Four Things I Know About Social Security

1. It’s not going bankrupt in seven years.

Stephen Moore shouted this popular-but-bogus claim (over Bernie Sanders’ objections) on the April 5 episode of Real Time with Bill Mahr. It’s a common conservative talking point often put forward in publications like the Washington Times.

2020 is when the Social Security is projected to start paying out more than it takes in. (It already pays out more than it collects in taxes, but interest will make up the difference until 2020, according to the current Trustees’ Report.) This has to do with the retirement of the baby-boomers, and has been foreseen for decades. (If you’re a baby-boomer with an IRA, at some point you plan to start taking money out rather than putting money in. You don’t become bankrupt at that moment.) That’s why Social Security has been taking in more than it paid out since it was reformed by President Reagan and a Democratic Congress in 1983. (Then, the Social Security Trust Fund was only months away from hitting zero.) That’s how the Social Security Trust Fund accumulated its $2.7 trillion surplus.

The claims Moore shouted were “That money’s been spent already.” and “You can’t spend the same money twice.” He’s referring to the fact that the government-as-a-whole has not been building up a surplus (other than briefly at the end of the Clinton administration), so what the SSTF holds is not a stash of dollars or a pile of gold, but U.S. government bonds. In other words, the SSTF loaned its surplus to the rest of the government, which spent it. This has been demagogued as “raiding the trust fund” and somehow is supposed to make the whole idea of the SSTF illegitimate.

But nobody applies that logic to any other situation. When private pension funds hold big chunks of their assets in U.S. government bonds, or when individuals have government bonds in their IRAs, that’s considered the safest possible investment; nobody claims the money is “already spent”. Ditto for corporate bonds. Hasn’t the corporation “already spent” that money too? Or bank CDs — that money isn’t sitting in the vault; the bank loaned it to people who “already spent” it by starting businesses or building houses.

In short, “you can’t spend the same money twice” is flim-flam, and Stephen Moore and the Washington Times know it. (That’s why Moore had to shout. If people examine what he’s saying calmly and rationally, they’ll see through it.) The SSTF is holding $2.7 trillion in the safest possible investments. That stash will keep increasing until 2020, when the program will begin to tap it the way President Reagan and Speaker O’Neill pictured back in 1983.

2. It’s not a “Ponzi scheme”.

Shortly after World War I, Charles Ponzi opened an investment company that promised large returns from a murky investment strategy, and his early investors seemed to get the returns he promised. That drew in more investors, who also got big returns, and so on.

The secret was that Ponzi was using the new investments to pay the returns to the current investors, creating the appearance of profits that didn’t exist. Bernie Madoff used the same trick just a few years ago. Both schemes collapsed, as such schemes eventually must, because they require more and more investors to keep going.

In an ideal Ponzi scheme, the schemer disappears with the money at precisely the moment when investors start trying to cash out, but neither Ponzi nor Madoff was able to time it correctly. Both went to jail.

Calling Social Security a “Ponzi scheme” (as Rick Perry and other conservatives have done) is a pejorative way to point out something everybody knows: The program relies on current workers paying taxes in order to finance the pensions of retirees. If the economy collapsed to the point that no one could pay taxes, the SSTF would drain out and benefit payments would stop. (Fox News’ Andrew Napolitano presented these well-publicized facts as if they were some top-secret revelation.)

But the differences dwarf the resemblances:

  • Social Security has no schemer who plans to run away with the money.
  • The finances are public. Everyone can see what is happening.
  • It’s not a get-rich-quick scheme that appeals to people’s greed. It’s a social contract between generations that appeals to our desires to (i) not let our elders starve, and (ii) not starve when we get old.
  • The assumptions Social Security depends on are a continued healthy economy and continued faith in the social contract. A Ponzi scheme depends on an exponentially growing pool of suckers that eventually has to exceed the population of the world.
  • Consequently, a Ponzi scheme inevitably collapses, at great loss to the last round of investors. Social Security can keep going as long as its two underlying assumptions hold.

In short, anybody who refers to Social Security as a Ponzi scheme is just trying to piss people off, and has no intention of discussing the program seriously.

3. Chained CPI is a way to cut Social Security benefits, not a way to measure inflation more accurately.

Chained consumer price index is an alternative to the consumer price index (CPI), which is how the government measures inflation for purposes like the cost-of-living adjustment (COLA) in Social Security. The original selling point for chained CPI was that it is a more accurate measure of inflation, because it allows for the way that people change their decisions as prices change. That’s the point made in this video by Fix the Debt (a “non-partisan” billionaire-funded organization that coincidentally wants “lower tax rates” that increase the debt, but benefit billionaires).

Chained CPI produces with a slightly lower measure of inflation, which results in lower COLAS than the CPI we use now, and — given time and the magic of compound interest — substantially lowers Social Security benefits down the road. Those lower benefits happen gradually, so we can tell ourselves it will be painless for the elderly.

We can also tell ourselves that it won’t “cut” benefits. As the FtD video says:

Benefits won’t be reduced, they’ll continue to grow over time, and they’ll do so more accurately. Furthermore, what the critics aren’t seeing is that the current system pays everyone more than it intends to. So instead of overpaying everyone, perhaps it makes more sense to focus on the people that need the additional help.

Here’s the problem with that: If you really wanted Social Security COLAs to be “accurate”, you’d base them not on the basket of goods and services tracked by either the CPI or the chained CPI, but on the goods and services seniors actually need and buy (i.e., fewer baby diapers and more adult diapers). Economist Dean Baker explains:

The Bureau of Labor Statistics (BLS) has constructed an experimental elderly index (CPI-E) which reflects the consumption patterns of people over age 62. This index has shown a rate of inflation that averages 0.2-0.3 percentage points higher than the CPI-W.

The main reason for the higher rate of inflation is that the elderly devote a larger share of their income to health care, which has generally risen more rapidly in price than other items. It is also likely that the elderly are less able to substitute between goods, both due to the nature of the items they consume and their limited mobility, so the substitutions assumed in the chained CPI might be especially inappropriate for the elderly population.*

While the CPI-E is just an experimental index, if the concern is really accuracy, then the logical route to go would be for the BLS to construct a full elderly CPI.

So the CPI-calculated COLAs have probably been too low, not too high. Rather than “overpaying everyone”, we’ve been letting inflation slowly whittle Social Security benefits away. Switching to chained CPI allows inflation to whittle faster.

If the way we want to reduce the deficit is by cutting Social Security benefits gradually over time, let’s argue that case on its merits. Let’s not kid ourselves about “more accurate” measures of inflation.**

4. We could keep the program solvent far into the future by raising the cap on taxed wages.

Unless you’re in the the upper or upper-middle class, you may not realize that not all wages are subject to the Social Security tax. In 2012, any wages over $110,100 were not charged Social Security tax. As a result (according to economist John Irons of the Economic Policy Institute), 6% of wage-earners exceed the cap, and because some of them exceed it by quite a bit, the percentage of income untaxed by Social Security is much larger and growing:

Due to growing income inequality, the share of earnings above the cap has risen from 10 percent in 1982 to over 16 percent in 2006. This is because incomes have grown strongly at the top while middle incomes have stagnated.

This trend is expected to continue, meaning that a growing share of earnings will remain outside the tax base.

The cap also means that higher-income individuals pay a smaller share of their income in Social Security taxes than middle-class employees. Including the employee and employer shares of Social Security and Medicare taxes, earners in the middle fifth of the income distribution pay an average effective payroll tax of about 11 percent. In contrast, the top 1 percent of earners pay just 1.5 percent on average.

… According to the Social Security Administration, fully eliminating the cap on taxable earnings would be sufficient to fully close the projected shortfall.

* People who talk about changing your buying habits have clearly not dealt with any actual seniors. When doctors suggested my 89-year-old father was developing a peanut-butter allergy, I bought him jars of soy and almond butter to try instead. While cleaning out his cabinets after he went to a nursing home, I found them unopened.

** I wouldn’t tie benefits to inflation at all. I’d tie them to the median wage.

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  • By Buying Civilization | The Weekly Sift on April 15, 2013 at 10:51 am

    […] the cost-of-living adjustments to Social Security using the stingier chained CPI. I discuss this in Four Things I Know About Social Security. #3 is “Chained CPI is a way to cut Social Security benefits, not a way to measure inflation […]

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