How Not To Fix Social Security

There is a wide spread idea that changing the way Social Security calculates its COLA is a painless way to fix the program. It is neither painless nor sufficient. It is a sign that what the program costs is more important than what the program does. Things to consider

1. Chain-CPI is not a better measure of inflation. It is not even a measure of inflation. It is a measure of Cost of Living - which includes the behavioral response to inflation.
2. The switch from protecting buying-power to protecting the cost of living is a reduction in benefits that grows over time. We are fixing old-age insurance with a solution that progressively lowers benefits as we age. That is like fire insurance which decreases in value based on the number of rooms in the fire.
3. Old-age insurance is important. As we age, our work options narrow and our savings is depleted. The older we get the more we need the program.

How Not To Fix Social Security

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.