Social Security has no Unfunded Liability
by Bruce Webb
Not in any real world sense. And before shaking your head in sorrow at the fact that Bruce seemingly has lost it given the numbers in Table IV.B6.—Unfunded OASDI Obligations for 1935 (Program Inception)Through the Infinite Horizon which clearly show a $4.3 trillion dollar gap over the 75 year window and a $13.6 trillion gap over ‘Infinite Horizon’, consider that obviously I know the Table exists, in fact here it is.
Plus its brother which throws a $17.4 trillion and a $15.6 trillion at us. Meaning that depending on how you define it and what time period you chose the Trustees tell us the unfunded obligation runs somewhere between $4.3 trillion and $17.4 trillion (source of the ‘$17.4 trillion backwards transfer). Table IV.B7.—Present Values of OASDI Cost Less Tax Revenue and Unfunded Obligations for Program Participant Click to enlarge either table.
Given that how can I possibly claim that the ‘Unfunded Liability’ doesn’t exist? Because unless you are the Commissioner of Social Security or one of the Trustees it just doesn’t equate to a real life event. To understand why you would need to follow me under the fold.
The key is to understand that the Commissioner and the Trustees are constrained by current law. While the Trustees tend to talk about events at depletion as being automatic
If no action were taken until the combined trust funds become exhausted in 2041, then the effects of changes would be more concentrated on fewer years and fewer cohorts:
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For example, payroll taxes could be raised to finance scheduled benefits fully in every year starting in 2041. In this case, the payroll tax would be increased to 15.94 percent at the point of trust fund exhaustion in 2041 and continue rising to 16.60 percent in 2082.
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Similarly, benefits could be reduced to the level that is payable with scheduled tax rates in each year beginning in 2041. Under this scenario, benefits would be reduced 22 percent at the point of trust fund exhaus tion in 2041, with reductions reaching 25 percent in 2082.
in fact they are not, the Commissioner and the Trustees having neither the authority to change the benefit schedule or the FICA rate, that being reserved to Congress. Which one way or another will simply eliminate some or most of the so-called ‘unfunded liability’.
Currently Social Security is faced with certain ‘inflection’ points. One is Shortfall, the date that income excluding interest (i.e. tax) falls behind total cost. Under Intermediate Cost projections that is set at 2017. At that point some of the accrued interest on the Trust Fund which heretofore had simply been ‘funded’ by crediting the TF with Special Treasuries (which are not funded with current year borrowing) instead has to come from the General Fund. Initially the effect is small, the Trust Fund continuing to grow right to the point that all interest has to be funded by current year borrowing. This point which I call ‘Peak’ is projected for 2023. After Peak funding full benefits means redeeming the accumulated Special Treasuries until they are gone. This event is called TF Depletion and under SSA projections is set for 2041. (The CBO uses somewhat different calculations and gets different dates but that is immaterial for the purposes of this discussion).
Now people vary on whether we should see Shortfall or Peak or Depletion as the key date for ‘Crisis’ but come what may under Intermediate Cost assumptions at some point Congress has to act, precisely because the Trustees are constrained by current law. Lets say Congress just decides to procrastinate right to Depletion. At this point they have some choices. They could raise FICA by 3.54% points or they could cut benefits by 22% or they could do some combination or they could do what the Greenspan Commission did and just do enough to kick the problem down the road for another 30 or 40 years. But whatever they do at a stroke they eliminate most to all of the ‘unfunded liability’. Because tax increases serve to fund the liability while benefit cuts serve to eliminate it and there is no third alternative being that the Commissioner has no ability to borrow money.
Seen properly ‘unfunded liability’ is just a fictive artifact stemming from the Trustees having to assume current law. If they are able to pay full benefits they are obligated to do so, to that extent there is a liability. But it is limited, if Congress decides to fund that liability it will be paid, if Congress deliberately decides not to the liability goes away.
It is useful and even crucially important to understand the gap between projected revenue and projected cost at the point of Trust Fund depletion. It is equally useful but not particularly important to examine that gap in some future year. What is not useful is to sum up those amounts and hang them like the Sword of Damocles over our heads. The summed gaps are not legal liabilities because Congress is free to eliminate them. Now some might consider them moral liabilities and potentially the needed changes would lead to some political liabilities for that future Congress, but the notion that every child born in America automatically inherits $150,000 in unfunded debt is hooey. Because before 2041 actions will be taken to either fund that debt or write it off and poof that ‘Unfunded Liability’ vanishes.
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On a somewhat different note I would ask you to take a look at Table IV.B7. First it tells us there is a $17.4 trillion dollar gap between future tax revenues and future costs for ‘Current participants’. This is the source of the claim that the problem is do to over generosity to people in the past. This is just not true, examination of the Tables shows that every penny of that $17.4 trillion is ‘owed’ to a subset of retirees projected to be drawing benefits between 2041 and 2108. The Report puts it as follows:
The first line of table IV.B7 shows that the present value of future cost less future taxes over the next 100 years for all current participants equals $17.4 trillion. For this purpose, current participants are defined as individuals who attain age 15 or older in 2008. Subtracting the current value of the trust fund (the accumulated value of past OASDI taxes less cost) gives a closed group (excluding all future participants) unfunded obligation of $15.2 trillion. This value represents the shortfall of lifetime contributions for all past and current participants relative to the lifetime costs associated with their generations. For a fully‑advance‑funded program this value would be equal to zero.
This may be the most political passage in the main body of the Report which by and large is pretty straightforward. Then again the whole notion of ‘Infinite Future Horizon’ wasn’t introduced until the 2003 Report and it is hard to not suspect that the motivation was political. Because the language is carefully crafted to put the blame on ‘past and current participants’ while giving ‘future participants’ a pass, leaving of course Gen-Xers to bath in their sense of being persecuted by Boomers. But in point of fact no Gen-Xer is a ‘future participant’ instead they are all classified as ‘current participants’ and the vast bulk of the projected gap is due to them not being able to fund their own benefits after 2041 and before 2108. A fact that is shown that once you subtract out the excess contributions of ‘past and current participants’ (i.e. the current Trust Fund) the gap drops to $15.2 trillion.
Which brings up a second point. ‘Past participants’ (i.e. dead people) are clearly paid up, those checks already cashed. And those ‘current participants’ who will be dead by 2041 are also paid up. Now those Boomers who will be living for some years after 2041 are on the hook for some portion of the $4.3 trillion of ‘unfunded liability’ over the 2041-2082 but not that much being that the total gap between 2008-2057 is just .94% of payroll and not all of that due to us. Instead most of the gap coming in that third 25 year window Table IV.B4.—Components of Summarized Income Rates and Cost Rates, Calendar Years 2008-82[As a percentage of taxable payroll]. Further lets look at the significance of these numbers:
$2.2 trillion = Trust Fund i.e excess contributions by past and current participants (including all Boomers)
-$4.3 trillion = Gap between tax and cost between 2041 and 2082 less credit for the TF (partially due to Boomers)
-$6.5 trillion = Total gap between tax and cost between 2041 and 2082 for all participants (including some future participants born between 1993 and 2015)
-$17.4 trillion = Total gap between tax and cost between 2041 and 2108 for current participants
-$15.2 trillion = Total gap between tax and cost between 2041 and 2108 less credit for the TF
-$13.6 trillion = Total gap between tax and cost between 2041 and Infinite Future after including the $1.5 trillion surplus from future participants.
So future participants are responsible for a small portion of the $6.5 trillion gap between 2041 and 2082. As are Boomers. But mostly you are talking about Gen-X and leading edge Millenials not paying their way.
Similarly future participants are not at all responsible for that $17.4 gap for current and past participants between 2041 and 2108. Nor are past participants, indeed many of them contributed to the Trust Fund that reduces that gap to $15.2 trillion. And by 2041 Boomers will range from old to dead. Meaning once again we are talking about Gen-X and leading edge Millenials not paying their way.
So when you add it all up almost all of this liability derives from the retirees of 2058-2108 not including any of those born after 1993. The very youngest Boomer will be 94 in 2058. And any of our grandkids born after 1993 will actually be contributing to a long term surplus. Meaning almost all of the problem derives from Gen-Xers and leading Millenials scheduled to get some $14+ trillion or so of extra benefits over contributions.
‘Backwards transfer’ my ass. Instead Boomers not only paid benefits for the Greatest Generation, we are projected to pay almost all of our own benefits and now are asked to take cuts so that Gen-X doesn’t feel aggrieved by adjustments to benefits after around 2029. Whereas if they just got off the couch and grew the economy like Boomers and our parents and grandparents did everybody gets paid in full.
But I guess it is more fun to whine about ‘Selfish Boomers’ than to do the actual arithmetic.
I understand what is said in this article. What I don’t understand is how under present conditions the future SS, Medicare and drug program will be paid. If that is not addressed then the unfunded liabilities do exist if we all want to receive these benefits. There is no money in the trust funds. If there is please show me the government account that has the balance in cash not Treasury notes. They are nothing more that debt our bankrupt government says they will pay back. I don’t think printing money is the answer.
Social Security is a SCAM. If it was such a GREAT PROGRAM, why does the government MANDATE that I pay into it via 12.4% FICA TAX WITHHOLDING from myself (6.2%) and
my employer’s “match” (6.2%). That 12.4% is currently COSTING me $8,184 per YEAR.
Liberals/statists tell me SS is not “an investment”, but is “insurance”. WHERE IN THE CONSTITUTION does it say that the government can FORCE ME to buy “insurance” from them??? I want to INVEST that $8,184 per year and become a MILLIONAIRE over my working lifetime and retire at 55, but my “caring, all-concerned” government is throwing the obstacle of a PONZI SCHEME known as Social Security in our way.
What a sad state of affairs the United States has become. Citizens are robbed of their wealth and their chance to move up in their standard of living is cutoff by socialists in the government who coerce the people to “LOVE” their servitude by handing over their money in exchange for “security”, and with Social Security basically bankrupt in every way except that the government can still print (counterfeit) money to pay people’s monthly SS “benefits” (my 78 year old mother collects about $800 per MONTH – and my late father could not save or invest because the FICA TAX was so high and cut in to his ability to save and invest. THANKS STATISTS!!!).
Like I said earlier, if SS was such a great program, people would be flocking to sign-up for it, and not have to be FORCED into handing over 12.4% of their salary each payday.
See MY website:
http://www.socialsecurityisascam.com
The United States COULD have been great, but statists and socialists are killing it.
In terms of legal statute, you are correct; Social Security and Medicare have no statutory unfunded liability. In 1984 the Congress passed legislation that makes it impossible for Social Security or Medicare to borrow funds or to use General Revenues to pay any shortfalls. In fact, the statue requires the SS trustees to report to congress promptly when they project at any given time the trust funds balance will fall below 20% of any given years expenses. This prompt report is to provide to congress the changes needed to bring the expenses and revenues into line to maintain a 205 trust fund in relation to any given years expenses.
It is clear that over the past 10 years, the SS statements all workers receive clearly indicate the trust fund is projected to be exhausted. This means it is far less than 20% of any given years expenses and is as low as 0%. When the trust fund falls below 20% of any given years expenses across the board cuts take place. COLA’s will cease about five to seven years prior to the projected Trust Fund exhaust date. When SS states they can pay 75% of promised benefits under law, this is of course without COLA. Without COLA, the equivalent promised benefit payable is around 62%.
Do we have to fear that these two programs will gobble up all general revenues, no? The reason is that there are 117 million potential voters under age 46 while there are only 43 million seniors and less than 60 million boomers. Those under age 46 out number all of us. When thoughts of increasing the retirement age are proposed, those under age 46 are asking themselves, is SS good for me? I pay 2, 3, 4 more years and collect less. Maybe it is time to cut my losses. As the retirement age increases, the support for these programs dwindle.
The question is not “will SS fail” ‘but “when will SS fail” or implode.
Boomers are not the problem for few boomers have retired and collected any SS-OASI benefits. Boomers as a collective have paid over $10 trillion into SS and with credited interest at the US Treasury rate would total far more than $23 Trillion. The SS-OASI trust fund has far less than $3 Trillion.
Years ago those who were retired collectively had an unfudned liability in terms of “promised benefits” of $5 trillion. Adding those who were not retired and over 50 increased this number to $10 Trillion. Adding those over 30 increased the number to $15 Trillion.
Today the unfunded promised SS-OASI benefit is over $23 Trillion based on the US treasury paying 5%, which it is not doing. At 0%, it increases to well over $100 Trillion.
Having researched this problem since the early 70’s, I invite you to read my analysis at http://www.justsayno.50megs.com/ss.html
You are forgetting one big issue, From Regan’s Arms Race onward the feds have pulled the cash out and put U.S. Treasuries in place of cash. Thus it is unfunded as the government is now scrambling to take from paul to give to peter and so on. A few months back thousdans of service men did not get full pay becuase the government rerounted some of the funds to pay out SS for a month.