Posts Tagged ‘Social Security Trust Fund’

Why is Obama attacking Social Security?

April 15, 2013

The Chained CPI proposed by President Obama would limit increases in Social Security, disability and veterans benefits on the grounds that recipients could offset increases in prices by lowering their standard of living.  That is the definition of the Chained CPI.   It is a CPI that will not keep up with the increases in prices measured by the standard Consumer Price Index.  Since income tax rates also are tied to the Consumer Price Index, switching to the Chained CPI would also be a middle-class tax cut.

ClassWarKitteh_catfoodNote also that Social Security benefits are linked to lifetime earnings, which for most citizens are not keeping up with inflation, so future retirees are going to have a tougher time even if the President does nothing.

Obama said his purpose is to induce Republicans in Congress to accept his budget and tax proposals, but the Republican leadership has not asked for this and is likely to use this as a political weapon against Obama and the Democrats.  It would be an effective weapon for the GOP.  Why, then, does the President want to cut Social Security?  Why is so much of the Washington establishment in favor of it?

While I can’t read their minds, I can think of two reasons why they might.  One reason is political and the other financial.

The political reason is that so long as Treasury bonds are held by the Social Security trust fund, that portion of the national debt is off-budget.  The federal government owes about $16 trillion to holders of Treasury bonds, but the $2.5 trillion held by the Social Security trust fund and $4 trillion held by other government trust funds are off-budget.

As soon as the Social Security Administration starts to sell those bonds to private investors, the national debt will appear to increase, even though the only thing that changes is that the debt is held by private citizens instead of for the benefit of American senior citizens.

Recall that Social Security taxes were increased and the full-benefits retirement age raised for 65 to 67 back in 1983 to create a surplus, which is intended the retirement benefits of the baby boom generation were covered.   That surplus was invested in Treasury bonds.  While the Social Security administration is paying out more in benefits than it is collecting in taxes, it still is accruing interest on its Treasury bonds.  But it will soon have to start cashing in those bonds in order to cover its obligations.

The economic reason that financiers might object to this is that putting Treasury bonds on the market will decrease the price of bonds, which is the same as increasing the interest on bonds.   Many other interest rates are pegged to the interest rate on U.S. government bonds, so, all other things being equal, this would mean an overall increase in interest rates.  An increase in interest rates makes bonds a better investment compared to stocks.  In other words, drawing down the Social Security trust fund would tend to depress the stock market.

I don’t think the effect would be trivial.  One of the things that has generated the current stock market boom is that most savers can’t earn interest on their bank accounts or money market funds.   Investors are forced to take a risk if they want to increase their holdings

I have two moderate suggestions:

  • Have the Federal Reserve System create money to buy Treasury bonds from the Social Security trust fund, just as it is now creating money to buy “toxic assets” from the big Wall Street banks.   The Fed could hold or extinguish the bonds, so the financial markets would be unaffected and the national debt would actually be lowered.
  • Index the cap on income subject to Social Security taxes to the Consumer Price Index to keep Social Security solvent for the long-term future.

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Social Security fund insolvent? running dry?

April 24, 2012

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]

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