Quantcast

«

»

Sep 17 2012

Social Security: It Isn’t Broke

This is part of a week-long series about Social Security. If you want to read the whole series, links are provided at the bottom of this post.

"Budget" and dollar-sign street signs.

“Budget” by 401(K) 2012. Some rights reserved.

Every few years, we hear the news that Social Security is going to go broke. They have run the numbers, and the money is going to run out.

Of course, it is always going to run out decades from now.

And no one really talks about what it means for Social Security to go broke. So let’s do that now, in a slightly simplified version.

The first thing you have to know is that we pay more into Social Security than we pay out each year and that we have for the last three decades until 2010. The excess funds go to buy Treasury bonds, which pay for other government spending. Those Treasury bonds are what will pay Social Security benefits in years in which other funding is not sufficient.

So did we start tapping into Treasury bonds in 2010, when Social Security taxes didn’t cover benefits? No. Social Security assets generate interest, which is also available to pay benefits. That interest is currently making up the shortfall between taxes and benefits. And it’s doing a fine job of it. We’re still buying Treasury bonds. Current estimates show that we’ll keep buying them, or at least not spending them, up to 2021, another nine years. Then we’ll spend the bonds, which will last another 12 years.

Then, and only then, will we experience a shortfall that will require an increase in taxes (either by percentage or by increasing the portion of income subject to taxation), a decrease in benefits (scaled or by percentage or through means testing), or a subsidy from general revenues. Social Security still would not be broke. It could, in fact, be fixed by doubling the taxes and ever so slightly less than doubling benefits.

That is what happens according to the current estimates. However, there’s something you need to know about the current estimates. These estimates looks a lot like prior estimates, in that they are decades out.

Social Security has been doomed to fail for a very long time without actually getting much closer to doing so. The reason is that the estimates are required by law to be based on very conservative assumptions. We cannot run the risk of going broke, so the reasoning goes, so we must plan very carefully.

How carefully?

But what’s annoying about all of this is that the prediction that Social Security revenues plus the accumulated U.S. securities (yes, the U.S. government, not China, is far and away the world’s largest holder of U.S. securities) will be unable to meet its obligations in 2037*, and only pay out 78 percent of benefits. That estimate comes from a Congressional Budget Office (CBO) report (pdf). But that CBO estimate is based on an annual real GDP rate of growth of 2.5%.

Zoiks! OK, I realize those of you who have managed to stick it out this far might not understand the implications of what a RGDP rate of growth of 2.5% implies (heathens!).

That rate would be so historically abysmal that, since going off the gold standard, we have never had a thirty year period with an average rate of growth of 2.5%. Ever.

This discussion predates the current set of estimates, and the current set of estimates does not show the gains (performance better than expected) we have come to expect comparing various sets of estimates. We have, however, been experiencing a period of dismal economic performance not seen since Social Security was enacted. If this continues, we have much, much more to worry about than when we might run out of Social Security funds squirreled away in Treasury bonds.

If we don’t assume that we have generally reached the end of economic growth in our country, if we don’t assume that this sort of unemployment and underemployment will last for two decades, those estimates are much, much further out, even with the baby boomers retiring and trying to live forever at the same time. There just isn’t that much of a story here…unless your goal is to scare people away from Social Security and into private investment.

In case you haven’t figured it out, that’s the point of all those stories. Next time you see one, look at who is quoted in the story. As with this story posted yesterday, you’ll usually find the expert in question is connected to a conservative think tank.

The day they’re not, then you worry. Until then, relax. Social Security isn’t broke.

——————–

The full series:

6 comments

7 pings

Skip to comment form

  1. 1
    smrnda

    Thanks for this great post. I find the level of ignorance about how social security works, given what a huge, visible program it is to be pretty shocking, along with the fact that you can look into the claims that it’s ‘going broke’ yourself and realize that it’s far from the crisis it’s made out to be.

    The only reason why this nonsense flies is the belief that’s been promoted that all government welfare programs end up being unsustainable, which is tied in with the idea that anything government does = waste and anything the market does is valuable. I find people who believe social security is going to go broke just believe that all government welfare programs go under or backfire as a sort of axiomatic belief that no evidence can dissuade, and any evidence that the program is going well is simply propaganda. The notion that arguments paid for by wealthy individuals could be a form of private sector propaganda seem to be lost on them.

  2. 2
    jesse

    I think it would be useful to post what the current payroll tax limit is (I think it’s $110K) and what it would mean to raise that limit — even assuming current (lowered) rates which is 4.2 percent, IIRC — to twice that. Sandy Weil gets a check, but he pays 0.042 percent of his income into the system. Mitt Romney is the same way — he pays a vanishingly small amount into the pie relative to what he makes. Not. Fair. Especially since the more you make the less use money actually has, because past a certain point it’s almost impossible to spend it all.

    (At this point someone will tell me that ultra-rich folks invest the money and are “job creators.” That assumes they invest it into some profit-making activity. Not everyone does that and not every profit-making activity generates wealth).

  3. 3
    HP

    All we have to do in the U.S. to join the developed world is to drop the ceiling on FICA and extend existing Medicare to all citizens. The cost savings would be tremendous, the effect on the global economy salutary, and any free-market absolutists would have the absolute right to purchase additional health coverage at a fair market price.

  4. 4
    Corvus illustris

    Sigh. The real problem is that this post should never have been necessary, because all the information you give (except for the tentative corrections you make to try to assess the impact of our Lesser Depression) has been around–particularly in CBO and SS trustee reports–for years. But to the mass media, the people who point this out are nothing, while the Very Serious Chicken Littles, like the ineffable Pete Peterson and Simpson & Bowles, are taken Very Seriously. The best case seems to be a “views differ on shape of earth” mention on the nightly news.

    The items on the Very Serious Agenda, of course, are headed by not having to pay back the trust fund. Perhaps I shouldn’t worry; my 99th birthday is in 2037. But ny mother and her brother lived to be 95 and 97 respectively–uh … maybe 78% is ok.

  5. 5
    Keith M Ellis

    I actually came looking at these earlier social security posts and their comments specifically to see if there are some “I don’t expect to receive any benefits” comments. I note that there isn’t any in this post’s comments, but there is later.

    What’s alarming to me is that my very strong impression is that even among liberals/progressives, a large number in their 20s and 30s strongly believe this myth that they won’t ever receive benefits because the fund will go broke before they retire. And this plays into the larger narrative found in these cohorts, on both the right and left, that we’re in the midst of a war between generations, that the middle-aged and older are deliberately screwing the young.

    Now, far be it from me to argue that the elderly Medicare recipients aren’t being … selfish … in their collective predisposition to oppose the ACA and health care reform, and that this doesn’t, in fact, hurt the interests of the young. It does. On the other hand, it’s not as if this group is any more self-interested, collectively, than any other large group of American voters.

    Still, this very widespread notion about social security plays a large role in encouraging this generational warfare view. I’d like to better understand how this view became so widespread and so distributed across the political spectrum. Progressives I’ve known who have an otherwise relatively strong grasp of policy are weirdly uninformed about social security and these issues and have correspondingly strong, and false, ideas about it going bankrupt. The first time I encountered this, it greatly surprised me.

    However, note that I find that a vast portion of the population doesn’t understand what marginal tax rates are yet nevertheless have strong opinions on issues that depend directly upon how marginal tax rates are … so, perhaps there’s just a general predisposition for ignorance on certain kinds of government policy issues (taxation and fiscal). See also: the portion of the budget that goes toward foreign aid or NASA or whatever.

  6. 6
    A in Ca

    If you want to steal something, without the owner protesting too much, the best way is to convince the owner that it is worthless. Hence the propaganda, that Social Security is broke, won’t be there anyway…

  1. 7
    Social Security: Should We Double It? | Almost Diamonds

    [...] It Isn’t Broke [...]

  2. 8
    Social Security: We Suck at Money | Almost Diamonds

    [...] It Isn’t Broke [...]

  3. 9
    Social Security: Corporate Retirement Funding | Almost Diamonds

    [...] It Isn’t Broke [...]

  4. 10
    Social Security: We Aren’t Investing | Almost Diamonds

    [...] It Isn’t Broke [...]

  5. 11
    Social Security: The Perqs of Retirement Security | Almost Diamonds

    [...] It Isn’t Broke [...]

  6. 12
    Links 9/24/12 | Mike the Mad Biologist

    [...] of Stuff Google Maps announces a 400 year advantage over Apple Maps Awesome comment troll smackdown Social Security: It Isn’t Broke Share this:TwitterFacebookStumbleUponRedditDiggEmailPrintLike this:LikeBe the first to like this. [...]

  7. 13
    Epicene Cyborg

    [...] Social Security: It Isn’t Broke. [...]

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite="" class=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>