My modest proposal: anyone writing about Social Security should have to pass a test demonstrating that they have read the Social Securities trustees report, and understand the basic dynamics of a system with a Trust Fund holding government bonds.
There is a certain “obvious” logic which suggests social security should face problems over the next few years — America is aging, the baby boom will soon retire, the number of workers per retiree will fall. That seems to suggest that social security should face troubles — that was what I thought, before, like Kevin Drum, I actually looked at the trustees report.
The funny thing is that social security can pay full benefits to baby boomers, even with conservative (in the sense of not unduely optimstic) assumptions. The coming retirement of the baby boomers is not a problem for social security; it is a problem for the rest of the government (the “general fund”). Remember, social security is running a cash surplus, taking in more in taxes than it pays in benefits, and will do so far at least ten more years (the tipping point is 2018). As more and more baby boomer retire, that cash surplus will slowly shrink and then disappear, meaning social security has less to lend to the rest of the government. The first problem the retirement of the baby boom creates come not with social security, but with the rest of the government. Then from 2018 to 2042 (or longer if you believe the CBO), social security has to draw on the accumulated assets of the trust fund. This too is a problem not for social security — it can draw on the trust funds’ assets and ongoing payroll taxes to pay all benefits — but for the general fund. Right now, interest paid to the social security trust fund is reinvested back in treasuries — i.e. lent back to the government. Compound interest leads the assets in the trust fund to build up over time. But they have to drawn down to fund the baby boom’s retirement — the social security will start using interest payments not to lend back to the government, but to pay benefits, and then it will start to redeem its stock of bonds to pay benefits (not a problem if the general fund is solvent — it can just sell bonds to private actors to pay off the trust fund). Again, the problems created by the baby boom show up first in the general fund, not in social security.
That’s why comments like ” ” in Monday’s Wall Street Journal are misleading.
Hard as it is to believe, the government — in a bipartisan way — acted responsibly back in the 1980s. It raised payroll taxes and cut benefits to build up a trust fund and in effect “pre-fund” the baby boom — making it possible to finance the baby-booms retirement without raising the social security payroll taxes. It all works if the rest of the government can pay back all the money it has borrowed from social security. But to do so, the “general fund” — the rest of the government — has to be in good financial shape. We were heading that way in 2000. We are not heading that way now.
Social security taxes are now something like 4.5% of GDP, and benefits are around 4% of GDP (ball park). Social security is therefore lending about a half percent of GDP ($70 billion) to the rest of the government every year, reducing the reported deficit by that much, and building up trust fund assets. Overtime, as the baby boom retires, benefits will rise to 6, may 6.25% of GDP (eyeballing the trustees report). The “gap” can be made up between 2018-2042 by the trust funds assets. that means rather than borrowing 0.5% of GDP from the payroll tax surplus and another 0.5% of GDP from the trust fund (interest payments are lend back to the government), as it does now, the rest of the government will have to pay the social security system back, to the tune of 1.5% of GDP.
That is a swing of around 2.5% of GDP — from 1% of GDP net financing from the social security system now to 1.5% of GDP net payments to social security. The retirement of baby boom is not a problem for the social security system: it is well prepared. The retirement of the baby boom is a problem for the general fund — which currently lacks revenues to pay anything close to all its expenses, and will have switch from borrowing from social security to making payments to social security. Unfortunately, the rest of the government is no longer well prepared to handle this challenge. That is the problem.
It is all in the trustees report. The President — and his Administration — would just rather that the public, and America’s journalist, not read it, and listen to them. Objectively, the general fund faces bigger problems than social security — the President, however, wants us to believe that the best funded part of the government — social security — faces serious problems, while the worst funded parts of government face no problems, so we can borrow more and avoid raising taxes …