CRS: Social Security: What Would Happen If the Trust Funds Ran Out?
Very interesting paper that I missed in real time.
Social Security: What Would Happen If the Trust Funds Ran Out?
Almost everyone who addresses this question assumes that the answer is pretty simple: if either of the Social Security Trust Funds goes to zero than benefits will automatically drop from ‘Scheduled’ to ‘Payable’ which translates to a 22-25% overnight cut depending on which Trust Fund we are talking about. But I had an interesting conversation with Andrew Biggs some years back. Andrew is a very prominent advocate of Social Security ‘reform’ which he sells on the basis that the system is ‘unsustainable’. As such he and I and Coberly and he have had some vigorous debates over the years, and mostly he is firmly in the ‘bad guy’ category on policy. For all that he is a nice guy and really, really knows the numbers and laws in play. Not least because he spent some time as the Principal Deputy Commissioner of Social Security (the no. 2) during the Bush Administration.
With that as background Biggs told me that the situation at Trust Fund Depletion was not as clear-cut as almost everyone assumed and had been the topic of some high end discussion at SSA. And their conclusion as related by Biggs to me mirrored that of the Congressional Research Service in this Report from last year.
The Social Security Trustees project that, under their intermediate assumptions and under current law, the Disability Insurance (DI) trust fund will become exhausted in 2016 and the Old-Age and Survivors Insurance (OASI) trust fund will become exhausted in 2034. Although the two funds are legally separate, they are often considered in combination. The trustees project that the combined Social Security trust funds will become exhausted in 2033. At that point, revenue would be sufficient to pay only about 77% of scheduled benefits.
If a trust fund became exhausted, there would be a conflict between two federal laws. Under the Social Security Act, beneficiaries would still be legally entitled to their full scheduled benefits. But the Antideficiency Act prohibits government spending in excess of available funds, so the
Social Security Administration (SSA) would not have legal authority to pay full Social Security benefits on time.
It is unclear what specific actions SSA would take if a trust fund were exhausted. After insolvency, Social Security would continue to receive tax income, from which a majority of scheduled benefits could be paid. One option would be to pay full benefit checks on a delayed schedule; another would be to make timely but reduced payments. Social Security beneficiaries would remain legally entitled to full, timely benefits and could take legal action to claim the balance of their benefits.
The Report proceeds to outline the possible responses and is interesting for that alone. More important for my purposes though is the suggestion that the “conflict between two federal laws” precludes the option of Congress just sitting back and letting “automatic” cuts happen. Because as Biggs some years back and CRS last year point out, there is nothing automatic about this at all.
Anyway something to talk about for those of us jonesing over the release of the 2015 Social Security Report. Which my fellow junkies is scheduled for tomorrow (Wednesday) probably at 1PM Eastern. If past file name practices are observed the web version should be available via URL:
while a PDF version should be viewable or downloadable at:
I should have another post up with these same links prior to Report Release. But anyone who wants to bookmark the URLs and try to get a jump on just about everyone else in the country should feel free.
>>> “the Disability Insurance (DI) trust fund will become exhausted in 2016″<<<
Let me understand this: is DI being paid for right now with bonds cashed by federal income tax?
Not to hard to look up.
payroll taxes $108B
DI TF at start $122B
DI TF at end $ 90B
Yes. DI has been drawing cash from the GF for a portion of its interest earnings since 2005 and has been drawing down principal in cash since 2008.
“with bonds cashed by federal income tax”
While you may well understand what you mean correctly, it is not well stated.
DI is being paid in part with funds from retiring Special Treasuries that were purchased with prior year excess payroll tax receipts.
BTW in an honest world this fact would put paid to the whole “Phony IOU” meme.
At the very moment that Bush was claiming that Trust Funds were just paper certificates in a filing cabinet his own Treasury Department started quietly paying part of interest in cash and before the end of his term were cashing out a portion of those “Phony IOUs”.
There was never a legal or political avenue to actually abrogate those Special Treasuries. In fact even the OAS Trust Fund is taking a portion of its interest earnings in cash and so while still in surplus is actually cash flow negative (surplus vs primary surplus/deficit)
Arne; while you’re at it, could you feed me roughly how many hundreds of billions a year would have to come from the GF to fund SS retirement at the end (just before the bonds run out)? Sorry, my Ph.D. is in taxi driving. 🙂
Denis a hard number to pin down precisely because after a certain point the Tables give dollar numbers every five years and the OAS TF projects to run out in 2034. But extrapolating from this table and the 2025 and 2030 numbers:
the transfer in the last year would be something like 23% of $2.6 trillion or about $400 billion.
Of course in they adopted some version of the Northwest Plan there wouldn’t be an such transfer at all.
There are tables with yearly values,
leading to http://ssa.gov/oact/TR/2014/lr6f7.html for trust funds
That does lead to a question which is on topic. What does the combined OASDI TF balance mean after the DI TF is depleted? Does it assume DI scheduled benefits are paid?
Arne thanks for the links to the additional tables. I always forget that they exist.
And in taking a look at combined OASDI balances it seems they do assume an actual combination that includes DI scheduled. Which makes sense based on past actual practice re reallocation.
Take Table VI.G8. It puts date of depletion at 2033 rather than the standalone 2034 for OAS. That couldn’t happen unless they were assuming DI scheduled (it seems to me)
So, there is a House rule that prevents legislation that moves funds, but can the SSA just follow the practice it has been reporting on?
I’d like to suggest (again) that this year’s calculation include another what-if: What are the effects on the SSTF if minimum wage is increased by 25%? 50%? 100%?
An increase in the minimum wage is likely to become an election year issue (probably despite Hillary). In the midst of the blather about “it costs jobs and reduces worker income” maybe we could add something useful about what an increase in the minimum wage would do to shore up SSTF balances?
Not per the linked CRS analysis or my online conversation with former Principal Deputy Commissioner Biggs. All such actions require SOME Congressional action.
The Trustees assert the following over an over, this from foot note 2 on the first page of the Overview section of the 2014 Reports:
“The OASI and DI Trust Funds are distinct legal entities which operate independently. To illustrate the actuarial status of the program as a whole, the fund operations are often combined on a theoretical basis.”
I think we have to go with “distinct legal” and “theoretical” here.
A.S. if you could come up with some numbers that would include the effect of any such change on total wage base it would be relatively easy to calculate the impact.
The best I can suggest is some sort of comparison of the Low Cost Altenative which shows Social Security funded with the Alternative Cost standard projection to give you a ball park idea of what such a change would produce.
On second thought let me take back that “relatively easy”. The problem with wage increases as regards solvency is that they impose future costs in the form of extra benefits even as they produce revenue. On balance we can say that increases in minimum that don’t have the Sky is FALLING! negative effects on employment should have a net benefit. Certainly they would boost the scheduled benefit for the lifelong low earner but exactly how that interacts with solvency per se is a much harder question. (Once again, so it seems to me)
‘BTW in an honest world this fact would put paid to the whole “Phony IOU” meme.’
Not really, Bruce. The DI Trust Fund draw-down is only half of the OASI Trust Fund increase. So the cash the General Fund got from the OASI could cover the DI withdrawals. When both are drawing heavily on the General Fund, we are going to have a problem.
Age limits could be set by percentages. In 2010, 15% of people were 65 or over. Let’s assume that, in the 2020 Census, 15% are 67 and older. Then, over the next ten years, we slowly ramp up that benefit age from 65 to 67. And if the 2030 Census says that the oldest 15% are 68 and up, we slowly ramp up to 68 over the following ten years.
What is the largest generational cohort of citizens?
What Bruce says is largely true, more well paying jobs and better salaries with productivity gains going to Labor rather than Capital (which pays squat to SS) would fix much of what ails the TF in the 2030s. This does not include everyone working 50 hour weeks, In fact, we could employ more by cutting hours to 32 weeks and cover the cost of doing so with greater productivity. A higher minimum wage would help also.
“jonesing”?! I haven’t heard that term in 25 years — when I was a High School teacher.
I get your point. Higher wages and contributions also yield larger benefits so the net effect on long term solvency ends up being unclear.
However wouldn’t any long term negative effect be mitigated exactly by modulating those benefits? Or eligibility age etc?
In the near term you (likely) would see a significant increase in cash flow from contributions. Which would help delay trust fund exhaution even without changing withholding rates yes? And any long term increase in liability could be adjusted as we go no?
Yes indeed A.S. my point is that it would be hard to quantify that effect on solvency. Which I thought, perhaps mistakenly, was the thrust of your original comment.
But as I have said before I have a five letter fix that would address much of the progressive economic agenda – including Social Security.
MJ.ABW. More Jobs. At Better Wages. And most definitely a $15 minimum wage would be a big start towards that.
Warren you might want to recheck the cash flow figures. Although the OAS Trust Fund is still running surpluses it has in fact for the last two years been in what CBO (and AEI) call ‘primary deficit’. Meaning from the standpoint of Treasury cash flow negative.
That is while DI is drawing down the last of its principal and residual interest OAS is taking a portion of its interest in cash as well. That is Treasury IS NOT getting any cash from OAS, in fact the flow is reversed.
(As to ‘Jonesing’ well congrats for not hanging around with heroin addicts any longer.)
Jesus Christ, we must have a readership entirely of philosophy professors. Let us indeed debate the number of SS angels who can dance on the head of a pin if the minimum wage is increased or the trust fund runs out or the sky falls or..
on the other hand, SS can continue to pay for itself forever as long as the people understand they are paying for their own “right” to retire at a reasonable age (actually 62 if they need/want to, or 65, 67, 70… if they like their jobs and don’t go crazy thinking about the money they are “losing” by not collecting retirement checks they are “entitled” to.
The answer to what SHOULD happen of the Trust Fund “runs out” is that the people should pay an extra bit of money to “fully fund” SS at whatever reasonable cost it takes. Current predictions are, and have been for a long time, and are not likely to change, that an extra 2% of payroll from each worker and from his boss would enable SS to pay “currently promised” benefits forever.
By phasing that 2% in gradually at about 0.1% per year… about eighty cents per week for a person earning 40k… the worker would have MORE money each year in his pocket AFTER paying the increased tax, AND he would get that money back… two or three times over… in the form of the effective interest generated under pay as you go financing by the growth in the economy (including inflation).
But by all means, let us obscure the “truth” by playing “what if” with ourselves.
And Warren we don’t have to ‘suppose’, we can roughly calculate those numbers from the following Table
But I think what you are missing is that Full Retirement Age is ALREADY set to ramp up to 67. And I am perfectly willing to wait until the 2030 Census to see if we need to propose to ramp it up to 68. So go Warren!
What I am not so keen on is using current numbers to suggest ramping up FRA to 70. Which is what all too many Republicans are proposing.
run75441 — what’s your point regarding the largest generational cohort?
With the employers’ paying half of the FICA tax, why do you say that Capital does not pay into Social Security?
In what way does labor contribute to efficiency gains? Are people working harder now than they did ten, or twenty, or fifty years ago? Aren’t productivity gains primarily the result of capital improvements — automation, just-in-time delivery, etc.? Why, then, would you expect labor to reap the rewards?
However, by skewing balance between labor costs and capital improvement costs, a higher Minimum Wage would drive companies to automation to replace the labor, thus improving the efficiency of the remaining workers.
to save a little bit of confusion by putting it into today’s terms, at Trust Fund Depletion, it would take a 33% tax increase (of a 12%…combined… tax). That’s a 4% of affected payroll tax increase, 2% from the worker, and 2% from the employer.
If the SS tax were not increased, the general tax COULD (but it would not longer be SS) pay the difference to reach the “promised benefit.”
That would still be 4% of “affected” wages. If I remember (and I may not) this is about half of “taxable income”.So a GENERAL tax increase of about 2% (of all wages) would pay for the SS shortfall…. in other words, not much difference at all to the “average taxpayer,” though it would mean taxing “the rich” more, which the rich would resist… and rightly so in my opinion. SS is not welfare and should not be paid for by the rich. It is an insurance and protected savings program for workers. It works. It should stay that way.
Dale most of us were aware of those numbers. Because you have made admirable efforts to drill them into our brains at every opportunity.
But even you have admitted that all kinds of employment and wage variables can move the needle and so move Triggers back and forth.
So I am a little baffled at your hostility to “What if’s”. Yes you have proposed one way to address the issue. And yes you are passionate about it. But nobody appointed you Mr. SocSec Censor and last I heard Angry Bear was still open for speculation about economic variables going forward.
So excuse us while we waste our time using Excel functions more complicated than (Sum).
Warren in standard business accounting wages don’t come out of capital, instead they are expensed out of income. And there is no direct connection between capital infusions and income in a mature business, in fact in a successful business capital is taking rents and no longer contributing anything.
It is I think a total fallacy to be attributing any part of wage and benefit expense, including the ’employer contribution’ to capital except at the very origin of the firm.
I disagree, Bruce. A capitalist puts his capital into the business, and his profit is return on that capital. That profit is the increase in his capital. If he puts that back into the business, to buy more equipment or to hire more employees, then that is again capital. It is that capital which pays the new employees’ salaries and benefits before the produce of their labor can be sold.
It is always capital which expands a business.
Every employee is paid out of capital, because employees will not wait until their produce is sold to get their pay.
“In what way does labor contribute to efficiency gains? Are people working harder now than they did ten, or twenty, or fifty years ago? Aren’t productivity gains primarily the result of capital improvements — automation, just-in-time delivery, etc.? ”
Computers don’t program themselves, and JIT is much more a matter of process improvement implemented by higher paid employees (engineers and administrators and even managers are part of labor BTW) and do not necessarily require much capital investment. Indeed the implementation of JIT actually results in LESS need for tying up capital or retained assets in a business – precisely because it reduces warehouse and inventory cost.
The idea that capital is somehow to be credited for every advance made in the computer age because they wrote the check for the hardware is laughable. They are just paying for the engineering and programming that made those efficiencies possible at second hand.
Bruce, please. How many computer programmers will be affected by increasing the Minimum Wage?
You are right, though, capital does pay for the engineering and programming. Would those engineers and programmers do that work without being paid, with the promise that they would be paid when the product sells? Capital is needed to pay those people until their work pays off.
Warren that is a cartoonish understand of what ‘capital’ means in a modern business enterprise. There are many business’s that are set up with practically no capital infusion at all. For example Facebook. Or your local H&R Block franchised office.
Look me and a couple of friends can get a few hundred dollars together and register a corporation with the Secretary of State and issue a fixed number of shares of stock at a stated/par value. And we might use that Corporation as a vehicle to develop a service business, which if we were enormously successful might allow us to stage an IPO and sell of 40% of the stock at a huge premium over par and pocket the funds. During all that time we could be hiring and paying employees and making gross profits and net profits and income before taxes and income after taxes, reinvesting some and taking other pieces out as owner’s share all without ever having invested any capital in the business at all.
Unless you want to get all metaphorical and say we are investing ‘idea capital’ or ‘sweat equity’ or something. But then you have just elevated the term ‘capital ‘ to some story book concept.
In business ‘profit’ is not the same as’ ‘return on capital’, You can have business’s that have no profits at all or are losing money hand over fist and heading straight for bankruptcy that generate a massive return on capital. That is how outfits like Bain Capital and its one time partner Mitt Romney made their money. Because there is a hell of a difference between ‘profit’ as that is defined in business and accounting and ‘asset stripping’, You can have the latter and a hell of a ROI without the former.
And this all just within standard corporate forms. Let us not event talk about partnerships, mutual companies, and cooperatives all of which can have employees and profits while not having much or any thing on the line item ‘paid in capital’.
You have simply expanded the meaning of ‘capital’ to include any use of funds by owners or managers in the function of the business. Well no, sorry. It just isn’t that simplistic.
Warren first it was Amateur Socialist and I who were talking about minimum wage. Your first contribution to this thread had fuck all to do with that and so throwing that back in my face in our talk about labor productivity barely rises to the level of a strawman.
And you don’t pay programmers out of capital. You don’t even necessarily pay for the purchase of equipment and software produced by engineers and programmers out of capital. (Although sometimes you do). As often or more you are purchasing it out of earnings, out of income, which doesn’t necessarily have a one to one relation to the capitalization of the business. But I think I will have to let someone else try to explain this to you.
Facebook started with no capital? And where did a college kid get $200,000 to buy the domain name? How were five straight years of losses paid for? Simple — $300M in capital: http://venturebeat.com/2008/02/01/zuckerberg-talks-facebook-financials-making-money-but-paying-for-growth/
H&R Block itself says that the initial investment is $35k to $136k. That’s called “capital.”
That’s called a “Franchise Fee”
No. The franchise fee is only $2500. The rest is securing a lease, initial payroll, and purchasing equipment. It all has to come out of CAPITAL. Try telling a prospective landlord or employee that you will pay him after the income flow starts.
yes, no doubt. but what i have utterly failed to drill into anyone’s brain is that there is a cheap and easy and real solution to the SS “problem.”
so it makes me angry to watch you all dancing on the head of a pin with imaginary angels while the bad guys are sharpening their knives.
you, of course, don’t have to pay attention to my anger, any more than i have to pay attention to your anger at my anger.
i realized a long time ago this was futile, but i still feel an obligation to tell the truth in case someone serious is listening.
of course a change in the level of wages and employment would “fix” Social Security. So tell me your actual, real, operational plans to change that level of wages before Social Security is destroyed by those saying “we can’t pay for it.”
A lie they couldn’t get away with if the “defenders of Social Security” would actually tell the people that it would cost them about eighty cents per week per year while their wages are going up about eight dollars per week per year.
And, of course, get them to understand it.
“where did a college kid get $200,000 to buy the domain name?”
Warren, a domain name costs less than $20. You are using a different definition of capital than most of us would use. Just because the investment comes from a Venture Capitalist does not make it capital.
This link is to a blog owned by an SS appeals lawyer who knows his case law and what Title II of the SS Act as amended actually means. He points out that it is far from clear what actually happens when older beneficiaries who are dually entitled to Disability and Retirement benefits elect to receive the lower retirement benefit instead of the higher DI rate.
Sounds obscure, but the majority of disability beneficiaries are older people, often of reduced retirement age and eligible for reduced retirement benefits. As Bruce points out, exactly who would get what benefits and what legal recourse beneficiaries against the Trustees is not clear. Actually, I think the beneficiaries could make a hell of a mess out of Congress’s employment prospects with or without a lot of legal niceties.
We can debate the desirability of paying out SS benefits to younger people, but older people are so beat up when they file for SS DI benefits that the next thing you hear from their wives is that they have died. No lie. This is common.
Is this an exaggeration? No. Is it real? Yes. Do you need to learn more about his program? Well. I suggest you do.
You betcha. Get real. If the FICA contributions of both workers and employers are increased, the program is solvent in the immediate future. And, if wages go up, no worries for damn ever.
Bruce and Coberly’s math is right. Stop with the kvetching, already. Genug. NancyO
Coberly what I think you don’t understand is that Social Security finance can be of absorbing interest quite apart from issues of “solutions”.
I am interested in the ways that the Reports get to and present their numbers, in fact I spent almost ten years exploring and explaining the hows and whys of Social Security maybe not even needing a “solution”. That ten year period ended by 2007 as a consequence of a world wide economic earthquake that began then and in many ways hasn’t ended and along the way had the collateral damage of killing my preferred plan for Social Security – the one I called “Nothing”. Sometime after that I started frequenting Angry Bear and came in contact with you and your solution to Social Security. And over the next couple years first came to agree with you on most aspects of that general approach and then with the help of Arne to suggest changes and refinements to it.
And I don’t regret that and certainly don’t regret that the final product caught the eye of influential people in DC in a process that ended up with me getting interviewed by phone by Pulitzer winning journalist David Cay Johnston on the Northwest Plan and which got you and I referenced in a major book on Social Security, Eric Laursen’s The People’s Pension (okay in a footnote) and to have the Northwest Plan cited as a contribution to Social Security Work’s 2014 ‘All Generations Plan” (okay in an endnote).
So you done good. Heck I will even say we done good. But my interest in Social Security started in 1997 and not with the 2009 iteration of Northwest. And I really can’t help that you dismiss my hobby and fairly intensive study of a particular program’s financials because it seems to you to be “dancing on the head of a pin with imaginary angels”. (Maybe because I took a course in Medieval Religious history that taught me why the question “How many angels can dance on the head of a pin?” is in fact a deeply serious and important question in theology. It sounds funny because it was meant to be if not funny then attention catching.)
My entire experience with Social Security started with a question “What if —-” In 1997. And in my own way I worked that question hard right through 2004 which in turn gave me ammunition to help the effort during the “There is No Crisis” blog effort of 2005 pushing back on Bush’sSocSec privatization tour. Which effort, together with other efforts, actually made a damn difference. Bush abandoned his plans.
So I can’t quite agree with you that my studies on this topic have just been a huge waste of fucking time compared to joining you in selling a particular approach to Social Security. And even if it was and is a waste of fucking time cavorting with invisible angels it is my fucking time and my pin dancing. Though I can’t lay claim to the angels.
As long as we are talking angerfying.
“No. The franchise fee is only $2500. The rest is securing a lease, initial payroll, and purchasing equipment. It all has to come out of CAPITAL.”
Well no it could come in the form of a business loan from a bank to the new formed corporation. Which would create a LIABILITY in the form of a NOTE PAYABLE on the books while not being debited to CAPITAL at all.
Operating CASH is not CAPITAL. It is not even on the same side of the ledger as CAPITAL and may or may not be matched by some form of OWNER’S EQUITY.
In this case there would be no capital investment, no return on capital, no new creation of capital perhaps until sufficient cash flow had been generated from operations to pay off that NOTE PAYABLE. And maybe not even then, it might instead go into an owners DRAWING ACCOUNT and just be drained out of the firm.
Operating cash from whatever source is not the same as capital. And owners of a firm can take compensation and returns out of that firm without having actually put in any capital at all. This exact scenario of 100% original financing via a note payable is probably uncommon. Because banks generally want owner-managers to have skin in the game. But there is nothing I can see that would make it impossible or terribly unlikely.
Other Bears feel free to jump in here, this really isn’t my field.
It seems like Warren needs a refresher course in accounting.
you are taking my comment too personally and overreacting.
I never said or implied that you all had no right to discuss angels dancing on the head of a pin. I just offered my comment on the discussion… exactly what anyone else does who comments on a blog. exactly what you do.
I have never diminished your work on Social Security. Quite the contrary.
“so it makes me angry to watch you all dancing on the head of a pin with imaginary angels while the bad guys are sharpening their knives.”
No you didn’t accuse me of TALKING about dancing on the head of a pin, you accused me and others of wasting time dancing while the bad guys were about to cut the throats of 60 million seniors.
That wasn’t a “comment on the discussion” that was indeed an accusation that I am my cohorts/minions were risking direct harm by our habit of dancing around with theoretical constructs.
Instead of you know having us “defenders of Social Security” getting about the serious business of “tell(ing) the people that it would cost them about eighty cents per week per year while their wages are going up about eight dollars per week per year.”
You know. Important stuff. Not wankish wonkery or wonkish wankery.
Not that any of that actually diminishes what I do. Oh no you were just posting a comment. Nothing personal. Just noting that it makes you angry.
Oh well it is less than 12 hours from the probable release time of the 2015 Social Security Report. Perhaps we can discuss some numbers from it tomorrow and get back to this kind of thing later. Maybe like the 33rd of Neverember.
Or just increase the interest paid to the trust fund – spreadsheet fixed. SS is not bankrupt because I believe that there is enough productive capacity to create ample goods consumed by all, workers and retirees.
Congrats on having Yves at Naked Capitalism picking up your post and adding it to Naked Capitalism. Well done.
One item many miss, including The CBO in Trust Fund data is ZIRP. The paper once redeemed in the Fund was around 5%-7%, those days are over. New issuance, that when redeemed, is a slow as 1.3%.
Or does this even matter anymore? Multimillionaire CONgress Members are collecting SS, who maxed out their personal contributions into the Fund in the first quarter – makes sense.
“who maxed out their personal contributions into the Fund in the first quarter”
I think Warren above was failing to communicate because he was using words that meant something different to him. But I think Woodrow is just misinformed about how SS works. (So badly that I would not know where to start)
Matt. I don’t think the interest rate thing works.
Given a perfect ‘sustainably solvent’ Social Security system actual earnings on Trust Fund assets would only cover about 3% of cost. As things stand now interest on the Trust Fund Special Treasuries are set at issuance at a rate determined by average maturity of a range of regular 10 years coming due. Which means two things, which are really one thing, first they are being set by and in relation to the market by an automatic formula, and two that rate is not subject to direct political interference.
Under your proposal someone, presumably Congress, just slaps some above market rate on Special Issue Treasuries that allows Treasury to just transfer over enough funds to meet any gaps. This it seems to me to open the process to endless negotiations over the proper balance of backfill via interest rate manipulation vs benefit cuts and all to mask what would really be a straightforward transfer of funds from the GF to Social Security. To me a recipe for disaster.
Right now the system is conceptually simple: collect contributions from workers and from tax on benefits for upper income recipients, use the receipts to pay benefits while investing any left over funds in a Reserve Account targeted at one year of Cost. The securities in that account are Special Issue Treasuries with a rate set by a formula tied to the market. The whole system is insulated from political battle by being placed off-budget and designated as mandatory spending where benefits are not subject to the annual appropriations process as long as funds are sufficient to pay benefits.
Taken all together and we have a program that has only required Congressional action for basic functions once since the last major overhaul in 1983. Why oh why would we make it into a political football for the sake of a gimmick?
Woodrow some of what you say is simply confused or being written for effect so I won’t address it.
As to the rates on securities being redeemed. Right now there are basically ten year old 10 Year Notes and carry the rates typical of ten years ago. Meaning an average of over 4% with some with rates up to 6.5%. And these yields will be much the same over the next few years on average. That is the “days are over” are really still here.
More importantly like many, many people you overrate the importance of yield on the Trust Fund to Social Security solvency. The Trust Fund earnings in normal operation would provide something like 3% of the total cost of the program, or not that much more really than just the cost of administration. The other 97% or so of Cost are or would be covered by contributions and taxes. Meaning that the precise yield on the Trust Fund is essentially meaningless compared to the proper targeting of the FICA rate and/or targetting employment and wage numbers. It is all a second order effect.
hope ever dawneth. you do appear to be misinformed. but that’s not unusual.
i would begin at the beginning, unless you have a settled purpose to remain misinformed. that would not be unusual either.
Social Security is insurance. It is paid for by the workers who will get the benefits. It is not welfare. Neither the Trust Fund nor the contributions of congressmen or other rich people have anything important to do with it.
The Trust Fund is merely a reserve… created from the contributions of workers not immediately needed to pay benefits of retirees… to provide stability for the fund during the normal ebbs and flows of collections of contributions. The Trust Fund has recently grown to about three times the size it is “normally” intended to be. This enhanced Trust Fund is supposed to have something to do with redressing a generational unfairness that would result from the larger than normal size of the baby boom generation. As the baby boomers retire and draw down the trust fund it will return to its normal size.
But because “meanwhile” we are living longer and having fewer children AND because wage growth is not currently projected to occur at the rate that kept the contribution rate lower in the past, the contribution rate will have to increase if the people making the contributions will have enough “in the bank” to pay for their longer retirements.
it’s as if the price of groceries went up when your wages did not. you would have to budget a larger percent of your wages to pay for groceries. not what you’d want, but necessary, and, as projected, not a very big hit after all. by the time the increased contribution rate is actually needed, the wages will have grown, even at their slower than projected rate of growth, more than ten times as fast as the needed contribution rate (aka the “payroll tax”). This means that future workers will have about nine dollars more in their pocket after paying the tax for every dollar increase in the tax… that is their standard of “current” living will be about twice as high by the end of the century, AND they will get their payroll tax back, three times over, in the form of a retirement check that will be about twice as big, and run for about 20% longer (longer life expectancy) than current retirees get.
The congressmen and other rich people pay their fair share… that is they pay a contribution rate that is commensurate with the benefit they will get. To make them pay more… would not be “fair,” it would simply turn SS from being a safe way for workers to insure their own retirement into a welfare program. most workers don’t want to depend on a handout from the rich. the rich certainly won’t pay for any more welfare than they can get away with. So the program to “enhance” Social Security… or worse, far worse, avoid the necessary “tax” increase (about eighty cents per week per year) it would take for the workers to pay for it themselves… is simply a back door way to destroy Social Security. The enemies of Social Security have been trying to turn it into welfare for decades as a first step to destroying it utterly. Now the “left” is eagerly trying to help them do this.
So we have this “debate” here on AB… nowhere else… about the wisdom of making structural changes in AB in order to save the workers eighty cents per week.
To me the answer is obvious. The question is ridiculous.
But people who don’t know better, and some who do, find the debate fascinating. The enemies of SS enjoy it too.
As to multimillionaires collecting Social Security.
So what? Nobody is collecting more than around $30k a year and almost all of these guys spent their working careers earning at or near the cap and are only dragging down a 15% replacement rate on that cap. In the meanwhile some part of their contributions went to fund benefits for lower income workers, especially those below the first income bend point.
The system is designed so that it never actually inverts: higher income career earners get a larger nominal check than lower income ones do. On the other hand there is a transfer from higher income to lower income via a stepped down replacement rate.
That is Social Security works as retirement income support for lower income workers, in many cases covering the vast bulk of their (very small) retirement income, while for the lucky duckies at the top of the income pyramid it served as wage insurance during their working lives (in case the ducky luck ran out) and as a nice reliable annuity to add a base to their retirement portfolio. Does it upset me that some people require their Social Security check to buy rice and beans and others use it as a nice bonus to fund their annual cruise or pay their country club dues? No. Because they get what they paid for even as some of their contributions were used progressively to those in the steerage compartment of life.
Anyway today is Report Release Day so I need to take all this to a new post. Be there or be square.
I should have made more clear: the interest rate on the trust fund, or the date the trust fund “runs out of money” will have no noticeable effect on the needed contribution rate to support the needed level of benefits if SS is to remain meaningful insurance of the workers “right” to retire at a reasonable age… that is the age at which he will have paid for a basic retirement., and at which he may need, or just want, to retire.
The people “debating” this are all essentially, frantically, searching for a way to save themselves from an imaginary crisis, by finding a formula for praying to the gods. oh god send us wage increases. oh god send us interest rate increases, oh god send us “cap” increases. they have no actual plan, but are sure if they keep talking about “things” that would save them from the “crisis” (what Dean Baker called a Phony Crisis), without understanding a single thing about what Social Security is, or how it is funded, or why.
But the fact remains for a tax increase of about (about) eighty cents per week (per year, while wages go up about eight dollars per week per year) they can continue to pay for their own Social Security (retirement insurance) just as their parents and grandparents before them did… and did out of smaller incomes than we have or will have.
And all to save themselves eighty cents per week. And these people are so intelligent, if they hear that it might be ninety cents per week they will run around screaming about a ten percent increase in what i told them, making me a liar. because, you see, an extra dime per week is such a huge, unfair, hit on their lifestyle.
(i am being mean. the fact is that most human beings don’t even have a place in their brains where they can evaluate the “size” of a number or its effect on their lives in the far future. The enemies of SS rely upon this.)
“Well no it could come in the form of a business loan from a bank to the new formed corporation.”
In which case, it is the CAPITAL of whomever made the loan.
“Warren, a domain name costs less than $20.” -Arne
“The last high-profile domain purchase by Facebook was for Facebook.com, all the way back when it was known as TheFacebook. The company paid $200,000 in August 2005 to acquire the domain….”
“The system is designed so that it never actually inverts….”
Doesn’t the tax of (some of) the old-age benefit for higher-income retirees actually cause it to invert?
Well yes it represents SOMEONE’S capital. But it isn’t the firm’s capital and has no direct relation to cash operations that pay salaries, buy equipment etc. Which makes most of your previous comments moot.
As to domain names. Whatever the source of the $200,000 the purchase of the domain name is not in fact an investment in a capital asset. The additional cost of the domain name above and beyond the actual cost basis for its original acquisition would I think be carried on the books under the misleading account name ‘Good Will’ and would be amortized away over a period of time ultimately leaving little to no asset value at all.
But all of this is a sideshow to a post about what happens at Trust Fund depletion. I hope it was educational to someone but i am going to have to drop it here.
Goodbye Warren. And thanks for all the fish!
In today’s our future.org /progressive breakfast is a good article. See the article “compromise bill faces many obstacles “…It is mentioned that $2.3B would be raised for SSA by blocking payments to individuals with felony warrants…My question to you is would this provision if passed make up the needed projected short fall in the Trust Fund to offset the proposed tax increase of 2% +2% proposed?
No, not nearly. We are talking a program that will soon have costs in excess of $1 trillion a year with a projected shortfall of 22% at Trust Fund Depletion. $2.3 billion is a drop in the bucket and horribly cruel to people that may just have a warrant for failure to appear on a crime from 20 years back. SSA already blocks criminals with active felony warrants, this is just an attempt to break down the wall between Social Security and the General Fund with the goal of undermining the program. Barbara Boxer should be ashamed of going along with this travesty.
Well, here we have Bruce Webb
at his wonky best.
providing answers at a level of detail I could not.
and yet somehow saying the same thing I have been trying to say.
perhaps, Bruce, my comment was directed at the Warrens and not at the Bruces (except Bruce K).
not entirely, of course. i still think you wander from the point in your desire to appear wonkish, to which i will offer the anecdote
Paul Ryan (the recent candidate for Vice President) was asked by a reporter to explain one of his claims. He responded, “You wouldn’t want me to get all wonkish on you.” This was of course a LIe. Ryan had no explanation for his BS claim, but he figured he could get away with pretending that the reporter would be too dumb to understand, or too bored to listen to, a technical explanation.
Don’t go all Ryanish on me.
And thanks for all the good work you do do.
Bruce, I may have been overly simplistic in my comment.
Currently the interest rate is about 3.8% on TF assets producing $98.8 billion a year. An increase to 6% (You could make it 7%) adds another $58 billion a year – I think that certainly helps expend the life of the TF for some time. Not sure why you chose to use the denominator of all SS payments, which yes, is a big number. But, the latter is covered mostly by payroll taxes. The shortfalls for SS are not as bad as the press and other Pollyanna’s want us to believe. Either way, it is the ability of future workers to generate goods in surplus of their needs is all that matters – just need enough to meet demands of retirees.
Yes, it is political, but all aspects of SS are political. The current politics are to keep cutting the benefit – death by 1000 paper cuts. Increasing the IR on the TF is better than getting a payroll tax increases through congress.
You could even vary the rate based on the economy as a counter cyclical measure. Higher when good, lower when bad – or maybe the other way around.
Either way, the IR on TF assets is a policy option.
correction to above “extend” the life
“It is mentioned that $2.3B would be raised for SSA by blocking payments to individuals with felony warrants….” – William Ryan
“$2.3 billion is a drop in the bucket and horribly cruel to people that may just have a warrant for failure to appear on a crime from 20 years back.” – Bruce Webb
Never mind that, how about its being a blatant violation of the Fifth Amendment: “No person shall be… deprived of life, liberty, or property, without due process of law”?
Gosh, I have not looked at Angry Bear for over a week, and look at this thread.
Bruce, original post very interesting, this information from the well-informed if disturbing Biggs. I was unaware that the matter was so up in the air. While it may not matter in the near future (although it might for the disability fund), it is of interest.
The other aspect of who bears what is that a large chunk of corporrate profits taxes do not end up being borne by “capital,” (owners), but gets passed through to consumers. It is not an accident that the Obama admin has advocated a small cut in corporate profits tax rate, but the GOP in Congress has refused to go along with this, even though they have all long supported this, because, well Obama proposed it, of course.
A better way to resolve funding issues in the longer run would be either coberly’s old tax proposal or just to raise the bloody cap.
as well as i remember, raising the cap would NOT resolve the SS funding “issue,” only part of it. while letting the workers who will get the benefits pay an extra (less than a dollar) a week per year while their wages are going up over ten dollars per week per year would solve the SS funding issue entirely and forever.
moreover, threatening to make the rich pay for SS is exactly what FDR worked to avoid “so no damn politician can take it away from them [the workers]”
Roosevelt reckoned without the persistence of damn politicians and the fecklessness of workers, but i remain certain that if the workers actually knew they could pay for SS themselves at that cheap a price, they would laugh the “SS crisis” out of court.
A poll by NASI has already shown the workers would rather raise their own tax 1% than have their benefits cut. 1% is half of the needed raise and would delay the need for the other half until about 2050 or so, by which time the workers might be ready for the other half.
calling to raise the cap just gives the Petersons moral cover for saying ‘they are going to tax us to death.” from what i have been able to hear on “progressive” web site, “they” certainly would. I used to consider myself “left,” but those “progressives” might as well be being paid by Peterson for their propaganda value.
maybe worse from my point of view, i am not just sure that if “the rich” would pay for me not to work, i wouldn’t find, or have found, it too easy to resist taking their money. not that i don’t like to work. but i don’t like to work for them.
so maybe… and i hate to say this… we really do need at least a little incentive to work for ourselves and pay for ourselves…. as much as we can… for our own retirement.
i am not against helping the poor, or against taxing the rich, but as a one size fits all answer to every need… well, in this country anyway it won’t work. i think mots of the people i have worked with agree with me.
and no, i have never really been able to figure out why bosses in general are such a sorry lot. a good one is not impossible, but not common, so don’t imagine i am “a shill for the rich” as i have been called on progressive blogs.
Warren though I hesitate to bring it up, because it gets used dishonestly or mistakenly by the bad guys. But in point of fact beneficiaries have no property right to their future benefits. They certainly have a legal claim under current law and so one that they could enforce in court. But the key there is “under current law”. Per the Supreme Court in a case called Flemming vs Nestor it was ruled that Social Security benefits could be taken away if a law was passed to do so under certain circumstances. In his case being deported as a commie.
I think Flemming vs Nestor was poorly decided. Then again I am not a lawyer or a judge and even if I was the Supreme Court could tell me to piss up a rope. Anyway it is what it is and as result this really terrible proposal (which was pulled by the way) would not have been subject to appeal on Sixth Amendment grounds.
‘The other aspect of who bears what is that a large chunk of corporrate profits taxes do not end up being borne by “capital,” (owners), but gets passed through to consumers.’
Yet another reason to eliminate corporate income taxes.
“Anyway it is what it is and as result this really terrible proposal (which was pulled by the way) would not have been subject to appeal on Sixth Amendment grounds.”
Glad it was pulled. Still, it would have made for interesting case law!