2015 Social Security Report Release Day (w/updates)
At 1:30 EDT the Trustees of Social Security will hold a media availability at which they will release the 2015 Social Security and Medicare Reports. If past practice holds the Reports will be released on line at or before that time in both a web (HTML) format and in PDF. Assuming past file name conventions hold the two URLs will be: http://www.ssa.gov/oact/tr/2015/index.html and
http://www.ssa.gov/oact/tr/2015/tr2015.pdf
Once the Report is released this post will be updated with key numbers, dates and talking points. I will also be working with the text of the Report to transform it into more readily accessible form as an Excel Workbook with associated .jpgs and .pngs of the more important Tables and Figures. More on that as we go along.
Note the above links will be dead until Report release. The actual launch page for current and past Reports is here: Reports From The Board of Trustees
Right now that current Report shows as the 2014. This should update to 2015 immediately on release and so this is probably the best link to be clicking on in the meantime. At least it will get you somewhere other than dreaded Room 404.
Back with more when there is more.
Update 1 Report not out online but Treasury Press release has Trust Fund Depletion in 2034 and 75 year actuarial gap at 2.68 or down from 2.88. Reasonably good news but the devil is in the details which are still forthcoming.
Update 2 HTML version online under first URL cited above.
Bruce
thanks for this. it doesn’t sound like Krasting’s devil, at any rate, is likely to be lurking in the details.
i’ll take a look at it later. maybe much later.
No such luck for you.
I’ll offer right here and now. If the actuarial deficit is on the order of 2.68 or even 3 percent, that says that a tax increase today of about one and a half percent on the worker and on the employer would pay for Social Security for the next 75 years (if the predictions hold up). That is close enough to the “one percent” that workers have already said they would rather pay than have their benefits cut, or the two percent the workers did pay without noticing when the payroll tax “holiday” lapsed… that it might be just as well to go ahead and increase the tax that much right now.
At least it would shut up the Petersons for another seventy five years, maybe long enough for sanity to prevail. Well, probably it wouldn’t. They would wait a year or two and then start announcing that “Social Security is Going Broke!’ [ or IS Broke,} it will run out of money in seventy five years and we are all going to die!”
Like I thought there actually was improvement to OAS and combined OASDI.
Standalone OAS TF Depletion moved out to 2035 from 2034
While OASDI moved out from combined 2033 to 2034
The latter number at least assumes a transfer or combination of the DI and OAS Trust Funds.
Yikes — I think their “Intermediate” fertility rate estimate is a bit high (2.0), since the last year’s number was down at 1.86.
http://www.washingtontimes.com/news/2014/may/28/us-birthrate-plummets-to-record-low/?page=all
Although the Trust Fund numbers did increase, the reality is that the expenditures were greater than the taxes — $859.2B vs. $785.6B. That $73.6B shortfall came out of the General Fund (out of which interest to the Trust Fund is paid).
We need to get the FICA taxes to the point that they pay for the benefits. If there is excess, then it should be refunded to those who paid, not put in a “Trust Fund”.
Warren under conditions of “Sustainable solvency” Contributions and Tax would directly fund about 97% of benefits, 3% would be funded by payment by Treasury of a portion of interest on the Trust Fund while the remainder of the accrued interest would be retained to keep the Trust Fund at a Trust Fund Ratio of 100 (meaning one year of next year’s cost), a necessary measure to buffer temporary downturns in employment and so in FICA contributions.
It would create untold complications and huge compliance costs for employers to adjust FICA rates each year so that revenue EXACTLY met cost. Indeed given the uncertainties it would be impossible. Meaning that SOME sort of reserve fund needs to exist and the only question is how large it should be. Personally I think one year of next year cost is a reasonable number because it allows at least a decade to react to fundamental changes that require a permanent adjustment to FICA rates.
Currently the Trust Funds are running at TF levels close to 300, or three years of reserve, mostly as a deliberate attempt to PARTIALLY address the known demographic bulge represented by Boomers. Under current projections that still creates a shortfall about 3/4s of the way through Boomer retirement and which combined with long term shifts in worker-retiree ratio suggests that FICA rates be increased in way that would result in taxes exceeding costs for most of the period in question.
Putting an artificial limit on this that would refund ANY cash “excess” to those who paid would be frankly short sighted and throw us into a situation of gyrating FICA rates in the out years. So unless you want every firm in the country constantly adjusting their payroll systems to match the gyrations it would be better to use a predictable smoothing method to match revenues to cost long term rather than slavishly adopting pure Pay-Go
The table showing the reasons for the overall change from 2.88% of payroll actuarial gap to 2.66% is Table IV.B7 which is contained in Section IV.6 Reasons for Change in Actuarial Balance
There is nothing particularly dramatic. Changes in economic data moved OAS 0.10% to the good, while method changes added another 0.15% which was offset by a built in -0.06% due to change in actuarial period and -0.03% due to demographic changes. The demographic changes result from changes in fertility assumptions (Note NOT life expectancy changes). The economic ones were a combination of minor effects, dominated by a change in ultimate real wage differential to 1.17 from 1.13.
So pretty much as anticipated. And pace Krasting SSA did not bow down to CBO and their new mortality assumptions. All things considered not a bad Report.
Warren is, unfortunately one of the many, who knowing nothing about Social Security has an answer for it.
In fact, Warren may not know much about anything. At least I can’t imagine a business running without a “cash reserve,” which is what the Trust Fund is. It is a “Trust Fund” however to make sure the cash reserve is not raided by Congress while waiting for the need for the reserve cash to show up.
What drives people like Warren is that they can’t stand to see a penny that “should be” theirs being used for a purpose they can’t understand… such as insurance against the day when they, even they, will need it back plus the interest it has earned waiting for them to need it. The need is entirely predictable but most people… yes, most… act as if somehow they can put off paying for their retirement and at the end of the day the magic fairy will come in and save them.
Whether they call that magic fairy the “stock market” or “the government” is a matter of their political stripe, but not in either case a measure of their understanding.
Bruce
I wouldn’t make too much of the difference between “life expectancy” and “fertility assumptions.” Life expectancy was baked into the numbers a long time ago and are not changing. The fertility “assumptions” appear to be more volatile.
But the formula is still you need to collect enough “taxes” to pay for the benefits. If people are living longer the benefits will be higher (more people not more dollars per person). If “fertility” or “wage increases” is/are not keeping up with the increase in life expectancy, the actuarial shortfall will increase unless the tax rate (dollars per dollar of income) increases.
Whatever the “cause” of the change in projections, the fact remains that you are going to need your social security. And the cost of paying for it is not going to change by anywhere near enough to make it a questionable bargain.
Or you could be like the shopper who expects the price of bread to be a dollar twenty, and gets to the store to find the price has gone up to a dollar twenty five, so she refuses to buy the bread and goes home to sulk and pray to god for a miracle. or write her congressman and demand “the rich” pay for her bread. or invest her dollar twenty in the stock market…
“It would create untold complications and huge compliance costs for employers to adjust FICA rates each year so that revenue EXACTLY met cost.”
Not at all. Put in a FICA tax that is projected to bring in 110% of outlays. (If they cannot get a one-year projection for that, then these 75-year projections are a complete joke.) The government reports the overrun at the end of the year as a percentage of the intake. For example… Let’s say that, in 2015, taxes bring in $900B, and expenditures are $846B. So there is a $54B surplus — 6% of taxes.
On your 2015 tax return, you have a refundable tax credit of 0.06 times whatever you paid in FICA taxes in 2015. (In fact, that 0.06 number can be printed right on the 1040 form, so we don’t have to look it up.)
That’s a whole lot easier than figuring the ACA subsidy!
“So unless you want every firm in the country constantly adjusting their payroll systems to match the gyrations….”
I did not notice that it was a big problem to adjust the payroll systems when the 1% reduction in the employee portion of the FICA tax was phased in, or when it was phased out. Neither was there much of an issue back when Bush I changed the deduction amounts for his silly stimulus. (He changed the amounts withheld so we got more in our paychecks, but we had to pay it back at tax time. 370H$$@.)
Really, the SSA should be able to predict fairly accurately even a few years out. And as I said, we multiply the estimate by 1.1, so there will be a good buffer, and the transitions should be pretty smooth.
‘It is a “Trust Fund” however to make sure the cash reserve is not raided by Congress while waiting for the need for the reserve cash to show up.’
But isn’t that exactly what Congress was doing? When there were excess taxes, Congress spent it and put the IOU’s in the Trust Fund.
But that was then and this is now. Now, our Trust Fund is being depleted. I do not want the Trust Fund to be depleted. I want the taxes to cover the expenditures, which they are not doing.
Double posted. (I don’t know how, though.)
Can you fix it for me? (yep)
Thanks. (yr’welcome)
(and I’ll disappear this one later – BW)
Why I am hard on the Warrens
First, he notes a change in the fertility assumptions, and assumes based on his superior knowledge that they must be wrong.
Second, he notes that current taxes are less than current expenditures, so he demands that taxes be CUT to be no more than CURRENT expenditures with the extra tax “returned to the tax payer” who god knows, will need the three cents more today than he will need his benefit check on the day the expenditures exceed the taxes.
Third, he says that 73.6B shortfall “came out of the general fund.” Well, no, it came out of the Trust Fund… money that the workers paid for their Social Security and the interest it earned by being LENT to the government. This is NOT the government paying for Social Security, it is the government finally paying for the submarine it bought with the money it borrowed FROM Social Security.
Warren is not the only person in the country who can’t understand the difference.
Warren
NO!
Congress did not RAID the Trust Fund. It BORROWED money from it. Wrote an “IOU” (called a “bond” in the world of finance) obligating it to pay it back with interest.
That’s the difference, you see. There is a LAW.
Money sitting in a drawer, or lock box, ceases to be money. You don’t let money sit idle for long. You lend it at interest. The borrower does not keep it in a drawer and hope it breeds in the dark. He spends it on something he needs or wants currently, and expects to be able to pay it back with interest, either because of what he earns from what he bought with it, or because of his future earnings from whatever source.
This is pretty basic stuff, but seems to be entirely forgotten by the people who talk about Social Security and say things like “Congress raided the Trust Fund..”
I am sorry to be unkind to you. You are do doubt a decent and intelligent person. I would treat you kindly, and feel kindly, if I knew you as a person. But I am very angry at the “ideas” that float around in the mindless minds (not a Buddhist concept) of “the public and the press and the politicians.”
Try not to take it personally. It is not meant personally. But frankly I don’t see where diplomatically lying to each other gives us any hope of actually knowing what we are talking about.
Webb – I would say an excellent report. Improvement in all the key metrics.
I think the 2015 Report will achieve the desired results. The Report is a strong argument to “Do Nothing” for a few more years. This takes SS out of Presidential politics.
Some quirky stuff. Compare 2014 Intermediate with 2015 Intermediate.
The 2014 report projected TF Net Increase in 2015 to be 28.3B. The 2015 report has the increase at only 9.2B. This is a negative swing of 19B. The 2015 report assumes a cash deficit of $83.9B for 2015. The 2014 report assumed that the 2015 cash deficit would be only 68.4B.
So this deterioration is the 2015 reality. But not to worry! 2016 and 2017 will be gangbusters for the economy. The TF surpluses jump back up for the next few years! – I find this reversal of trend hard to believe. We shall see.
Consider the % income line post 2019. The TF will be in decline, but % income will be on the rise. How’s that possible? Easy! Interest rates will rapidly rise over the next few years. This will boost TF income!
But tell me again how you have this big jump in the economy while interest rates are rapidly rising?
I gotta get outta here before I explode from apoplexy.
It used to be well understood that “the public” were idiots and a politician could get elected by calling his opponent a “practicing thespian.”
But the powers have figured out that it is safer to fund and elect politicians who are also idiots. So now every politician is a practicing thespian.
Krasting interest rates at the ZLB are not a good thing for the economy. On the other hand double digit interest rates are not good for the economy either. The first indicates at least a risk of deflation and economic stagnation, the other excessive inflation that if left unchecked could trigger nastiness’s like the stagflation of the late 70’s.
Which is why we have something called ‘monetary policy’ which targets interest rates and inflation rates somewhere in the middle so as to hit the sweet spot that indicates a growing economy. And of course you know all this.
Which makes this bordering on dishonesty:
“But tell me again how you have this big jump in the economy while interest rates are rapidly rising?”
Well that depends entirely on HOW rapidly they are rising and whether that actually risks overshooting the interest rate targets established by the Fed SOMA. I have yet to look at that particular Table but there certainly is a economic outcome that has a big improvement in the macroeconomic numbers that is also marked by increases from current interest rates. For example I would be pretty happy seeing interest rates at 5% nominal and 3% real and a 2% inflation rate. Heck you could add a digit onto all three and we wouldn’t exactly be Weimar.
Dale what is worse is that the public seems to be emulating those thespians. Which can’t be good for the moral fiber of the country.
BKrasting, 1) I don’t think rates rapidly rise – or rise much at all. I see us near zero for a long time, like Japan. I am sure the FED will try to push rates up, but it won’t last. 2) I see the economy doing ok to poor in the next two years. 3) Globally there is a lot of unemployment, a lot of productive capacity, low inflation, inadequate demand, austerity so rates in many major economies will remain low.
Krasting in poking around the numbers comparing Table IV.A3 in the 2014 and 2015 Reports it seems that the big number difference in FICA contributions with 2015 now being projected to come in some $25 billion less than projected with the 2014. Maybe that and the improvements projected for the outyears are directly related to interest rate changes rather than say short term overestimation of Real Wage Differential, I’ll do some check. But can you point me to some specific Table that would show the cause of this specific change?
“[Warren] notes that current taxes are less than current expenditures, so he demands that taxes be CUT to be no more than CURRENT expenditures with the extra tax ‘returned to the tax payer’ who god knows, will need the three cents more today than he will need his benefit check on the day the expenditures exceed the taxes.”
Uh, NO. I want the taxes RAISED to 1.1 times expenditures, and any excess returned to those who paid that year, in proportion to whatever the excess was.
I really don’t see why you would have a problem with that.
“But tell me again how you have this big jump in the economy while interest rates are rapidly rising?”
But Bruce, the rise in interest rates is the response to the rising economy.
“[Warren] says that 73.6B shortfall ‘came out of the general fund.’ Well, no, it came out of the Trust Fund… money that the workers paid for their Social Security and the interest it earned by being LENT to the government. This is NOT the government paying for Social Security, it is the government finally paying for the submarine it bought with the money it borrowed FROM Social Security.
“Warren is not the only person in the country who can’t understand the difference.”
No, I really DON’T understand the difference.
The interest paid to the trust fund is, by definition, interest, not principal. That interest is paid out of the General Fund. When the Trust Fund starts to decline, THEN the General Fund will start paying back principal that it “borrowed”.
And Krasting I don’t even see the interest rate revisions you are talking about. The relevant Table in each Report is V.B2
http://www.ssa.gov/oact/tr/2015/V_B_econ.html#308187
http://www.ssa.gov/oact/tr/2014/V_B_econ.html#308187
2014 Report
2014 2.9
2015 3.6
2016 4.2
2017 4.7
2018 5.1
2015 Report
2014 2.2
2015 2.3
2016 3.4
2017 4.1
2018 4.8
All I can think is that in actuality you meant there to be a disconnect between the following two paragraphs and not as I assume a causal relation. Because whatever is changing those surplus numbers it certainly isn’t upward revisions in interest rates. Because the numbers show it going the opposite direction. Can you explicate?
” But not to worry! 2016 and 2017 will be gangbusters for the economy. The TF surpluses jump back up for the next few years! – I find this reversal of trend hard to believe. We shall see.
Consider the % income line post 2019. The TF will be in decline, but % income will be on the rise. How’s that possible? Easy! Interest rates will rapidly rise over the next few years. This will boost TF income!”
Warren you understand that borrowing money has a cost? And that a big part of say paying off your mortgage is paying off the accruing interest? And that is doesn’t really make sense to say that the part of your payment that goes to interest isn’t “really” “paying back” what was “borrowed”?
Money has a time value. Which a borrower is borrowing along with the principal. And each has to be paid back.
Arne aren’t rates supposed to target inflation and unemployment? An economy can grow and have low inflation. In fact, inflation has been falling since Sept 2011 and NGDP has been somewhat steady until lately.
Might have to adjust the FRED chart timeline for the past 15 years
https://research.stlouisfed.org/fred2/graph/?g=1uLB
Warren,
Most people who say something like “the reality is that the expenditures were greater than the taxes” and “Congress spent it and put the IOU’s in the Trust Fund” are arguing to cut benefits to make SS balance. You may be running into a programmed reaction when you choose to echo those phrases even if you understand what they really meet.
After all, paper money is really nothing more than an IOU as well.
Your approach would work, but such a change is not really needed. What we need is for people to understand that they need to pay for what they want and that they need understand it better so that they will know they should want the retirement insurance that SS provides.
Yes, Bruce. But our government (through the General Fund) has NOT paid any principal. That is how these bonds work. They are not like mortages, in which each payment is greater than the accrued interest for that period, and so pays a little of the principal.
Bonds, generally, pay regular interest (coupons) for the life of the bond, and then the entire principal is returned at the end (maturity). So even when the General Fund pays interest to the Trust Fund, it is not paying interest. And even when such bonds mature (do they ever?), the Trust Fund would simply turn around and buy more bonds, converting the principal of the old bonds into new ones.
“Uh, NO. I want the taxes RAISED to 1.1 times expenditures, and any excess returned to those who paid that year, in proportion to whatever the excess was.
I really don’t see why you would have a problem with that.”
Warren millions of people earn wages and pay FICA but are not required to pay or file income taxes. Like most every high school or college student working a part time job at MacDonad’s or the campus library. You are placing a huge compliance burden on them and the IRS for nothing. Why not just target a 100% reserve via a single change to FICA rather than making the IRS do some calculation for every wage earner in the country?
“Your approach would work, but such a change is not really needed.”
I hope you are right, but the SSA projections are that FICA taxes and income tax on benefits will not cover the expenditures. They are not now, and they are not projected to do so.
I see what I propose as more honest — a true Pay-Go system.
As things are now, and have been in the past, the excess of taxes has gone into the General Fund (through bonds sold by the Trust Fund); and currently and in the future, the shortfall will come out of the General Fund (through interest and principal paid to the Trust Fund).
As an Engineer, I see the Trust Fund is an accounting gimmick to disguise the fact that excess FICA taxes go to the General Fund, and shortfalls in the FICA taxes are covered by the General Fund.
Warren the government has paid off billions of dollars or principal to the DI Trust Fund. Plus it has also redeemed hundreds of billions of bonds as they matured and rolled over.
http://www.ssa.gov/oact/tr/2015/IV_A_SRest.html#494265
In this Table the third to last column is “Net increase during the year”. And when it is showing negative numbers it is showing principal redemptions. Which DI has been doing even before the base year of this Table.
And yes the Special Treasuries have maturities and are redeemed and replaced with new ones as necessary
http://www.ssa.gov/oact/tr/2015/VI_A_cyoper_hist.html#297482
I think you need to slow down and do more thinking and a lot more reading before you just comment willy-nilly. Which might save you from head scratchers like this:
“So even when the General Fund pays interest to the Trust Fund, it is not paying interest.”
Uh. Huh? Waaht!? That follows how?
Warren
when you borrow money at interest from the bank, the interest on the money belongs to the bank. trust me on this.
the bank does not care that you have to get a job to pay back the loan, including the interest.
and if you used the money you borrowed from the bank to buy a car, you have the car but you have not paid for it yet. when you pay back the bank you are paying for the car. the interest is what you pay the bank for their service of lending you the money. it also accounts for the “time value” of the money you borrowed.
if you borrowed a hundred million today, and offered to pay them back a hundred million in forty years “and call it square” they would send Luigi and Guillermo out to ‘splain things to you.
“Warren millions of people earn wages and pay FICA but are not required to pay or file income taxes. Like most every high school or college student working a part time job at MacDonad’s or the campus library.”
I see your point. (Though my kids always file. Maybe they are doing so when they don’t have to. I’ll check into it.)
As I said on another post, that may be why so many people getting ACA subsidies have not put in their tax returns and reconciled the subsidies with their actual (vs projected) income.
“You are placing a huge compliance burden on them and the IRS for nothing.”
Not on the IRS, I think. It’s just a percentage overage that the SSA would report at the end of the year, and the IRS would put that one number on the tax return.
“Why not just target a 100% reserve via a single change to FICA…?”
Because I don’t think our short-term projections of payroll taxes are that good. That’s why I recommended the 10% excess — to deal with unexpected downturns in the economy.
Warren I suggest you read this piece as it explains the foundation of Social Security – once people understand this they might not focus so much on political hyperbole, and realize that SS is much more than paper money and accounting.
http://www.forbes.com/sites/johntharvey/2011/04/08/why-social-security-cannot-go-bankrupt/
Same with Medicare/medicaid – we can afford it, so long as there is enough supply of healthcare goods and labor to meet the needs or working and non-working folks. If there are no doctor’s left in the future, then the money is irrelevant.
Warren let me query you something.
Let’s say I set up a Pay-Go system but because of ‘reasons’ wanted to maintain a reserve to buffer out smallish changes in contributions and payouts. Which means accumulating at least a minor surplus.
Where should I park that money? In cash on a back shelf of my safe? In a bank at 0.01% interest on savings? Investing in gold futures? Tying it up for years in a REIT? Or would I want to hold it in a form that was both 100% liquid and safe but yet paid some minor real (after inflation) return?
Well in 1939 when this question came up Congress determined that the newly created Trust Fund would be limited to investing any reserves in securities fully guaranteed as to principal and interest by the U.S. Treasury. Now you can of course second guess this decision but it seems pretty sensible to me.
Now there are only a handful of securities which meet this requirement and mostly they fall into the category of Treasury Bill, Certificates, Notes, and Bonds. And in each case the proceeds from selling these securities are deposited into the General Fund.
Now thousands and millions of Bond purchasers over time have not been particularly concerned by this fact, if they thought about the accounting at all. Instead they were buying Notes and Bonds backed by Full Faith and Credit of the United States.
Now you would have all these people understand that they were victims of a massive multi-decade accounting fraud, that there money had simply disappeared into the never satiated maw of the federal government and what they thought were actual obligations of the Government were just paper IOUs and an “accounting gimmick”.
Good to know Warren. I assume you are fully invested in physical gold buried in your backyard where it will be safe.
(BTW where is the nearest hardware store to your house? I seem to have an urgent need for some bolt cutters and a shovel)
Webb you say:
“Krasting interest rates at the ZLB are not a good
thing for the economy.”
Really? Does that mean that the Fed, who has set rates at zero for the PAST SEVEN years, was doing it because it was not ‘good for the economy”??
Trust me on this one point ZIRP has been a big plus to the economy.
Warren your kids might be filing because for whatever reason their employers are withholding for income tax, maybe because your kids didn’t claim the right number of exemptions on their W-4, and want to get their tax refund.
But a lot of employers of teens don’t withould income tax knowing that many of them will actually have no obligation.
“As an Engineer, I see the Trust Fund is an accounting gimmick to disguise the fact that excess FICA taxes go to the General Fund, and shortfalls in the FICA taxes are covered by the General Fund.”
Well, as an engineer, I appreciate simple gimmicks – and I have looked at enough Report numbers to see that this gimmick will work.
Krasting stop being obtuse. You know better.
Is the Fed TARGETING the ZLB? or are they hoping that a economic recovery will force their hands to increase the discount rate back to 2%
ZIRP is the remedy and not the policy goal. And the sickness is continuing wage stagnation. This economy has not been a big plus for everyone. Not in decades really, given that in retrospect 98-99 was a bubble driven fluke.
Webb – I never said anything about revisions of % rate forecasts. Possibly you misread me.
As you point out above, the 2015 report has ten-year rates rising to 4.8%. The current level is 2.3%. So SSA is forecasting a doubling of % rates over the next 3 years.
A doubling of long-term % rates over this short a period of time clearly meets the definition of “rapidly rising”.
OK, I just reread my post. The gimmick does not disguise anything. It just keeps track.
Arne
and as a sometimes practitioner of logic, i appreciate that this gimmick
“excess FICA taxes go to the general fund and shortfalls in FICA taxes are covered by the general fund” as something called “banking,” and keeping track of it is another gimmick called “accounting.”
Krasting anyone with normal reading skills would draw the same conclusion. Here is what you said, and after posting this I will go into edit mode to show that you WERE blaming interest rate revisions.
” But not to worry! 2016 and 2017 will be gangbusters for the economy. The TF surpluses jump back up for the next few years! – I find this reversal of trend hard to believe. We shall see.
Consider the % income line post 2019. The TF will be in decline, but % income will be on the rise. How’s that possible? Easy! Interest rates will rapidly rise over the next few years. This will boost TF income!”
Of course you are making a causal claim here. Twice. You cite a reversal of trend causing TF surpluses to “jump back up’ and in the next paragraph say that interest rates “rapidly ris(ing)” will “boost TF income”. Come on man, this not only links interest rates to TF income and surpluses but via your snarkish “hard to believe. We shall see.” implies that it is deliberate manipulation. Why else “hard to believe”?
“So even when the General Fund pays interest to the Trust Fund, it is not paying interest.” -me
Oops. That was supposed to be “paying back principal.”
As of last year, according to Table 4.A1 of last year’s Supplement, the General Fund has borrowed $1.028T from the Trust Fund. The Trust Fund currently has a $2.674T balance. Until that balance gets below $1.028T, the General Fund is just paying interest.
Warren
Bruce has bravely been trying to explain this to you. Let me try my luck.
Suppose you project SS needs in the coming year to be one Trillion, so you order up a payroll tax of 1.1 Trillion just in case. And plan to refund the 0.1 trillion at the end of the year if your expectations are on target.
Fine, so what do you do if costs come in at 1.2 Trillion? send out a bill to all the taxpayers for “immediate attention” or an extra 0.1 Trillion?
And what do you do if you can look and see that the number of retirees relative to the number of workers in ten years will be 25% greater than it is today? will you wait for ten years and then raise the tax 25%… meaning the folks then retiring will have gotten a free ride by paying a lower tax today than the people who will have to pay the (immediate) bill for their retirement?
It’s a pretty rube goldberg idea. neither fair nor workable.
I don’t know what kind of an engineer you were, but I hope if you were a civil engineer you did not give advice to electrical engineers, or vice versa.
“I assume you are fully invested in physical gold buried in your backyard where it will be safe.”
Oh, no. But I do have a goodly supply of lead! 😀
Warren when you put $10000 in the bank at 5% interest and let it compound for 12 years the end result is a principal balance.
Let’s say the Trustees of Social Security took the accrued interest from a ten year Special Issue and turned around and used it to buy a Regular 30 year Treasury. Would thirty years later anyone explain the redemption of that Treasury at maturity as “just paying interest”? At what remove does some compounding investment transform from interest to principal? Never?
This is silly. A security instrument is principal, earnings on it are interest or dividends. Saying it isn’t really principal because the funds that were used to purchase it were sourced from previous interest or dividends is to slice the logic too thin. Nobody talks that way.
“So what do you do if costs come in at 1.2 Trillion?”
Fire the guys who made the predictions!
But seriously, that is not the likely problem. Those projections are easy. The hard one is the payroll tax. From 2010 to 2011, they dropped over 11.4%. Obviously, the severity of such a drop would have to come out of the General Fund. However, the current Trust Fund interest is enough to cover that.
Just to be clear, I am NOT recommending we get rid of the Trust Funds.
I am recommending that we set payroll taxes high enough to cover all projected expenses for the next year, plus a 10% buffer. Then, rather than increasing the principal borrowed by the General Fund, we refund the excess to those who paid.
Ah yes Warren! Gotta love libertarians!
They got 2nd Amendment remedies for WHATEVER ails ya.
“Let’s say the Trustees of Social Security took the accrued interest from a ten year Special Issue and turned around and used it to buy a Regular 30 year Treasury. Would thirty years later anyone explain the redemption of that Treasury at maturity as ‘just paying interest’?”
First of all, they cannot do that. But over those 30 years, that Treasury Bond would be returning a set interest each year. At the end of that 30 years, the par value (principal) is returned.
“At what remove does some compounding investment transform from interest to principal? Never?”
Yes, never. Look at the Roth IRA as an example. Let’s say that I have put $10,000 into a Roth IRA fifteen years ago. It is now worth $20,000. I can take out $10,000 tax-free (I’m not old enough to qualify to take is ALL out tax-free.), but no more. Even though I have been getting interest on that original $10,000 for fifteen years, the IRS will never consider any of that interest as principal. So if I take out any amount above that original $10,000, that amount WILL get taxed.
So it is that, since the Trust Fund is greater than the amount the General Fund has borrowed, the General Fund has not paid down any of the principal.
Yessir, Bruce — if’n my Socialable Security check don’t come in, I can git me a possum fer m’ supper!
Warren first of all they absolutely can use interest and/or maturing Trust Fund principal to buy a regular 30 year Treasury. The Trustees have in the past invested in marketable securities they are not limited to rolling over into new Specials.
And you are claiming exactly that Trust Fund assets in excess of the $1.02 trillion in excess contributions are “just interest”. What else could the following mean otherwise?
“As of last year, according to Table 4.A1 of last year’s Supplement, the General Fund has borrowed $1.028T from the Trust Fund. The Trust Fund currently has a $2.674T balance. Until that balance gets below $1.028T, the General Fund is just paying interest.”
Starting in the late 90’s the Trust Fund’s started throwing off considerable amounts of interest which was converted to longer term securities which then matured and were rolled over into new securities. Which is how $1 trillion in excess contributions turn int $2.8 trillion in assets. Which are held in medium to long term securities. Redemptions of which you are calling “just paying interest”.
The biggest objection to Warren’s proposal is that it would have counter-cyclical economic effects. During recessions, when revenues are down, he would have to raise the tax rate to make up the difference, prolonging the recession. During a recovery, when revenues are up, he would reduce the tax rate, risking a bubble. This is exactly the opposite of a rational tax policy.
The Trust Fund provides a buffer so that you don’t need to raise the tax rate during a recession. And during the recovery, you maintain the current tax rate to rebuild the buffer used up during the recession. This is exactly the way any prudent business operates.
Thank you BillB. Very nicely done.
Table VI.A4.—OASI Trust Fund Asset Reserves, End of Calendar Years 2013 and 2014
[In thousands]
Just as a helpful aid. There is no account, cash or otherwise labeled “interest”. The Trustees maintain a limited amount of ‘cash’ in the form of Treasury Certificates ($60 billion) but the rest of the $2.7 trillion in OAS assets are held in Bonds with no distinction as to the origin of the funds.
“And you are claiming exactly that Trust Fund assets in excess of the $1.02 trillion in excess contributions are ‘just interest’?”
YES. You’ve got it. Although not “just” interest, but COMPOUND interest.
“The biggest objection to Warren’s proposal is that it would have counter-cyclical economic effects. During recessions, when revenues are down, he would have to raise the tax rate to make up the difference, prolonging the recession. During a recovery, when revenues are up, he would reduce the tax rate, risking a bubble. This is exactly the opposite of a rational tax policy.”
That IS an excellent point, BillB, except for the fact that I have NOT called for the elimination of the Trust Fund, only for not putting any more excess into it.
“The Trust Fund provides a buffer so that you don’t need to raise the tax rate during a recession. And during the recovery, you maintain the current tax rate to rebuild the buffer used up during the recession. This is exactly the way any prudent business operates.”
No, it is not, because for the SSA to draw down the Trust Fund to cover FICA shortfalls, the money has to come out of the General Fund, which is also running a deficit. To cover that shortfall, we’d have to raise non-FICA taxes, or issue more general debt. So the General Fund would be selling bonds on the open market to pay for the redemption of Trust Fund bonds.
Warren
Bruce tried to explain this to you. Here is another attempt:
suppose you borrow a hundred dollars from bank A. at the end of the year you pay them back one hundred dollars plus five dollars interest. you still need the money so you go to bank B. your credit is good so they loan you one hundred and five dollars. at the end of next year you pay them back one hundred and five dollars plus another five dollars and some cents interest. But you still need the money so you go to bank A. Your credit is still good so Bank A lends you a hundred and ten dollars and some cents. at the end of that year you pay back bank A a hundred and ten dollars and some cent principle plus about five dollars and some cents interest.
Now, is the hundred and ten dollars “just” interest on the original loan, or is it he “principle” of the third loan?
and how is that different from just borrowing the hundred once from Bank A and paying five percent interest compounded for three years?
i guess i don’t really care how you answer this. you are either funning us or are another one of those many people we see here who are locked into an insane idea, very facile and thinking up rationalizations against every objection and a perfect waste of time to talk to, except to take advantage of their volunteering themselves as a straw man and giving us a chance to try to explain what’s wrong with a stupid idea to those still capable of thinking normally.
Tell that to the IRS, Coberly, and see whether they will let me take more than my original $10,000 out of my Roth IRA without its being taxed.
They won’t. No matter how many times I roll the interest and dividends over into new principal, they will still tax it as compound interest on the original purchase.
Warren this is totally whacked:
“Yes, never. Look at the Roth IRA as an example. Let’s say that I have put $10,000 into a Roth IRA fifteen years ago. It is now worth $20,000. I can take out $10,000 tax-free (I’m not old enough to qualify to take is ALL out tax-free.), but no more. Even though I have been getting interest on that original $10,000 for fifteen years, the IRS will never consider any of that interest as principal. So if I take out any amount above that original $10,000, that amount WILL get taxed.”
The IRS rules of whether withdrawals on IRA’s Roth or otherwise have nothing to do with whether the money is considered principal or interest but entirely on the tax status of the IRA – pre-tax or post-tax combined with any restrictions on early withdrawals.
The way you phrase it here the reason that your withdrawal is not taxable is not because it is coming from a Roth but because it is considered interest by the IRS. As if interest was not in the normal course of events taxable.
As to drawing down the Trust Fund during a recession. This may be hard for you to grasp by interest payments on and principal redemptions of Special Treasuries are NOT considered ‘outlays’ for budget purposes. That is interest on the TFs whether taken in cash or simply credited in the form of new Special Treasuries are not included in the budget line item ‘Net Interest’ and are not financed in the simple/simplistic way you seem to think they must. The whole thing is complicated and it depends on how you look at the books and from which perspective but one way of looking at it is that every Special Issue Treasury retired/redeemed by Treasury subtracts dollar for dollar for Total Public Debt and so opens up a certain degree of borrowing space for Treasury.
For others tired of this back and forth there is a new Social Security post up and just begging for comments. Ones at least that have SOMETHING to do with Social Security rather than say the time value of money or the ins and outs of tax sheltered (or not) IRAs.
“The way you phrase it here the reason that your withdrawal is not taxable is not because it is coming from a Roth but because it is considered interest by the IRS. As if interest was not in the normal course of events taxable.”
It depends on the interest. If someone is stupid enough to buy government bonds in his Roth IRA, the interest WOULD be taxed if taken out early, even though that interest earned outside of such an account would not be.
But you are correct that, whether we call it “compound interest” or “re-invested capital”, the fact is that the General Fund still owes much more than it has borrowed.
And then we get to your last point, which is very relevant indeed:
“[One] way of looking at it is that every Special Issue Treasury retired/redeemed by Treasury subtracts dollar for dollar for Total Public Debt and so opens up a certain degree of borrowing space for Treasury.”
Yes, the debt to the SSTF is subject to the debt limit, but such a redemption of an SSTF bond without a matching rollover into a new bond has not happened since 1981. (Table 3) https://www.fas.org/sgp/crs/misc/RL33028.pdf
“Yes, the debt to the SSTF is subject to the debt limit, but such a redemption of an SSTF bond without a matching rollover into a new bond has not happened since 1981.”
Except every year since 2010 in the DI Trust Fund
Table VI.A5.—DI Trust Fund Asset Reserves, End of Calendar Years 2013 and 2014
http://www.ssa.gov/oact/tr/2015/VI_A_cyoper_hist.html#297536
The DI Trust Fund redeemed $30 billion of such bonds that were in its holdings at the end of 2013 while rolling over ZERO to new bonds held at the end of 2014
For extra credit note that some of the bonds redeemed had maturity dates out to 2021. All Special Issues being reemable at any time.
Look of course the OAS Trust Fund will roll over ever SSTF bond while it is running a surplus. All it can legally use the money for is to pay benefits and if revenue from contributions and tax and then interest is sufficient to cover cost then OF COURSE THEY ALL ROLL OVER.
Until like Di all those sources run short and they no longer do.
Alright, let’s try to recap the proposal piecemeal…
1) Can we agree that we should raise the FICA tax to the level where we expect FICA taxes and taxes on benefits to cover expenditures?
2) Can we agree that we should raise the FICA tax slightly more the Part 1 projection, to cover a possible downturn in the economy? (I recommend a projected 10% surplus, because only once in the last many years has a downturn in receipts been more than that. I’m not stuck on that number.)
3) Can we agree that, with FICA taxes so raised, we do not need to add more to the principal in the SSTF, but that interest can continue to accrue to the SSTF, such that any shortfall more that Part 2 can be covered by the SSTF?
4) Can we agree that, if there is an excess in FICA taxes collected, the surplus can go back to those who paid it?
Warren, first thanks for that link to the CRS Report. I had not known of its existence and it looks to be a very useful reference, especially for people newish to the topic that still want to get fairly deep into things.
But it needs to be read with caution. For example Table 3 use the term ‘THE Social Security Trust Fund’ in its heading when it it really reporting the theoretical OASDI Trust Fund which is in fact two distinct Trust Funds namely OAS and DI. But the actual holdings and redemptions and rollovers are not handled as a combined entity but separately for each Trust Fund. Hence the link I supplied in my previous comment that goes specifically to DI.
You know, the Warren-type arguments (no offense, Warren) are getting old. They are simply based on either a basic misunderstanding of SS or a conscious effort to undermine SS.
Well no. Certainly not in full and not in the way you phrased it.
On 1) we should phase in Social Security FICA in a way that targets current measures of solvency, which is to say no year in the following ten where TF balances get to less than a 100 TF ratio.
On 2) Adopting my version of 1) takes care of that nicely. And a 10% surplus really doesn’t allow enough political space for phased in changes as opposed to rapid fixes that will tend to rely on ‘balanced’ ‘reform’ that mixes cuts and revenue increases. Or just cuts.
On 3) If you assume that we need a reserve fund then no matter where you fix it as a proportion of cost eventually you have to have nominal values of principle increase. For example the Northwest Plan promoted by Coberly, Webb and Larson has the TF Ratio dropping steadily from near 300 down to 128 over a 20 year period but never actually has TF balances drop in nominal terms. So no.
On 4) Well no, the method is too complicated. A better way is to target solvency and adjust FICA on the front end to target it. If done carefully and on a phased in basis, as Northwest does, and adjusted automatically by formula, as Northwest does, then you never get any substantial excess collections of FICA over cost.
It is common for people to insist that the present Trust Fund balances in excess of the 100 TF Ratio were consciously planned and desired as a method of pre-paying Boomer Retirement. This is at best half true as can be seen by reading the account by Bob Ball, lead Dem negotiator on the Greenspan Commission and in the actual deal making that happened outside that structure. The ideal solution from the perspective of long time SocSec Commissioner Ball would have been to stretch out the FICA increases beyond the 10 year period actually settled on and not included the retirement age increase. What this would have required was a second round of FICA increase starting in the mid 00’s but wouldn’t have caused the massive accumulation meanwhile. But there were good reason, not economic, per se, but budgetary and political to get everything scheduled within a 10 year window. And so it was done.
So at last we get to a minor point of agreement between you and I (I won’t speak for Coberly here). The bloated Trust Fund that we saw from 2000 on was a mistake and we should have avoided the interest on interest effect that turned a $1.02 trillion into $2.8 trillion. But that ship has sailed and there is no reason to try to force down the current TF balance prior to it starting to shrink on its own come 2023.
Bruce
as long as you put it that way, I agree with you entirely.
note that here and in your post re “low cost” you have nuanced your argument in ways that perhaps you always meant but which were never understood by me. hence a great deal of pointless argument.
Warren: ” So the General Fund would be selling bonds on the open market to pay for the redemption of Trust Fund bonds.”
So what? The government just trades one bond for another bond. The amount of government debt has not changed at all. Previously the government borrowed money from senior citizens. Later the government borrowed money from Donald Trump, or a city firemen’s pension fund, or maybe the Chinese. The amount of debt hasn’t changed. Just the owners of the debt. So what?
Bruce…
On 1) I would prefer that the TAXES be such that the projections estimate 110% coverage every year for ten years.
On 2) Could you explain? I don’t understand what you mean by, “a 10% surplus really doesn’t allow enough political space for phased in changes as opposed to rapid fixes…”
On 3) Since you folks consider past interest to be new principal, and my proposal tries very hard to prevent drawing on the Trust Fund at all, then the balance in the TF would indeed be increasing each year, by the amount of that interest.
On 4) How about, rather than refunding (and the non-filers are a great reason for that), we adjust the 110% FICA tax based on the prior year’s surplus? So if, in year one, we have a 5% surplus, we only collect 105% of projected expenditures the following year?
On 2) The DI program failed the test for ‘Short Term Actuarial Balance’ over ten years ago. A fact that was reported right up front in the Annual Reports and included in the 15 page Summary which was maybe all you could expect a Senator or Congressman to read. And yet even with ten years of notice before the system even breaching a 100% reserve nothing was done. Now if something HAD been done the incremental cost of the fix would have been unnoticeable, we could have done the job by increasing FICA by maybe 0.025% each year or 0.012% out of take home and fixed the whole thing up for 75 years. Out of couch change. But by allowing the problem to drift for ten years we drove the price of solution up to a single jolt ten times that of the incremental. Instead of couch change it is coffee or something. Which in turn induces more proposals for split-the-baby ‘balanced’ solutions.
The smaller the reserve the more time that Congress can go officially ignorant (as opposed to just ignoring) of the pending problem and the less time and space to introduce correct policy. Which for people on my side of the question will always want to come down on the side of preserving benefits rather than privileging solvency for its own sake. We want to remove the ‘crisis’ narrative as much as possible.
Going back to 1) on the flip side 10% while inadequate to protect the system of a problem developing in the out years seems like overkill in the current year. What could possibly cause a revenue shortage of that magnitude in a single year? Are we really likely to spike to 15% unemployment in a typical year such that we should year in and year out make contingency plans for that? As it is you are turning Social Security into some sort of National Christmas Club with money held through the year only to be rebated by the 4th of July or so. Good news for big box stores who can schedule sales that week but I just don’t see the policy justification.
On 3) Well a qualified yes. By a proportion of the interest. If you target a 100% Trust Fund and have Cost going up in relation to inflation and have any kind of real return on assets in the Trust Fund there will always be more interest collected than needed to maintain the Trust Fund at but not over a ratio of 100. Meaning that if we just postulate average 10 year returns of 5% nominal and 3% real we can pocket the 2% nominal to maintain our TF ratio and use the remaining 3% to partially fund benefits making the system as a whole 97% Pay-Go.
It is worth noting that in this scenario the Trust Fund would be in surplus each and every year but also cash flow negative. As well as increasing national debt by the amount of needed increase in Trust Fund assets to maintain that 100 TF Ratio. Rather odd conceptually but that is how the numbers would run.
On 4) Well you are getting awfully close to Northwest there. Just with more jagged changes in FICA rather than the smoothing a ten year window gives us. But shoot if that will make you happy I’ll give that point to you.
Bruce and Dale,
Notice that Warren has stuck with this conversation even though both of you have provided many derogatory responses to his posts. He has learned some things, too. His item 4) at 6:32 is an improvement over 4) from the night before (even if it is still too complicated.
I suggest you step back and look for where you agree.
1) Very importantly, Warren is not suggesting benefit cuts.
2) He has observed that SS taxes need to adjust to changing conditions.
With this basis, you should be able to negotiate a workable system.
For some reason Warren values keeping the TF as low as possible. I suggest that understanding where he is coming from on that is a necessary prelude to real progress in your discussion.
Warren has not had the years you have had looking at the ups and downs of the reports. Since he wants a solution that meets his engineers view, he needs an estimate of those short and long term variations.
Another important point you have not actually discussed is how to get Congress to agree to automatic triggers. Warren is putting them in by making new projections each year. It makes sense to him because it is a meaningful system approach. But Congress is used to having more control.
Warren,
So why do you think the TF should be kept as small as possible? The current policy is that it should hold one years expenses. I admit I have just accepted that, but it does seem consistent with the changes in projections that can occur in a ten year window.
You have described a system with a 10 percent reserve (a reservoir in an engineering analog). Whatever the size, population increase and life span increase and inflation will mean the absolute size must increase with time.
Eliminating the flow associated with refunds (as you did this morning) makes the system better by being simpler. I have a preference for limited instance of changes in payroll tax rate, so I think using a 10 year projection window also make the system better.
Arne
i don’t think i have made any derogatory comments. i have told him what i think of his ideas and his persistence. that is not an insult. that is what i think.
i have pretty much given up on selling congress anything (or “negotiating” with anyone). the trigger would be the sensible way to go, but not very necessary. the tenth percent per year increase that will be needed will be needed close enough to every year for the next twenty that it hardly makes any difference whether it is triggered or just presented as a “phased in two percent (each) increase.”
maybe twenty years from now we will have a sensible congress or at least an informed public, and small increases will be expected in the event of “short term actuarial insolvency” and people will be able to evaluate when and whether the tax rate is in fact “too hight” or the benefit level is “too low.” i have no problem with decisions made by an informed electorate or an honest congress. today we have neither.
“Coberly
July 22, 2015 3:11 pm
Warren is, unfortunately one of the many, who knowing nothing about Social Security has an answer for it.”
Perhaps your inability to see this as derogatory is one of the reasons why I find most of your posts to be very good, but have trouble with your comments.
Arne
help to civilize me. it appears to me to be a fact that W knows nothing about Social Security and that he has opinions about it.
why is it derogatory for me to say so?
Bruce,
“10%… seems like overkill in the current year. What could possibly cause a revenue shortage of that magnitude in a single year?”
That happened in 2008 — receipts dropped 11.4% from 2007. (Obviously, boosting the Minimum Wage does not guarantee an increase in FICA taxes.)
“As it is you are turning Social Security into some sort of National Christmas Club… I just don’t see the policy justification.”
The policy justification is to get FICA taxes and taxes on benefits to cover the outlays each year, but not to keep more of people’s money than is necessary for that purpose. We have already discussed the biggest problem with that, which is non-filers, and I altered the proposal to adjust the next year’s withholdings downward according to how much overage there was. That will be a hit for those who work less the following year, however.
Arne,
“For some reason Warren values keeping the TF as low as possible.”
Actually, BRUCE is the one who wants to the 100% TF ratio. I’m content to let the interest accumulate.
Yes, it does (theoretically) increase the debt, but it is debt the government owes itself, so I really don’t care whether it goes up or not. (“I have $20 in my left pocket that I owe to my right pocket. Next year, the interest will make my left pocket $22 in debt to my right.”)
As for a ten-year projection window, a projection of what? Income out outgo? Outgo is easy, and does not fluctuate. Income is very hard. No-one projected such a slow recovery. You are just as good projecting next year to be like this one.