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Backing Away from Confronting Social Security’s Realities

Charles Blahous | 11/10/2011
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On Sunday, October 29, the Washington Post published a front-page article by Lori Montgomery about Social Security. The piece explained that the current excess of Social Security expenditures over incoming tax revenues was straining the federal budget and that the recent recession had caused this situation to arise earlier than previously anticipated.

The article itself was unexceptional but the reaction to it was not. A number of commentators on the left, including Paul Krugman, Jared Bernstein and Dean Baker, criticized the Post’s portrayal of Social Security finances. The following Sunday, the Post’s Ombudsman posted a follow-up piece that defended the article in some respects. Unfortunately, while attempting to accommodate the viewpoints expressed by critics, the Ombudsman committed some factual errors that undercut the original article’s informational value.

Talking Past One Another

Why was there so much controversy over the Post article?

As a program trustee I find that Social Security policy advocates often talk past one another because they are focused on different issues. Discussions of the Social Security Trust Fund (technically Trust “Funds” because there is more than one; I will refer to the consolidated Trust Fund) are especially prone to this dynamic. At least two different issues involving the Trust Fund strike many commentators as important:

  1. The bonds in the Trust Fund embody real interest-earning assets of Social Security, and the program has full authority to pay benefits so long as the Trust Fund has a positive balance.
  2. A positive Trust Fund balance by itself doesn’t tell us how we will generate the economic resources to pay for Social Security benefits.

Both of these statements are true, but they represent different perspectives. Many of the Post’s critics were focused on issue #1, while the article focused primarily on issue #2. The argument was thus less about the facts, and more about which perspective is more important.

A real-world example may help explain the distinctions between the two perspectives. For this year, Congress and the Administration enacted a 2 percentage point reduction in the Social Security payroll tax, cutting tax collections by $105 billion. At the same time, they legislated a transfer of $105 billion in general fund revenues to the Social Security Trust Fund. That $105 billion deposit into the Trust Fund will thereby become a real asset to Social Security. Because it exists in the form of Treasury bonds, it will also earn interest in the years ahead. By adding to the Trust Fund balance, it also adds to Social Security’s spending authority.

None of this, however, really answers the question of who will pay for that $105 billion, nor how. By issuing the transfer while simultaneously cutting the payroll tax, the federal government implemented a policy decision to simply borrow that additional amount of money to pay benefits. All money that the federal government borrows creates a liability of both principal and interest that future taxpayers will be required to deal with in some yet-unspecified way. That $105 billion transfer thus creates real assets and real spending authority for Social Security, but it doesn’t answer the question of how we will ultimately pay for that spending.

If that’s not fully clear, perhaps a more extreme hypothetical example will drive the point home. Suppose that instead of Congress’s cutting the payroll tax by just two points, the entire 12.4% tax had been eliminated – forever. Federal deficits and debt would of course rise enormously. And suppose we simultaneously passed a law transferring general revenues to Social Security’s Trust Funds in whatever amounts were necessary to fund benefits. Though the Trust Fund would technically be solvent forever under this scenario, we would not have rendered Social Security cost-free nor solved our financing challenge. Paying the benefits would still have substantial costs, and adding all those costs to the deficit would have troublesome fiscal implications. A positive Trust Fund balance in and of itself thus does not tell us anything about whether we have a sound plan for financing Social Security.

Jared Bernstein suggests that noting these budgetary realities “intimates that the US Treasury will default on its debt.” That’s a straw-man argument for at least a couple of reasons. First, the bonds in the Trust Fund will be honored during the program’s deficit years. Only the rate at which this should occur is at issue. If current benefit and tax schedules are left untouched, we get the worst result: huge annual cash shortfalls, an unsustainable rate of bond redemptions and Trust Fund exhaustion in 2036. Under a reform proposal like Simpson Bowles, bond redemptions would also occur but they would be more gradual (stretching through 2050) and the Trust Fund would never run out. But the bonds are honored either way.

More fundamentally, raising practical concerns about the schedule and plan for redeeming the Trust Fund in no way implies that the U.S. will default on its debts. After all, we could render Social Security technically solvent forever simply by passing a single bill issuing a further $17.9 trillion in debt to its Trust Fund. Such a maneuver would completely sidestep the question of how we will actually pay for benefits. Acknowledging this reality hardly equates to an attack on the creditworthiness of the United States.

Ombudsman Error #1: Social Security and the Deficit

The Ombudsman’s piece unfortunately made a couple of factual errors, the most glaring of which was the assertion that Social Security “does not contribute to annual deficits.”

This is incorrect. Social Security is adding approximately $151 billion to the total federal deficit in 2011. The chart below shows this year’s operations in full detail:

Social Security’s net impact on the federal deficit in a given year is equal to the difference between the incoming tax revenue it generates and the expenditures it sends out. In 2011, it will spend approximately $738 billion, in comparison with $587 billion of tax revenue, for a net deficit impact of $151 billion.

Though Social Security is considered “off-budget” for accounting purposes, the story doesn’t end there; it has multiple interactions with the rest of the federal budget. Some of the Trust Fund’s income sources indeed come from within the federal government, including its interest earnings as well as any transfers of general revenues. These intragovernmental transfers can (and do) increase the balance of the Trust Fund – but at the expense of the general fund. Equally importantly, these transactions (which embody a substantial portion of the Trust Fund) have no impact on the total budget deficit. (I should mention that it is theoretically possible for Trust Fund interest payments to indirectly reflect a net improvement in the unified federal deficit, but only if past Social Security surpluses were used to reduce publicly-held debt; multiple academic studies have found this not to be the case.)

The bottom line: for the purpose of measuring Social Security’s net effect on the deficit, only the program’s actual tax revenue and expenditures matter. Whenever program costs exceed tax collections this adds to the deficit, and neither the Trust Fund’s interest income nor any other general revenue transfers change this. The non-partisan scorekeepers all agree. The Congressional Budget Office, for example, writes in its Long-Term Budget Outlook:

(B)ecause those interest transactions represent payments from one part of the government (the general fund of the Treasury) to another (the Social Security trust funds), they do not affect federal deficits or surpluses.

See also this passage from the 2009 (before I became a trustee) summary of the Social Security and Medicare trustees’ reports:

Concern about the long-range financial outlook for Medicare and Social Security often focuses on the exhaustion dates for the HI and OASDI Trust Funds. . . A more immediate issue is the growing burden that the programs will place on the Federal budget well before the trust funds are exhausted. . . Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any net new income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.” (Emphasis added).

Notably, the 2009 trustees wrote this under a section entitled, “Why is Reform to Improve the Social Security and Medicare Imbalances Needed?” The trustees emphasized that a true understanding of program financing needs to look beyond the evolution of its trust funds and at the budgetary strains that arise whenever expenditures exceed tax income. This language (which closely resembled language in several previous summaries) was authored by the four trustees who serve in the Obama Administration cabinet: Treasury Secretary Tim Geithner, Labor Secretary Hilda Solis, HHS Secretary Kathleen Sebelius and SSA Commissioner Mike Astrue.

I mention these authors only because the Ombudsman stated that “Some, mainly on the left, didn’t like (the Post’s) story, while those on the right did.” Putting it thus creates the misimpression that there is a left-right divide over the facts presented by the Post about how Social Security operates within the larger budget. That’s not the case; among the non-partisan scorekeepers there is a longstanding consensus on the financial realities detailed in the original article.

But no matter whether one looks at the program from a unified budget perspective or from the perspective of its own trust funds, one reaches the same conclusion: Social Security finances need to be addressed. If one takes a purely “unified budget” perspective, there is clearly a significant problem already: the program is adding substantially to the deficit and will add far more in the years to come. But even from a pure trust fund perspective, program finances are on an unsustainable course best corrected by prompt action. This year’s trustees’ report summary (which I signed) makes the point:

Interactions between the Social Security and Medicare programs on the one hand and the larger federal budget on the other are inevitably and appropriately subjects of public discussion and debate. Whether viewed from the narrower trust fund perspective or from the wider unified budget perspective, the financial challenges confronting both programs must be addressed. From the trust fund perspective, both programs face projected shortfalls that necessitate correction sooner rather than later if balance is to be restored without large, abrupt benefit reductions or tax increases.”

Ombudsman Error #2: Working “precisely as planned?

The Ombudsman’s piece also contained this mistaken passage:

The huge number of baby boomer retirees will continue to be paid largely with payroll taxes, plus — very important — the proceeds from $2.6 trillion in government bonds. The Social Security Administration bought these bonds from the Treasury during the years when the trust fund was intentionally building up a surplus of payroll tax receipts because the baby boomers hadn’t started to retire. The 1983 reforms to Social Security, agreed to by Democrats and President Reagan, designed it this way. It’s working precisely as planned. (Emphasis added).

This is a myth – a widely-believed myth, but a myth nevertheless. What actually happened in 1983 was that this pattern of large surpluses followed by large deficits was not properly anticipated, so no mechanism was established to ensure that the surpluses could actually be saved so as to help get us through the deficit years that have now arrived.

The evidence of this is pervasive and overwhelming. I review some of it in my book “Social Security: The Unfinished Work,” and in a shorter Hoover Institution Policy Review article. There are the statements of Greenspan Commission Executive Director Robert Myers (“It wasn’t planned.”); of Senator Daniel P. Moynihan (“(I)t has come upon us almost unawares”); of the House Ways and Means Social Security Subcommittee Chairman Jake Pickle (this key legislative author actually argued that a trust fund buildup would “not likely be tolerated by the public”); then-Assistant Comptroller General Lawrence Thompson (“(T)he currently scheduled buildup of Social Security reserves was not planned.”) and in materials prepared by SSA for the 1989 Social Security Advisory Council (“The buildup and subsequent drawdown of the trust funds is largely an unintended result of the 1983 Amendments.”).

One especially good resource on this history available online is a 1997 Congressional Research Service report on the 1983 amendments, which states clearly:

Various misperceptions of their intent have developed over the years, among them being that Congress wanted to create surpluses to ‘advance fund’ the benefits of post World War II baby boomers. . . There is, however, little evidence to support the view that the surpluses were intended to pay for the baby boomers’ retirement.

For years it was widely understood that this was not a deliberate plan but a problem borne of incomplete analysis. This is why a number of bipartisan technical panels thereafter urged the program’s actuaries to refine their methods to ensure that the mistake was not repeated in the future. In recent years, however, the 1983 reforms have become increasingly mischaracterized to the effect that the annual cash deficits dawning before us are not a problem but simply the next stage of a long-intended plan.

If this were simply a matter of testing one person’s subjective remembrances against another’s, the issue might be arguable. But the metrics employed by policy makers in 1983, however, conclusively settle the issue. When the reforms developed by the Greenspan Commission and Congress were scored, the balance of the Trust Fund was not even counted in the calculations. Future interest earnings of the Trust Fund were also ignored. There is simply no way to square 1983’s scorekeeping decisions with an intent to pre-fund the Boomers’ retirements by building up a large Trust Fund.

It’s not totally surprising that the Ombudsman would make this mistake, given how pervasive the myth of an “intentional” Trust Fund buildup has become. But given that his piece had the potential to undercut the reporter’s work, the Ombudsman should have taken greater care to get these facts right.

In sum, the Washington Post had printed an important story about Social Security finances, one generally consistent with the analyses of non-partisan scorekeepers. In response to complaints from outside parties, the Post’s Ombudsman published a follow-up piece that got some critical points flatly wrong. That’s too bad. The public should know the salient facts of Social Security finances, even if they’re facts that not everyone chooses to emphasize.

Charles Blahous is a research fellow with the Hoover Institution, a senior research fellow with the Mercatus Center, and the author of Social Security: The Unfinished Work.


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