Tuesday, October 16, 2012

Is it the end for Social Security as a self-financing program?

Writing for the Mercatus Center at George Mason University, Social Security Trustee Chuck Blahous raises concerns that Social Security’s self-funding status – which has help maintain both political support and budget discipline over the years – is at risk.


  • FDR designed Social Security as a self-financed program to distinguish it from welfare, to impose fiscal discipline within the program, and to ensure all working people had a sense of having earned their benefits—all of which worked together to protect benefits from political pressure and budgetary competition.
  • Since its inception, Social Security has enjoyed a unique level of political support because it was structured on the self-financing principle. With relatively minor exceptions, there remained a strong bipartisan consensus through the mid 1990s to preserve this structure.
  • Over the past several years, commitment to this practice has progressively weakened as lawmakers have become less willing to tax workers, particularly lower-income workers, at the level required to finance rising benefit costs.
  • While several policies had already been enacted to shift Social Security financing burdens tacitly from individual payroll tax payers to the general government fund, the self-financing link remained formally intact until the payroll tax cut was enacted in 2010 and made effective for 2011–12.
  • In 2010, President Obama and Congress formally severed the Social Security program’s contribution-benefit link with the enactment of the payroll tax cut, which included a provision to tap general revenues to subsidize Social Security benefit payments. 
  • If Social Security’s contribution-benefit link continues to deteriorate, it could transform public perceptions of the program into something more akin to welfare.


WilliamLarsen said...

Andrew, self financing to me is one that is designed to pay for itself. Based on the testimony of

A. J. Altmeyer, Chairman
Social Security Board Before the House Ways and Means Committee November 27, 1944

“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. As I pointed out in my testimony of last year, none of the actuarial estimates which have been made on the basis of present economic conditions and other factors now clearly discernible result in a level annual cost of this insurance system of less than 4 percent of payroll.”

“Indeed, under certain assumptions the level annual cost has been estimated to be as much as 7 percent of payrolls. On the basis of a 4-percent-level annual cost it may be said that the reserve fund of this system already has a deficit of $6,600 million. On the basis of 7-percent-level annual cost it may be said that the reserve fund already has a deficit of about $16,500 million.”


The concept of Social Security never got to the design stage. It was never validated as workable program. It is built on the very same model as Mr. Ponzi.

Arne said...

William needs more context to understand Altmeyer. Payroll taxes were planned to be phased in over the course of the 1940s, but as of 1944 Congress had delayed the increase 3 times. Altmeyer was telling them they needed to follow the plan.

Pay as you go is a reasonable plan for self-financing. Unlike a Ponzi scheme, it can go on forever. Lawmakers simply need to admit that rising costs can be handled by increasing revenue.

"Congress formally severed the Social Security program’s contribution-benefit link"
Not so. Social Security infrastructure was used to provide a stimulus payment to combat the downturn. The associated payments from the general fund were well-defined in order to maintain the contribution-benefit link even as this pass-through occurred.

WilliamLarsen said...

Arne wrote "Pay as you go is a reasonable plan for self-financing. Unlike a Ponzi scheme, it can go on forever. Lawmakers simply need to admit that rising costs can be handled by increasing revenue."

Do you understand math at all? Altmyer stated clearly the payroll tax had to be 6% if not 7% in 1943, not the 2% that was needed. Altmeyer clearly stated and was correct that future generations would pay more for their benefits than they were worth. We reached that point for those born around 1944.

You insinuate a Ponzi scheme cannot go on forever, but that a paygo can. The problem with the pay-go of OASI is;

"the OASDI program has operated on a largely pay-as-you-go (PAYGO) basis, the level of contributions for each generation of workers does not directly relate to the benefits these workers will receive."

"The Increased Payroll Tax scenario raises payroll-tax rates, beginning with the year of Trust Fund reserve depletion, to finance scheduled benefits fully in every year. The payroll-tax rate increases from the present law amount of 12.4 percent beginning in 2036. The payroll-tax rate increases to 16.21 percent for 2037 and continues to increase year-by-year, reaching 16.64 percent for 2085."

In simpler terms, I believe Arne thinks making future generations pay for today's generations wants and needs is a good idea. Take from the future, they cannot vote yet. I call this theft and immoral.

What happens when those being ripped off or conned decide to stand up and vote for candidates that radically change OASI? EVer play hot potato? Will you be the generation holding an empty promise because others decide to repeal OASI?