Steady State Social Security: What Would it Look LIke?

What would Social Security look like if it met all current law requirements for ‘solvency’? Well unfortunately we have to start with the most eye-glazing opening ever deployed: ‘first lets define our terms’. To which I would add ‘within an artificial economic model’. Because real life is messy, particularly right now, and that introduces unnecessary conceptual confusion. So lets begin.

First assume a solid state economy. For my purposes I will define that as 5.5% unemployment, 5% nominal yield on 10 year Treasuries, 2.5% Real GDP, 2% inflation, 1% annual growth in SS beneficiaries. (Yes in the real world these interact, and maybe this precise combination is unlikely, though each number in isolation is in intermediate ranges, but that will not effect the basic argument).

Second assume that Social Security is currently ‘solvent’, meaning that income from all sources is sufficient to pay all costs, leaving a reserve numerically equal to next year cost. What would it take to keep it ‘solvent’?

Well in our simplified model Social Security cost increases year over year as a sum of inflation growth and beneficiary population. Which ignoring interactions means an increase of 3% per year. Which in turn means that maintaining ‘solvency’ requires bringing in enough income from all sources to pay 103% of Year One cost AND add 3% to Trust Fund principal and so leaving the Trust Fund ratio (reserves as a percentage of NEXT year cost) at the end of Year Two at 100 or one year’s worth of Year Three cost.

Now in our model the 5% nominal yield on Trust Fund assets (mostly invested in a mirror of 5 year bonds) would boost the TF ratio to 105% by interest effects alone, assuming that is that no portion of current interest was needed to pay current cost. Turning that around this means that 2 points of interest are available to reduce the need for ‘income excluding interest’ to match cost. Meaning that such income has to total 98% of the new 103% of previous year cost.

Now in year over year terms this has two effects on the overall economy. First ‘income excluding interest’ has to increase year over year to pick up its 98% share of the new year’s new increased cost. And second some part of the 5% interest on Trust Fund assets has to be transferred in cash to pick up its 2% share.

What does this leave us? Well a Social Security system that is cash flow negative each and every year. But with a wrinkle. Since that portion of the 5% nominal interest retained simply to meet the 3% growth in TF balance to maintain a TF ratio of 100 is credited in the form of NEW Special Treasuries, which are NOT financed directly by borrowing, that nominal interest is discounted in cash terms by some 60% from the perspective of the General Fund and the taxpayers who pay into it. AND the system is picking up basic income support for the 1% of the population being added on net to the beneficiary pool.

It seems to me that once having established steady state solvency that people paying taxes on non-wage income are getting a pretty good deal out of Social Security. To the degree that basic income support for seniors, widows/widowers/orphans, the disabled is some societal wide responsibility then 98% is being paid by current wage workers in FICA and by retired workers in tax on benefits and an additional percentage by income tax on wage workers leaving a pretty damn small levy on gains from capital. Forgive the language.

All this of course stems from a condition of ‘solvency’, which translates to keeping the income excluding interest/cost ratio approximating 98%. Which in theory can be done on either the benefit or cost side. But either way the resultant post-solvency is not remotely ‘unsustainable’. Or if so leave some numbers in comments. The only real policy question it seems to me is determining the actual costs and trade-offs getting from where we are now to solvency as defined. And not as is too common now trying to calculate the costs of paying off all the principal going forward. Because as noted in a previous post in a Steady State Social Security system principal NEVER needs to be paid down, instead all of it has to be retained to meet reserve requirements.