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Social Security: A Small Problem That Still Grows Bigger Over Time

August 9th, 2010 . by economistmom

OASDI Cost and Scheduled Tax Revenue as a Percentage of GDP

OASDI Cost and Scheduled Tax Revenue as a Percentage of GDP

The Trustees’ reports on the status of the Social Security and Medicare programs came out last week, and the reports underscore two “big picture” points:

  1. Of the two programs, Medicare faces much larger fiscal challenges than does Social Security, because Medicare has both demographic factors and rising per capita health costs working against it; and
  2. If health care reform is to significantly help the outlook for Medicare, some tough choices prescribed in the reform bill and in the rest of current law will have to be followed through on.

Let me put aside point #2 for now.  It’s a point the Concord Coalition has made before regarding health care reform, underscored by CBO’s long-term outlook report as well, in the difference between their “extended baseline” (not so scary) scenario versus their “alternative” (very scary) scenario.

On point #1, the contribution of the Social Security program to the overall fiscal gap is expected to be relatively small over the coming decades–with the difference between annual program income (without interest) and annual program cost staying close to 1 percent of GDP within the 75-year long-range window under “intermediate” assumptions, as can be seen in Figure II.D5 above from the Trustees’ report.  (Over the last half of the period the gap grows steadily from just over 1 percent to closer to 1.5 percent–reaching 1.44 percent by 2085; see details in table VI.F4 here.)

Some suggest that if Social Security contributes so little to the fiscal gap relative to Medicare, then why do we have to talk about reforming Social Security?  (In fact, CBO doesn’t even vary their current-law assumptions about Social Security in considering their two different fiscal scenarios.)  The argument is often that if Social Security is not really “the problem” (at least not the big part of the problem), then why pick on it?

The trouble is that it’s often impossible to simply “undo” the causes of the problem–and given that we “can’t get back there from here,” we have to learn how to “deal with it” and move on as best we can.  In the case of the fiscal challenges posed mostly by uncontrolled growth in health care spending, it’s highly unlikely that we will be able to close the gap in the health care programs just by (even major) health care reform alone.  And even if it were theoretically possible, we’d be unlikely to choose those policy changes given their likely implications for the quality of health care and quality of life.

On Social Security, it’s a small gap, but it’s one that’s much easier to close, both theoretically and in practice.  Closing the gap is certainly not “fun” and does involve sacrifice.  We would not want to do it right away in any way that would place undue burdens on current retirees and lower-income workers, especially given the currently-still-weak economy.  But there are many different options available to immediately improve that 75-year outlook on Social Security without immediately burdening anyone.  (The Committee for a Responsible Federal Budget just released this nice summary of the Social Security Trustees’ report including a very helpful compilation of Social Security reform options.)

And although the Social Security Trustees’ report does not get into specific policy options to close the (small) gap in Social Security, they do make the point that even small problems have a tendency to get larger over time (in this case because the demographic challenge just keeps growing), and closing that gap sooner–even with a plan that is phased in very slowly over time–would be easier than closing it later.  From the conclusion of the report’s overview (emphasis added):

Over the full 75-year projection period, the actuarial deficit estimated for the combined trust funds is 1.92 percent of taxable payroll?—?0.08 percentage point smaller than the 2.00 percent deficit projected in last year’s report. Solvency of the combined OASDI Trust Funds for the next 75 years could be restored under the intermediate assumptions if increases were made equivalent to immediately and permanently increasing the Social Security payroll tax from its current level of 12.40 percent (for employees and employers combined) to 14.24 percent. Alternatively, changes could be made that are equivalent to reducing scheduled benefits by about 12.0 percent. Other ways of reducing the deficit include transfers of general revenue or some combination of approaches.

If no substantial action is taken until the combined trust funds become exhausted in 2037, then changes necessary to make Social Security solvent over the next 75 years will be concentrated on fewer years and fewer generations:

For example, payroll taxes could be raised to finance scheduled benefits fully in every year starting in 2037. In this case, the payroll tax would be increased to about 16.1 percent at the point of trust fund exhaustion in 2037 and continue rising generally thereafter, reaching about 16.7 percent in 2084.

Similarly, benefits could be reduced to the level that is payable with scheduled tax rates in each year beginning in 2037. Under this scenario, scheduled benefits would be reduced 22 percent at the point of trust fund exhaustion in 2037, with reductions reaching 25 percent in 2084.

And regarding the argument often made that we can afford to put those reforms off to future generations, well, even if we made the above changes anytime between now and 2037, the Trustees’ report explains that we wouldn’t be done–that there would be plenty more for future generations to worry about once we get to that next place we’re kicking the can to:

Either of these actions would eliminate the shortfall for the 75-year period as a whole by specifically eliminating annual deficits after trust fund exhaustion. Based on the assumption of continued increase in the average age of the population after the 75?year period (due to expected improvement in life expectancy), Social Security’s annual cost will very likely continue to grow faster than scheduled tax revenue after 2084. As a result, ensuring solvency of the system beyond 2084 would likely require further changes beyond those expected to be needed for 2084.

So Social Security reform isn’t absolutely “easy”–but it is certainly relatively easier to do than health care reform, and it’s even easier the sooner we do it.

18 Responses to “Social Security: A Small Problem That Still Grows Bigger Over Time”

  1. comment number 1 by: Brooks

    Diane,

    I have to say I’m surprised to see you working from the absolutely nonsensical premise that the size of the projected Social Security “gap” has anything to do at all with the degree to which Social Security contributes to our projected overall fiscal imbalance. I don’t have time to repeat my explanations or even to grab links to them, but you must realize that that “gap” is simply a matter of insignificant bookkeeping involving the level of dedicated taxation, which is meaningless from the standpoint of our overall fiscal imbalance. Social Security revenues are part of overall revenues. Social Security spending is part of overall spending. To view the gap that happens to exist between the two as something meaningful vis a vis our overall fiscal imbalance is downright silly, however conventional it unfortunately is.

    I will illustrate how silly it is in one quick way. If that gap were meaningful, it would mean that if we just shifted taxation around by lowering general fund tax rates and increasing FICA SS such that we eliminate that gap, then — presto! — Social Security would not be contributing at all to our overall fiscal imbalance. And then we could do the same for Medicare. Wow! Then neither would be contributing at all to our projected overall fiscal imbalance, and of course since neither would be part of the problem, we’d want to look elsewhere for spending to cut, not at those programs. Of course, our overall fiscal imbalance would not have changed one bit if all we did was shift the revenue around. Yet you can see the absolutely nonsensical implications that flow from accepting the ridiculous premise that these internal bookkeeping “gaps” are some kind of gauge of the degree to which these programs contribute to our overall fiscal imbalance.

    I realize there may be times when people need to accept obviously invalid premises and fight the good fight within that constraint, but I hate to see a normally intellectually honest blog go that route.

  2. comment number 2 by: Jim Glass

    On Social Security, it’s a small gap, but it’s one that’s much easier to close, both theoretically and in practice.

    So small and so easy.

    The SS funding gap grows to over 1.25% of GDP in the 2030s.

    For perspective, that’s twice the size of the biggest tax increase of the last 60 years — the Clinton tax hike that passed the Democratic House by one vote and Democratic Senate only on a vice-presidential tie-breaker. (And the Dems got wiped out in the election the next year.)

    And it is six-and-a-half times the tax increase used to bail out Social Security the last time, in 1983, which had all of D.C. paralyzed until the very last moment, when a deal including equal-sized benefit cuts was put through.

    It’s good to be optimistic, but we may be defining “small and easy” down here.

    Though considering what’s coming down the pike for Medicare combined with Obamacare, one can understand an urge towards wishful thinking on “lesser” problems.

  3. comment number 3 by: Brooks

    Et tu Jim?

    Jim, I know you know I’m right that it’s absurd to buy the underlying premise that the size of the SS gap is meaningful in some way (other than in a political way due to mass, utter confusion on this point) vis a vis our overall fiscal imbalance problem and how we should approach reducing that imbalance.

  4. comment number 4 by: VAT Brat

    Let’s focus on solutions.

    First SS benefits are going to be taxable going forward.

    Second, eliminate the Ponzi scheme structure and convert to a defined contribution plan.

    Everyone under age 30 has their payroll contributions deposited into mutual fund managed by the US Treasury that consists of Treasury securities (inflation protected) of maturities matching the outstanding pool procured from secondary market transactions. Each taxpayer will know exactly how much he owns. When he retires, he can live off the interest with some restrictions on the maximum amount of principal that can be withdrawn to guard against outliving your pension. When he dies, anything left goes to the heirs.

    With this mechanism, retiree benefits are not left to the whim of political currents. They are earned and judicially protected. You eliminate the inherent discrimination of the current system where lifetime net present value of benefits for subgroups (e.g. females) with higher life expectancies exceed those for others.

    Politically, a defined contribution plan forces politicians to act in an actuarially responsible manner. This is how we eliminate the problem created by social security and any defined benefit pension plan administered by the government.

  5. comment number 5 by: AMTbuff

    The shape of the graph surprises me. Why doesn’t the demographic problem decrease after the baby boomers die? Is life expectancy projected to increase faster than the influx of retirees decreases?

  6. comment number 6 by: Arne

    AMTbuff,to the extent that the trust fund is a valid mechanism, the Boomer demographics were solved. By 2037 most of the benefits will be going to people born after 1960.

    The issue after that is mostly rising lifespans. Fewer replacement workers (smaller families being projected) adds somewhat. Note that rising lifespans means both longer retirements and more people surviving to retirement.

    The boomer bulge changes things failry rapidly, but lifespans keep going up steadily.

  7. comment number 7 by: BillSmith

    The report makes some unrealistic assumptions that makes it pretty much worthless.

  8. comment number 8 by: SteveinCH

    Arne,

    Please read Diane’s next post. The trust fund is not a valid mechanism. That money is gone, spent, kaput.

  9. comment number 9 by: Arne

    Brooks,

    Have you ever actually had anyone agree with you about your above concern?

  10. comment number 10 by: Arne

    To put the SS funding gap in perspective, realize that it only takes a 50 percent increase in receipts to cover a 100 percent increase in portion of the population that is retired. Since such as increase in retirees has never happened before, trying to apply historical limits is almost meaningless.

  11. comment number 11 by: coberly

    Mom had to work fairly hard to make SS seem to be in worse shape than it is. See the CBO report on “options”. Option #3 would raise the payroll tax (combined) half a tenth of a percent per year and would close 5/6 of the actuarial gap over 60 years.
    There is no reason not to continue raising the tax half a tenth of a percent per year for the rest of the actuarial period and close the gap entirely. Moreover this would fully fund Social Security over the infinite horizon.

    It is bizarre to claim that “waiting” would put the “burden” on later generations. It is the fact that later generations are going to be living longer that causes the need for the tax increase. That half a tenth of a percent per year is 40 cents per week per year in today’s terms, and your boss pays half of that.

    Seems to me to be a pretty cheap price to guarantee you can retire at 65 (or 62) if you need to or want to. Please note that wages will be going up ten dollars per week per year over the same time.

  12. comment number 12 by: coberly

    Stevin CH

    If the Trust Fund is gone… how do you account for the fact that it is being used to cover the current “cash shortfall” due to the recession?

  13. comment number 13 by: Dave Erhard

    I think that the best retirement plan is not to rely on any Government run retirement program whether you live in the U.S., Germany, Canada, or any other first-world country.

    Don’t count on getting anything back and if you do, look at this as a bonus to be blown on non-essentials.

    Perhaps this artilce will put things in proper perspective:

    “Social Security Is a Secure Way to Find Great Pleasue in Being Terribly Deceived”

    http://www.redroom.com/blog/ernie-j-zelinski/social-security-is-a-secure-way-find-great-pleasure-being-terribly-deceived

    Dave E.

  14. comment number 14 by: Brooks

    Arne,

    To answer your question: Yes, of course. In fact, here on this blog.

    Just because the dittoheads on the echo chamber blogs you (and Coberly) frequent either can’t get it or won’t admit it doesn’t mean others can’t or won’t.

    It’s really fairly simple. Anyone interested in elaboration and some of the many illustrations I’ve provided over the years (and which Arne has seen) can go to http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=02&year=2010&base_name=more_failed_airthmetic_at_the#comment-6314617

  15. comment number 15 by: SteveinCH

    Not that you guys will care but I agree with Brooks on this as should be obvious. Coberly, pardon my French but what the hell are you talking about. What trust fund is being used to cover what cash shortfall. The trust fund contains bonds not cash. The only way to turn bonds into cash is to sell them for cash to someone. That process is called incurring debt.

  16. comment number 16 by: Arne

    Brooks,

    In the link you provided, no one agreed with you. I have seen that it is not just Dean Baker, but also Diane and Andrew Biggs that have disagreed with you.

  17. comment number 17 by: Jim Glass

    If the Trust Fund is gone… how do you account for the fact that it is being used to cover the current “cash shortfall” due to the recession?

    The govt is paying promised SS benefits to the extent they exceed SS payroll tax collections by using general revenue and running up the national debt — exactly as it would if the Trust Fund didn’t exist. To the penny.

    Net difference made by the existence of the SS Trust Fund: $0.00

  18. comment number 18 by: Brooks

    Arne,

    LOL, Thanks for proving my point. You and your echo-chamber-dwelling friends typically, mindlessly agree on the same stuff and reflexively reject the same stuff, and then you confuse your unanimity with rational thought, valid conclusions, and unanimity among people in general.

    Steve gets it. I’m pretty sure Jim Glass here gets it, even if his initial comment here doesn’t reflect it. And moreover, it is a fairly simple, rather obviously valid point. You just don’t get it. Perhaps some on your echo chamber blogs get it but won’t admit it (IIRC, Barkley Rosser at least at times seemed to get it, but would pull back when I pushed him to be explicit about his agreement, I guess so as not to lose favor with the crowd).

    Arne, I see you at least get out once in a while, but you really should get out more, although I must admit, I don’t know if you’ll ever learn to actually listen and think.