Despite these intensifying annual warnings, lawmakers have not acted. One reason they have not is the presence of an accounting phenomenon known as the Social Security trust funds. The assets held by these combined trust funds appear massive ($2.9 trillion in the latest report) while the projected date of their depletion seems to be distant (2034). The apparent remoteness of doomsday has signaled, to the uninformed, that there is still plenty of time for elected officials to fix the problem before it becomes an urgent crisis. This is very wrong. The crisis is now.
This is from Charles Blahous, “Social Security’s Downward Spiral,” Defining Ideas, August 23, 2018.
Blahous is a visiting fellow at the Hoover Institution.
The whole piece is well worth reading. Two things in particular are worth watching for: (1) his analysis of the so-called Social Security Trust Fund, and (2) his laying out of the cuts that would be required to keep Social Security operating for the next 75 years.
On (1), he writes:
Let’s back up for a moment to explain the trust funds and their significance to Social Security financing. In the past, whenever Social Security ran a surplus of taxes over expenditures, federal treasury bonds were issued in that surplus amount to its trust funds, which the program could later draw upon for future spending authority. These bonds earn interest, which is paid from the federal government’s general fund. As long as there are assets in these trust funds, benefit checks can continue to be sent out – even after incoming payroll taxes become insufficient by themselves to finance the payments. Indeed, that tax shortfall emerged in 2010 and has been worsening ever since, yet the Social Security trust funds’ holdings have continued to grow due to increasing payments of interest from the general fund.
In 2005, I gave a talk at Santa Clara University titled “Social Security: The Nightmare in Your Future.” My daughter, Karen, was attending SCU at the time and attended my talk and I had her permission to tell this story. Here is, from memory, what I said.
When Karen was about 11, she asked me if I had started saving for her to go to college. I answered that I had just started doing that. “How much will you have saved by the time I’m 18?” she asked. [That numerate acorn did not fall far from the tree. Her question got a laugh from the audience.] “About $80,000,” I answered. My plan was to save about $10,000 a year for 8 years. It wasn’t that smooth, but by the time she was 18, we had saved a little over $80,000. But what if, instead, I had, each year, written on a piece of paper, “IOU $10,000” and put the piece of paper in a jar that I safely tucked away? Then, when it came time to pay her tuition, I poured out the 8 IOUs. What would I have? Nothing. That, ladies and gentlemen, is the equivalent of the Social Security Trust Fund. It’s a bunch of IOUs saying that the U.S. Treasury owes the trust fund a lot of money.
On (2), Blahous writes:
Some illustrations from recent trustees’ reports may help to clarify the situation. Closing Social Security’s shortfall over the next 75 years (far less than a permanent fix) would require savings equal to 17 percent of its scheduled expenditures if enacted today. Obviously, lawmakers have never and will never indiscriminately cut benefits 17 percent across the board, which would hit today’s poor 90-year-old widow as hard as someone who won’t retire for 40 years. Assuming instead that lawmakers only change benefits for those yet to retire, the size of the required cuts rises to 21%. But again, that severely understates the adjustments required, for we are not about to cut benefits 21% for everyone, rich and poor, who retires next year. Changes would undoubtedly be phased in more gradually, and thus would need to hit future retirees far harder.
Moreover,
If this doesn’t sound difficult enough, consider what happens if we wait until 2034, the projected depletion date for the combined Social Security trust funds. By that point, even total elimination of all benefits for the newly-retiring would be insufficient to maintain solvency. For all practical intents and purposes, the shortfall by then will have grown too large to correct.
A few years ago, when I knew I would retire soon and was trying to figure out when to start collecting Social Security, I knew that with the Social Security earnings penalty, I should wait until age 66. But should I wait longer? Every year you wait past age 66 up to age 70, your annual benefit rises by 8%, non-compounded. So, in the limit, if I waited until age 70, my benefit would be 32% higher than if I started getting SS benefits at age 66. Figuring out what to do is not hard, once you estimate your life expectancy and use a reasonable interest rate to discount benefits. (Incidentally, as I documented here, one of the most sophisticated financial firms in the business, Vanguard, did the calculation by assuming a zero interest rate.) But just to make sure, I paid $40 to economist Laurence Kotlikoff for his estimate. I’m guessing Larry has become a multi-millionaire with his software and good for him. I wasn’t at all surprised when his software spit out the answer that I should wait until age 70. (By the way, Larry wrote two excellent pieces for The Concise Encyclopedia of Economics, titled “Saving” and “Fiscal Sustainability.”)
But all such estimates are based on assumptions. One key assumption in Larry’s model is that the rules for Social Security won’t change. I think they will. I think that sometime in the next 15 years, and maybe even in the next 10, Congress will rein in benefits for “the wealthy” and Congress will see me, by looking either at my net worth or, more likely, at my income, as one of “the wealthy.” I’m not saying Congress would be wrong. I think of myself as wealthy.
So I split the difference, not in half but in quarters. I started taking Social Security at age 67. But I’m allocating my other retirement savings as if my SS benefit 10 to 15 years from now will be 30% lower than promised.
READER COMMENTS
Alan Goldhammer
Aug 24 2018 at 3:06pm
The IOU analogy is valid only if you think the US will default on its debt, otherwise these are treasure bonds and will be redeemed as promised. There are a couple of things that can be done to relieve the pressure on Social Security. First, they should eliminate the current salary cap on what is taxable for the purposes of the program. All the folks earning big salaries (hedge fund managers, CEOs, investment bankers, etc.) should pay more into the program than they do today. Second, deferral of benefits until one turns 70 should be done away with. People live longer today and the program has not adequately compensated for the increased benefit that gets paid at this age (I also started taking my SS at 67).
I’m also not sure how the current tax on social security benefits is accounted for. Thanks to prudent investing we pay taxes on 85% of our SS benefits at the Federal level and will for the foreseeable future because of mandatory IRA withdrawals that kick in this year. There are lots of others who are in this same position (and I would hope that our esteemed economist who wrote this piece is as well). So those of us who did invest and plan well do NOT receive full benefits because of this tax. It would be nice if these funds went back to the trust fund but I’m not sure that is the case.
XVO
Aug 24 2018 at 3:17pm
“First, they should eliminate the current salary cap on what is taxable for the purposes of the program.”
Excuse my ignorance, but if they remove the salary cap would they not also be obligated to raise the benefits cap? Isn’t that the fiction that social security is meant for everyone, and we’re just getting back the amount we paid in plus interest?
BC
Aug 24 2018 at 4:13pm
How are those treasury bonds “redeemed as promised”? From *general fund* tax revenues, e.g., income taxes. So, when the “trust fund” was being built up, Social Security taxes in excess of benefits were being used to pay general government expenses. Now and in the future, general government taxes will be used to pay the difference between excess Social Security benefits and taxes.
That’s exactly the same as David’s IOU analogy. When his daughter was growing up, don’t bother saving for her college. When she reaches college age, try to pay for her college, i.e., “redeem the IOUs as promised”, from his current income. That’s not saving in any sense of the word.
Alan Goldhammer
Aug 24 2018 at 6:11pm
I well understand the flow of funds regarding the trust fund. Now you and I might not think this is optimal but the point still remains is that the trust fund is as solid as US credit is. This is a far different scenario from the Henderson family example.
David Henderson
Aug 24 2018 at 6:20pm
Thanks for replying to Alan. You’re spot on. The analogy does not depend on no default.
BC
Aug 24 2018 at 10:13pm
Upon further consideration of the generational aspects, it seems David’s analogy doesn’t go far enough. He should emphasize that the IOUs are not money that *David* owes to the college fund but rather represent money that *Karen* owes to the fund. David would have signed them on Karen’s behalf as her guardian. When it came time for Karen to go to college, David would present Karen with the IOUs, Karen would owe that money to David, and David would then use Karen’s IOU payments to “pay for” Karen’s tuition. The IOUs in the Social Security Trust Fund must be paid back by *current* workers, not the previous workers / current retirees that spent the money on their own general government expenditures.
For people that still don’t believe that the Social Security Trust Fund is a fiction, consider the following scheme for current workers to vastly *increase* our future benefits without paying a single dollar more in taxes: eliminate all federal income taxes and increase our FICA taxes by the same dollar amount. Use all those extra FICA taxes to buy treasury bonds for a Trust Fund, and promise ourselves much higher retirement benefits to be paid from that Trust Fund. The treasury bond sales can also finance the same general government spending that would have occurred before the federal income tax cut. If the future generation balks at our high retirement benefits, we can just point to all of the “extra” FICA taxes that we paid. Under this scheme, would we truly have a moral claim on future retirement benefits due to having “paid into the system”? Of course not; we would have just re-labeled taxes used for general expenditures as “FICA taxes”. That’s exactly how the Social Security “trust fund” was built up.
The claim that we can’t morally cut retirees’ benefits because they already (fully) “paid for them” is false. They only appeared to have paid for them because they labeled taxes used to pay for their own general expenditures as “FICA taxes”.
robc
Aug 25 2018 at 8:21am
The biggest thing to be done to relieve the pressure on SS is to convert it from a pay-as-you-go system to a mandatory retirement account system. Say 5% of salary from both employer and employee into the account (I figure the other 1.2% of the 6.2% can go for the child survivor benefits portion of SS).
That works for this point forward and makes it 100% solvent for the NEXT generation. The 2nd needed part would be to fund current workers accounts for the amount they have already paid. That should be easy, just cash out the Trust Fund immediately. I am sure the general fund is good for it, right?
I haven’t run the numbers, but if we started only adding the 5% employee portion to there accounts, would the remaining employee portion plus trust fund be enough to fund current retirees plus proportionate payouts to future reitirees?
Probably not. There would need to be a one time hit, I would guess, in order to make the switch. However, after the switch was made, the system would be stable going forward.
It would add an immediate big chunk to the debt, but it might be worth it to make SS a non-issue going forward.
Plus, it has the advantage that you don’t have to play (the same) guessing games about when you are going to die. If you die earlier than you expected, your heirs could inherit the remainder of your account.
Mark Bahner
Aug 26 2018 at 12:22am
A very important point that seems to be missed here is that the Social Security “Trust Fund” consists of *special issue* treasury bonds. If the U.S. does not honor those bonds, it does not hurt the credit rating of the U.S. government. In fact, it probably enhances the credit rating for the bonds that are traded in the public sphere (because there is less outstanding debt).
David Henderson is exactly right. He would only be wrong if the bonds in the Trust Fund were capable of being traded on the open market.
If there was *no* Trust Fund, what would the federal government have to do to cover the difference, if the amount paid out from Social Security is more than the amount paid in? The answer is that the government would either have to cut expenses somewhere else, pay out less to Social Security recipients, raise taxes, or go further into debt…or some combination of those things. That’s exactly what the federal government has to do *with* the Trust Fund in existence. Therefore, the Trust Fund is by definition worthless…because the federal government has to do the same things whether the Trust Fund exists or does not exist.
BC
Aug 24 2018 at 4:31pm
“I think that sometime in the next 15 years, and maybe even in the next 10, Congress will rein in benefits for ‘the wealthy’.”
Conservatives generally favor resolving budget shortfalls through less government spending, and progressives generally favor resolving shortfalls through higher taxes. One way to make both groups happy might be to resolve the shortfall by levying taxes on the wealthy, not by increasing their current tax rates, but by netting those taxes against their future Social Security benefits. We could also allow them to opt-out of paying taxes with benefit cuts through a check box on their tax returns: checking the box would increase their current tax rates and restore their future benefits.
This idea borrows a lot, of course, from the current proposal to pay for a government family leave benefit through reduced or delayed Social Security benefits. Of course, one can only spend a dollar (in present value) of future benefit cuts once to pay a dollar of taxes now. So, we can’t necessarily do both. We would just have to decide whether it’s worth the risk of spending limited future Social Security benefit cuts to launch a new federal entitlement when those benefit cuts might be badly needed to preserve our existing entitlements.
James Schaefer
Aug 24 2018 at 5:37pm
I would describe the Trust Fund a bit differently. I apologize for the length.
Yes, it contain IOUs, rather than real assets; however, the Trust Fund was created from actual FICA taxes that were paid by taxpayers: $2.9 trillion worth over 30 years, as excess FICA taxes between 1989 and 2018.
(Prior to that, the system was roughly in balance, with regular surpluses and deficits. The history of Trust Fund’s deficits and surpluses is available on the SSA’s website).
The actuaries knew that FICA revenue would be insufficient to sustain Social Security long term, and President Reagan and House Speaker Tip O’Neill worked together in the 1980s to create the fix, raising payroll (FICA) taxes.
The first major surpluses show up in 1989. It is this increase in FICA taxes that enabled the current Trust Fund surplus to be created, to its current $2.9 trillion.
Here’s the rub, and why it’s going to hurt.
The only way the Trust Fund can be redeemed is by taxing citizens again for something they’ve already paid for.
To put it slightly differently, US taxpayers will pay, between 1989 and 2034, $5.8 trillion to provide $2.9 trillion in benefits.
The first $2.9 trillion in taxes was to buy the Treasuries, over a 30-year period. The second $2.9 trillion in taxes will be to redeem them, over about 15 – 18 years.
The boomers will end up paying both times, first at the height of their working years as payroll taxes, then later as taxes in retirement. So for the boomers it’s not even kicking the can down the road to the next generation.
What if the annual FICA surpluses had been put into the market and invested, say, into a broad spectrum of mutual funds?
This is an easy calculation. We can use the market returns for the S&P 500, or the Dow (both available on-line), plus the history of Trust Fund surpluses between 1989 to 2018, and run the math with compounded growth.
The rough number is around $3 trillion dollars.
The difference is that Trust Fund would be real assets, invested in real companies.
This leads to a question: what happened to the $2.9 trillion used to buy the U.S. Treasuries? It’s still sitting there in Washington, right?
(Side note: The Trust Fund Treasuries are not in Washington. They’re actually printed on paper, and they are stored at the Social Security office in Parkersville, West Virginia).
Surplus FICA taxes are used to purchase the special U.S. Treasuries, as required by law.
Once that money is paid, it goes to the U.S. Treasury and directly into the general fund. It is commingled with other tax revenue, and it gets spent on other programs.
This is why the Trust Fund is “empty”.
And this is why the IOUs will have to be paid for a second time.
Yes, U.S. Treasuries are safe and secure, backed by the full faith and credit of the U.S. government (read: U.S. taxpayer). Nobody’s arguing the safety and security of U.S. Treasuries.
Hypothetical: had the Trust Fund surplus been invested into the market (as many public sector pension funds are), and had the market crashed all the way to zero, we’d be no worse off than we are right now.
We’d still end up paying $2.9 trillion twice, first to purchase the hypothetical Trust Fund market investments, then to redeem the hypothetical loss.
Incidentally, the Trust Fund represents only a small percentage of the money collected and disbursed by Social Security.
The remainder is real-time FICA taxes being received and turned around immediately to pay real-time Social Security benefits.
So when a headline says “Social Security is Going Broke in 2034”, it doesn’t mean that Social Security will end. This is an important point.
What it should say is that the Trust Fund – the reserve account that represents a small portion of the total amount collected and disbursed – will go dry in around 2034.
The rest of Social Security will remain in place and will still be functioning: real-time revenue being used to pay real-time benefits.
Because of changing demographics, however, there will be fewer workers paying into the system and more retirees receiving benefits. That is a legitimate issue, and it deserves a separate discussion.
Calpers, the Railroad Investment Trust, and the Alternate Plan in Texas are all public sector pension funds (at the state, national and county level, respectively).
All are invested in the market (yes, “Wall Street”).
If the market is safe for investments made by public sector pension funds, then it should be safe for the Social Security Trust fund.
If the market is not safe for the Social Security Trust Fund, then it should not be safe for the public sector pension funds.
Is there a solution to the pending decline of the Trust Fund, and the changing demographics that will require changing Social Security benefits?
Insurance companies offer annuities, private pension plans exist, and the Alternate Plan in Texas is solvent, so we know it can be done.
All it will take is the political will.
Mark Bahner
Aug 26 2018 at 12:30am
I’m arguing against the safety and security of special issue U.S. Treasuries. Defaulting on them does not hurt the creditworthiness of the federal government.
But I agree with your statement here:
Except I would substitute the word “worthless” for empty. 😉
David Seltzer
Aug 24 2018 at 6:43pm
Compounding the issues; increased spending, borrowing and deficits all monetized with the Treasury’s press. The unintended consequence of increased taxes on the wealthy will be similar to what happened in Greece. Less productivity and tax avoidance schemes to blunt forced confiscation of taxes and property. Socializing losses doesn’t work and flies in the face of one’s liberty!
Alan Goldhammer
Aug 25 2018 at 8:58am
“The unintended consequence of increased taxes on the wealthy will be similar to what happened in Greece.”
Ok, let’s look at who the high income individuals are and whether this statement is true (taking the top 2% earners as a cutoff). Most of them are in the financial services industry (hedge fund, investment banking, private equity; some are senior managers of large corporations, some are lawyers and doctors. If taxes on this group are raised by a rational amount, say 2-3% leading to a ‘new’ tax bracket is this really onerous? I think not.
Another point is that real tax reform would include a VAT and/or financial transaction tax that could lead to lower personal rates but that’s an argument for another day.
Bill
Aug 25 2018 at 11:59am
” …the trust fund is as solid as US credit is.”
Exactly, and this demonstrates that the trust fund is financially irrelevant when it comes time to pay SS retirement benefits. That is, when payroll tax revenues are insufficient to pay for SS retirement benefits, the existence of the IOUs in the trust fund plays no financial role in determining how to pay the benefits. Payments must be funded through borrowing, increased taxes, diverting funds from other government programs, or monetization whether or not there are IOUs in a trust fund. Thus, the college fund analogy holds.
Bill
Aug 25 2018 at 12:25pm
An exception to my sweeping statement of “financial irrelevance” occurs when the federal government is confronted with dept-limit induced borrowing restrictions. That issue was addressed a few years ago by David :
https://www.econlib.org/archives/2011/07/tom_saving_on_t.html
Mark Bahner
Aug 26 2018 at 12:36am
Oops. In my previous comments, I didn’t realize someone had already written–and more succinctly–what I just wrote. I probably should read more carefully before commenting. 🙂
David Seltzer
Aug 25 2018 at 7:08pm
Yes Alan it is onerous. I’m not duty bound to provide for others especially when profligate administrations coerce taxpayers to underwrite government folly. I have dominion, authority and jurisdiction over my person and property. NO ONE ELSE DOES! One percenters paid 40% of all federal tax revenue in 2017. 2%, 3% MORE? Where does it end?
Steven
Aug 24 2018 at 9:23pm
Whether or not the Social Security trust fund represents savings or not is entirely dependent on government spending in the counterfactual world where Social Security didn’t exist. If government spending was unaffected and the trust fund was used to reduce public borrowing, then it represents an increase in government savings.
Similarly, if you had used the $80,000 to pay off your mortgage ahead of the schedule you otherwise would have, while at the same time writing a nonmarketable IOU to your daughter, it would be money saved for college because your external debts would be lower.
One small additional quibble, the Social Security earnings test is not really a penalty or a tax. If benefits are repaid to the government because of the earnings test, they’ll be repaid in the form of a higher monthly benefit over the recipient’s lifetime (see https://www.ssa.gov/pubs/EN-05-10069.pdf).
Radford Neal
Aug 24 2018 at 10:20pm
It seems to me that both sides in this “debate” are just being silly.
You might (A) be worried that Social Security administration will not have enough money, and hence not be able to pay beneficiaries as promised.
You might (B) be worried that the US government will have too much debt, and not be able to pay its debt obligations as they become due.
The existence of the trust fund might make you less worried about (A). But since it’s invested in US government debt, its existence might make you more worried about (B).
Supposing that you consider the US debt obligations apart from the trust fund to be manageable, you should worry about either (A) or (B) – take your pick – but not BOTH, and not NEITHER. You can consider the trust fund a fiction, and then worry about (A) but not (B) – fictional debt is no problem, right? Or you can consider the trust fund real, and worry about (B) but not (A). Debating whether the trust fund is real or fictional is entirely meaningless, since these two worries are really about the same thing.
Thaomas
Aug 25 2018 at 10:38am
I think the basic problem was to have funded SS and Medicare with a wage tax whose base is subject to demographic trends instead of a consumption tax. We still can. Adjusting the rate of a consumption tax as numbers of beneficiaries and benefits change would probably be easier. By raising the EITC we can offset the effects of the tax on the consumption of low wage workers.
bill
Aug 25 2018 at 5:27pm
We’ll be fine.
Mark Bahner
Aug 26 2018 at 6:03pm
As long as “we” are roughly the middle of the Baby Boomer generation or older, I think that’s true.
The only way I can see being completely sanguine for the generations after the Baby Boomers is if economic growth picks up significantly***. I think that’s a distinct possibility…I would even label it as a probability:
http://markbahner.typepad.com/random_thoughts/2004/10/3rd_thoughts_on.html
If so, there is no need to worry about Social Security, Medicare, Medicaid, or any other social program (see item #2 in the following link…”The Kids are Gonna be Alright”):
http://markbahner.typepad.com/random_thoughts/2004/10/implications_of.html
P.S. ***Economic growth could “pick up significantly” even if current methods to measure GDP don’t show it…particularly if there exists significant unmeasured deflation. I think that’s also a possibility…though not a probability.
Mark Bahner
Aug 26 2018 at 10:37pm
As long as “we” are roughly the middle of the Baby Boomer generation or older, I think that’s true.
The only way I can see being completely sanguine for the generations after the Baby Boomers is if economic growth picks up significantly***. I think that’s a distinct possibility…I would even label it as a probability:
markbahner.typepad.com/random_thoughts/2004/10/3rd_thoughts_on.html
If so, there is no need to worry about Social Security, Medicare, Medicaid, or any other social program (see item #2 in the following link…”The Kids are Gonna be Alright”):
markbahner.typepad.com/random_thoughts/2004/10/implications_of.html
P.S. ***Economic growth could “pick up significantly” even if current methods to measure GDP don’t show it…particularly if there exists significant unmeasured deflation. I think that’s also a possibility…though not a probability.
bill
Aug 27 2018 at 3:31pm
Mark, I like your comments. They’ve prompted me to write a little more.
In hindsight, I’ve come to think that the Trust Fund was not a good idea. Since the passage of Social Security, almost $21 trillion of SS taxes have been paid in and about $18 trillion in benefits have been paid out. That excess had to be accounted for somehow. Reagan and the Congress decided on a Trust Fund to hold US Treasuries and that investing the funds in private business would be a bad idea (I agree). Of course, we could sell those Treasuries and buy other assets like index funds, though that won’t matter much longer as the Trust Fund may be empty by 2034 (and I’ll be 68, so about the worst age possible). As you point out, productivity could be higher. If the recent JTCA will boost the economy as predicted by some, this issue will be moot.
https://www.econlib.org/archives/2017/10/hassett_on_tax.html
In fact, with the growth that’s coming, we’ll probably have surpluses in the Social Security Trust Fund forever. I’d like to see what the Social Security Trust Fund projections looks like once they are updated to match the JTCA projections.
But I’m sanguine because the issue is a “real” issue, not a financial one. Demographically, it would be nice if the ratio of workers to beneficiaries stayed around 2.7:1 so that the current tax rate worked. But if it doesn’t, I know we’ll adjust. Probably with higher taxes and lower benefits. Maybe a change in retirement age. But maybe (I hope not) with supplemental funds paid by general tax revenues. Almost all voters have parents or children or hope to be 67 or 70 some day. Japan is doing fine with an age structure that is already worse than anything the US will likely see in the next 80 years. Germany too has more retirees (as a ratio) and it is still running a budget surplus. But we can’t do anything in advance because that would just result in more money going to a Trust Fund that is viewed as IOUs. Some people wish we could save up (have a fully funded Trust Fund), but how? I certainly don’t want the government owning trillions of dollars in stocks. And owning Treasuries is just an accounting mechanism (in that sense, I guess calling them IOU’s makes sense). So it has to be pay-as-you-go (like it’s been for a million years before we had Social Security). Voters can decide if they want to handle the PAYGO obligation in a joint manner like Social Security or go back to everyone fending for themselves and their own relatives. Social Security is just a mechanism to pool the obligations. It doesn’t change the underlying costs. If we cut benefits, some people will be better off and others will have to directly help their parents or in-laws.
Mark Bahner
Aug 29 2018 at 11:08pm
Hi Bill,
Some comments on your comments. 🙂
That’s the key thing about the “assets” in the Trust Fund. They’re “special issue” bonds. They can’t be sold on the open market by the Social Security Administration. Therefore, they are not worth anything, because the U.S. government does not face any penalty to its credit rating if the “special issue” bonds aren’t fully honored.
And because the special issue bonds in the Trust Fund are worthless, the year that’s important is not when the Trust Fund is “empty”…because what’s in there is worthless. The year that’s important is the year that inputs to SS are less than outputs to SS recipients…and every year after that, if inputs continue to be less than outputs.
The growth I’m talking about dwarfs any growth considered to be plausible by 99.99% of the economics profession (as far as I know…David Henderson or others at Econlog can help me out if I’m wrong). I’m talking about growth rates of 7 to 10+ percent per year, or even more. And I’m talking about those high growth rates happening year after year. So any plausible boosts to the economy by the JTCA are dwarfed by the growth rates I’m predicting…which I’m predicting will be due to artificial intelligence.
By 2034, the year you retire, I’m predicting that we’ll be growing at 7-10+ per year in the U.S. and around the world. If I’m right, you’ll be golden. (And I’ll be looking for at least a share of the Nobel in Economics. ;-)) If I’m completely wrong, things could get sticky for you…and everyone retiring after you.
Japan’s government debt as a percentage of GDP seems frighteningly high to me. But I don’t know much about the subject. (Which will make my Nobel in Economics all the more surprising. ;-))
Philo
Aug 26 2018 at 4:32pm
There is no legally binding promise to beneficiaries and potential beneficiaries of the Social Security system. There is a sort of “quasi-promise,” but it can be revoked at any time by Congress. This “quasi-promise” is so vast that almost certainly it will not be kept. The benefits, though not the FICA taxes, will be greatly reduced, and everyone will see the system as a bad deal for actual retirees and a veritable millstone around the necks of young workers. This is virtually inevitable, the only practical issue being whether it will be handled *badly* or *very badly*!
But let me add that the various obligations and quasi-obligations of the government can be paid for not just from current revenue and increased borrowing: the government could sell assets, which would delay the final reckoning. Does anyone have an estimate of the value of the various assets owned by the Federal Government (a figure that really should be mentioned in discussions of the “National Debt”)?
robc
Aug 27 2018 at 10:04am
Does anyone have an estimate of the value of the various assets owned by the Federal Government (a figure that really should be mentioned in discussions of the “National Debt”)?
I dont know the answer, but wasn’t that a plank in the Browne LP campaign in 1996 and 2000? He wanted to sell off government assets to fund paying social security benefits for everyone over age N (50? 55?) at the time and end the program for those under it.
Peter Schiavo
Aug 27 2018 at 9:45pm
The solution to the Trust Fund conundrum would have been to purchase hard, non-degradable assets with the surplus cash. Gold or crude oil or platinum. Predictable purchases each year when accumulating surpluses and predictable sales when paying out benefits.
William Meek
Aug 28 2018 at 10:51am
Gentlemen, just a superb discussion by all contributors. I learned more here than in any other place about Social Security and the funding issues associated with the program. As someone now 62 and fairly rapidly approaching retirement my decision about when to take Soc.Sec. has till now been influenced by some excellent writing by Daniel Amerman (danielamerman.com). Other than comments made here, his CFA based “advice” is to strongly consider taking the payments early and he has some excellent arguments when that should be done on his site.
I think there are many ways to alleviate (but not eliminate) the Social Security burden (including a medley of smaller FICA tax increases, raising the contribution limits, coupled with ending the early SS age 62 option and moving to an accelerated phase in increase in the SS retirement eligibility date to age 70 before 2025. We just NEED to do something NOW to increase confidence and reduce the problem before it blows up in the middle of the next great recession (coming soon) and perhaps less thought out steps are forced on the system with perhaps less thoughtful consideration. However, my understanding is that Medicare is actually going to be the much bigger problem within just a few short years. Thanks for a great 1 hour read.
bob
Aug 28 2018 at 5:19pm
David,
Social security is about 5% of GDP and is expected to grow to 6.1 by 2035, which is admittedly a %20 increase. But do we really consider 1% of GDP to be an existential threat? Defense spending approached 6% in 2010 from 3.5% in 2000. That’s nearly a 2.5% swing. Trump’s tax cut was 1.1% of GDP. I’m not saying it isn’t a problem. I’m just saying it’s a 1% problem, not a 17% or 21% problem. And we’ve been successful in the past dealing with 1% problems.
Todd Kreider
Aug 28 2018 at 10:44pm
Bill wrote:
Good news! At 68 in 2034 you won’t die of cancer, Alzheimer’s disease, Parkinson’s disease or heart disease. That’s a small consolation prize, right?
Thomas Boyle
Aug 29 2018 at 7:13am
David,
Your analogy doesn’t go far enough. To complete it, your daughter saves $10,000 a year and, instead of letting her put it in the bank, you require her to lend it to you, and you give her an IOU for the money.
That IOU is a real financial asset she owns, not monopoly money in a jar. You really do owe her the money. Assuming you have the resources to pay her, she has saved for college.
When the government puts bonds in the social security fund, it is not taking money out of its left pocket and putting it in the right. It is, instead, making a commitment to lenders (the social security beneficiaries) that will be repaid by taxpayers – who are not the same people. It is real debt to taxpayers, and a real financial asset to the social security beneficiaries.
To put it another way, suppose the government received the money and simply put it in a box, in cash, and handed the box to independent trustees, who act solely in the beneficiaries’ interest but have a single constraint: no risk. The trustees, looking for a risk-free investment, buy bonds issued by the treasury, since that’s no higher a risk than holding US dollars in cash, and it pays a return. Isn’t that the same outcome as what’s actually happening?
Mark Bahner
Aug 29 2018 at 11:21pm
I don’t agree. It is not a real financial asset. A real financial asset can be sold on the open market. The “special issue” bonds in the (alleged) SS Trust Fund can’t be sold on the open market.
The Social Security Administration can’t sue the rest of the federal government to honor the I.O.U.s in the Trust Fund.
Thomas Boyle
Aug 30 2018 at 7:43am
Mark,
I wasn’t aware of the “special issue” nature of those bonds, which is disturbing. Nevertheless, that in and of itself does not change their status as bonds, claims against the government, and financial assets.
I’m skeptical that the SSA couldn’t insist that the Treasury honor the bonds. Failure to do so would be a violation of the constitution. Perhaps a bigger worry might be whether, in fact, anyone at the SSA actually would bring the suit, at a time of national fiscal crisis. But, a decision to default on Treasury bonds is a decision to default; in itself, it doesn’t change the status of the bonds as claims against the government, and financial assets – it just means that they, as with any other financial asset, could face a default event.
robc
Aug 30 2018 at 10:47am
Fleming v Nestor.
Congress has the ability to change social security benefits as they see fit. There is no contract. They could decide to “pay back” the SSA at 50 cents on the dollar. Or they could cut benefits by 50% to make the trust fund last longer. This is the problem with the system.
Its another reason my suggestion above is a good idea, converting SS to a government mandated retirement account that gives property ownership rights to the individual prevents these possibilities.
bill
Aug 30 2018 at 4:30pm
I could be mistaken but I think David is more afraid that Congress will raise taxes to continue paying the promised benefits than he is that the benefits will be cut. I also recall reading that if Congress does nothing, current law says that once the Trust Fund is empty, benefits are automatically cut to match whatever the then-current revenues are. I could be mistaken on both of these statements.
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