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Posted by on Mar 25, 2010 in Economy, Politics | 44 comments

Social Security Dips a Toe in the Red Ink Pool

bankrupt.jpgA rather dismaying headline crossed my desk this morning from our friends at Hot Air. Social Security will tip over into annual deficits … now. And given that the source of the story was The New York Times it’s hard to write this off as “right wing alarmism.” A long expected – but not expected just yet – milestone has apparently been reached.

This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office. …

Mr. Goss, the actuary, emphasized that even the $29 billion shortfall projected for this year was small, relative to the roughly $700 billion that would flow in and out of the system. The system, he added, has a balance of about $2.5 trillion that will take decades to deplete. Mr. Goss said that large cushion could start to grow again if the economy recovers briskly.

There’s plenty of political spin to be had on this story from both sides, but the numbers don’t lie. Personally, I still maintain that even at present rates of depletion, it would be many years before the system actually went completely belly up. And if our elected leaders can muster the intestinal fortitude to tackle the issue, it’s still fixable without any drastic, draconian measures. They just won’t be politically popular, especially with older voters who tend to show up at the polls most reliably.

But that doesn’t mean that there aren’t some bigger underlying problems here. As Ed Morrissey points out, that $2.5 trillion “lock box” of Al Gore’s has long since been raided, and the cash was replaced with a stack of I.O.U notes.

Er, what $2.5 trillion balance? Al Gore (another name absent from this report) talked about a “lockbox” for Social Security assets, but they’re vaporware. It consists of Treasury IOUs that the US has to pay by selling more debt. The program has no hard cash of its own. As it falls into the red, benefits have to be paid through borrowing, whether the SSA does it directly or Treasury does it indirectly. Congress spends it all every year in order to cover its own deficits, or at least make those deficits look better than they would otherwise.

So we kind of, sort of “have” the money to pay out the benefits. We just don’t actually… you know… have the money. This turns what might have been a manageable problem into an even bigger headache. One of the largest areas of concern among voters today is the dismal job Washington has done of managing the public purse, with spiraling deficits and a T-Rex sized national debt. There will be no support for cutting benefits across the board, but the money has to come from someplace, so when the S.S. system calls in those notes, more debt will have to be accumulated. It’s a situation which can quickly spiral out of control.

The Republicans didn’t fix the problem while they were last in power (though to give credit where due, they at least floated some ideas for it, flawed though I may have found them) and now the Democrats have gotten their wish and are in charge of the country. Can they come up with a plan to take this bull by the horns? Or will they kick the can further down the road?

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  • DLS

    I read the New York Times story this morning. (It also had a good front-page story about Elizabeth Warren.) This thread is a refresher, too. Finally, some people are starting to take notice! The Trustees and some of us have tried to warn people for years.

    You realize, Jazz, that there is no guarantee there will be a return this decade of surpluses before the resumption of deficits. We may have a “lost decade” without having prepared for the 2020s and onward (Baby Boomer retirements). We may end up in a debt trap or with inflation, and still be running deficits, before 2016 (when Social Security’s deficits in earnest were alredy projected) and into the 2020s.

    * * *

    “The Republicans didn’t fix the problem while they were last in power (though to give credit where due, they at least floated some ideas for it, flawed though I may have found them)”

    This was when the Dems were even worse! They didn’t seize the initiative to save the program, but actually denied there was anything wrong with the program, and lied about it! Fools.

    * * *

    “when the S.S. system calls in those notes, more debt will have to be accumulated”

    I just hope it’s not all “paid for” by more debt. I suspect part of it at least will be paid for though tax increases (ending the FICA payroll tax income cap, etc.).

    I have little or no faith in this “deficit reduction commission.” Will they emphasize the correct thing, that most or all deficit reduction needs to be through spending reductions and controls, or just offer bipartisan political cover for tax increases or new taxes (retail, VAT, wealth, energy, motor vehicle fuel taxes)?

  • DLS

    “will they kick the can further down the road”

    Many will want to do it again (just as they, the Dems, did it in the previous decade).

    Conventional wisdom about their folly is that they (and the GOP) will wait until 2016, until they can’t wait any more. Then, they’ll retire.

  • DLS
  • DLS
  • JSpencer

    Conventional wisdom about their folly is that they (and the GOP) will wait until 2016, until they can’t wait any more. Then, they’ll retire.

    Maybe so, unless the public (with a little responsible support from the media for a change) gets active in demanding SS be addressed. Both parties spend too much time rationalizing new ways to stick their heads in the sand, but at least the democrats are beginning to address serious issues. One thing for sure, this will require actual leadership, not politics as usual.

    Knowing what we all know now, I wonder how many independents and moderate R’s wish they could go back in time and vote for Al Gore. Quite a few I reckon…

    • $1690528

      If by address, you mean create new programs, I guess you’re right. Addressing solvency however is a bit of a different issue than giveaways.

      • JSpencer

        A failure to address healthcare would have allowed problems to continue and increase, which seems to have been fine with one party – which goes to my comment about “leadership”. No magic answers are available, there will be tough slogging for anyone who is serious about HCR and it’s far from done. As for SS, there was this guy named Al Gore who wanted to prevent all the raiding on it, but instead we got this guy who was more concerned about tax cuts for the rich and driving us hundreds of billions into the red by taking us into a war of choice. Again, SS will require leadership with backbone and intelligence. If the GOP is capable of providing that, then more power to them, but it seems like a fantasy given their present makeup.

        • $1690528

          JS,

          The “lock box” idea was a silly one imo. Let me try to explain why.

          Let’s say the government takes in more money than it spends in a year. It basically has 3 options.

          1. Spend the money on something else.

          2. Use the extra to retire debt

          3. “Invest” the extra.

          The lock box is a form of 3. But how would this really work. The government couldn’t invest in government bonds because that’s actually equivalent to number 1. So it would have to invest in the private market in some way shape, manner or form, a sovereign wealth fund if you will. Of course, then there would be some pretty substantial market impacts and a lot of politicking on what would happen if the investments declined in value (as they eventually would).

          So 3 as an idea doesn’t actually work in practice.

          The best answer is 2 but that’s not the same as the “lock box.”

          • JSpencer

            Of course my point wasn’t just about the “lock box”; it was about the big picture. Squandered opportunity in any case, as the “decider” ended up getting the keys. I reckon we all know how that turned out.

          • $1690528

            So said differently, your post was “Bush bad”

  • DLS

    “As for SS, there was this guy named Al Gore who wanted to prevent all the raiding on it”

    Surely you don’t believe that… not even if he showed you a box chained and locked shut with “lock box” stenciled on it?

    • JSpencer

      It doesn’t take a genius to realize that 8 years of Al Gore would probably have left us in better shape than 8 years of George Bush did – and that includes policies toward SS. Of course we are where we are, and it has to be dealt with. Nobody expects magic and sparkles my friend, but matters of degree count, as does leadership that isn’t easily cowed.

      • DLS

        “leadership that isn’t easily cowed”

        Why didn’t Obama reform Medicare and Social Security, as he said was essential and that he’d do?

        He’s finding political cover with the deficit commission.

      • Rambie

        “It doesn’t take a genius to realize that 8 years of Al Gore…”

        Why do you think we would have had 8-years of Al Gore? It’d be hard to convince me that 9/11 would not have occurred with Al Gore as POTUS. Which would have been, as it was, a rallying cry for the GOP in 2004. At best the Iraq war may not have occurred.

        I know I’m painted here as some commie liberal, but out of all the field of 2000, I wish McCain had won the GOP ticket and the office.

  • Not that there isn’t a long term problem, but as Jazz points out, it’s decades away and can be fixed. This seems needlessly alarmist, but perhaps those alarmed overlooked the fact that we’re in a recession in terms of employment, which reduces the income side. It was unforeseen that we’d have 10% unemployment this year, but nothing has changed in terms of SS or the numbers CBO looked at, then and now. Increase employment and revenues rise.

    • $1690528

      Not entirely true. SS has been actuarially unsound for years. It’s worse to the tune of about $1.5 trillion because of the recession but that is a question of degree, not direction.

      Remember, the trust fund is a fiction. The only way to redeem it is to borrow more money in general obligation bonds.

    • Rambie

      I meant to click Reply not like. (wish they’d move the button a bit)

      Anyway GreenDreams, SS issues have been growing for at least two decades and it’s much closer than “decades away”. The longer the issue is passed onto the next generation, the harder it will be to fix.

      • Rambie, as one who has vocally opposed “borrow and spend” since Reagan started it in 1980, I know very well what a mess we’ve made of it. The GOP has demonized taxes and worshipped tax cuts even at the cost of saddling future generations. It continues to this day.

        The total national debt in 1980 was 1 trillion. Reagan tripled it. Bush the elder added another couple trillion. Clinton turned it around and even reduced it as a % of GDP. W doubled it again, to nearly 12 trillion. Now the GOP wants to cut the social safety net while preserving its unsustainable largess to the rich.

        That’s not going to happen. Bloggers can rave, politicians can bluster, but no one is ending or “privatizing” SS or Medicare. Time for both parties to deal with this, I agree, but how? No one dares to raise taxes or to cut spending. So we’re stuck. But these two programs are hugely popular, so they’re not going away. I don’t know what you propose, but I’ll bet it’s politically impossible.

        • Rambie

          I wasn’t disagreeing with you about the *need* to change, but the “when”. The *how* is not as easy

  • DLS

    “it’s decades away and can be fixed”

    This has always been false! Why do you repeat it? Failure of the program was projected in 2016, when deficits were to begin (necessiting additional revenues raised in some way if benefits were to be paid in full with redemption of the trust fund bonds). Deficits are happening now, not in 2016. NOW, not “decades away.”

    And “can be fixed” is insufficient. HOW?

    • “This has always been false! Why do you repeat it?”

      A program is not insolvent when it starts to have deficits, but when it has spent all the money allocated to it, in this case paid into it by working folk through their FICA. That the funds raised for seniors was spent on other things does not make it insolvent. Just as a company that borrows from its pension fund must pay it back, the funds raised for this program have to be there. SS isn’t going away, DLS, and you know it.

      “And “can be fixed” is insufficient. HOW?”

      Chris nails it pretty well above. The government needs more revenue and less spending, in order to balance the budget and meet its obligations.

      • DLS

        The beginning of deficits is when the program begins FAILING unless something then is done. (The trust fund bonds have no value; they are simply claims on Treasury revenues.) I’ve been clear about this, saying “failure” rather than “insolvent.” The correct time when something must be done is, or used to be, 2016, when deficits begin. (As I’ve also said, to shatter other myths, eliminating the FICA income cap, while sensible, is no solution by itself, despite the claims of some; it only postpones deficits by 6-7 years.)

        I’ve been perfectly clear and consistent in my statements.

        Meanwhile,

        “Chris nails it pretty well above.”

        You have never answered that question, HOW to save the program. (You once gave a general policy for all of federal finance, which is not an answer.) I’ve at least provided an answer to that (actually, more than one answer, more than one choice, all of them valid solutions).

        • “The beginning of deficits is when the program begins FAILING ”

          Technically true, but SS can pay out for decades before the balance sheet is truly in the red.l I agree it should be fixed, and must be eventually. But once again, triage is the key here. At some point we have to decide what we can afford to do in every single area of the budget. The GOP always wants to cut social spending, and maybe they (and maybe you) think that by spending ourselves into huge debt, they can finally kill the social programs they hate so “because we can’t afford it.

          But they can’t end them, privatize them or radically cut services. And won’t. I don’t know what you propose, but it will fail politically. Look at how the GOP has used Medicare cost savings to try and scare voters into rejecting HCR. They know it’s potent politics to scare the elderly that they will lose benefits. And the Dems, easily beat back any Medicare or SS “reform” that the GOP proposes in the same way. Better look elsewhere for both savings and revenue. I will admit that one idea I think you may have floated was to change the rules, including retirement age, for younger citizens. That would spare the political backlash from mature voters, but try selling it to younger ones.

          • DLS

            “Technically true”

            Thanks.

            “SS can pay out for decades before the balance sheet is truly in the red”

            It can’t pay benefits in full when it is running a deficit, without additional money.

            “At some point we have to decide what we can afford to do in every single area of the budget.

            Yes, and we should pay for everything honestly. It’s going to get tough and increasingly tougher after 2020.

            “But [the GOP] can’t end [entitlements, including Social Security], privatize them or radically cut services. And won’t. I don’t know what you propose, but it will fail politically.”

            You’re being illogical again, and you’re indicating you haven’t bothered to read what I’ve posted, on numerous threads, including on this thread earlier.

            Since I may (or may not) have your attention, I’ll add what I stated in another thread as an extra and general solution example: we (the people) should be presented with a range of options, from raising the retirement age to 70 1/2 with no early retirement, having a retirement age of 70 1/2 with early retirement as early as age 59 1/2 (benefits would be much less, or should be in this scheme), or something that is more generous and expensive, all the way to full retirement at age 59 1/2. Just also show us what it would cost in taxes for each example.

  • DLS,
    Raising taxes slowly back to where they were. Americans have demanded more and more from their government for decades, but at least since Reagan, Republicans have managed to repeatedly cut taxes (mostly for the rich) and keep Democrats sufficiently afraid to never even whisper about raising them.

    Luckily, we know from our own past and our European friends, that marginal tax rates could go up from where they are now and not result in economic disaster.

  • HemmD

    So let me get this right. GOP war cries of lowering taxes for the past 20 years were more important than funding SS? Well I guess so.

    For starts, let’s tax all income along the current SS rate and end the magic cut-off for those making over the artificial ceiling currently in place.

    Let’s change the Retirement Age starting for those who wish to retire in 2030. No one 20 years from retirement would notice the difference. End early retirement immediately.

    Add means testing to the payment schedule. If you have a trust fund of a couple million paying out, maybe the couple thousand you get from SS is not so vital to your retirement happiness.

    And once again, rescind the current practice of paying military retirement pay until they reach 65.

    If any of these seem unfair, step up to the mike and tell us your thoughts on how to solve the problem. I just ask that any proposals consider that lots of people facing retirement in the next 5-10 years have counted on SS as a goodly portion of their retirement plans.

    • $1690528

      Well, I don’t think you can look at SS in isolation…

      1. Rescind Bush and Obama tax cuts including the AMT fix

      2. Cut the military budget somewhere between $50 and $100 billioon

      3. End preferential tax treatment of “favored” industries

      4. Stop paying SS and Medicare to anyone with a net worth of $500,000 or more

      5. Freeze (in aggregate) the balance of the budget.

      That will give us a good chunk of time to solve the problem before we have to look at it again.

      GOP war cries of lowering taxes actually didn’t do much to lower taxes sadly. Please see the link at the post above.

    • DLS

      “lots of people facing retirement in the next 5-10 years have counted on SS”

      Actually, a huge number of Baby Boomers (many who don’t even know it yet) will be counting on SS.

      That’s despite our being different from Europe, where dependence on government benefits is higher.

      http://www.mof.go.jp/jouhou/soken/kenkyu/h18/s3_01.pdf

  • DLS

    “we know from our own past and our European friends, that marginal tax rates could go up from where they are now and not result in economic disaster”

    Not result immediately in complete disaster, I suppose you’re right. [grin]

    “Raising taxes slowly back to where they were.”

    Actually, I have written before that what the Trustees said that would make Social Security and part of Medicare solvent for quite a long time, is what we can use as as guide, and I have said that the tax-increase variant of what’s required would probably be accepted by most people (raising the FICA payroll taxes to the low twenties per cent), as it would continue to pay benefits in full (which many will eventually need). The increase could be slightly lowered if we were to abolish (or repeal) the income cap, which I would support.

    Long term, not only with entitlements but with all the other parts of government, the key is controlling spending. Europe is showing the problems with the spending as well as needing to reform unsustainable entitlements. (It has ridiculously low retirement ages values, for example.) Europe’s economy has been inferior to ours because of higher taxes and Greece is giving everyone the first warnings about spending and debt. (We also are going to have to face the problems with government employee retirements.)

    http://www.economist.com/business-finance/displaystory.cfm?story_id=15604130

  • steve,
    As your CBO document shows, taxes seem to have gone down quite a bit since 1979 and those who have gained the most are the ones who least needed the help. The richest 1% in our country have seen their effective tax rate drop from 37% to 31%

  • $1690528

    ChrisWWW,

    Right so 37% to 31% is a reduction of 6/37 or about 16.3%. Let’s contrast that to the middle 20%. They went from 18.6% to 14.2% or a reduction of 4.4/18.6 or 23.6% or perhaps the lowest 20% who went from 8.0% to 4.3% or a reduction of 3.7/8.0 or 46.25%.

    Care to revise and extend?

    Or look at it differently, the ratio of the rate for the top 1% to the middle 20% has gone from 1.99 in 1979 to 2.20 in 2006. Hard to say it’s moving in favor of the top 1%. To be fair, it did move in favor of the top during Reagan but has not since.

    • HemmD

      Nice ratios.
      Now, riddle me.

      Would you rather have 6% of a couple hundred thousand or 46% of peanuts?

      Relative percentages merely mask the fact the truly poor get a cut worth truly very little while the truly rich get more from a smaller percentage. If this percent logic is true to logic, how does it account for the upper 1% having a greater total of the wealth? They must be getting a greater aggregate from somewhere.

      • $1690528

        Yeah, they are getting the money from their jobs and investments. Those aren’t actually driven by the tax code.

        So let’s try it this way.

        You and I go out to dinner tonight. The dinner costs $100, you pay 90 and I pay 10. We go to dinner tomorrow. It costs $90, you pay $84 and I pay $6. I then say, no wait, that’s not fair, you should pay 85 and I should pay 5 since that’s an equal reduction. That’s the functional equivalent of the argument you are making.

        Remember, if you don’t pay anything, it’s hard to get a tax cut that is worth anything.

        • HemmD

          Steve

          Nice try

          You see, I’ve made that $90 or $85 from long term capital gains and so that money was actually taxed at a rate of 15%, so that 90 dollars I’ve netted only cost me $13.50. As the poor guy makes $10,000 a year, we are paying the same rate, 15%.

          Of course being wealthy, I also get sweeter deals on donations, and my business allows me to even drive a great car that’s actually a tax deduction too. Being wealthy is sure tough.

          You’re right, that poor guy is really trying to take advantage.

          • $1690528

            Hemm,

            You’re argument is full of it. Most people make money through earnings not capital gains. If you don’t understand that, you don’t understand the economy.

            Your argument says you’re not entitled to the $90 you made which, by the way, you or someone else already paid full income tax on before it was ever invested.

          • HemmD

            So you’re ready to tax capital gains at a regular rate? How about dropping the donation rate to that of the poor guy? I didn’t think so.

            Let’s just tax your total income for SS withholding and call it still not even.

            BTW, the criticism that my argument is “full of it” certainly articulates your mastery of the English language.

            As to your original hypothetical, what poor person has ever taken part in a $100 meal for two? Such exorbitant spending is something the poor guy never experiences. If the rich guy was paying for a dollar meal selection at McDonalds, maybe you’d see that the cost doesn’t really attack that $250,000 paycheck.

          • $1690528

            You’re being obtuse for the sake of it in my opinion but that’s fine with me.

            You’re welcome to make the tax system more progressive than it already is if you can get the votes. That’s what’s been happening for the last 30 years. The data is the data. The fact that it doesn’t fit your perspective of the world’s realities really isn’t my problem.

      • $1690528

        And in answer to your first question, I’ll take .01% of the cost overruns on HCR relative to the CBO projection in 2020 and call it fair ; )

  • merkin

    Social Security is hardly failing. It has 2.5 trillion dollars of government bonds to cash. It is inconceivable that the United States would default on these bonds as many here are suggesting. That the money has to be raised by the government to pay off the bonds is a problem but is not a problem with Social Security.

    One thing we could do is ask the people who spent this money to lower taxes what their plan is to pay it back. They must of had a plan. At the same time maybe also ask them how they intended to pay for the terrorism wars, Medicare part D, etc.[/wishful thinking]

    When the trust fund is exhausted and the incoming taxes are not sufficient to pay benefits the Trustees will reduce benefits to match output to input. Many here, in other threads have told me this is not a problem, that Social Security recipients will be more than happy to accept lower benefits if it is necessary to preserve Social Security. I personally have my doubts that this is true. I think they will scream to high heaven.

    • DLS

      Social Security is unsustainable in its current form. Once it begins running deficits (which actually is happening now due to current economic conditions, but which is hoped to end for a few years soon), it is failing, repeat, failing; it will require additional money from elsewhere in order to pay benefits in full. The trust fund bonds, which are redeemed when deficits occur, have no value of their own at all.

      We can decide to let failure happen and expect to raise taxes or borrow more, or take money from elsewhere in the federal budget, then, to pay for the redemption of the bonds, or we could reform and rescue the program sometime between now and 2016 (when the deficits are projected to begin and continue indefinitely, and in fact increase with time after then, as dependency ratios begin to climb).

  • merkin

    It is important to note that one of the reasons payroll tax receipts are too low is because we have had national policies in place for the last thirty years to pass most, if not all of the nation’s new, real income growth each year to the wealthiest people in the country. These people make much more than the $106,000 and change that is subject to the payroll tax. So the real income growth in the country has been out of the touch of Social Security.

    In the 1950’s to the 1980’s. we distributed the income much better across all income levels and Social Security participated in the country’s growth.

    The net result is that the poor and middle income people who didn’t see any real income growth while they were working will be asked to take another hit when they retire.

    • $1690528

      What are these national policies that have passed “most, if not all of the nation’s new, real income growth each year to the wealthiest people in the country?”

      Some data that demonstrates how this worked would be helpful too. ; )

  • DavidD

    “Social Security is unsustainable in its current form.” Yes, but how big of a truth is this? The unsustainability has many dimensions. One is the age of the population vs. age of retirement. Another is the tax that fund the benefits. Another is who exactly gets how much benefits.

    Many changes are possible, but what’s the simplest outcome? What if politicians continue to be politicians and gullible voters remain just as gullible? The last projections I saw said that revenues will only pay for something like 70% of current benefits when the greatest bulge of baby-boomers stress the system.

    So whenever something says we can’t use debt for this any more, the simplest solution will be to cut benefits by 30%. That’s what “failure” means, nothing worse than that. This would be a disruption for many who receive Social Security, as I do. Some of us would have to move to cheaper housing. It’s not the disaster that so much of the rhetoric on this issue suggests. It’s not reason for young people to believe they’ll never receive benefits when they’re old, though a lot of them believe that.

    There are a lot of ways to avoid that much disruption. The sooner one starts means-testing or whatever else, the less traumatic this may be, but talk of the whole system “failing” or “not having any money to pay out” is irrational. No money to pay out is very different from 70% to pay out. I wish people would realize this as they describe the issue. If you don’t resist our human nature of speaking in black and white terms, you’ll wind up making false conclusions.

    Of course if one wanted Social Security revenues to create a surplus to bring down the overall debt, that would require a greater disruption, but you can say that about the entire society, not just Social Security. Maybe the belt tightening of World War II will come again this century, for some reason I can’t foresee. Was that so awful? The prospect of a similar challenge doesn’t frighten me. Does it really terrify so many people who speak of so many issues as impending disasters?

    Short of such a major challenge, all of this is about whether we will ever reform Social Security before reality forces a moderate reduction in benefits. Maybe yes, maybe no, but I wish people would have the reality of this clearly in mind, because it is not a reasonable cause for apocalyptic fear-mongering.

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