What IS the Social Security Crisis?

Well the answer is in the above figure, or actually answers because the post title actually hides multiple questions depending on your view of Social Security generally. This is going to get kind of long so I will take it below the fold right away.

There are actually three lines represented in the figure: scheduled benefits (top thin line), payable benefits (middle thick line), and income excluding interest (bottom thin line). A close examination shows that tax income exceeded scheduled benefits up until 2009, meaning Social Security was in surplus by anyone’s definition, that tax income dipped below scheduled benefits this year, but are projected to rise again to meet the schedule in 2012 only to go permanently below the schedule in 2017. But the figure also shows that payable benefits continue to be paid until 2037, the difference representing the draw down of first interest on and ultimately principal from the current Trust Fund.

Which is our first point of departure. Current critics of Social Security often maintain that Trust Fund assets are not ‘real’ or where they concede they are in fact real, maintain that they are not affordable. Now they couch these arguments in different terms that sound reasonable enough to them but which come across to supporters of Social Security as a confession along the lines of “Yes we are thieves and congenital liars and you were fools to believe us all along. And what are you going to do about it?”. Needless to say arguments that start from these very different premises often don’t end well.

So laying aside the ‘thief and liar’ element for the moment how do these opponents interpret ‘crisis’ based on the above figure? Well for them the redemption of the Trust Fund interest and principal is a pure burden starting essentially immediately and extending to 2037. At which point if nothing is done they get a huge tax cut. In constant 2010 dollars one in excess of $300 billion a year. Forever. After that Social Security limps along paying what it can from current tax dollars or between 75% and 78% of the schedule. Which isn’t their problem, instead 2037 is a get out of jail free card.

But as almost the flip side of opportunity, in this case tax cut, is danger. The biggest danger for this group is that retirees demand that the schedule be maintained ANYWAY, and worse that the gap be largely or entirely financed by taxes on people earning over the current payroll gap. Under this scenario the wealthy not only pay enough in taxes to keep benefits flowing but also to keep the Trust Funds in actuarial balance (100% of next year cost) meaning that they will ALSO HAVE TO CONTINUE PAYING INTEREST. It’s like a double nightmare.

Now oddly the Northwest Plan for a Real Social Security fix we push here at Angry Bear numerically works out as a medium term break for this group. By putting the burden of extra FICA on workers it reduces the role of the General Fund to just enough debt service to stabilize the Trust Funds at their mandated level, instead of having to pay 20% plus of Social Security costs during the last phase of redeeming the Trust Fund (the 2030s) they ultimately settle out paying around 5% of those costs servicing the debt. But instead they are rolling the dice in hopes of a better deal.

If Trust Fund Depletion in 2037 represents a potential tax cut for income tax payers what does it mean for retirees? Well under current law an immediate cut in benefits of 22%. And no argument from that Bruce Webb based on Rosser’s Equation is going to make that sticker shock go away, people don’t think that way. (For example the lack of a COLA for 2009 and 2010 actually is the result of retirees getting that increase EARLY and under a system that doesn’t allow for clawback. In reality they are all dollars ahead on net. Trust me they don’t get this. At all.)

So in the face of this psychological sticker shock that certainly would spark demands for ACTION. DAMMIT. YESTERDAY. how do the wealthy preserve their long term tax cut? Simple get retirees to take those cuts gradually starting as soon as possible and hope they don’t recognize that their resulting 2038 check still ends up as small or smaller than a plan of ‘Nothing’ would provide.

None of this is about long term deficit reduction, if it was the wealthy would just work to enforce ‘Nothing’. After all that 22% 2037 reset in benefits also has the effect of wiping out all those trillions in ‘Unfunded Liability’ the PGP/AEI folk like to tout. Under current law there is no unfunded liability, it is instead a theoretical construct that assumes that future retirees will demand that some or all the current benefit schedule is maintained. Which in the end is a political argument and not an economic one at all.

Returning to the figure the solution for current critics of Social Security is to get the ‘Scheduled’ line down to the ‘Income line’ while supporters are focused on getting the ‘Payable’ line up to ‘Scheduled’. Even within the confines of this simple figure we are using two different sets of lines (a fact obscured that for the 2012 to 2037 period that ‘Scheduled’ and ‘Payable’ overlap). No wonder consensus seems unreachable, we don’t even agree on the nature of the Crisis.