Depending upon whom you ask, the Social Security trust fund is either the “greatest accomplishment in the history of government” or nothing more than a “collection of accounting tricks designed to benefit the political class at the expense of the working class.” Both statements have been used to describe the exact same system.
Compounding the problem is the fact that both sides point to the same source of data, the Social Security Trustees Report for 2011, to support their claim. Proponents of the system point to the projection that the system is projected to be solvent until 2036 (page 1). The other side of the argument points to a different page in the same report (page 14) that says that the system has made 20.4 trillion dollars of promises for which there is 2.5 trillion held in trust leaving a 17.9 trillion dollar shortfall. How are polar opposites possible?
In Washington, the number of beans is never as important as how you count them. In 1944, the Chairman of the Social Security Board testified that “There is no question that the benefits promised under the present Federal old-age and survivors insurance system will cost far more than the 2 percent of payrolls now being collected.” He projected that real cost of the system was closer to 7% of payrolls.
Of course, Mr. Altmeyer counts in one way, and Congress counts in another. Congress treats payroll taxes as revenue, and includes the cost only when it is paid. So payroll taxes collected in 1940 are revenue in 1940, where as the promises associated with that revenue are a distant future expense. Those costs from 1940 would filter slowly into the system through 1990. So when someone says that there is a surplus or that Social Security has “made money every year for 70 years” it is based on the idea that the promises to take that money have no cost. It is easy to make money when you take money from 16 people and only count the cost of 1 of them.
In other words, payroll taxes were basically free money. It should surprise no one that Congress spent it like drunken sailors. Congress waived every one of the payroll taxes increases promulgated under the original law. Instead increasing the costs to the recommended level, Congress increased benefits in 1950, 1952, 1956, 1958, 1960, 1961, and 1965. While costs increased, the cost of old age retirement insurance would not reach the 7% level requested in 1944 until 1981! By 1983 – the system was insolvent and had to borrow funds to pay benefits.
In 1983, the Social Security system had zero cash, and the overhang of costs that had been accumulating untabulated since the start of the system. Washington chose to ignore the long-term costs, and came up with a short-term solution, raise taxes and cut benefits. The reality is that every payroll tax dollar received was either spent on early expenses or held in the trust against the accumulating costs of promises held in the system.
We increased taxes and cut benefits 3 different times; in 1977, 1983, and 1993. Each time we were assured that the system would be sound for the next 50 years. Each time the promise lasted last than 10 years. In 1977, the government projected that the system would be whole for the next 50 years, and within 6 it was completely insolvent.
Supporters of the system believe that these costs will be carried by future generations. Ben Bernanke has said that the higher costs should be borne by future generations because he believes that they will have a higher level of productivity to offset the higher costs. In this sense they justify the accounting that the costs should be associated with the future expense.
His statements are not supported well by the data. When Social Security says that the system is solvent until 2036, it assumes that future generations will be contribute to the system at the same rate as they have in the past. By comparison, workers of today have very low income tax burdens. In 2010, nearly 50% of the public has no income tax obligation. It is a generous assumption that future generations will be able to maintain the same contribution rate in the face of rising income taxes needed to support the national debt. Basically, the assumption is that future generations will pay the taxes that we ourselves haven’t.
How reasonable is that assumption. The latest data coming from Pew Research suggests that it is highly unlikely. Their research shows that poverty in households lead by someone 35 and younger has doubled over the past 40 years to 22% . So we are depending upon a group of people to keep retirees out of poverty when the group has a hard time keeping itself out of poverty. Beyond being unable to escape poverty, this group has historic levels of look-through debt from the government on a per capita basis.
The system has made 20 trillion dollars of promises, and holds about 2.5 trillion in funds. The system increases the costs of production here by 15.3%. It is literally an anti-tariff, encouraging companies to produce goods elsewhere. And there are those who want to increase payroll taxes on the rich. One needs to explain to the next generation why we increased taxes to shore up our retirement system instead of controlling their debt. In the end, tax increases do nothing but shift more of our tax base to retirees and away from debt control and encourage companies to move more jobs off-shore. The status quo is insane. We need to recognize the costs of the system, and more importantly we are going to need to figure out how to pay for them.