Why everything you know about the Social Security Crisis is wrong.

Seems like something about Social Security in the news every month. There seems to be general agreement that SS has a "problem," perhaps it's even in "crisis."

We're told we'll need to start dipping into the Trust Fund in 2017. By 2041 the Trust Fund will be exhausted, & SS won't be able to pay the benefits they promised.

Maybe we won't even have enough money in the general budget to repay the Trust Fund! Both Bush & Cheney have implied as much.

So people argue about solutions. Private accounts? Increase payroll taxes? Lift the cap & get the high earners to pay more? Everyone has their favorite fix, & sometimes the discussions get quite involved - into the minutia of stock returns, management fees, interest on Treasury Bonds, & so on. Gives you the feeling you have to be a financial whiz to understand what's going on.

I'll save you all this trouble. The solution is - do nothing. Absolutely nothing. "Do nothing" is the best solution to a problem that doesn't exist.

"What?" you say. "Doesn't exist? Of course it exists, everyone agrees it exists! They talk about it on TV, in the paper, Dems talk about it, Pugs talk about it - how could it not exist?"

These are Orwellian times. The first thing you should do, when people try to sell you economic predictions, is to check their figures.

In the case of SS, it's easy to do. All the figures under discussion come from one place - the SS Administration's yearly Trustees' report, & they very helpfully post their reports on the web.

Each year the Trustees make 3 forecasts charting the predicted state of SS financing out 75 years into the future. These forecasts are based on assumptions about future population, longevity, productivity, GDP & so on.

There's the "Low-Cost Forecast". This is the best-case scenario - the best they expect the economy to be able to do.

There's the "Intermediate Forecast." This is supposedly what's most LIKELY to happen, & all the numbers you hear in the media come from this forecast.

Finally, there's the "High-Cost Forecast." This is the worst-case scenario; the worst the economy could do.

So, three forecasts, & the intermediate forecast is used for all public pronouncements on SS. This is where the numbers predicting SS shortfall come from.

OK, so what?

Bruce Webb has been monitoring the Trustees' forecasts for 10 years, & he's discovered a startling fact. Nearly every year, the real numbers hit the LOW-COST FORECAST. That's right. Real economic performance most closely matches the Trustees' BEST-CASE scenario.

And what result does the low-cost forecast give us?

Seventy-five years of fully-funded SS plus a Trust Fund surplus in the trillions.

The table on his web page isn't formatted well, so I'll reproduce the essence here: The Trustees' growth forecasts for the next year under the Intermediate & Low-cost assumptions, then the actual percentage growth of that year:

1997

Int-Cost Forecst 2.5%
Low-cost Forecst 3.2%*
Actual 3.8% (+.6 better than low-cost)

1998

Int-Cost Forecst 2.5
Low-cost Forecst 3.1*
Actual 3.9 (+.8)

1999

Int-Cost Forecst 2.6
Low-cost Forecst 3.4*
Actual 4.0 (+.6)

2000

Int-Cost Forecst 3.5
Low-cost Forecst 3.9*
Actual 5.1 (+1.2)

2001

Int-Cost Forecst 3.1*
Low-cost Forecst 3.5
Actual 1.0 (-2.0 worse than int-cost)

2002

Int-Cost Forecst .7
Low-cost Forecst 1.6*
Actual 2.4 (+.9)

2003

Int-Cost Forecst 2.9*
Low-cost Forecst 3.8
Actual 3.1 (+.2)

2004

Int-Cost Forecst 4.4*
Low-cost Forecst 4.9
Actual 4.4 ()

2005

Int-Cost Forecst 3.6*
Low-cost Forecst 3.9
Actual 3.6 ()

2006

Int-Cost Forecst 3.4
Low-cost Forecst 3.8*
Actual 4.7 (+.4)

2007

Int-Cost Forecst 2.6*
Low-cost Forecst 3.4
Actual 2.2 (Prelim) (-.4)

Average Int-Cost 2.89
Average Low-cost 3.5*
Average Actual 3.47


There you have it. In 6/11 years, the real numbers come in BETTER THAN the low-cost forecast (the supposedly "optimistic" one).

In 1/11 years, the real numbers come in lower than the optimistic forecast, but better than the intermediate forecast.

In 2/11 years, the real numbers match the intermediate forecast.

In 2/11 years, the real numbers are lower than the intermediate forecast (one of these years being the anomalous year of 9/11).

On average, the real numbers essentially match the optimistic forecast.

This means fully funded SS 75 years out, & trillions of surplus in the Trust Fund.

The implication being, we may be paying TOO MUCH payroll tax.

So forget the private accounts v. increased payroll tax debate. Instead, ask yourself -

Why isn't the media analyzing the Trustees' reports & bringing you this information? Why do all the news accounts discuss the "shortfall" as if it were set-in-stone gospel, certain to occur?

Why don't they even tell you that these are 75-year economic forecasts, & discuss the likely accuracy of 75-year economic forecasts?

Why hasn't anyone in Congress noticed that the Trustees, on average, can't accurately forecast the NEXT year, let alone the next 75? Don't our reps have staffers whose job it is to follow these things? Why aren't they minding our shop? Why do they all seem to take the existence of the "problem" for granted?

I'll tell you what I think. Eleven years of economic data comes in too suspiciously close to the low-cost forecast. I think the low-cost forecast represents the real forecast, and the intermediate forecast is ratcheted under that to produce the crisis scenario certain actors wish to sell us.

I believe we're being conned, & that some in the media & in Congress know we're being conned.

The Bruce Web (has links to all the Trustees Reports & other data).

http://bruceweb.blogspot.com/search?updated-min=2008-01-01T00%3A00%3A00-08%3A00&updated-max=2009-01-01T00%3A00%3A00-08%3A00&max-results=5

Personally, that'd cut into my paycheck every August till the end of the year, so I'm not arguing this from the point of somebody with nothing to lose.

It's the fairest way to deal with a shortfall (if, as you contend, even exists).

I agree. SS is NOT an issue.

The payroll cap is in place for very solid political and policy reasons, it acts as a firewall to keep Social Security as a worker funded retirement and disability insurance program for workers. Since Social Security does not draw from capital it owes nothing to capital. On the other hand lifting the cap simply transforms Social Security into a welfare plan which then allows the Right to lump it in with every other social program as 'programs we cannot afford and that need to be cut' (as opposed to things like Star Wars which they place in the category of 'funding we can't NOT afford). We don't want Social Security to be perceived as just another government program, instead it is of the worker, by the worker, and for the worker and will stay that way if we are vigilant and don't drop our guard or foolishly raise the cap.

Moreover eliminating the FICA cutoff actually does not cure anything. Given the current structure of FICA and the current state of affairs in Social Security finance a cap increase results in a bailout of capital by workers, it is in fact a Trojan Horse. Social Security is currently running in strong surplus, a surplus that is then borrowed by the General Fund in return for Special Treasuries. And there is nothing wrong with that, despite bleatings from idiots on the Right those Special Treasuries are just as real and just as secure as the ones sold to the Public. But right now we really don't need any more. Lifting the cap would simply have the effect of laundering even more money through the Trust Fund to mask General Fund spending on things like war and tax cuts. Moreover it would make the effort to let Bush tax cuts expire that much more difficult, the combination of a cap increase and sunsetting the tax cuts puts middle class professionals right back at Reagan era marginal rates while giving the investor class a pass. Because income from returns on capital isn't exposed to FICA in the first place. Lifting the cap doesn't tax the top 5% and certainly not the top 1% who generally have no wage income to speak of and who in any event could restructure their compensation packages to avoid categorizing any part of it as wages. Instead a cap increase simply smacks successful professionals who might otherwise be solid supporters of progressive ideas like Universal Single Payer.

I am all for restoring progressivity to the tax system, but not in a way that gives hedge fund managers a free pass. If you want progressivity do it on the income tax side by raising top marginal rates and taxing capital gains as regular income. Do not fall for the Trojan Horse that a cap increase represents. It looks progressive, it sounds progressive, but in the over context of income distribution it is actually net regressive. Leave the cap alone, the cap is our friend.

I'm already of the opinion that capital should be taxed more than labor, so no change of opinion there, but you've gotten me to rethink SS.

Bruce Webb wrote: "The payroll cap is our friend.
The payroll cap is in place for very solid political and policy reasons, it acts as a firewall to keep Social Security as a worker funded retirement and disability insurance program for workers. Since Social Security does not draw from capital it owes nothing to capital."

While there certainly isn't any kind of social security crisis, I have to disagree with your assertion that the "payroll cap is our friend" because the fund does not draw any money from capital.

Actually, nearly half of all social security payments are in fact made by capital, the employers. They are required to match the money contributions paid by their individual employees into the fund.

Now if the payroll cap is increaased, or even eliminated, we could do two things to help working class people right now.

1. Decrease the retirement age to 60 with full social security benefits. That could also open up several million full-time jobs for those who are unemployed or working part-time.

2. Increase monthly social security payments by a significant amount.

Standard economic theory holds that the real incidence of the employer match falls on the employee. And even if you disagree that does not change the argument. Raising the cap shifts the total power balance away from workers (who may indeed be working for non-profits or government) towards capital.

The medicare cap was eliminated by Clinton in 1994 though and medicare still exists.

As far as a SS cap, I can see the argument for keeping it. But since most economic growth in the last few decades has gone to the top 10% I think the cap should be increased. Increasing it to 130k or so would be fine by me.

of total income.

I think it would be better to push for raises in median income, or increased capital gains tax or top income bracket hikes, e.g. rescind the bush tax cuts.

The current Liebman-MacGuineas-Samwick Non Partisan Social Security Reform Plan proposes to restore taxation to that level. And given that Obama's chief Social Security advisor is that same Jeffrey Liebman my working assumption is that when Obama is talking about raising the cap on 'people like me' that he is buying into some version of LMS. But really all a cap increase does is to further the continued effort of the Economic Right to drive a wedge between the mid to upper middle class and the working class. You see it everywhere, they constantly seek to reduce tax on returns from capital (corporate income tax, estate tax, tax on dividends, capital gains tax rates) while shifting burdens to the middle class. For example the Right consistently tries to sell the idea that rather than work for raises in median income through such things as increasing minimum wage we should instead use measures such as EITC. Which in the total scheme of their combined tax cut vision means putting the screws to the middle class while letting the plutocracy off scot free.

90% is not some magic number. We need to draw the line between where the government's interest in having people fund their own minimum retirement stops. That might well mean a cap decrease, generally speaking households making over the median have access to various types of retirement planning options that people under the median don't.

If someone was to suggest that we slap a tax surcharge equivalent to the cap increase on all taxpayers making above $102,000 from all sources and used the proceeds in a way that increased economic and social utility for everyone including seniors, well I am right there. We can start with SCHIPS. But Social Security as currently configured does not need more cash flow, not right now and maybe not ever, the cap increase is a Trojan Horse designed to undercut support for Social Security among the professional class to the benefit of the investor class.

Why penalize the professional class while giving the investor class a free ride? Why smack your typical doctor or professor on the side of the head and let hedge fund managers off the hook? What is it about people earning between $102,000 and $130,000 that makes them uniquely responsible for subsidizing retirement income for those making under the cap? As opposed to people making $130,000 and $100 million? The incidence of the tax falls in the wrong place here.

If I may paraphrase, you are essentially saying that by leaving the cap as it is, we buy the good will we need to keep the wolves from the program's door. But as we have seen, particularly during the past 7 years, enthusiasm to 'reform' Social Security has not been in short supply.

The very same revenue source differences you cite also make the Trust Fund a favored target of the program's enemies. Their goal is to ensure that none of the bonds are ever redeemed by the general fund, thereby ensuring a partial retroactive tax holiday since Saint Ronnie's day for the upper class - at the expense of the middle class workers who paid extra payroll taxes all those years. This prospect I find morally reprehensible, particularly when I see the retirement age raised, and other beneficiary sacrifices proposed to keep moving 2017 further out.

But the point about the cap might be academic, as these results of your studies have fortified a belief I already held, that nothing at all is the best thing we can do to 'reform' Social Security. I'll do what I can to help spread the word.

...only 30-40 more for Social Security?

:applause:

Thanks Hannah, I think you have summarized this perfectly. And as a bonus induced me to register at DU. I used to come here regularly and still wear my DU 'The Revolution will Not be Televised, it will be online' hat everyday.

In my defense the reason the data isn't formatted well is that I just dumped it there as a placeholder. The actual data extraction was originally done as input to a policy paper a Professor friend of mine submitted to the head of Economists for Obama who in turn got it into the hands of Austan Goolsbee, chief economic advisor to the Obama campaign. So this information is only a degree of separation or two from the probable next President of the US. Whether it gets through is another question because Obama's chief advisor on Social Security is Jeffrey Liebman of Harvard who is lead author of the truly worker unfriendly Liebman-MacGuineas-Samwick Non Partisan Social Security Reform Plan. But we can hope.

Since your last visit I put up a post on the very surprising 2008 Low Cost projection. Lid Blown off Low Cost Whether or not the cap on Low Cost which held the outcome to a fully funded but not overfunded Social Security system was deliberate or not, there is no doubt at all that operationally it was in place from 1997 to 2007. Which was the subject of one of my very first posts in Nov. 2004 What is the Low Cost Alternative. Well in 2008 they lifted the lid with the results to be seen in the following: Figure II.D6.—Long-Range OASDI Trust Fund Ratios Under Alternative Assumptions(Assets as a percentage of annual cost0 Low Cost is outcome I. Under new Lost Cost Trust Fund balances initially peak at 450 (four and a half years of then projected cost) in 2021, sink down to about 390 in 2043 and then accelerate smartly up to 650 through the 75 year actuarial window. For the first time the Trustees are on record with a model that shows an overfunded Social Security system given Low Cost assumptions.

I don't know if I would go so far and say that Low Cost was the "real forecast", instead it is my belief that Low Cost was being fitted to a particular curve, one that had it producing what I call a Baby Bear outcome, a Social Security system fully funded but not overfunded. This in turn put a lid on Intermediate Cost which had to come in below Low Cost to preserve 'crisis'. Because once your honest economic prediction intersects Low Cost it is game over. But this year they blew the lid off Low Cost and didn't even provide a Baby Bear forecast. But just doing an eyeball interpolation of the current models something like average 2.6-2.7% GDP brings this baby home.

Thanks again for getting this out to a new audience and for getting me back to DU.

Throw money at it. That solves it. Next?

I mean, 1~3 trillion for an occupation that gives us nothing?!?

WTF!?

I got news for you. You don't.

If you pointed to something that actually showed you know more about social security than most.

I have been posting on this topic here and there for over a decade and from experience can tell you that levels of knowledge on this topic historically ranged down to near zero. Things have change some since the There is No Crisis effort of 2005 but still a Professor of Economics I know has polled his incoming students for years and exactly zero of them could define 'Crisis' in relation to percentage of real benefit at Trust Fund Depletion. And these are projected Econ majors.

So before you take offense maybe you could show that you pass the Social Security literacy test. Can you tell me off the top of your head what the current payroll gap is? Or what Intermediate Cost assumptions about ultimate Real GDP are? Lots of people 'know' things about Social Security that simply are not true at all and demonstrate that on pretty much every thread on this topic. Taking offense from the assumption that you share the beliefs of maybe 95% plus of Americans is kind of thin-skinned. Because after all the universe does not revolve around the precise level of gristy's knowledge about any given topic.

The poster claimed that "everything I know about the Social Security Crisis is wrong." I can know close to "near zero" about SS and this claim will still be false.

For that pretty gracious response to what could well be considered a rude comment by me.

But taking offense at what is actually a rhetorical gesture is kind of odd. I really don't think when the self-advice book and then the movie 'Everything you know about Sex is Wrong' were released in the seventies that either the psychologist author or director Woody Allen really thought that in their very different takes on this topic that nobody understood what parts interacted with other parts. Most people at least got the fundamentals. But understanding a little about sex can be very, very dangerous. And the same can be true about things such as the actual financials of Social Security. Probably no one got Iraq 100% wrong, I don't think anyone will dissent on 'Saddam was a monster', but translating 'near zero' knowledge into 'lets do something' is a recipe for disaster. Which I am thinking was Hannah's point.

Good subject headers seek to introduce topics in ways that draw in readers, they rarely are a real summary of the point in question.

"The solution is - do nothing."....thank you, Hannah Bell

and a higher salary cap we'd all be rolling in SS dough.

You must not have read the OP.

We're already rolling in SS dough, 2 trillion dollars' worth.

The "SS problem" is completely imaginary.

SS - because we take payroll tax from them - but they can't collect SS! Isn't that wonderful? Aren't you glAd SS has been "saved" by stealing from poor immigrants?

Oh, except there are still a few problems, the NYT goes on - we still need to raise payroll taxes & reduce benefits.

Is there any doubt that US "leadership" is corrupt & dishonest, down to the tips of their $500 shoes?

http://www.nytimes.com/2008/04/02/opinion/02wed3.html?ei=5088&en=89c27bd2cb7ac97c&ex=1364788800&partner=rssnyt&emc=rss&pagewanted=print

There is no SS crisis.

Now medicare, that's got some problems...

I seriously doubt, though, that 1/100 knew that the low cost forecast was more accurate than the intermediate cost forecast.

I've been reading up on SS for several years. I'd never seen anyone analyzing these particular numbers but webb until quite recently.

I'd read criticisms of the "standard story" from other angles, but not from this particular one.

NT

It is possible that the future economy will perform more or less in line with the 2007 Low Cost model, with Social Security fully funded through the 75 year window but not overfunded, and that of course would be a good thing. But it is also possible that the economy will grow faster than the 2007 model and instead return results as seen in the 2008 Low Cost projection:
http://bruceweb.blogspot.com/2008/04/shape-of-low-cost.html
Odd as it may sound an overfunded Social Security system is just as much a policy/political mess than an underfunded one, and taken to extremes actually an existential threat to Social Security itself.

Phase I: There is no crisis, the problem itself is small and decades away. (This is pretty much where the argument sits today)
Phase II: Social Security is not broke. At all. Perfectly achievable Low Cost numbers solve the whole thing. (This is the direction this post is pointing to.)
Phase III: Ohmigod, FICA at current rates may well be set too high, leading to results that actually undermine future support for Social Security. (What the hell is Webb talking about?! Is he nuts? Maybe so, but come 2011 we may be in a much different conversation about SS than anyone thinks)

2005 was all about Phase I and that was a really, really important first step, we had to stop the bleeding. In say 2007 a few of us including Prof. Barkley Rosser of JMU (whom I named 'Rosser's Equation' after) started pushing Phase II arguing that Low Cost outcomes were possible. And this is a hugely important second step, getting people to understand that the numbers over the last decade show clearly that 'Nothing' was a perfectly fine plan over the last decade. 'Nothing' left dollars in our pocket and yielded a smaller problem going forward. If I could get the whole country to Phase II by 2009 I would be pretty content, we need to bury the 'crisis' narrative once and for all. Because no one is ready to take on Phase III. The very concept that Social Security is as likely to be overfunded as underfunded going forwards seems crazy to most people, when you suggest that actually introduces a crisis of its own even your friends and associates start looking at you sideways.

So it is almost certainly too early to try to open a wide discussion about a possible Phase III, we still have so much work to do on Phase II. But if 'Low Cost is out there', and it is, so is Low Cost Plus and its Bizarro world outcomes.

Just to get them to look at the evidence for P-1 is difficult.

:kick:

Although I just learned on the History Channel that the Aztec calendar shows The End Of The World As We Know It will occur roughly a month before I become eligible to start drawing SS and my meager pension. Figures.

But I'm going to bookmark it. Thanks for this excellent contribution.

I shared your message http://www.unlawflcombatnt.proboards84.com/index.c.cgi?action=display&board=pensionssocialsecurity&thread=1207474919">here at the Economic Populist website.

For 2006 I believe you should show:

Int-Cost Forecst 3.4
Low-cost Forecst 3.8*
Actual 4.7 (+.9)