut the expenses.
Excellent points. It is especially important to separate Social Security from all the rest. Especially since the govt has a large moral obligation to all the wage earners who payroll taxes (and employer share) kept our debt down to a fair level – that is, these taxed were used (borrowed) to fund things like starwars.
Re both medicare and medicaid, we can either simply cut benefits, but maintain current fee for service (as Republicans want – and as many providers want) or we can try to do a better jobs, starting with ending fee for service and also paying strict attention to end of life care (for which was pay an inordinate amount). My mother, for example, could have had hospice care in her last hospital admission. Same with my mother in law. Both were very old, and had no special interest in aggressive medicine. But — republicans sadly don’t really want to reform Medicare/caid, only cut the expenses.
clearly i 1) lack system skills and 2) need an editor.