Reasons NOT to worry about political risk to SS

[Khufu]

Dean Baker has an especially insightful column about the extent to which the hand-wringing about the ability of Social Security to pay its future benefits is exaggerated:

Social Security and the Economy | Beat the Press

Some highlights:

This matters because the main reason that revenue is projected to be lower in 2012 than in 2011 is that unemployment is now projected to be higher and wage growth is projected to be lower. This once again shows the importance for Social Security of having adults in charge of managing the economy. When the economy does badly, Social Security's finances do badly (repeat 256,000 times). ...

According to the latest projections from CBO we still have more than a quarter-century before the [Trust] fund will first face a shortfall. Even after that date the program would still be able to pay more than 80 percent of projected benefits, which would be more than current beneficiaries receive. {emphasis added}

[MasterBlaster]

I didn't read all of the article but have the usual comments regarding SS and entitlements.

It's true, as the article suggests, that strong growth over the next quarter century (or so) could indeed solve many of these financing problems. Absent strong growth though,we are in for some hard choices.

Social Security though doesn't operate in a vacuum It will have to compete with all of the other priorities for it's funding. And that funding includes the SS trust fund money which is earmarked for SS only. It is fantasy to expect SS to be completely funded while everything else withers (promises or not).

The entitlements including SS and Medicare/Medicaid are clearly not sustainable going foreward at any level of taxation. Big changes are inevitable by either negotiated/planned legislation or by austerity driven by overwhelming accumulated debt and the drying up of the debt markets.

Articles such as the linked one take a very narrow and rose-colored view of the future. In my opinion articles such as the linked one do a disservice to the American people. really what's needed is an honest discussion of where we are and what we need to do.

[ziggy29]

To me the main thing is that too many people say SS will "go broke" in 20XX. But "going broke" doesn't mean no one gets benefits, but that if benefits are only paid out to the degree SS taxes are coming in, the expectation at the "go broke" point would be that recipients still receive at least 75% of what they were expecting.

This is why I think it's silly to *expect* nothing. (If you want to *assume* nothing for conservative financial planning, fine.) Worst case those who aren't in really high income groups can easily expect to get 70% of what they are currently expected to get, if not more.

It would also be nice if the SS trust fund really were locked away from other things, but because it's all invested in government debt, every extra dollar the government borrows is potentially slightly more the promises are called into question.

[Khufu]

Quote:

Originally Posted by MasterBlaster The entitlements including SS and Medicare/Medicaid are clearly not sustainable going foreward at any level of taxation.

Either you honestly misunderstand or you are deliberately misrepresenting the situation. SS is fully funded for the next 25 years and more. The department of Defense, for example, is not, although it would make just as much sense to lump DOD with Medicare. However, neither the SSA nor the DOD represents a threat to the financial health of the nation. The rising cost of healthcare, which is predicted to reach to rise from the current 16% to 20% of GDP, does. Whether the nation attempts to cope with the unsustainable rise in the cost of health care through Medicare, through some new govt program, by nationalizing the insurance and healthcare industries or by forcing households to absorb the risk and cost entirely, it is the healthcare cost itself, not SS or DOD or the Park service, that is unsustainable.

The strategy of the political attack on SS has been to blur the distinction between the entirely sustainable SS system and the entirely unsustainable health care system by lumping SS & Medicare. It is completely dishonest. I sincerely hope that does not include you.

[rayvt]

You're making the mistake of assuming the "trust fund" is something real. It isn't. Look at the substance rather than the form -- just like the IRS does when they nail people for clever tricks that constitute tax evation.

The trust fund doesn't contain any real assets. It's just a bunch of IOU's from one department of the government to another department of the government. Actually, it's not an IOU, it's a IOme. A book-keeping entry that is only paper figures.

[Nords]

Quote:

Originally Posted by Khufu Dean Baker has an especially insightful column about the extent to which the hand-wringing about the ability of Social Security to pay its future benefits is exaggerated:

The media doesn't find that anywhere near as attention-grabbing as a headline blaring:
"Social Security defunded 30% AGAIN by Congress!!"

[clifp]

Well I hate to inject data into this conversation ... The hand wringing over SS may or may not be overwrought, but one thing is absolutely true there is no way you can look at the CBO's projection from last year and this year and reach any conclusion other than SS is in worse shape.

The CBO projects that revenue (i.e. payroll taxes) will grow from $566 billion in 2011 to 1.096 Trillion in 2022. This is a CAGR of 6.2% which includes tax increases from both higher wages and increased population, but no changes to the FICA tax rate, other than inflation adjustments on the FICA cap. I haven't gone back and looked at the data in great detail, but I suspect that is probably a bit higher than historical growth. I certainly wouldn't bet big money that the economy will grow this quickly over the next decade, unless inflation ramps up.

Last year the CBO project that payroll taxes in 2012 would be 668 billion, this year that dropped to 632B. (Note the payroll tax holiday is being funded by transfers from the general fund). The CBO has moved the big jump in payroll tax revenue from 2012 to 2013, since 2011 turned out not to be the year unemployment dropped despite the CBO forecast. But never fear the CBO oracles are confidently predicting a 11% increase in 2013 payroll taxes. If anybody believes this projection, I'd be delighted to place any type of wager. I think that the CBO is smoking dope.

Another troubling projection is that last year projected SS revenue growth from 2014-2021 (i.e. after the recovery) to be 4.2% CAGR. This year they uped the growth rate to 4.8%. A trick that virtually every entrepreneur tries when soliciting investments (yes we didn't hit are sales figures this year but don't worry will grow them faster in the future).

The other major change to CBO projects are a dramatic decrease in interest from last year to this year. I guess the Feds war on savers has other victims beside retirees, like the SS trust fund. For instance last year CBO projected that trust fund would earn 164 billion in interest in 2021, this years projections drop that to 111B.

So let me summarize, the CBO projects lower social security taxes, but a faster recovery starting next year, much lower earning from interest, modestly higher expenditures. Meanwhile Congress is extending the payroll tax holiday for another year. Why shouldn't we be more concerned SS funding than we were in the past?

Quote:

which would be more than current beneficiaries receive.

Since you are relatively new here I'll be somewhat gentle. This is kinda of BS statement that belongs on partisan bumper sticker not on the forum. Telling a 62 year-old who just started collecting their $1400 month SS check that don't worry about SS because when you are 87, you'll get more than today is dangerously misleading. For a very simple reason with 3% inflation that $1400 check in 25 year has the purchasing power of <$700.

[Khufu]

Quote:

Originally Posted by rayvt You're making the mistake of assuming the "trust fund" is something real. It isn't. Look at the substance rather than the form -- just like the IRS does when they nail people for clever tricks that constitute tax evation. The trust fund doesn't contain any real assets. It's just a bunch of IOU's from one department of the government to another department of the government. Actually, it's not an IOU, it's a IOme. A book-keeping entry that is only paper figures.

Otherwise known as US Treasury Bonds, the safest securities in the world. Cheapest rhetorical trick in the bag: rename the object in question with a trash name even it's the same as it always was.

What do you call shares of stocks, "IDon'tOweYous?"

[Khufu]

Quote:

Originally Posted by clifp Since you are relatively new here I'll be somewhat gentle. This is kinda of BS statement that belongs on partisan bumper sticker not on the forum. Telling a 62 year-old who just started collecting their $1400 month SS check that don't worry about SS because when you are 87, you'll get more than today is dangerously misleading. For a very simple reason with 3% inflation that $1400 check in 25 year has the purchasing power of <$700.

Thanks for the condescension, although it's a little curious coming from someone who apparently doesn't grasp the difference between a real (i.e. after inflation) increase in benefits (planned) and the COLA, (in effect and planned to continue.)

I'll check your other figures. In the meantime you might clear up your confusion of FDIC and FICA.

[Mulligan]

I fully understand the angst of anyone trying to figure out what to expect from SS, because once you are relying on income outside of your own assets, there is a loss of control. But I would think one thing that hasnt been mentioned, nor is in the article that would benefit people nearing SS is the powerful elderly voting block that happens to also include the big baby boomer population. That would have to be a plus for future of SS benefits, at least for the next 20-30 years.

[clifp]

FDIC was clearly just a typo I fixed it.

I don't believe the statement

Quote:

Even after that date the program would still be able to pay more than 80 percent of projected benefits, which would be more than current beneficiaries receive.

The only way this statement would be true is wages increase so much faster than inflation that a 20% cut in benefits would still result in a real (after inflation) increase in benefits. I'd challenge you to show me a 25 year period of time in the last 50 years where this is true. Otherwise I standby they only way you can make such a statement true is by ignoring inflation.

[rayvt]

Quote:

Originally Posted by Khufu Otherwise known as US Treasury Bonds, the safest securities in the world.

Oh, please. Look at the substance, not the form. Drop the mindless usenet talking point about "US Treasury Bonds, the safest securities in the world" and educate yourself about the realities. All of the “assets” in the Trust Fund are promises from the Government to pay to the Government. That is not an asset – it is a myth.

The bonds in the Social Security trust fund are counted both as an asset of the trust fund and as a liability, since they are part of the total federal debt. Basically, one hand of the government owes the other hand, and the investments in the "trust fund" are not separate from the entity that sponsors the trust fund.

Bottom line – the Government cannot have an “asset” that it sells to itself. By definition, the asset does not exist, and is only a “promise” to future benficiaries.

[Khufu]

Quote:

Originally Posted by clifp FDIC was clearly just a typo I fixed it. I don't believe the statement The only way this statement would be true is wages increase so much faster than inflation that a 20% cut in benefits would still result in a real (after inflation) increase in benefits. I'd challenge you to show me a 25 year period of time in the last 50 years where this is true. Otherwise I standby they only way you can make such a statement true is by ignoring inflation.

Wages typically grow faster than inflation which is why the standard of living has grown after all. That is also why the COLA used to adjust your SS PIA prior to retirement is the Average Wage Index. After retirement COLA adjustments are based on CPI-W.

National Average Wage Index

Here's a writer citing data on the subject:

Between 1974 and 2011 the AWI rose a cumulative 17% (adjusted for inflation).

COLAs, CPIs, and the $14 Minimum Wage | Inequality.org

Not an authoritative source, but you can do your own googling. That's a 27 year period so it's in the ballpark for the period we are discussing.

There is no guarantee that wages will continue to outpace inflation, of course, since we are talking about the future.

Am I being gentle enough?

[Gumby]

Quote:

Originally Posted by rayvt Oh, please. Look at the substance, not the form. Drop the mindless usenet talking point about "US Treasury Bonds, the safest securities in the world" and educate yourself about the realities. All of the “assets” in the Trust Fund are promises from the Government to pay to the Government. That is not an asset – it is a myth. The bonds in the Social Security trust fund are counted both as an asset of the trust fund and as a liability, since they are part of the total federal debt. Basically, one hand of the government owes the other hand, and the investments in the "trust fund" are not separate from the entity that sponsors the trust fund. Bottom line – the Government cannot have an “asset” that it sells to itself. By definition, the asset does not exist, and is only a “promise” to future benficiaries.

Suppose you were the trustee of the Social Security Trust Fund. You're collecting money from the working boomers and the fund balance is growing. You know that when those boomers start retiring you'll need to draw on that fund in inflated dollars, so you need it to grow from investing, not just contributions. What do you do with the money? You would be breaching your fiduciary duties as a trustee if you just put stacks of dollar bills in a warehouse. So you need to invest it. Where can you invest all that money without adversely affecting the market and without undue risk? U.S. treasury securities. And that's what they do. The fact that the U.S. Government borrows money from (by issuing bonds to) the Social Security Trust Fund is no different than borrowing from the Chinese or anyone else who buys Treasuries. If you think the government spends beyond its means, you may have a point, but that does not render the Social Security trust fund insolvent.

[Khufu]

Quote:

Originally Posted by rayvt Oh, please. Look at the substance, not the form. Drop the mindless usenet talking point about "US Treasury Bonds, the safest securities in the world" and educate yourself about the realities. All of the “assets” in the Trust Fund are promises from the Government to pay to the Government. That is not an asset – it is a myth. The bonds in the Social Security trust fund are counted both as an asset of the trust fund and as a liability, since they are part of the total federal debt. Basically, one hand of the government owes the other hand, and the investments in the "trust fund" are not separate from the entity that sponsors the trust fund. Bottom line – the Government cannot have an “asset” that it sells to itself. By definition, the asset does not exist, and is only a “promise” to future benficiaries.

[MOD EDIT] The US govt is current on its obligations for interest payments to the Trust Fund. Its ability to continue such payments and all its other bond obligations is not in question[MOD EDIT]. At least the bond market doesn't think so. 10 year Treasuries remain at < 2% as they have for some time. It will no doubt shock you to learn that all bonds (translation for your benefit: IOUs) are promises to pay. The global economy runs on them.

[clifp]

Quote:

Originally Posted by Khufu Here's a writer citing data on the subject: Between 1974 and 2011 the AWI rose a cumulative 17% (adjusted for inflation). COLAs, CPIs, and the $14 Minimum Wage | Inequality.org Not an authoritative source, but you can do your own googling. That's a 27 year period so it's in the ballpark for the period we are discussing. There is no guarantee that wages will continue to outpace inflation, of course, since we are talking about the future. Am I being gentle enough?

Thank you for making my point. If real wages increase 17% over the next 27 year and Social Security only can pay 80% once the trust fund runs out in 25 how can real benefits increase?

Let say average wages are 40K (close enough for government work) they increase by 17% to $46800. The average benefit is currently $1177 which increase 17% to $1377/month (in today's dollars). The SS Trust fund runs out of money and we move to a pay as you go system and benefits are cut by 20% meaning the average SS beneficiary is now getting $1100.

How is it that $1100 check in 25 years (after inflation) is better than today's $1177 check?

Now if you want to pretend that America workers are more competitive now than were in the last century and we are going to get even bigger real wage increase than we did in the 80s and 90s than I am sure everything will work out just hunky dory.

Of course the last decade hasn't worked out so good for worker's wages in this country which is why concern about SS funding may not be overwrought.

[Nords]

Quote:

Originally Posted by Khufu Am I being gentle enough?

You'll have to take that one up with the moderators.

I, for one, have always enjoyed being lectured to in the second-person tense.

[clifp]

Quote:

Originally Posted by Gumby The fact that the U.S. Government borrows money from (by issuing bonds to) the Social Security Trust Fund is no different than borrowing from the Chinese or anyone else who buys Treasuries. If you think the government spends beyond its means, you may have a point, but that does not render the Social Security trust fund insolvent.

I agree and I don't have a problem with the trust fund accounting.

What is troubling is the bottom line. If all the fancy account tricks are ignored in 2012, Uncle Sam is suppose to collect $627 billion in payroll taxes and total Social Security payments (including disabilities SSI etc.) made by Uncle Sam are 776 billion. The difference of $149 billion isn't chump change and is roughly $1,000 per worker. Considering the first of the baby boomers just turned 65 in 2010 it is more than a little scary we are running this large of a deficit this early.

I guess the good news is Social Security is in better shape than Medicare or state and local pensions.

[FIRE'd@51]

Quote:

Originally Posted by Gumby The fact that the U.S. Government borrows money from (by issuing bonds to) the Social Security Trust Fund is no different than borrowing from the Chinese or anyone else who buys Treasuries.

Isn't the difference that the money borrowed from the Chinese is counted as part of the Federal deficit and that borrowed from the SS Trust Fund isn't?

[Gumby]

Quote:

Originally Posted by FIRE'd@51 Isn't the difference that the money borrowed from the Chinese is counted as part of the Federal deficit and that borrowed from the SS Trust Fund isn't?

As I understand it, the reported yearly federal budget deficit ignores intra-governmental transfers (which includes more things than Social Security), but the total public debt (for purposes of the debt ceiling) includes intra-governmental transfers, like the social security special treasury bonds, plus all debt to third parties, like the Chinese. But I could be wrong; it wouldn't be the first time and won't be the last.