Looting Social Security: (the Basics Revisited, Again)

Mark Thoma at Economist’s View links us to the following article from William Grieder at The Nation.
Looting Social Security

Governing elites in Washington and Wall Street have devised a fiendishly clever “grand bargain” they want President Obama to embrace in the name of “fiscal responsibility.” The government, they argue, having spent billions on bailing out the banks, can recover its costs by looting the Social Security system. They are also targeting Medicare and Medicaid. The pitch sounds preposterous to millions of ordinary working people anxious about their economic security and worried about their retirement years. But an impressive armada is lined up to push the idea–Washington’s leading think tanks, the prestige media, tax-exempt foundations, skillful propagandists posing as economic experts and a self-righteous billionaire spending his fortune to save the nation from the elderly.

The “self-righteous billionaire” is of course our old friend Peter. G. Peterson. How do they propose to do this? With the oldest trick in the book, get some corporate funded think tankers from the center, combine them with corporate funded think tankers from the right and call the effort ‘bi-partisan’.

Peterson’s proposal would essentially dismantle the Social Security entitlement enacted in the New Deal, much as Bill Clinton repealed the right to welfare. Peterson has assembled influential allies for this radical step. They include a coalition of six major think tanks and four tax-exempt foundations.
Their report–Taking Back Our Fiscal Future, issued jointly by the Brookings Institution and the Heritage Foundation–recommends that Congress put long-term budget caps on Social Security and other entitlement spending, which would automatically trigger benefits cuts if needed to stay within the prescribed limits. The same antidemocratic mechanisms–a commission of technocrats and limited Congressional discretion–would shield politicians from popular blowback.
The authors of this plan are sixteen economists from Brookings and Heritage, joined by the American Enterprise Institute, the Concord Coalition, the New America Foundation, the Progressive Policy Institute and the Urban Institute. “Our group covers the ideological spectrum,” they claim. This too is a falsehood. All these organizations are corporate-friendly and dependent on big-money contributors. No liberal or labor thinkers need apply, though the group includes some formerly liberal economists like Robert Reischauer, Alice Rivlin and Isabel Sawhill.

The report itself can be found here Taking Back our Fiscal Future but really there is nothing new here, just a recitation of the standard talking points.

A commenter at my blog asked me if I could just put the case for ‘Nothing’ as a plan for Social Security in a condensed form and I had to confess ‘Well no, in fact my effort to explain this has reached 66 posts’ Angry Bear Social Security Series but what the heck I’ll try to boil it down under the fold.
Bottom line: Social Security does not need to be fixed anytime in the next 18 years. We don’t need to increase retirement ages, we don’t need to lift the payroll cap (and I don’t care how progressive that sounds). Fundamentally it is not broken.

1. If you grant the critics every economic and demographic assumption the payroll gap is currently 1.7%. Don’t let them spook you with percentages of GDP or anything else, do the arithmetic. If we assume the employer/employee split holds the cost of a permanent fix for a household earning $50,000 is $425 per year. When you see any other plan proposed ask yourself if the combination of benefit cuts and tax increases is more or less than that. If it is more then why bother? (Hint generally it is much more with not much better results.)

2. Initial benefits under Social Security increase with real wage which prior to Bush II have tended to increase over time. Meaning Social Security is a mildly better deal each year when measured as a basket of goods (the income replacement percentage stays pretty constant). Under the current schedule the benefit in 2040, the last year when full benefits are projected to be paid, would be 160% of the 2009 benefit. In 2041 it would have to be reset to 78% of that. As Prof. Rosser of JMU pointed out to me long ago 78% of 160% is 125%. Well actually that is not precisely right, when he presented me with what I call Rosser’s Equation the projected cut was to 75% giving us 75% of 160% = 120%. In any event that is what ‘Crisis’ is in numeric context, a real benefit 25% better than the one my Mom gets today.

3. The improvement from a 75% benefit to a 78% benefit simply tracks other metrics. In 1997 the Trust Fund was projected to go to depletion in 2029 and the fix was an immediate increase in payroll taxes of 2.23%. With the 2008 Report that date had been pushed back to 2041 and the gap down to 2.23% 1.7% (h/t Arne) . I am sure there is an apt word for a problem that left unaddressed gets pushed back in time and whose cost to fix shrinks. That word is not crisis.

4. Under the various Social Security Acts the health of Social Security is measured in terms of Short Term and Long Term Actuarial Balance. Moreover the two components of OAS (Old Age Survivors) and DI (Disability Insurance) are officially tracked separately. Meaning when Dean Baker or me tell you Social Security is fully funded until 2041 (SSA) or 2049 (CBO) we are mildly fibbing. Because DI is scheduled to run out somewhat before OAS. But the Trustees talk in the same terms, they talk about the combined Trust Funds running out at some fixed date requiring an immediate cut. But that is not how the system actually works.

The Trust Funds are typically scored by Trust Fund Ratio which is simply the ratio of the TF balance to projected cost in any given year where 100=1 year. If the combined Trust Funds are projected to have TF ratios over 100 in each of the following 10 years they are deemed to be in Short Term Actuarial Balance. If the combined TFs are projected to have TF ratios over 100 in each of the following 75 years they are deemed to be in Long Term Actuarial Balance. Officially the Trustees are mandated to alert Congress when they TFs go out of Short Term Actuarial Balance so that they can consider adjusting the tax/benefit ratio. Which is to say it is unlikely that the Trust Funds will ever go to Depletion or that there would ever be a wrenching dislocation. Instead the country would have ten plus years to plan and adjust after the TFs fall out of balance.

As noted above the actual date of Trust Fund depletion and so the time that the TFs fall out of Short Term Balance has been steadily pushed back in time and in fact at a combined rate that suggests at least a strong possibility that it will never actually happen. In fact there is a reasonably plausible scenario provided by the Trustees that would have Social Security left unaddressed be much overfunded after mid-century. This scenario which is called Low Cost would have us soon debating whether the best policy was to cut FICA or increase benefits. Which needless to say is a conversation that 99.9% of the population doesn’t even dream possible.

So I suggest that there is a logical time to move on Social Security which is in fact dictated by current law. We can and should wait until the Trust Funds actually fall out of balance which is to say 9 years before the TF ratio is projected to fall below 100. Under current projections that date is set at about 2038 meaning we would need to start planning to adjust the system around 2029. Unless of course things continue to improve.

But there is exactly no reason to move on this in the near future. Because those that insist that ‘we can’t afford to wait’ and ‘delay will only make the fix harder’ are dead wrong. Because 12 years of delay have left us with a much smaller projected fix.
Table IV.B3.—Estimated Trust Fund Ratios, Calendar Years 2008-85[In percent]