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Social Security Tied to Tsunami in Japan and Bubonic Plague

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Tuesday, 05 April 2011 08:36

Okay, we haven't seen this headline yet, but given current fashions in Washington policy circles it can only be a matter of time. Today the New York Times ran a column on Social Security by Alicia Munnell, the Director of the Center for Retirement Research at Boston College and a former member of President Clinton's Council of Economic Advisors.

This column made the claim that Social Security does contribute to the deficit, telling readers that:

"scheduled Social Security benefits and current payroll taxes are included in long-term deficit projections by the Congressional Budget Office, the Office of Management and Budget and the Government Accountability Office. These projections matter: policymakers, investors and the bond markets use them to gauge the nation’s fiscal health. Since a shortfall in Social Security is embedded in these projections, eliminating that shortfall would substantially improve the long-term budget outlook and the nation’s creditworthiness."

This is an interesting observation. These projections are supposed to reflect current law. Under the law, as Munnell points out, Social Security is prohibited from spending anything beyond the money in its trust fund. This means that if these baseline projections show deficits from the program spending at levels beyond what can be supported by the trust fund, then they are not making projections based on what Social Security can legally spend.

The more obvious complaint would seem to be with the nature of the projections than with the Social Security program. In effect, the projections assume that Congress will opt to maintain the level of scheduled benefits without doing anything to increase revenues. While this is a possibility, that seems a rather strong assumption to include in a baseline projection.

The column also includes another serious stretch. It tells readers that people are taking Social Security at the earliest possible age of eligibility because they are worried that the program will not be there for them if they wait until a later age. The article links to a USA Today article which supports this view by noting that the percentage of people who began taking benefits at age 62 rose sharply in 2009.

The most obvious reason that the share of people age 62 who took benefits rose in 2009 is that the unemployment jumped by 5 percentage points from its 2008 level. There were undoubtedly many workers age 62 who unexpectedly lost their job and saw little prospect of finding a new one. Therefore they decided to start collecting their Social Security benefits.

There has been a lack of confidence in the Social Security system for decades. And there has been much more serious talk of reform at other times, notably the late 90s and 2005 when President Bush proposed to privatize the program. Concern about the future of the program is not a plausible explanation for the jump in people collecting early benefits in 2009, nor is it likely a major factor in the decision of workers to take early benefits more generally.

(Thanks to Eric Kingson, the co-director of Social Security Works, for calling this one to my attention.)

Comments (11)Add Comment
Slippery Slope of Social Security Surplus Slides into Socialism
written by izzatzo, April 05, 2011 10:55
Social Security Tied to Tsunami in Japan and Bubonic Plague


It's sad to see progressives like Baker stoop to such sanctimonious satire. Any economist knows that tsunamis and plagues - like recessions - are a necessary part of the business cycle of life that cull out the excess of the prior boom period to achieve maximum living standards over the long run.

Except for Social Security of course, which must run an increasing growing surplus forever in boomer fashion lest it lapse into a Steady State Equilibrium of Slippery Slope Socialism caused by the freeloading welfare shirkers who took it early at age 62.

Stupid liberals.
...
written by GTB in DC, April 05, 2011 10:59
Let me rise to Alicia Munnell's defense. What she wrote in the Times is this: "... Social Security has not contributed to the deficit in the past, because it’s been financed by payroll taxes, and technically cannot in the future because, by law, it cannot spend money it doesn’t have. But in reality, scheduled Social Security benefits and current payroll taxes are included in long-term deficit projections by the Congressional Budget Office, the Office of Management and Budget and the Government Accountability Office. These projections matter: policymakers, investors and the bond markets use them to gauge the nation’s fiscal health. Since a shortfall in Social Security is embedded in these projections, eliminating that shortfall would substantially improve the long-term budget outlook and the nation’s creditworthiness."

The CBO estimates that the Old-Age, Survivors, and Disability Insurance (OASDI) program will run down its Trust Fund by 2040 http://www.cbo.gov/doc.cfm?index=11943&type=2]. Up until that point, the program can pay all of scheduled benefits using a combination of payroll taxes, interest earnings on the Trust Fund, and the remaining balance in the OASDI Trust Fund. Nonetheless, as Munnell points out, OMB, the CBO, the GAO, and financial markets look at a comprehensive measure of the federal government's fiscal policy. Under this comprehensive measure, the interest payments to the Trust Fund are treated as Social Security income but as a cost to the Federal Treasury. In other words, from the perspective of the UNIFIED government budget (including both Social Security and all other components of Federal taxes and spending) the interest earnings of the Social Security Trust Fund are invisible. They are a positive entry in one component of the budget and an identical but negative entry in another component of the budget.

This means Munnell is 100% correct: Scheduled Social Security benefits and current payroll taxes are included in long-term deficit projections, BUT THE INTEREST PAYMENTS TO SOCIAL SECURITY DON'T AFFECT THE UNIFIED BUDGET ONE WAY OR THE OTHER. This means Munnell is also correct that increasing Social Security payroll taxes or reducing future Social Security benefit payments WILL REDUCE THE SIZE OF THE UNIFIED BUDGET DEFICIT.

The CBO estimates that the gap between Social Security taxes and Social Security benefit payments will average about 0.7% of GDP per year between 2011 and 2039. This means Social Security will be adding to the unified budget deficit 0.7% of GDP … EVEN THOUGH EVERY PENNY OF SOCIAL SECURITY BENEFITS WILL BE PAYABLE OUT OF PAYROLL TAXES, INTEREST ON THE TRUST FUND, AND A DRAW-DOWN OF THE SOCIAL SECURITY TRUST FUND.

I don't know whether raising Social Security taxes or cutting promised Social Security benefits will increase workers' confidence they will collect Social Security in the future. I would be surprised if these changes reduced workers' confidence or left it unchanged, and I suspect that better informed observers would think the financial prospects of Social Security are a brighter if its long-term deficit were reduced. But I don't know this for certain, any more than Dean knows whether the opposite is true.

The main problem with Dean's critique of Munnell is that he is confusing the period after 2039 (when the Trust Fund will be zero under the CBO's forecast) and the period before 2040 (when payroll tax revenues will be smaller than benefit payments and part of benefit payments will be financed with interest on the Trust Fund and a drawdown of the Trust Fund). In the period before 2040 Munnell is unquestionably correct about both the details of Social Security financing and the impact of Social Security on the federal budget as most financial observers view the budget: The net effect of Social Security is to increase the size of the unified federal deficit. Increasing payroll taxes or reducing scheduled Social Security benefits would reduce the size of the unified federal deficit between 2011 and 2040. Therefore, raising Social Security taxes or cutting Social Security benefits would certainly reduce the size of the nation’s long-run budget problem. Payroll tax increases or Social Security benefit cuts if adopted soon enough would reduce the nation’s MEDIUM-TERM budget problem. To pretend otherwise is to deny the obvious.
Nothing surprising about this, GTB
written by Dennis Doubleday, April 05, 2011 11:36
To GTB: this was the plan ever since 1983, yet curiously Munnell and her ilk did not complain when SS was lowering the unified budget projections. You are trying to change the game now that wage earners have overpaid for nearly 30 years to prepare for this day.
GTB, You're Accusing Munnell of Being Dishonest
written by Dean, April 05, 2011 11:47
Eliminating the SS shortfall would not prevent the program from relying on the interest and principal in its trust fund over the period from 2016 to 2037. For example, raising the retirement age and the tax rate in 2035 would not change this path, even though it could eliminate the 75 year shortfall.

If her point is that SS is contributing to the unified deficit in the years when it draws on the interest and principal in the Trust Fund, then she should have said that. Instead, she said that she wanted to eliminate its 75-year shortfall. I would assume that she meant what she said.
The problem is...
written by OJC, April 05, 2011 4:04
... that the Treasury has borrowed SocSec money, spent it, and starting about now must repay it.

Repayment is a bitch.
Higher payroll taxes or lower benefit payments reduce unified deficit
written by GTB in DC, April 05, 2011 5:46
If the 75-year imbalance is eliminated, Munnell (like everyone else) assumes the reforms will also reduce the gap between payroll taxes and benefit payments between now and 2040. If this occurs, it will reduce the unified budget deficit in those years. This does not require that payroll taxes be higher than benefit payments in every year between now and 2040. But any reform that narrows the gap (i.e., makes the shortfall of payroll taxes below benefit payments smaller) also reduces the unified deficit. Part of the cost of Social Security may still be financed out of interest on the Trust Fund or a draw-down of the Trust Fund, but the point is that the interest rate contribution or the Trust Fund drawdown would be smaller ... and the unified federal deficit would also be smaller.

I'm puzzled by this hostility to Munnell. She is a strong supporter of Social Security. She indicates in the op-ed piece it would be an error to cut benefits too much because she believes (and she has done research to show) that the private retirement system is too small to fill in the gap if Social Security is reduced too much. Why are we firing bullets at people who strongly believe the Social Security program is worth defending, that its defense requires the long-term imbalance be reduced, and that the basic benefit package should be protected even if that requires a tax increase?
...
written by reg , April 05, 2011 7:21
GTB is puzzled by nothing
Munnell's Soul Is Not the Issue, Her Proposal Is
written by Dean, April 05, 2011 7:55
GTB,

i know Alicia Munnell and respect her work. That is not the issue. She is proposing substantial cuts to Social Security which would hurt many people. Her proposed cut in the annual cost of living adjustment would lower benefits by 3 percent by the time they are retired 10 years, by 6 percent by the time they are retired 20 years and by 9 percent by the time they are retired 30 years.

For almost a third of retirees, SS is 90 percent or more of their income. If you don't think this is a big deal consider how outraged the Republicans were over a tax increase that at its worse would reduce rich people's after-tax income by less than 3 percent.

This proposal, coupled with her plan to increase the retirement age even for people who are not seeing much increase in life expectancy, would cause much needless pain. This is what I am objecting to, I have nothing against Alicia Munnell.
...
written by AndrewDover, April 05, 2011 9:11
I agree with Dean that "cash flow needs" matters more than worries about program stability when deciding when to start Social Security.

Alicia Munnell was a co-author of this Social Security survey which is reasonably fair and lays out most of the options:
http://crr.bc.edu/images/stories/download/social_security_fix-it_e-book_-_sm.pdf

Note that she assumes that Congress would raise payroll taxes to 16% to meet scheduled benefits in 2037. Dean is assuming Congress would let scheduled benefits drop to payable benefits; ie payroll collections.

Noticing that Paul Ryan's latest proposal has no specific changes to social security, it looks like "do nothing" will be the national policy choice for the next few years.


p.s Alicia Munnell did explicitly raise an objection to the cost of living increase:

"While the Domenici-Rivlin plan is far from perfect — for example, the change in the cost-of-living adjustment would hurt the oldest of the old — it can serve as a starting point."
...
written by liberal, April 05, 2011 9:34
GTB wrote,
...and I suspect that better informed observers would think the financial prospects of Social Security are a brighter if its long-term deficit were reduced.


If you think that benefit cuts/payroll tax increases are going to go anywhere except more tax cuts for the rich or more money down the Pentagon rathole, you're a blithering idiot.
...
written by liberal, April 05, 2011 9:36
(in the current political climate)

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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.

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