Social Security under ‘Sustainable Solvency’: Debt & Deficit Revisited

The current Chief Actuary of Social Security is Stephen Goss and on the occasion of the publication of the 75th Anniversary issue of the Social Security Bulletin he contributed what may be the most valuable single piece you will ever read on Social Security financials. The article carried the title The Future Financial Status of the Social Security Program The abstract/teaser for the article starts out with this:

The concepts of solvency, sustainability, and budget impact are common in discussions of Social Security, but are not well understood.

To which I can only add “Boy Howdy!”
Steve is perhaps best associated with the concept of ‘Sustainable Solvency’ which he describes as follows:

Sustainable solvency requires both that the trust fund be positive throughout the 75-year projection period and that the level of trust fund reserves at the end of the period be stable or rising as a percentage of the annual cost of the program.

Well this requires some unpacking. Under current law the Social Security Trust Funds are considered ‘solvent’ if they have a Trust Fund balance equalling 100% of the next years cost at the end of a given actuarial period. Stronger versions of this would require that the Trust Fund meet this standard in every year of the period and/or that it be trending upwards at the end. That is Steve’s “stable or rising”. Well all that is reasonable enough, but what would it look like under standard budget scoring? Well the answer is either “kind of odd” or “mind-bending”. Which will be explored under the fold.

You don’t even have to look at the Tables of the Social Security Report to understand that the nominal amount of benefits payable rises each and every year simply due to population growth combined with any amount of price inflation. And this fact is basically independent of whether that cost is rising or falling as a percentage of GDP. It is even independent of the fact that there are differentials between the demographic cohorts. Those factors can influence the amount of the increase but not under any reasonable projection make nominal cost growth of Social Security negative.

That being true it follows that the requirement to keep a reserve at 100% of next year’s cost means that Trust Fund balances have to increase by at least that same nominal amount to meet the “stable or rising” requirement. Which gets us to our first point. Since under current law Trust Fund reserves are required to be held in financial instruments full guaranteed as to principal and interest by the Federal government this means that such holdings have to increase year over year forever. And since the only instruments that currently fully meet that requirement are Treasury Bills, Notes and Bonds and since all of those are included in both ‘Total Public Debt’ and ‘Debt Subject to the Limit’ this means that Social Security will increase Total Public Debt year over year for every year that it maintains a state of sustainable solvency. That is Social Security Solvency equates to Perma-increases in Debt.

But how does this translate to ‘deficit’? Well under current scoring rules any year that Social Security increases its year end balance is a year that Social Security is running a ‘surplus’ as defined by CBO. So Social Security Solvency equals Perma-Surpluses. Which among other things shows us that the common sense relation of ‘debt’ to ‘deficit’ can use some revisiting, at least as it comes to Social Security.

Still the curve balls keep coming. Social Security’s Trust Funds are held almost entirely in Special Issue Treasuries that are set by a formula at the average rate of maturing 10 year Notes. And since over the long run it is somewhere between unlikely and impossible that Coupon Rates on the 10 year will be negative in real terms this means that interest on a fully solvent Trust Fund will be in excess of the need to build those Reserves. Meaning that once we achieve Sustainable Solvency it will be Self-Sustaining Solvency. In fact so much so that in order to prevent Trust Fund balances from balooning out of control it would require any interest accrued that was in excess of the amount needed to maintain solvency to be expended as partial payment of benefits. Which in turn would mean that Social Security ‘Revenue excluding Interest’ would have to be kept under ‘Cost’ by the same amount as that excess interest. Which in turns means that some part of the Debt Service on the interest earning Trust Funds would have to come in the form of General Fund transfers. Which would make the system as a whole slightly cash flow negative. This conclusion is not simply due to me running through the numbers, Chief Actuary Goss says as much in the following (bolding mine):

However, the occurrence of a negative cash flow, when tax revenue alone is insufficient to pay full scheduled benefits, does not necessarily mean that the trust funds are moving toward exhaustion. In fact, in a perfectly pay-as-you-go (PAYGO) financing approach, with the assets in the trust fund maintained consistently at the level of a “contingency reserve” targeted at one year’s cost for the program, the program might well be in a position of having negative cash flow on a permanent basis. This would occur when the interest rate on the trust fund assets is greater than the rate of growth in program cost. In this case, interest on the trust fund assets would be more than enough to grow the assets as fast as program cost, leaving some of the interest available to augment current tax revenue to meet current cost. Under the trustees’ current intermediate assumptions, the long-term average real interest rate is assumed at 2.9 percent, and real growth of OASDI program cost (growth in excess of price inflation) is projected to average about 1.6 percent from 2030 to 2080. Thus, if program modifications are made to maintain a consistent level of trust fund assets in the future, interest on those assets would generally augment current tax income in the payment of scheduled benefits.

So to sum up. Under conditions of Sustainable Solvency Social Security would at one and the same time be 1) adding to Public Debt year over year, 2) be in permanent surplus for Budget Deficit calculations, and 3) be permanently cash flow negative.

More Debt, Less Deficits, Cash Flow Negative. It only sounds paradoxical.