Social Security & Cato

Social Security 2002
The Financing of Social Security
Fact 1: The Social Security trust funds are a sure thing.
Many people are under the impression that Social Security is broken, unable to fulfill its promise to the people who have contributed to it over the years. Well, the fact is, the Social Security trust funds aren't just sound, they're building a surplus. Today, that surplus is more than $1.4 trillion and growing. That's a lot of money. But it's necessary as we prepare for the boomers. Back in the early 1980s, the President and Congress took the first steps to strengthen Social Security and get it ready for the future. The stockpile has been building, and it will continue to grow well past the time the first boomers reach retirement age.
How is that possible? Today, 65 million boomers are paying into the system and, along with about 89 million other employed Americans, are helping build that reserve. Add to that the nearly one in three retired Americans who are contributing to the trust funds by paying taxes on their Social Security. It all adds up. The income in the Social Security trust funds is earmarked to pay for benefits and administrative costs. Right now, there is more money coming in than is going out. For example, in 2002, Social Security's income was $627.1 billion. It paid out $461.6 billion, leaving a surplus of about $165.5 billion. That $165.5 billion went into the trust funds.

Fact 2: Financing Social Security isn't the toughest thing government bonds have ever done.
Some people who want to scrap Social Security call the government's investment in Treasury Bonds an accounting trick. Others think it's just good, thoughtful, and conservative investing.
It's natural that people are confused and wonder what these trust funds are and where the money goes. Well, here's how it works, plain and simple: the Social Security trust funds buy interest-earning special Treasury Bonds — similar to the government bonds pension funds and private investors buy. That's easy to understand. Last year, the Trustees invested what was a $165.5 billion Social Security surplus, buying special Treasury Bonds that are earning interest in the trust funds. It brought the total holding of the trust funds to more than $1.4 trillion. When we need to use them, the Treasury Bonds will be cashed.
Treasury bonds aren't only safe; they're earning approximately 7 percent in annual interest. Last year, about 13 percent of Social Security's total income — that's nearly $80 billion — was just interest alone. There you have it. For over two hundred years, in good times and in bad, these government bonds have paid off, even Revolutionary War Debt..

Fact 3: We can close the gap in the trust funds.
The problem isn't as big as you might have heard. Without any kind of change at all, Social Security will do just what it's been doing — paying 100 percent of promised benefits — until 2042. After that, if nothing is done, Social Security will still be able to pay nearly three-quarters of promised benefits. Obviously, that's not acceptable. Getting three-quarters wouldn't be okay today and it won't be in the 2040s either. That's why this is such an important issue. But we need to start considering changes now; thanks to the time we have, we can close the gap.

Fact 4 2012
It hasn’t really changed in the 10 years since 2002, but I would like to mention that 2011 saw the Payroll Tax collections drop below the amount sent out in benefit checks. In fact, the Speaker said that SS was in imminent danger of bankruptcy. He knows that the Treasury has to pay out for interest on the SS Trust Fund as the appropriations committee has to shell out over 100 million dollars, putting a 2.76% rate on the new notes that it then immediately borrows, adding that to the general fund that it had just subtracted to generate the notes. While this kept SS above water, without it, SS would have been in the Red as the Speaker mistakenly asserted.
“The numeric average of the 12 monthly interest rates for 2010 was 2.760 percent. The annual effective interest rate (the average rate of return on all investments over a one-year period) for the OASI and DI Trust Funds, combined, was 4.642 percent in 2010. This higher effective rate resulted because the funds hold special-issue bonds acquired in past years when interest rates were higher.” (from the SS Administrators).
Please note the drop in average annual interest from 7% (above) to 4.642 this year. So the shell out was 120 billion, and would have been 183 billion or 63 b. more, which would put the bottom line in the black.
Investment transactions of the OASI and DI Trust Funds, calendar year 2010
[In thousands]
Activity Type of security OASI Trust Fund DI Trust Fund OASI and DI Trust Funds, combined
Held at end of 2009 SI bonds $2,266,356,491 $196,025,014 $2,462,381,505
SI certificates 52,423,996 3,735,389 56,159,385
Marketable bonds 0 0 0
Total 2,318,780,487 199,760,403 2,518,540,890
Acquisitions in 2010 SI bonds 262,277,638 7,732,055 270,009,693
SI certificates 646,634,427 103,195,197 749,829,624
Marketable bonds 0 0 0
Total 908,912,065 110,927,252 1,019,839,317
Dispositions in 2010 SI bonds 168,600,345 30,568,966 199,169,311
SI certificates 629,578,237 100,095,441 729,673,678
Marketable bonds 0 0 0
Total 798,178,582 130,664,407 928,842,989
Held at end of 2010 SI bonds 2,360,033,784 173,188,103 2,533,221,887
SI certificates 69,480,186 6,835,145 76,315,331
Total 2,429,513,970 180,023,248 2,609,537,218


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Please note that the ‘Total’ in the table at the end of 2010 is 100 b. more than at the end of 2009, and a similar result is expected at the end of 2011.

OPINION
Money Matters The Cato Institute Michael Tanner 28 Mar. 2011

Because the recession and increased unemployment have reduced payroll tax revenue,
Social Security began running a cash-flow deficit this year, paying out more in benefits than it takes in through taxes (see Figure 14).

In theory, of course, Social Security is supposed to continue paying benefits by drawing on the Social Security Trust Fund. The Trust Fund is supposed to provide sufficient funds to continue paying full benefits until 2037, after which it will be exhausted.

At that point, by law, Social Security benefits will have to be cut by approximately 22 percent.
However, in reality, the Social Security Trust Fund is not an asset that can be used to pay benefits. Any Social Security surpluses accumulated to date have been spent, leaving a Trust Fund that consists only of government bonds (IOUs) that will eventually have to be repaid by taxpayers. As the Clinton administration’s fiscal year 2000 budget explained:
These [Trust Fund] balances are available to finance future benefit payments
and other Trust Fund expenditures— but only in a bookkeeping sense. . . . They
do not consist of real economic assets that can be drawn down in the future to
fund benefits. Instead, they are claims on the Treasury that, when redeemed,
will have to be financed by raising taxes, borrowing from the public, or reducing
benefits or other expenditures. The existence of large Trust Fund balances,
therefore, does not, by itself, have any impact on the Government’s ability to
pay benefits.
Even if Congress can find a way to redeem the bonds, the Trust Fund surplus will be
completely exhausted by 2037.
At that point, Social Security will have to rely solely on revenue from the payroll tax—but that
revenue will not be sufficient to pay all promised benefits. Overall, Social Security faces
unfunded liabilities of nearly $16.1 trillion ($18.7 trillion if the cost of redeeming the
Trust Fund is included).

Clearly, Social Security is not sustainable in its current form. And, there are very few options for dealing with the problem. As former president Bill Clinton pointed out, the only ways to keep
Social Security solvent are to (a) raise taxes, (b) cut benefits, or (c) get a higher rate of return
through private capital investment.
Or as Henry Aaron of the Brookings Institution told Congress, “Increased funding to raise pension reserves is possible only with some combination of additional tax revenues, reduced benefits, or increased investment returns from investing in higher- yield assets.”

Supporters of the current Social Security system have long advocated the first of those
options, bringing in additional tax revenue, notably by removing the cap on income subject to the Social Security payroll tax. Currently, workers pay the 12.4 percent payroll tax on
just the first $106,800 of annual wage income. The bipartisan Commission on Fiscal Responsibility and Reform recommended that this be increased to $190,000 by 2020.

The Center for American Progress would remove the cap entirely on the employer’s portion of the Social Security tax.

The National Committee for Preserving Social Security and Medicare has
called for removing the cap for the entire payroll tax.
Eliminating the cap would give the United States the highest marginal tax rates in the
world, higher even than countries like Sweden. Studies suggest that it would cost the United
States as much as $136 billion in lost economic growth over the next 10 years, and as many
as 1.1 million lost jobs.

And, it is important to note that the Patient Protection and Affordable Care Act already raised payroll taxes on families earning more than $250,000 per
year by 0.9 percent.

Eliminating the cap could also lead to the perverse result of actually providing a huge
increase in benefits to the wealthiest retirees. That is because the benefit formula is partially based on the level of wages taxed.

For example, Table 3 shows the benefit hike that retirees would receive if taxes were increased
but the current benefit formula was retained. Yet even this enormous tax increase would
do relatively little to increase Social Security’s long-term cash-flow solvency. Although there
have been no cash-flow simulations provided Table 3
Increased Social Security Benefits If Cap Were Eliminated
Annual Income Annual benefit $106,800 (current) $25,440 $400,000 $72,000 $1,000,000 $162,000
Source: Janemarie Mulvey, “Social Security: Raising or Eliminating the Taxable Earnings Base,” Congressional Research Service, September 24, 2010.20
Combine any reduction in government provided benefits with an option for younger workers to save and invest a portion of their Social Security taxes for recent proposals, earlier simulations
suggest that even the most radical proposal—eliminating the cap completely while also
changing the benefit formula so as not to provide any additional benefits—would add
just seven years of cash-flow solvency to the system. Applied to the current solvency projections, that would extend to 2018 the date at which Social Security begins to run a cashflow shortfall.

Eliminating the cap would, of course, extend the exhaustion date of the Social Security
Trust Fund, but as we have seen above, that merely increases intergovernmental debt without actually improving the system’s finances. If the additional revenue was used to pay for
what would otherwise be deficit-financed spending, removing the cap would be indistinguishable from any other tax increase. Thus we could see a marginal improvement to the
government’s overall financial picture—not Social Security’s—but at the costs associated
with any other tax hike.
Cutting Social Security benefits, however, would have a positive impact on both the
system’s finances and the government’s general balance sheet. Of course there are many
different ways to reduce future Social Security payments with very different impacts on recipients. The bipartisan Commission on Fiscal Responsibility and Reform, for instance,
has recommended a broad array of benefit changes, including raising the retirement age
to 69 by 2075, with the early retirement age rising to 64 over the same period, reforming
the formula for annual cost of living adjustments (COLA’s), and trimming benefits for
high-income recipients.

A better approach would be to change the formula used to calculate the accrual of
Benefits so that they are indexed to price inflation rather than national wage growth.
Since wages tend to grow at a rate roughly one percentage point faster than prices, such
a change would hold future Social Security benefits constant in real terms, but eliminate the benefit escalation that is built into the current formula. Estimates suggest that
making this change alone would result in a 35 percent reduction in Social Security’s currently scheduled level of benefits, bringing the system into balance by 2050.

Variations on this approach would apply the formula change only to higher-income seniors, preserving the current wage-indexed formula for low-income seniors.
Other benefit reductions that have been discussed at one time or another include increasing
the number of years included in income averaging as part of the benefit formula from 35 to 38
years, restructuring spousal benefits, and various means/asset-testing schemes.

The biggest downside of any benefit cuts is that it makes Social Security an even worse
deal for younger workers than it already is. Indeed, for many young workers, Social Security
taxes are already so high relative to benefits that they will receive a rate of return on their
Social Security taxes well below the return that they could expect from private investment.
It makes sense, therefore, to combine any reduction in government-provided benefits
with an option for younger workers to save and invest a portion of their Social Security
taxes through individual accounts. A proposal by scholars from the Cato Institute that
combines the wage-price indexing proposal described above with personal accounts equal
to 6.2 percent of wages was scored by actuaries with the Social Security Administration in
2005 as reducing Social Security’s unfunded liabilities by $6.3 trillion, roughly half the
system’s predicted shortfall at that time. If the Cato plan had been adopted in 2005, the
system would have begun running surpluses by 2046. Indeed, by the end of the 75-year actuarial window, the system would have been running surpluses in excess of $1.8 trillion.

At the same time, SSA actuaries concluded that average-wage workers who were age 45 or
younger could expect higher benefits under the Cato proposal than Social Security would
otherwise be able to pay.
While there is no more current scoring available, there is no reason to presume that savings or benefits would be substantially different today. Personal accounts would also solve some
of the other problems with the current Social 21 Personal accounts remain not only the best policy option for Social Security reform, but also a viable political option Security system. Under the current system, workers have no ownership of their benefits; they are left totally dependent on the good will of 535 politicians to determine what they’ll receive in retirement. Moreover, benefits are not inheritable, and the program is a barrier to wealth accumulation. Finally, the program
unfairly penalizes African Americans, working women, and others. In short, it is a program
crying out for reform. By giving workers ownership and control over a portion of their retirement funds, personal accounts are the only reform measure that deals with those issues.
Of course opponents of personal accounts have pointed to the recent struggles of the
stock market to suggest that personal accounts are too risky to be relied on for retirement. The
reality, however, is that despite recent volatility in the market, long-term investment represents
a remarkably safe retirement strategy. According to Andrew Biggs, former associate
commissioner of Social Security for policy, someone who retired in, say, 2008, at the lowest point of the market’s recent decline, and who started paying Social Security taxes when
he was 22, would have begun investing in 1965. Since that time, the annual rate of return based
on the S&P 500 Index, even adjusting for inflation, has been more than 7 percent, while
Social Security investments expect an average annual return of just 2.2 percent. That means
that despite the market’s decline, he still would have seen substantial overall gains.

The failure of President Bush’s disastrous campaign for personal accounts is widely believed to have taken the idea off the table for the foreseeable future. None of the recent deficit commissions included personal accounts in their recommendations. However, Rep. Paul
Ryan (R-WI) has included a proposal for personal accounts in his Roadmap for America’s
Future. Ryan would allow workers under age 55 the option of privately investing slightly more
than one third of their Social Security taxes through personal retirement accounts.

The Congressional Budget Office estimates that Ryan’s proposal would gradually reduce Social
Security’s budget shortfall and, ultimately, restore the program to cash-flow solvency by 2083.

Several new representatives and senators elected in the 2010 mid-term elections appear
sympathetic to personal accounts, meaning that a combination of benefit reductions and
personal accounts remain not only the best policy option for Social Security reform, but
also a viable political option.

(Tanner's writings have appeared in nearly every major American newspaper, including the New York Times, Washington Post, Los Angeles Times, Wall Street Journal, and USA Today. A prolific writer and frequent guest lecturer, Tanner appears regularly on network and cable news programs. The New York Times refers to him as "a lucid writer and skilled polemicist."
Under Tanner's direction, Cato launched the Project on Social Security Choice, which is widely considered the leading impetus for transforming the soon-to-be-bankrupt system into a private savings program. Time Magazine calls Tanner, "one of the architects of the private accounts movement," and Congressional Quarterly named him one of the nation's five most influential experts on Social Security. Before joining Cato in 1993, Tanner served as director of research of the Georgia Public Policy Foundation and as legislative director for the American Legislative Exchange Council.)

OPINION RESPONSE

I am not yet a fact checker, but Tanner’s opening sentence is 4 Pinnochios in my book. If he can be so outrageously wrong in his first sentence, how can you put credence in the extended remarks? I see that both Clinton and Henry Aaron both see a third rail in solving Social Security, which is surprising after the Greenspan Commission spent several years finding out that the only way to cure Social Security’s bankruptcy in 1983 was to DECREASE BENEFITS or increase taxes. They decided to do both, not checking out of the box to see an alternative. This guy decided that a Fix could come about after getting a revenue boost from privatizing Social Security, an idea that Bush picked up and then found it to be so unpopular that he abandoned the effort. How many times did he fill up the gas on Airforce One at $86000 a pop to campaign for that, money that could be spent on lots of other non-controversial projects, like infra-structure construction. Decreasing benefits he wisely saw that could drop funds from checks for people who are at the bottom. Raising the income limit is ridiculous on its face as, If the program is such a lucrative Ponzi Scheme, why let rich people get in it, too? And how many times would he have to kiss Grover Norquist’s ring to get him to approve an increase in Payroll Tax, or even re-instate the Payroll Tax Cut recently extended by Boehner’s Congress?
James E. Opfell 15 January 2012