Wednesday, February 18, 2009

Social Security: 2009 myth busting edition

The BruceWeb started out in Nov 2004 in response to then President Bush's call to 'reform' Social Security in response to 'crisis'. I put the two terms in scare quotes because on examination we see that 'reformers' use 'reform' and 'crisis' in quite different ways that regular people do, and indeed much of there argument comes down to a bait and switch. To understand this we have to lay out the standard narrative and then set it in actual numeric context.

The standard narrative is simple and well understood. It holds that the pending wave of Baby Boomer retirements will inevitably overwhelm Social Security and ultimately drive it to bankruptcy. Moreover promoters insist that we can't just tax our way out, nope we need to take action as soon as possible even if that means accepting painful cuts in benefits. In fact they insist that the whole system is so flawed that we need to transition it to a new sustainable form based on a system of PRAs (Personal Retirement Acounts).

What is missing from this picture? Numbers and dates. This is actually pretty typical of the debate, dollar figures are rarely used and when they are tend to be stated in mysterious ways like 'unfunded liability over the infinite future horizon", and when dates are deployed they are rarely put in real context. Does crisis start in 2017? or 2023? or 2041? or 2049? or has it started already? Well it depends on who you ask and how they define crisis.

So lets put some dates and numbers in. The Social Security Act of 1935 established two different programs, one under Title 1 and the other under Title 2. Title 1 was a straight out government pension funded directly from the General Fund and meant to replace a hodge podge of inadequate state plans. It was designed to phase out over time and be replaced by a new worker funded Title 2 insurance plan. Which is the source of MYTH 1 that FDR envisioned Social Security as being temporary and that PRAs are just what had been planned all along. Instead the replacement is precisely what we know as Social Security today, i.e. Title 2 insurance. Title 2 was set up on a Pay-Go basis, while your benefit was determined by your worklife contributions, the actual funding would mostly come from current working people making contributions to the Social Security Trust Fund via payroll reductions. Which leads to MYTH 2 that the Trust Fund is just a product of the 1983 Reform. Instead it has always served its function as common pool and reserve and allowed to grow and shrink as needed to meet projected needs. The first benefit checks under Title 2 did not go out until 1941 with people retiring before that point relying on Title 1 while waiting for the Trust Fund to grow to a size to support Pay-Go. Just as banks have to be capitalized and have specific reserves so too did Social Security.

Which leads us to MYTH 3 that early retirees got much better rates of return than later ones do. These calculations never seem to measure the taxes being paid to support Title 1 benefits which continued to make up a larger share of overall Social Security benefits right up to 1951. This seems also the source of MYTH 4 that FDR promised that payroll taxes would never exceed some low percentage of your first X dollars in income. Instead there was the recognition that over time as Title 1 retirees died then payroll taxes could be raised to offset income taxes no longer needed. In any event any legacy costs were met by 1980 (assuming a typical entry into the work force by 21 year olds in 1936).

Giving us MYTH 5 that current problems in Social Security were caused by over-generosity to people in the past. This where it is not just driven by confusion over the terminology is shown to be strained argumentation. Take the following numbers which show total benefit payouts under Title 2 since program inception.
OAS 1941-1956 $25.6 billion
OASDI 1957-1968 $181 billion
OASDI 1969-1980 $793.1 billion
OASDI 1981-1992 $2.476.5 trillion
OASDI 1993-2000 $2.829.3 trillion
OASDI 2001-2007 $6.330,9 trillion

For a grand total of $12.636.4 trillion. Total benefits paid out by 1980 totaled $999.7 billion dollars. All of it paid out under a Pay-Go system. All legacy costs associated with people not being covered under Title 2 their entire working lives have now been liquidated. There are still certainly a handful of people collecting benefits who entered the work force before 1936 but the youngest would be 93 years old. To suggest as some people do that the $1 trillion in benefits paid out by 1980 somehow leapfrogs over the current $2.4 trillion surplus to create a $17 trillion dollar gap over the infinite future is absurd. Yet some people solemnly point to Table IV.B7 as if it were proof of what they call 'Backwards Transfer', when instead it is a failure to understand what the Trustees mean by 'past and current participants'.

And lastly MYTH 6 that Social Security should be viewed as an investment fund and Myth 7 should be measured against a theoretical standalone retirement plan set up in 1936. Myth 7 blows away when you realize it takes into no account the transition costs stemming from the need to pay for Title 1, all of which was paid by the same people who are blamed for getting over generous returns under Title 2. In any event a transition to PRAs has to include some way to cover people too close to retirement to benefit, which fact tends to sink all such privatization plans. Fundamentally they face the same problem getting rid of Social Security that the crafters of the original system did, what do you do about people who are already old? MYTH 6 largely blows away on the same grounds but also ignores the fact that the Trust Funds never served as an investment fund to begin with. Certainly the balance in the Trust Fund has always drawn interest and that interest was drawn down during years when the system ran overall deficits as for example in the 1959-1965 span and in the 1971-1981 Table VI.A4.—Historical Operations of the Combined OASI and DI Trust Funds, Calendar Years 1957-2007 [Amounts in billions]. But at no time were those interest earnings really important, indeed I see no year before 1983 where interest was more than 5% of all income. People can do all the calculations they want but Social Security remains what it always has been since Title 1 phased out, a worker funded Pay-Go insurance plan.

Having hopefully disposed, or at least cast doubt on, the prevailing myths we can proceed to talk about what Social Security is rather than what is is not


Anonymous said...

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