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October 09, 2006

If You Care About The Deficit, You Care About Social Security

Dean Baker has a bone to pick with Ben Bernanke:

The projected increase in Social Security spending is relatively modest over the next 45 years and in fact no larger than it was over the last 45 years. In addition, he also knows that workers have already largely paid for this projected increase in spending, paying a designated Social Security tax that exceeds current needs. The Congressional Budget Office projects that future tax revenue, plus the accumulated surplus over the last quarter century, will be sufficient to pay all scheduled Social Security benefits through the year 2046, with no changes whatsoever.

So, Mr. Bernanke was not being honest when he claims there is a problem with Social Security...

At the risk of being labeled one of those "unified budget types" that keep Angry Bear's pgl angry, I object.  The trick there is the stipulation that "future tax revenue, plus the accumulated surplus will be sufficient to pay all scheduled Social Security benefits."  It is fair enough to say that the Social Security "trust fund" is a promise to workers that the government ought not breach.  It is incorrect to say that it will finance "all scheduled Social Security benefits" in any economically meaningful sense. 

The relevant piece of information is this, from the 2006 report of the Social Security and Medicare Board of Trustees:  "Projected OASDI tax income will begin to fall short of outlays in 2017..."  In other words, the Social Security ceases to be self-financing out of payroll taxes in about 10 years.  Absent an increase in overall tax revenues or a reduction in government spending, the payment of scheduled social security benefits adds to the deficit. If you think that deficits are a problem, then logic compels you to treat the payment of accrued Social Security promises as a problem, and one that will arrive in fairly short order.

Note that the same sort of problem does not apply to a large chunk of the Medicare program.  Again, from the Board of Trustees:

Part B of the SMI Trust Fund, which pays doctors' bills and other outpatient expenses, and the recent Part D, which pays for access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future by operation of current law that automatically sets financing each year to meet next year's expected costs.

Part A of the program, which covers hospitalization costs, remains a problem, of course, and it is big -- about 1/2 of all Medicare outlays.  And you might reasonably argue that the increasing share of medical expenditures in both government expenditures and GDP is worrisome. Though I think this subject to some dispute, I'm not inclined to object too vehemently. But I just don't buy the argument that this is reason for ignoring the very real imbalance that exists in the Social Security system.

Several bloggers I admire have consistently argued that, given the benefit promises they imply, it would be a very good thing to not commingle Social Security taxes with other sources of federal revenues.  pgl is in that group.  So is Calculated Risk and Andrew Samwick.  In the name of transparency, you can put me on that list as well.  But unless you harbor pretty firm Ricardian views -- in which case you believe that any discussion of the deficit per se is fundamentally off-topic -- the relevant economic measure is indeed the unified budget.  And for that, the trust funds don't mean a thing.

October 9, 2006 in Social Security | Permalink


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I appreciate the words of wisdom from President Bush's Social Security trustees (4 of the 6 arer political appointees). In spite of the efforts by politicians to confuse the issue, under the law, the bonds held by the trust fund are assets for SS and are treated as such in SS accounts.

Unless Congress votes to default on these bonds (can anyone identify any advocates of default? I'm sure we can get them a new job post-November)then this money is there for SS. Of course, this money must be raised by the federal government from tax revenue, but this has nothing to do with SS finances.

This trick by the enemies of SS would be like saying that Ross Perot has a big problem because he holds $2 billion of government bonds, and the government doesn't have the money to pay him back. It is certainly reasonable to claim that government debt is too large, but this gets back to a discussion of the cost of the tax cuts, the war, etc. This is not a a discussion about a program that is fully funded to 2046 by its own tax.

Posted by: Dean Baker | October 09, 2006 at 11:04 AM

I noted your objection in my update as I object. Let's be clear - someone's taxes will go up either explicitly or implicitly for reasons that I note. Now if you are all for converting payroll contributions into that backdoor employment tax increase that I keep mentioning - just say so. Lord knows, the GOP politicians will never be so honest.

Posted by: pgl | October 09, 2006 at 12:07 PM

I said this in comments at AngryBear and repeat it here in slightly different form:

Your declaration that "Social Security ceases to be self-financing out of payroll taxes in about 10 years" is disingenuous at best, as the mechanism for addressing that issue has been in place and active for the past 23 years: that is, the Greenspan Commission's increase in the payroll tax rate to cover this very matter was based on demographic analysis (which remains spot-on) and economic analysis (which was, if anything, pessimistic) and concluded with that investing the excess collection in Government Securities (read: risk-free investment) to prefund the SocSec TF so that it can provide me and my peers (in both directions) with the same level of benefits those slightly older received.

That the "grasshoppers" of the current Administration want to use our monies to pay for its yachts does not undermine the reality that one would have to breach the social contract offered by the Greenspan Commission to contend that 2017 (give or take four or five years) is significant as anything other than a Known Event for which we "ants" of the Baby Boom have been saving.

This is not a future matter of Ricardian Equivalence; that decision has been in place for more than a generation. To suddenly discover that the general fund will owe more is no different than having a balloon or IO mortgage with a set payment schedule.

Posted by: Ken Houghton | October 09, 2006 at 12:47 PM

We've only managed to keep SS going by a 14-fold increase in payroll taxes--including raising both rates and income subject to those rates. That's not an option anymore.

The simple reality is that the Federal govt. has NEVER been able to sustain revenues of even 19% of GDP. So, it won't be able to raise the 25-30% that it would need to meet promised SS-Medicare-Medicaid when the baby boomers are fully retired, either.

And, shortly, that will become obvious. Not in ten years, more like three or four, when the first eligible boomers retire and stop paying in and start collecting. That's when the SS surplus begins to decline and congress has to either replace that revenue or cut spending. Whether they like it or not.

Btw, it is truly Orwellian Double Think to hold in one mind, simultaneously, the two contradictory ideas, 1; The SS trust fund has any value. 2; The important figure is the combination of Debt Held by the Public and Intragovernmental Holdings.

Posted by: Patrick R. Sullivan | October 09, 2006 at 04:25 PM

My sincere apologies to David for letting the virus known as Patrick R. Sullivan coming over here with his usual offpoint banter.

Patrick - beyond the World War II period, how many times has the Federal government run expenditures massively in excess of 20% of GDP? I suspect none. So this notion that the Federal government has even TRIED to collect more than 20% of GDP in revenues strikes me as some Marxist fantasy. So Patrick, pray tell - are you a closet frustrated Marxist disguised as a rightwing hack?

Posted by: pgl | October 09, 2006 at 05:42 PM

Few discussion get my blood boiling as this one does. I am not an economist, nor an academic. I am a 55 year old working man who has never earned more than the SS tax base in my entire working career. I think I am pretty typical of the baby boom generation.

We agreed back over twenty years ago to have our SS taxes raised in order to build up a trust fund for our retirement years. As we understood it then, these extra taxes would be used to reduce the governments borrowing from the private sector. This would strengthing the federal govenments balance sheet by replacing public debt with trust fund debt. Then when the time came that us baby boomers started retiring the govenment would have a clean balance sheet and could pay off the trust fund debt by borrowing from the public sector.

Instead what happened is they used our extra payroll taxes to reduce income taxes and continued to increase the public public debt anyway. And now we have federal government with a far weaker balance sheet than we were told to expect and we have politicians telling us that they have to cut our benefits in order to keep the system solvent.

Someone should hang for this.

Posted by: ken | October 09, 2006 at 10:05 PM


Which generation elected the politicians that did it?

Perhaps they should hang for this.

Posted by: ErikR | October 10, 2006 at 06:01 AM

Ken, well stated. It's incredibly sad for Fed credibility that AG, highly praised for so long by the Economics community, so energetically fed BOTH sides of the argument.

Posted by: bailey | October 10, 2006 at 07:42 AM

I'm not surprised that pgl is too lazy to look up Federal expenditures as a pct of GDP, I always have to do the work for him. Beginning in the mid 70s (thanks to total control of Congress by Democrats) spending hit 21.29% in 1975.

It rose gradually to 23.5% in 1983, until Reagan and his coalition in Congress reversed the trend. Even with the top marginal rate at 70% revenue fluctuated between 17.1% and 19.6% (with only two years above 19%).

That's the reality.

Now, would you like to finally take a crack at reconciling your contradictory beliefs in 1. the 'reality' of the SS trust fund, and 2. the burden of 'intragovernmental debt holdings'?

Posted by: Patrick R. Sullivan | October 10, 2006 at 09:22 AM

I realize this comment is coming a bit late, but I come to this topic from the health care side of things. In particular I was struck by the final quoted paragraph from the Medicare BOT. The one referring to the "mechanisms" in place to adjust reimbursement for doctors and hospitals and keep the program in the black. I believe that mechanism refers specifically to an annual adjustment to the Medicare Conversion Factor referred to as the Update Adjustment Factor. It grows out of the concept of Sustainable Growth Rate.

The adjustment factor is based upon the difference between predicted and actual expenses for the previous year and the last 10 years in aggregate. There is a complicated factor (the Medicare Economic Index I think) adjusting for things like GDP and non-farm wages included as well. By statute, the adjustment can only be between something like 3% and -7%. If memory serves, the last 4-5 years expenditures have been far enough above predicted expenses that the adjustment factor was calculated to be like -22% (and therefore limited by statute to -7%). I'll leave it as an exercise for readers to find out what the ACTUAL Medicare Update Adjustment Factor was for those years (hint: it wasn't negative).

I can't blame docs for objecting to consecutive large reimbursement cuts on already low Medicare reimbursement rates (these rates generally form the ceiling for Medicaid reimbursement, and private insurers often peg their reimbursements to ~10% over Medicare). So consecutive large cuts like those that would have come under the Update Adjustment Factor "mechanism" would have reverberated throughout the system. That said, it's hardly a reliable "mechanism" for checking growth in Medicare Part B (doctor and outpatient services) spending.


Posted by: pidgas | October 13, 2006 at 02:51 AM

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