In the wake of the deficit commission post-election bombshell about the nation’s budget woes, partisans from all fronts are coming out of the woodwork with their talking points. But everyone is doing the nation a disservice by talking about “the budget” as though it were a single unit. It’s not. It’s just like a business or personal budget, composed of both fixed costs (e.g., rent or mortgage payments) and discretionary or variable purchases (e.g., electricity, printer paper, coffee, movie tickets). However, when talking about the federal budget, those words may not be used the way you use them in your home or business.
What does the short- and long-term budget look like if we break it into its components? For the purposes of this series, I’m dividing “the budget” into these components:
- Shortfall (borrowed money) : $1.47 trillion (2010)
- Defense : $1.059 trillion (Pentagon, War on Terror, VA, military benefits and pensions, 2009)
- Social Security : $714 billion (OAS/DI, 2010) – self-funded (solvent)
- Medicare : $531 billion (2010) – partially self-funded (insolvent)
- Interest on Debt : $414 billion (2010)
- Health and Human Services (Medicaid, SCHIP, Food Stamps, etc) : $618 billion (2009, xls)
- Commerce and Housing (includes USPS) : $291.5 billion (2009, xls)
- Natural and Physical Resources (USDA, Interior, Transportation, etc) : $142 billion (2009, xls)
- Unemployment Compensation : $122.5 billion (2009, xls)
- Federal employee retirement and disability : $118 billion (2009, xls)
- Education : $79.7 billion (2009, xls)
- Criminal Justice System : $52 billion (2009, xls)
- International Affairs : $37.5 billion (2009, xls)
- Science, Space, Technology, Energy : $34 billion (2009, xls)
- Community and Regional Development : $27.7 billion (2009, xls)
- General Government : $22 billion (2009, xls)
Social Security
Initial press reports characterized the deficit commission plan thusly: “mixing painful cuts to Social Security and Medicare with big tax increases.” What most of us think of as “Social Security” is actually the Old-Age and Survivors Insurance (OASI) Trust Fund.
First, I argue that Social Security should be treated as its own, stand-alone budget. It is characterized rhetorically as an “entitlement” program but it is an insurance program. That is, people who work for a living contribute a fixed amount of their income to the program with the expectation of getting money back at some point in the future. Yes, the employer contributes, too, but an argument could be made that this is indirect employee renumeration.
Second, how’s Social Security doing? From the 2010 Trustee’s Report (emphasis added):
The financial outlook for Social Security is little changed from last year. The short term outlook is worsened by a deeper recession than was projected last year, but the overall 75-year outlook is nevertheless somewhat improved primarily because a provision of the ACA is expected to cause a higher share of labor compensation to be paid in the form of wages that are subject to the Social Security payroll tax than would occur in the absence of the legislation.
[…]
Social Security expenditures are expected to exceed tax receipts this year for the first time since 1983. The projected deficit of $41 billion this year (excluding interest income) is attributable to the recession and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink substantially for 2011 and to return to small surpluses for years 2012-2014 due to the improving economy. After 2014 deficits are expected to grow rapidly as the baby boom generation’s retirement causes the number of beneficiaries to grow substantially more rapidly than the number of covered workers. The annual deficits will be made up by redeeming trust fund assets in amounts less than interest earnings through 2024, and then by redeeming trust fund assets until reserves are exhausted in 2037, at which point tax income would be sufficient to pay about 75 percent of scheduled benefits through 2084.
What are the relevant points?
- Trust fund reserves will be exhausted in 2037.
- Without a change in funding source or eligibility, from 2037-2084, the Social Security Trust Fund could pay benefits at a 75% rate.
What does this mean?
It means that Social Security is not in imminent threat of collapse, although there are structural problems.
It also means that changes such as raising the eligibility age to 70 should improve the life of the trust fund in terms of additional years of contribution. Such a change reflects increases in life expectancy since 1935, when Congress passed the Social Security Act. For example, in 1940, a man who was 65 years old could expect to live 12.7 more years (~78); a woman, 14.7 more years (~80). A man who is 65 years old can expect to live, on average, until age 83; a woman who is 65 years old can expect to live until 85, according to US News and World Report. According to the CDC (pdf), in 2007, someone aged 85 could expect to live 6.5 more years (~92).
| Life Expectancy for Men and Women Aged 65 | ||
|---|---|---|
| Year | Men | Women |
| 1940 | ~78 | ~80 |
| 2010 | ~83 | ~85 |
Disability Insurance (DI) Trust Fund
The Disability Insurance Trust Fund pays monthly benefits to disabled-worker beneficiaries and their spouses and children. It was created by the Social Security Act Amendments of 1956. According to the 2010 Trustees report, the DI Trust Fund is “projected to become exhausted in 2018.”
In 2010, OASI took in $686 billion and spent $586. The DI Trust Fund, on the other hand, took in $105 billion and spent $128 billion. The Trustees do not explain the discrepancy or the steady increase in DI expenditures forecast for the next 10 years. Before we try to engineer a solution to the problem, we need to understand why DI is already upside down.
Clearly, the DI Trust fund needs immediate attention, far more immediate attention that OASI. Find that in any news story or political sound-bite.
Possible Solutions
The actual tax rate for OASI/DI has been unchanged for 20 years. Since 1990, it has been 6.20% of the taxable income level. In 1980, it was 5.08%. Increasing the rate slightly may be a reasonable response to the pressing problem facing DI — or it may not be. It’s difficult to engineer an effective solution to a poorly defined problem.
What about indexing the income threshold for OASI? It is already indexed. In fact, in the past 30 years the income threshold has grown faster than inflation. In 1980, the income threshold was $25,900. In 2010 dollars, that’s $68,659.83. However, the income threshold in 2010 is $106,800, more than a 50% increase.
The most logical short-term modification is to increase the full retirement age.The nature of work (more cerebral, less physical) and lifespan have both changed since the SSA was passed in 1935. In 1935, the the “full” retirement age was 65. In 1943, Congress increased it to 66. Since 1960, it has been 67. Thus, we are long overdue for an increase in the full retirement age. Without question, such a change would have an impact on total revenue, assuming that people continued working until retirement age. However, it is unclear as to the effect such a change might have on outlays, as the program is currently constructed:
As a general rule, early or late retirement will give you about the same total Social Security benefits over your lifetime. If you retire early, the monthly benefit amounts will be smaller to take into account the longer period you will receive them. If you retire late, you will get benefits for a shorter period of time but the monthly amounts will be larger to make up for the months when you did not receive anything.
A Note About The Trustees
There are six trustees — four by virtue of their appointed government position and two representing the public. The two Public Trustee positions — appointed by the President and confirmed by the Senate as required by the “Social Security Amendments of 1983 — are currently vacant. Why?
Known for gnawing at complex questions like a terrier with a bone. Digital evangelist, writer, teacher. Transplanted Southerner; teach newbies to ride motorcycles. @kegill (Twitter and Mastodon.social); wiredpen.com