Soc Sec XIV: Why benefit cuts and cap increases backfire
I know I promised to back off the pace but yesterday’s comment thread got temporarily derailed before the point could be made. In yesterday’s post I highlighted the cash flow in and out of the General Fund to redeem the Trust Fund ‘Crisis’ at Shortfall in an effort to show that in inflation adjusted dollars the payback was no big deal. Well wouldn’t benefit cuts or a cap increase make the problem even smaller? Well no, you just end up taking the problem out in time by a year or so and make the ultimate cost bigger. Take the numeric series from yesterday for Intermediate Cost or here today for Low Cost and apply the effects of either benefit cuts or tax increase. Once again the left column represents total surplus and so the increase in Trust Fund balance, while the right column represents current year cash flow to or from the General Fund (in constant 2008 dollars). Either a benefit cut or a tax increase will increase the dollars in both columns. A good thing? Well not really. Because the real dollars in the right column from either benefits not being paid in full or more revenue coming are just spent in the current year. If this actually reduced current year borrowing dollar for dollar it would be one thing, but there is no real world evidence that this actually happens. So boom that extra cash is spent. And the left column properly considered is actually an increase in interest earning debt. You are not doing your kids any favors by starving gramma, not if the result is extra payments in the form of future interest on an even bigger interim Trust Fund. The net effect is to move the date of Intermediate Cost shortfall out a bit, and depletion out maybe quite a bit all at the cost of larger needs for future General Fund transfers to pay for that compounding interest. So that is Intermediate Cost. What happens with Low Cost? Well first the numbers, discussion under the fold.
Low Cost Surpluses and Cash Flow to/from the General Fund
2010 $236, $106
2015 $267, $78
2020 $250, $8
2025 $217, -$68
2030 $170, -$122
2035 $169, -$160
2040 $205, -$143
2045 $273, -$104
2050 $358, -$66
2055 $455, -$40
2060 $567, $17
2065 $715, $18
2070 $801, $58
What is with the negative numbers? I thought Bruce was always telling us that Low Cost meant fully funded?
Well it does, if you use the Trustees’ definitions of Income and Cost. For the Trustees, who as the name assume have to act as if the Trust Fund is real (after all they are the guardians), Income includes Interest. But if you step back and look at this in the total budget perspective you see that Interest is suddenly transformed from a source of Income to an open obligation on the General Fund. With the results you see above, starting in about 2023 a portion of the interest earned needs to be tapped to pay benefits. But whereas under IC this portion rapidly increases after 2017 and takes in all interest by 2023, under Low Cost the effect always remains partial. In the 2007 Report the result was a system in equilibrium, with approximately 25% of all cost being paid by transfers from the General Fund. Which raises our first problem, in last years Report this subsidy goes on forever, while the utility of the actual dollars borrowed fades as the decades go by. That is not really a good outcome. In the 2008 Report the effect is only worse. Because while the needed transfers grow until about 2035 (though never as high as IC) they start shrinking until in around 2056 the need vanishes completely as Income excluding Interest once again exceeds Cost.
Well the problem is that you now are stuck with a near useless $12 trillion Trust Fund merrily compounding away. But you can’t just abrogate it by explaining that almost all of it what just the effect of interest on interest and so in some sense disconnected from the real economy. Because the worker of 2056 is going to look at that string of negative numbers from 2023 to 2055 and likely think ‘Hell they were real enough when my income tax dollar was being tapped to pay some of that interest’. But redeeming the now useless Trust Fund to eliminate the future effects of those compound interest dollars requires lowering FICA taxes by enough to offset the total accrued interest plus some extra reductions in rates to allow some gradual paydown on principle. Which means you would have to boost your transfers from 2055’s $40 billion to at least $470 billion in 2056 simply to keep you in the same place financially. So instead of having to pick up 25% of the tab for a time limited span of 2017 to 2053, here you pay varying portions of the tab through 2055 ramping down to 1% and then get a sharp jump back to 25%, more if you want to take any serious crack at paying down the principle. In effect Low Cost either requires your grandkids simply to accept that they were taxed extra all those years, that now that we didn’t need the extra income they should just get over it. Or tell them yeah the money is real and we want $470 billion a year forever out of income tax. Just to add some spice to the soup the end result is that Low Income workers who pay little or no income tax get a huge tax cut. Because the only way to make the books balance is to cut FICA back dollar for dollar in relation to that General Fund transfer.
Put this in a matrix with lifetime Low, Medium and High Income Worker on one axis, and Entry age, Median age, and New retiree then start examining where the incidences hit. And who woulda thunk it, the people who get crushed are people earning around the payroll cap.
Okay in this scenario what is the effect of either a benefit cut or a cap increase? Well once again it keeps the numbers in both columns more positive for a longer period of time, that is instead of a negative number from 2023 to 2055 you get a smaller transfer for a shorter period of time. But all that means is an even bigger Trust Fund and more accrued interest at the point of crossover and so an even HIGHER need for General Fund transfers to keep the beast of Interest on Interest from eating you up.
In the cold light of day the ‘right’ answer is to take it as you would if you found out that your insurance company made record profits because of lower than expected claims. As long as all your claims were honored, who cares? I’ll be 99 in 2056. But I have some nieces, nephews and great nieces who will be rapidly approaching retirement at that point. I don’t see how screwing over Great Gramma Alice and Great Uncle Bruce on their retirement bought them anything more than a huge political mess. That is why benefit cuts and cap increases backfire.