Social Security Crisis and Cato's 'Big Lie'

Social Security is not broke: by the Numbers That was the title to my Introduction when I put up by first series of posts on Social Security in November 2004. It holds up very well today. But for a new Introduction you might start with Guide to the BruceWeb

Social Security is not broke, even if taken on its own terms. It is fully funded until 2041, and even then if nothing was done the benefit cut would still leave a check 120% better than retirees get today. Everything else you hear about "looming Boomer retirement""phony IOUs""looted Trust Fund" is just part of a contrived narrative set forth in the Fall 1983 Cato Journal whose title is Social Security: Continuing Crisis or real reform

more below

Most egregious of all the Cato Journal articles is Butler and Germanis Achieving a "Leninist" Strategy where they layout an elaborate campaign with four components.

One, get the stakeholders on board to sell a consistent message:
"What we must do is construct a coalition around the Ferrara plan, a coalition that will gain directly from its implementation. That coalition should consist of not only those who will reap benefits from the IRA-based private system Ferrara has proposed but also the banks, insurance companies, and other institutions that will gain from providing such plans to the public."

Two, reassure those approaching retirement
"Calming Existing Beneficiaries
The sine qua non of any successful Social Security reform strategy must he an assurance to those already retired or nearing retirement that their benefits will he paid in full."

Three, convince the young that there is an irreparable problem
"The second main element in our reform strategy involves what one might crudely call guerrilla warthre against both the current Social Security system and the coalition that supports it."

Four, blame the Boomers.

The whole thing is worth reading. This campaign was carried out brilliantly and maintains much of its strength today even though the facts stopped supporting it around 1998, and its falsity confirmed by 2000.

People who believe Social Security faces any kind of crisis are simply the victims of the Leninist guerilla war strategy outlined by Butler and Germanis in 1983. The Republicans and certain tools in the Democratic center are either lying to you or equally victims who have not bothered to actually examine the numbers.

Rather than draw this out I'll just see if anyone cares to respond.

Tags: Cato, Social Security (all tags)

Comments

24 Comments

Re: Social Security Crisis and Cato's 'Big Lie'

Thanks for posting this, Bruce.

by clarkent 2007-05-27 07:57AM | 0 recs
Social Security in for the Long Term

I agree that Social Security is not broke.  However, the trust fund will be exhausted by mid-century.  It might sound like an awful long time from now to those who'll be dead, but I want to retire around then.

It is clear, based on most estimates that Social Security is not in long term financial balance.  If you take a look at VI.E2 in the OASDI Trustees Report (http://www.ssa.gov/OACT/TR/TR07/VI_stoch astic.html#wp103390) it is clear that unless Social Security is at the lowest of low cost estimates it will be in financial imbalance even with the interest earned on the trust fund.

I think that progressives should adopt the framing that AARP advocates.  Social Security is not bankrupt, but it needs a bit of a tweak.  We can with some minor reforms preserve Social Security in current form for generations to come.  If we decide to wait and bet on the low cost estimates and it ends up to be in worse shape than expected privatization advocates will have a field day.

For the sake of preserving a landmark achievement, we should reform the system in the minor ways necessary now.

by Obama08 2007-05-27 08:23AM | 0 recs
Re: Social Security in for the Long Term

It's not in crisis or even in serious trouble. Even if we do nothing and the trustees' very conservative estimates of economic growth are correct, retirees 50 years from now will still receive more money than retirees do today - in real terms! Why do we want to mess with that by putting a bunch of junk on the table?

by clarkent 2007-05-27 08:41AM | 0 recs
Re: Social Security in for the Long Term

The point of the cost of living adjustment adjusting with real wages rather than inflation is for it to be consistent with the standard of living.  The standard of living for retirees will drop when that drop occurs.

Over time in America our standard of living increases.  Yes, even if Social Security were only able to pay out 75 percent of benefits in 40 years people would be able to eat.  It wouldn't however hold them over the poverty line.

by Obama08 2007-05-27 09:22AM | 0 recs
From 160% to only 120%

We call it Rosser's Law. Scheduled benefits in 2041 are 160% relative to todays benefits. If the economy really performs down to Intermediate Cost, then the system can only deliver 75% of that 160% or 120%. Well Boo Hoo.

Under currrent law the Trustees have to warn Congress whenever the Trust Fund falls into short term actuarial imbalance, defined as a Trust Fund going to a trust fund ratio of less than 100 in any of the next 10 years. Under Intermediate Cost that point is not projected until 2027, which would seem plenty of time to fix the problem if one is still there.

Traditionally the argument over Social Security has essentially blamed Boomers. But the fact is that in 2041 Boomers will range in age from  77 to 95, which is to say that we will by and large have fully paid for our own retirements.

Why should I agree in advance to benefit cuts from 2023 to 2041? The facts are that the only thing keeping Social Security from being fully funded forever is for Gen X and Gen Y to keep future productivity near historical trend. 2.0% ultimate brings home the day. Get the slackers off the couch and working and the 'crisis' vanishes.

by Bruce Webb 2007-05-27 10:04AM | 0 recs
Hey, now wait a minute ...

... while there seems to be some confusion as to whether I'm a Boomer or a Gen-Xer (Strauss and Howe would put me in Gen-X, together with a lot of marketers, while the cohort thresholds common in the blogosphere makes me a Boomer) ... a lot of that is not productivity, its just shifting incomes from wages to profits and from the middle of the income ladder to the very top. Profit incomes do not contribute to Social Security payroll income tax, and neither does income growth for people already earning more than the cap.

And, of course, underinvesting in the workforce results in less productivity growth than we could have had.

by BruceMcF 2007-05-27 11:33AM | 0 recs
Productivity is the lead number

In the economic tables of the Trustees. And historically there has been a close correlation between Productivity and Real Wages.

The real point being that the Trustees have presented a set of numbers that would return a fully funded Social Security system, it is called Low Cost. It is incumbant on people who insist the system needs some tweaking to show what component of Low Cost is so optimistic as not to be reachable. The only plausible candidate is fertility, which at 2.23 is perhaps high. On the other hand the immigration numbers are a joke.

Over the last ten years the economy has consistently returned numbers better than Low Cost and the result is what you would logically expect, a crisis that gets pushed out further in time.

Privatizers typically don't even recognize the existence of Low Cost. Because they understand full well that any model based on stocks returning traditional levels also assume trend growth which is substantially more than required to return Low Cost numbers.
What is the Low Cost Alternative
The only thing they hate more than Low Cost is the payroll tax gap. It is why Bush took it off the table to start with. Right now the number is 1.95% of payroll. Even given Intermediate Cost assumptions that is what it would take. Privatizers need to show they can produce a better result at a cheaper price, because otherwise why bother. They can't do it, not for workers making under the median. They don't even try.

by Bruce Webb 2007-05-27 12:07PM | 0 recs
Re: Productivity is the lead number

Productivity itself is a shaky number, especially as services (whether outsourcing of service previously done inhouse by manufacturers, like cleaning, or industries that actually have services as their final output) is the largest sector.

The failure of median wages to track productivity growth during the Bush regime is precisely the same as profits and incomes in the top 5% of the income ladder claiming the bulk of all income growth for the entire current recovery.

by BruceMcF 2007-05-27 01:08PM | 0 recs
Particularly shaky lately

The Productivity series went nuts in Q4 2005 and frankly I don't trust reported numbers since. But that really has no bearing on the overall issue. The Trustees project Real GDP, CPI, Unemployment, Real Wages, Nominal and Real Interest, anyone is free to make their case on the totality of the numbers.

Right up to 2001 the lead number in Table V.B1 was Real GDP, which people understood and which is widely reported. Why that was swapped for Productivity is a question for the Office of the Chief Actuary. My personal belief is that it was politically motivated to hide the fact that the system was not in crisis. At the time they were gearing up for tax cuts and promising future growth, it would have been a little embarassing to be projecting huge drops in future Real GDP at the same time.

The reality is that the Bush Tax Cut narrative is at fatal odds with the Social Security Crisis narrative. If Tax Cuts deliver the growth they promise any semblance of crisis vanishes. If the economy does long term sink to 1.7% productivity and 2.0% Real GDP (Intermediate Cost projections) then you will have proof that tax cuts do not create growth. They just want to have it both ways. Privatizers have to work out of two sets of books, one to predict crisis and a totally different and more positive set to sell private accounts based on equities. Which is why they simply refuse to discuss economic assumptions directly.

So feel free to approach this debate from the standpoint of Real Wages and Real GDP rather than Productivity, it doesn't change the underlying reality.

In both 2005 and 2006 Productivity was reported at very disappointing rates. Yet oddly in both years Social Security dollar receipts came in ahead of both Intermediate and Low Cost projections. Which was odd because if taken seriously it would mean that the disconnect between productivity and wages you cite actually reversed course in those years with workers retaining a even bigger share of a smaller pie. I don't believe this actually happened which is one reason I don't trust the productivity series over the last six quarters.

But feel free to compare the actual cash balances in the Trust Funds, tracked to the penny monthly by the Bureau of Public Dept, to the projected balances in the Report. There is a one month lag time, numbers for April will not be released until May 31. The real health of the Trust Funds can be tracked with precision. They are not sick. 'They' because DI (Disability Insurance) and OASI (Old/Age Survivors) are legally distinct and reported individually and combined in the Reports but separately by the Bureau.

http://www.treasurydirect.gov/govt/repor ts/tfmp/tfmp.htm

by Bruce Webb 2007-05-28 09:13AM | 0 recs
Stochaistic what?

"It should be noted that this model is subject to further development. Future improvements and refinements are expected to be more likely to expand rather than reduce the indicated range of uncertainty."

This section only showed up in the 2004 Report and seemed then and now to be written in a deliberate opague way. Maybe I am just stupid but this sentence seems to suggest that if you simply assume Intermediate cost than random variation will not deliver Low Cost results. Which may be true, but is kind of irrelevant to the question at hand.

"Each time-series equation is designed such that, in the absence of random variation, the value of the variable would equal the value assumed under the intermediate set of assumptions."
------------------

Exhuastion of the Trust Fund does not mean that the program is defunded, FICA goes on as does taxation on some benefits. But that is not really the point. Every year from 1997 to 2004 the date of exhaustion got pushed back and the payroll gap shrank.
EPI Changes in Trustees Projections over That trend stalled in 2005 over changes in assumptions in future retirees labor hours, and reversed itself in 2006 by a reduction in assumed interest from 3.0% to 2.9% which threw the payroll gap up to 2.02%, but 2007 shows a strong continuation in the trend with the gap now down to 1.95% and depletion back out to 2041

It is an odd crisis which left addressed grows smaller and more distant in time.

I did a series of posts at my blog called Cost of Inactivity. That is if you take payroll gap as a proxy for the fix you can go back to 1997 and calculate the cost of not fixing it when you had the chance. Now in nine of those years it is a slam dunk, year to year the gap shrank and the netsult is the equivalent of a tax cut, that is that money left in your pocket. But even in years that the gap increases you can still calculate your personal Cost of Inactivity. Its an interesting exercise.

by Bruce Webb 2007-05-27 09:50AM | 0 recs
Fine start an IRA

"It might sound like an awful long time from now to those who'll be dead, but I want to retire around then."

Why tax me extra? If you are 34 years or more away from retirement you have plenty of time to build assets to compensate for only getting a check 20% better in real terms than my mom gets today. Any adjustment in future benefits presents me with a clear loss for 18 years against the very small probability that the economy will perform down to Intermediate Cost. Because if there is someone out there that is arguing that 1.7% ultimate productivity is the best mid-range estimate going forward I am not seeing it.

Nothing is a proven plan.

by Bruce Webb 2007-05-27 10:18AM | 0 recs
Re: Fine start an IRA

Because Social Security was always intended to be a pay as you go system.  You should be paying closer to your mother's benefits than you will be in 10 to 20 years.  When you retire I'll pay yours, I promise.

by Obama08 2007-05-27 10:31AM | 0 recs
It's running a surplus

Right now the system is clocking along at PayGo plus. We collectively are already paying an extra $150,000,000 in and the system is fully funded until I am 84.

No one has made a numerically based argument that straightforwardly makes the case that the system as currently configured is not over-funded going forward.

That is no typo. Trend productivity gives an overfunded system. It only takes productivity of 2.0% to give a return that doesn't even require repaying the principal. Moreover any productivity over 1.7% pushes depletion out, that is an outcome anywhere between I & II is possible and even likely. (You may need to scroll down to II.D7)
Trust Fund Ratios under the Three Alternatives
(Interestingly this figure has the exact same shape every year, Low Cost being adjusted downwards most years to keep the graph from pointing up. Stick in assumptions from 1997, assumptions pretty well validated since, project them forward and step back)
In tabular form

by Bruce Webb 2007-05-27 12:24PM | 0 recs
Not if we fix income growth, it won't be.

This is really simple. Social Security's own numbers has it solvent until 2041 ... projecting ahead from the Bush Economy with essentially no income growth for people on incomes under $100,000 ... which means, no contributions growth from people on incomes under the $100,000 cap.

By contrast, even under the Clinton recovery, which was the second worst post-WWII economic recovery for income growth for the majority of Americans ... the trust fund surplus soared, because there was at least some income growth for people earning below the SS payroll tax cap.

All we have to do is restore balanced income growth between the top 5% of the population and the super-majority 80% of the population, and that "crisis" in 2040 starts heading out at faster than a year per year ... which is the definition of "receding over the horizon".

The real crisis is Medicare ... and that requires at the outset establishment of universal health care so that we can get a handle on cost shifting and start getting our rampant health care price inflation under control.

by BruceMcF 2007-05-27 11:25AM | 0 recs
Medicare is a problem

On the other hand Medicare explictly uses Intermediate Cost assumptions, meaning that their revenues going forward are likely to be larger than projected. Interestingly I have the paper report in front of me and it doesn't present Low Cost.

Even so we have this from page 3 of the 2007 Report.
"Under the intermediate assumptions the HI trust fund is projected to be exhausted in 2019, 1 year later than in last year's report, due to slightly higher projected payroll tax and slightly lower projected benefits than previously estimated."

In other words their models are too pessimistic. In 1992 Medicare was projected to have the HI Trust Fund hit zero in 1999. Over the last 15 years that date has been pushed back 20 years. I am not going to project 'receding over the horizon', but similar effects are happening here.

Obviously Medicare has problems, but the magnitude of those problems is hidden behind pessimistic revenue forecasts. If we ever get some honest forecasts in Intermediate Cost then we can get a handle on the whole picture. Until then don't fully trust those numbers in the papers, they are distorted by the economic model.

by Bruce Webb 2007-05-27 12:37PM | 0 recs
Out of here

Out for the day.

Last note. Trend productivity more than rescues Social Security, at some point and soon we are likely to be see proposals to cut FICA. But alternately we could divert that cut one for one to Medicare payroll tax. Same combined rate, different split. The combination between that and underestimated revenues going forward might make for a surprising picture. We'll have to see.

A lot could happen over the next four years if we can just get a Democrat in the White House. The numbers just aren't as dark as they are being painted.

by Bruce Webb 2007-05-27 12:44PM | 0 recs
national health insurance?

Can we learn some lessons from this approach? Like, say, applying it to national health insurance?

by tgeraghty 2007-05-27 01:51PM | 0 recs
Re: national health insurance?

Without the lies and the "blame the boomers" crap, of course. But the rest of it -- organizing existing stakeholders, reassuring current beneficiaries, convincing people the current health care system is irreparably broken -- would seem tailor-made for the health care issue. And we wouldn't even have to lie.

Oh, and one more lesson: be in this for the long-term. The original SS deform article from the Cato Journal is 25 years old. One we didn't learn back in '93-'94.

by tgeraghty 2007-05-27 01:54PM | 0 recs
Given honest numbers

Sure. But note that in Social Security the stakeholders didn't actually include the people at large, only the companies that would profit from privatization. Which is what gave us Medicare Part D in the current Big Pharma friendly form it has.

Step one is to convince the American people that they have simply been lied to for twenty five years, that Social Security is fine, that governments are not always the problem, but often the solution, and that there is no pure magic in market solutions.

The battle over Social Security and Single Payer is not and never has been an economic one using actual honest numbers. It has been an ideological one. As I asked back in 2005 Social Security: Is it about Solvency or about Ayn Rand? . The Economic Right hates Social Security and always has, their biggest nightmare is waking up to find a solvent Trust Fund, well dawn is breaking and you can only hit the Snooze button that many times.

by Bruce Webb 2007-05-28 09:28AM | 0 recs
Trust Fund and the 2nd Big Lie

The 2nd Big Lie is particularly dangerous because it has been absorbed even by defenders of Social Security. It is the notion that contributions to Social Security have been 'diverted' 'looted' 'spent' 'stolen' 'used to fund the Cold War'. Well they haven't and to believe they have is just to fall into the baited trap. They derive from a distorted depictions of what Social Security is and what the function of the Trust Fund plays within it.

Social Security is Social Insurance. Like most insurance it has four components: Premiums, Benefits, Coverage, and Reserves.

Point one: Premiums have no direct relation to Benefits. You can insure your house, your car, your health and never collect a nickel over your whole life time. In which case your nickname is probably 'Lucky'. This is a feature and not a buy of Insurance

Point two: Premiums buy Coverage and typically higher Premiums get you more Coverage.

Point three: Social Security Premiums (FICA payroll tax) buys three different Coverages in two packets. One packet is DI - Disability Insurance. The other is OASI - Old Age/Survivors Insurance, In each case the benefits come in the form of an annuity, payments which terminate when eligible beneficiaries die. That is a feature and not a bug of an Annuity.

Point four: This one is important. Once you pay your Premium you have no more property interest in those dollars, they belong to the insurance company which can spend and invest them however it chooses consistent with its responsibility to pay Benefits. You have purchased Coverage.

Point five: Insurance companies, like banks have to have Reserves, they have to be able to handle times when premiums and deposits don't equal benefits and withdrawels. The individual policy holder has no direct financial interest in that Reserve.

By now people are saying "Well Duh! Everybody knows this stuff!" Well they don't when it comes to Social Security.

Under Social Security FICA payroll tax (premiums) buys Coverage in the form of Scheduled Benefits. Whether you collect any actual benefits depends on your health, like a good driver you might pay in your whole life and get nothing. Feature not a bug. Like any Insurance company Social Security maintains if possible a prudent Reserve which is kept in a Trust Fund and measured by Trust Fund Ratio expressed as a function of time. The Social Security Trustees measure for a actuarial safe Reserve is a Trust Fund Ratio of 100, which is to say a year of projected benefits.

Okay this is the hardest point of all. Premium payers (wage workers) do not own any part of the Trust Fund, what you 'own' if anything is your Coverage in the form of scheduled benefits. The government can't 'steal' it any more than your insurance company 'stole' that part of your premium it used to maintain its own reserve. You paid a portion of your salary to the Government and fully expect to get it back in the form of Benefits, in between is bookkeeping.

by Bruce Webb 2007-05-28 10:08AM | 0 recs
2nd Big Lie Continued

The Trust Fund is simply a Reserve, it is not a Prepayment of anything. Social Security like most insurance is PayGo, it collects enough in Premiums to pay Benefits with a prudent Reserve.

In the case of the Trust Fund these reserves are held in the form of Special Treasuries which are interest earning instruments much like any other public or private bond you would buy, with different maturities and different rates. If you like you can check out the portfolio, here is the one for OASI (DI having its own).
Assets of the OASI Trust Fund. Opponents of Social Security can and do put forth convoluted explanations of why these are just 'Phony IOUs'. Well they are all bogus, those bonds are exactly as real as the dollars in your wallet and for the same reason, they are backed by the Full Faith and Credit of the United States.

But in the end it doesn't matter, no individual has any direct interest in the Trust Fund to start with, you only have the scheduled benefit, and that modifiable by future income. To understand this we need a little history lesson.

To be continued.

by Bruce Webb 2007-05-28 10:25AM | 0 recs
Social Security in 1983

Well it was in trouble, deep trouble. Trouble which can be tracked in the far right column of this table. Historical Operations of the OASDI Trust Fund. A trust fund that had a comfortable Trust Fund Ratio of 298 (almost three years) in 1957 slid to 103 in 1970 and then started a steady slide towards zero. In 1983 something had to happen. Under the law benefits could have been cut to match income. For both policy and political reasons that was deemed unwise. The solution was to phase in increases in FICA over time to gradually restore actuarial balance, that is a Trust Fund Ratio of 100 in each of the following ten years.

That point was not reached until 1993 and until it was it can't be said that anyone was prefunding anything, every dollar that had ever been paid in had been paid out, including interest on the daily balances in the Reserve, i.e. the Trust Fund.

So while I am as happy as the next Progressive to bash Nixon, Reagan and the first Bush the fact is that none of them stole, or diverted a single penny. Payroll dollars in excess of benefits were invested in interest earning bonds.

So why is everyone convinced something nefarious happened? Because it was built into the narrative of the Big Lie.

by Bruce Webb 2007-05-28 10:45AM | 0 recs
3rd Big Lie: Thieves and Liars

The 'Crisis' narrative after the 1983 reform was easy. The Trust Fund was projected to go to zero in around 2023 right as the numeric peak of the Baby Boom hit the system. Since the General Fund was then creating huge deficits 'as far as the eye can see' the idea was that the double whammy would be too much and that something would have to give.

Private accounts were conceived as a way to pull an end-run and exploit the better return of stocks over bonds. No matter that this strategy only really worked for earners over the median, Cato economists don't spend a lot of sleepless nights worrying over people they consider losers anyway. Instead they were counting on the argument 'Something is better than nothing' to carry the day.

Because one component of the Big Lie was to get workers to confuse Depletion with Bankruptcy instead of what it really is, living Paycheck to Paycheck. They wanted people to confuse 'smaller benefit' with 'zero benefit' and largely succeeded.

Well the 90s happened and however you explain the surge in tax revenues that turned 'deficits as far as the eye can see' that turned deficits to a tiny surplus, it happened and had the same effect on Social Security. Which in retrospect should have been obvious but some how wasn't. By 2000 it was clear that for almost every worker 'Nothing' was a far superior plan to any Private Account system.

by Bruce Webb 2007-05-28 11:00AM | 0 recs
Re: Social Security Crisis and Cato's 'Big Lie'
 Of course, Cato wants to create an "age war" by blaming the Boomers. They have to convince the young folks that Social Security is a quaint notion like fixed company pensions and benefits. The "age war" is a substitute for talking about class, which Cato doesn't really believe actually exists or only exists if you are lazy and undeserving. It helps to create a false wedge against percieved notions of who gets "entitlements". Never mind that Boomers might not be as wealthy as Cato would like us to believe. If you watch enough TV which might be what they are counting, on you might end up thinking everybody retires with millions at 50 and has never been downsized or outsourced.
  If you start from the assumption that social Security is "bad" there is no doubt a brilliant strategy to explain why it can't be saved will follow.
by Undercovercalico 2007-05-28 07:30PM | 0 recs

Diaries

Advertise Blogads