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Social Security Will Be There (and Should Be There) for My Children

August 15th, 2010 . by economistmom

I was just on CNN’s “Your Money” show with host Ali Velshi this weekend, and among the topics was Social Security on its 75th anniversary, as they interviewed Michael Astrue, the Social Security commissioner.  Michael made all the right points about how “exhaustion” of the Social Security trust fund in 2037 does not mean Social Security goes away, but it does mean we have to consider ways to bring the program into better balance–the hard choices between benefit cuts, tax increases, or some combination of both.   But I wish he (and the Social Security Administration as an institution) had not emphasized the program being able to cover a bit over three-fourths (78 percent to be exact) of promised benefits even after trust fund exhaustion, because it puts still too much emphasis on the trust fund balance (which even now is only filled with IOUs and not real money) as determining how sustainable the program is.  The point I tried to make in my remarks on the CNN program was that I am optimistic that Social Security will be there after 2037 and should be there to serve a social insurance function (not a private, high-return-but-high-risk investment function that Stephen Moore suggested), that Social Security is not “broken” but simply underfunded which just means it will start costing us money on net (like the rest of government, I suggested), and that we could easily choose to continue to fund 100 percent (not just 75-78 percent) of promised benefits–or any other level and distribution of benefits–with the policy choices we as a society are willing to make.

The President’s weekly address (video above) also emphasizes that Social Security can be counted on, but that there’s work to be done to “strengthen” the program if we want to keep the program self-sustainable–more work for the fiscal commission again, by the way.  ;)

The President also rightly stresses that privatizing the program is not the answer, because Americans value the safety of Social Security–especially given the current economic climate that puts so much fear in people (and which was the opening topic on the same CNN Your Money show this weekend).

19 Responses to “Social Security Will Be There (and Should Be There) for My Children”

  1. comment number 1 by: John Bailey

    What a joke!

    The only thing that can be counted on is that the Fed is going to crank up the printing presses to finance the deficit for the very short term.

    We need to deal with Social Security, Federal civilian and military retirement, state and local pension funds, the Pension Benefit Guaranty Corporation, Medicare, Medicaid, state and Federal retiree health benefits, private health insurance, the tax code, Federal, state and local spending, unemployment, underwater mortgages, Fannie, Freddie, et.al., bank failures, the FDIC, and the Federal debt.

    If you have an answer, let me hear it.

    John Bailey

  2. comment number 2 by: SteveinCH

    Diane,

    Let’s say your daughter has the good fortune to be as rich as Bill Gates one day. Should SS be there for her in the future? Why?

  3. comment number 3 by: BillSmith

    The Social Security Report assumes the economy will start creating 1 million net jobs a month in January 2011. It also assume a higher growth rate in GDP than has ever happenned over 75 years.

    The 2037 number is out of line.

  4. comment number 4 by: SteveinCH

    Don’t forget it also assumes very low inflation rate : )

  5. comment number 5 by: Arne

    BillSmith needs to doublecheck his numbers.
    http://www.ssa.gov/OACT/TR/2010/lr4b2.html
    Covered workers are projected to increase by 1.9 million for the entire 2011 year. The peak year was 1984 (a recovery year) with an increase of 4.2 million.

    And CPI is projected to return to 2.8 percent by 2014. Higher than for the last decade, about the same as the 20 year average.

  6. comment number 6 by: SteveinCH

    CPI is well below the average of most decades. But the bigger issue is the one we already posted about. The bonds are worth nothing so computing the interest on them is a bit of a lark.

  7. comment number 7 by: Arne

    broken links

    CNN transcript
    http://www.cnnstudentnews.cnn.com/TRANSCRIPTS/1008/14/cnnitm.01.html

    SSA press release
    http://www.ssa.gov/pressoffice/pr/trustee10-pr.htm

  8. comment number 8 by: BillSmith

    Arne:

    I got my numbers out of the actual Social Security Trust Fund report. This is how:

    For 2010 they project $647.4 billion in net contributions. In 2011 they project $707.5 billion in net contributions. The 2010 to 2011 difference is about $60.0 billion. Data is on page 50 in the PDF of the report, Table IV.A3 Operations of the Combined OASI and DI Trust Funds, Calendar Years 2005-19a.of the actual report.

    Social Security tax is 12.4%, so $60 billion / 12.4% = $483.8 billion increase in payrolls.

    What is the average wage income for a worker in the United States? Looking around I see numbers between $35k and $41k. If you don’t like those numbers, plug your own in. Remember the issue about the payroll tax topping out about $107k so the average for this is not the average overall.

    @ $35k Social Security is projecting 13.8 million new jobs next year. Or about 1.1 million per month. ($483.8 billion / $35,000)

    @ $41k Social Security is projecting 11.8 million new jobs next year. Or about 1 million per month. ($483.8 billion / $41,000)

    Others have done the same analysis.

  9. comment number 9 by: BillSmith

    As to the growth rate of real GNP:

    The report “Long-Term Growth of the U.S. Economy: Significance, Determinants, and Policy” out of the Congressional Research Service in 2006 says:

    “For the United States, the long-term growth of real GDP per-capita over the last 125 years has revealed remarkable steadiness, advancing decade after decade with only modest and temporary variation from a trend annual average rate of
    growth of 1.8%.”

    Table V.B2.—Additional Economic Factors, on page 113 has their numbers. About 2.1% over the next 75 years.

  10. comment number 10 by: Arne

    Bill,

    Why try to calculate the number of jobs when they give it to you? Use the supplementalable table I linked to get annual values and just subtract.

    Your method fails to account for (at least) the increase in average wage and the increase in number of hours worked.

    I suspect that the insertion of “per-capita” in the CRS report makes the two non-comparable. Certainly the historical values in Table V.B2 are visibly higher than the projected values. Quite a bit higher than 1.8 percent.

  11. comment number 11 by: Jim Glass

    Arne, I don’t see what point you are trying to make citing Table V.B2.

    Historically SS initially covered only a limited set of workers when enacted, then over time Congress repeatedly broadened the class of covered workers to increase the payroll tax available to cover benefits and popular benefit increases while minimizing the need for unpopular payroll tax increases. Of course, that game’s been pretty much played out now.

    The point is, the number of “covered workers” in the table doesn’t represent growth of the number of workers in the economy, just the growth of the number of workers covered by the law. (The growth rate of the latter being a lot higher than the growth rate of the former.) If that is the point you are addressing.

    Going forward GDP growth is projected to be significantly lower than historical average simply because the retirement of the baby boomers sharply reduces the growth rate of the work force.

    GDP growth = growth of work force, x growth of worker productivity, x growth of hours worked per worker.

    The SS intermediate projection simply takes the long-term historical averages for growth of worker productivity and hours worked, and applies them to the projected number of future workers as per today’s population demographics.

    The result is that the projected future growth rate of GDP drops by most of a point from the past long-term average. It’s nothing more complicated than that.

    Of course, the number of future workers during the next few decades is constrained bythe number of people already born today, and their ages. Unless mass immigration suddenly becomes politically a whole lot more popular than it is today.

  12. comment number 12 by: Arne

    Jim,

    Re: GDP. I was pointing out how Bill could have one number and the report a different number.

    Re: workers. “93% of all workers, are covered under Social Security”, so my point that Bill’s calculations are wrong is valid.

  13. comment number 13 by: BillSmith

    Arne:

    As Jim points out the Table V.B2 is not employed workers, but covered workers. As you point out my calculation doesn’t cover an increase in income for already employed workers.

    You can actually split the $60 billion between the two groups in various proportions (increase for existing and new workers) and see what kind of numbers the report is claiming. They are over optimistic.

  14. comment number 14 by: Brooks

    Re: Social Security is not “broken” but simply underfunded which just means it will start costing us money on net (like the rest of government…)

    Ya’ mean it would be free as long as the dedicated tax revenues (or those plus the fantasy “trust fund balances”) kept matching the spending on the program? It would be “costing us money” in that scenario?

    With all due respect Diane, such language reinforces fundamental conceptual confusion on this issue that gets in the way of rational policy discussion and decision-making.

    Here’s the implication people see: “The degree to which SS is contributing to our overall long-term fiscal imbalance is measured by the size of the ‘funding gap’ (projected SS spending minus both revenues and “trust fund” balances). If that ‘funding gap’ were zero (or if it were zero even without the “trust fund” balances), that would mean that SS is not contributing at all to the overall fiscal imbalance, and it would mean that it wouldn’t make sense to even consider reducing projected SS spending as part of our effort to reduce the overall fiscal imbalance, because it couldn’t help mathematically (or because it’s just unfair to take away from a program that isn’t contributing to the problem)”.

    All obviously hogwash. Even if there were no “gap”, spending an additional dollar on SS would contribute a dollar to the overall fiscal imbalance (roughly, net of dynamic effects), and of course it would still be possible to reduce the imbalance by reducing projected SS spending. The existence of a dedicated tax is irrelevant, and the gap is merely a function of spending vs. the level of that dedicated taxation, which could be decreased as we wish to match any lower level of spending.

    To drag up one of my old examples, imagine if, decades ago, we decided to “fund” the Defense budget completely with a dedicated tax, the “Defense Tax”. Suppose it were set such that foresight that today’s projected revenues for the next few decades matched projected revenues, so there were zero “funding gap”. Would anyone say that Defense spending was “not costing us” anything, or that it was not contributing to the projected overall long-term fiscal imbalance and therefore cuts in Defense shouldn’t even be considered as we look for ways to reduce the overall imbalance?

    That’s the same “logic” as is being applied to this whole ridiculous focus on the SS “gap” as if it were more than just a matter of bookkeeping (and perhaps also the mix of tax revenue we choose to get from different taxes).

    Obviously in that scenario Defense spending would still be “costing us”, and if we wanted to reduce the overall imbalance by lowering Defense spending, we could just lower the Defense tax and offset that tax cut with an increase in other taxes, resulting in no change in projected revenues, lower projected spending, and therefore lower projected deficits.

  15. comment number 15 by: Brooks

    Obviously in my rhetorical question above I meant to ask “It would not be “costing us money” in that scenario?”

  16. comment number 16 by: Brooks

    Yeesh, I was sloppy, but hopefully in context my meaning was clear. With my Defense Tax illustration, I meant to say “Suppose it were set with such that foresight that today’s projected revenues for the next few decades matched projected spending, so there were zero “funding gap”

  17. comment number 17 by: Arne

    Bill,

    They may be over optimistic, but nowhere near as much as your first post implies.

    Try this calculation:

    Table V.B2.—Additional Economic Factors gives the rise in total employment at 1.2 percent or .012×154=1.8 million. Lousy for an economic recovery, but it has been a lousy recovery.

  18. comment number 18 by: Arne

    Brooks,

    It seems to me that you are concerned that people would be unable to discern the difference between closing the gap entirely by raising taxes and closing the gap entirely by reducing benefits. Is that what you are saying?

  19. comment number 19 by: Brooks

    Arne,

    You apparently have zero understanding of what I’m saying. Which doesn’t surprise me. I spent a lot of time in the past trying to get you to understand this. Won’t do it again.