Friday, December 4, 2015

New paper: “Social Security’s Impending Insolvency — Just the Facts”

From Mark Warshawsky at the Mercatus Center. Check it out here.


Arne said...

"Under current law and absent reform, Social Security is projected to suffer cash-flow shortfalls — gaps between payroll taxes and spending on benefits — forever. "

It bothers me to call this a 'fact.' A PAYGO program with an interest earning reserve should project cash-flow shortfalls - forever, so the statement is meaningless without context. Besides, it is false. Under current law, when the reserve is gone, benefits are will be required to drop so that there is no shortfall.

We need to do something, but "just the facts" is a strong title that is not merited.

WilliamLarsen said...

Arne makes a good point. “Social Security’s Impending Insolvency — Just the Facts” implies that Social Security be definition can be insolvent. Insolvent infers that there is liability greater than assets.

In Nestor v Flemming, the US Supreme court ruled that Social Security benefits are not guaranteed. Congress reserved the right to alter, change or repeal any portion of the social security act without liability.

In ways it is similar to the dispute over retired military being eligible for life time healthcare. Recruiters (DOD employees) routinely told prospective recruits (including me that they would get free life time healthcare after 20 years service. This proved to be wrong and the courts ruled that only Congress could legislate this and they did not. DOD employees, recruiters, were not authorized to make this offer to anyone. Likewise many politicians have routinely stated Social Security is a earned benefit or that they are promised or that they are guaranteed. However legislation makes it clear that they are neither guaranteed nor promised, simply a benefit that under current law pays only what can be paid out of the combined trust fund, dedicated payroll tax and tax on benefits.

This brings us back to what is Social Security? Politicians have clearly been part of the cover up as to what Social Security is. The AARP certainly has not helped as well as other organizations.

It is true that Social Security under current law can never be insolvent. However, I have used the term insolvent to identify the scheduled benefits v the payable benefits for decades. Is "scheduled" v "Payable" benefits the correct term? Anyone have a better term to use?

Social Security's objective is not to reduce poverty for it if it is, it does not specify it in any way, but simply pays a benefit based on wages subjected to Social Security taxes. I would call this the shot gun approach, no accuracy, with little effectiveness beyond a given distance, in this case ability to pay ones own way.

When You have a program based on woman having a consistent number of babies that has a lead time of 65 years, you are trying to predict 65 years ahead that things do not change. No longer is the program dependent on today's resources, but the resources of decades in the future. When birth rates decline the amount of dedicated work from one workers to support one beneficiary must increase. It is not rocket science.

It is a mathematical certainty that either payroll taxes increase or benefits decrease. Benefit decreases include increase in retirement age (pay more and you collect fewer years). Doing nothing means benefits decrease.

A Pay-Go-Program has the inherent risk of things changing. Look at IL pension benefits, $100 Billion in the hole pay-go-pension that was never paid for while the employees were working leaving it to future taxpayers to fund who did not receive any of the benefits for which their new taxes will be used. Similar to Social Security. Workers paying for current beneficiaries for which they obtain nothing for their tax.

It is one thing to help those in need. The many can take care of a few, but attempting to pay everyone something requires a huge tax.

What many refuse to accept is that the total of all payroll taxes paid since 1937 is about $2.7 Trillion including interest. Clearly not enough to fund the current 44 million equivalent age 65 and over beneficiaries let alone the 160 million workers who have accrued some form of benefit. The money is gone. Do we continue on the same road or cut our losses? When you enter a mine field you stop. The best option is to retrace your foot steps exactly. Going forward could prove perilous.

Today Social Security is of no benefit to current workers. It costs more than it is worth to them as individual cohorts. Do we reduce the payroll tax and make a welfare benefit based on income/assets thus greatly reducing the cost of SS while at the same time greatly increasing the ability of current workers to save more to become independent?