Social Security: What Would Happen If the Trust Funds Ran Out?
A repost of a Bruce Webb take on Social Security and what happens if the Trust Funds go to zero. This is from 2015 and as you know, not much has been done. In one respect, maybe nothing should be done as long as it does not become a major crisis. By that I mean, we should be sure our actions are not over-zealous in solution. Do enough to stabilize it for the future as Dale Coberly and Bruce Webb proposed with the Northwest Plan. The timely is now and yet all we hear are crickets.
Angry Bear, Bruce Webb
July 21, 2015 1:01 pm
Very interesting paper that I missed in real time.
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 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:
http://www.ssa.gov/oact/tr/2015/index.html
A PDF version should be viewable or downloadable at: “The 2015 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.
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.
CRS: Social Security: What Would Happen If the Trust Funds Ran Out?
Well, since I am on record as saying it wouldn’t matter if the Trust Fund disappeared overnight IF the payroll tax continues to pay the bills as it has for over 80 years, I need to clarify that since that time the payroll tax has not kept up with the cost of benefits and has relied on the interest from the Trust Fund to fill the gap. And a couple of years ago it began to eat into the principle. At that time an increase in the tax of about one tenth of one percent would have eliminated the need to dip into the principle. Since then, further increases of about one tenth of one percent per year would eliminate the need to need to spend down the principle essenrially forever,
BUT, after next year if we have not begun raising the tax one tenth of one percent per year we would need to increase the rate of tax increase in order to make up for the amount it would have needed to increase each year to keep up with the increasing cost of benefits due to the increasing number of retirees [itself due to increasing life expectancy of retires.] If we wait until the TF is entirely depleted we will need to raise the tax 2 whole percent for the future tax to keep up with the cost of benefits. (Four whole percent if you count both the worker’s and employer’s share.) This is not catastrophic, but it would be better to start raising the tax now.
These are just facts. But alas SS is not just a matter of facts; it is a matter of opinions and politics.
And not all opinions are sound, and not all politicians are honest or even know what they are talking about. So there is considerable danger that we will not raise the tax in time, and then do something cruel and stupid and dishonest like cutting benefits that will then be not enough to live on in retirement. This would amount to stealing from the people who paid their payroll tax on the assurance that they would get adequate benefits …from their own money…when they can no longer work.
Unnecessary invidious comment:
The last paragraphs of the main post are somewhat dated. Don’t wait up for the 2015 Report.
And, despite Bruce’s opinion that the “conflict of laws” is “more important,” it’s not. It might be “more interesting” to him, but laws can be changed. Facts are more difficult.
Biggs is being somewhat disingenuous. According to one of the champions of MMT, he and Biggs had a chance meeting back in the mid 2000’s. At the end of the meeting, Biggs fully understood and agreed with MMT. Biggs knows that Congress can appropriate the money to fully fund SS regardless of the trust fund balance going negative. This doesn’t violate the anti deficiency act because the money is appropriated by Congress.
BTW, the stimulus checks sent out by Bush in 2008 was a result of this meeting.
MarkG:
I have seen your name in other comments to posts in 2015. Some of these posts still have a sound foundation and are workable even in 2024/25. We are within a 10-year window in which to enact small changes yearly rather than make dramatic changes.
Bill
not sure what you are saying here. American Academy of Actuaries say one tenth percent per year increases will stop not work if not enacted before end of 2025. That does not say some higher percent increase per year will not work,
I calculated the same thin a couple of years ago, but no one cared.
Congress can of course fully fund SS any time it wishes, but once it is funded out of general taxes, it ceases to be worker-paid and you can bet the vultures will be out.
Even MMT would work… until they had to tax the rich to control inflation..as Stephanie Kelton suggested.
It amazes me that people keep looking for a fix that won’t cost them one dollar per week per year. Oh, yes, if you work for yourself, it would cost two dollars per week, And if you make a hundred thousand a year, it would cost you four dollars per week. And what sane person making a hundred thousnd a year would want to pay an extra two hundred dollars per year to guarantee he’d have enough to live on if, you know, something happened?
the above may contain errors, or just be too confusing because i changed denominators in midstream.
it adds up to a big enough pile of money to notice after the needed change is fully phased in. most people will forget or discount the fact that their real income will have increased at least 20% by that time, and that the will get that tax back plus interest in the form of SS benefits enough to see him through a longer retirement.
Fun fact:
The ‘Full Faith & Credit Act’, proposed in Congress 2013-14, did not become law.
H.R.807 – Full Faith and Credit Act
But, no worries, the Constituion has the Full Faith & Credit clause…
Article IV, Section 1:
Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State. And the Congress may by general Laws prescribe the Manner in which such Acts, Records and Proceedings shall be proved, and the Effect thereof.
(Doesn’t say anything about debt, particularly federal debt, I notice. Pretty sketchy!)
Frequently Asked Questions about the Social Security Trust Funds
Why do some people describe the “special issue” securities held by the trust funds as worthless IOUs?
Another Fun Fact: Apparently George Bush Jr never said ‘The Constitution is just a G/D piece of paper!’
@Fred,
“The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.”
Yep. Like the dollar, another financial instrument of the Federal govenment.
Sort of like the average IQ always being 100, the dollar is always worth just that.
Then there are other ‘special-issure’ securities…
Examples of Known Phony Securities
Office of the Inspector General – US Treasury
(For example, ‘”LIMITED EDITION” TREASURY SECURITIES’.)
@Fred,
So like the way counterfeit money is “special-issue” dollars?
Joel
you could be misunderstood putting it this way. special issue treasuries are special issue because they rare “not marketable. that’s good because their value does not change. and they are not sold to the public but only to the SS Trust find, where they quietly pay interest until they mature and are redeemed and replaced if SS has extra money it wants to save in a safe place, and of course Congress needs to borrow the money, which it always does. currently those bonds are not being replaced because SS no longer has surplus income.
the people who say they “worthless iou’s” don’t know what they are talking about, or are lying through their teeth,
“Why do some people describe the “special issue” securities held by the trust funds as worthless IOUs?”
1) Because they are paid to lie about Social Security.
2) Because they are ignorant and thoughtless people who believe the lies about Social Security.
3) This includes the “economics reporter” on PBS “News Hour” A “high end news source on “television for intelligent people.” It also includes public radio, NPR, radio for intelligent people.
4) It also icludes Bill Meyers, a thoughtful liberal reporter and commentator who listened at his masters feet while Peter Peterson lied about Social Security and asked no questions that showed the least sign of doubt.
Why ramp up rates well in advance of trust fund depletion then? The “ramp up” funds do not become benefits, but hold the trust fund balance much higher than needed. Move the rate to whatever it needs to be in 2032. The accompanying shrinking of the trust fund should be viewed simply as distributing it to workers via the “delay” in tax increase. The most conclusive proof that the trust fund is not worthless is to redeem it.
Eric
you keep saying this despite my trying to show you what’s wrong with it.
the goddam rate increases are needed now. the TF is depleting. It will reach “short term financial inadequacy” in a few years, and total depletion shortly after that.
at that point it would take an immediate tax raise of about 2% each….and that would not restore the Trust Fund to a ‘prudent” level, but would keep benefits adequate.
meanwhile if we begin raising the tax a tiny amount the trust fund remains…as a balance between income/outgo natural variation, longer term variation due to a recession, say, and provides interest , like any trust fund, that helps keep tax rates a little bit lower than they would otherwise need to be.
you appear to have absolutely no understanding of how all this works. but you keep saying something that won’t work. your ideas do not describe how even private sector trust funds work, could you please find something else to do with my time.
Dale:
I do not believe you can say it any plainer than what you said.
bill don’t know where eric gets his idea that the trust fund is too big.
it was made big by raising the tax on the boomer generation so they could put away in the trust fund enough money to pay for their own retirement without imposing a larger burden on the following generation, while creating a windfall for the boomers if normal pay as you go financing were followed.
meanhile it is now being paid down to do just what it was designed to do…help pay for the boomers.
Eric has NO idea what he is talking about,
Coberly:
Just answer. Give your explanation and be done with it. Don’t try to keep explaining as your answers are being ignored.
Bill @Mar 20 9:26pm
I could not agree with you more.
But there is this;
1) I am not talking to the Erics; I am talking to anyone else who may have dropped in to AB and hasn’t been hearing this for as long as you have.
2) sometimes when i try to explain better, i learn something from the exercise.
3) unlikely, but possible, that even the Erics may be on to something that I do not yet understand. If they could explain themselves better, or I listen better, we both might learn something.
But mostly you are right. All I do is make myself mad.
@Eric,
Would you agree to implement the Canadian approach to solvency?
https://www.bostonglobe.com/2024/03/15/opinion/social-security-shortfall-fix-congress/
“Old Age Security ( OAS ) is a nearly universal pension financed from general revenues and paid to almost all Canadians aged 65 or older.”
(Nothing like US Social Security, it would appear.)
Globe:
The Canadian Safety Net for the Elderly
Social Security Bulletin, Vol. 68, No. 2, 2008
The ‘Canadian Safety Net’ is not OAS apparently.
It’s something comparable to our Supplemental Security Income program (SSI).
Fred
there are some obvious problems with this. but you are tired of hearing from me and i am tired of talking to the wind.
may repent later.
Canada seems much more liberal/progressive than the US when it comes to ‘pension benefits for all’ and also ‘SSI’ benefits. Funding pension benefits out of general revenues is a wonderful idea if you are ‘socialistical’ enough to legislate it into being. The right-most Americans would not stand for this.
that’s Bill Moyers
Congress can do whatever it wants as long as both houses and the president agree. They could abolish SS, appropriate general fund money to the TF, change the tax per the NW Plan, or anything. The thing I think noteworthy in the suggestion to simply appropriate the money is that it would require annual re-appropriations. Since the NW Plan includes features to raise taxes as required to meet 10-year horizons, it is a single piece of legislation that would not need further revisions.
I personally fear that the longer Congress waits, the scarier the needed change sounds, the larger the cuts that will end up being negotiated. I also fear the House Freedom Caucus has the power to let it fester.