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Social Security and the Economy

Thursday, 23 February 2012 15:47

Allan Sloan is a conscientious columnist with whom I occasionally have serious disagreements. The finances of Social Security is one of those occasions.

Sloan's Fortune column this week provides one of those occasions. The focus is the deterioration in the near-term projections for Social Security. Sloan compares the 2011 Social Security Trustees report with the 2012 projections from the Congressional Budget Office (CBO) and finds a worsening of $300 billion in the projected cash flow of the trust fund over the next five years. He argues that this strengthens the case for measures to shore up the program's finances. There are three slightly technical points on Sloan's analysis that are worth making and then one substantive point.

First, Sloan compares sources that use somewhat different assumptions when comparing the Trustees numbers with the CBO numbers. The 2011 CBO numbers would have shown a somewhat worse picture than the 2011 Trustees numbers. If we compare the 2012 CBO numbers with the 2011 CBO numbers we can see the extent to which the situation has deteriorated due to a worsening economic outlook.

This doesn't change the picture hugely, but it does make the deterioration somewhat less severe. The difference in the projected shortfall for the years 2012-2016 is $240 billion rather than the $300 billion using the 2011 Trustees numbers as the basis for comparison. (The Disability Trust Fund is projected to be depleted in 2016, so CBO does not project revenue and spending in that year. I have imputed a shortfall of $45 billion, the same as the prior two years.)

A second item worth noting is that the deterioration is mostly on the revenue side. Sloan attributes the problem to higher-than-projected cost-of-living adjustments that resulted from the jump in oil prices. While this is a factor, most of the story is on the revenue side.


                                            Source: CBO 2011 and 2012.

This matters because the main reason that revenue is projected to be lower in 2012 than in 2011 is that unemployment is now projected to be higher and wage growth is projected to be lower. This once again shows the importance for Social Security of having adults in charge of managing the economy. When the economy does badly, Social Security's finances do badly (repeat 256,000 times).

The third point worth noting in this story is the extent to which the deterioration in the projections from 2011 to 2012 is due to the disability portion of the program. With my imputation for 2016, the worsening finances of disability accounted for $49 billion of the $240 billion deterioration in the program's projections from 2011 to 2012. This means that a program that receives just 14.5 percent of the program's revenue accounted for 20.4 percent of the deterioration in finances. 

This is not a new story. The cost of the disability program has been rising considerably more rapidly than had previously been projected throughout this downturn. There are not conclusive answers as to why this is the case, but it seems pretty clear that a prolonged period of high unemployment is a big part of the story. In a strong economy, people who have various physical and psychological problems may be able to hold onto their jobs until retirement. (Most of the disabled are older workers.) In a weak economy many of these people may lose their jobs and be unable to find new ones. The moral of the story is again the need to have adults running the economy.

Finally there is the substantive issue about the urgency of a Social Security fix. I see little urgency for two reasons. The first reason is that at a time when we are still down close to 10 million jobs from where the economy should be, the first, second, and third priority of policymakers should be job creation. In principle, Congress and the president can do more than one thing at a time, but this is Washington that we are talking about.

The second reason why I see no urgency for a Social Security fix is that the program is still fundamentally sound. According to the latest projections from CBO we still have more than a quarter-century before the fund will first face a shortfall. Even after that date the program would still be able to pay more than 80 percent of projected benefits, which would be more than current beneficiaries receive.

The eventual fix for Social Security will inevitably involve some mix of revenue increases and benefit cuts. There has been a well-financed campaign over the last few decades to convince the public that the program's finances are far worse than is in fact the case. (A payroll tax increase equal to one-twentieth of projected wage growth over the next four decades would be more than enough to keep the program fully solvent past the end of the century.) 

The lack of confidence in Social Security's finances created by this misinformation campaign may cause the public to accept much larger cuts than if they realized the program's true financial state. Therefore it makes sense to delay any major changes in the hope that the public will be better informed about the program in the future. (Peter Peterson will eventually run out of money.)

So the word for the day is "relax" – Social Security is fine for long into the future. Folks should instead spend their time yelling about the lack of adequate stimulus, insufficient measures from the Fed, and an over-valued dollar.

Comments (16)Add Comment
written by Stuart Levine, February 23, 2012 4:52
Actually, now may be a good time to address the actuarial shortfall in the Social Security trust fund. The following will likely not cover the entire actuarial shortfall, but it will cover most:

First, take off the income limitation for making contributions. My understanding is that this will substantially resolve most of the actuarial shortfall.

Second, make certain that carried interests are subject to SECA/FICA taxes.
written by coberly, February 23, 2012 8:42
stuart levine

i was going to leave this alone because Dean did such a good job. But you are repeating one of the bad solutions that we often hear.

scrapping the cap would turn Social Security into welfare as we knew it. exactly what FDR didn't want it to be "so that no damn politician can take it away from them."

social security works perfectly well exactly the way it was designed. there is no need for ANY benefit cuts (sorry, Dean), and there is no need for "taxing the rich."

the people who will get the benefits can pay for them, as they always have. that one twentieth of the projected wage growth that Dean refers to amounts to a raise of about forty cents per week per year. that seems to me a pretty cheap price to keep SS from becoming another welfare political football.

to the extent that it is one today is entirely because of the Big Lie paid for by Peterson and swallowed whole by the media and apparently every damn politician too lazy to do arithmetic, or unclear on the concept of "the workers pay for it themselves."
written by coberly, February 23, 2012 8:46
what Peterson has accomplished with the Big Lie is to throw the finances of Social Security into doubt (there is no doubt if you do the arithmetic).

and that gives everyone the license to propose a fix after giving it about six milliseconds of thought. well, not thought exactly. synaptic activity.
written by skeptonomist, February 24, 2012 8:43
These things are important to the SS trustees, but in terms of the overall debate they are trivial. In that debate, the problem is not that there will be a "shortfall" of some unknown amount, it is that the nature of the program is not understood by the majority of people in the country. Among other things, they have been convinced that the Trust Fund is the entirety of the program and that when it runs out SS will be "insolvent". As Atrios says, certain people will always be coming after the money in SS, no matter what the numbers are; and one of the their tactics is to get people arguing about projections, which are really irrelevant.

People like Sloan actually do a major disservice by devoting columns to arguing about these projections, rather than hammering at the basic facts of SS.
written by liberal, February 24, 2012 9:54
Allan Sloan is a conscientious columnist with whom I occasionally have serious disagreements. The finances of Social Security is one of those occasions.

He's fine on many issues, but on SS he's a complete hack, since he thinks the bonds in the Trust Fund are worthless.
Trust Fund's True Purpose
written by mark seidner, February 24, 2012 10:32
I am not sure of the exact figure, but there is about a 2.5 trillion accumulated surplus in the social security trust fund. However, in reality this is just book-keeping. That accumulated surplus has been spent already. This surplus was used to shore-up the federal budget to offset tax cuts given mainly to the rich. Now that this yearly surplus is going away, there's is a sudden interest in cutting social security benefits. Imagine that!
Trust Fund's True Purpose
written by Don Levit, February 24, 2012 11:10
Mark Seidner has got it completely right.
The entire trust fund - principal and interest - has been lent to the Treasury over the years, spent for current expenses, and lowered the budget deficits.
The hollowness of the trust fund was hidden, until the cash outgo exceeded the cash income in 2010.
When the interest was redeemed from the trust fund to make up for the cash shortfall, new general revenues had to be raised AS IF THE TRUST FUND DID NOT EXIST! Tapping the trust fund for cash shortfalls is the same process used to pay all government expenses - pay-as-you-go, with no store of wealth backing any fund, including a trust fund.
Don Levit
written by liberal, February 24, 2012 2:32
Don Levit wrote,
...with no store of wealth backing any fund...

What's the store of wealth backing Treasuries owned by non-governmental parties?
Store of wealth behind Treasuries?
written by Don Levit, February 24, 2012 2:47
When you say non-governmental parties, would you be referring to say, individuals, pension plans, life insurers, etc.?
The store of wealth is the money actually paid for the bond.
For example, if you purchase a Treasury bond, you provide x dollars for y bonds. That money is actually handed over to the federal government - it is funded, by you!
The same dynamic occurred with Social Security, which, if that was the end of it, it would have been fine.
The excess dollars paid in would have bought Treasury securities, period. The problem is there was no period, no stopping point. Instead, the excess dollars were removed from the Treasury bonds and loaned to the Treasury to pay for current expenses.
And, that, my friend, is the difference between a funded Treasury and an unfunded Treasury. The excess FICA dollars cannot be in 2 places at the same time - in the trust fund AND spent for current expenses.
Don Levit
written by urban legend, February 24, 2012 5:09
Mark Seidner and Don Levit are clueless tools for right wing propaganda. The Trust Fund itself may by law only be used to pay benefits, and the bonds by law must be paid by the Government. Lending money is not the same thing as spending it. The only reason any Treasury bond you hold is the most secure investment in the world is that they are backed by the Full Faith and Credit of the United States Government and must be paid by law.

Your dollar bills in your wallet have value solely and entirely because they are made so BY LAW. Get it?
written by Don Levit, February 24, 2012 5:43
Urban legend:
You say the trust fund may only be used to pay benefits.
You then say lending money is not the same thing as spending it.
The budget is based on a cash perspective.
When the money was lent from the trust fund, the cash WAS spent, for the expenses were paid, and the deficits were lowered.
If the trust fund was to be used only to pay benefits backed by nonmarketable bonds, the surplus would be real. However,the trust fund was not used only to pay Social Security benefits, for the money was lent to the Treasury.
It is not backed by hard assets, but by soft faith and credit.
And, whether that faith and credit makes the investment secure is purely a subjective opinion.
Don Levit
written by Jack, February 25, 2012 3:31
Get off your high horse, or should I say stop beating the same dead horse you've been beating for over a year now on other sites like Econospeak and Angry Bear. You make the same bogus argument abouot Trust Fund assets having been spent to cover general budget deficit. That's what borrowed funds are for Don. You borrow to cover expenses. The Trust Fund is owed $2.6B by the USofA. That is how the SS legislation was first written and reiterated in the early '80s. Excess SS payroll taxes must be given over to the Treasury so that they can earn interest. Those funds are lent back to the Treasury and so the cycle continues. And the Treasury uses FICA income and Trust Fund assets to pay benefits. It's not that complicated unless you are a liar or an idiot. Take your choice.
rightwing tool? Hammer ?
written by mark seidner, February 25, 2012 6:44
hey "urban legend" calling me a right wing tool is hilarious! The trust fund consists of paper, "obligations of the US government", the excess money that was collected each year from FICA has already been spent and been exchanged for these bonds. The US government must "sell" these bonds to repay this amount. How they'll sell them is called "Quantitive Easing". They will sell to the Federal Reserve, but first they will issue the credit to the Federal Reserve so they can buy them. In other words the government will borrow this money. So I repeat again, the money has been spent, it was used to hide the true size of the deficit caused by tax breaks to the rich.
Does that sound to you like the statement of tool of the right? Really?
written by Zazoo, February 25, 2012 7:40
"This is not a new story. The cost of the disability program has been rising considerably more rapidly than had previously been projected throughout this downturn."

Again, you ignore fraud. Social security is rapidly becoming a welfare program where more and more of the underclass are learning to tap into it. (Perhaps "fraud" is a little too strong. In any event, most people on SS disability today would not have been on it twenty years ago ("crazy checks" are the most egregious example). The disability rate has roughly tripled in the last twenty years, while, given medical advances, the true rate of disability could only have gone down.)

This trend has been going on for at least twenty years. In another twenty years, the trend will likely engulf social security.

Many times, you have argued that social security is safe because minor adjustments will fix it. You obviously care about SS's solvency. But, what about the disability part of SS? Aren't you concerned it will severely undermine SS's long term viability?

You seem like a pretty honest commentator. I suspect you are concerned about this. What should we do? Shouldn't we at least talk about it?
The evidence of what is happening to SS Disability is everywhere
written by Zazoo, February 27, 2012 10:25
The evidence is everywhere. For instance:

“Fishtown in 2010 is a very different place. People simply don't feel an obligation to either work or get married. There are many never married people, and many out of wedlock children. A lot of the guys are just bums—don't work, don't want to work, don't want to get married, and waste their time watching television. An inordinately large number have figured how to game the system by qualifying for Social Security disability. Their attitude is that work is for chumps.”

-- Graham H. Seibert

Wake up. This is important.
written by Carly EngageAmerica, February 29, 2012 11:06
The annual share of the U.S. budget spent on programs benefiting seniors has increased rapidly in the past few decades. More importantly is that these same programs under current law are expected to continue to increase rapidly in decades to come. Data on Social Security and Medicare spending from the Congressional Budget Office is used to show the historical trends and projected share of the budget between 1970 and 2084. In 1970, spending on Social Security and Medicare was one-fifth of the budget. This portion has since grown to nearly 37&#xof; the budget in 2010; this amounts to 8.4% of the country's gross domestic product.
The growing number of beneficiaries due to the aging of the baby-boom generation will cause scheduled spending to surge. If current Social Security and Medicare policies continue without change, large deficits will undoubtedly emerge in the next decade and will grow even larger in subsequent decades. Undoubtedly, these trends are unsustainable, and current law cannot be allowed to stand if these entitlement programs are to remain solvent without bankrupting the federal government (http://bit.ly/y5BFQX).

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.