Is the Social Security Trust Fund Worth Anything?
Almost two years ago, I posed this question, which really was the title of a paper by Kent Smetters:
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.
I bring this up in light of the fact that President Bush is confusing the increase in Trust Fund surpluses with fiscal responsibility. Simply put – the General Fund deficit is not declining. David Altig quotes the Wall Street Journal as saying:
Strong tax receipts from individuals and corporations helped to shrink the U.S. budget deficit for the fiscal year ended Sept. 30 to $248 billion, far narrower than the $423 billion previously projected by the White House … While the deficit shrank in fiscal 2006, the White House and many economists expect it to widen again this fiscal year as revenue growth slows and spending continues to increase. The costs of entitlement programs are growing faster than the government’s ability to pay for them, and government debt payments, which totaled $406 billion in fiscal 2006, are also rising.
For Christ’s sake! Where the WSJ is going with this “costs of entitlement programs are growing faster than the government’s ability to pay for them” is the Trust Fund SURPLUS will not be as large. David goes onto to note an interesting op-ed by Chris Edwards and Jagadeesh Gokhale:
State and local governments are amassing huge obligations in the form of unfunded retirement benefits for their workers. Aside from underfunded pension plans, governments have also run up large obligations from their retiree health plans … The only good options are to cut benefits and move state and local retirement plans to a pre-funded basis with personal savings plans
Pre-funded? Wasn’t that what we did back in 1983 with respect to Social Security under President Reagan? I was all set to agree with something else that David wrote:
The right measure for characterizing fiscal policy depends on what question is being asked. If the question is “Does the government have the current means to pay for its current expenditures?”, then the unified budget — which includes receipts from Social Security payroll taxes — is clearly the right concept. The reason is that those payroll taxes do finance contemporaneous spending. Although the portion of that spending paid out of excess Social Security taxes are logged as contributions to the system’s trust fund, the trust fund never provides independent revenues for the government as a whole. All future payments in excess of what is collected by the payroll tax must come from other tax sources. However, if the question is “Does the government have the current means to pay for its current expenditures after it has honored accrued entitlement benefits payable in the current year?”, then the deficit excluding off-budget items like Social Security is the right concept. And as I have said many, many times on this weblog, honoring those benefits should be the starting point for any and all discussions of Social Security reform.
David was posing the question in a similar fashion to how Kent Smetters posed it. If David’s point is that the unified budget must be balanced in the long-run, he’s right. Folks like CalculatedRisk, Andrew Samwick, Dean Baker, and myself would put the additional restriction that the Trust Funds and the General Funds should stand on their own. Andrew asks that the General Fund not bail out the Trust Funds and I ask the converse. So when we look at the General Fund, we see massive long-run solvency problems – as compared to a much more modest Social Security Trust Fund issue. But if there are politicians out there (e.g., George W. Bush) who wants to take our payroll contributions and simply (ab)use them to give tax cuts to the very rich – can we simply ask these folks to just admit it. To cheerlead now that the unified deficit has shrunk is sort of like cheering for the bank robber to get away.
Update: As I was noting the Clown Show talk from the President, I did not even realize that he made my point here:
We’ve made good progress, as I mentioned to you, in getting the fiscal house in order, but there’s another problem with our budget, and that has to do with mandatory spending, particularly with Social Security, Medicare and Medicaid. These are really important programs. They’re called entitlement programs because when each of us retire we’re entitled to a benefit, in Social Security for example. And yet the health of these programs – the health is in serious jeopardy … the government has made promises with a future generation’s money that we can’t keep. And so the fundamental question facing the government in Washington, D.C. is: Will we have the will necessary to deal with these entitlement programs to leave behind a better budget picture to deal with the unfunded liabilities and the mandatory programs for future generations? … Look, you don’t have to cut benefits. You’ve just got to slow the rate at which benefits are growing in order to make sure a future generation is not strapped with a budgetary system that is unaffordable.
So many lies – so little time. President Reagan in 1983 made a promise to workers my age that if we paid more in payroll contributions, the Social Security Trust Fund will accumulate reserves to pre-fund our benefits. The real reason these benefits might be in jeopardy is the push by this dishonest President to increase the General Fund deficit so he can get his fat cat contributors both pork barrel spending benefits and tax cuts as well. Slowing the rate at which benefits grow is just a euphemism for insuring the inflation-adjusted value of our Social Security benefits ARE cut. Yes – there is an unfunded liability from that expensive Prescription Drug benefit (largely for Big Pharma) that this dishonest President brags about. When George W. Bush says he’s not cutting your retirement benefits – watch your back because that’s exactly his intention.