I have said a number of times in posts and comments here that the numbers on Social Security are all extremely important, because paradoxically little of the debate about ‘crisis’ is number driven at all. Instead I want to argue that it is fundamentally an attempt to tell a story to sell a particular set of policy proposals, that of ‘private’ or ‘personal’ (the terms overlap but are not synonomous) retirement accounts to ultimately replace Social Security.
In this case we have a number of top level ‘crisis’ narratives with any number of sub-stories. But first we have to develop the characters who fall into five demographic cohorts. (The limiting birth dates for each may not line up precisely with those used by demographers, but my argument is only to a limited degree demographic to start with). So we have the Greatest Generation with birthdates from 1910 to 1928, the Depression/War Babies 1929 to 1945, the Baby Boomers, 1946 to 1964, Gen-X from 1965 to 1983, and the Millennials from 1984 to 2001. In our first story who is the villain and who the victim?
Well the villain is pretty clear, it is the Baby Boomers whose pending retirements are simply going to wreck the system (so the story goes). The notion that Boomers are inherently selfish was not invented by privatizers, instead they latched onto a theme that had been developing since about 1964 when the first Boomers arrived on college campuses. Immediately and at an accelerating pace Boomers were swept up in a massive series of societal changes that in toto put paid to the middle class consensus as it had developed in the fifties. For the next twenty two years it was going to be our music, our fashion, our sensibility that would rule the day. Now certainly those sensiblities changed as we moved from tie dye and acid to cocaine and hot tubs in the seventies, but the overall message stayed the same: ‘Don’t trust anyone over 30’ (until of course we started turning 30 in 1976). Did we deserve being called self-absorbed, I daresay we did. But did we deserve the label of ‘selfish’. Well not in the event. Because things didn’t and are not turning out as planned.
There are two top level narratives about Social Security ‘crisis’. One is ‘Crisis at Trust Fund Depletion’. The other is ‘Crisis at Social Security Shortfall’. Analysis and discussion under the fold.
The more traditional model of ‘crisis’ is placed at Trust Fund Depletion which is to say that date at which the Treasury Department has fulfilled all its legal obligation to redeem Trust Fund security instruments. And that is an important point, privatizers like to talk about ‘Unfunded liability’ over the Long Term 75 year window and now over the Infinite Horizon, and to be fair the Trustees also use it as a term of art. But to my best understanding it is not at all a ‘liability’ in the legal sense. When and if first Pay/Go fails us requiring us to tap the interest and then that fails to keep up requiring us to repay principal well when we come to the end of the road that is where it stops. At that point Social Security is legally on its own to pay whatever it can out of current tax income. Now it may be that society as a whole will feel a social obligation to backfill benefits, and there may be political pressure to do so, and people may or may not be confident we can pick up the subsequent bill, but none of those are absolute obligations. Which leads us to our first three narratives: Crisis of the Naive, Crisis of the Concerned, and Crisis of the Cynical.
Crisis of the Naive. Certain advocates of privatization from the President on down have used reckless language like ‘bankrupt’ and ‘flat broke’ to describe Social Security after Depletion with the result that large numbers of Americans who still to this point probably command majorities have translated to ‘no check’ and ‘Social Security won’t be there for me’. This is off course nonsense, as long as there exists a FICA payroll tax benefit checks can continue to be paid to some level, these people simply haven’t been given the conceptual tools to think this through, and privatizers are not exactly rushing to clear this fundamental issue up. So we can leave the Naive behind.
Crisis of the Concerned. These people probably understand the above point, but believe the needed cuts will be too deep and that we will have a moral requirement to make the scheduled benefit. Well color me unconvinced. The current schedule would deliver a benefit in 2041 that is 160% in real terms relative to ones similarly situated retirees get today. This is because initial benefits adjust to real wages and the fact is that taken as a whole this country has gotten wealthier over time. Will this process always continue? Well maybe not but right now the official line is that in 2041 the system will deliver 78% of the scheduled benefit, and given that 78% of 160% = 125% it is far from clear to me that this is necessarily a call to action. Particularly since most proposed ‘fixes’ just phase those cuts in earlier and don’t materially advance the economic interest of the typical retiree at mid-century. Feel free to argue in comments why I should take benefit cuts from 2023 to 2041 that end up delivering the same result as taking full benefits and having a one time reset (past efforts at telling this story have not been at all convincing, but give it a shot.
Crisis of the Cynical. These people are just blowing smoke. They make the argument that our villainous Selfish Boomers will look at that 125% check and demand the full 160% be continued no matter what and enforce that demand with their superior numbers with the battle cry ‘Screw everyone else! I want mine! And I want it now!!’, and then the Cynics follow up on that by claiming the result would ruin the country. Well this just ignores the historical record. It was the Greatest Generation and the War Babies that allowed the Trust Fund to drop below 100 in 1971 and then go to zero levels in 1983. Boomers might at that point have been ruling the streets and most of the campuses but many of us were not even old enough to meet age requirements for Congress. We didn’t screw the pooch on this one, that would be the two cohorts before us. And when the time came we stepped up to the plate. By 1984 almost all Boomers were in the workforce and those who had followed the election knew the 1983 Reform was at best a partial fix, for us at least. But we did fix it for our parents lifetime. We may not have listened to them when we were growing up, but neither did we send them out to sea on an ice floe, no we paid in extra for most of our working lives with no guarantee we would get full benefits out. To call us ‘selfish’ is kind of to miss the mark. Nor in the years since have I seen any real evidence that Boomers simply don’t give a shit about our children and grand children, yeah it is a good story line to sell to resentful Gen-Xers who think to themselves ‘My Uncle got to go to Woodstock and all I got was a T-Shirt with ‘Just say No’ on the front and ‘Abstinence Only’ on the back’, but it all rests on a misconception of what Social Security is actually promising. They still look to get a pretty good deal, it just might not be as great as planned (but still may-Low Cost is out there).
Two more points on the Cynical. The original narrative of circa 1997 worked out a lot better. At that point Trust Fund Depletion was scheduled for 2029 and indeed the outlook had been darkening. And this would have left Boomers ranging from 65 to 83, not only in our prime voting years but according to the mortality tables still likely to be around. To that degree the sub-story that had us storming Capitol Hill at least made some sense. Fast forward to 2008, now our ages at Depletion in 2041 would be 77 to 95 and the mortality tables suggest that time would not be on our side. The people likely to be in a position to raise a ruckus are going to be those same resentful Gen-Xers, the Boomers will have paid their own freight on this one.
Last point on the Cynical. As noted nothing requires us to backfill that 78% to 100% of the schedule, but pretending it would be a huge burden ignores the fact that the cost of paying off the last installment of Trust Fund obligations in 2040 and early 2041 is almost exactly that of continuing to fund it out of straight General Fund transfers. In either case the gap remains the same. If we do decide to backfill it we just keep borrowing at the rates we had done since about 2035, if we decide not to backfill it and take the 125% the result is a large (but not huge tax cut). Taken from the standpoint of the typical income taxpayer, crisis at depletion actually is the functional equivalent of paying off an amortized mortgage, a large annual obligation simply vanishes off the books.
So that is Crisis at Depletion, on examination it just melts away. Which is why privatizers in recent years pivoted to Crisis at Shortfall.
Crisis at Shortfall equally falls into multiple parts. The basic story is that the key point is not when the Trust Fund exhausts its legal claims on the General Fund, but when the General Fund has to start paying interest (2017) and then principal (2023) but it splits after that. One camp simply tries to tell the ‘phony IOU’ story, and pushed pseudo-legal arguments that the government can’t owe debt to itself and the fact that the Special Treasuries being not negotiable makes some sort of difference. Well neither is true though people can take their best story telling shots in comments. Because when I talk with some of the top privatizers they freely admit the claims are valid and that they have never said otherwise. (Though I don’t see a lot of active effort to shut the bogus argument lines down.) Instead the more sophisticated Crisis at Shortfall people simply argue that however valid those obligations may be, actually honoring them in practice would require large tax increases and slashes in other government programs. Well nice appeal to liberal guilt there, but in point of fact the initial transfers are very small and don’t ramp up until sometime after 2027, which is plenty of time to start a planning process. The notion that we need to take action NOW! is a simple fairy tale told by some clever story tellers. Put the numbers in actual context and the narratives of crisis simply dissolve into fairy dust.
Table VI.F7.—Operations of the Combined OASI and DI Trust Funds, in Constant 2008 Dollars, Calendar Years 2008-85 [In billions]
Of course if you don’t adjust for inflation everything looks worse. The ability these guys have a slipping back and forth from nominal to real is never ending.