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.