Social Security fund insolvent? running dry?

SOCIAL SECURITY CLOSER TO INSOLVENCY: Government says trust funds will run dry in 2033.

That was the headline over the lede [1] story this morning in my local newspaper, the Democrat and Chronicle.  Stephen Ohlemacher, the Associated Press reporter, began as follows:

Social Security is rushing even faster toward insolvency, driven by retiring baby boomers, a weak economy and politicians’ reluctance to take painful action to fix the huge retirement and disability program.

The trust funds that support Social Security will run dry in 2033—three years earlier than previously projected—the government said Monday.

There was no change in the year that Medicare’s hospital insurance fund is projected to run out of money.  It’s still 2024. … …

But then when you get to paragraph six, you learn what “running dry” means.

If the Social Security and Medicare funds ever become exhausted, the nation’s two biggest benefit programs would only collect enough money in payroll taxes to pay partial benefits.  Social Security could only cover about 75 percent of benefits, the trustees said in their annual report.  Medicare’s giant hospital fund could pay 87 percent of costs.

In other words, Social Security and Medicare will not have run out of money when the funds “run dry”.  The two programs will have used up the surplus in the Social Security and Medicare trust funds that were created by increasing payroll taxes during the Reagan administration, in anticipation of the retirement of the Baby Boom generation.  There are different ways this could be handled, including a moderate increase in the ceiling for payroll taxes.  But Social Security and Medicare will not be broke.

The estimated date that Social Security and Medicare will exhaust their surpluses fluctuates a great deal from year to year, depending on changes in the current state of the economic and forecasts for the future.  By some past estimates, these funds should already have been exhausted.

There is a larger issue than the amount of Treasury bonds in the Social Security trust fund.   Financial assets are not wealth, whether they be Treasury bonds, corporate stocks or bank savings certificates.  They are claims on wealth.  The real wealth is the amount of goods and services that are produced in any given year.  If the working-age population is not producing enough to support themselves and us retirees as well, that is a problem, no matter what we have in our retirement accounts or the Social Security administration has in its trust fund.

The answer is to somehow get back to a high-wage, full-employment economy, where somebody in their 50s who loses their job is not unemployable.  We need both better productivity and a more widely-shared prosperity. If a quarter of the nation’s increase in wealth is flowing to the upper 1 percent of the population, as it is now, there is not much left over for 85-year-old widows who depend on Social Security.  And if productivity increases are not keeping up with the increase in the aging population, then there is less to go around.   Of course we can improve the demographic balance by increasing the number of working-age immigrants.

Click on Robert Greenstein for a sober statement on the Social Security trustees’ report by the founder and President of the Center on Budget and Policy Priorities.

Click on Paul Van de Water for a sober statement on the Medicare trustees’ report by a senior fellow for the Center on Budget and Policy Priorities.

Click on Let’s beef up Social Security benefits instead of cutting them for a column by economics writer Michael Hiltzik in the Los Angeles Times. [Added 4/25/12]

Social Security is in danger—from Obama

President Obama is using the debt ceiling talks as an excuse to reduce Social Security benefits—even though Social Security adds not one cent to the national government’s debt.

Click to enlarge

The method by which this would be accomplished would be to index Social Security benefits to something called the “chained Consumer Price Index” which would go up at a slower rate than the regular Consumer Price Index.  This could lower the annual income of the average retiree by small amounts year by year, but the cumulative amount would be large—nearly $1,000 a year by age 85, nearly $1,400 a year by age 95.

The idea of the chained CPI is that people adapt to higher prices by changing their habits, and so their actual cost of living does not go up at as fast a rate as actual prices.  This is different from the “substitution effect,” which is incorporated into the regular CPI—that if the price of beef goes up, but the price of chicken does not, then people will switch to chicken and this affects their cost of food.  (This illustrates the principle.  I don’t know if it is an actual example.)(This is an actual example)  The chained CPI takes into account not only substitutions of products, but changes in lifestyle.  If you take a “staycation” instead of a regular vacation, your cost of living doesn’t rise with the cost of travel.  (I’m not sure if this is an actual example).

The problem with this is that the budgets of elderly people are not so flexible.   Even the regular CPI does not reflect the cost of living of the elderly.  A couple of years back, the Bureau of Labor Statistics created a new index called the “Consumer Price Index–Elderly” or CPI-E, which reflected out-of-pocket expenses for medical care, drugs, special diets and other costs specific to the elderly.  What the bureau found was that the CPI-E index rose twice as fast as the regular CPI.   So Social Security increases already fall short of the actual cost of living of the elderly, and the Chained CPI would cause them to fall behind even more.

Cutting Social Security benefits would not reduce the national debt one cent.   Social Security has its own revenue stream, and the Social Security Administration is currently drawing down a surplus accumulated in prior years to meet its current payments.  By most estimates, the Social Security Administration will be able to meet its obligations with no change in benefits or taxes for at least 25 years.

If Social Security benefits are cut and Social Security taxes remain the same, the Social Security Trust Fund will continue to buy U.S. Treasury bonds, and these bonds will still be a fiduciary obligation of the government, whatever retirees get or don’t get.