Social Security Losing Traction

The media has reported multiple articles that say the interest in Social Security in politics is shrinking while the interest in the voter base is growing.

Jed Graham is a great writer on the issue of Social Security. His article (“Social Security Woes Deepen As Talk Of Fix Recedes”) is here.  Russ Wiles produced a similar article for The Arizona Republic, here. Russ provides more detail on how little the politicians are doing.

The big difference in the articles is the source of information.  Jed normally relies upon CBO.  Russ is using SSA.  One program two completely different views. Here is Jed’s closing – emphasis added.

New projections from the Social Security Trustees may put Social Security higher up on the agenda. Last year, Social Security actuaries projected that the trust fund wouldn’t run dry until 2034, but that estimate built in a far more optimistic economic outlook than the White House, Federal Reserve or CBO expect. This year’s report could deliver a dose of reality.

The take-away is that there are two different pictures of the system that will come together over the next decade. 

What Is The 2.8 Trillion Dollar Surplus

How broken is Social Security? It has collected a total of $17 trillion in revenue, and in exchange has created $25 trillion in unfunded liabilities.  (That is the optimistic view of the SSA)  For every $1 that the system has ever collected, the system has created $1.50 of promises it can’t keep.

But wait.  Social Security has a $2.8 trillion surplus that can pay every benefit owed to every eligible American for the next 18 years. 

How can both be true?

Let’s compare Social Security to the checking account that you have.  The unfunded liability is like a check that has been written on the checking account but hasn’t cleared at the bank. The surplus is like the balance that you see at the ATM.  In the analogy, Social Security is like you having a $1,000 in the checking account on which you have written $10,000 in checks. 

In other words for every dollar of problem we have about a dime of solution.  This will tell you how dysfunctional our attention span is: we want to argue about the value of the dime.  Half of the people say we have $1,000 in the checking account.  The other half says we have nothing but worthless IOUs designed to funnel cash to the general fund.  Instead of focusing on the $0.90 of problem, we are bitching about what to call the dime of solution.

The problem isn’t the dime.  It is us.

The 3rd Rail Of Politics Is.... Derailing

The media largely missed an AP poll in which Social Security beat joblessness as the top economic issue for the coming election. For the 3rd Rail of Politics to work, the voter base has to have a large segment of people who aren't affected by the impact of their vote.  This is what the poll means, and why now. 

This piece originally appeared on American Thinker.

For the last 80 years, politicians have said just enough about the program to get elected, and then done as little as possible to get re-elected. That strategy works.

Hillary Clinton is the personification of this political tactic.  She will tell you what she won’t do, while telling you nothing about what she will do.  She has promised to consider asking high-wage earners to contribute more, but can’t tell you what she will do when they say “no”.  She has said that Social Security is unfair, but can’t tell supporters what changes she believes are necessary to make the program fair to those ‘unfairly treated by the system’.

Voters Will Be Affected This Time

The politics of blah-blah-blah thrived in the past on a dedicated supply of indifference in the voter base. The political calculus served older voters who expected to be dead long before the consequences of their votes arrived. As recently as 2009, that audience included about 50 percent of voting aged Americans. The policies also drew support from a younger audience possessed with the misguided idea that Social Security is an unquestioned expense which keeps seniors from starving in the streets.

This political ploy will face demographic challenges as current voters realize that reforming Social Security will affect them personally. In their most recent report, the Trustees of the program’s Trust Funds reported that the system has about a coin flip chance for paying full benefits into 2034.  That means that people turning 49 this year expect to retire the year that the Trust Fund is exhausted.  That is roughly 50 percent of voting aged Americans. 

The trend is that more people will follow the issue. Every day, 10,000 Boomers reach normal retirement age.  About half of the people turning 68 this year reasonably expect to be alive in 2034. They will worry less about the job that they don’t have, and more about the meal ticket on which they depend.

The Demographics of younger workers
The finances of Social Security are also unravelling much faster than the public generally understands.  Since 2009, the cost to keep Social Security ‘solvent’ has quadrupled according to Andrew Biggs, AEI’s policy expert for Social Security.  The system now accrues unfunded liabilities faster than it collects revenue.  In other words, every penny of benefit paid in 2016 comes at the projected expense of a future retiree.

The younger audience present an even larger problem for politicians depending upon a docile electorate. When I was a kid, children were raised by people who truly believed that Social Security was the greatest accomplishment of government. Now kids are raised by people who call it a Ponzi scheme. That dynamic will not improve as politicians ask these parents to work until 70 in order to preserve the system for political convenience.

Political Uncertainty none of these people have a plan

Unfortunately for polite politics, Bernie Sanders is agitating his base with a plan. It is a crazy plan, one which would divert $11 trillion from debt control to expand and extend Social Security. His incremental spending is largely directed to wealthier seniors. His promise to preserve Social Security for 50 years is the essentially cost to make the Boomers problem a larger problem for Millennials.

The GOP on the other hand is largely committed to preserving benefits for current voters, but these politicians haven’t said what taxes it will raise in order to fulfill its promise. What little benefit reductions that they support, largely do nothing.  The GOP is offering one benefit reduction in order to replace the one that will be forced by insolvency anyway.

Comically enough, some people believe that demographics will insulate Social Security from economic gravity as the finances of the program unravel.  The reality is that demographics will doom Social Security politically long before they can financially.

No Matter Who Wins In Iowa, Social Security Loses

No matter who wins in Iowa, Social Security loses.

AARP says that 8 out of 10 voters in Iowa want a plan for Social Security.  No one has a plan, including Bernie Sanders.

The leaders of the GOP field do not have a plan - if they do Google cannot find it. The GOP’s solution to the financial problems in the system is to convince younger workers to accept them.

Democrats are willing to tax high-wage earners. That means that they are willing to throw money at the problem. This approach is OK with supporters because it is largely someone else’s money. The problem is, of course, that much of the incremental revenue is going to current beneficiaries rather than to shoring-up the system’s long-term financial picture.

For nearly eight of ten Iowa caucus voters, this election will be a disappointment. For ten out of ten Americans, it will be a bust. (read : See more at: http://www.fedsmith.com/2016/02/02/presidential-candidates-social-security-proposals-throw-future-seniors-under-the-bus/#sthash.XGuqtqMF.dpuf)

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.