Social Security: Trust Fund Ratios, Solvency and the Reagan ‘Raid’

What does or would it mean to say that Social Security was ‘solvent’? Under the rules that govern the Trustees of Social Security the test for any given year is pretty simple: did or will the year end with all obligations/cost met while still retaining assets equal to the next year’s cost. To determine this you take the year end Trust Fund Balance and divide by Cost to get a Trust Fund Ratio where 100 = 1 year. If the TF Ratio is 100 or above Social Security is solvent for that year, 99 or under not. It is important to note that a TF Ratio under 100 doesn’t mean any change in benefits being paid out, instead benefits can and under current law must be paid in full as long as there are any assets to draw on, that is a TF Ratio greater than 0. Still any number between 0 and 100 is worrisome.

Is Social Security ‘solvent’ today? By this test certainly, at least for the Old Age/Retirement (OAS) Trust Fund, at years end 2012 OAS had a TF Ratio of 391. Has Social Security OAS always been ‘solvent’. Well no, and we can track its performance since 1937 in the following Table for the 2013 Report.
Table VI.A1.— Operations of the OASI Trust Fund, Calendar Years 1937-2012
By this simple TF Ratio test OAS was solvent every year from 1937 to 1965 and again from 1967 to 1970 only to fall under the 100 mark in 1971 enroute to its lowest year end point in 1982 at 14. At that point full payments of benefits were at serious risk, literally SOMETHING had to be done. And lo! the Greenspan Commission. More below.

Ignoring for our purposes the specific package that came out of the 1983 legislation that followed on that Commission and staying strictly to our metric, we can see that ‘solvency’ steadily improved with the full year of reform and the TF ratio was up to (the still dangerously low) level of 24. By the end of Reagan’s last full year it was 41 and then to 103 by the last year of Bush I. So if we reasonably consider the goal of the 1983 legislation to restore solvency to Social Security over the standard 10 year budget scoring window then the effort has to be seen as a success. On the other hand for the first nine years of that process Social Security was in fact ‘insolvent’ as defined here.

And this is where some standard narratives start coming off the tracks. But first a backtrack. What exactly are the assets whose value is numerator here? Well as mandated by the Social Security Amendments that formally established the OAS Trust Fund they are entirely financial instruments ‘fully guaranteed as to interest and principal by the Federal Government’ which is to say Treasury Bonds and Notes. And the key word is ‘mandated’, the Trustees of Social Security HAVE to exchange any revenues not needed for current cost for Treasuries. And importantly this would even be true if the General Fund was in surplus otherwise, it doesn’t matter if policy makers needed to extra funds at that point in time, the Trustees of Social Security would still be forced to ‘buy’ Treasuries and Treasury to ‘sell’ them and this was just as true in the days of Ike as in the days of the Gipper. The law mandates this buy/sell transaction.

Of course we could also cast that same transaction as lend/borrow. Because when anyone from PIMCO to the Chinese Central Bank or in our case the Social Security Trustees buy a bond direct from the issuer (Treasury) they are lending that money and in turn the issuer is borrowing it. But the point is whether the Treasury is at that point in time a reluctant seller or an eager borrower, the actual exchange of that Note or Bond for the excess revenue generated by Social Security is not a matter of choice but instead the simple operation of a law unchanged in that respect since 1939.

Returning to 1983 we can see that the legislative package had the result of boosting revenues at a rate that had them slowly growing faster than cost and so increasing the Trust Fund Ratio. And as just noted every dollar of that excess had by law to be exchanged for Treasuries. And as mentioned this can be cast as a case of the Reagan Administration borrowing the money. But in this case they literally had no choice, in effect FDR and Frances Perkins forced their hands here. But note that the end result was STILL a Trust Fund that was technically insolvent. But also note that the only way to make it more solvent would either to cut costs/benefits or contrawise increase revenues. And maybe some people would want to fault the deal makers of 1983 for not rebuilding the Trust Fund more quickly. On the other hand this would have FORCED REAGAN TO BORROW EVEN MORE. Because every extra dollar sent to Social Security is a dollar that has to be exchanged for a Treasury Note or Bond.

Seen in this light the whole ‘Reagan looted the Trust Fund to pay for guns and tax cuts’ story starts running thin. Because if that was really the intent the Administration would have insisted that the 2 point FICA increase that was part of the deal be phased in much faster than it in fact was. Instead they effectively starved themselves of their ‘loot’ by going slow. In fact given that the OAS Trust Fund was only at 41 in 1988 one could argue with a straight face that Reagan failed his fiduciary responsibility to Social Security by NOT BORROWING ENOUGH. At which point the whole ‘Great Reagan Raid’ narrative fades into myth.

Alongside of which we have to lay the myth of Boomer Prefunding. This will be the subject of a follow up post, but let me leave with this: in any year that Social Security has a Trust Fund Ratio below 100 then sending new revenues to its Trust Fund is not ‘prefunding’ anything. It is instead retroactively restoring that Trust Fund to the minimum level established by current law and policy. Moreover even after the Trust Fund is restored to solvency the ‘prefunding’ is limited to that amount of new assets in excess of that needed to maintain the TF Ratio above 100. And if there ever is a point when the Trust Fund projects to go back below that point than any such pre-funding has stopped. Even though the nominal balance in the TF may be in the trillions of dollars, after that point you have only prefunded a portion of the reserve and not the payouts at all.

Still however you come out on this second point, the first one still stands: Reagan didn’t loot the Trust Funds. His Administration’s ‘borrowing’ if you want to call it that was just in operation of pre-existing law. And if their goals had been that nefarious the solution would have been to rebuilt the Trust Fund even faster. Because you need to have assets in the pot before you can steal them.