Why the ‘Prefunding Boomer Retirement’ Myth is Dangerous
by Bruce Webb
In a variety of comments posts I have argued that the 1983 Social Security compromise was not intended specifically to prefund Boomer retirement using several pieces of evidence including this interview with the Executive Director of the Commission Robert Myers and Prefunding Social Security. Now as it turns out current projections indeed show that Boomer retirement has largely been financed; whether we use SSA’s date of 2041 or CBO’s date of 2049 the very youngest Boomers will be 77 or 85 while leading edge Boomers will be, er, dead. Given that in point of fact Boomers carried their own load and did pre-fund their own retirement, why not just say that this was part of the plan all along if that helps us win the argument? Well, a couple of reasons come to mind, but the biggest one is that by using this line of argument you risk falling into a Glibertarian trap by building their assumptions in. To see how this works we need to tell the same story from two perspectives.
Supporters of traditional Social Security tell the story this way:
1) The 1983 compromise raised payroll tax to pay for Boomer Retirement
2) But starting with Reagan the federal government just borrowed the money to spend on other things.
3) Meaning that any attempt to delay or avoid paying it back by cutting benefits is simple theft from workers.
While the conclusion is true and seems to flow naturally from the premises, the premises are themselves fatally flawed as we begin to see from the same story told from the anti-Social Security Glibertarian perspective. Note the changes along the way.
1) The 1983 compromise raised payroll tax with promises to save the extra for Boomer retirement.
2) This was a lie, instead the federal government just borrowed the money to spend on other things.
3) Tax and spend democrats also made no efforts to restrain other spending putting us in a position where we will never be able to pay Social Security back, overall debt being too high.
4) Meaning that younger workers will never see a penny from Social Security, it all going to the selfish Boomers who ran up the debt.
5) And only chumps would have believed it would happen any other way. Because Big Government is never the Solution.
6) This wouldn’t have happened if the money had instead been put in private accounts safe from the government.
7) Though it is too late for Gen-X to recoup the losses why throw good money after bad, instead we should salvage what we can be going to private accounts today. After all something is better than nothing.
8) And if this means screwing over the Boomers? Too bad, they got us into this mess. And older generations? Well heck they got more out than they ever put in. (ed. the Backwards Transfer argument)
Now each and everyone of the steps in the Glibertarian argument are subject to challenge. But the door was open to it as soon as supporters in their own step 2 start out with ‘But’ which puts in play the argument that you just can’t trust government to keep its promises. And this extends it self to both parties because the borrowing continued through Congresses and White Houses controlled alternately by both Democrats and Republicans.
Not every supporter of Social Security holds Social Democratic views. Indeed we have commenters who are convinced we should leave Social Security alone that lean in what I consider Reactionary directions (using ‘Reaction’ in its European sense) and wouldn’t be caught dead identifying themselves as Democrats.
But I am both a partisan Democrat and someone pushing an overall Social Democratic agenda and won’t accept the starting point of ‘both parties are equally guilty’. Because they are not. In my view President Reagan did immense damage to this country. On the other hand he turned out to be an excellent steward for Social Security. Also in my view the first President Bush started out in some wrong directions only to realize that his original judgement back in 1980 was correct: Supply Side economics is in fact Voodoo Economics. (His late term tax increase may have doomed his re-election but helped prime the pump for the Clinton economy, and liberals give him too little credit for at least moving back in the right direction.) He too was an excellent steward for Social Security and in fact handed it over to Clinton with a Trust Fund right where it was supposed to be. On December 31st 2000 the TF ratio was 97, by Inaugeration day it would have been so close to the legal mandate of 100 as to not matter.
The real goal of the 1983 Commission had nothing to do with the specific timing of Boomer retirement. Per the interview linked above its first priority was to address the near term, which Social Security scores over a ten year window, with a secondary priority to be able to say that they had also addressed the long term, which Social Security scores over a seventy-five year window. They had neither the time or the intent to address specific intervals between the ten and seventy-five year window. So I intend to reject both the traditional supporter narrative of ‘theft’ and the Glibertarian equivalent ‘government is always the problem’ and tell the story my way. Below the fold.
1) By the late seventies it was clear that Social Security was headed to near term insolvency. The trend was undeniable, the TF ratio dipped below 100 in 1971 and simply continued to shrink through the next decade.
Table VI.A4.—Historical Operations of the Combined OASI and DI Trust Funds, Calendar Years 1957-2007 [Amounts in billions]
2) When Reagan took the oath Social Security’s reserves were below three months (TF ratio of 25) and steadily bleeding. If nothing was done it would mean cutting benefit checks sometime in 1983.
3) Something was done. Reagan who would have liked to transform Social Security into something else concluded he had no real hope of doing so near term and so cut a deal with Tip O’Neill to create a Bi-Partisan Commission.
4) The Commission with the help of the technical staff at SSA developed four economic models a High Cost, a Low Cost, and two Intermediate Cost. Under Low Cost the whole problem would go away, under Intermediate Cost the problem would be solved for the first 10 years and ON AVERAGE for the next 75.
5) Because the immediate crisis was not Boomer’s starting retirement 25 years out, instead it was the looming shortfall in the very next year that would cause current checks to Greatest Generation retirees to get cut. It was not a matter of pre-funding but of funding period. (This part simply not being understood today).
6) The tax increases were phased in with the final piece not to be in place until 1990. This allowed benefits to be paid near term while slowly building the Trust Fund back to its mandated target of 100.
7) Since a TF ratio of 100 was simply considered the minimum buffer for operational safety against a temporary downturn, the excess of revenue over cost was kept in a safe and predictable instrument sheltered from market movements which is to say interest earning, non-marketable Special Treasuries. While diversification into other asset classes could be considered it wouldn’t be prudent to do that with the first year of reserves because a temporary drop in employment and hence current revenues was likely to coincide with a market downturn and so be exactly the wrong time to be selling equities.
8) (And this is important) Given that a TF ratio of 100 was considered to be a minimum to protect CURRENT benefits any year the TF ratio remained under 100 the overall system could hardly even be considered to be in surplus and so was not really pre-funding anything, and certainly not events 25 and more years out.
9) Between Reagan and Bush Social Security was returned to a TF ratio of 100 within a ten year period and Clinton inherited a clean short term slate.
10) Although the short term problem was solved, newer more detailed Reports showed that when you broke out the 75 year long term window that there remained some mid-term problems. In particular the retirement of Boomers starting in 2008 projected to take the TF to depletion sometime around 2030.
11) And even though the economy after the mid-nineties started sending the Unified Budget to surplus, much of that was due to rapidly growing TF surpluses after 1996, the challenge of funding Social Security in 2030 had not gone away.
12) Meaning that Republican demands for tax cuts were at best premature, and remained so even after it looked like the General Fund side would itself go to surplus. Instead the prudent thing would be to pay down debt held by the public in anticipation of new borrowing needs starting in the mid 2010’s.
13) Leading to the calls to ‘Save Social Security First’.
14) Meaning Reagan, Bush and Clinton all did the right thing when it came to Social Security, the first two restoring it to actuarial balance using Special Treasuries as the natural and safe instrument, and the latter preserving Social Security from being the cover for a short sighted set of tax cuts that would simply make things more difficult down the road.
15) Something that Bush II simply ignored in his desire to reward his base, as he so charmingly explained at the Oct 2000 Al Smith dinner. Dueling Jokes At Dinner Of NY Political Elite
Bush gazed around the diamond-studded $800-a-plate crowd and commented on the wealth on display.
“This is an impressive crowd – the haves and the have-mores,” quipped the GOP standard-bearer. “Some people call you the elites; I call you my base.”
Insert hollow laugh here. Because he meant it.
Okay my story is a little longer than the supporters nice little three step one. And has the virtue of being actually true. But its real virtue is that it wholy undercuts the Glibertarian narrative. Taking it point by point:
1. The tax increase was not designed to pay for Boomer retirement. Indeed that specific question didn’t come up.
2. Nobody lied about anything. Instead they set in place a ten-year plan to restore Short Term Actuarial Balance using the same instrument the Trust Fund had pretty much always used: interest earning Special Treasuries
3. The General Fund deficits of the eighties were not the sole responsibility of the Democrats. Indeed they generally passed spending bills calling for less spending than Reagan asked for, just differently allocated. Those deficits were caused by Reagan’s insistence on buying guns and giving the wealthy tax cuts at the same time.
4. Starting in 2041 Gen-Xers MAY start receiving benefits only 25% better than current retirees do, down from a 60% benefit under the schedule. The idea that Social Security ‘will not be there for me’ and that this is the fault of Boomers being a combination of ignorance of the numbers and inability to read a calender. The Boomers not only covered the mid-eighties shortages looming over the Greatest Generations benefit checks, we also ended up (more or less by happy accident) covering the projected gaps in our own. Mainly because we grew the economy more than lazy ass Gen-X slackers are projected to do.
5. Sorry pal, when it comes to securing retirement security for workers and particularly workers earning below the median Social Security instead shows that Government often can be a huge part of the solution.
6. Sorry again, there is no realistic scenario under which government operated PRAs would be legally more protected than the current system of Pay-Go. Only people who have beliefs that labels like ‘private’ have magical powers would think so. Even if the accounts were in total control of the individual (something that is in no actual privatization plan out there), government can always operate in a way that destroys wealth. Take a look at your 401k.
7. Dude you haven’t lost anything. And nobody has devised a PRA plan does not simply screw over earlier generations.
8. Though apparently you don’t care that come what may you will make out better than the Greatest Generation did. Instead you would rather whine that Ida Mae Fuller lived to be a hundred. Well I suggest the selfish one is the guy staring back at you out of the mirror.
So once you abandon the ideas that in 1983 the point was pre-funding Boomers and that Reagan, Bush I and Clinton did something wrong by putting excess revenues in Special Treasuries (and so spending the actual cash on other stuff) the whole Glibertarian case falls apart. While leaving those ideas to stay allows them to
validate their ‘all governments are inherently made up of thieves and liars’ narrative.
That is why the Pre-funding myth is dangerous. At least to those of us with a Social Democratic agenda. It tends to block any idea of funding specific public goods (like universal single coverage) with any dedicated tax stream and promotes the idea that all taxation is fungible.