Thursday, November 25, 2004

Trust Fund Exhaustion: a Personal Odyssey

Who the hell am I to be lecturing economists on Social Security? Well let's take a visit down memory lane.

In the 1980's the accepted figure for Trust Fund Exhaustion was 2023, a date I found amusingly ironic as it coincided with the year that I would be eligible for full retirement under the reformed system: in my case 66 years and 4 months. But it fixed the date in my mind.

In 1993 I was watching some show or another or browsing through some paper and someone commented that the Trust Fund was due to run out in 2026. Had I misremembered the earlier date? No, the date had been officially changed. Which taught me Lesson One of the Social Security Trust Fund: The exhaustion date is not fixed in stone, it moves with the economy.

In 1996 I was able to get back on line and started actively seeking information on Trust Fund exhaustion. I came across articles like this one from July/August 1995 (the date may be a typo, the article refers to a Dec 1995 article in LBO) The Myth of Social Security's Imminent Collapse Which taught me Lesson Two of the Social Security Trust Fund: The exhaustion date is not determined independently. Everyone is drawing from the same set of numbers: (link to) The Annual Reports of the Trustees of Social Security. And by the way, the exhaustion date was now set at 2030. Which taught me Lesson Three: the exhaustion date can move out fairly quickly, in this case 4 years over a 3 year period. At that rate the Trust Fund would never run out.

At this point I hear the murmering "No you fool, the Boomers are going to start to retire putting impossible stress on the Fund". Well no, the Annual Reports are fully aware of this impending demographic bulge, that in large part is what they are attempting to address, and every date and factoid you have ever seen is drawn from their pages. God is not making more Boomers, the demographic problem is fixed in stone, all of these forecasts are working with the same pool of retirees.

So lets look at some more numbers. Every year the Trustees present The Three Economic Alternatives and based on those projections give us some key dates and numbers. I want to focus on two. First the date of Trust Fund exhaustion under the Intermediate Cost Alternative if we do nothing, and second the amount of immediate payroll tax increase to fix it. But first a word from the other side.

From our good friends at the Cato Institute from June of 1998 The Myth of the 2.2 Percent Solution
"The 2.2 percent figure assumes that the reform would take effect at the beginning of calendar year 1998. Thus it is already out of date. Each year Congress waits, the magnitude of the tax hike required to balance the Social Security trust funds rises. "
This argument is followed by a series of very dubious assertions, based on from what I can see nothing at all. But let's test this particular assumption: 'by doing nothing the magnitude of the tax hike would have to rise'.

Report Year / Trust Fund Exhaustion Date / Amount of Payroll Gap (and so tax increase needed)
1996 / 2030 / 2.19%
1997 / 2030 / 2.23%
1998 / 2032 / 2.19%
1999 / 2034 / 2.07%
2000 / 2037 / 1.89%
2001 / 2038 / 1.86%
2002 / 2041 / 1.87%
2003 / 2042 / 1.92%
2004 / 2042 / 1.89%

These numbers can be found in each reports "Overview" section. 2004 Report: Overview. Graphic representations of the Trust Fund ratio (zero equalling exhaustion) can be found at Trust Fund Ratios under the Three Alternatives

Now we can argue the numbers in any given year, and the motives of the Trustees (and I will), but a look at these numbers shows that the central premise of the Cato Institute is flat out wrong. We did nothing to address the gap. If they had been correct the exhaustion date should have stayed steady and the amount of tax needed should have gone up. Leaving 2.19% of my paycheck in my pocket every year from 1998 to date instead of devoting it to the Trust Fund should have left that Fund relatively worse off. It didn't. Actually the reverse is true. By doing nothing Congress left thousands of dollars for me to spend or invest over that span, and now the Trustees are reporting that not only did they not need that money after all, they actually need a smaller percentage going forward.

There is a world for a problem that left untreated retreats into the distance and requires an ever shrinking fix. That word is not "Crisis".
(And though it may look like progress is stalled, that has more to do with the increasingly gloomy numbers posted in the 2004 report. As the real numbers for 2004 are reported, and a more realistic number for 2005 is inserted, that 2042 date should lurch forward 2004: Economic Assumptions).

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