Saturday, August 16, 2008

The Angry Bear Social Security Series

Social Security Posts on Angry Bear Soc Sec 0-23 (starting May 2008)

More Social Security Posts from Angry Bear Soc Sec 24-44

Even More Posts from AB: late Aug to Dec 2008

January 2009: a Flurry of Social Security Posts at AB

Angry Bear Social Security Blogging: Spring 2009

AB Social Security Blogging: Northwest Plan Edition

Fall 2009-Spring 2010

Social Security: Where's the Report?/Catfood Commission Ed

Fall 2010 Social Security Posts

55 comments:

Laurie said...

Hiya Bruce,
I was trying to explain what I'd read of your posts on AB to two voters at the hair shop the other day, and simply couldn't. I was reading your posts here to see if it's been placed in a nutshell anywhere.

Can you put it in a nutshell?

Thanks.

Bruce Webb said...

Hi Laurie and thanks for your comments here and at AB.

Unfortunately the answer to your question is "No." Now you could get all tendentious on people and 'explain' that "Social Security is just fine and people who tell you different are either underinformed or lying". Which has the virtue of being true but the vice of being vaguely insulting. After all if you have spent the last twenty years doing your due diligence and following this issue in the media then there are some things that you just know about Social Security. Surely hundreds of journalists and economists couldn't simply be wrong on this? Certainly someone must have checked the numbers for themselves? It seems crazy to just say 'look for yourself'.

At this point probably your best bet to get this across to most center to left people is to name drop Paul Krugman as in "Paul Krugman has examined the numbers and concluded that Social Security is not in fact in any kind of crisis". But other than that the process of getting to the center is not to crack a nut but instead to unpeel an onion.

Sorry I can't do better than that.

rdan said...

Your the best. I can place these lists on AB somehow...drop down menu style with label.

Anonymous said...

Laurie

my nutshell is not exactly the same as Bruce's, but it gets us to the same place:

Social Security is not facing a crisis. It is paid for until 2040 or so. After that, if the predictions are true, it may be necessary to pay a small amount more in order to keep the same benefits over a longer life expectancy. That will average about 20 dollars per week on an income that is 300 dollars per week bigger than today, and will pay for an extra 6 years of life expectancy.

This money does not come from "the government". It is your money saved for you, and protected from inflation by "pay as you go" with wage indexing.

The only way the bad guys get the scary numbers is to assume that we will not pay the the extra 20 bucks but keep collecting unreduced benefits for seventy five years or the infinite horizon.

Because Soc Sec is pay as you go and NOT an "investment" there is no need to raise the tax before we reach the point where people are actually living longer.

Where Bruce and I disagree is that he treats the Trust Fund as though it was important. I say that it is not. It was only a temporary measure and was always intended to run out. Bruce can show that it may not run out at all, and that anyway nothing is gained, so far, by trying to pay more in now, or reduce benefits now.

I only say that there is no reason to change anything about Social Security now. And that the worst case is that sometime in the future it might be necessary to pay a small amount more because you are going to be living a lot longer.

coberly

kavips said...

This author agrees with your premise but goes the next step and solves the Medicare Crises.

He however insist that only a 1.7% increase in the FICA tax will create a solvent Social Security Program...

Mr.Sparkle said...

Hi Bruce,

I read many of your posts over at Angry Bear and when I saw this story: http://www.bloomberg.com/apps/news?pid=20601110&sid=asbiybVqsYC0

at Bloomberg, I immediately was reminded of them. Bloomberg doesn't do a great job of noting editorial vs. factual content and so it wasn't until the veeeery bottom that I noticed that it noted the author was an AEI guy. Anyhow, my assumption is there isn't a lot of substance. Nevertheless, I thought you would be interested and I'd be curious about your thoughts on it.

Bruce Webb said...

Kavips thanks.

The Trustees do put the cost of a fix at 1.7% in their 2008 Report. The CBO using different methodology put it at 1.06% in August 2008. When the next Trustees Report comes out in a month or so that should shift some but should still be under 2%.

Bruce Webb said...

Mr. Sparkle

I tucked a comment about this on my last post at AB kind of as an afterthought. Short version he is using 'surplus' in a valid but non-standard way. For Unified Budget purposes Social Security is still strongly in surplus once you count interest on the Trust Fund. Plus almost all the damage is temporary and concentrated on the Disability TF. I left an extended comment on Biggs 'Notes on Social Security Reform' website. I may stick up an AB post on this tomorrow.

Rdan said...

Good morning Bruce. Dan

Robert Oak said...

Hi Bruce,

I didn't realize you had your own site. This is Robert Oak, The Economic Populist admin. I wanted to invite you over to EP if you want to cross post your economics/ss articles (see user guide on EP for cross posting tips). I had picked up on them via AB, excellent coverage, in depth, the kind of information needed in this MSM/lobbyist agenda world.

(Yes I know our CAPTCHA sucks, we're a community site so security is a huge issue but if you create an account all of that goes away and yes I am working on a site upgrade. ;))

Anonymous said...

Would like to draw your attention to Allan Sloan's article in Fortune in respect to SS.

It does not present the same sanguine view that Social Security is doing okay so anyone with pre-existing ideological commitments that insist SS is okay may want to avoid it to prevent their world view from being disturbed.

http://money.cnn.com/2009/07/29/news/economy/fixing_social_security.fortune/index.htm

run75441 said...

Bruce:

I too was going to mention Allan Sloan's Fortune article saying revenue from SS had dropped to $18 billion here: http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/social-security-crunch-coming-fast.aspx

regards,

Bill

Bruce Webb said...

Sloan is being hacktacular here.

First like the AEI guys he has discounted the interest being credited to the Trust Fund to zero. The dollars he is talking about respresent the cash flow the General Fund has been happy to borrow from Social Security, only to realize out of horror that it may have to start paying it back. Sloan is just playing another version of the Phony IOU game.

Social Security combined cash surpluses were projected to run out in 2019, that date has been moved back to 2017 but that fact does not materially effect anything. And if you take DI and OAS separately, as they legally are DI went cash flow negative in 2006, the current deterioration just reflects some faster deterioration due to two years of sub-standard collections due to high unemployment.

Plus it is too bad for Mr. Sloan that the CBO just released its new scoring for SSA and essentially blows his boo-hooing out of the water for the crocodile tears it is. The CBO release got literally zero MSM coverage (as of a few days ago), probably because it doesn't support the 'Oh my God, the recession is killing Social Security!' meme these guys are trying to float.

http://angrybear.blogspot.com/2009/08/cbos-long-term-projections-for-social.html

The long term outlook for Social Security is essentially unchanged with a total fix scored at either 2% of payroll (SSA) or 1.3% of payroll (CBO) and those increases could be phased in over a near twenty year fix if we liked.

We have worked up a spreadsheet showing that a 0.20% increase in 2010 and a 0.10% increase in 2011 fixes Social Security until another set of roughly 0.20% fixes kicks in in 2026.

It works to about $1.50 per week by year two in take-home by a couple earning the median family income. All the rest is pure smoke being blown by Sloane.

(And I did see this when it came out, I didn't consider it worth commenting on.)

Anonymous said...

I appreciate Bruce's point. Considered on its own, the Trust fund has a lot of assets and does get credited with interest. However, that misses, I think, Mr. Sloan's main point.

That point being just this, because the SS surplus has already been spent when it comes time for the trust fund to be redeemed the money will have to be raised by either taxing anew or borrowing anew.

So yes, if considering SS alone is okay when doing one's analysis the SS is either fine or can be easily fixed. But that is like finding out someone has a CD for 100K at a bank somewhere and inferring that their financial status is just fine without looking at the 5 million in liabilities against which it must be balanced.

With so many competing claims on the federal purse, what will be the impact of redeeming the SS trust fund when the federal financial status is viewed in toto?

I think that was the essential point Mr. Sloan was trying to make and it is one I'd like to see addressed.

Bruce Webb said...

With so many competing claims on the federal purse, what will be the impact of redeeming the SS trust fund when the federal financial status is viewed in toto?

Very small in the first decade and a half, and then a little more significant in the years 2032-2037. Per SSA. CBO numbers would have the impact be considerably smaller and more stretched out. Which explains why people like Sloan ever seem to quantify anything. Social Security has to start taking money in 2017!!!!!!!!!!! Well Mr. Sloan, how much and why is that significant?
This gives the number inflation adjusted so as to compare with current war, bailout and stimulus costs
http://www.ssa.gov/OACT/TR/2009/VI_OASDHI_dollars.html#140103
This gives the current dollar number
http://www.ssa.gov/OACT/TR/2009/VI_OASDHI_dollars.html#150920

Current dollar $43 billion in 2017
Constant dollar $35 billion in 2017

The notion that debt repayment starting at these levels is such an emergency that we have to take action is in my view dishonest special pleading.

When was the last time you saw a figure for 'unfunded liability over the Infinite Future Horizon' for defense spending? Or even a calculation of the present value of contracts already awarded and force levels authorized? Never. Only Social Security and Medicare get this curious treatment.

Anonymous said...

Bruce, thanks very much for the response. Your response is quite sensible I think. I'm inclined to think of Rawl's argument for full disclosure of information about government plans and planning in his Political Liberalism; i.e., "If the basic structure relies on coercive sanctions, however rarely and scrupulously applied, the grounds of its institutions should stand up to public scrutiny. When
basic social arrangements and individual actions are fully justifiable, citizens can give reasons for their beliefs and conduct before one another confident that this avowed reckoning itself will strengthen
and not weaken public understanding.
The political order does not, it seems, depend on historically accidental or established delusions, or other mistaken
beliefs resting on the deceptive appearances of institutions that mislead us as to how they work."

When I consider Rawl's advice on the matter I have to also consider the statements of the GAO in it's December 2007 report titled "Accrual Budgeting Useful in Certain Areas but Does Not Provide Sufficient Information for Reporting on Our Nation’s Longer-Term Fiscal Challenge" where it says, "Although a more complete picture of the government’s fiscal stance today and over time comes from looking at both the cash and accrual measures than from looking at either alone, even the two together do not provide sufficient information on our future fiscal challenges. In addition to considering the federal government’s current financial condition, it is critical to look at other measures of the long-term fiscal outlook of the federal government. While there are various ways to consider and assess the long-term fiscal outlook, any analysis should include more than just the obligations and costs recognized in the budget and financial statements. It should take account of the implicit promises embedded in current policy and the timing of these longer-term obligations and commitments in relation to the resources available under various assumptions. For example, while the cash and accrual measures showed improvement between fiscal year 2005 and fiscal year 2007, our long-term fiscal outlook did not change. In fact, the U.S. government’s total reported liabilities, net social insurance commitments, and other fiscal exposures continue to grow and total more than $52 trillion, representing approximately four times the nation’s total output, or gross domestic product (GDP), in fiscal year 2007, up from about $20 trillion, or two times GDP in fiscal year 2000 (see table 1).

Table 1 omitted here

and then it continues:

"Another way to assess the U.S. government’s long-term fiscal outlook and the sustainability of federal programs is to run simulations of future revenues and spending for all federal programs, based on a continuation of current or proposed policy. Long-term simulations by GAO, the Congressional Budget Office, and others show that we face large and growing structural deficits driven primarily by rising health care costs and known demographic trends. As shown in figure 2, GAO’s long-term simulations—which are neither forecasts nor predictions—continue to show ever-increasing long-term deficits resulting in a federal debt level that ultimately spirals out of control. The timing of deficits and the resulting debt buildup varies depending on the assumptions used, but under either optimistic (“Baseline Extended”) or more realistic assumptions (“Alternative simulation”), the federal government’s current fiscal policy is unsustainable."

This leaves me in the position of wishing there were figures for the unfunded liability over the infinite future horizon for defense spending, etc. because I think this information is, at least to some degree, made inscrutable precisely for the purpose of getting more money for programs that a majority of the public would consider rediculously foolhardy if its true costs were known.

Anonymous said...

Bruce, now I'm confused. You refer to a table from the trustees that shows different figures than what I think to be essentially the same table linked to by Sloan.

The table Sloan links to can be found here: http://www.socialsecurity.gov/OACT/TR/2009/lr6f8.html

According to the table linked to by Sloan, the need to redeem the trust fund starts in 2016 and the totals look like this for the intermediate assumption in current dollars (Billions):

Cost Income Excl Int. Shortfall
1005.3 986.4 18.9 (2016)
1074.3 1031.4 42.9 (2017)
1147.5 1077.0 70.5 (2018)
1226.2 1125.2 101 (2019)
1308.8 1175.5 133 (2020)

etc. etc. thru to 2036 where the figures are:

3054.4 2360 694.4 (2036)

When I plug these figures into Excel and sum up the income coming into SS over this time I get 33.175 trillion. When I sum up costs over the time period I get 40.498 trillion meaning that, under the intermediate cost assumption there will be a need for an additional 7.323 trillion in tax revenues over and above tax revenues required by other government spending over this period to cover redemptions of the SS trust fund.

If this sum is split evenly between the 21 years in the time period covered this averages out to 348.719 billion in taxes per year needed to cover the redemptions of the SS trust fund from the time they start being redeemed (2016) to the time the projections end (2036).

If you look at projected population at 2010 and 2040 (from http://www.census.gov/population/www/projections/usinterimproj/)
and take an average of the two you get an average population over the period of 350,441,000 people during the time period.

That means that it's probably going to cost around $995 average per person ($3980 for a family of four) per year over the time frame to redeem enough of the SS trust fund to cover the projeced costs of the trust fund that exceed the amount coming in.

That seems like a lot to me but it probably pales in comparison to what we are spending per person on the military which last year was around $2500 per person or 10,000 per family of four.

Bruce Webb said...

Well it does appear to be 2016 from combined OASDI.

I would note that taken separately DI started requiring transfers from the Treasury back in 2006 and this didn't occasion any crisis in the borrowing markets. This amount of transfer will ramp up slowly over the next decade as DI deficits grow and OAS surpluses shrink but the actual crossover point represents no new crisis. To see this you would need to look at the numbers of Table IV.A1 for OAS where you would see that total tax revenues for that program in 2017 total $884 billion against $893 billion in cost for a net need for new borrowing of only $9 billion.
On the other hand when you look at Table IV.A2 for DI you see $22.8 billion of new borrowing in 2015 increases to $24.5 billion in 2016. That is for each individual component the gap and so any subsequent fix starts small and then builds only slowly.
http://www.ssa.gov/OACT/TR/2009/trLOT.html
For example we can show that a fix to DI could be accomplished with a 0.3% increase in FICA over 2010-2011 which would then serve to shove the combined OASDI gap back a long way. 2016 or 2017 only seem to represent a discontinuity when you combine two separate processes into one.

As to the totals. Well i am not going to challenge your Excel spreadsheet but will make some points. One is that under your formulation the cost drops from your average $995 million between now and 2036 to zero in 2038, no TF no redemption. That is if nothing is done. This would require an uprupt but not fatal cut in benefits starting in 2037. On the other hand rather than looking at this as a fully amortized mortgage we could readjust revenues so that instead of the Trust Fund ratio going to zero in 2037 that we could trend it down to a fairly healthy 130 at the end of the seventy five year window by adopting the revenue increases in the Northwest Plan. That is if we change our current 27 year mortgage to a 75 year one we can drop our payment per person per year way down and in fact significantly below the projected in per person Real Wage over that same period. Numbers are available in the spreadsheet.

Anyway a nice conversation and I hope it can continue here and at AB but for now I am late for Happy Hour (where I can read but not easily respond to posted comments.)

Anonymous said...

Bruce, thanks for the reply. I've been very worried by what I've seen saying the overall fiscal situation is unsustainable so I've been trying to get a handle on the parts of that to know where to focus my attention. At least now I know that it's not SS that is the unsustainable part. $995 per person per year for necessary SS trust fund redemptions is an awful lot of money but it's not totallyt out of the question. I read a little about the Northwest plan and will read more. Mainly I was worried that redeeming the SS trust fund was going to be impossible given all the other demands on the public purse but that appears not to be the case unless the economy stays this bad for a long time and the intermediate cost assumptions just don't pertain any more.

It looks like military spending and health care are the real bombs waiting to blow up and I haven't got a clue what we are going to do about them.

Bruce Webb said...

It is worth noting that Social Security shares the upside and the downside of the economy. If Greenspan's predictions about productivity and the parallel predictions by Bush's people on the actual effects of tax cuts had actually been borne out then they would have fully funded Social Security along the way. Which is what led to my ditty from 1997:

If Privatization is Necessary, it Won't Be Possible
If Privatization is Possible, it Won't Be Necessary

It is very difficult and in many people's view (like the authors of BDK - a well known paper by Baker, Delong and Krugman) impossible to get historic returns on stocks given Intermediate Cost assumptions, while the growth rates associated with those historic returns would serve to fund Social Security as is. Plenty of people have tried to thread the needle to show that demographics make Social Security an unsustainable program but have no corresponding effect on the overall economy. I don't see that it can be done, it certainly hasn't been convincingly demonstrated.

Anonymous said...

Bruce, nice ditty. Both clever and accurate. However, I am not sanguine about growth rates going forward. I think we are headed for an economic collapse. Len Burman at the Urban Institute expresses my take on the situation better than I do. His take can be seen here: http://vimeo.com/6070085

Anonymous said...

Hi Bruce: I don't have your email so I don't know how to contact you that way. I will use this means. I have posted from time to time on Angry Bear, but most of my posts have disappeared. I emailed rdan about it and got several explanations, mainly that the software did it. I believed him at first, but when I returned and posted again I found those comments also had disappeared. Since I tend to support your viewpoint I find it odd that I should be removed for some reason. But that's what happens. My comments appear, but then after a while just vanish. Any ideas?

Chris

contact me at ellerveira@yahoo.com

Larry said...

I'd greatly appreciate an update, given the latest revenue numbers, which show outlays exceeding income at least for the time being.

Bruce Webb said...

Larry obviously Social Security takes a short term double hit whenever unemployment jumps. First it is a direct loss on the revenue side plus it tends to spark a spike in disability and early retirement claims. I mean if you planned to stick it out in your job even if you could qualify for disability or were over 62 but wanted the bigger check, something is better than nothing if you are laid off and are faced with getting a new job with your condition or at your age.

But Social Security remains largely a pay-go system, relying on the Trust Fund only in times of trouble. So yes projections are that Social Security will have to draw minor amounts from its $2.5 trillion in reserves for the next two years, then go back into surplus for around three years and then start drawing on those reserves starting a year earlier than planned. But that is what the Trust Fund is for, the recent troubles have just moved some dates around.

Now there are people who claim on various grounds that the Special Treasuries in the Trust Fund are in some sense unreal, and if you go through this series you will find some refutations of those arguments. Short version: the people promoting those arguments are either idiots, thieves or liars. At best they have not sat down and thought about what 'money' is and is not, and what they would have done with extra cash flow from payroll taxes from 1983 to now. At worst they simply want to keep the $1.2 trillion in so in cash they borrowed from workers and accrued interest and deny any obligation to pay it back.

Social Security is still drawing revenue from the 90% of Americans per U-3 or 80% of Americans per U-6 and is running a surplus just over $100 billion a year due to interest on the $2.5 trillion Trust Fund. If you ignore that interest and the existence of the Trust Fund itself then you can assert that outlays are exceeding income. Otherwise not.

I trust in the Full Faith and Credit of the United States and find it hard to believe that the U.S. will simply deny its obligations to the 300 plus Americans who are either retired, working, or will retire within the next 67 years and are or will be subject to FICA payroll taxes just because some billionaires led by Peter G Peterson don't want to pay their $2.5 trillion dollar tab.

The people pushing the idea that short term cash flow and not total assets should be the policy driver here are in my mind being deliberately dishonest or have simply been duped by the liars and would be thieves.

Under the law the Trustees of Social Security are supposed to maintain 1 year of reserves. Currently they are sitting on 3.5 years. Under current projections Social Security is projected to fall under 1 year of reserves in around 2026. It is likely that updated numbers would push that to 2025. Which means we have about 16 years to put together a plan to address that. Which we have, it is called the Northwest Plan for a Real Social Security Fix. It turns out that a phased series of tax increases that would be mostly unfelt puts Social Security on a path where it would stay at a 100% reserve level for the standard 75 year window. During some of those years it will be cash flow negative but never at levels comparable to whatever war of choice we are undertaking at the time.

Bruce Webb said...

(cont)

Summing up. Certain people on the Right have hated Social Security from its initiation. They hoped to kill it the last time it came to a crisis in 1983 but were beaten back. AT which point they put in a plan to undermine confidence in it that they could deploy whenever it seemed to be approaching crisis again. This deep recession gave them an opportunity to launch an attack, just as the Bush win in 2004 gave them (they thought) an opportunity. We beat them back in Spring 2005 and we will beat them back this time. So don't buy into the crocodile tears. The same people who tried to kill Social Security when it was riding high in 2001 and 2004 are, and I mean this quite literally, the same people who are striking at it when it is down and it you wanted names I could give them.

Michael Tanner, Kevin Hassett, Andrew Biggs, and people associated with Peter G Peterson. Dig into any story about Social Security 'crisis' and one or more of those names will spring up.

Anonymous said...

Hello, Bruce! I'm a huge fan. There is one thing you touch upon that bothers me which is found in this, "Now there are people who claim on various grounds that the Special Treasuries in the Trust Fund are in some sense unreal, and if you go through this series you will find some refutations of those arguments. Short version: the people promoting those arguments are either idiots, thieves or liars. At best they have not sat down and thought about what 'money' is and is not, and what they would have done with extra cash flow from payroll taxes from 1983 to now. At worst they simply want to keep the $1.2 trillion in so in cash they borrowed from workers and accrued interest and deny any obligation to pay it back."

The Government Account Series securities (GAS) are no more or no less real than US Treasury bonds. However, I'd like to point out one is marketable while the GAS securities are non-marketable.

I realize that doesn't make much difference except that in 1985 Congress and Sec. of Treas. James Baker loved the difference when the bonds were sold on the secondary market creating cash for the general fund which Congress could easily spend.

GAS securities replaced the US Treasury bonds in order to keep track of what was owed. It took over 20 years but Congress finally sold all the original maretable US Treasury bonds and replaced them with GAS securities.

Great work you do, Bruce! Thank you.

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Robert Bostick said...

Bruce,

Because 99.9% of Americans are clueless about the implications of abandoning the gold standard they’re equally clueless about what happens to their tax payments. Tax dollars get destroyed.

While OMB, Treasury and CBO keep records of what the government takes in there is no direct or indirect payment from SS Trust Funds to anyone. Our Federal income and payroll taxes do not per se fund anything. Moreover, because the U.S. is monetarily sovereign neither it as a nation nor any of its programs face insolvency at anytime unless politicians refuse to enact legislation which appropriates funding.

The Federal Government (FG) spends (appropriations) new (paper/electronic) dollars into the Private Sector (PS) to purchase goods and services and make transfer payments (Social Security/Medicare/Medicaid, unemployment insurance, etc.) to the (PS).

We must use some of these dollars to pay our Federal taxes. Because the FG requires payment in dollars, nothing else. An indisputable fact is that the FG must spend before it taxes or buys Treasury securities.

Why would the Sovereign Government destroy the tax Dollars it collects? Doesn’t it need those tax Dollars to pay for its spending? Shouldn’t the “drain” (taxation) really be a sump-pump that lifts the tax Dollars back up and dumps them into the FG pot?

NO!!

The reason is the underlying reality of what a U.S. Dollar actually is: It is simply a promise, by the U.S. sovereign government, that it will accept the Dollar as payment for a Dollar’s worth of taxes. That’s it.

A Dollar—whether it’s a paper Dollar or an “electronic” Dollar—is nothing more than that promise. In other words, a Dollar is the I.O.U. of the sovereign government. The Dollar says: “I owe you one Dollar’s worth of tax credit.”

This I.O.U. means a lot more to all of us in the Private Sector (households and businesses) because we also use this I.O.U. Dollar for our MONEY—we use it to buy goods and services from each other, to invest in business ventures, and to save for future spending in our retirement.

But at its most official heart, the U.S. Dollar is simply the I.O.U. promise of our sovereign Federal Government.

You give the Federal Government back its I.O.U., the FG declares your taxes paid, and the I.O.U. is cancelled. That I.O.U. is of no further use to the Federal Government. It is illogical for the FG to “keep” an I.O.U. that says it owes something to itself.

It could recycle the I.O.U. and use it to buy new goods and services from the Private Sector. But even that is illogical, because it is far easier and more efficient, when the Sovereign Government needs to spend again, for it to simply issue a new I.O.U.

This is especially true since the vast majority of Dollars issued and spent are electronic—simple keystrokes on a computer screen.

Source: J.D. Alt “Diagrams and Dollars” A primer on how money is created, spent and taxed. http://neweconomicperspectives.org/2014/01/diagrams-dollars-modern-money-illustrated-part-1.html