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Beating a Dead Horse: Social Security Edition

On 25 Feb 2009 the Boston Globe published a commentary by Alicia Munnell, a professor at Boston College, which explained why she thought that Social Security was not in trouble. As it happens, the same week Joe Conason’s column at Salon addressed pretty much the same topic and with the same general conclusion.

This week Salon published a pre-emptive strike by Michael Lind intended to minimize the impact of a dismal report by the Trustees of the Social Security Administration on the state of Social Security and Medicad by arguing that the Trustees got it wrong — that Social Security is fundamentally sound.

Once again I find myself amazed at the level of myopia the subject of Social Security elicits. And so once again I find myself trying to find a way to make people see what I see. I know, this is getting repetitive. But it’s important!

The first of these letters was a response to the Globe commentary. It was sent to the Globe editors and directly to professor Munnel; it was not published and I received no reply from the good professor.

The second of these was posted to Salon in response to Conason’s article.

25 February 2009

(To the Boston Globe editors and professor Alice Munnell)

Ref: “A Bright Light in a Dismal Landscape” , 25 Feb 2009

I’m wondering about the claim you and others make about the “shortfall” in Social Security being relatively small — coverable by a 1.7% increase in the payroll tax.

Since you report that number comes from the Social Security actuaries — who are responsible only for Social Security and not for anything else in the government — I am presuming that they are taking the Social Security trust fund into account; that is, I am presuming they are counting on the fact that the Social Security Administration can liquidate its holdings of Treasury bonds as it goes along to help defray their increasing expenses, and that is why their projected shortfall is as small as it is. That is by design, and I am quite confident their numbers hold up.

What I find continually frustrating is that people seem to look at this as if that is all that matters. Being pedantic about it I will grant that Social Security is on a firm financial footing. It has the trust fund it can liquidate as necessary. What I am worried about is what happens to the rest of the government — the part that is not the Social Security Administration — when that great liquidation begins.

Presumably we created the Social Security trust fund in the first place because somewhere along the line we decided that trying to fund the bump in benefit spending related to the boomers’ retirement out of contemporary revenues would be a bad idea. The demographic projections say that at some point the number of workers paying in will only be twice the number of people taking out, and that suggests our decision was valid. Trying to pay as we go under those circumstances would be a bad idea. Better that we should save now to cover that eventuality later. And that’s what we’ve been doing with the trust fund.

Except that those Treasury bonds we’ve been buying represent loans to the other half of the government, and the other half of the government has been spending the money as fast as Social Security has been loaning it.

When the Social Security Administration begins to liquidate its bonds — when it starts to draw down the trust fund to cover benefits — where do you think the money it withdraws will come from? There are no assets to sell. There is no money sitting in a vault somewhere. That money will come from contemporary revenues.

True, it will not come from the Social Security Administration’s contemporary revenues. It will come from the Treasury department’s contemporary revenues. But so what? The amount being drawn from contemporary revenues will be the entire amount required to cover contemporary Social Security benefits. What the Social Security Administration doesn’t cover the Treasury will have to.

I don’t know about you, but I don’t really worry about which part of my tax bill (or the federal government’s borrowing) accrues to the Social Security Administration and which accrues to the rest of government. From where I sit it’s all part of the same monolith, and revenue to one is interchangeable with revenue to the other. If it was a bad idea to fund future Social Security benefits entirely out of contemporary revenue — the original justification for creating the trust fund — then the idea doesn’t become somehow more palatable because that funding comes from the Treasury’s revenue rather than from the Social Security Administration’s revenue. Bad is bad. And it’s bad.

If you believe that we never really needed the trust fund in the first place — that funding benefits out of contemporary revenues was never a bad idea anyway — then I can understand why this wouldn’t alarm you. I disagree vehemently with you, but I can understand your complacence. But if that is your view then stop defending the trust fund. Just admit that we will be paying a whole lot of taxes and borrowing a whole lot of money from somewhere other than Social Security to cover those payments on as as-we-go basis.

But if you think the trust fund was necessary and yet still think there is no problem then you’re wearing blinders. You can’t look only at Social Security. This is an integrated system that flies or crashes as a whole. If Social Security remains solvent by bankrupting the rest of the government we have not succeeded and Social Security cannot really be considered secure.

23 February 2009

(To Joe Conason and his readers)

Ref: “Reform healthcare — and leave Social Security alone” , 23 Feb 2009

Follow the Money

I’m one of those who believes Social Security is in trouble.

Nonetheless, I will grant you that the Social Security Administration, through the mechanism of the trust fund, is largely fiscally sound. It owns federal government bonds, which it will cash in to cover its liabilities. Absolutely true. Government bonds — at least so far — are “safe”, backed by the “full faith and credit of the United States Government”. Also absolutely true. By that standard, Social Security has no problem.

The question is, what happens to the rest of the government — the part that is not the Social Security Administration — when that great cashing-in happens?

What does cashing in those bonds mean? It isn’t as if all that money that has been invested is sitting in a vault somewhere. It isn’t like it was used to buy some underlying assets that can be sold to get the money back.

No, folks. We spent it! It’s gone!

Those bonds were a loan to the rest of the government, and the government has already used the loans to buy stuff and to pay people. When the Social Security Administration decides to cash in the bonds to cover its expenses, that simply means that the rest of the government has to pay the loans back.

And since the money is gone, that payback will need to come out of contemporary revenues. The rest of the government has no savings. It has no trust fund to fall back on. All that money will have to come out of the general fund, where it will be competing for resources and priority with all the other things the government does.

And where will the rest of the government get the money to cover those loans it suddenly needs to pay back? One of three places: it will tax us more, or it will borrow more from somewhere else, or it will cut its expenses elsewhere. Personally, given the historical record, I think number 3 is not all that likely, so we will end up with higher taxes and more borrowing. In fact, we will end up with exactly enough taxing and borrowing to make up the shortfall in contemporary Social Security revenue.

True, the Social Security Administration won’t have to do all that taxing and borrowing. No, it will have subcontracted that unpleasantness to the Department of the Treasury.

Presumably we created the Social Security trust fund in the first place because somewhere along the line we decided that it would be a bad idea to try to cover the large bump in Social Security payments associated with the boomers’ retirement out of current revenues. We looked forward and decided that would be disastrous; better that we start saving now for that eventuality. Except we didn’t save. We simply pushed the shortfall from one account to another.

I don’t know about you, but I don’t generally differentiate between the Social Security administration and the rest of the government when I’m thinking about how much “the government” is taking from my paycheck or borrowing against my childrens’ future. It’s all the government and I don’t really care whether it’s the right hand or the left hand doing the taxing and borrowing and spending. The fact that one part of the government is “solvent” because it’s extracting resources from the other part and pushing it into insolvency doesn’t fill me with confidence.

The problem is not that the Social Security Administration will run out of money to pay for benefits. The problem is that it may well bankrupt the rest of the government to avoid doing so.

So yes, if you want to be pedantic about it, Social Security is not in trouble at all. It is covered by the trust fund. The managers of the Social Security Administration can sleep well at night knowing they’ve served us well in securing the benefits they’ve promised.

But unless we do something clever, and fairly soon, the federal government as a whole will be in trouble because of Social Security. To me that is a distinction without a difference.

(C) Copyright 2009, Augustus P. Lowell

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