Reading the Social Security Report: "What is crisis? In context?"
The first link is to the 2011 Report and is meant as a teaching tool. The Table shows projected income, cost, and balance projections over what the Trustees consider the ‘short term’, which is the same ten years used by OMB and CBO in their scoring. Table IV.A3.—Operations of the Combined OASI and DI Trust Funds, Calendar Years 2006-20
Traditionally income came in three primary forms: contributions from payroll (FICA), tax on benefits, and interest on Trust Fund principal. In 2011 the loss of income due to the payroll tax holiday was projected to be replaced by General Fund transfers so adding a fourth (offsetting) category. Cost also comes in three forms with benefits constituting more than 99% (including Railroad Retirement Board interchange) and admin just under 1%. In any year when total income including accrued interest exceeds total cost the Table shows a surplus ‘Net increase during year’ and a corresponding addition to the Trust Fund balance ‘Amount at end of year’. And taken ON ITS OWN TERMS, combined OASDI shows continuing surpluses through the ten year window to a total of something over $900 billion in surpluses. Which BTW score as such on the top line number CBO and subsequently the press report as THE Budget Surplus/Deficit. Okay then where is the crisis? What part of ‘near a trillion dollar surplus’ don’t we understand? Well there are a couple of answers to that, which to start with will require some longer range outlook. New table below the fold.
Table VI.F8.—Operations of the Combined OASI and DI Trust Funds, in Current Dollars, Calendar Years 2011-85 This table shows longer term projections under the three different economic and demographic models used by the Trustees of which ‘Intermediate Cost’ is the standard one. Here we can see that under IC projections surpluses vanish soon after the ten year window of Table IV.A3 and that year end balances start shrinking ultimately to vanish in 2036. Now the end of surpluses and even depletion of Trust Fund balances doesn’t mean that there simply are no funds to pay any benefits, even in 2035 ‘Income excluding interest’ STILL will exceed $2.2 trillion a year. On the other hand projected Cost under the scheduled benefit would be a little over $2.8 trillion, leaving a 22% or so gap. And since under current law Social Security has no ability to borrow would require an abrupt drop in benefits to 78% of the schedule. So THAT is the agreed definition of ‘crisis’: ‘sudden immediate drop in benefits by 22% at the point of Trust Fund Depletion’. But that is also the point where agreement stops as a divide arises between what I will call Social Security ‘supporters’, ‘reformers’ and ‘Rosserites’ (a term I just invented). For ‘supporters’, that is for advocates of traditional Social Security crisis focuses on ‘drop’. As a result their range of policy responses mostly revolve around ways to avoid the cut altogether, which given a system where non-benefit costs (i.e. admin) represent 1% of total costs, requires boosts on the income side. Hence approaches ranging from ‘lift the cap’ to Dale Coberly’s ‘good grief, it is just 40 cents a week to start if you gradually boost FICA’. On the other hand while some ‘reformers’ pay at least lip service to ‘drop’ their real concern is the ‘sudden immediate’ part and what they anticipate will be the political reaction: which in their imagination means millions of screaming ‘Greedy Geezer’ Boomers descending on Capitol Hill demanding that all scheduled benefits be paid in full no matter what. So their range of policy responses fall into two basic approaches plus a blend. One approach is to appeal to the Magical Fairy Dust of Equity Markets and claim that private accounts will simply make up the difference. Another approach is just to avoid the ‘sudden’ part by simply phasing in the cut by such things as means testing, retirement age adjustments, changes in CPI whatever that end up with the same 22% (or more) cut but with less drama. And the more cynical ones combine both approaches by pretending (or believing) that Magical Fairy Dust will just offset those gradual cuts and everyone (but especially account managers of private accounts) will live happily ever after. But either way this leaves ‘supporters’ and ‘reformers’ talking past each other with the former focused on avoiding cuts altogether while the latter concentrate on making them imperceptible. But which makes them just not hear solutions that would actually cost them anything, because ‘cuts’ as such are not where they see the problem to start with. Now somewhere between ‘supporters’ and ‘reformers’ are the distinct minority of ‘Rosserites’. And by ‘distinct minority’ I mean Professor Barkley J Rosser and your (not-so) humble blogger. (Although such luminaries as Prof K and Dean Baker at least acknowledge that we exist and have a point). Now Rosserites are opposed by the non-Rosserites (which mostly means AB commenter Dale Coberly, we could have a joint meeting of both sides in a phone booth-if such existed anymore)who I think misjudge us. That is where Rosserites are making an observation, and drawing a theoretical conclusion, we are not in fact ADVOCATING that outcome, just pointing out that the 22% cut at Trust Fund Exhaustion is not in full context a ‘crisis’ at all. And that understanding this allows us to modulate our responses to what all agree is a problem, whether that be defined as ‘cut’ or ‘sudden’. Rosserites, or at least this Rosserite, point to the following 2002 Congressional Budget Office Report: The Future Growth of Social Security: It’s Not Just Society’s Aging and particularly to Figure 2 on page 2. Now in what may be the least known aspect of Social Security it turns out that the scheduled benefit under current law actually results in increased REAL benefits over time. That is measured in terms of actual purchaseable basket of goods the average benefit was projected to rise from $14,000 in 2002 dollars to $26,000 in 2002 dollars between 2002 and the end of the 75 year projection period. Or close to a 85% REAL INCREASE for the retiree of 2077 as opposed to what my Mom got in 2002. Which Rosserites take as an argument to put the 22% cut in 2036 in the context of this upward sloping baseline. That is per CBO benefits at the point of Trust Fund Depletion (using 2002) projections were scheduled to be about 140-150% of then current benefits and a 25% cut to THAT still rendered what I cheekily call ‘Rosser’s Equation’ (Barkley can’t decide whether to be ‘bemused’ or ‘amused’ by this), that is 75% of 150% = 115%. Meaning that the real world consequence of that ‘sudden’ ‘cut’ would still be a check 15% better than my Mom gets today. In real basket of goods terms. Which doesn’t mean we shouldn’t take steps to avoid or at least mitigate that cut, just to point out that it is hard to parse ‘15% better real benefit’ into ‘Boomer Geezers giving Gen-X a bone job’. Or in less crude terms ‘what the heck kind of ‘intergenerational warfare’ are we talking here?’ Well it is getting close to Report release time and I want to leave time for people to do some fact checking and link following. All I ask is that people keep the reality of the current baseline of the scheduled benefit in mind when assessing ‘crisis’ if and when the Trust Fund actually goes to zero balances.
Bruce, Do you have any idea who is going to be in the Press Conference besides Geithner and Sibelius? NancyO
I am not a non-Rosserite. I have taken to mentioning the Rosser result every chance I get.
What I once tried to point out to you and Rosser, and have the scars to show it, is that the Rosser equation looks an awful lot like changing from “wage adjusted” to “price adjusted.” And with the memory of the Boskin Commission still provoking me to rage and nausea, I don’t trust the gummint to give us an honest price adjustment.
Moreover, I am pretty sure that future beneficiaries will not see the point of a “real” benefit increase. They will judge their benefits in terms of what they are used to… their wages, which will include the same “real” increase as the benefits otherwise would absent the “price adjustment” or the Rosser effect.
You here in fact give the best argument I have seen against the Rosser shock therapy: the folks who already are getting benefits in 2035 will see a 22% cut in THOSE benefits in 2036. This will indeed produce some political noise.
So, while fully appreciating the Rosser equation, and even using it myself frequently to make a point: social Security can continue to pay “enough” benefits forever with NO CHANGES WHATSOEVER, I still prefer to point out to people that on the other hand
IF THOSE FUTURE RETIREES WILL WANT TO KEEP UP WITH THE STANDARD OF LIVING THEY WILL HAVE HELPED CREATE, or, which is the same thing, GET A MONTHLY CHECK THAT IS THE SAME REPLACEMENT RATE as today’s beneficiaries, EVEN THOUGH THEY WILL BE LIVING MANY MORE MONTHS (years), they can pay for the increased benefits simply by
RAISING THEIR OWN “TAX” (SAVINGS) one half of one tenth of one percent per year…which as we all know by now is FORTY CENTS PER WEEK in todays terms WHILE INCOMES ARE GOING UP EIGHT DOLLARS PER WEEK.
This would be about a total of one percent increase, average, over a forty year career.
“Now in what may be the least known aspect of Social Security it turns out that the scheduled benefit under current law actually results in increased REAL benefits over time.”
Here is my graph of that from a year and a half ago.
I don’t think I can be classed as a Rosserite because, even though I believe that Congress will decide to reduce scheduled benefits and that it will not be a crisis, if Congress waits past 2030 and then imposes a solution with no tax increases it will be miserably stupid and a political disaster.
If you use the chart to solve the problem graphically (transfer from the blue line to the red line such that you fill the valley by cutting off the peak) you see that you should start by about 2020.
It is now clear that the improvement in the depletion date from 1997 to 2004 came from the fact that the stock market and housing bubbles brought additional workers into the system. It is also now clear that we should start making adjustements as soon as the economy gets back to normal.
The big problem is that the people in charge of making the adjustments are not even considering much in the way of increasing revenues to cover increasing costs.
Lets see, with some totally unfair simplification, we have three car dealers on the corner. One of them is promising to provide the customer with a better new car every year… as Boskin would tell us, higher price means higher value not inflation. But in 2036 the new model will be the same car as the 2012 model.
The second dealer says, that’s too much of a shock, we can start in 2025 and just reissue the 2024 model, then in 2026 we can bring back the 2023 model, and so on until by 2036 we will be bringing back the 2014 model and everyone will have gotten used to it gradually.
While on the third lot, the dealer is saying, but wait, if your income is going to go up one percent each year, and you are willing to pay one half of one tenth of one percent more for a new model each year, there is no reason to force everyone to drive a 2012 model for the rest of their lives and their chidren’s lives.
On the fourth corner? oh, that’s where the liberals are saying… no, no, no, everything is all right, we’ll just make the rich pay for the more expensive newer cars we will give to the poor poor, like us college professors. And old Pete, saying, but really, the 1936 model was good enough for poor people, and Alan Simpson is saying, I always liked the 1789 model myself.
i should have said wage INDEXED and price INDEXED, not wage “adjusted” or price “adjusted.”