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Mar 06 2008

The phony Social Security crisis-3: More realistic views of the alleged ‘crisis’

(For previous posts in this series, see here.)

In deciding whether Social Security is in trouble or not, it is important to bear in mind different measures. Let us start by assuming that no changes at all are made in the system and that current projections for future demographics hold for the next fifty years. This is a very big ‘if’ indeed, but a starting point for analysis. The alarmists look at the year in which projected Social Security benefits paid out in that year exceed the revenues from the payroll tax that same year. That is expected to occur around 2018. But that alone does not constitute a crisis. Social Security has been running a surplus all these years so by that time the trust fund will have about 3.7 trillion dollars in reserve. This fund earns interest and the interest can be used to supplement the payouts following the year when the expenditures start to exceed the revenues. At a 4.5% interest rate on the US treasury bonds, the accumulated trust fund can generate an annual growth of about $170 billion due to interest alone. Using this interest to pay benefits can be done for some time during which the size of the trust fund will remain the same or will still be increasing, though more slowly.

There will then come a year when the addition of the interest to the payroll tax revenues is not sufficient to cover the cost of the expenditures. The trust fund principal will then have to be used to pay benefits and will thus start to decrease. The worst-case scenario is having all the trust fund be used up, which is quite far into the future, somewhere around 2050. Actually, this scenario is actually the original Social Security model. It was designed as a pay-as-you-go system, with each year’s payroll tax revenues going to meet that same year’s benefits expenditures, without running up big surpluses or deficits.

But there is no reason to think that even this ‘worst-case’ scenario is inevitable. Dean Baker and Mark Weisbrot, co-directors for the Center for Economic and Policy Research, in their book Social Security: The Phony Crisis demolish the scaremonger arguments about Social Security by those who would love to turn over all that money to investors to speculate with. In an op-ed article, they write a detailed point-by-point rebuttal of all the myths propagated and conclude:

The latest Social Security trustees’ report, whose numbers even the White House uses, predicts that the Social Security program can pay all promised benefits for the next 38 years—with no changes at all. The June 2004 estimate from the nonpartisan Congressional Budget Office projects that Social Security can pay all promised benefits without changes for even longer, until 2052. That’s nearly half a century.

And we are supposed to be worried about this?
. . .
The bottom line is that Social Security is more financially sound today than it has been throughout most of its 69-year history, according to Social Security trustees’ numbers.
. . .
The impending crisis of Social Security is a myth. Without it, however, Bush’s initiative to slash benefits and partially privatize the program wouldn’t have a prayer.

Economist Paul Krugman has also challenged the myth of a Social Security crisis, and his article is worth quoting extensively:

Inside the Beltway, doomsaying about Social Security — declaring that the program as we know it can’t survive the onslaught of retiring baby boomers — is regarded as a sort of badge of seriousness, a way of showing how statesmanlike and tough-minded you are.
. . .
But the “everyone” who knows that Social Security is doomed doesn’t include anyone who actually understands the numbers. In fact, the whole Beltway obsession with the fiscal burden of an aging population is misguided.

As Peter Orszag, the director of the Congressional Budget Office, put it in a recent article co-authored with senior analyst Philip Ellis: “The long-term fiscal condition of the United States has been largely misdiagnosed. Despite all the attention paid to demographic challenges, such as the coming retirement of the baby-boom generation, our country’s financial health will in fact be determined primarily by the growth rate of per capita health care costs.”

How has conventional wisdom gotten this so wrong? Well, in large part it’s the result of decades of scare-mongering about Social Security’s future from conservative ideologues, whose ultimate goal is to undermine the program.

Thus, in 2005, the Bush administration tried to push through a combination of privatization and benefit cuts that would, over time, have reduced Social Security to nothing but a giant 401(k). The administration claimed that this was necessary to save the program, which officials insisted was “heading toward an iceberg.”

But the administration’s real motives were, in fact, ideological. The anti-tax activist Stephen Moore gave the game away when he described Social Security as “the soft underbelly of the welfare state,” and hailed the Bush plan as a way to put a “spear” through that soft underbelly.

Fortunately, the scare tactics failed. Democrats in Congress stood their ground; progressive analysts debunked, one after another, the phony arguments of the privatizers; and the public made it clear that it wants to preserve a basic safety net for retired Americans.
. . .
Social Security isn’t a big problem that demands a solution; it’s a small problem, way down the list of major issues facing America, that has nonetheless become an obsession of Beltway insiders. And on Social Security, as on many other issues, what Washington means by bipartisanship is mainly that everyone should come together to give conservatives what they want.

Orszag, Krugman, Baker, and Weisbrot point their fingers at the real problem, which is the out-of-control rise in health care costs. Of the 15.3% of the income below the cap that goes as payroll taxes (half of which is paid by employers), 2.9% goes towards Medicare. It is these rapidly rising health care costs that will cause huge budgetary problems in the future, not paying Social Security retirement benefits.

Scaring us about Social Security serves the purpose of diverting out attention from the very real problem of high health care costs. After all, the administration and Congress are completely in the pockets of the health care industry (the insurance and pharmaceutical companies and the hospital and doctors lobbies) and they want to avoid for as long as possible the fact that a government-run single-payer system of financing health care is the only long-term solution to this problem.

Next: What needs to be done

POST SCRIPT: This woman is very upset

Before he started playing the doctor in the current TV series House, Hugh Laurie played goofy characters in comedies on British TV. Here he plays a hapless TV news reporter in a sketch from the BBC TV show A Bit of Fry and Laurie.

1 comment

  1. 1
    Rian

    The big problem for me isn’t speculation to try to keep money in the account. It’s that when the T-bills and T-bonds representing the value currently in the Social Security account have to be liquidated to pay benefits is when there’s a problem – the money to pay the interest on those bonds and bills comes from the Federal budget, already under great strain.

    And if the dollar continues its slide as the reserve currency for the world, then who will want the additional bonds in the first place? China, the holder of the largest amount of dollars held overseas, is starting to slow their rate of purchase of dollars, instead opting for euros. Eventually, the United States dollar will be a peer competitor with the euro in terms of a reserve currency (which makes sense, since the eurozone is roughly the same size and economic strength as the United States), which bodes ill for the demand of the primary debt notes of the United States government. Don’t be surprised if we don’t default on our Social Security after all; but at the same time interest rates skyrocket and inflation further erodes the value of the dollar. It will make people wax nostalgic for the 1970s.

    Do keep in mind that governments have defaulted on their debts many times throughout history. It is in fact possible that America will do the same, especially as the demand for securities backed by dollars erodes. Also, Social Security impacts one of the last remaining politically active segments of American society, the retirees, and for sure it’s a political tactic (aided and abetted by those who want a couple of trillion dollars injected into the speculative markets) to whip up that last bastion of voting strength into a furor.

    There certainly is a structural flaw in the system, but it’s not the one that garners the political attention. Having a four trillion dollar IOU, even as secure of an IOU as a Treasury bond, is not the same thing as having four trillion dollars in cash.

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