Mike the Mad Biologist

More on Social Security

Looking at the comments from a previous post about social security, I wanted to address a couple of other points, and then provide some more evidence about the ridiculousness of the Social Security ‘crisis.’ First, as I’ll discuss below, Social Security will not collapse. There is no serious evidence to support that scenario (please, take a deep breath; I’ll get to that). If you want to privatize social security, cut benefits, or change the eligibilty rules (one-third of Social Security payouts do not go to the elderly, but to widows, orphans, and the disabled), you have to make those arguments on their own merits, and not based on the supposed coming implosion of the Social Security system.

A few years back (and it’s been updated since then), economist Dean Baker wrote “Social Security: The Phony Crisis.” The conservative magazine The Economist summarized the book (behind a firewall, sorry):

In their recent book on America’s Social Security (public pension) system, Dean Baker and Mark Weisbrot have no trouble at all demonstrating that even on highly conservative assumptions about economic growth, the much-forecast insolvency of the Social Security system by about 2030 is most unlikely to happen then, if indeed ever.

So before you blow a gasket, remember than Dean Baker (and co-author Marc Weisbrot) really do know what they’re talking about (I’ve never seen a substantial rebuttal of their arguments). Anyway, here’s how Baker and Weisbrot have summarized the state of Social Security (italics mine):

Granted, half a century is not an eternity, and the Social Security Trustees’ Report puts the date of insolvency at 2042. But even after 2042, Social Security will be able to pay an average benefit that is actually higher than what workers receive today — indefinitely. That’s in 2004 dollars — adjusted for inflation.

Social Security benefits are programmed to rise not only with inflation, but also with wages. So to pay all promised benefits after 2042, the country will at some point have to increase taxes if future generations choose to enjoy more of their longer life spans in retirement. But of course the same thing has been true for the last six decades.

This so-called problem is not large — in fact the projected shortfall for the whole 75-year planning period is less than what was fixed in each of the following decades: the 1950s, 1960s, 1970s, and 1980s. It is also about one-third the size of the tax cuts enacted during the Bush Administration.

In other words, it’s a non-issue. Or should be.

Then they debunk some common myths:

– The Disappearing Trust Fund: You may have heard that Social Security will run out of money in 2018. But this is like saying that Bill Gates will be in financial trouble if he decides to work only half-time. He will still have $40 billion in assets, enough to keep him and his descendants living well for a very long time. Similarly, the Social Security Trust Fund will have $3.7 trillion (in today’s dollars) in 2018. Together with payroll tax revenues, that is enough to pay promised benefits until 2042 — or 2052, if we use the CBO estimates.

– “That Money’s All Been Spent”: This is also nonsense. When you loan money to the Federal government by buying a bond, the government spends it. The government also pays you interest and repays what they borrowed from you. The same is true for the Social Security Trust Fund. Social Security has been running an annual surplus (now at more than $150 billion) since 1983. By law it is required to invest that surplus in U.S. Treasury obligations, for which it receives interest, and will be repaid the principal.

– “But the Trust Fund is only holding I.O.U.s — just pieces of paper!” Another trick: all bonds are by definition I.O.U.’s. Those “pieces of paper” held by the Social Security Trust Fund have the full faith and credit of the U.S. government, which hasn’t defaulted on its bonds in our entire history as a nation. [Mad Biologist: If the U.S. defaults on the Social Security Trust Fund, it will also default on the bonds held by U.S. citizens, corporations, China, and Japan. Not going to happen, and if it did we're really fucked.]

– “The baby boomers’ retirement will bankrupt Social Security.” Far from it. The first boomers actually begin retiring in 2008. Most of them will be long dead before Social Security faces any financial difficulties.

– “There are currently 3.3 workers for every beneficiary; by 2035 there will be only 2.1.” True enough, but about as useful as one half of a baseball score. The other half of the score is that productivity (output per hour) will grow by more than 70 percent during the same time, so we won’t need nearly as many people working to support a larger retired population.

– “If nothing is done, Social Security and Medicare will eat up 90 percent of our federal budget by 2050.” The trick here is mixing in Medicare, a separate program from Social Security with its own payroll tax and federal funding. The projected costs of Medicare are indeed out of control — but not because of our aging population or the program itself. Medicare’s problems are a direct result of spiraling private health care costs. The United States spends nearly twice as much as other high-income countries on health care, yet has worse health care outcomes and still leaves 45 million of our citizens uninsured. This makes a strong case for health care reform. But it has nothing to do with the cost-effectiveness of Medicare (which has much lower administrative costs than the private sector). And certainly nothing to do with Social Security.

And here’s some historical perspective on the Social Security ‘crisis’:

The bottom line is that Social Security is — by unanimous agreement among the experts, since they are all using the same numbers — more financially sound today that it has been through most of its 69-year history. If workers in 2050, who will be earning on average 68 percent more in real, inflation-adjusted dollars than they are today, have to pay one or two percent more of their income in taxes — as they have in the past — it is unlikely that they will complain. They will still enjoy a much higher living standard than we do today. And Social Security will provide a much larger real annual benefit for a longer retirement when it is their turn to retire.

Finally, let’s hear what they say about Bush’s Social Security plan:

Which is a shame, because the “President’s Commission to Strengthen Social Security” (nice name!) has proposed serious benefit cuts. For a 20 year-old just entering the labor force, the plan would reduce benefits by 37 percent, or close to $172,000 over a lifetime of retirement. Only about $5,000 of this would on average be recovered by those choosing to divert some of their Social Security taxes into an individual account — provided they don’t get into the stock market at the wrong time.

As I wrote earlier, you might want to alter the way Social Security works for ideological reasons, but the program is quite sound and stable. You might not agree with Baker’s and Weisbrot’s political and ideological program, but, to my knowledge, no one has successfully refuted their numbers, for the simple reason that they’re using the same numbers as everyone else.

Saddam Hussein wasn’t involved in the Sept. 11 attacks. Social Security isn’t in ‘crisis.’ Get it?

Comments

  1. #1 bigTom
    September 5, 2006

    I wouldn’t be complacent about the 2018-2042ish period, where SS can continue to pay benefits by using up the accumulated surplus. That doesn’t sound like a good long term plan to me (Ok it’ll work for me I’m a baby boomer, and will be gone before the crunch). Just as with federal spending the political populace becomes used to getting something for nothing (Bush is giving us low taxes & high spending), the same will apply to SS, but like any subsidy, taking it away when it’s time is up is very difficult.
    “There are currently 3.3 workers for every beneficiary; by 2035 there will be only 2.1.” True enough, but about as useful as one half of a baseball score. The other half of the score is that productivity (output per hour) will grow by more than 70 percent …
    If only the dismal science could make such accurate predictions. We just don’t know where we will be, maybe we will have 2.1 human workers, and 10 robots per retiree, in which case productivity growth will hopefully exceed the 70% figure. But I don’t think we can take even the 70% as given. Among other things we have to transition away from the cheap fossil fuels that make us rich…
    I think you have some very good points, it would sure be nice to tamp down the hysteria surrounding the issue.
    Personally I think “defined benefit” as opposed to “defined contribution” is a terrible idea. The problem is that defined benefit requires some sort of assumptions about future economics, and demographics, defined contributions “adjust” as those assumptions change, and don’t require a nasty political battle, everytime an adjustment is needed. We’ve seen this especially in the corporate sector, where it is easy to promise future benefits to be paid for by future profits, only to find decades later that the corporation (or industry) hasn’t enjoyed the exponential growth required to fund the past promises.

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