The Myth Of Spending Social Security On Other Programs

One of the most enduring myths of the Social Security debate suggests that the money collected for the system was spent on other government programs.

Legend holds that Social Security was running well enough on its own until politicians crept in at night to empty the cash register. Congress, those liars and cheats, took the money that we contributed to Social Security and Medicare, and spent it on other things.

The followers of this myth however aren’t just conspiracy theory crack-pots, who routinely accuse every president since Kennedy of stealing money from Social Security for other priorities.  Some of these accusers are people running for the Presidential nomination of major parties. Ironically enough, some of these accusers are the people who served in the Congress that supposedly stole the money.

Today Social Security collects less in payroll taxes than it spends on benefits. The system has not generated a penny of excess cash to spend since 2009.  So there hasn't been anything to spend on other programs in more than five years.

What about the past?  Originally, Social Security was designed to build a reserve of cash. Some members of Congress feared that any such reserve would not be truly “saved”. So the Social Security system was specifically changed over the 1940s to a pay-as-you-go method in which there wouldn’t be a large reserve to spend on other federal initiatives.

The downside of the pay-as-you-go strategy was insolvency.  To deal with this problem, Congress adapted the financing approach to the system such that the system could build-up a reserve.  Since the change, Social Security has built a reserve of $2.8 trillion, most of which was accumulate after the mid-1990s.

So where did the money go?  Not to other programs.

The Social Security Administration provides information on the cashflows of the system dating back to 1937 which shows how the money was collected and spent. Since inception, Social Security has collected about 15.7 trillion dollars. That revenue falls broadly into three categories of revenue: payroll tax revenue ($13.4 trillion), general fund subsidies ($0.6 trillion), and interest on loans ($1.7 trillion).

The vast majority of the resources were spent on benefits for retirees.  Clearly retirees are not “other things”.  In total, benefits have cost $13 trillion or roughly 82% of all revenue ever collected.  It is roughly the same amount as the system collected in payroll taxes.

The next largest use of the Trust Fund resources finances the government’s debt. This is the payment of interest, and interest on the interest. Interest does not pay for one brick in the bridge to no-where.  Interest represents the cost of borrowing money. Interest today accounts for more than 60 percent of the $2.8 trillion dollar trust fund.  All of which has bought nothing but time.
If the money is not repaid, it means that the money was used to pay for the time value of money, not other government programs.  If it is repaid, the money will be used for benefits of retirees.

After benefit expense and the cost of time, there isn’t a lot of money left over to spend on any other programs.  Our payroll tax collections have exceeded benefit expenses by less than half a trillion dollars.  This figure is less than the subsidies from the General Fund. In other words, the government in the net is putting money into Social Security rather than using it out to finance other programs.

We love the storyline because the fabled scheme dovetails into what we want to believe anyway. People like Social Security. People dislike Congress. This story sells like telling a 6 year-old: yes, there is a Santa Claus.

Originally Published On FedSmith.Com ( See more at : http://www.fedsmith.com/2015/12/08/the-myth-of-the-missing-social-security-trust-fund)    

Social Security, the Debt Ceiling and Partisan Politics

Curse You John Boehner!

Late last night, the departing Speaker of the House announced a tentative deal aimed at heading off a government shutdown and debt crisis. While this agreement may be good for the country, the timing is inconvenient for me and my latest article on Social Security and the debt ceiling.

The article says that Social Security is the one function of government that is virtually exempt from the consequences of the debt ceiling. This piece is compelling when politicians are baiting seniors over their benefit checks. It becomes less interesting once seniors cease to worry about whether there is enough money in the coffers to cover the next round of benefit checks.

Where are partisan politics when you need them?

What is the debt ceiling? The debt ceiling limits the amount of debt that the U.S. Treasury can issue. When the level of the government’s debt exceeds the legal limit, government spending is limited to the revenue collected by the government because it cannot borrow money.

Social Security is largely unaffected by this event because the system has layers of dedicated funding. The program has exclusive claims on payroll tax revenue. Beyond that line of funding, Social Security has a trust fund with more than $2.7 trillion in dedicated funding. 

The mechanics of the Social Security program are poorly understood even by experts. Ed Lorenzen, a budget analyst at the Center for a Responsible Federal Budget, says it would be like a homeowner paying the mortgage but not all of his or her utility bills. Actually it would be like the utility expecting to invade the escrow account with the bank that holds the mortgage.

The debt held by the Social Security Trust Fund can be refinanced without increasing the total debt outstanding. The government has to issue bonds which will increase the debt outstanding.  The proceeds are however used to pay down debt.  The net impact on total outstanding debt is zero.

The last person to play the Social Security card in a debt ceiling debate was Treasury Secretary Jacob Lew.  He is of course the last person who should be playing this card because he happens to be managing trustee of the Social Security Trust Funds.

As such, it is his job to manage the resources of the trust fund to anticipate foreseeable events such as the debt ceiling crisis. In fact, he recently signed a letter to Congress assuring the public that the Social Security Trust Fund had sufficient resources to pay benefits for more than three years. So if there were any truth to his claim, he would be pleading the fifth rather than publically admitting to the largest breach of fiduciary responsibility in the history of mankind. 

Let’s assume that the Treasury employees who process payroll taxes are sent home.  No one collects payroll taxes. In that case, Social Security would draw on the resources of the Trust Fund.  Let’s assume that Secretary Lew is completely remiss in his responsibilities, and has failed to build a cash reserve in the Trust Fund. The government can still pay the bills of Social Security because refinancing the debt held by Social Security has no impact on the overall national debt.

Life is stranger than fiction. When Social Security has excess cash, the program is required to invest the money in government securities. Once the debt ceiling limits the government’s ability to borrow money, any excess cash would sit uninvested, while the rest of the government shuts down from lack of funding.

Social Security will plenty of money to pay the check.  The real question is whether the rest of the government will have the money to mail it.

Lessons Of 1983

In 1983, seniors were within months of having benefit checks from Social Security reduced because Social Security was on the brink of insolvency.

Insolvency means that the revenue collected by Social Security is insufficient to pay scheduled benefits. In such cases, the system draws revenue from the Trust Fund to pay scheduled amounts. In 1983, that reserve was nearly empty meaning that the system would have had to cut benefits back to the level of payroll taxes collected.

The politicians went to work enacting a reform based on the work of The Greenspan Commission which was formed in 1981.  It was chaired by Alan Greenspan, the man who would overtime bring us the housing crash.  The recommendations consisted of raising taxes and cutting benefits.   The politicians applauded the hard-fought compromise, and told the country that the system was fixed into the 2060s.

Reality is very different.  Since 1983, the system has lost projected solvency 50% faster than what was forecast.  The system now has nearly 26 trillion dollars of unfunded liabilities¹.  That figure means that the system has roughly $10 of promises for every dollar of asset. The interest burden of the legacy costs is more than the system collects in all forms of revenue. 

Understanding this failure is essential for anyone who hopes to save the system.  The failure is actually very simple to understand.  The country pushed the legacy costs of Social Security disproportionally on to non-voters with the assumption that they would cover the increasing costs.  Non-voters received substantially larger benefit cuts and substantially larger cost increases.  Now these people can vote, and there is no way to bind them to the terms of the 1983 agreement.

Over time, these people who had no vote in 1983 have grown into a massive voting block.  In fact, 2010 was the first year in which a majority of voting aged-Americans could expect to have benefits reduced as the Trust Fund runs dry.  

This voting block results from two factors.  The estimates from 1983 were overly optimistic.  Also people who were non-voters have gotten older.  The person who was 17 in 1983 is now 49.

Summary Of The Greenspan Commission

 

The people who were non-voters at the time of the 1983 changes could expect to pay the higher rates of taxes than any generation and were subjected to larger cuts in benefits.

  

Increased tax rates :

“Advances scheduled increases in Social Security tax rates. Social Security tax rates (which include the Hospital Insurance tax rates) for employers and employees will increase to 7.0 percent in 1984, 7.05 percent in 1985, 7.15 percent in 1986-87, 7.51 percent in 1988-89 and 7.65 percent in 1990 and thereafter.”

Today Social Security’s portion of payroll taxes is 10.6% of the 15.3%².  If you started work in 1990, you expected to face 49 years of peak rates.  If you were 40 in 1983, you could expect to face 26 years of peak rates.  If you were 45 in 1983, you could expect to face 20 years of peak rates.

Adjustments to retirement age:

“Raises the age of eligibility for unreduced retirement benefits in two stages to 67 by the year 2027. Workers born in 1938 will be the first group affected by the gradual increase. Benefits will still be available at age 62, but with greater reduction.”

In 1984, the retirement age of someone who was 45 was unaffected.  Someone born in 1938, faced a modest increase in retirement age.  Someone born in 1960 and later got the full increase of two more years of work.  So the majority of the savings comes at the expense of non-voters in 1983.   

Introduction of means-testing :

“Beginning in 1984, includes up to one-half of Social Security benefits as taxable income for taxpayers whose adjusted gross income, combined with half their benefits and any tax-exempt interest they may have exceeds $25,000 for a single taxpayer and $32,000 for married taxpayers filing jointly. Benefits received by married taxpayers filing separately are taxable without regard to other income. Appropriates amounts equal to estimated tax liability to the Social Security trust funds.”

“Changes the earnings test for beneficiaries age 65 and over so that $1 in benefits will be withheld for each $3 of earnings above the annual exempt amount, beginning in 1990”

In 1984, this rule did not affect many people, less that 5% of those receiving benefits.  The problem is that these limits have not been changed for inflation.  These rules also have a greater impact on people who saved for retirement with IRAs or 401Ks.  Today it affects up to 1/3^rd of retired Americans.

The Lesson Of 1983

 

The lesson is simple.  You can't solve the legacy burden of Social Security by voting to put the costs on non-voters.  Overtime, these people will grow into voters that will not honor the terms of the agreement.  By sheltering one voting block at another’s expense, we opened Pandora’s Box.  Every generation will feel entitled to shift the costs that were given to them to the next generation.  When a generation says 'no', it will create a very difficult transition.

1, 2015 Social Security Trustees Report
2. The payroll tax holiday reduces OAS rates from 10.6 to 8.6% on a personal basis.  It raises an offseting amount from the general taxpayer.  So FICA really mains at 15.3% of wages.

Revisiting GWB's Plan To Save Social Security

Ten years ago, George W. Bush outlined his vision for Social Security reform.  And a lot has been written on the subject since that time. 

My piece looks at issues with his vision that have largely gone uncovered. The foundations of the plan were built on faulty reasoning. Personal accounts do not create investment capital, and they will not earn near the 7% returns that supporters promise.

Whether it is a good idea is a separate question.  The promised results would not have occurred.

Originally published on TheHill.Com, (see the article)

How Did The Social Security Prospects Improve?

This article originally appeared on AmericanThinker.Com.

The 2015 Trustees Report for the Social Security Trust Fund showed a surprising improvement.  The combined Trust Funds are projected to be exhausted in early 2034.  It is surprising in part because CBO's projections showed continued deterioration.

Where did the improvement come from.  In large part the Trustees now forecast substantially lower costs.  This is the number of checks issued, and their size.  That savings, along with the interest on the savings, largely explains the entire improvement, about $500 billion in Trust Fund balances.

What is not well reported is that the Trustees turned more negative on the next 10 years, particularly on the revenue side.  The 10 year forecast is basically the same as last year.  So the improvement that is forecast are in jobs that don't exist, and pay raises that will not be considered in the coming decade.  Let's hope that the Trustees are right.
 Read : (more)

The Mythology Of Borrowing And Stealing From Social Security

There is a level of crazy in the Social Security debate that is simply not healthy for the nation.  We have reached the point where the sound of the sound bite is more important than the facts underneath it.

Governor Christie in an effort to shutdown Mike Huckabee in the recent GOP debate invoked the crazy card.  He said, "The lying and stealing has already occurred. The Trust Fund is filled with IOUs.” He subsequently followed this statement with a plea for political honesty with the public. Are you kidding me?

Every candidate is entitled to his own opinion, but today candidates simply make up facts that fit their sound bite. Christies’ statement is classified by the Social Security Administration as Urban Legend. He isn't lying. He is wrong.

So we have left the realm of reason and entered Crazytown. And, Crazytown has a large voting block.  Consider that the following quote has drawn 50,000 likes and 500,000 shares.

 “Next time a Republican tells you that ‘Social Security is broke,’ remind them that Pres. Bush ‘borrowed’ $1.37 trillion of Social Security surplus revenue to pay for his tax cuts for the rich and his war in Iraq and never paid it back.” ~ Occupy Democrats

PolitiFact conidered this quote, and rated it as “Mostly False.” That is of course a polite rating. It is “Stir Crazy”, and 500,000 people took time out of their day to share lunacy. Make no mistake, Governor Christie wants to tap into the energy of Crazytown for his campaign.

Every President since Kennedy has been accused of stealing money from Social Security. There isn’t a shred of evidence to suggest that any program money has been misused. I have seen people accuse Ford and Carter of stealing money, and their budgets actually subsidized the system. 

I have written previously on LBJ, who draws the ire of conservatives. Bush draws serves as a lightning rod for liberals. The story is all the same, where the name of the thief varies based on the ideology of the author. The story is noise.

PolitiFact’s article is right on a number of things. It correctly points out that the current surplus stems from changes made in 1983.  Also the process of borrowing the money hasn’t changed since the inception of the system. Between the two, we are borrowing more money under a process that dates back to the 1930s.

By law, the excess cash of Social Security is converted into government securities, and, yes, the cash is used by the Treasury to pay for government expenses.  This is no different from a private pension that buys Treasury obligations.  The only difference is that no one at these private pensions complains about the theft, questions the IOUs, or worries about the repayment of the bonds.  Why? Because these investment professionals aren’t crazy.

The article is specifically incorrect about the repayment of bonds.  It says: “As for not ‘paying back’, the bonds won’t need to be repaid until 2020.” This is nutty. The bonds held by the Social Security Trust Fund have specific maturity dates.  On those dates, the Treasury refinances the maturing bonds with new loans under new terms from the Social Security Trust Fund.

To be clear, it is factually wrong to say that no one pressed Bush for payment on the money borrowed by the government.  It is factually wrong to say that the money borrowed by the Bush administration hasn’t been repaid with interest. Much of the money that was borrowed by the Bush administration has been repaid by loans made from Social Security to the Obama administration.

It is more accurate to say that we will need to find a new source of refinancing in the next few years.  CBO says that it is 2017.  SSA projects it is likely to be 2019. This is a serious problem – one that get no attention in Crazytown.

Governor Christie isn’t lying.  He is simply wrong.  The problems of Social Security have nothing to do with what is in the Trust Fund, and everything to do with the sums that were never put into it.

Today the largest expense in the government’s budget is on auto-pilot, and largely governed by politicians trolling Crazytown for votes. No one really should be surprised if that mix falls into crisis.

2015 Social Security Trustees Reports & Leprechauns

The slight improvement in the forecast for the Social Security Trust Funds is largely a false positive that results more from optimistic estimates than improvements to the system's fundamentals.

The report increases the projected exhaustion point from 2033 to 2034.  But the assumptions on which the increase is based isn't terribly more realistic than expecting leprechauns to spit out gold coins to pay for the imbalances. 

The improvement in the system’s prospects do not come from people working in a better economy.  The Trustees have offset what is with what might be. 2014 wasn’t good, but 2016-2089 are going to be fantastic! Understand that the drivers of the progress are jobs that do not yet exist and wage increases that have not occurred.

The longer piece was written for FedSmith.Com (read more)

This isn't the first piece questioning the Trustees estimates.

Jed Graham, (see Why The Trustees Of Social Security Can't Be Trusted)
David Stockman (see The 2015 Untrustworthies Report )
American Journal Of Economic Perspectives (see Systematic Bias and Nontransparency in US Social Security Administration Forecasts)

Social Security’s (Missing) Guarantee

Social Security benefits are not guaranteed. This isn’t my opinion.  It is the opinion of the Supreme Court, Flemming V Nestor.

In its ruling, the Court held that entitlement to Social Security benefits is not a contractual right.  Benefit levels are what Congress says that they are. The Social Security Administration recognizes the case.  PolitiFact delivers research on it. Notch Babies provide evidence of it.  There is no guarantee.

See more at: http://www.fedsmith.com/2015/07/06/social-securitys-missing-guarantee

The piece looks at the specifics of the case, and how they affect you, your parents, and beneficiaries in general.  Nestor sets an unusual precedent.  Nestor was retired at the time that his benefits were reduced, and no longer participating in the Communist Party. 

What Happened to the $2.6 Trillion Social Security Trust Fund?”

This is part of a series of articles in which I look at other articles on the internet that are forwarded as reasoned thought.  Just because you read it on the internet, does not make it true.

Many want to believe that Social Security Trust Fund is a scam.  No matter how reasoned the counter-argument, they eventually cite a piece from Forbes blog, “What Happened to the $2.6 Trillion Social Security Trust Fund?”

Readers tend to think that the article says that the Social Security Trust Fund is a scam.  That isn’t what the article actually says though.

The article contains some fact problems. The author states that the Social Security Trust Fund is the source of benefit checks.  This is factually wrong.  The primary resource of revenue for the system is payroll taxes.  So it is factually wrong to suggest that the only way for Social Security to get cash is from the general fund or incremental borrowing. The Trust Fund is little more than a parking lot for excess cash.

The article has reasoning problems. This statement is a false dichotomy. 

·        “Well, either Obama and Geithner are lying to us now, or they and all defenders of the Social Security status quo have been lying to us for decades.  It must be one or the other.”

It is unlikely to be either. 

Anytime you deal with politics you are dealing with words that have many meanings.  Here is the quote, "I cannot guarantee that those checks go out on August 3rd if we haven't resolved this issue. Because there may simply not be the money in the coffers to do it."

The writer has chosen to read that sentence as social security checks might not go out because there may not be money in the Social Security Trust Fund."  If that is what the President meant, then the answer is simple: the President doesn't understand how Social Security works. The benefits of Social Security are funded by the payroll tax.  If checks didn't go out, it would mean that payroll tax collection had entirely ceased.  The Trust Fund serves as a buffer for Social Security rather than a primary source of cash.

Moreover, the Social Security Trust Fund is exempt from the discussion of the debt ceiling.  The government has the power to refinance any bond held by the Trust Fund because refinancing debt does not increase overall debt levels.  The government issues a bond and uses the proceeds to retire a bond.  The impact is a wash on the level of Federal debt.

One fact that Matthews fails to mention is that Secretary Geithner is the managing trustee of the Social Security Trust Fund.  It is his responsibility to build cash reserves necessary to pay bills in the face of foreseeable events.  If Geithner is telling the truth, he is effectively pleading guilty to the largest breach of fiduciary responsibility in the history of mankind. 

It is highly unlikely that the asset structure of the Social Security Trust Fund would be the cause the government's inability to deliver checks – nearly zero.  The primary source of revenue is payroll taxes.  It is virtually impossible to believe that the Trustee would have failed to build the necessary cash reserves if the Trust Fund was going to be needed.

The problem here is that no one in Congress or the media took the statement seriously enough to drive out the meaning of the President's words. The writer attributes meanings to the words that the President cannot mean. I have seen a number of other interpretations about the statement. 

There are two things that we know for sure: Coffers clearly can't mean the Social Security Trust Fund. If checks didn’t go out on that August 3rd, it would have been a matter of priority rather than financial resources.

At best for Matthews’ argument, the President is woefully uninformed about the mechanics of the system.  The idea that ‘real assets’ would have changed the President’s statement is simply false.

Why Writers Say That Social Security Can't Go Bankrupt

In writing about Social Security, I get a lot of impassioned missives to tell me how wrong I am, with links that purport to show how wrong I am.  I welcome feedback, but understand that just because you read it on the internet does not make it true.

Some of these emails are better than others. The worst of these include links to the blog pages of traditional media.  The readers tend to confuse the credibility of the media brand with the accuracy of the article.  Just because a blogger writes for Forbes blog page, does not mean that a Forbes' editor has read the piece much less fact checked it.

The most spammed piece in my mind is from Forbes blog writer, John T. Harvey, who has published “Social Security CannotGo Bankrupt.”  Understand that before you send it, the article does not say what you think it says.

Readers who have sent the piece to me believe that the article says that Social Security is financially stable, and that the concerns that I express are meritless. The writer hasn't said that Social Security is financially stable.  He is playing semantics in which that Social Security cannot run out of money.  It can run out of political support..

His analysis presents politics and money as completely separate and unrelated.  The difference is theoretical.  The writer sees Social Security as a political system, whereas the laws of the system make it a financial system of dedicated inputs and outputs.  Political systems can run short of political support.  Financial systems can run out of money.  In practice, the system fails regardless of wording. 

The problem with the theory in the article is that the author completely misrepresents how Social Security works.  If laws mean anything, Social Security is self-financed.  That means the system collects revenue from workers in exchange for the promise of future benefits.  This is why Social Security Administration says that the system is self-financed.

The writer chooses to ignore the impact of future benefits.  He writes, “It’s an immediate transfer from workers today to retirees today.”  If future benefits did not exist, then he would be correct.  The problem is that if you eliminate future benefits you pretty much eliminate the political support for the system. 

Beyond mischaracterizing the system’s operations, he leverages the standard straw-man of the debate.  No one says that the Social Security Trust Fund will dry up making it impossible for anyone to receive their Social Security payment.  Everyone says that if the Trust Fund dries up, that people will get checks of a lesser amount.

It is important for the reader to understand. If Social Security operated as the writer suggests, he would be correct.  The Trust Fund would be unnecessary if the revenue was tax money which did not generate future obligations.  We would match tax revenues and pay outs.  The problem is that the revenue collected today defines what we owe in the future.

“The lesson from this is that if we want Social Security to “be there” when we retire, our efforts must be focused on increasing productivity and making sure in particular that these increases get passed on to workers in the form of higher wages”

The writer seems unaware that Social Security indexes past contributions to average wages.  There is nothing about higher wages that makes Social Security more stable.  As wages rise, the primary insurance amount of new retirees is pushed higher.  The definition of their own future benefits is pushed higher.

The writer would be right if Social Security worked as he presents.  Unfortunately it doesn’t.

 

Jeb Bush Projections On Social Security Off By 30 Years

This statement is off by roughly 30 years.  Can we expect candidates to know the finances of the government's largest expense?

“We need to look over the horizon and begin to phase in, over an extended period of time, going from 65 to 68 or 70,” he added. “And that, by itself, will help sustain the retirement system for anybody under the age of 40.”

Jeb Bush’s statements from CBS’s “Face the Nation” about Social Security expose a distance from the issue that is unhealthy for Americans who depend upon the system. In his interview, he states the wrong retirement age, and delivers promises which are off by decades.

A number of his critics have already pointed out that Bush misstated the normal retirement age (“NRA”).  The NRA of Social Security is 66, not 65.  It hasn’t been 65 in more than a decade. Yes, some enjoy poking a wealthy politician unacquainted with his own retirement age about the suggestion to increase the NRA of others.

For me, it is a forgivable slip given that Bush was speaking on a Sunday morning news program, rather than in a more formal setting.  He has spoken in the past of increasing the retirement age.  In this interview, he was only providing additional clarity to a past position. 

Originally published on TheHill.Com, (see the article)

This chart shows the life prospects of a retiree.  The change to gradually increase the retirement age that started in 2000, basically accounts for all of the increase in a retiree's life expectancy until 2050.

Life Expectations At Retirement By Year For Social Security
Year	Survivor	Male	Females
2000 (Life Expectancy At 65)	87%	20.42	22.97
2050 (Life Expectancy At 67)	89%	21.06	23.41
Source: Social Security Administration Actuarial Study 120 (A survivor is the likelihood of a 21 year-old reaching retirement)

 

Politicians See Social Security Fix As 'Easy'

Over and over again, the media and experts tell us that financing shortfall in Social Security is relatively easy to address.  Conventional wisdom presents options for Social Security as though the problem with system is one of political will rather than one of economic resources. Basically if politicians could just get along, all of Social Security’s troubles would evaporate.

The latest to make this claim is Lindsey Graham, who reportedly said “you could [design a plan to fix Social Security] on the back of a napkin.” There is no way to be polite about this statement.  If you believe that Social Security can be solved in 15 minutes or on the back of a napkin, it is because you have an inner struggle with the meaning of commas and zeros in very large numbers.

The problem isn’t politics.  It is economics..... (See More At FedSmith.Com)

The Media And The Collapse Of Social Security

The media is a major player in the decline of the prospects of Social Security.  It has consistently proven unable to express the challenges of the program in terms that the public understands.

Writers in general focus on headlines, rather than content. For example, over the past two weeks, the media has jumped on a recent study published in the Journal of Economic Perspectives that accuses the actuaries of the Social Security Administration (“OCACT”) of systemically overstating the projections for the solvency of the trust funds.

While any question about the integrity of these forecasts deserves coverage, even the best coverage of this story failed to explain the basics of how this study fits into the questions about the stability of Social Security.  Most of the stories inflated the breadth of the research, and applied the findings far removed the scope of the study.

The study isn’t about the future.  It is about the past.  It deals with the inputs to the forecast, not the output of the forecast. It deals with three inputs, not all inputs.  It tells you almost nothing about the long-term decline of the projected solvency of the Trust Funds. In total, study suggests that OCACT is getting worse at fortune telling, and we don’t know why.

Oddly enough, the answer is actually pretty simple: OCACT did not foresee the Great Recession five years out. The irony here is that most of the reporters covering this story didn’t see the financial crisis coming when it was months away.

The study expresses the revelation in language that is highly inflammatory. It said, “In recent years, especially after about 2000, the Social Security Administration began issuing systematically biased forecasts with overconfident assessments of uncertainty.” It is the language rather than the content that has created the coverage.

It really can’t surprise anyone that forecasts during a steady economic expansion, 1982 to 2000, were more accurate than ones from a period of economic uncertainty which started with the end of Internet Bubble and finished in the Great Recession. The lesson of the study is that even the best forecasts are subject to the mercy of future events.

News coverage went in a different direction:

“[Since 2000], the forecasters proved overly optimistic, overestimating revenue and underestimating costs, with the total error reached nearly $1 trillion.” ~ Barron’s

A great deal of coverage prominently cited a figure of $1 trillion dollars. This figure does not come from the study, or its authors.  According to Gary King an author of the study, the figures were a calculation of the media writer.

The figure deals with issues that are well outside the realm of the study. The $1 trillion dollars of total forecasting error is the sum of ALL variance in forecasting inputs and modeling errors. The study on the other hand examines only three of the ingredients that go into baking the pie that we call the forecast.  Moreover, the study provided the cost assessment of only a sliver of one of the variables.

That sliver happens to be the sliver that makes the forecast appear worse. The study estimated of the cost of people 65 and older outliving statistics. This is the number of people who lived longer than the actuaries expected. The calculated cost to the program was equal to the number of unexpected beneficiaries multiplied average benefits.

If you are going to calculate the impact of under-estimating mortality, the estimate needs to include all ages, not just the ones where people are collecting benefits.  The estimate in the study is only meaningful if the only age group to outlive expectation is those people 65 and older. You have to know at what point in our lives that we are living longer.

The answer to that question may surprise you.  OCACT recognizes that we are living longer.  In 1940, somewhere between 50% and 60% of the population could expect to survive from 21 to 65.  In 1990, that figure had risen to 72% to 83%.  Big increase, yes.  That increase in life expectancy is however occurring at a point in our lives where we are generally contributing to Social Security rather than drawing benefits.

Overall, the report doesn’t change my view.  I use the information from OCACT almost exclusively.  Over the years of writing about Social Security reform, I have come to trust the forecasts from the Social Security Administration as the best-effort available.  They may not always be right, but I am confident that no one is paying them to be wrong.

The study largely represents a missed opportunity to ask more serious questions.  As much as I use the data from OCACT, I recommend that you follow the trend.  Since 1987, the system has lost about 1.5 years of solvency for year one calendar passed.  At that rate, the system reaches insolvency in 2027.  This study tells you nothing about the longer-term decline, and in fact seems to ignore it.

The projections of the Congressional Budget Office are even more troubling.  It projects that Social Security will turn cash flow negative in 2017, rather than the more optimistic figure of 2020 provided by the SSA.  The gap in forecasts is longer than it might take to arrive.  No one is asking about that gap.

The coverage of the study drives home a larger issue.  How can we expect to have an informed debate about Social Security when the media puts headlines over content?

- See more at: http://www.fedsmith.com/2015/05/26/the-medias-role-in-social-securitys-collapse/#sthash.P4vQeMWN.dpuf

Chris Christie And Means Testing Social Security

In a recent article, I questioned the candor of Chris Christie in his proposed Social Security reform.  Now it is time to question the wisdom.

Governor Christie's proposal contained a controversial policy option of means-testing benefits.  Some believe that phasing-out benefits for higher-income Americans should be the first option to consider for addressing the financing gap in Social Security.  This alternative should be the last.  It introduces terrible incentives to the system, and begs questions about how we pay for benefits. 

Supporters of this policy option argue that this approach narrows the imbalances without disrupting the retirement plans of existing seniors.  This alternative appeals to politicians because it affects few current voters, and fosters a feeling of responsibility that we are doing something about a predictable crisis.

The foreshadows of that crisis are well documented.  According to the Social Security Administration, the system has less than a break-even chance of paying full benefits through 2033.  That means someone who reaches normal retirement age this year expects to outlive the system’s ability to pay scheduled benefits.

Would eliminating the benefits of the affluent make a difference?  Not really. In one example, the Social Security Administration projected that means-testing benefits would not even change the date of the projected exhaustion point of the trust fund.  Mind you, that projection assumes that no one tries to avoid the reduction in benefits.

The fact is that people will try to avoid losing benefits.  A means-test serves as an implicit tax on savings, which will discourage savings and deflate economic activity.  The consequence is to discourage people from saving outside of the system.  These rules would unintentionally change the system that was created to provide a buffer against poverty-ridden old-age, into one that fosters it.

Means-testing Social Security largely postpones the crisis only to have it grow in consequence. By removing savers from the system, the mix of beneficiaries will increase overtime in both number and dependency upon the system. We are essentially shifting deck chairs on the Titanic to make room on the boat for more passengers who don't swim very well.

Means-testing creates a more serious problem for how we pay for Social Security benefits.
Today the system is self-financed.  That means it borrows money from workers in exchange for the promise of future benefits.  This proposal takes money in exchange for nothing. 

One is a contribution and the other is a purely a tax. The distinction is critical to Social Security because a tax brings along the question of priority.  Taxes are allocated yearly based on political priority.  A contribution is dedicated financing over time.  Social Security has grown into the largest expense in the budget in large part because of the perception that benefits are paid for by contribution.

Social Security's position within the budget becomes more precarious as we shift the way we pay for the system from contribution to tax. Voters will ask whether it is a wise use of public money to provide a subsidy to the people who had the best jobs over the longest careers. They will ask whether it is fair to pay husbands twice as much as wives.  Benefits make a lot of sense when we pay for them with contributions. 

FDR did not want politicians deciding who needs and who doesn't need benefits.  He wanted workers to have 'a legal, moral, and political right' to benefits.  FDR did not want the needs of the elderly to be just another political priority. 

Social Security was intended to be old-age insurance, a hedge against the cost of the unknown.  It was based on four characteristics only one of which remains, that benefits should not be means-tested or based on need.  If we preserve none of the qualities of Social Security, why are we keeping the name?

It is possible to say that the world has changed since 1935.  It is possible to say that the system has become more progressive since that time.  It is possible to say that means testing Social Security benefits simply extends those changes that we have made over time.

What it is not possible to say is that means-testing Social Security makes it work.  It fixes the system by giving it a new purpose much like fixing a hole in the wall by calling it a window. 

Chris Christie And Honesty About Social Security

This article originally appeared on TheHill.

Last week, Governor Chris Christie dedicated time to champion entitlement reform at a 4-stop tour through New Hampshire. The governor said “Washington is afraid to have an honest conversation about Social Security, Medicare and Medicaid with the people of our country. I am not.”

 

So let's be honest.

 

The Trustees will soon release the 2015 Trustees Report which will give us new insight to the financial imbalances in Social Security. In the report issued last year, the Trustees projected that the financing constraints of the system will emerge in 2033, forcing a 23% reduction in benefits. That exhaustion point means that someone who turns 67 today on average expects to outlive scheduled benefits.

 

To be honest, the proposal that Governor Christie laid out does not “fix” Social Security.  The changes do not even assure us that Social Security will function for 75 years, roughly the time to get most existing contributors through retirement. The Committee for a Responsible Federal Budget projects that his changes create about 60% of the savings necessary to kick the can once again.

 

The biggest problem with Christie’s proposal is that the components do not address the structural issues within Social Security that are causing the imbalances reported by the Trustees. The package in total simply takes the projected reduction of benefits and codifies on whom the reductions will fall.

 

His proposal calls for the normal retirement age to increase gradually to 69.  What does a change in retirement age mean to someone who is 50? The person can still retire at 67, but with the lower benefit levels offered by early retirement.  Those rules translate into a 13.3% reduction of benefits for someone who elects to keep the retirement age that he has today.

 

This change would make sense if the problems within Social Security derived from increases in life expectancy of future retirees. The Social Security Administration projects that the life expectancy of a retiree will rise about 2.5 years between 1980 and 2030.  If adopted, Christie’s plan would make the increase the normal retirement age by 4 years over that time.

 

While Christie is telling the truth that Americans are living longer, he isn’t telling the whole truth.  The research of the Social Security Administration reveals that the largest increases in life expectancy occur at a time of life when people are generally contributing to rather than collecting from Social Security.

 

Christie’s proposal also includes the adoption of the Chain-CPI for future COLA adjustments.  He says that this measure tracks inflation more accurately. This is however not true.

 

If we are going to be honest, Chain-CPI does not measure actual inflation.  It measures in part how people respond to inflation. If I decide, for example, that my health insurance is too expensive, and increase my deductible so that my premium remains the same, Chain-CPI says that the cost of living hasn’t changed because I use less expensive insurance.

 

The use of Chain-CPI is a benefit cut which reduces buying power of benefits over time. This alternative is a very strange way to fix old-age insurance because the change progressively reduces benefit levels as someone ages.  The use of Chain-CPI for Social Security’s COLAs is somewhat like fire insurance which decreases its coverage as more rooms of a house burn.

 

The governor’s proposal would introduce the idea of means-testing the program. While some estimate that this change will save the program a lot of money, this alternative breaks a founding principle of the program.  Social Security should provide benefits without a means or needs test. 

 

The reasoning for this principle is sound.  The program was created to lower the likelihood that a retiree might fall into poverty-ridden old-age.  A means-test tends to discourage the savings that actually prevents poverty-ridden old-age. This approach is a strange way to fix Social Security.

 

If we are going to be honest, the worker who is 50 and younger is likely better off rejecting Christie’s proposal, and accepting the estimated 23% reduction in benefits when the Trust Fund is exhausted. The governor’s vision of Social Security offers even less benefits, and less protection of those benefits.  It secures the future mainly for politicians who get to argue about who is ‘fortunate enough not to need’ Social Security as today’s workers approach retirement.

 

But let’s be completely honest.  Governor Christie’s solution is a stop-gap measure that solves the problems for today’s politicians rather the concerns of the retirees who depend upon the system.  Today’s 50 year-old will be in 20 years back at the table of politics explaining to his children’s generation that Social Security will work if they just accept less.

The Real Social Security Debate

Between Chris Christie and Senator Warren (D-MA), Social Security reform is getting more media coverage today than at any time in the past 30 years. From hearing the details, you might conclude they are talking about different government programs.  They aren’t. 

These people are part of the changing debate that is taking shape in Washington.  For decades, any problem that developed within Social Security was fixed by shifting the cost to future workers.  Today that isn’t possible. 

What is the problem? Social Security contains a massive imbalance between resources and promises.  The Trustees of the Social Security’s Trust Funds estimate that the system carries roughly $25 trillion dollars of promises for which the system does not expect to generate cash.  The figure means that we would have to add $25 trillion dollars today to the Trust Fund so that Social Security can work for all generations. That is more than $1.50 of brokenness for every $1 collected since its inception.

The primary force driving the gap wider is time, not demographics. According to the Trustees, adding a year to the clock created roughly 900 billion in unfunded liabilities because the gap grows just as though it were a bond charging the system interest.  Time measures the nothing that Congress has done every year for the last 32 years, and it is driving the crisis forming in Social Security more than all other demographic forces combined. 

Someone who is 32 today was born in the year of the last Social Security reform.  Congress has done nothing about the imbalances since that time.  Someone under the age of 50 didn’t even have a vote at the time.  The point here is that less than half of voting aged-Americans had a vote in the how the system is structured today. So the Social Security debate is in part a discussion about how to allocate the brokenness of the system to people who had nothing to do with the creation of it.  

For example,

• Eliminating the cap would push the cost difference onto high wage workers.
• Adding means-testing to the benefits formula means that wealthy retirees would absorb the gap.
• Increasing the retirement age allocates the cost to future retirees.
• Increasing the payroll tax distributes the cost to future workers. 

In the past, Congress has largely shifted the cost from generation to generation.  The last major reform to Social Security in 1983 allocated the highest tax increases and benefit cuts on people who were 11 and younger at the time.  Today the costs to fix Social Security are so large that there is no way to completely insulate voters from the changes.

So the new debate that is forming today is how to redefine what Social Security does so that voters will agree that the system works.  The Far Left would like to transform the program into a welfare program to keep the elderly out of poverty.  The Far Right wants Social Security to become a form of forced savings, in which workers are required to save for their own retirement. These changes are somewhat like fixing a broken refrigerator by calling it a doorstop.

These ideas do not fix Social Security.  They simply change the role that it plays in our lives. Originally Social Security was designed to be old-age insurance which would help a retiree hedge the potential cost of longevity.  It is statistically possible that for a retiree to live to 100, the cost of which would be staggering.  The point of Social Security 70 years ago was to give that worker some protection against outliving their resources.

Americans should think seriously about these transformations. We are trading what we can’t get for something that we already have. The government already offers many welfare programs.  The government already incentivizes retirement savings with an alphabet soup of retirement plans.  There is no alternative for the vast majority of Americans who need old-age insurance. 

These changes haven’t been well thought out because the goal isn’t to fix Social Security.  The goal of the real Social Security debate is to create a program named Social Security that doesn’t hemorrhage cash.  For example, reformers would like to change the COLA to a new measure of inflation. This proposal would fix a system which is supposed to provide old-age insurance by reducing buying power of benefits as someone gets older. That is like auto insurance which increases the deductible as the car wreck gets worse.

Do you want to privatize Social Security? The math is simple. There is no way to privatize a negative number.  We will have to fill in the $25 trillion dollar hole before there is anything to privatize.

Do you want Social Security to be a safety-net?  Social Security has no visibility into the need of anyone.  Millions of Americans are not even eligible for benefits.  The irony of this approach is that the cost of supporting Social Security as a safety-net would drive even greater numbers of younger Americans into the poverty that the welfare program is supposed to alleviate.

There is no real debate about Social Security reform.  It is a shouting match where few people are actually listening. We aren’t trying to fix a broken system.  We are trying to find someone willing to pay for one.