Ruminations of an Expatriate

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Tuesday, September 25th, 2007...11:20 am

Social Security Shortfall Report Badly Reported

You have no doubt been reading the screaming headlines announcing a report of the US Department of the Treasury documenting the imperiled Social Security System.

“Bush Administration Says Social Security Facing a $13.6 Trillion Shortfall, Fix Needed” - ABC

“$13.6 trillion shortfall seen in Social Security” - Boston Globe

“Big shortfall seen for Social Security” - Philadelphia Inquirer

Yikes. You get the idea. Sounds scary, doesn’t it? The reporting of the Treasury report’s content I have read is atrocious. What a surprise.

I must say, though, that the Treasury report is a refreshingly honest piece of work coming from an administration that not so long ago was spreading fear and lies in its promotion of “privatization.” The report is the first in a series addressing Social Security planned by the Treasury Dept.

The problem is that the headlines screaming “$13.6 trillion shortfall”, nor most of the stories that ensue, don’t include an indication that the accrued shortfall is for a period of time referred in the report as “over the indefinite future”, and tax or benefit adjustments are necessary to make the system“permanently solvent” or to “restore solvency permanently.”

Shucks, “the indefinite future” or “permanently” is a really long time. Forever, really. So please understand that the $13.6 trillion “shortfall” is over a period encompassing forever.

And that is why you should not work yourself into a lather over Treasury’s report or the prospects of Social Security, such as financial management interests urged us to do not so many months ago in their efforts to “privatize” the system. Privatization would result in windfalls in “private account” management fees, much higher than the Social Security Administration 1% administration costs.

The Treasury report is only fourteen pages. I urge you to read it. There are a few pages describing how benefits are calculated that I skipped, but the parts describing the history of taxes and benefits I found fascinating. I have placed a couple of excerpts below.

But first, here is what the Social Security Board of Trustees Annual Report, issued in April, 2007 and entitled “Long-Range Financing Challenges Continue”, has to say.

* The projected point at which tax revenues will fall below program costs comes in 2017 — the same as the estimate in last year’s report.

* The projected point at which the Trust Funds will be exhausted comes in 2041 — one year later than the projection in last year’s report.

* The projected actuarial deficit over the 75-year long-range period is 1.95 percent of taxable payroll — .06 percentage point smaller than in last year’s report.

* Over the 75-year period, the Trust Funds would require additional revenue equivalent to $4.7 trillion in today’s dollars to pay all scheduled benefits. This unfunded obligation is about $100 billion higher than the amount estimated last year.

The Treasury report indicates that from its inception in 1935 until 1983 SS operated on a “pay as you go” system, that is current workers pay for current retirees. Significant, real SS reforms were enacted by Congress and approved by President Reagan that increased taxes with the purpose of “pre-funding” a “trust fund” to help see us babyboomers through our dotage. The trust fund, now containing $2 trillion, is projected to continuing growing until 2009 and to not be depleted until 2041.

Given the quality of reporting of the matter and that most folks in the USA will just read or hear the headline, I fear a grave misunderstanding of the condition of the Social Security system.

Here are the bullet points on page one of the Treasury report issued yesterday, which apparently is the only part of the report being reported.

* Social Security faces a shortfall over the indefinite future [emphasis added] of $13.6 trillion in present value terms, an amount equal to 3.5 percent of future taxable payrolls. Looking at the gap over a shorter horizon provides only limited information on the financial status of the program.

* Social Security can be made permanently solvent [emphasis added] only by reducing the present value of scheduled benefits and/or increasing the present value of scheduled tax revenues. Other changes to the program might be desirable, but only these changes can restore solvency permanently [emphasis added].

* Delaying changes to Social Security reduces the number of cohorts over which the burden of reform can be spread. Not taking action is thus unfair to future generations. This is a significant cost of delay.

* By itself, faster economic growth will not solve Social Security’s financial imbalance—realistically, there is no way to “grow out of the problem.”

And here a very interesting excerpt from a bit further along indicating that, “Because Social Security benefits paid to the earliest Social Security beneficiaries were more generous than what could be financed out of the proceeds from their own contributions, those benefits were largely financed with taxes paid by younger birth cohorts. And because the younger birth cohorts’ taxes were paid out rather than saved, their benefits must in turn be financed by the taxes of still younger birth cohorts. This method of financing benefits is referred to as “pay-as-you-go,” in which each generation’s taxes finance the benefits of the generation that preceded it. The alternative to pay-as-you-go finance is pre-funding, in which each generation accumulates assets to be drawn upon to pay that generation’s future benefits.4

“Figure 3 shows that Social Security has been financed almost entirely on a pay-as-you-go basis for most of its history (currently, a small amount of potential pre-funding of benefits is also involved). As a share of tax revenues, program outlays rose very rapidly in the early years of the program, reaching 100 percent in 1958 and staying near 100 percent through 1983. Social Security’s cash surpluses since 1983 reflect reforms that resulted in the large baby-boom generations paying more taxes than were needed to finance the benefits of earlier birth cohorts. Whether these surpluses resulted in true pre-funding of future benefits is discussed in Treasury’s second issue brief. Between the end of 1983 and the end of 2006, Social Security costs averaged 88 percent of non-interest income, and the inflation-adjusted trust fund balance rose from $50 billion to $2 trillion.

“Social Security is officially solvent so long as the trust fund balance is positive. Based on economic and demographic assumptions from the Social Security Board of Trustees, the Social Security Administration projects that the OASDI trust fund (the combined OASI and DI trust funds) will have insufficient funds to pay currently scheduled benefits beginning in 2041. The projected trust fund exhaustion date can change from year to year as new data and assumptions are introduced into the Social Security Administration’s calculations. For example, the 2000 Trustees Report projected a trust fund exhaustion date of 2037; since then, the date has been pushed back four years, to 2041. That said, if the current projections prove accurate and if no program changes are made, then current law mandates that benefits actually paid be scaled back to a level that is consistent with then-current payroll tax income when the trust fund is depleted. In other words, if no action is taken, current projections imply that all beneficiaries will have their benefits reduced in 2041 by 25 percent compared to what is promised. The share of scheduled benefits that would be payable would then slowly decline from 75 percent in 2041 to 70 percent in 2081.”

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