Social Security: Doing just fine, thank you

August 10, 2010

The on-going pollution of our information stream makes it ever-harder to see reality. Social Security, for the historically challenged, was designed as, sold as, and functions as, SOCIAL security. That is, it protects society against an inundation of penniless elderly, by assuring those who work that they will have at least something when they retire. Remember all those Republican schemes to replace Social Security by investments in the stock market? THAT would have worked out pretty well, wouldn’t it? And if you will stop to realize how many pension funds have gone bankrupt, thus breaking the employers’ promise to their employees, then ask yourself what good alternative to Social Security most seniors have. The good news is, it ain’t broke. The bad news is, certain interests continue to try to “fix” it. That is, kill it.

From http://articles.latimes.com/2010/aug/08/business/la-fi-hiltzik-20100808 via SchwartzReport.

The myth of the Social Security system’s financial shortfall

The trust fund is in far better shape than critics admit.

August 08, 2010|Michael Hiltzik

The annual report of the Social Security Trustees is the sort of rich compendium of facts and analysis that has something for everybody, like the Bible.

In recent years, during which conservatives have intensified their efforts to destroy one of the few U.S. government programs that actually works as intended, the report’s publication has become an occasion for hand-wringing and crocodile tears over the (supposedly) parlous state of the system’s finances.

This year’s report, which came out Thursday, is no exception. Within minutes of its release, some analysts were claiming that it projected a “shortfall” for Social Security this year of $41 billion.

Before we get to the bogus math behind that statement — which doesn’t actually appear in the report — let’s look at the encouraging findings by the agency’s trustees, who include the secretaries of Labor, the Treasury, and Health and Human Services.

The trustees indicated that the program has made it through the worst economic downturn in its life span essentially unscathed. In fact, by at least one measure it’s fiscally stronger than a year ago: Its projected actuarial deficit over the next 75 years (a measurement required by law) is smaller now than a year ago.

The old age and disability trust funds, which hold the system’s surplus, grew in 2009 by $122 billion, to $2.5 trillion. The program paid out $675 billion to 53 million beneficiaries — men, women and children — with administrative costs of 0.9% of expenditures. For all you privatization advocates out there, you’d be lucky to find a retirement and insurance plan of this complexity with an administrative fee less than five or 10 times that ratio.

This year and next, the program’s costs will exceed its take from the payroll tax and income tax on benefits. That’s an artifact of the recession, and it’s expected to reverse from 2012 through 2014. The difference is covered by the program’s other income source — interest on the Treasury bonds in the Social Security trust fund.

That brings us back to this supposed $41-billion “shortfall,” which exists only if you decide not to count interest due of about $118 billion.

And that, in turn, leads us to the convoluted subject of the trust fund, which for some two decades has been the prime target of the crowd trying to bamboozle Americans into thinking Social Security is insolvent, bankrupt, broke — pick any term you wish, because they’re all wrong. The trust fund is the mechanism by which baby boomers have pre-funded their own (OK, our own) retirements. When tax receipts fall short, its bonds are redeemed by the government to cover the gap.

Despite what Social Security’s enemies love to claim, the trust fund is not a myth, it’s not mere paper. It’s real money, and it represents the savings of every worker paying into the system today. So I’m going to train a microscope on it.

What trips up many people about the trust fund is the notion that redeeming the bonds in the fund to produce cash for Social Security is the equivalent of “the government” paying money to “the government.” Superficially, this resembles transferring a dollar from your brown pants to your gray pants — you’re no more or less flush than you were before changing pants.

But that assumes every one of us contributes equally to “the government,” and by equal methods — you, me and the chairman of Goldman Sachs.

The truth is that there are two separate tax programs at work here — the payroll tax and the income tax — and they affect Americans in different ways. The first pays for Social Security and the second for the rest of the federal budget.

Most Americans pay more payroll tax than income tax. Not until you pull in $200,000 or more, which puts you among roughly the top 5% of income-earners, are you likely to pay more in income tax than payroll tax. One reason is that the income taxed for Social Security is capped — this year, at $106,800. (My payroll and income tax figurescome from the Brookings Institution, and the income distribution statistics come from the U.S. Census Bureau.)

Since 1983, the money from all payroll taxpayers has been building up the Social Security surplus, swelling the trust fund. What’s happened to the money? It’s been borrowed by the federal government and spent on federal programs — housing, stimulus, war and a big income tax cut for the richest Americans, enacted under President George W. Bush in 2001.

In other words, money from the taxpayers at the lower end of the income scale has been spent to help out those at the higher end. That transfer — that loan, to characterize it accurately — is represented by the Treasury bonds held by the trust fund.

The interest on those bonds, and the eventual redemption of the principal, should have to be paid for by income taxpayers, who reaped the direct benefits from borrowing the money.

So all the whining you hear about how redeeming the trust fund will require a tax hike we can’t afford is simply the sound of wealthy taxpayers trying to skip out on a bill about to come due. The next time someone tells you the trust fund is full of worthless IOUs, try to guess what tax bracket he’s in.

It should come as no surprise that one of the leading advocates for cutting Social Security benefits or raising payroll taxes is the Wall Street billionaire Peter G. Peterson, who has pumped millions into an alarmist campaign about the federal deficit.

But ask Peterson, who made his money as a hedge fund manager, about closing the enormous tax loophole enjoyed by hedge fund managers — it costs the Treasury a couple of billion dollars a year — and he warns that it would force hedge funds to move overseas, which would be bad for the U.S. economy. This is the sort of argument my mother used to describe as: “I like me, who do you like?”

The trust fund may not last forever, but reports of its demise are certainly premature. The trustees say it will be drawn down to zero in 2037, at which point the program will only have enough money coming in from taxes to pay 78% of the benefits due under current law. So sometime in the next quarter-century — but by no means right now — does anything have to be fixed, say through a hike in the payroll tax ceiling (or, better, its elimination)?

That 2037 deadline, in truth, is a moving target. It’s based on long-term projections, which become more uncertain the further out you look. The estimated date is very sensitive to forecasts of immigration, wage and economic growth, and birth and death rates, all of which are uncertain. Over the last 10 years, it has fluctuated between 2037 and 2042, mostly due to economic factors. It has held steady at 2037 for two years despite the downturn, but that’s still better than the projection in 1998, which was for exhaustion in 2032.

In short, if the new trustees report gets examined wisely and responsibly, it should put an end to all the current talk about raising the retirement age or cutting benefits. Social Security doesn’t contribute a dime to the federal deficit, and in these days of market stagnation and cutbacks in pensions, it has never been more important to millions of Americans. The Pete Petersons of the world should find themselves a different target.

Michael Hiltzik’s column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columnshere, check out his Facebook page and follow @latimeshiltzik on Twitter.

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3 Responses to “Social Security: Doing just fine, thank you”

  1. Wayne Goodwin Says:

    The only responsible reply that I can think of to this article would be the “Morality” argument by Fr. Robert A. Sirico back in December 1999. See here: http://www.fff.org/freedom/1299g.asp


    • That argument merely proves (to me, anyway) that many a good idea can be made to sound foolish or immoral; and that many a vital factor may be ignored, and, by being ignored, allow a very bad idea to sound reasonable.

      Are we individuals, really? Or are we members of families? I’d say, primarily we are members of families: biological families first, and immediately thereafter, social families of many types. No baby could exist without care for years; no individual could exist for long without an extensive network of support from multitudes s/he will never even come into direct contact with.

      And perhaps the largest invisible fact in the good father’s argument is this: Society as it is presently constituted makes it impossible for anyone to exist without resources, and concentrates the vast bulk of those resources in very few hands, leaving the overwhelming majority dependent, not because they lack some character-element but because they were not born into the right family. Once face this fact squarely and Social Security can be seen in its proper perspective, as one of the few programs designed to assure that at least a minimal amount of those resources will be spread among those who have worked for them and not received them.

  2. Wayne Goodwin Says:

    Just to be clear. When I use the word “responsible”, it is on my part and no one else.
    Wayne


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