Social Security: An Update

by Bruce Webb

If you click on the Social Security link in the upper left sidebar you are sent to an index page on my website which in turn links back to an extended series of posts here at Angry Bear starting in May of 2008. Something that apparently a reader did this morning leaving the following comment:

Larry said…
I’d greatly appreciate an update, given the latest revenue numbers, which show outlays exceeding income at least for the time being.

Well I left an extended reply there but thought I would supplement it with a brief version here. (Well it didn’t turn out brief, sorry.)

It is quite possible that 2009 and 2010 will see Social Security go cash flow negative in that they will take in a little less in cash via payroll tax and tax on benefits than they will pay out in benefits. Whether this is a problem or not depends on your views about the Social Security Trust Fund. Legally Social Security has roughly $2.5 trillion dollars in assets which in turn represent about 20% of total U.S. Public Debt. Under the law Social Security is on an equal standing with all other creditors who have lent money to the U.S. and expect to get it back based on Full Faith and Credit of the United States. Now there are some valid questions about whether the U.S. can sustain a Public Debt load that is as of last Friday $11,920,519,164,319.42 and projected to grow at $1 trillion a year for the next 10 years. On the other hand people who are using legalisms to tell you that somehow the $2.5 trillion of that $11.9 trillion that is owed to current workers and retirees is in a junior debt position to the $800.5 billion owed to China are blowing smoke. Legally, morally and even more important electorally the claims of American workers and retirees are if anything better than those of the Chinese Central Bank.

There are people who will make earnest claims that one branch of government cannot owe money to another branch. There is no legal basis for that claim, it is a simple exercise in logical hair splitting. The reality is this. A major part of total American income has been tapped to pay out retirement benefits to workers and to build up a reserve to continue those pay outs for future retirees. The excess dollars have been borrowed on behalf of all Americans including those who gain their income from sources not exposed to this particular source of taxation. Those people, whose incomes range from the lower six to the upper eight digits, by and large don’t want to pay those dollars back and have hired people to manufacture reasons to convince people making five digit incomes or less that America as a whole simply can’t afford to pay that money back and that the lower 95% or so of Americans just have to lump it and accept that as a lost cost. Well we don’t have to lump it and have at our disposal democratic means that ensure that the the six to eight digit people pay back their fair share of the money that we all borrowed. Unless of course we fall for the spin being presented by the paid spinners at the Concord Coalition, Cato, and American Enterprise Institute. (And those were not chosen at random, they are the collective headquarters of the War on Social Security).

So my answer to Larry is: We have $2.5 trillion dollars backed by the Full Faith and Credit of the United States in the Social Security Trust Funds. Those dollars are currently earning around $110 billion in interest this year which is more than enough to cover what may be a $5 billion or so shortfall in tax income this year and potentially more next. Social Security is still running large surpluses and Trust Fund balances will continue to increase until around 2022 and then start shrinking until they fall under a 100% reserve around 2026 en route to running out totally by 2037. If we want to maintain full scheduled benefits after 2037 we need to make minor changes in revenue either starting immediately or when Social Security falls out of Short Term Actuarial Balance (which the Trustees define as not having a 100% reserve in each of the next 10 years). But unless you simply discount that $2.5 trillion dollar balance and the interest it earns to zero a cash flow shortfall representing less than 1% of total outlays for Social Security is absolutely nothing to worry about. And those who earnestly tell you different are liars, thieves or people deceived by the liars and thieves.

(BTW some of the liars are some of the nicest people you will meet. Just as people who are paid to represent rapists and murderers may be nice people in person. That doesn’t mean that their goals are benign. So feel free to substitute ‘paid advocate’ for ‘liar’ if you like, it doesn’t change the substance.)