The myth of the Social Security system's financial shortfall

[one...two...tree 2,762]

ByMichael Hiltzik, LA Times

The annual report of the Social Security Trustees is the sort of rich compendium of facts and analysis that has something for everybody, like the Bible.

In recent years, during which conservatives have intensified their efforts to destroy one of the few U.S. government programs that actually works as intended, the report's publication has become an occasion for hand-wringing and crocodile tears over the (supposedly) parlous state of the system's finances.

This year's report, which came out Thursday, is no exception. Within minutes of its release, some analysts were claiming that it projected a "shortfall" for Social Security this year of $41 billion.

Before we get to the bogus math behind that statement — which doesn't actually appear in the report — let's look at the encouraging findings by the agency's trustees, who include the secretaries of Labor, the Treasury, and Health and Human Services.

The trustees indicated that the program has made it through the worst economic downturn in its life span essentially unscathed. In fact, by at least one measure it's fiscally stronger than a year ago: Its projected actuarial deficit over the next 75 years (a measurement required by law) is smaller now than a year ago.

The old age and disability trust funds, which hold the system's surplus, grew in 2009 by $122 billion, to $2.5 trillion. The program paid out $675 billion to 53 million beneficiaries — men, women and children — with administrative costs of 0.9% of expenditures. For all you privatization advocates out there, you'd be lucky to find a retirement and insurance plan of this complexity with an administrative fee less than five or 10 times that ratio.

This year and next, the program's costs will exceed its take from the payroll tax and income tax on benefits. That's an artifact of the recession, and it's expected to reverse from 2012 through 2014. The difference is covered by the program's other income source — interest on the Treasury bonds in the Social Security trust fund.

That brings us back to this supposed $41-billion "shortfall," which exists only if you decide not to count interest due of about $118 billion.

And that, in turn, leads us to the convoluted subject of the trust fund, which for some two decades has been the prime target of the crowd trying to bamboozle Americans into thinking Social Security is insolvent, bankrupt, broke — pick any term you wish, because they're all wrong. The trust fund is the mechanism by which baby boomers have pre-funded their own (OK, our own) retirements. When tax receipts fall short, its bonds are redeemed by the government to cover the gap.

Despite what Social Security's enemies love to claim, the trust fund is not a myth, it's not mere paper. It's real money, and it represents the savings of every worker paying into the system today. So I'm going to train a microscope on it.

What trips up many people about the trust fund is the notion that redeeming the bonds in the fund to produce cash for Social Security is the equivalent of "the government" paying money to "the government." Superficially, this resembles transferring a dollar from your brown pants to your gray pants — you're no more or less flush than you were before changing pants.

But that assumes every one of us contributes equally to "the government," and by equal methods — you, me and the chairman of Goldman Sachs.

The truth is that there are two separate tax programs at work here — the payroll tax and the income tax — and they affect Americans in different ways. The first pays for Social Security and the second for the rest of the federal budget.

Most Americans pay more payroll tax than income tax. Not until you pull in $200,000 or more, which puts you among roughly the top 5% of income-earners, are you likely to pay more in income tax than payroll tax. One reason is that the income taxed for Social Security is capped — this year, at $106,800. (My payroll and income tax figures come from the Brookings Institution, and the income distribution statistics come from the U.S. Census Bureau.)

Since 1983, the money from all payroll taxpayers has been building up the Social Security surplus, swelling the trust fund. What's happened to the money? It's been borrowed by the federal government and spent on federal programs — housing, stimulus, war and a big income tax cut for the richest Americans, enacted under President George W. Bush in 2001.

In other words, money from the taxpayers at the lower end of the income scale has been spent to help out those at the higher end. That transfer — that loan, to characterize it accurately — is represented by the Treasury bonds held by the trust fund.

The interest on those bonds, and the eventual redemption of the principal, should have to be paid for by income taxpayers, who reaped the direct benefits from borrowing the money.

So all the whining you hear about how redeeming the trust fund will require a tax hike we can't afford is simply the sound of wealthy taxpayers trying to skip out on a bill about to come due. The next time someone tells you the trust fund is full of worthless IOUs, try to guess what tax bracket he's in.

It should come as no surprise that one of the leading advocates for cutting Social Security benefits or raising payroll taxes is the Wall Street billionaire Peter G. Peterson, who has pumped millions into an alarmist campaign about the federal deficit.

But ask Peterson, who made his money as a hedge fund manager, about closing the enormous tax loophole enjoyed by hedge fund managers — it costs the Treasury a couple of billion dollars a year — and he warns that it would force hedge funds to move overseas, which would be bad for the U.S. economy. This is the sort of argument my mother used to describe as: "I like me, who do you like?"

The trust fund may not last forever, but reports of its demise are certainly premature. The trustees say it will be drawn down to zero in 2037, at which point the program will only have enough money coming in from taxes to pay 78% of the benefits due under current law. So sometime in the next quarter-century — but by no means right now — does anything have to be fixed, say through a hike in the payroll tax ceiling (or, better, its elimination)?

That 2037 deadline, in truth, is a moving target. It's based on long-term projections, which become more uncertain the further out you look. The estimated date is very sensitive to forecasts of immigration, wage and economic growth, and birth and death rates, all of which are uncertain. Over the last 10 years, it has fluctuated between 2037 and 2042, mostly due to economic factors. It has held steady at 2037 for two years despite the downturn, but that's still better than the projection in 1998, which was for exhaustion in 2032.

In short, if the new trustees report gets examined wisely and responsibly, it should put an end to all the current talk about raising the retirement age or cutting benefits. Social Security doesn't contribute a dime to the federal deficit, and in these days of market stagnation and cutbacks in pensions, it has never been more important to millions of Americans. The Pete Petersons of the world should find themselves a different target.

Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns here, check out his Facebook page and follow @latimeshiltzik on Twitter.

http://www.latimes.com/business/la-fi-hiltzik-20100808,0,1359956.column

[JimVaPhuong 4,863]

Meh. I've heard the same arguments many times before. At least this author is somewhat honest with the facts, even though he tries to spin them.

Interest on T bills is not "income" when that interest is owed to an agency of the US government. It's exactly like he describes - moving the money from one pocket to another. The government doesn't earn money - they take it from taxpayers. When the treasury has to pay back those bonds they are are either going to have to take more from taxpayers or print more. Increasing taxes on any segment of the population has a detrimental effect on the economy. When you tax the poor then they go hungry. When you tax the middle class then they don't spend and the economy falters. When you tax the rich then they don't invest and businesses don't hire. Printing more money just devalues the money already in circulation, and leads to rampant inflation. There's no way you can dig a hole this deep and come out of it unscathed.

This year's deficit is a milestone, of sorts. The Social Security Trust Fund has taken in less than it's paid out for the first time since it's inception. This was not projected to happen for a few more years. In reality, Congress had been raiding the trust fund for years, replacing real money with bonds. If the author honestly believes that Congress can stop the bleeding by taxing only the rich then he's severely naive.

[slim 1,528]

My little brother can do the math on this one. If you take away more than you put in, what's that leave you with?

[JimVaPhuong 4,863]

My little brother can do the math on this one. If you take away more than you put in, what's that leave you with?

It's even worse that that. US taxpayers have been filling the bucket at a rate faster than the SSA has been draining it up until this year. By itself, that doesn't sound too dire. What makes it worse is that Congress has also been draining the bucket for years, replacing the water they take with rocks that occupy the same space (the bonds), with the promise that they'll replace the rocks with water at some point in the future, and even add a little more water (the interest). The author calls this "income", and then glosses over the fact that Congress has to get the water from the same taxpayers who filled the bucket initially. They can't honestly call it "taxes" when they take the money from the taxpayers, and then call it "income" when they shift the money to the Social Security Trust Fund.

Every election cycle I am infuriated by the government (usually the state government) taking advantage of the average voter's ignorance of how bonds work. "Oh, I can vote for this enormously expensive boondoggle because it's not paid for with new taxes, it's going to paid for by BONDS sold to INVESTORS!" The average voter doesn't realize that it's HIS future taxes that are going to repay those bonds, with INTEREST. How can a voter understand that buying something with his credit card means he'll have to pay it back, yet not understand that voting for a bond measure is the same thing. The author of the article is trying to play on that same ignorance by pretending that the interest on the bonds held by the trustees is actually income for taxpayers and not a liability.

[slim 1,528]

How can a voter understand that buying something with his credit card means he'll have to pay it back, yet not understand that voting for a bond measure is the same thing.

The average voter who does that is paying 20% or more on a loan. Why are they making financial decisions at all?

[Mr. Big Dog 10,747]

So, if not treasuries - still one of the safest investment on earth - what should the SSA invest the excess revenues in?

[mawilson 2,133]

The old age and disability trust funds, which hold the system's surplus, grew in 2009 by $122 billion, to $2.5 trillion.

Ok, but where's the money? Poof, gone. That's right, the government spent it and replaced it with IOUs.

The trust fund has $0 in it.

[Heracles 417]

Ok, but where's the money? Poof, gone. That's right, the government spent it and replaced it with IOUs.

The trust fund has $0 in it.

Which is the exact problem.

Like a 401K, SS works, when you invest the money and allow it to grow. It's not designed to be used as a piggy-bank or loan department for non-revenue generating projects. Had they borrowed money and used it to build a toll road, that generates revenue over 20 or 30 years, all is good.

[Atencio 43]

Here is an interesting article on the Trust Fund. (Can't vouch for accuracy)

http://mises.org/daily/4528

[JimVaPhuong 4,863]

So, if not treasuries - still one of the safest investment on earth - what should the SSA invest the excess revenues in?

Yep, it's a safe investment for you, me, or any other private investor. When that bond matures, then the investor is going to keep all of the interest, and the cost for repaying that bond with interest is going to be distributed among all the taxpayers of the US. We are all sharing the load for the government to borrow money from private investors.

In this case, the government is taking money it's ALREADY collected from the taxpayers, loaning that money back to itself, and charging the taxpayers to pay it back with interest. How would you feel if your bank sent you a notice saying "We took the money you have on deposit and loaned it to ourselves. Now we need you to deposit more money so that we can pay ourselves back with interest."

Yes, there is technically 2.5 trillion dollars in the Social Security Trust Fund - all represented by special bonds. All of that money has already been spent. Though the Trust Fund remains separate from the federal budget, that 2.5 trillion dollars is reflected in the total of the national debt. And this year we hit the break-even point, where we need to start drawing from that fund in order to continue to pay full benefits.

[mawilson 2,133]

Yep, it's a safe investment for you, me, or any other private investor. When that bond matures, then the investor is going to keep all of the interest, and the cost for repaying that bond with interest is going to be distributed among all the taxpayers of the US. We are all sharing the load for the government to borrow money from private investors.

In this case, the government is taking money it's ALREADY collected from the taxpayers, loaning that money back to itself, and charging the taxpayers to pay it back with interest. How would you feel if your bank sent you a notice saying "We took the money you have on deposit and loaned it to ourselves. Now we need you to deposit more money so that we can pay ourselves back with interest."

Yes, there is technically 2.5 trillion dollars in the Social Security Trust Fund - all represented by special bonds. All of that money has already been spent. Though the Trust Fund remains separate from the federal budget, that 2.5 trillion dollars is reflected in the total of the national debt. And this year we hit the break-even point, where we need to start drawing from that fund in order to continue to pay full benefits.

+1

[Mr. Big Dog 10,747]

Yep, it's a safe investment for you, me, or any other private investor. When that bond matures, then the investor is going to keep all of the interest, and the cost for repaying that bond with interest is going to be distributed among all the taxpayers of the US. We are all sharing the load for the government to borrow money from private investors.

In this case, the government is taking money it's ALREADY collected from the taxpayers, loaning that money back to itself, and charging the taxpayers to pay it back with interest. How would you feel if your bank sent you a notice saying "We took the money you have on deposit and loaned it to ourselves. Now we need you to deposit more money so that we can pay ourselves back with interest."

Yes, there is technically 2.5 trillion dollars in the Social Security Trust Fund - all represented by special bonds. All of that money has already been spent. Though the Trust Fund remains separate from the federal budget, that 2.5 trillion dollars is reflected in the total of the national debt. And this year we hit the break-even point, where we need to start drawing from that fund in order to continue to pay full benefits.

Correct. So, from the perspective of the payroll taxpayer, rather than collecting interest from other parties, we collect interest from the income taxpayer who we've loaned funds to. As the payroll taxpayer, we are assured that our investments are safe and that P&I will be paid as agreed.

Looking at it from the other side, rather than paying other parties interest that would be due on borrowed funds, we pay the SSF who loaned funds to us when we needed them - in order to cut taxes w/o cutting spending, for example. If the SSF wouldn't have loaned the funds, we would have had to raise them on the private market - from other governments, banks, and pension funds perhaps. What difference does it make? Interest would be due one way or another.

I don't know how this is even remotely relevant or why there's any outrage over it. Corporations loan money from one of their businesses to another all the time. The lending business receives while the borrowing business pays interest on such loans. What's the big deal?

[I AM NOT THAT GUY 5,715]

Substitute "taxpayer" for "investor", and what do you get?

What is a Ponzi scheme?

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.

Why do Ponzi schemes collapse?

With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.

http://www.sec.gov/answers/ponzi.htm

Any questions?

[one...two...tree 2,762]

Substitute "taxpayer" for "investor", and what do you get?

Any questions?

Yeah. Do you ever read anything besides RWN talking points?

Fortune Magazine: Why Social Security is not a Ponzi Scheme

[tmma 467]

It's my opinion that anyone working now ( like our age) who is anticipating relying on their SS pension when they retire is ignoring the fact that although some financial experts say SS is NOT insolvent, there is a load that say by they time we retire, it will be.

To me, it's foolish not to listen to both sides, because really...who do you believe? It's hard not to start believing the 'SS will be bankrupt' side when we have an aging population, high unemployment and a spendthrift Government.