Is the Social Security Trust Fund Worth Anything?
Kent Smetters poses this question as the title of this paper. Several economists including myself would answer yes to this question but then Smetters notes that we are assuming policymakers set spending and tax rates for the other levels of government so as to insure that the General Fund adheres to a long-run balanced budget constraint. In particular note that his Figure 1 shows the assets of the Social Security Trust Fund still rising after 2018 when payouts to retirees start to exceed payroll contributions. The reason for this is that the diagram assumes that the interest on Trust Fund bonds will not be used by the General Fund.
Also note that even the on-budget surplus (deficit) has the interest paid to the Social Security Trust Fund being counted as an offset to the overall interest expenses from total Federal debt. In other words, any funds placed into the Trust Fund today are akin to zero coupon bonds with the amount contributed being the face value at some future date – say 15 years from now. But in that case, about half of the present value of this contribution has effectively been turned over to the General Fund.
If policy makers are viewing the Social Security Trust surpluses as funds available for general spending or to allow for lower income tax rates, then comments such as this one are not as bizarre as we supporters of the current system would like to believe. In other words if the Trust Fund assets and/or their accrued interest income are used to pay for Bush’s fiscal irresponsibility, then the Trust Fund will go broke much sooner than 2042. I say this in light of a recent email from Bruce Bartlett, which simpy said:
I have made the point that it is silly to attribute debts long in the future to the current generation of taxpayers, as is often implied.
as Bruce pointed to his NRO oped, which tries to claim the Smetters-Gokhale $44 trillion present value of government deficits represented only 6.5% of GDP if GDP will be $682 trillion as of 2075. I find it odd that one would compare the present value of government deficits as of 2002 to the future value of GDP in 2075, especially since $44 trillion invested in bonds paying 5% for a 74-year period would become $1627 trillion by 2075. In other words, the Smetters-Gokhale calculation implies a debt-to-GDP ratio equal to around 240% by 2075 if neither the (modest) Social Security insolvency and the massive General Fund insolvency are not addressed by either spending cuts or by tax increases.
Bruce might be right to suggest this calculation is silly if policy makers decide early enough to either cut spending (his preference) or raise taxes (given that even conservative Republicans have no appetite for serious spending reduction – the more likely reality). This Smetters-Gokhale calculation notes that most of the insolvency problem is from the General Fund so if the “lock box” is in effect so the Social Security pre-funding of our retirement is not touched, then the General Fund will have to do the adjusting.
But here is what concerns me. Many conservatives, including apparently Bruce, take the view that the payment for our future retirement will be borne by payroll taxes (as opposed to contributions) on future generations so the alleged Trust Fund assets can be siphoned off so as to reduce current taxes on capital income. As someone who believes in the pre-funding of our own retirement, I am troubled by this suggestion that we “attribute debts long in the future” when at least part of this attribution goes to paying for our retirement in a couple of decades – something we should be pre-funding now.