Wednesday, April 16, 2008

100/100 in action

In the post below this one I argue that high Trust Fund ratios present a threat to Social Security by transferring it from worker paid insurance to general fund paid welfare. This was specifically a political calculation, under our current situation the Economic Right has successfully been able to separate federal spending into two categories: one of spending that we can't NOT afford which includes all things military, and the other of spending we CAN'T afford which includes most social spending. That the stuff that we can't NOT afford comes with prices starting with 'b's and the stuff we CAN'T afford comes with prices typically starting with 'm's never seems to register. (The Administration practically wet itself announcing $200 million in world food aid yesterday, which works out to 8 hours of the current costs of waging war in Iraq). It is important to keep Social Security from being lumped in with all those other programs, the Right hates it and always has. That is not hyperbole, if they can kill they will, Alf Landon explicitly ran against it in 1936 and the Republicans never really stopped.

A Trust Fund Ratio of 100 is not only a reasonable target, it is in fact the legal test of Short Term Actuarial Balance for the Trustees. Now one way of getting there is to use the brute force method of simply not collecting FICA at all for the next two and a half years and so drive the TF ratio down from its current level of 360 to 100. But that would mean taking a combined $800 billion annual hit to the General Fund over that period. Not only is that not going to happen, it is not necessary. Instead we need to craft a new model that will deliver us to sustainable solvency after 2040.

We know what level of tax increase we would need under Intermediate Cost assumptions: 1.7% of payroll. We know the growth numbers that will return an overfunded system along the lines of Low Cost: 2.9% Real GDP in the years after 2013. So lets go target shooting.

For political reasons our first target point is 2011. We can start with Intermediate Cost assumptions and assume we will need to start phasing in that 1.7% with an initial increase of .4% of payroll. If between now and 2011 we beat IC numbers we simply shave that initial increase down to compensate. If we do enough better to make it unnecessary we can make an adjustment in the next target point of 2015 or whatever interval we choose but always with the goal of delivering 100% of benefits while keeping the TF tail from going long term significantly over a ratio of 100.

It is my personal opinion that subsequent adjustments in the targets will be more likely in the direction of cutting the rates rather than raising them, but in this case opinions don't matter, economic performance does. Rather than quarrel about 75 year windows instead we can just settle on a policy outcome and adjust the FICA rate as needed to hit it.

This is not to say that the current schedule is perfect or that adjustments to benefits are totally off the table, we might agree to settle on a 95/100 solution. But the points are one, we need to be proactive and not reactive, and two there are significant dangers to allowing the Trust Fund ratio from getting out of hand, we are in fact called to thread the economic needle.


Anonymous said...

Bruce, this is the person who posted your stuff on DU. This is off-topic, but I noticed you commenting about the current commodities problems on some blogs elsewhere. I'm not able to post on those venues for some reason, but I wondered if you'd be interested in this, re the current rice shortages - production figures don't seem to justify the shortages.

If you think it's worthwhile, please pass it on, & sorry to post off-topic in your comment section.


Patrick said...

Our discussion of insurance last Friday was very insightful. Thanks.