The Heritage Foundation's David C. John has a new web memo online regarding Social Security's slip into deficits for this year: Starting this year, Social Security will spend more in benefits than it will receive from its payroll taxes. This is somewhat unexpected as just last year, the 2009 cash surplus was predicted to be about $80 billion. Even in May of this year, the program's actuaries predicted a roughly $19 billion surplus. However, they failed to allow for the full effects of the recession, and the soaring unemployment both reduced tax collections and increased the number of workers who were forced to take early retirement. This is very bad news for taxpayers, but worse is yet to follow. The 2009 deficit of about $10 billion will be followed by a 2010 deficit of about $9 billion. If there is a strong recovery--which is questionable at best--the program could briefly return to surpluses. But by 2016, deficits will return and continue permanently. A far more likely scenario is that Social Security will run deficits from this point on. The Reality of the Trust Fund These deficits do not mean that benefits will be cut, but they do increase the burden on taxpayers to pay them. On top of the $1 trillion-plus deficit predicted for this year to pay for the Obama Administration's programs, taxpayers will have to find still more money to pay Social Security's deficits. It is true that a trust fund exists that has been funded by $2.4 trillion of Social Security surpluses since 1983, but there is no real money in that trust fund. As the Office of Management and Budget said in 2000, "These balances are available to finance future benefit payments ... only in a bookkeeping sense. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits, or other expenditures."[1] Congress has already spent every penny of that money, and all that is left are IOUs that must be repaid by the same taxpayers who paid the extra taxes in the first place. Taxpayers, not the trust fund, will end up covering Social Security's deficits. Massive Deficits and an Even Worse Future This May, Social Security predicted that it would first run deficits in 2016, and after that the picture was grim. After adjusting for inflation, annual deficits were predicted to reach $68.5 billion in 2020, $170.4 billion in 2030, and $293.6 billion in 2035. Now those deficits will come much sooner than expected. In net present value terms, Social Security owes $7.7 trillion more in benefits than it will receive in taxes. This consists of $2.4 trillion to repay the special issue bonds in the trust fund and $5.3 trillion to pay benefits after the trust fund is exhausted in 2037. In other words, Congress would have to invest $7.7 trillion today in order to have enough money to pay all of Social Security's promised benefits between 2016 and 2083. This money would be in addition to what Social Security receives during those years from its payroll taxes. According to the 2009 Trustees Report, Social Security is projected to owe $7.4 trillion after 2083, making a perpetual deficit of $15.1 trillion. Last year's number was $13.6 trillion. This means that Social Security's total deficit continues to grow well beyond the 75-year projection period. Therefore, any reform that just eliminates deficits over the 75-year window will not be sufficient to solve the program's problems. Many opponents of reform claim that raising payroll taxes by about 2 percent (the average percentage difference between revenues and outlays over the 75-year period) would solve Social Security's problems. The reality, however, is that the program's future deficits are projected to be large and growing, so this tax increase would still leave a huge shortfall. Short-Term Fixes There are three ways to fix Social Security: The first two will take years to have a real effect. Accounts of any size need to grow for about 20-25 years before they are large enough to pay much in the way of retirement benefits. Moreover, benefit changes are politically feasible only if current retirees and those close to retirement are not affected, which means that it would be several years before benefit changes start to take effect. On the other hand, some prefer tax increases because they would immediately pump money into Social Security. But that band-aid would just delay the start of real long-term reform and make it much more likely that Congress would keep taking the easy way out by raising taxes. Fix Social Security Now or Face the Consequences Social Security's future has arrived early. After years of talk about how well-funded the program is, the reality is that never-ending deficits will eat up money that could be used for other programs or tax cuts. Despite reassuring words that these deficits are temporary, the reality is much worse. These deficits are likely to be permanent, and the only way out of this cash crunch is to fix the program. David C. John is Senior Research Fellow in Retirement Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation. [1]Office of Management and Budget, Budget of the United States Government, Fiscal Year 2000:
Analytical Perspectives (Washington, D.C.: U.S. Government Printing Office, 1999), p. 335.
Wednesday, September 30, 2009
New paper: Social Security's Unexpected Deficits Show Urgent Need for Reform
Tuesday, September 29, 2009
The Today Show Discusses Social Security Reform
Money Magazine writer Janice Revell discusses Social Security reform on the Today Show. Here's the clip, much of which is quite good, but there are a couple items on Social Security reform I think are worth fact-checking. Visit msnbc.com for Breaking News, World News, and News about the Economy Revell first says, "The truth of the matter is the Social Security system is not going broke, it is in far better shape, really, than you probably expect … I think what makes it safe, if you look at the actual numbers if the government did absolutely nothing and said you're on your own people for the next 30 years there would be enough money in the system to pay full benefits. Even after that, there would be enough money for decade and decades to pay very high benefits." In a sense she's clearly correct: the program is current solvent through the late 2030s and will be able to pay around three-quarters of promised benefits thereafter. But the problem of paying for Social Security – which is a problem for the government, and therefore a problem for you and me – begins in just a few years. And that burden will be large: by 2025 Social Security will run a deficit equal to around 1 percent of GDP; the deficits will continue and increase in perpetuity thereafter. This means that, in addition to tackling the even larger cost of fixing Medicare, the government will need to dedicate an extra 5 percent of its resources to Social Security. Entire cabinet departments don't take up that much money, so unless we want to raise taxes even more we'll need to make some changes. Revelle then says that there is plenty of time for the government to get on top of the problem and that reform will probably constitute some minor increase in payroll taxes and some taxation (meaning, presumably, reduction) of benefits. Let's think about this: If we wanted to fix Social Security permanently today by raising taxes, we'd need to increase the payroll tax rate from 12.4 percent to around 15.8 percent, a 27 percent increase in what is already the largest tax paid by most workers. Again, that's the amount if we acted today and if we wanted with reasonable certainty not to have to raise taxes again in the future. If we put reform off, as Congress has a tendency to do, then the costs get even bigger. It's all in the eye of the beholder, but the numbers seem a bit more sobering than Ms. Revelle's description of them should warrant.
Hoyer skeptical of calls for ad hoc COLA payments
CQ TODAY ONLINE NEWS – PENSIONS & RETIREMENT Idea of $250 Payment to Seniors Gains No Traction With Hoyer By David Clarke, CQ Staff House Majority Leader Steny H. Hoyer on Tuesday declined to throw his support behind providing senior citizens with a one-time payment of $250 to make up for the expected lack of a cost-of-living boost for Social Security recipients next year. Senior citizen groups and many members of Congress want some action taken and have been advocating that Social Security recipients receive a $250 check, as would be the case under legislation (S 1685, HR 3597) introduced by Sen. Bernard Sanders, I-Vt., and Rep. Peter A. DeFazio, D-Ore. They argue that while inflation in general may not be on the rise — thus making a monthly cost-of-living adjustment (COLA) unlikely in 2010 — medical expenses and some other bills for seniors are increasing. Hoyer, D-Md., did not explicitly say he is against providing such a payment, but he made the case to reporters that Congress has already taken action this year to help seniors. As part of the economic stimulus bill () enacted in February, seniors received a one-time payment of $250, and last week the House passed a bill, 406-18, to prevent any senior from having their Medicare Part B premium, which covers physician services and outpatient care, increased next year. "Frankly the Congress has taken very substantial action in consideration of the needs of our seniors," Hoyer said. He also pointed out that Social Security recipients received a 5.8 percent cost of living adjustment this year, which is the largest since 1982. But members of Congress do not like to disappoint seniors, who are active politically. And Democrats are especially attuned to the issue now as they work on a health care overhaul that has some seniors concerned about its impact on their benefits. Consequently, Hoyer could be a lonely voice of protest against a Social Security boost, as he was last week when he was one of 18 members to vote against the Part B bill (HR 3631). Hoyer argued 73 percent of seniors are already protected from such premium increases under law when they are not scheduled to get a boost in their Social Security payments and that Congress had to start making tough decisions given the state of the government's budget. "I don't know how many of you go to sleep at night worried about whether Ross Perot can pay his premium, but this will freeze Ross Perot's basic premium from going up. I think that as well-meaning as this legislation is, it is not about poor seniors," Hoyer said on the House floor last week. The National Committee to Preserve Social Security and Medicare, a group that advocates for seniors, is holding an event on Capitol Hill Wednesday to try to build support for a one-time payment for seniors.
Sept. 29, 2009 – 12:56 p.m.
Upcoming event: THE FINANCIAL AND ECONOMIC CONSEQUENCES OF AN EXPLODING DEBT
THE FINANCIAL AND ECONOMIC CONSEQUENCES OF AN EXPLODING DEBT Tuesday, October 6, 2009 Noon–1:30 p.m. ET To attend in Washington, D.C., RSVP at http://www.urban.org/events/FirstTuesdays/rsvp.cfm, e-mail If you're not in Washington, D.C., or can't leave your computer, listen to the audio webcast by registering at http://www.visualwebcaster.com/event.asp?id=62295. Panelists: The Congressional Budget Office's most recent long-term budget outlook declared that "current policies are unsustainable." Translation, according to tax scholar Len Burman: if we don't change course, we're doomed. America will celebrate its tricentennial with IOUs 6.5 times its total economic output if current policies continue, CBO says, and that is under implausibly optimistic assumptions about the economy. Join the conversation as a panel of experts considers At the Urban Institute 2100 M Street N.W., 5th Floor, Washington, D.C. Lunch will be provided at 11:45 a.m. The forum begins promptly at noon. Webcast note: You will need to register for the webcast on the same computer you will use to listen. You can register anytime up to and during the event. To access the webcast, you can go to the same link where you registered, http://www.visualwebcaster.com/event.asp?id=62295.
paffairs@urban.org, or call (202) 261-5709.
Monday, September 28, 2009
New paper: Social Security Rules and Labor Force Participation of Older Workers: Evidence from Chile
This paper from Alexandra Cox Edwards and Estelle James just popped up on my SSRN email. Titled "Social Security Rules and Labor Force Participation of Older Workers: Evidence from Chile" it looks at how the shift from a traditional DB pension to a DC system of personal accounts has influenced incentives to delay retirement. Here's the abstract to the Edwards/James paper: Recent research has argued that incentives stemming from social security systems influence the worker's decision to retire. The experience of Chile, which radically changed its system in 1981, offers an opportunity to test this hypothesis. The new system tightened access to early pensions, replaced an actuarially unfair defined benefit plan with an actuarially fair defined contribution plan, exempted pensioners from the pension payroll tax and allowed widows to keep their own pension in addition to their survivor's benefit. Although the old system is being phased out, since 1981 the two systems have co-existed. Using probit analysis of the behavior of a retrospective sample of new and old system affiliates, we estimate the impact of the new social security rules on the probability of dropping out of the labor force, for older workers. We find large effects. Age of pensioning has been postponed. Labor force participation is much higher among affiliates of the new system compared with the old, especially for pensioners and women. This is not simply due to selection: Aggregate participation rates have increased as the new system's share of total affiliates has risen. As I and my co-authors showed in this paper, incentives to remain in the workforce under the U.S. Social Security program are quite poor. The typical person who chooses to work and pay Social Security taxes an additional year receives only around 2.5 cents in additional lifetime benefits for each dollar of additional taxes they pay. If we wish people to delay retirement we need to give them reasonable incentives to do so.
Social Security job opening at Congressional Research Service
CONGRESSIONAL RESEARCH SERVICE Washington DC Domestic Social Policy Division Two Public Policy Analysts ($86,927 - $113,007) The Congressional Research Service (CRS), Domestic Social Policy Division is seeking two analysts for its Income Security Section. CRS works exclusively for the United States Congress, providing policy and legal analysis to committees and Members of both the House and Senate, regardless of party affiliation. ANALYST IN DISABILITY POLICY: The analyst will focus on issues such as: - Employment trends for persons with disabilities and mechanisms to support people with moderate to severe functional limitations - The interrelationships between federal programs and private mechanisms to improve the income security of persons with disabilities - The role of the federal and state governments and the private sector in the delivery, quality assurance, and financing of services (long-term care, income security, health, etc.) for persons with disabilities - Understanding and reconciling different definitions of disability that are utilized in research as compared to programmatic definitions ANALYST IN INCOME SECURITY (SOCIAL SECURITY): The analyst will work on issues related to programs for providing income security for: - The aged (e.g. Social Security retirement and disability benefits) - Disabled, (e.g. Supplemental Security Income (SSI)) - Unemployed (e.g. Unemployment Insurance (UI) benefits) SALARY: Both positions are being offered at the GS-13 level $86,927 - $113,007. APPLICATION PROCEDURE: Applications must be submitted by October 26, 2009. For more information and to apply online please visit: If you are unable to apply online, please call: Tel: 202.707.5627 to request an applicant job kit. CRS is the public policy research arm of the United States Congress and is fully committed to workforce diversity.
Sunday, September 27, 2009
The best way to pay for Social Security?
It's good to be optimistic about our ability to solve big problems -- goodness knows the power of positive thinking is about the only power we're showing these days. And financial analyst Schurenberg's source material is updated estimates from Social Security's actuaries of the financial effects of various reform provisions, summarized in a new paper from the Employee Benefit Research Institute. Schurenberg says "The new EBRI research shows that it won't really cause a huge amount of pain. We just have to get to it." For instance, "One way to fully fund Social Security is to apply payroll tax to all wages. At the moment, taxes cease after your income hits $106,800. That covers the 2% gap with 0.19% of national payroll left over to have a party to celebrate." The problem is with that of this option imposes an additional 12.4% fewer tax on all earnings, with no additional benefits paid in return. This would push top marginal tax rates well past 50%. Usually, tax exiles flee to places like the Cayman Islands or Monte Carlo; in this world, people could flee to Sweden to find lower taxes. But Schurenberg is also big on cutting benefits: "My favorite tactic is to tinker with the complicated formula Social Security uses to calculate benefits in such a way that future benefits rise at the rate of inflation rather than the rate of wage growth, as it does now. The adjustment is invisible because it still creates benefits that are nominally higher year after year, and the pain is gradual because it phases in slowly. And it's more than good enough: it adds up over time to 2.3% of the national payroll." The problem here is that price indexing, while keeping real benefits constant, implies lower benefits relative to pre-retirement earnings – that is, a lower "replacement rate" – and relative to taxes paid. This doesn't mean that more seniors will be thrown into poverty, but they'll also surely notice what's going on and many won't be happy. The key conclusion is that while fixing Social Security is easy on paper, the size of the shortfall means there will be significant pain no matter which route we choose.
Eric Schurenberg, writing at MarketWatch.com, is pretty confident.
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