Social Security Redux

With all eyes focused on Obama’s medical reform or on Afghanistan or on the economy and the unemployment rate (aside from those eyes watching football and other sports and thinking about Tiger Woods among other diversions–in essence, most eyes, in our relatively primitive, political culture), there may be a hidden drama of enormous negative import taking place.

Kent Conrad, a Democratic Senator from North Dakota, is leading an effort to get Nancy Pelosi (and President Obama) to cede the power of Congress to control budget and taxes to an independent commission that will allow it to slash Social Security and partially privatize it (what George W. Bush attempted in his second term–it never got out of committee–but in his case, I believe, the goal was the ultimate abolition of a government run retirement program).

The reason Conrad can even think about getting away with this is that the average person–I suspect even you, gentle reader–is of the belief that Social Security is in great financial difficulties, if not “flat broke,” to use the deceitful characterization of our unlamented previous president.

But the truth is exactly the opposite. I will quote the words of the country’s leading health expert, a Senior Fellow at the moderately liberal and prestigious Brookings Institution, Henry J Aaron (an equal in his field to his namesake in baseball).

Speaking on May 14, 2009, Aaron says "I think the Social Security trust funds report should be interpreted as worse news than last year, but actually better than the news that has been on the average for about the last 15 years. The Actuary's projections have been pretty much constant over that period. The system has enough money until sometime late in the 2030s or early 2040s. It does face a long term deficit, and the sooner we deal with that problem the better, but there is really no cause for hand ringing that the sky is falling. There is a steady warning that it is time for Congress to face this problem and deal with it. Furthermore it’s a relatively easy problem to deal with. Small adjustments in revenues or in benefits would be sufficient to put the system on a steady financial course for the indefinite future."

Many good books have written, including two I recommend (though a little dated): Social Security: The Phony Crisis by Dean Baker and Mark Weisbrot, 1999 and Is Social Security Broke? A Cartoon Guide to the Issues by Barbara Bergmann (a distinguished economist) and Jim Bush. But I recommend above all–the best single article I have read on the subject–“A Question of Numbers,” by Roger Lowenstein which appeared in The New York Times Magazine, January 16, 2005 (and can be read in total, just by getting to it, though I did have trouble printing it).

A quote from the Lowenstein article: “What's more, there is a strong case to be made that the agency is erring on the side of being overly pessimistic. If its more optimistic projection turns out to be correct, then there will be no need for any benefit cuts or payroll-tax increases over the full 75 years.”

Again, from Lowenstein: “No one can definitively predict that outcome, either, of course, but David Langer, an independent actuary who made a study of Social Security's previous projections compared with the actual results in 2003, thinks the ''optimistic'' case is its most accurate. [The trustees make three different projections–DM] Over a recent 10-year span, the trustees' intermediate guesses turned out to be quite pessimistic. Its optimistic guesses were dead on, and its pessimistic case -- sort of a doomsday situation -- was wildly inaccurate.
And, contrary to widespread belief, recent demographic trends have been modestly better (from an actuary's gloomy standpoint) than anticipated. For instance, longevity hasn't increased as much as expected. Partly as a result, since 1997 the agency has pushed back, by 13 years, the date at which it projects its reserves will be exhausted. In other words, as the cries of impending doom started to crescendo, the guardians of the system have grown more optimistic.”

But no doubt, the unusual economic weakness that exists right now is likely to slightly worsen things, as less employment means less receipts, although–and this is ugly but perhaps true–if life expectancy is negatively affected by the Great Recession, and probably it is, the Social Security fund benefits.

What deceives some, and scoundrels use this to confuse and mislead, is that the money coming in from workers will, in about 8 years, fall short of the amounts being paid out–or if you like social security will have a deficit. Suppose, however, we take two cases, in which the money you are earning is less than the money you are paying out for food, clothing, necessities and luxuries. In case one, you are in deep do-do, because you have no savings to draw upon. But in case two, suppose you have one million dollars in government bonds. You can make up the difference in case two by using the interest and drawing down the amount you own.

This is exactly the position Social Security is in. The surpluses of the past decades have been invested in US government bonds–it owns more than two trillions of dollars of these. It will, in 2018 (or whenever the point is reached) begin using the interest from these bonds to pay fully those it owes–retirees, those on disability and others. After the late 2020's, it can begin cashing in the bonds to make its payments. In about 2040, it will cash out these bonds and at that point it will only be able to pay about 75% of what it legally owes to retirees and others.

But wait. Before this induces the gotcha’s by the anti-Social Security crowd–probably no one reading this is in this crowd [if anyone is reading this (excuse my anxiety)]-- the 75% people will be getting–ADJUSTED FOR INFLATION–will be more than what you or I are getting, if you are retired as I am. This I will try to show with a numerical example, but note first the Social Security payment system is a (progressive) retrieval system. (Progressive, because those making lower incomes receive as Social Security payments a higher percentage of their incomes than those making very high incomes.)

Suppose you are earning $40,000 and you earn one-half of median income. (Actually of course, the situation is much more complicated because people make different amounts during their lifetimes and there is also inflation.) Suppose this amount–$40,000--today, receives 40% in Social Security payments or $16,000 a year. Then, suppose persons who are earning one-half of median income receive, in 2040, $60,00 in real (inflation-adjusted) income, the result of average yearly increases of about 1.3 %, which is way below the historic level of real wage increases (over the years 1989 to 1996, for example, real wages rose 2.6% a year) and unless there is an utter catastrophe ahead, wages should rise at least this minimal rate and probably will do much better.

Anyway, 40% of $60,000 is $18,000. The person receiving 75% of what he is legally due in Social Security will be getting 12.5% more than what a similar economically positioned person receives today. Keep in mind, this figure is adjusted to inflation. (The recipients of Social Security in 2040 I am talking might, because of inflation, be receiving $30,000, depending on the rate of inflation, and when adjusted, it will be equal to what $18,000 buys today.) In other words, in the worst case scenario, we in no way have a disaster.

But go back to Aaron: “Small adjustments in revenues or in benefits would be sufficient to put the system on a steady financial course for the indefinite future." I think what he has in mind is that raising the SS tax from the 6.2% level on both the employee and the employer by about one point, to 7.2% (on each) would solve the problem, plain and simple. Or better yet, follow Medicare. It taxes people 1.45 %, with no limit on income, whereas Social Security has a limit on the income which can be taxed (which is adjusted for inflation) but is now approximately $102,000. Changing this cap on taxes to what Medicare does would, I believe, probably solve the problem or come close. At the very least, we could go a long way towards a “solution”–that is, a situation where for 75 years no problem is projected–simply by increasing the amount of income that is subject to Social Security taxes to, say $250,000 (adjusted yearly, as now, for inflation).

Finally, options I might not prefer, but ones which would solve the problem (and be in keeping with Aaron’s “small adjustments . . . in benefits”) would be to increase over time the age when benefits are available. This is being done and we are in the process of moving the age from 65 to 67 (and I think at this moment, the regular Social Security payment is now made at 66), but it could be phased in over time to 68or 69. This is less of a burden, some argue, since life expectancy has been increasing. But I would prefer the tax on higher incomes be increased.

Given all this, why is Kent Conrad doing what he is doing? And will Pelosi and Obama permit him and others like Senator Bayh to do this? In many ways Social Security is as important to the well-being of Americans as a good health plan. Without Social Security, nearly 50% of the elderly would be classified as
poor (47.6%), while with Social Security, the percentage falls to 11.9%.

One last point: Medicare does have a problem. As Aaron puts it, “In the case of Medicare the prospects as indicated by the trust funds reports this week (this was a speech delivered May 14, 2009) are far more serious than in the case of Social Security. There are smaller reserves for hospital insurance, so the system is projected to exhaust those reserves much sooner.” But to parlay Medicare’s problems with Social Security is nasty and duplicitous. Let’s hope, as in 2005, with Bush’s SS fiasco, common sense prevails, aided by the appropriate emotional feelings people have about Social Security.