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.

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.

 

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

The Value Of The Social Security Trust Fund

"What I enjoy most, is living like an aristocrat without the burden of having to be one…. I don't envy them. It's only the trappings of aristocracy that I find worthwhile - the fine furniture, the paintings, the sliver--the very things they have to sell when the money runs out. And it always does, and all they are left with is their lovely manners." - Jim Williams in Midnight In The Garden Of Good And Evil.

It is de rigueur conservative politics to call the Social Security Trust Fund a collection of worthless IOUs. This presents a serious problem for Americans worried about the subject because hyperbole will condition people to believe that the Social Security system can't get into worse shape, when in fact the situation can and will get much worse.

These are serious think tanks, journalists, and investment magazines.

• "As they are bonds not backed by any real assets, the government will have to either borrow or raise taxes to pay for them" ~ The Heritage Foundation
• "They do not consist of real economic assets that can be drawn down in the future to fund benefits." In other words, the Social Security trust fund contains - nothing." ~ Charles Krauthammer
• "Officially, the trust fund holds $2.6 trillion in special-issue Treasury bonds. In reality, it has no assets of any value", ~ Investors Business Daily

According to IBD, 28% of Americans have already become comfortable with the idea that Social Security contains nothing but worthless IOUs when in fact the assets are far from worthless. No hard assets? The government has significant hard assets in gold and oil. It is the largest land holder in the country. It has a pending revenue stream coming from 16 trillion dollars held in tax deferred accounts. The government today has the hardest asset in the country – the power to print money. This power is absolutely the hardest asset because it undermines every other asset in the country.

The problem isn’t that the securities held by the Social Security Trust Fund are worthless. The problem is that they are worth less every day, and will be worthless one day. Every day the government makes more promises, borrows more money and prints more money. The collective promises are growing much faster than our hard-assets. They are growing faster than our tax base. We are basically a family living on wealth which is running out. And if you don’t think it can get worse just wait until all we have left is our lovely manners.

USA Today's Dangerous Minds

http://www.usatoday.com/news/opinion/editorials/2011-06-16-Payroll-taxes-raid-Social-Security_n.htm

In an editoral, USAToday offers "For almost three decades, Social Security was the only major government benefit program that generated more money than it cost, thanks to hefty payroll tax revenue that exceeded benefit payments to seniors." It is dangerous thinking.

The only way you can say the Social Security has generated more money than it cost, is to ignore the real costs of the system. In 2010, Social Security generated a total of 677 billion and paid out 584 billion. But the 584 billion does not include the cost of future promises. In exchange for the 677 billion, we give pension promises to the working generation who pay Social Security. Social Security is only cashflow positive to the extent that we intend to renege on these commitments.

What USAToday says is based on "cash-accounting". Before you roll your eyes, here is a practical example of "cash-accounting": Wells is a beer drinking college student, who goes daily to the ATM to retreive his balance. He doesn't bother with the other checks that he has written or the impending tuition payment. Whatever the ATM says is how much beer he can buy. That is how cash-accounting works.

Now you may think that Wells is not a problem because he is not your son. But he is your problem if he is the chief accountant for the Social Security system. And there is no way to say he is not when you look at the way that the accounting is handled. When you hear that Social Security is 'making money' you need to think of Wells standing at the ATM shaking a receipt in your face and saying "come-on you cheap skate I'm buying".

The take home here is that cash accounting is illegal for all public companies. There is a reason. It is grossly misleading. Social Security does not generate more than it takes in. It has generated unfunded liabilities in the trillions of dollars.

Does Social Security Add To The Deficit

"Does. Does Not. " And the argument goes on forever.

The short answer is that Social Security in our view is a contributor to the deficit. The amount is less important because the short answer is no one knows the extent.

FICA taxes contribute to the deficit today, not just in the future. FICA taxes restrict the economic activity which generates income taxes that would pay down the deficit. They lower the incentive to work, and increase the incentive to evade or avoid the tax system all together. They make the cost of goods produced in the United States less competitive in the world markets, which costs us jobs.

The larger impact on the deficit comes as FICA diverts taxable income away from the general fund to the retirement system. FICA and Income taxes are connected because they compete for resources within the same tax base. They are like two straws drinking from the same soda. What one takes is not available for the other. This impact is enormous.

There are people who will disagree with our position. These people will argue that FICA isn't a tax at all. It is an economic investment which will pay-off at retirement. Further they suggest that it is an investment which lowers the overall borrowing costs of the government. Our surveys find very little public support for this theory. ABC News/Washington Post polls showed that 81% of Americans believe that Social Security is heading for a crisis without changes. So if it is an investment, most people think it is a pretty bad one.

No one can tell you how much Social Security contributes to the deficit. The more it is a tax, the more it contributes to the deficit. The more it is an investment, the less it contributes.

FICA Is A Tax

The flaw in most commentary about Social Security is that it assumes that FICA taxes and Income taxes are unrelated. They are related because FICA taxes and Income taxes compete for resouces within the same tax base. You might view them like two straws drinking from the same soda. What one takes, the other cannot. Every dollar that is collected by FICA is a dollar that could have been raised to pay down the deficit. In the extreme view, we are allocating our tax base to our own retirement system and putting the rest of the government on our kids credit card.

The more people view that it is a tax, the more it adds to the deficit. As a tax, it directly contributes to the underground economy - now estimated to be about 2 trillion dollars. As a tax, it creates a significant pushback on general taxes. It is not possible to miss the correlation between rising FICA taxes and increasing pushback on income taxes. Today 47% of American households had no income tax obligation, and yet more than half of them had a FICA contribution.

FICA Is An Investment

The other extreme view is that FICA isn't a tax at all. It is an insurance premium which people treat like an investment. Many years ago people though of it as an investment at least to some extent. The terms were so generous that my father worked two summers away from home just to qualify. His salary barely covered his gas and lodgings, but it added the two quarters necessary for him to qualify for Social Security. He not only thought of it as an investment but a good one. In the extreme view, it is just a forced investment which induces a reduction in personal savings.

Does Social Security Add To The Deficit?

Anyone telling you that Social Security does not contribute to the deficit believes that FICA is an investment. They believe that every man, woman, and yes child(contributing) to the system believes that it is an investment. We will tell you that people have different views of what FICA is or isn't. To the extent that FICA is considered a tax, it adds to the deficit in a significant way.

Hauser's Law

The proposition was first put forward in 1993 by William Kurt Hauser, who wrote, "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." That means that as FICA taxes go up, some other tax revenue must go down.

Why People Hate Discussions Of Social Security

One reason that people avoid the discussion of Social Security is that Yes is not necessarily the opposite of No. This is the result of politics in which the answer is less important than the framing of the question. Case in point.

This is : Yes, Social Security adds to the budget deficit

"These deficits, which began in 2009, could add trillions to the federal debt held by the public and hundreds of billions in annual interest costs. "

This is : No, Social Security does not add to the budget deficit

"In fact, Social Security’s Old Age and Survivors Insurance Trust Fund and its Disability Insurance Trust Fund are prohibited from paying benefits unless those funds have sufficient income and assets to cover the cost, and they have no borrowing authority to acquire the requisite income and assets. Consequently, Social Security is prohibited by law from deficit-spending and thus contributing to the federal deficit"

Both are true statements, but they don't actually refer to the same thing. The difference is "Held By The Public". The Social Security Trust Fund is not the public. It is an intergovernmental agency. So as we liquidate the Trust Fund, we will have to borrow from "the public", and we will see higher interest costs as a result.

Why does the public get a better deal than Social Security? Because "the public" has options to invest its money at the best rate. Social Security doesn't - and no one is talking about fixing that. (other than us)...

source :
http://jec.senate.gov/republicans/public/?a=Files.Serve&File_id=0edfdbbe-6f48-4007-a429-6ef64fda10cb

What Washington Is Missing

The biggest challenge for Social Security is the stubbornness of Washington where our leaders are focused on yesterday's news, and promote ideas which are yesterday's answers. The experts believe that the problem is demographic in nature, ie too many retirees for each worker. While demographics may be a problem, it isn't the imminent problem.

The pressing problem is stagnant wages. Social Security depends upon wages from the private sector to pay benefits. While public sector jobs may contribute to the system, these jobs are funded again by private sector wages in the form of income taxes. Over the past 10 years, the problem of demographics has been replaced by a much larger problem of economics: jobs, wages, and productivity.

The following article is important to read. Here is its connection to Social Security. There are fewer jobs to pay into Social Security. The job mix is shifting to lower paying work. Finally, much of the wage growth is in benefits which are not subject to FICA tax. In conclusion : you can't increase wage growth with higher taxes.

http://www.investors.com/NewsAndAnalysis/Article/573982/201106020800/10-Year-Real-Wage-Growth-Worse-Than-During-Depression.aspx is a worthwhile article to see what is happening our labor markets.

Here are some highlights:

• There has been a net loss of 2.7 million private nonfarm jobs since March 2001. (Government payrolls rose by 1.2 million over that span.)




• The problem is worse than lost jobs, as job losses have been concentrated in higher-paying goods-producing sector, including construction and manufacturing, which has shed 26% of its workers. Job growth has been in typically lower-paying service industries have kept growing their payrolls: social assistance (41%), nursing homes (21%), leisure and hospitality (10%).




• Globalization of production has fed a "the substitution of capital for labor" amid a push for productivity and competitiveness.




• The increase in nonwage compensation — fueled by the growth of tax-free health care spending — which has eroded real wage gains.