Monday, July 18, 2016

Blahous: Why a Social Security Fix Can’t Wait

Over at e21, Social Security Trustee and Mercatus Center fellow Chuck Blahous writes about the need for – as the Social Security Trustees often put it – prompt action on Social Security reform:

…financing corrections postponed from today until the early 2030s would need to take effect virtually immediately and be several times as painful, rendering enactment highly implausible.  It would be far likelier then that legislators would resort to subsidizing Social Security from the government’s general fund.  This would end longstanding arrangements through which Social Security has enjoyed unique popular support because it is perceived as a separate, self-financing program of benefits workers have earned with their payroll taxes.

Click here to read the whole article.


WilliamLarsen said...

"financing corrections postponed from today until the early 2030s would need to take effect virtually immediately and be several times as painful, rendering enactment highly implausible."

I am old enough to know that for the past nearly 50 years Social Security has been in the news about its impending inability to pay scheduled benefits. Between 1971 and 1983 SS-OASI's expenses exceeded payroll taxes. They waited until 1983 to enact increases in payroll tax, base, retirement age and began taxing benefits. The projection was that in 2064 SS-OASI would face the identical problem, but worse in 2064 - so much for a fix.

We can look back even earlier to 1950. In that year the fix was to enroll the undesirable workers who were not part of the original social security act of 1935. They were deemed undesirable because they had less than average wages, unsteady work and would be a drain on a immature program (their benefits would cost more than they would contribute in payroll taxes). However, they were enrolled in Social Security in groups over the next 13 years. This second tier of covered workers would pay taxes and not collect for some number of years thus providing revenue to pay the first tier of workers their benefits. Sounds a lot like a Ponzi scheme.

A. J. Altmeyer testified in 1943 and 1944 stating the payroll tax needed to be immediately raised to 6-7%, otherwise future workers would pay more for their benefits than they were worth. This would undermine the support for Social Security.

Robert Ball wrote that social security was an immature program in the first three decades. It paid meaningful benefits without paying meaningful payroll taxes. This is now referred to as the Legacy Debt.

2030 is 14 years away. Not much time to save for retirement. This means there is not much time to save to pay social security benefits.

There are only two ways to close the deficit: raise payroll taxes and/or reduce benefits.

If benefits are reduced, then the reduction would be about 25% in the first year after the trust fun is exhausted and would continue to drop by 1/2% a year.

If payroll taxes are increased, then workers pay more for the same scheduled benefit.

Raising the retirement age is both a tax increase and a benefit cut; You pay more and longer and receive the scheduled benefit, but for a shorter period of time.

Now some propose a change to the benefit formula. Of course this is the same a benefit cut.

There is no way around the fact that the dollar in benefits per dollar paid in payroll taxes is going to be lower. To put it in terms that is more understandable we could view it as buying a gallon of gas from Social Security v the Gas station on the corner.

The social security gas station would be selling gas for $4.61 while the gas station on the corner is selling it for $2.17. Who would buy gas at the Social Security gas station?

Arne said...
This comment has been removed by the author.
Arne said...

"A. J. Altmeyer testified in 1943 and 1944 stating the payroll tax needed to be immediately raised to to 6-7%"

Please provide a link.

My reading of Altmeyer is that he was simply encouraging Congress not to keep delaying the already planned raises, which were supposed to get to 6 percent (3 employee, 3 employer) in 1948. At the time the explicit plan was for the Trust Fund to be higher than the current target of 100 percent of annual expenses. Congress was delaying because the rapid economic turnaround after 1939 had caused the TF to reach 300 percent far sooner than expected and because many members (Rs and Ds)did not want government managing a large TF.

Congress did not listen. They delayed the first increase until 1950 and did not get to 3 and 3 until 1960.

WilliamLarsen said...

Link to A. J. Altmeyer

"(1) In the early years of the operation of the old-age and survivors insurance system, the actuarial value of the benefits paid are many times the actuarial value of the individual worker's contributions."

"3) It is a mathematical certainty that the longer the present pay-roll tax rate remains in effect, the higher the future pay-roll tax must be if the insurance system continues to be financed wholly by payroll taxes. Therefore, the indefinite continuation of the present contribution rate (assuming the system is self-sustaining, and the costs are shared equally by the employees and employers) will eventually necessitate raising the employees' contribution rate later to a point where future beneficiaries will be obliged to pay more for their benefits than if they obtained this insurance from a private insurance company."

"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."

"Another indication of the magnitude of the liability which the Federal Government has assumed can be obtained from the fact that the present value of the benefits payable to those now eligible amounts to approximately four and one-half billion dollars. Let me emphasize that this figure represents only the liabilities which the Federal Government has assumed for those persons already eligible for benefits. Since the reserve fund as of January 1, 1945, will be only six billion dollars, this leaves only a billion and a half dollars in the reserve fund to meet the liabilities which the Federal Government has assumed for the payment of benefits to the 69 million persons who have accumulated wage credits but have not yet died or reached the retirement age of 65.

"It is true that we are collecting at the present rate of 1 percent as much as we estimated in 1939 we would collect at 2 percent. However, this is because more people have become insured and larger wage credits, upon which benefits are based, have been accumulated by the workers insured under this system. Therefore, it is quite fallacious to assume that because we are collecting as much at the present 1-percent rate as we estimated in 1939 we would collect at the 2-percent rate it is not necessary to permit the increased rate to go into effect. A private insurance company that wrote twice as much business and, therefore, had twice as much premium income as it had previously estimated does not cut its premium rates in half, because it realizes that it has also assumed an increased liability. In my judgment, it is likewise unsound for the Federal Government to do so."

WilliamLarsen said...

Here is a link to the OASI and DI tax rates.

Keep in mind that A. J. Altmeyer was referring to OASI alone. DI was not implemented until 1957.

The combined OASI tax rate of 7% was reached in 1966 and the self employed paid 5.375% less than 6%.

Too little Too late.

Do you really want a politician managing 10.6% of your wages? The past 79 years clearly reveals congress is not who you want managing your retirement.