As CalculatedRisk has some fun with the unified deficit along with his proper noting that there is a Social Security Trust Fund that is accumulating reserves to pre-fund the retirement benefits of the baby boom generation, I’m reminded why I get ticked off at the unified budget types. It is sort of why I get ticked off at CFOs who play games with SFAS 87, that is, Employer’s Accounting for Pensions. Robert Mills writing in the July 1989 CPA Journal noted:
The study reveals that the most common benefit plan selected by companies was the Defined Benefit Plans for single employers and that the assumed discount rate for most of the companies in all industry classifications ranged between 8% and 9.9%. An analysis of the results generated from the research reveals that requiring a standardized method for measuring pension cost is more understandable, comparable, and useful. Additionally, users can now better understand the effect and extent of employers’ efforts to provide pensions due to expanded disclosure of statistical and financial data. However, it is believed that the one way where financial reporting can be enhanced is by narrowing the range of actuarial assumptions relating to rates of return on assets, rates of discount, and rates of compensation increase.
One might wonder why private defined benefits plans are co-mingled with the financing of the corporation. It not only sets up the requirements that shareholders have to be informed as to the expected cost of deferred compensation, it puts worker retirements at risk if the corporation ends up in financial difficulty.
Of course, people might wish to have at least some of their retirement in a defined benefits plan – be it privately run or publicly run. The whole Bush push for privatization sort of misses this point. And if we are going to have a defined benefits plan that is not commingled with the fortunes of corporations being run (hopefully) in the interest of shareholders – why not have it be run by the government? Besides, the Social Security Administration annually publishes not only its historical financials but also its projections of inflows and outflows over the next 75 years. And when we review these projections, the health of the system looks pretty good.
So why does Dean Baker has to continue to remind us of things such as the following:
Of course, Mr. Bernanke knows that three quarters of this projected increase in spending is due to the projected rise in Medicare costs. The projected increase in Social Security spending is relatively modest over the next 45 years and in fact no larger than it was over the last 45 years. In addition, he also knows that workers have already largely paid for this projected increase in spending, paying a designated Social Security tax that exceeds current needs. The Congressional Budget Office projects that future tax revenue, plus the accumulated surplus over the last quarter century, will be sufficient to pay all scheduled Social Security benefits through the year 2046, with no changes whatsoever. So, Mr. Bernanke was not being honest when he claims there is a problem with Social Security. There is a problem with projected Medicare spending. Because of the projected problem with Medicare spending, there is also a problem with any category of spending which includes Medicare.
Oh yea, there was some speech by Ben Bernanke:
The Fed chief said Congress could not avoid hard choices to reform what he called “unsustainable” Medicare and Social Security benefits. If Congress shores up the programs solely through higher revenue, taxes would have to rise by 25% by 2030, with further increases needed down the line.
Much of what Bernanke had to say was quite right, but I can see where Dean is coming from. It would be like saying why not improve the income statement of this company by ignoring its defined benefits commitments to its works. Then again – General Motors is taking away the retirement benefits so shareholders can make more equity. But isn’t that the real agenda behind George W. Bush’s fiscal policy – create a train wreck per the General Fund via reduction in tax rates on capital income so that the retirement benefits under Social Security have to be slashed?
Update: David Altig objects:
The trick there is the stipulation that “future tax revenue, plus the accumulated surplus will be sufficient to pay all scheduled Social Security benefits.” It is fair enough to say that the Social Security “trust fund” is a promise to workers that the government ought not breach. It is incorrect to say that it will finance “all scheduled Social Security benefits” in any economically meaningful sense … In other words, the Social Security ceases to be self-financing out of payroll taxes in about 10 years. Absent an increase in overall tax revenues or a reduction in government spending, the payment of scheduled social security benefits adds to the deficit. If you think that deficits are a problem, then logic compels you to treat the payment of accrued Social Security promises as a problem, and one that will arrive in fairly short order.
In other words, David thinks we have a small current problem in the form of the circa $240 billion unified budget deficit – whereas some of us (e.g., CalculatedRisk) think we have a large current problem in the form of a circa $575 billion general fund deficit. And what is this “absent an increase in overall tax revenues” et al.? Haven’t I been clear that George W. Bush only shifted the tax burden onto the future? Yes, we will see someone’s taxes go up in the future. Either this will be explicit or it will take the form of an implicit tax increase ala a massive conversion of what workers thought were payroll contributions to their future Social Security retirement benefit into a retroactive employment tax increase. If Republicans wish to see this massive backdoor employment tax increase – might they at least have the integrity to say so?