Over three years of researching Social Security, I have come to two conclusions. One, Social Security is a vital program. Two, there is no single force driving that program to crisis faster than the media and the experts that it quotes.
Today, polls show that roughly 80% of the public believe that Social Security is heading for crisis without reform. Social Security reform has number. That support is however diluted across dozens of ideas by the media which has abdicated any responsibility for educating the voters.
In 2012, there was very little coverage of Social Security in the Presidential campaigns. During the debates, President Obama stated that Social Security was 'structurally sound'. The Trustees project that in the 14 seconds that Obama took to say it, Social Security issued roughly $220,000 of additional broken promises. Both candidates talked about the necessary changes in terms of tweaks. The Trustees put the cost of these 'tweaks' at nearly 10 trillion in 2013 dollars. The media treated these euphemisms as facts.
Ideology is largely what passes for information in the media. Recently, on Bloomberg, Barry Ritholtz wrote that small changes to the wages subject to payroll taxes would make Social Security solvent well into the next century. It isn't close to true, and quickly discounted with research from Social Security Administration.
To his credit, Mr. Ritholtz wrote a correction. Unfortunately his correction was even less accurate. It introduced a web page from the American Academy of Actuaries that was based on data from 2009. He doesn't disclose that this data is trillions of dollar out of date. By profession, Mr. Ritholtz is a money manager. Do you think he buys and sells companies based on earnings from 5 years ago when the companies which have shown deteriorating financials for nearly 10 consecutive years?
Bloomberg will tell you that it is not responsible for Mr. Ritholtz's opinion or his research. Mr. Ritholtz in all likelihood will tell you that it is not his responsibility to correct information on the website of the American Academy of Actuaries. The American Academy of Actuaries will likely tell you that people should use the more current webpage on its site. Ironically enough, Mr. Ritholtz original article condemned the lack of accountability in pundits.
And thus the rumor spreads faster than the fact. News outlets and bloggers pick-up stories from Bloomberg because of its reputation. Bloomberg trusts Mr. Ritholtz, who seems to have assumed that the American Academy of Actuaries was a reliable source. There is virtually no accountability in the entire process.
None of the characters here are particularly unusual. Mr. Ritholtz isn't the lone writer using dubious sources. The American Academy of Actuaries aren't the sole source of noise. The Social Security debate has evolved into a cottage industry of agenda-driven think-tanks pushing a flavor of social policy through Social Security. Cato Institute pushes privatization. The Heritage Foundation sells its American Dream. These groups plus NASI, and CEPR, all make a living selling the noise that has turned the Social Security debate into a shouting match.
Thursday, June 19, 2014
Friday, June 6, 2014
Social Security And The Safety-Net
One of the more dangerous arguments in the debate about the Social Security system is the growing belief that Social Security is part of a social safety-net that protects the elderly or the poor. The argument is dangerous because it expands the charter of Social Security at a time when the system lacks the resources to serve its primary goal.
Social Security is supposed to be old-age insurance which provides some financial certainty to people who no longer have a viable option to work. Old age is an uncertainty, one which can create great expense. Insurance spreads the risk of old age across a large population, and concentrates resources on those who incur the cost. Unfortunately, the trustees of Social Security project that even in a good economy the program cannot fulfill that role for people who are 64 and younger.
The argument to broaden the scope of the system has bled into the lexicon of both parties, and become a standard for media analysis of any proposal to reform the system. The problem here is that there is no basis in the argument. The history of the program does not support the argument. The cashflows do not support the argument. Comically enough, the design of the system makes it uniquely unfit to serve as a social safety net.
Social Security Was Not Originally a Safety Net
The Social Security Act Of 1935 includes many things, some of which deal with needs of the elderly, unemployed, and children. Separately, it created the Social Security Old-Age Insurance. If Title 2, "TITLE II- FEDERAL OLD-AGE BENEFITS," was intended to provide a safety net for the poor, there would have been no need for Title 1, "TITLE I- GRANTS TO STATES FOR OLD-AGE ASSISTANCE". Title 2 is what created the Social Security Old-Age Insurance program.
FDR structured the law in this way because he did not want his program to be subject to political priorities. Originally, Social Security was supposed to be a self-funded contributory benefits system. FDR referred to these contributions as "politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits." A social safety net has no rights. It is a political priority.
AJ Altmeyer, who was the chairman of the Social Security Board said in 1944, rejected the idea that Social Security was a public dole in congressional testimony.
Social Security Cannot Serve As a Safety Net
Social Security is uniquely unfit even to play a role in a social safety net. Millions of Americans are not covered by Social Security. Many of them do not qualify because of a spotty job history that created need in the later years of life. So the system excludes those who would need financial support most. Even if everyone were covered, Social Security does not even have visibility into the poverty that it is supposed to alleviate. As a social safety net, the system blindly throws money at people who may or may not be in need at all.
The Social Security system is highly progressive, in which high-wage earners subsidize those who are lower-wage earners. This makes old-age insurance more affordable for a wider audience. Yes, the formula rewards people progressively less as they earn more. Yes, the formulas reduce benefits for people who saved for their own retirement. At the same time, the Social Security system does not pay a penny based on need.
Social Security's Benefit Formulas Reward Everyone But the Poor
The benefits formula for Social Security has more than 2,000 rules which change the benefits based on whether you have kids or how many times you marry. The benefit formula rewards people for living longer or working longer. The formula allocates the largest amount of resources to people who contributed the most in the past, live the longest, have the most qualifying ex-wives, and have the most children after the age of 65. Nowhere do the formulas base benefits on need.
Social Security pays the most money to someone like Pete Stark. Who is Pete Stark? An ex-Congressman who is wealthy by congressional standards. He is apt to collect the maximum payment allowed by Social Security. He is apt to live longer than most Americans. He married three times, giving the system three potential wives to collect survivor benefits from Social Security. The last wife produced three children all of whom have been eligible for Social Security almost since birth. It is not possible to call a system that lards benefits on someone like Pete Stark a safety net.
In contrast to the haul of Pete Stark, Social Security will allocate zero resources to people who worked for Central Falls, a small town in Rhode Island which faces bankruptcy. Like many towns and municipalities, Central Falls did not put its employees into Social Security. With their pensions gone in bankruptcy, the people who retired from the city will have significant needs and no way to collect from Social Security.
Social Security is supposed to be old-age insurance which provides some financial certainty to people who no longer have a viable option to work. Old age is an uncertainty, one which can create great expense. Insurance spreads the risk of old age across a large population, and concentrates resources on those who incur the cost. Unfortunately, the trustees of Social Security project that even in a good economy the program cannot fulfill that role for people who are 64 and younger.
The argument to broaden the scope of the system has bled into the lexicon of both parties, and become a standard for media analysis of any proposal to reform the system. The problem here is that there is no basis in the argument. The history of the program does not support the argument. The cashflows do not support the argument. Comically enough, the design of the system makes it uniquely unfit to serve as a social safety net.
Social Security Was Not Originally a Safety Net
The Social Security Act Of 1935 includes many things, some of which deal with needs of the elderly, unemployed, and children. Separately, it created the Social Security Old-Age Insurance. If Title 2, "TITLE II- FEDERAL OLD-AGE BENEFITS," was intended to provide a safety net for the poor, there would have been no need for Title 1, "TITLE I- GRANTS TO STATES FOR OLD-AGE ASSISTANCE". Title 2 is what created the Social Security Old-Age Insurance program.
FDR structured the law in this way because he did not want his program to be subject to political priorities. Originally, Social Security was supposed to be a self-funded contributory benefits system. FDR referred to these contributions as "politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits." A social safety net has no rights. It is a political priority.
AJ Altmeyer, who was the chairman of the Social Security Board said in 1944, rejected the idea that Social Security was a public dole in congressional testimony.
"I believe that I am safe in saying that the people of this country, that the Congress of the United States, and that the members of this Committee favor a system of contributory social insurance for providing protection against the inevitable economic hazards that beset the workers of this country, rather than a Government dole."
Social Security Cannot Serve As a Safety Net
Social Security is uniquely unfit even to play a role in a social safety net. Millions of Americans are not covered by Social Security. Many of them do not qualify because of a spotty job history that created need in the later years of life. So the system excludes those who would need financial support most. Even if everyone were covered, Social Security does not even have visibility into the poverty that it is supposed to alleviate. As a social safety net, the system blindly throws money at people who may or may not be in need at all.
The Social Security system is highly progressive, in which high-wage earners subsidize those who are lower-wage earners. This makes old-age insurance more affordable for a wider audience. Yes, the formula rewards people progressively less as they earn more. Yes, the formulas reduce benefits for people who saved for their own retirement. At the same time, the Social Security system does not pay a penny based on need.
Social Security's Benefit Formulas Reward Everyone But the Poor
The benefits formula for Social Security has more than 2,000 rules which change the benefits based on whether you have kids or how many times you marry. The benefit formula rewards people for living longer or working longer. The formula allocates the largest amount of resources to people who contributed the most in the past, live the longest, have the most qualifying ex-wives, and have the most children after the age of 65. Nowhere do the formulas base benefits on need.
Social Security pays the most money to someone like Pete Stark. Who is Pete Stark? An ex-Congressman who is wealthy by congressional standards. He is apt to collect the maximum payment allowed by Social Security. He is apt to live longer than most Americans. He married three times, giving the system three potential wives to collect survivor benefits from Social Security. The last wife produced three children all of whom have been eligible for Social Security almost since birth. It is not possible to call a system that lards benefits on someone like Pete Stark a safety net.
In contrast to the haul of Pete Stark, Social Security will allocate zero resources to people who worked for Central Falls, a small town in Rhode Island which faces bankruptcy. Like many towns and municipalities, Central Falls did not put its employees into Social Security. With their pensions gone in bankruptcy, the people who retired from the city will have significant needs and no way to collect from Social Security.
Why Social Security is Falling Apart, Explained in Language You Can Understand
The Social Security debate has its own private lexicon wherein words take on new meanings, which at times even contradict the meaning those words have in the English language. The consequence of the Social Security pseudo-code is a stalemate, because it is virtually impossible to build any consensus in a world where up means down and right means left.
For example, the standard rebuttal to any call for reform is, "Social Security has funds in a worst-case scenario to pay full benefits for more than 20 years, and minor changes could easily fix the long-term funding problem." While you hear this often, you need a decoder ring to understand what is really being said.
The most abused word in the debate about Social Security is "fixed." Writers use the word "fixed" and "solvent" interchangeably, even though the concepts are 14 trillion dollars apart according to the Social Security Administration. "Fixed" means that we have no problem. "Solvent" means that we have made our problem a problem for our kids. These are not the same thing.
For millennials, "solvent" means that the nation will divert roughly $10 trillion away from deficit control so that in 35 years millennials can be in the exact same situation Boomers are today. As millennials approach retirement, the system would have massive solvency shortfalls. The working generation would be complaining about the cost of the system, doubting that they will collect anything. The nation will be right back where it was in 2013 and 1983 with millennials trying to convince their children that Social Security will provide them a safe retirement provided that they pay more and get less.
This problem comes in part because the word "funds," in a Social Security context, does not mean funds in the traditional sense of the word. Social Security is financed, not funded. Social Security collects payroll revenue in exchange for the promise of future benefits. This is no different from going to a bank to borrow money in exchange for the promise of future interest and principal payments. Social Security pays every dollar of benefits with borrowed money, where the next generation serves as a new bank.
Yes, the system holds $2.7 trillion in borrowed money in the trust funds. In building that reserve, the system issued more than $25 trillion of promises for which there are no funds in any true sense of the word.
Words of certainty in the Social Security debate also have no meaning. "Will" means "might," or at best "should." The Trustees of Social Security say that in a good economy Social Security might be able to pay full benefits until 2033. 2033 is not a prediction. It is a likely outcome. The projection is provided as a warning, not as a guarantee.
Even so, what would the word "guarantee" mean? On Dec. 20, 1977, President Carter said, "This legislation will guarantee that from 1980 to the year 2030, the social security funds will be sound." "Guarantee" meant that six years later the system was completely insolvent, requiring massive tax increases, benefit cuts, and the inclusion of millions of more workers.
Not only is 2033 not a guarantee, it is not even a "worst-case" scenario. The Trustees provide projections based on three different scenarios, ranging from low-cost to high-cost. On page 58 of the Trustees Report, the Trustees provide outcomes based on less favorable economic assumptions where the system pays degraded benefits in 2027. And while these assumptions are called "high-cost," they are far from a worst-case scenario.
Words of magnitude in the Social Security debate have no meaning. The opponents in the debate change the wording of $10 trillion so that it has no meaning. Ten trillion is expressed as a percentage of GPD. It is expressed as a percentage of wages. For example, Gail Buckner on Fox Business referred to the $10 trillion as "small" increase in the payroll tax rate of 1.3%. Another way to express her ideas is, "Raising Payroll Taxes to Save Social Security will Cost the Average Worker $73,000." Expressing the problem in fewer digits does not make the problem smaller —$10 trillion is still $10 trillion.
In a debate where words have no meaning, it is possible to say that Social Security's financing gap is easy to fix — whatever "easy" means.
For example, the standard rebuttal to any call for reform is, "Social Security has funds in a worst-case scenario to pay full benefits for more than 20 years, and minor changes could easily fix the long-term funding problem." While you hear this often, you need a decoder ring to understand what is really being said.
The most abused word in the debate about Social Security is "fixed." Writers use the word "fixed" and "solvent" interchangeably, even though the concepts are 14 trillion dollars apart according to the Social Security Administration. "Fixed" means that we have no problem. "Solvent" means that we have made our problem a problem for our kids. These are not the same thing.
For millennials, "solvent" means that the nation will divert roughly $10 trillion away from deficit control so that in 35 years millennials can be in the exact same situation Boomers are today. As millennials approach retirement, the system would have massive solvency shortfalls. The working generation would be complaining about the cost of the system, doubting that they will collect anything. The nation will be right back where it was in 2013 and 1983 with millennials trying to convince their children that Social Security will provide them a safe retirement provided that they pay more and get less.
This problem comes in part because the word "funds," in a Social Security context, does not mean funds in the traditional sense of the word. Social Security is financed, not funded. Social Security collects payroll revenue in exchange for the promise of future benefits. This is no different from going to a bank to borrow money in exchange for the promise of future interest and principal payments. Social Security pays every dollar of benefits with borrowed money, where the next generation serves as a new bank.
Yes, the system holds $2.7 trillion in borrowed money in the trust funds. In building that reserve, the system issued more than $25 trillion of promises for which there are no funds in any true sense of the word.
Words of certainty in the Social Security debate also have no meaning. "Will" means "might," or at best "should." The Trustees of Social Security say that in a good economy Social Security might be able to pay full benefits until 2033. 2033 is not a prediction. It is a likely outcome. The projection is provided as a warning, not as a guarantee.
Even so, what would the word "guarantee" mean? On Dec. 20, 1977, President Carter said, "This legislation will guarantee that from 1980 to the year 2030, the social security funds will be sound." "Guarantee" meant that six years later the system was completely insolvent, requiring massive tax increases, benefit cuts, and the inclusion of millions of more workers.
Not only is 2033 not a guarantee, it is not even a "worst-case" scenario. The Trustees provide projections based on three different scenarios, ranging from low-cost to high-cost. On page 58 of the Trustees Report, the Trustees provide outcomes based on less favorable economic assumptions where the system pays degraded benefits in 2027. And while these assumptions are called "high-cost," they are far from a worst-case scenario.
Words of magnitude in the Social Security debate have no meaning. The opponents in the debate change the wording of $10 trillion so that it has no meaning. Ten trillion is expressed as a percentage of GPD. It is expressed as a percentage of wages. For example, Gail Buckner on Fox Business referred to the $10 trillion as "small" increase in the payroll tax rate of 1.3%. Another way to express her ideas is, "Raising Payroll Taxes to Save Social Security will Cost the Average Worker $73,000." Expressing the problem in fewer digits does not make the problem smaller —$10 trillion is still $10 trillion.
In a debate where words have no meaning, it is possible to say that Social Security's financing gap is easy to fix — whatever "easy" means.
Think Social Security is Unaffordable Now? Just You Wait
Millennials who have an interest in the debt and the burden the government can place on the economy should pay attention to a trend among older Americans. Today, an estimated 10,000 people leave the workforce for a pension from Social Security — every day.
People tend to see this trend as a problem for Social Security, and it is. The trend presents, however, a larger problem for the people who are expected to pay for the general debt of the government. The problem is that retirees in general are leaving income-tax-producing jobs for a pension that is exempt from taxation.
Many people mistakenly believe that Social Security benefits are subject to income taxes. While the income is reported to the IRS and revenue is collected, the monies paid to the IRS on Social Security benefits are returned to Social Security. Not one penny of the revenue collected on Social Security benefits goes to the general fund to help control the deficit. The penalty collected by the IRS is really a means-tested clawback of benefits.
Not only are people leaving the work force, but as Andrew Biggs reports, the trend is for Americans to retire early over time. In the 1950s, the typical American claimed Social Security benefits at age 68 and lived to around age 76. Today, the typical American retires at age 63 and can expect to survive until age 83. Today only about 30% of first-time checks go to retirees who have reached full retirement age.
It is difficult not to reach the conclusion that Social Security induces people to retire earlier than they normally would. In fact, Social Security penalizes those who work part-time during early retirement. It is impossible the reach the conclusion that Social Security will not foster lower income tax revenues in the long run.
Let's look at a simple example of consequences. If I were to retire next year, my wife would continue to work, making around $15,000. My accountant tells me that we can manage our income to avoid Social Security's penalties on outside income. Our income tax will drop from $6,700 to zero. Our payroll taxes will drop from roughly $10,500 to $2,250. Our total tax bill will drop from more than $17,000 to about $2,000.
The situation is worse because of the way that the penalty on Social Security benefits is imposed. My wife's wages might make getting below the penalty threshold more difficult. If we miss the threshold, even by a penny, 50% of my Social Security benefit will be subject to penalty at our marginal rate. As it works out, my wife may quit her job late in the year because the tax and penalty liability would exceed her paycheck.
This picture becomes more troubling once my wife actually retires because we will not fully replace her wages with outside income. We will compensate for lower disposable income by spending less. That lower spending will feed into the economy as a whole. I am not a problem by myself, but 10,000 people retiring every day does present a problem in terms of tax revenue and domestic spending.
There is no doubt that we will spend less. Even with less spending, we will transition from a net buyer of investments to a net seller in order to provide the lower standard of living. As the focus of Americans shifts from equity investments to fixed income, it will affect the capital gains created for all Americans. There are no winners in my spending less money.
Americans need to pay attention to a tax system that is grounded on income when many people are transitioning from an income-based lifestyle to one based on wealth. In my case, we'll get less income and lower spending. More broadly, my decisions are apt to hurt capital-gains taxes paid by others. If it were just me, the change wouldn't be a problem, but there are 10,000 people who are joining me every day.
People tend to see this trend as a problem for Social Security, and it is. The trend presents, however, a larger problem for the people who are expected to pay for the general debt of the government. The problem is that retirees in general are leaving income-tax-producing jobs for a pension that is exempt from taxation.
Many people mistakenly believe that Social Security benefits are subject to income taxes. While the income is reported to the IRS and revenue is collected, the monies paid to the IRS on Social Security benefits are returned to Social Security. Not one penny of the revenue collected on Social Security benefits goes to the general fund to help control the deficit. The penalty collected by the IRS is really a means-tested clawback of benefits.
Not only are people leaving the work force, but as Andrew Biggs reports, the trend is for Americans to retire early over time. In the 1950s, the typical American claimed Social Security benefits at age 68 and lived to around age 76. Today, the typical American retires at age 63 and can expect to survive until age 83. Today only about 30% of first-time checks go to retirees who have reached full retirement age.
It is difficult not to reach the conclusion that Social Security induces people to retire earlier than they normally would. In fact, Social Security penalizes those who work part-time during early retirement. It is impossible the reach the conclusion that Social Security will not foster lower income tax revenues in the long run.
Let's look at a simple example of consequences. If I were to retire next year, my wife would continue to work, making around $15,000. My accountant tells me that we can manage our income to avoid Social Security's penalties on outside income. Our income tax will drop from $6,700 to zero. Our payroll taxes will drop from roughly $10,500 to $2,250. Our total tax bill will drop from more than $17,000 to about $2,000.
The situation is worse because of the way that the penalty on Social Security benefits is imposed. My wife's wages might make getting below the penalty threshold more difficult. If we miss the threshold, even by a penny, 50% of my Social Security benefit will be subject to penalty at our marginal rate. As it works out, my wife may quit her job late in the year because the tax and penalty liability would exceed her paycheck.
This picture becomes more troubling once my wife actually retires because we will not fully replace her wages with outside income. We will compensate for lower disposable income by spending less. That lower spending will feed into the economy as a whole. I am not a problem by myself, but 10,000 people retiring every day does present a problem in terms of tax revenue and domestic spending.
There is no doubt that we will spend less. Even with less spending, we will transition from a net buyer of investments to a net seller in order to provide the lower standard of living. As the focus of Americans shifts from equity investments to fixed income, it will affect the capital gains created for all Americans. There are no winners in my spending less money.
Americans need to pay attention to a tax system that is grounded on income when many people are transitioning from an income-based lifestyle to one based on wealth. In my case, we'll get less income and lower spending. More broadly, my decisions are apt to hurt capital-gains taxes paid by others. If it were just me, the change wouldn't be a problem, but there are 10,000 people who are joining me every day.
The $3 Trillion Dollar Question No One Is Asking....
The media is not covering the problem looming in Social Security, one which will fall on millennials much sooner than 2033. The $3 trillion question is: Where will the government get the money to repay the Trust Fund?
This is a huge question for millennials. Social Security will add $3 trillion of funding questions to a government which is already plagued by debt. Social Security will create this problem at the exact time that it is reducing its role as the nation's private banker.
When the Social Security Trust Fund redeems a bond for cash, the Treasury Department needs a source of funds with which to pay the bond. The Treasury Department has two options: It can buy the debt or it can refinance the debt through a new lender. Buying the debt means increasing tax revenue. Refinancing the debt means finding a new lender. Between 2021 and 2032, the Social Security Trust Fund is projected to redeem $3 trillion in bonds.
The media and experts tend to view this process as a seamless transaction that will go unnoticed by the markets. The problem is that today Social Security is the best customer of the US Department of Treasury, holding 2.7 trillion dollars of assets in a private pool of capital on which the government can draw at friendly rates. This reserve insulates the government from the cost of borrowing in the public markets. Basically Social Security is the government's best friend.
This friendship has been in modest decline since 2007 when Social Security generated roughly $200 billion in excess cash flow. By 2010, Social Security's operating cash flow turned negative. As Social Security excess cash flow has dropped, the government has increased its dependence on the Federal Reserve for its funding needs.
In 2021, the terms of the friendship change entirely. Social Security will start liquidating bonds in order to pay full benefits. At that time, the projected gap between the income of Social Security and its expenses will require the system to redeem bonds. In short, the best customer of the Treasury is about to become a direct competitor.
If you owned a shoe store, and your best client was leaving you, it would be a worrisome event. The problem in this case is exponentially larger because the best client is leaving so that he can open his own shoe store next door. In terms of Social Security, it isn't even clear that anyone is even paying attention.
The government should be asking who will fill the void created by the decreasing excess cash flow from Social Security if only for its own borrowing needs. The fact that Social Security will add 3 trillion dollars of incremental financing is a question that everyone should be asking.
The Social Security Trust Funds hold $2.7 dollars of assets. It is the largest customer of government debt in the world. The terms of 1 3/8% are fairly generous. Social Security is projected to need to start redeeming bonds in 2021. Between 2021 and 2033, Social Security will redeem a projected $3 trillion of debt.
This is a huge question for millennials. Social Security will add $3 trillion of funding questions to a government which is already plagued by debt. Social Security will create this problem at the exact time that it is reducing its role as the nation's private banker.
When the Social Security Trust Fund redeems a bond for cash, the Treasury Department needs a source of funds with which to pay the bond. The Treasury Department has two options: It can buy the debt or it can refinance the debt through a new lender. Buying the debt means increasing tax revenue. Refinancing the debt means finding a new lender. Between 2021 and 2032, the Social Security Trust Fund is projected to redeem $3 trillion in bonds.
The media and experts tend to view this process as a seamless transaction that will go unnoticed by the markets. The problem is that today Social Security is the best customer of the US Department of Treasury, holding 2.7 trillion dollars of assets in a private pool of capital on which the government can draw at friendly rates. This reserve insulates the government from the cost of borrowing in the public markets. Basically Social Security is the government's best friend.
This friendship has been in modest decline since 2007 when Social Security generated roughly $200 billion in excess cash flow. By 2010, Social Security's operating cash flow turned negative. As Social Security excess cash flow has dropped, the government has increased its dependence on the Federal Reserve for its funding needs.
In 2021, the terms of the friendship change entirely. Social Security will start liquidating bonds in order to pay full benefits. At that time, the projected gap between the income of Social Security and its expenses will require the system to redeem bonds. In short, the best customer of the Treasury is about to become a direct competitor.
If you owned a shoe store, and your best client was leaving you, it would be a worrisome event. The problem in this case is exponentially larger because the best client is leaving so that he can open his own shoe store next door. In terms of Social Security, it isn't even clear that anyone is even paying attention.
The government should be asking who will fill the void created by the decreasing excess cash flow from Social Security if only for its own borrowing needs. The fact that Social Security will add 3 trillion dollars of incremental financing is a question that everyone should be asking.
The Social Security Trust Funds hold $2.7 dollars of assets. It is the largest customer of government debt in the world. The terms of 1 3/8% are fairly generous. Social Security is projected to need to start redeeming bonds in 2021. Between 2021 and 2033, Social Security will redeem a projected $3 trillion of debt.
Social Security Crisis Explained In Four Simple Steps
When Social Security was created in 1935, the system was designed to be funded by workers not financed by their children. It wasn't a generational-transfer or a Ponzi scheme. Since that time, the system's finances have deteriorated virtually every year to the point where the financing gap is nearly the size of our entire GDP. So what the hell happened?
How to destroy the future in four easy steps:
1. Give To Voters
During the 1950s, Social Security became a way to buy votes. Congress raised benefits — every election year in the 1950s. Social Security Act Amendments of 1950, 1952, 1954, 1956, 1958 all increased benefits. These increased the value of existing benefits, created new benefits, or expanded coverage to more Americans. The 1950 Amendment raised benefits by 77%, 1952 (12.5%), 1954 (13%), 1956(added disability), 1958 (7%).
A couple retiring in 1960 expected to collect $8 of benefits for every $1 of contribution. Basically, Congress in the 1950s was selling dollars of benefits to voters for little more than a dime. The difference between the cost and the benefit was largely passed on to future generations who had no vote in 1950.
2. Take From Non-Voters
The original law included automatic tax increases which would have increased the cost of Social Security to 6% of wages from its 2% base. Over the 1940s, Congress waived every increase, one of which required a Congressional override of FDR's veto. Funding for Social Security did not reach the originally envisioned 6% until the 1960s. Self-employed workers would not pay 6% until the 1970s.
These tax cuts transformed Social Security from a system paid by workers to a system financed by children who had no vote at the time.
3. Allow The Federal Reserve to Lower Interest Rates At A Cost Of $1.2 trillion of Projected Interest Income (in 2012 alone)
In 2011, projected interest income over the life of the Trust Fund was 3.6 trillion. In 2012, projected interest income over the life of the Trust Fund was 2.4 trillion.
Thanks, Ben Bernanke.
4. Ignore The Problem
Social Security almost reached insolvency in 1983. At that time, Social Security had more than 40 years of promises embedded in a system that did not have a penny to pay them. The solution to these problems in 1983? Repeat step 1. Repeat step 2. Prepare for step 3. The solution to these problems in 2013? Repeat step 1. Repeat step 2.
Today, Social Security is not much different than spending quarters to buy dimes. Congress' solution is for us to get our kids to spend quarters to buy nickels.
How to destroy the future in four easy steps:
1. Give To Voters
During the 1950s, Social Security became a way to buy votes. Congress raised benefits — every election year in the 1950s. Social Security Act Amendments of 1950, 1952, 1954, 1956, 1958 all increased benefits. These increased the value of existing benefits, created new benefits, or expanded coverage to more Americans. The 1950 Amendment raised benefits by 77%, 1952 (12.5%), 1954 (13%), 1956(added disability), 1958 (7%).
A couple retiring in 1960 expected to collect $8 of benefits for every $1 of contribution. Basically, Congress in the 1950s was selling dollars of benefits to voters for little more than a dime. The difference between the cost and the benefit was largely passed on to future generations who had no vote in 1950.
2. Take From Non-Voters
The original law included automatic tax increases which would have increased the cost of Social Security to 6% of wages from its 2% base. Over the 1940s, Congress waived every increase, one of which required a Congressional override of FDR's veto. Funding for Social Security did not reach the originally envisioned 6% until the 1960s. Self-employed workers would not pay 6% until the 1970s.
These tax cuts transformed Social Security from a system paid by workers to a system financed by children who had no vote at the time.
3. Allow The Federal Reserve to Lower Interest Rates At A Cost Of $1.2 trillion of Projected Interest Income (in 2012 alone)
In 2011, projected interest income over the life of the Trust Fund was 3.6 trillion. In 2012, projected interest income over the life of the Trust Fund was 2.4 trillion.
Thanks, Ben Bernanke.
4. Ignore The Problem
Social Security almost reached insolvency in 1983. At that time, Social Security had more than 40 years of promises embedded in a system that did not have a penny to pay them. The solution to these problems in 1983? Repeat step 1. Repeat step 2. Prepare for step 3. The solution to these problems in 2013? Repeat step 1. Repeat step 2.
Today, Social Security is not much different than spending quarters to buy dimes. Congress' solution is for us to get our kids to spend quarters to buy nickels.
A Frightening Phrase: "I'm Your Mother-in-Law. I Need a Place to Stay.
If Social Security is important to you at all, you should be paying attention to the cost of doing nothing.
During 2012, we did nothing, the cost of which was roughly $1 trillion. According to the trustees, the cost to maintain Social Security rose from $8.6 trillion in 2012 to $9.6 trillion in 2013. Basically, the system lost more money than it collected, in its entirety.
Another way to look at this dynamic is we lost more money not fixing Social Security than we spent on the entire military. If we diverted every penny that we spent on the military and education in 2012 to Social Security, the system would be slightly worse off financially at the end of 2012 than it was at the start.
The problem for millennials isn't whether they will get Social Security benefits. The more immediate problem is whether their parents will get benefits. The Congressional Budget Office ("CBO") projects Social Security will pay depleted benefits in 2031. If so, every future retiree from now until eternity expects to outlive scheduled benefits.
CBO's projected imbalances are based on many economic uncertainties which may or may not come to pass. The one ingredient in this mess that we can measure with certainty is time. The Trustees Report says, "The unfunded obligation would have increased from $8.6 trillion to $9.1 trillion solely due to the change in the valuation period."
This is not economic uncertainty. It is the mathematical cost of time.
Doing nothing means that we didn't change the revenue intake, benefit formula, age requirements, or the number of quarters to qualify. We let the system run while politicians talked. In the 14 seconds that it took candidate Obama to say, "Social Security is structurally sound," the system lost over $220,000 (even more if you count the time it took candidate Romney to agree).
Politicians will tell you that we have time to fix Social Security. But time is the one thing that we know for certain will make Social Security worse.
During 2012, we did nothing, the cost of which was roughly $1 trillion. According to the trustees, the cost to maintain Social Security rose from $8.6 trillion in 2012 to $9.6 trillion in 2013. Basically, the system lost more money than it collected, in its entirety.
Another way to look at this dynamic is we lost more money not fixing Social Security than we spent on the entire military. If we diverted every penny that we spent on the military and education in 2012 to Social Security, the system would be slightly worse off financially at the end of 2012 than it was at the start.
The problem for millennials isn't whether they will get Social Security benefits. The more immediate problem is whether their parents will get benefits. The Congressional Budget Office ("CBO") projects Social Security will pay depleted benefits in 2031. If so, every future retiree from now until eternity expects to outlive scheduled benefits.
CBO's projected imbalances are based on many economic uncertainties which may or may not come to pass. The one ingredient in this mess that we can measure with certainty is time. The Trustees Report says, "The unfunded obligation would have increased from $8.6 trillion to $9.1 trillion solely due to the change in the valuation period."
This is not economic uncertainty. It is the mathematical cost of time.
Doing nothing means that we didn't change the revenue intake, benefit formula, age requirements, or the number of quarters to qualify. We let the system run while politicians talked. In the 14 seconds that it took candidate Obama to say, "Social Security is structurally sound," the system lost over $220,000 (even more if you count the time it took candidate Romney to agree).
Because the equation "discounts fewer years" and replaces the cost of 2012 with the cost of 2088, I know with mathematical certainty that time has added more than $500 billion to the cost of Social Security in 2013 because of nothing being done.
Politicians will tell you that we have time to fix Social Security. But time is the one thing that we know for certain will make Social Security worse.
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