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)    

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)

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. 

Gaming Social Security

Few, if any, articles on Social Security discuss “Adverse Selection”, and the associated havoc that it can play on projections for the system’s future.  Another name for “Adverse Selection” is gaming the system.  Whatever you call it, the concept is basically the economic equivalent of gravity.

The concept refers to the economic force in which freedom and choice combine to create the least profitable response to a business’s offerings.  In terms of Social Security, the least profitable mix of customer means that some taxpayers are trying to contribute the least while at the same time some beneficiaries are trying to maximize what they collect.  While we may like the system as a whole, our individual interests are doing everything that they can to drive the system to insolvency.

Adverse selection has been around since the inception of Social Security.  What is not getting enough coverage is that these forces are getting stronger over time as beneficiaries have more resources with which to make claiming strategies more effective.

The Trustees Reports are based on historic norms that cannot reflect this evolution.  Historically, there was little way for someone to completely maximize their benefit levels from Social Security.  There are more than 2,000 rules which can determine benefit levels.  That is a lot of rules to maximize.

Retirees are not on our own anymore. The internet is greatly improving the odds in favor of retirees. Today retirees have a cottage industry of financial advisors that do nothing other than help retirees maximize their benefits.  These people know how to twist the thousands of rules in the system in favor of their clients.

Retirees are using these resources.  “Get What’s Yours”, a how-to book on maximizing your Social Security payout, reached #3 on Amazon’s best seller list last month. This isn’t “50 Shades of Grey”, but it is an example of people learning to game the system.

One example of this trend is the “File and Suspend” tactic enjoyed by married couples.  The Center for Retirement Research at Boston College says, “This strategy is equivalent to a “no interest” loan from Social Security and could potentially cost the program as much as $11 billion a year.”  This isn’t what people paid for.  It is a loophole that was created in 2000.

This is a trend that Social Security Administration should follow.  When the Trustees project the solvency of the Trust Fund, they use assumptions that are based on historic standards.  These historic measures will be progressively out-of-sync with actual benefit draws as retirees get better at gaming the system.

Here are the facts.  In 1984, Social Security was projected to be solvent for roughly 80 years, more than 2060.  Since that time, roughly 30 years of solvency have simply evaporated.  The projected exhaustion point of the Trust Fund is now to 2033.  The Congressional Budget Office even predicts 2030.

There are a couple of things that are clear. Retirees are trying to improve their return on their past Social Security contributions.  Any success that they have will come at the expense of the system’s solvency.

Originally published at :  http://www.fedsmith.com/2015/03/25/gaming-social-security/#sthash.fEL9Vzlr.dpuf