Social Security Sense and Nonsense (Center on Budget and Policy Priorities)

[pinto]

Interesting post at the organization's blog section ~ pinto

Social Security Sense and Nonsense
Posted by:
Paul N. Van de Water

Here are the facts. Social Security is a well-run, fiscally responsible program. People earn retirement, survivors, and disability benefits by making payroll tax contributions during their working years. Those taxes and other revenues are deposited in the Social Security trust funds, and all benefits and administrative expenses are paid out of the trust funds. The amount that Social Security can spend is limited by its payroll tax income plus the balance in the trust funds.

The Social Security trustees — the official body charged with evaluating the program’s long-term finances — project that Social Security can pay 100 percent of promised benefits through 2037 and about three-quarters of scheduled benefits after that, even if Congress makes no changes in the program. Relatively modest changes would put the program on a sound financial footing for 75 years and beyond.

Nonetheless, some critics are attempting to undermine confidence in Social Security with wild and blatantly false accusations. They allege that the trust funds have been “raided” or disparage the trust funds as “funny money” or mere “IOUs.” Some even label Social Security a “Ponzi scheme” after the notorious 1920s swindler Charles Ponzi. All of these claims are nonsense.

Every year since 1984, Social Security has collected more in payroll taxes and other income than it pays in benefits and other expenses. (The authors of the 1983 Social Security reform law did this on purpose in order to help pre-fund some of the costs of the baby boomers’ retirement.) These surpluses are invested in U.S. Treasury securities that are every bit as sound as the U.S. government securities held by investors around the globe; investors regard these securities as among the world’s very safest investments.

More, with a number of background citations, at -

http://www.offthechartsblog.org/social-security-sense-and-nonsense/

Paul N. Van de Water is a Senior Fellow at the Center on Budget and Policy Priorities, where he specializes in Medicare, Social Security, and health coverage issues.

[Champion Jack]

1. Thanks for posting this

[Recursion]

2. When those bonds are redeemed, where does the money come from?

Its trust fund is made up of guaranteed payments from general revenues.

Redeeming those bonds will be a double hit on the budget:

1) The money to redeem that $2.5 trillion must be borrowed, raised from taxes, or compensated by equivalent spending reductions

2) In addition, SSA will not be purchasing any new bonds in the next few decades (not entirely true; I seem to recall they're projected to have some yearly surpluses in the 2020s again). But in general there will be a weaker market for treasury bonds because SSA isn't guaranteed to buy a few dozen billion worth per year like it used to.

I am totally in agreement with pretty much everybody on this board that we must meet our obligations to the SSA. But sometimes I feel like I'm the only one who sees that the government is going to have to actually come up with 2.5 trillion dollars to make that happen. And that's easier said than done. And financing it through deficit spending is going to be difficult because (per 2 above) it's going to get harder to borrow money as time goes on.

[pinto]

4. Here's Van de Water's and a colleague's take -

What the 2010 Trustees’ Report Shows about Social Security
By Kathy Ruffing and Paul N. Van de Water

Although the exhaustion date attracts keen attention, the trustees caution that their projections are uncertain. For example, while 2037 is their best estimate of when the trust funds will be depleted, they reckon there is an 80 percent probability that trust fund exhaustion will occur sometime between 2032 and 2045 — and a 95 percent chance that depletion will happen between 2030 and 2055. In short, all reasonable estimates show a long-run problem but not an immediate crisis.

Two other, earlier dates also receive attention but have little significance for Social Security financing:

* 2010 will mark the first year since 1983 in which the program’s total expenses (for benefits and administrative costs) exceed its tax income (from payroll taxes and income taxes that higher-income beneficiaries pay on a portion of their Social Security benefits). That temporary imbalance — which the actuaries peg at $41 billion in 2010 — results from the severe economic downturn and will shrink dramatically in 2011 and disappear in 2012, although a so-called cash deficit will return permanently in 2015 as the retirement of the baby boom accelerates. Throughout that period, however, the trust funds will continue to grow larger, primarily because of the interest income the trust funds will receive on the Treasury bonds they hold. Even in 2010, for example, the trustees estimate that the trust funds’ interest income of $118 billion will more than offset the cash deficit of $41 billion.<7>

* 2025 will be the first year in which the program’s expenses exceed its total income, including its interest income. At that point, the trust funds — after peaking at $4.2 trillion — will start to shrink as Social Security begins to redeem its Treasury bonds to pay benefits.

Neither of these dates affects Social Security beneficiaries. Since the mid-1980s, Social Security has collected more in taxes each year than it pays out in benefits, has lent the excess revenue to the Treasury, and has received Treasury bonds in return. That accounts for the $2.6 trillion in Treasury bonds that the trust funds hold today.

The designers of the 1983 Social Security legislation purposely designed program financing in this manner to help pre-fund some of the costs of the baby boomers’ retirement. The interest income that the Social Security trust funds earn on their bonds, as well as the proceeds the trust funds will subsequently receive when the bonds are redeemed, will enable Social Security to keep paying full benefits until 2037. Of course, policymakers should put Social Security on a sound footing well beyond that. But they should not focus much on annual cash flows in a program that is meant to take a long-term perspective.

http://www.cbpp.org/cms/index.cfm?fa=view&id=3262

[damntexdem]

5. Those bonds are U.S. bonds. The U.S. dare not default on any of its bonds.

It did not default on its debts, even when it assumed those of its Revolutionary War, when it was just starting and had no promise that it could ultimately pay them -- it did so, nevertheless. Those bonds are my money, your money, the money of all who have paid and do pay FICA taxes. We are owed that money just as much as China, Japan, and any other country that holds U.S. bonds. If the U.S. defaults on any of those bonds, then its good name and credit is gone, and with it the U.S. economy, and in consequence, likely the world economy. There is no ALTERNATIVE to those bonds' being good.

[Recursion]

6. You're saying that as if I disagree

I said in that very post, we absolutely must meet those obligations.

But why do I feel like I'm the only one who sees that coming up with that 2.5 trillion is not going to be easily done?

[pinto]

8. I'm no economist, by any stretch, but it seems the tax receipts + the dividend income = solvency.

:shrug:

[Igel]

7. One can argue otherwise.

The SS bonds are special issue. They can only be held by the Social Security Administration, a branch of the US government. They can only be sold back to the Treasury Department, a branch of the US government.

Defaulting on the bonds is precisely equivalent in effect to redeeming the bonds but having Congress transfer the funds back to Congress is precisely equivalent to having Congress order the SSA to simply destroy them. The only difference is which "ledger" you enter the numbers, i.e., the accounting procedure.

All the other debts had to be honored because they were between the US government and "non-US-government actors"--people, companies, corporations, or other governments. If there's a default on the special issue bonds, the only question would be if the non-US-government actors would think this was prelude to defaulting on US government debt to *them*.

[PoliticAverse]

10. Default not necessary for the securities not to be repaid.

It is not necessary for the securities to be "defaulted" on for them not to be repaid.
Congress just has to cur social security benefits or raise taxes in a sufficient amount
and then the securities would not have to be redeemed at all (they would just be "rolled
over" when they come due).

[damntexdem]

3. And in 2037, the oldest boomer will be 91, the youngest 73.

And most will be gone; most of those still alive with few years to go. Remember that the aging of the population that the U.S. sees is made up of two parts: the tendency of each cohort to live longer and the large size of the boomer cohort. The latter will be gone soon after 2037. That does not mean that all will be well fiscally; but it does mean that the problem will not grow then as it is doing now and will in the next few decades. And an elimination of the FICA wage cap would take care of the remaining fiscal issues.

[PoliticAverse]

9. "pre-funding" was never the intention.

This statement:
"Every year since 1984, Social Security has collected more in payroll taxes and other income than it pays in benefits and other expenses. (The authors of the 1983 Social Security reform law did this on purpose in order to help pre-fund some of the costs of the baby boomers’ retirement.)"

just isn't true. It was never the intention to "pre-fund" the boomer's retirement.

[freshwest]

11. Sounds great. Has anything changed with the reduction in payroll tax? Sanders indicated that it did.

Just interested in opinions, not claiming to know what the end result of these changes will be.

[PoliticAverse]

12. It depends on how "temporary" the "temporary" reduction turns out to be... n/t