"House rich & cash poor": Why Social Security can’t be Raided (Part 1)

(cross posted from Daily Kos Social Security Defenders Group)
There are three prevalent myths about the assets in Social Security Trust Funds, plural because there are two of them OAS-Old/Age Survivors and DI-Disability Insurance. The first myth, which comes mostly from the Right, is that those assets are just ‘Phony IOUs’. The second myth comes mostly from the Left and is just a version of ‘Phony IOU’, that the assets of the Trust Fund were real but were raided starting with Ronald Reagan. I and others have dealt with these two before and I mention them only to dismiss them for now, though happy to discuss the ideas in comments.

The third myth, and the topic of this post is the idea that the Trust Fund assets were and are real and are just a big juicy target of Wall Street, that is that they have not been raided YET. Well this like the first two is based on a profound misunderstanding of the nature and operations of the Trust Funds since their inception. But to clear up, or even begin to, requires some tedious plodding through the numbers and concepts, but for those that do I hope you will understand with I used the descriptor and made the claim in the post Title. Oh and did I say there would be numbers? Continued below the fold.

The Trustees of Social Security sign off on a Annual Report of Social Security each year. I say ‘sign off’ because the Report is not fundamentally their work product, although their top staff review and modify the ultimate conclusions the bulk of the Report is produced by the professional demographers and actuaries of the Social Security Office of the Chief Actuary, heretofore the OACT. Most people and about 99% of all reporters who even make an effort know the Report in the form of the Summary. And indeed if you go the Actuarial Publications webpage this publication is the second to be served up. But the first is the full Annual Report of the Trustees which adds just under 200 pages of data tables and explanatory text. And it is in those data tables that you begin to unravel the nature of the Trust Funds.

And this is where things get a little tedious. But necessary. The main table under discussion is Table VI.A2.— Operations of the OASI Trust Fund, Calendar Years 1937-2010 Note first that this Table does not include the DI Trust Fund, those numbers and ones for combined OASDI are available down the page in Tables VI.A3 & A4. This exclusion is necessary because DI has some complications of its own.

On inspection you will see by year Trust Fund operations reported under three categories: Income, Cost, and Assets. Assets are reported in three forms: Increase in Assets which is the annual surplus or deficit used for budget calculations, Amount at End of Year which is the total TF balance, and Trust Fund Ratio which is that balance expressed as a percentage of the next year’s cost with 100=1 year, in turn the official target. Income and Cost are reported as Totals and then sub-totals with all sources of Income less all incidence of Cost making up the Increase in Assets.

Income to the Trust Funds come in 4 forms, only three significant (at least prior to this year), Those three are Contributions or FICA tax collections, Tax on Benefits, and Interest. FICA taxes and Tax on Benefits represent actual cash money extracted from the economy while Interest in most years just comes as a credit from Treasury to the Trust Funds. This distinction will become very important later.

Cost equally comes in three forms being Benefit Payments which make up the vast bulk of expenditures, Administrative Costs and RRB Exchange. RRB is Railroad Retirement, a parallel and older retirement system to Social Security and one with reciprocal funding with Exchange being the net transfer. As you can see from the numbers not that important in current context. Administration too is insignificant, in fact for OAS it represents only 0.6% of cost as compared to the overall Admin cost of 0.9% for combined OASDI, since DI is a more expensive component proportionately though not absolutely. One of those ‘complications’ alluded to above.

To the meat of the matter (or the tofu or brown rice as your diet would have it). If we examine 2010 for Increase in Assets we see a figure for positive $92.2 billion which as noted is the OAS surplus for budget calculations. “But, but, but the WaPo told me Social Security was in deficit for the first time since 1983!” Well they did and there are two reasonably valid, though ultimately confusing reasons. One they are focusing on cash flow only and not total Income and two they are reporting combined OAS+DI.

As to cash flow as noted above in most years in this Table interest simply comes to Social Security in the form of a credit. Only in those years where Income excluding Interest fails to exceed Cost does some or all of it come in the form of cash transfers. And only in those years when Income INCLUDING Interest trails cost is there an actual decrease in TF balances or in other words a cashing in of principal in the form of Special Treasuries. But back to cash flow. Determining it for any given year is simple, just subtract Interest from Increase in Assets. A positive remainder means cash flow in, a negative one cash flow out. And if we perform the exercise we see positive cash flow every year from 1936 to 1956. But also might note that this didn’t equate to gains in Trust Fund Ratios as such, while through the 40s those ratios ranged between 15 and 27 years of reserves in terms of the next year’s cost by 1956 this was down to under 4 years, and interestingly by this measure the same position we are in today.

Which brings up a point in passing. People who claim that the current ‘pre-funding’ is unprecedented need to look at those numbers from the 40s. Instead of the popular picture of the first two generations of retirees/workers being pure parasites we see people who sent positive cash flow to the system ever year for twenty years and significantly pre-funded their own retirements.

And that pre-funding was needed. An examination of the numbers from 1956 to 1982 shows 14 years in which total balances shrank as Increase in Assets went negative but also additional years when actual cash flow was negative as well, for example 1971-1974 where Increase in Assets minus Interest also yields negative numbers. Meaning that Social Security was cash flow negative every year from 1971 to 1982. Again making hash of the argument that negative cash flows, as seen this year on a combined OASDI basis, are unprecedented. And also the accompanying claim that Social Security has ‘always’ been Pay-Go. Well not unless you count interest and not even then in all cases.

But this is getting long. So I stuck ‘Part 1’ in the title and will post this piece now with Part 2 coming right up. And in the interim maybe those interested can run through the numbers in the data tables.