Social Security: Simple story vs. myth busting
by Bruce Webb
In comments there were requests for a clear unitary narrative summing up my view of Social Security. This is more difficult than it sounds because of the competing narrative is so simple and compelling: Boomer retirement hits Social Security, the latter itself goes ‘Boom’, lets do something now to mitigate the blow. Okay but how hard is the hit, what is the actual result, and can we clarify ‘something’? And what are the underlying assumptions? Suddenly the story gets not so simple.
And the same is true in reverse. If I set out to tell a simple story readers who have internalized those underlying assumptions in the course of perusing that competing narrative tend to stop you at every turn with questions starting out “Everyone knows …” In order to forestall this process your story-telling has to get more complicated. But I’m willing to give the no frills, no caveat version below the fold.
Social Security was set up in 1935 as two programs. One under Title 1 was a straight out government pension system paid out of the general fund. Title 1 was designed to phase out in favor of a Title 2 worker funded insurance plan. It is this Title 2 insurance plan that we know as Social Security today.
Like most insurance plans there is no direct connection between the dollar paid in and the benefit paid out, instead what you are buying is coverage, once your actual premium dollar is collected it belongs to the company, or in this case government, and you have to trust that the results of THEIR investment decisions and continued flow of premiums will be sufficient to pay out all claims. In Social Security lingo this is called Pay-Go with a group of active workers paying premiums and a group of retired workers collecting benefits.
Social Security is obviously non-profit so it can and does keep its premium as low as possible and still be able to pay out benefits. Those premiums are credited into two accounts at the Treasury Department: the Old Age/Survivors Trust Fund (OAS) and the Disability Insurance Trust Fund (DI). For reasons of convenience these are normally reported together as the OASDI Trust Fund, but legally they are quite separate and have different degrees of solvency. Currently OAS is more solvent than DI and overall is ten times larger, meaning that changes to it have a much greater effect on the health of the overall system.
Under the Act the Trustees are mandated to target Short Term and Long Term Actuarial Balance which is defined as having one year of reserves projected for the next 10 years or 75 years respectively. This is expressed in terms of a Trust Fund Ratio where 100=1 year. Currently DI is projected to drop below 100 sometime in 2017 en route to a total depletion date in 2025. Therefore it is in neither Short Term or Long Term Balance. OAS is projected to not drop below 100 until the late 2030s en route to depletion in 2042 meaning that it is in Short Term Balance but out of Long Term. The combined OASDI is, due to the larger size of OAS, roughly equivalent with Short Term Balance projected to fail in about 2029 when the 10th year (2038) projects to fall below 100 en route to a depletion in 2041. But for most purposes the Trustees deal with the combined OASDI numbers and talk about THE Social Security Trust Fund as do almost all commentators.
Social Security first had a TF ratio below 100 in 1971 and despite reform efforts in 1977 was on track for total depletion in 1983. We should note that Trust Fund Depletion does not equate to ‘No Check’, as long as FICA is collected there will be some payout. In fact there was no year before 1983 where interest on the Trust Fund accounted for more than 5% of total revenue. Still this was considered to be enough of a problem that the President and Congress appointed a 15 person commission known after its chairman as the Greenspan Commission. They studied the issue and set forth four different scenarios for the future. There was a more optimistic Low Cost model, a more pessimistic High Cost model and two Intermediate Cost ones. It was determined that a package of tax increases and changes in retirement age would under Intermediate Cost assumptions put the system back into Short Term Balance by the end of a ten year period and would ON AVERAGE do the same for the 75 year Long Term actuarial window.
The Greenspan Commission Plan worked, by 1993 the Trust Fund ratio was back above 100. This doesn’t mean everything was solved, the numbers still showed the TF going to depletion in around 2030 meaning that it would fall out of Short Term balance sometime late in the 2010s. Which left the people of 1993 the freedom to plan in leisure.
Table VI.A4.—Historical Operations of the Combined OASI and DI Trust Funds, Calendar Years 1957-2007 [Amounts in billions]
Table VI.F8.—Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2008-85 [In billions]
As it turns out they had more time than they thought. Actual economic performance after 1996 came in at or better than the more optimistic Low Cost model projected. And given that Low Cost projected no Trust Fund Depletion at all, that is it would have Social Security be fully funded with no change in benefits, taxation or retirement age, it seemed that a plan of ‘Nothing’ was fully justified or at least the adoption of ‘Watch and wait’ was perfectly defensible. By 2004 the projected date of Trust Fund depletion had advanced from the 2029 of the 1997 Report to 2042, an improvement of 14 years in outlook over an 8 year span. Given that the ‘There is no Crisis’ movement of early 2005 had little trouble turning back the privatizers.
In the years since not much has happened to shake our faith in maintaining a ‘Watch and wait’ approach to Social Security. Although Trust Fund depletion stopped moving out in time and is now set for 2041 the combined Trust Fund will still be in short term actuarial balance until 2029 and at that point leaving us with 12 years to plan and implement a fix. People who argue ‘We can’t afford to wait’ have been proven wrong every year since 1997. We can and should stay alert and monitor the numbers but nothing currently justifies changes in taxation, retirement age, or the benefit formula. Until or unless privatizers can make the case for ‘crisis’ using real numbers rather than talking points they should be pushed back.
Well that is the simple story, or as simple as I can make it. There is a competing narrative marked by what I conceive to be myths. I attempted some myth busting this morning on my site Social Security: 2009 Myth Busting edition. No one has to read it but for those who are considering comments starting “Don’t you know…” well the odds are that I am familiar with your claim, have examined the evidence pro and con and have rightfully or wrongly dismissed it already. Though I will be happy to recapitulate my argument.