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Guest Graph: Henry Aaron on Social Security's Solvency

Fun title, right? But this is a new feature on the blog. "Guest Graph" is where I'll ask experts in various fields to contribute a post built around a graph of their choice. They choose the image. They choose the argument. The only constraint is that there needs to be a chart illustrating what they're saying. I decided to start with my friend Henry Aaron, a senior fellow at the Brookings Institution and an expert on health care and entitlement policy. His post -- and graph! -- follows.

The release of the report of the Social Security trustees last week provoked a spate of hand-wringing about the dire straights of the nation’s pension system. The 2009 report moved forward the year in which reserves are projected to be exhausted from 2041 to 2037 and increased the average projected deficit from 1.7 percent to 2.00 percent of earnings subject to the payroll tax.

What the news stories didn’t convey, but the following charts clearly show, is that Social Security seems to be in pretty much the same situation it has been in for the last fifteen years. It faces a small, projected deficit. A strong economy, like that of the late 1990s, modestly improves the economic prospects of that pension system, but didn’t — and isn’t likely to — erase that deficit. A bad economy, like the current one, hurts the system somewhat, but less than you might think because Social Security, unlike individual accounts, is built to spread risks and insulate people from being battered by financial market fluctuations.

socialsecurityoutlook.jpg

What the charts don’t show, but all Americans should appreciate, is that Social Security, with relatively minor adjustments, is rock solid. Social Security is the only pension that is fully protected against inflation and immune to the financial market contagion that has laid low the economic security of many of retirees and disrupted the retirement plans of older workers. Although the need for the secure income that Social Security provides has increased in an ever riskier financial world, benefit cuts enacted in 1983 (but not yet fully implemented) and rising Medicare part B premiums (which are deducted from checks before they are sent out) have eroded Social Security ‘take-home pay.’

Against that background, and the demonstrated insecurity of 401ks and even company pension plans, proposals to restore long-term balance by cutting Social Security benefits further seem to be remarkably unwise.

By Ezra Klein  |  May 22, 2009; 4:00 PM ET
Categories:  Charts and Graphs , Guest Graph , Social Security  
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Comments

What trust fund reserves???

The "reserves" are spent as soon as they come in. There's nothing but promises to pay it somehow. If that's all it takes to satisfy you that the program is solvent, why have any charts at all?

Just say "The benefits are independent of Social Security taxes because the government will provide any politically convenient benefits regardless of any deficit." Maybe they'll raise taxes, maybe they'll increase the money supply, maybe they'll cut benefits, maybe they'll reduce spending (Ha!).

I don't find that very comforting.

Posted by: Gil_M | May 22, 2009 10:56 PM | Report abuse

Aaron argues that SS is solid in that pensioners are likely to be paid and that it a good thing for pensioners to have an inflation-protected income source in "retirement." Agreed. What is his argument for a "retirement" age that leaves the plan unfunded?

Posted by: ThoamsH | May 23, 2009 1:17 PM | Report abuse

Gil think about the nature of investment.

You buy a regular Treasury Bond at auction. The government takes your $100,000 and spends it. You get a piece of paper (or electronic equivalent) and a promise.

You send an insurance premium to New York Life. They give you several pieces of paper and a promise. Then they take your premium dollar and spend it on current benefit payouts or investing it in the market.

You deposit your paycheck in the bank. In turn the bank gives you a paper receipt. They keep some fraction of your dollars in reserves, themselves in the forms of government notes, another fraction in the vault for daily cash operations and the rest they lend to author people.

In fact that is the characteristic of any investment at all. You turn over current dollars with the expectation that you will get it back plus some out of future productivity. In no case if 'your dollar' securely segregated away from other people's dollar. The real world does not operate like Gringott's

The idea that the Special Treasuries in the Trust Fund are really different than regular Treasuries is based on legalistic mumbo-umbo akin to the Austrian Schools bleating about Fiat Money.

You give the government money with expectations of getting it back at a projected rate. They spend it on tanks 'instead'. For some people that is a 'Ponzi Scheme' for people who think a few seconds about the fundamentals of money and investment that is called 'buying a bond'.

You have fallen into a trap deliberately set in June 1983. Google 'Cato Butler Germanis Leninist Strategy'.

Posted by: BruceWebb | May 23, 2009 1:21 PM | Report abuse

ThoamsH

Why start from the assumption that raising the retirement age is the place to start? Or raising the cap? Why has no one actually done the work on a cross the board solution via tax increases? Because it is astonishing little.

Increase FICA by 0.20% in 2010, another 0.10% and the system needs not be touched until 2026 ushers in another annual series of 0.20% increases.

0.20% means $100 per year for a family making $50,000, If split with your employer that means a dollar a week to start. If you are making below the median say as an hourly worker making $12.50/hour your weekly costs drops to fifty cents in 2010 and another quarter in 2011. Why do we just assume that the average worker who more often than not takes early Social Security anyway would not trade off less than a buck a week in exchange for NOT working two or three more years?

If those dollar terms seem too good to be true feel free to find the errors in the following PDF'd spreadsheet. NW Plan: Combined OAS and DI Triggers
http://angrybear.blogspot.com/2009/05/nw-plan-combined-oas-and-di-triggers.html

Posted by: BruceWebb | May 23, 2009 1:35 PM | Report abuse

we should not be raising taxes MORE for social security. When soc. sec. was enacted, the life expectancy was 65. It was for people who are unable to work. We have created a society that believes they should only be working for a few years (if at all) and otherwise, someone else should take care of them.

Taxes are ASTRONOMICAL already for soc sec. They should be LOWERED. And the age of benefits should be increased, gradually to something like 75 or 80 years of age. People should be expected to work, and save. They should be expected to not live on soc sec (as it was supposedly never intended for that). We cannot keep decreasing the number of workers needed to provide for retirees, it's a ponzi scheme that won't work - do you want to keep increasing taxes as life expectancy keeps rising? How long? How much?

Posted by: atlmom1234 | May 23, 2009 4:21 PM | Report abuse

atlmom1234

Wrong. You know, the world did not begin yesterday. The original Social Security Trustees performed a very sophisicated actuarial analysis that very accurately predicted current lifespans and the current percentage of the population over age 65.

http://www.atypon-link.com/AEAP/doi/pdf/10.1257/0895330054048759?cookieSet=1

Any changes that need to be made to Social Security are right now very small. Of course, with 30 years or so before contributions cease to exceed outlays we do have some time to figure out what the right way to preserve the system is.

You say: "...it's a ponzi scheme that won't work..."

I do admire the Right's tenacity in sticking to script. Well, this "Ponzi scheme" was worked like a charm, delivering benefits without interruption with only a 1%-1.5% overhead for seventy years, and is rock-solid for the next thirty. Ever hear of a Ponzi scheme (yes, the P is capped) thet functioned without even a glitch for that long?

So no, taxes should not be lowered for SS. In fact, the payroll cap should be raised so that it is not only the poor and middle class who pay SS tax on every dollar they earn. In addition, capital gains should also be taxed to pay for SS. Why should only wages support the system when there are many, many very rich people who earn their money completely without wages? They draw the benefits too, you know.

You say: "...We cannot keep decreasing the number of workers needed to provide for retirees..."

Yes, we can. Gosh, it's like you never heard of productivity growth. Or math, even.

Oh, and hi Ezra! You totally rock.

Posted by: spudpuppy2000 | May 23, 2009 5:37 PM | Report abuse

"Social Security, with relatively minor adjustments, is rock solid."

Doesn't anybody write in English any more? If you require a change to achieve a state, you have to say "would be", not "is". As in

"Social Security, with relatively minor adjustments, would be rock solid."


Posted by: lfstevens | May 23, 2009 7:13 PM | Report abuse

"dire straits".

Not "dire straights".

Just piling on the "Doesn't anybody write in English any more?" theme.

Posted by: jimvj | May 24, 2009 9:44 AM | Report abuse

Returning to Hanks chart.

The payroll gap is measured over a seventy five year projection meaning that every year a new year 75 is added and old year 1 becomes year zero. This effect alone adds right at 0,05% to the cap. Plus not having taken action in what is now year zero automatically adds a fraction to the gap in the form of theoretical revenue not collected. As a result the bias is upwards, after 12 years of inaction you would expect the gap to be about .65% higher in 2009 than it was in 1997. Instead it has remained remarkably even with a mean of just under 2.0%. Where is the hidden 0.05% yearly that seemingly counteracts the structural change in valuation period?

If the real argument around Social Security was some sort of academic econometric one we would be examining the data and coming up with explanations why Social Security finances are not deteriorating under the current policy of 'Nothing'. Instead we get people stubbornly insisting that "The longer we wait the more its going to cost". Except that it hasn't. We did not raise FICA by 2.23% in 1997, not having done so is in effect a tax cut for that year. And then we did that again and again for over a decade. Result? A fix going forward 20+% cheaper.

Why is this happening? Well I have an answer, it is just that nobody seems to think the question interesting enough to ask, or even notice.

Posted by: BruceWebb | May 24, 2009 11:07 AM | Report abuse

BruceWebb,

The government has not taken the money and invested (no matter how much they like to abuse the word "investment") it in actual assets that can reasonably be expected to generate revenues to pay the debts (the way real investments do). No, they spend money in ways that no sane investor would spend his own money. They're buying re-election prospects, not solvency.

If a private insurance company "invested" its reserves the way the federal government has, it would be rightly convicted of fraud.

Posted by: Gil_M | May 24, 2009 10:44 PM | Report abuse

BruceWebb is so wrong it hurts. There is a huge difference between a structured investment, such as a bond, and a payment to a current retiree.

Social Security is screwed. If you aren't saving for retirement in hopes of the money you put in being there for you 40 years from now- you are screwed. The solutions are simple:
1) Lockbox- the money does not go to the treasury to get spent on other stuff. What you put in is yours, from today forward
2) Retirement age = to average life expectancy
3) Means tested for all the baby boomer scheming bastards who have spent all of the money that was meant for their own retirement, blowing the surplus.

Posted by: staticvars | May 26, 2009 10:30 PM | Report abuse

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