by Bruce Webb
A new front was opened Monday in the war on Social Security. The first shot came from Kevin Hassett of AEI who wrote a piece for Bloomberg Recession Bites Into Social Security’s Surplus
We have all been so busy whining about bonuses at American International Group Inc. and arguing about the so-called card- check legislation that we forgot to watch the Social Security surplus. While we were looking away, that surplus disappeared, eight years ahead of schedule.
This was immediately picked up by the Washington Post stenographers in a piece from Lori Montgomery on Tuesday Recession Puts a Major Strain On Social Security Trust Fund: As Payroll Tax Revenue Falls, So Does Surplus
With unemployment rising, the payroll tax revenue that finances Social Security benefits for nearly 51 million retirees and other recipients is falling, according to a report from the Congressional Budget Office. As a result, the trust fund’s annual surplus is forecast to all but vanish next year — nearly a decade ahead of schedule — and deprive the government of billions of dollars it had been counting on to help balance the nation’s books.
If true this would be a totally ‘Holy Crap Batman!’ moment, because per the 2008 Report Social Security ran a positive balance of $190 billion in 2007, was projected to run a $196 billion positive balance in 2008 and $212 billion in 2009 Table IV.A3.—Operations of the Combined OASI and DI Trust Funds, Calendar Years 2003-17. In fact it was still projected to be adding assets to the tune of $213 billion in 2017. How could all of that just vanish without anyone noticing?
Answer? It didn’t. Hassett is mostly just playing word games. If we back up and examine the Historical Operations of the Combined OASI and DI Trust Funds, Calendar Years 1957-2007 we can see combined balances in the Trust Funds at the end of 1993 of $378 billion dollars with a Trust Fund ratio of 107, which is to say just over one year of reserves. In the years since that balance has grown to $2.4 trillion and a TF ratio above 350. The increase in the fund balance is normally called the ‘Social Security surplus’ and is scored as such when calculating the Unified Budget deficit or surplus. But in point of fact Social Security does not extract the full amount of the fund increase from the current year economy, a big part of the annual surplus is from accrued interest on the Trust Fund which in 2003 accounted for more than half of that surplus and the percentage is increasing all the time. So if we examine Table IV.B3 and look at the projections for 2017 we can see that of a total fund increase of $213 billion that $238 billion is the result of interest. Or in other words the amount of dollars extracted from the economy via FICA payroll tax and tax on benefits will be $25 billion less than is needed to pay then current benefits, an amount that will have to be made up by a PARTIAL payment of interest due on the Trust Fund.
Hassett has simply redefined this long known crossover point (known as Shortfall) as the time that ‘surpluses’ vanish. And then piles on by claiming that February numbers show that it had actually moved right up to today. This is totally misleading and verging on outright lying. To see why follow me below the fold.
While commenters and the Trustees alike for most purposes treat the Trust Funds as a combined whole there are legally two different funds, OASI (Old Age/Survivors Insurance) and DI (Disability Insurance). DI is approximately 10% of the size of OAS and has in recent years been much the weaker of the two. While the combined funds are projected to reach Shortfall in 2017 when DI is examined in isolation we can see that it actually hit Shortfall in 2005. From that point on the difference between cost and income excluding interest has been made up by tapping the interest on the DI Trust Fund. Even before the current downturn DI cost was projected to run ahead of total income including interest in 2012. As it turns out that event happened sometime between June and August of 2008. In June the DI Trust Fund was sitting at $220 billion which was actually ahead of Intermediate Cost’s year end projection and close to that of Low Cost’s year-end of $221 billion. By August it had actually dropped to $219 billion and has continued to sink from there until in February it had fallen to $214 billion down a pretty shocking $1.8 billion for the month. Which led Andrew Biggs to post the numbers under the title Slowdown Slashes Social Security Surplus. In fact the DI deficit overwhelmed the $525 million OAS surplus for the month to create a combined OASDI deficit of $1.25 billion and so leading Hassett and his faithful stenographer Montgomery to claim the sky was falling.
This is nonsense, they are simply counting on readers to not know these numbers or the breakdown of them between OAS and DI or how DI actually interacts with OAS. Certainly neither makes any effort to actually supply the numbers or the context, in fact Hassett who links to just about everything he references somehow manages to not link the the CBO and Social Security documents he is drawing from. So I guess it is up to me to supply that context.
There are plenty of people who would qualify for DI who remain in the workforce. Some just like their jobs, others make more income than their DI check would yield, and most of them are interested in boosting their ultimate OAS check. Because DI is not permanent, at full retirement age recipients are shifted over to OAS. This gives people who would qualify for DI an incentive to continuing working and making contributions to OAS. Until of course they lose their job and are faced with the choice of say trying to find new work as a wheelchair bound person over the age of 55 or taking DI as a form of early-early retirement. Well it looks like a large number of workers are letting their feet or perhaps their wheels do the talking. The result is a big yet temporary hit on the DI Trust Fund (temporary because I think we can readily assume that most of these people are approaching retirement years and will soon transition out of DI anyway). Moreover this hit on DI is offset somewhat by them probably getting a reduced check under OAS than if they had managed to stay in the work force. (And BTW that is also true for that group of workers who are old enough for early retirement, certainly if I were unemployed and 62 I would be filing (because you can always go back in the workforce and qualify for higher permanent benefits by paying back early retirement ones-and IIRC interest free)). Making the following statement from Hassett simply wrong.
Second, many individuals who retire early or go on disability in this crisis may not return to the workforce once the recession ends, so the higher payments are probably with us forever.
Hmm no, the hit to DI is temporary while the hit from increased levels of early retirement is offset actuarially by a lower permanent retirement check. Plus the followup is wrong as well.
Finally, Social Security just increased everyone’s benefits by 5.8 percent to cover the increase in the cost of living last year, the biggest increase since 1982. That adjustment jacks up benefits payments permanently.
Uh Kevin, a prolonged period of low inflation or deflation lowers benefits permanently compared the the baseline projection, that knife cuts both ways.
DI has long been in actuarial trouble per Intermediate Cost projections. As it turns out it was actually outperforming those projections by running bigger surpluses than anticipated in 2006, 2007 and the first half of 2008. But even with that it was pretty clear that something would need to be done for DI in the relative short run, the 2008 Report projected DI Trust Fund depletion for 2025 or sixteen years ahead of the combined depletion date of 2041. DI TF depletion may well move up some as a result of this downturn, and the longer and more severe the recession gets the more effect we can expect to see. But a potential crisis in DI is still not a reason to tamper with OAS. What we have here is just another use of crisis conflation, just as a real challenge to Medicare and Medicaid is used to sell ‘Entitlements Crisis’ so is a problem with DI turned into a crisis for Social Security as a whole. These guys want to kill traditional Social Security and always have.
OASDI cash surpluses were already dropping but the overall surplus is continuing to rise and in fact will continue to do so even after cash transfers from the General Fund start redeeming part of the interest. Only when those transfers exceed the total amount of interest owed and principal starts being paid down can Social Security even plausibly be said to be in deficit. And even that is a little odd considering at that point the Trust Funds are projected to have a combined $5.7 trillion in assets. Though he won’t come out and say it Hassett’s argument implicitly denies that workers have a valid claim on the interest and principal in the Trust Funds, his talk of ‘vanishing surpluses’ is just a gambit in an effort to abrogate the trillions of dollars in excess contributions plus legally accrued interest that is still adding to the balances in the combined Trust Funds.
Don’t fall for this bait and switch attempt to steal our money. Social Security will still run a surplus in 2009 from the $110 billion in interest owed on the current balance plus the probably small OAS surplus. Fixing DI is something we could do but even if it runs deficits at February’s level it still has about ten years of available balances, there really is now rush. If we did decide to fix it we are faced with an long term actuarial gap projected at 0.24% of payroll in the 2008 Report, which translates to $120/year for a median household earning $50,000. Hassett is just trying to make a mountain out of a mole hill.