Saturday, September 11, 2010

Does Social Security really have a perfect payout record?

A recent letter in the Washington Post repeats a talking point I've heard a number of times recently: unlike other sources of retirement income, Social Security has never missed a payment. Richard Joffe of New York writes,

The Sept. 4 editorial "Alan Simpson's truthiness" pointed out that by 2037, "Social Security's reserves will have been drained, and it will be able to pay only 76 percent of scheduled benefits." I agree that we should fix this problem. But we should also do something else. We should acknowledge that, on the day the reserves run out, Social Security will have succeeded in paying 100 percent of the benefits owed for 100 years.

In one sense, this is entirely correct: no one has ever received less from Social Security than what the law says they should receive. The problem, of course, is that the law can be changed. For instance, someone born in 1943 entered the system assuming they could retire at age 65; instead, they must work to 66 to receive the same benefits. Likewise, someone born in 1960 has to work until 67 to receive full benefits, which is an effective benefit cut of around 13 percent.

Likewise, the reason the government will never default on the bonds it owes to the Social Security trust fund is that it doesn't have to. If these costs prove too much of a burden, the government can simply reduce benefits making required repayments smaller.

The point isn't that we shouldn't have raised the retirement age; we should have and should continue to do so as one way to address the problems of an underfunded system. But one of the problems of a program that's controlled by elected officials who are reluctant to make tough choices is that these decisions get delayed, and the changes necessary get larger. So, contra what Mr. Joffe and others like to say, Social Security has missed some payments along the way.

1 comment:

Bruce Webb said...

Well I was with you until "changes necessary get larger".

Because they haven't. I mean you can cherry pick 1.86% 75 year gaps and 1.70% but the empirical reality is that between 1997 and 2010 the projected gap is down to 1.92% from 2.23% even given a change in actuarial period that should have been adding 0.05% or so per year for that reason alone. Turns out that "We CAN afford to wait". This may not persist but that fact is not as self-evident as argument proponents have held it to be over the last decade.