sob asked what will happen when the revenue-payment ratio for Social Security reaches 1:1, and provides a Luskin artical proclaiming disaster. Let us deconstruct Mr. Luskin's piece, shall we?
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According to the latest annual report of the Trustees of the Social Security Trust Funds, the surplus in 2004 was $64.4 billion dollars. It will be higher this year — at $87.7 billion. The surplus will keep getting bigger and bigger through 2008, when it will reach $108 billion. Each year, that’s more and more money that the federal government won’t have to raise from the world capital markets. It’s a captive audience of bond buyers — and a growing one.
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This is true. The surplus for SS is the amount of extra money - say, equivelant to an individual person's savings account - used to pay whatever amount of the benefits can't be paid in a given year by the money SS recieved that year. Say SS has to pay $100 a year in benefits, but only receives $90 a year in 2009. This means that $10 has to be removed from the Trust Fund. About that time, in real life, the Trust Fund will have over a billion dollars. But then Luskin says:
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But in 2009, just 5 years from now, the surplus will start to shrink. In 2009 it will fall to $103.7 billion, and in that year the federal government will have to go to the capital markets to raise $4.3 billion that it didn’t have to raise the year before. That’s not a lot of money in the grand governmental scheme of things. But it’s an important turning point for Social Security — it’s the year the crisis begins.
Every year after that the crisis will deepen. Each year the government will get several billion dollars less from the Social Security surplus than it did the year before, and it will have to make up that difference by tapping the capital markets, or by raising taxes or trimming spending.
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This is spin - and it is just silly. What Luskin is trying to make you think is that, as SS takes money out of the Trust Fund, beginning in 2009, and it shrinks as a result, SS will be forced to get money from somewhere else. What he doesn't say is that such a scenario is only true if SS were to have a goal of maintaining the Trust Fund at its peak, or the level it is at the day before SS begins dipping into it. To further my example from above, if the Trust Fund had $50 on December 31, 2008, it would have only $40 dollars by December 31, 2009. Luskin is saying that SS will have to begin finding other sources of funding in order to maintain a total amount of available SS money - including Trust Fund money - equal to what existed on December 31, 2008. He calls this situation a crisis.
Back on planet Earth, the Social Security Administration will do no such thing. It is silly to think that the Trust Fund should always remain filled with as much money as humanly possible. The Trust Fund is actually there in order to ensure benefits for many years after SS begins paying out more in benefits than it takes in. It is not meant to be a minimally acceptable level of available money. When the Trust Fund was established in its current form - in 1983, by Reagan - it was designed to simply cover SS benefits for a while and, in doing so, eventually dwindle. To use my example again, the Trust Fund will dwindle over the years - from $50 on the last day of 2008 to $0 at some future point - as it is spent by SS to ensure 100% payment of benefits. This "crisis" Luskin is referring to is the Trust Fund doing EXACTLY what it was designed to do.
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Most observers point to 2018 as the earliest year for the Social Security crisis to begin. But that’s only the year the crisis will pass an especially attention-grabbing milestone. That’s the year, according to the trustees, that the Social Security surplus will disappear entirely and become a deficit. In other words, for the first time tax revenues will be less than the benefits paid out that year. From the standpoint of public finance, though, it will just be another painful year in which the federal government had to raise more money from capital markets — or raise taxes more or trim more spending — than it did the year before. By 2018, the Treasury will have already received $359 billion less cash each year, cumulatively, than it received in the peak year of 2008.
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OK, so in 2018 the Trust Fund will have run out of money and Social Security will be taking in less in taxes than it pays in benefits. Well, there wasn't really a crisis in 2009, no matter how much latitute you grant Luskin on the semantics of the word. But, I mean, this time, Luskin can't be wrong, can he? Well, yes. See, as Luskin points out, SS has a large amount of bonds that it can dip into in order to pay out 100% of benefits:
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Starting in 2018, as soon as Social Security tax revenues are insufficient to cover benefit payments, the gap will be made up as the trust funds redeem the Treasury bills they have been hoarding. Not only will the Social Security system no longer give cash to the federal government in exchange for Treasury bonds. Starting in 2018 the situation will be just the opposite: The Social Security system will give back the Treasury bonds held in the trust funds — and the interest on those bonds, which is held in the form of more bonds — and demand cash for them.
According to the Social Security actuary, in 2018 the trust funds will demand $23.4 billion in cash from the federal government. The trust funds will redeem the last of their bonds in 2041 — demanding from the government $1.003 trillion that year. From 2018 through 2041, the trust funds will redeem bonds worth, cumulatively, $11.9 trillion. Once again, just to be perfectly clear, let me emphasize that the federal government will have to come up with this $11.9 trillion somehow — either by tapping the capital markets, raising taxes, or trimming spending.
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So SS has been paying the federal government money for years in the form of bonds in order to have - excuse me, hoard - Treasury bills. Think of these as IOUs with a bullet: SS has been giving money for a long time to the federal government so that one day, when they need money, they can receive what they originally gave back with interest. In 2018, as Luskin has correctly shown, SS will need to dip into their hoard of Treasury bills and receive their investment back with interest. So if they gave the feds $50 dollars originally, with interest they may be expected to get back, say $55 (this doesn't correspond to reality, I'm just creating an example). What is wrong with this? I mean, if you put your money in the bank and withdraw it a few years later, you expect to get it back with interest, right? Shouldn't SS too?
Well, he says that this puts the government $11.9 trillion dollars (the amount they will owe SS) further in debt. Is the real SS crisis that the government will have to pay back to SS the money it owes them? Perhaps - I mean, $11.9 trillion is a lot of money. So what are the possible solutions to this problem?
Luskin has no answers. Instead, he points out the obvious - that the government has to get the money to repay that $11.9 from somewhere:
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This should illuminate the debate on whether the trust funds are “real” or not. They are perfectly “real” in the sense that the Treasury bonds they hold are valid legal claims on the government. But they are not “real” in the sense that they, as a June, 2004, Congressional Budget Office report put it, “contain no financial resources” in and of themselves. For their value to be realized, the Treasury bills they hold must be redeemed for cash by the government — and that cash has to come from somewhere.
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I can propose a solution or, more accurately, describe what other, smarter people have written.
As Matthew Yglesias wrote, "The White House has repeatedly defined Social Security's move into cash flow imbalance starting in 2019 as the problem. One can dispute whether or not this is, in fact, problematic. It is clear, however, that it only is problematic if you think there's something problematic about paying the money back." Why does the White House think it is problematic to pay back the money it owes? I propose that it is because the White House wishes to make Bush's tax cuts permanent.
As this report from the non-partisan Congressional Budget Office shows, "If the 2001 and 2003 tax cuts are made permanent as the Administration has proposed, their cost over the next 75 years will be more than five times the Social Security shortfall over this period." Don't believe the CBO?
How about John Kerry: "And all you need to do to move Social Security into safety, well into the 22nd century, into the next century, is to roll back part of George Bush's tax cut today. His tax cut takes three times the deficit of what is contained in Social Security."
In fact, "rolling back Bush's tax cuts just for those Americans who earn more than $350,000 a year would come close to covering the shortfall! If the tax cuts were NOT made permanent, in other words, the government could easily cover all of its Social Security expenses. When Luskin asks where this money will come from, everyone should answer, "from revenue generated if Bush's taxcuts are allowed to sunset (expire)."
OK, replies Luskin, what if the federal government does repay its debt to SS? Even then, SS will only be able to ensure everyone receives 100% of benefits until 2042, and surely THAT is the crisis [although I question the imminent adjective he likes to use]:
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From the standpoint of public finance, the crisis ends in 2042 when the trust funds’ hoard of bonds is completely exhausted. Under current law, Social Security benefits will then be trimmed such that they will be payable out of current tax revenues. According to the trustees, benefits will have to be cut 27 percent from their present scheduled levels, with the situation only getting worse as time goes by. So, yes, the drain on the Treasury will end in 2042 — but at that point the crisis will simply be inherited by retirees in the form of lower benefits.
Those are all simple facts. Yes, they are estimates. They might be off a little bit one way or the other. But the general pattern is clear. Social Security will start to become a drag on the budget of the federal government in 2009. The state of affairs will get progressively worse through 2042, by which time Social Security will have consumed $11.9 trillion from the federal budget. And after that, Social Security benefits will be automatically cut. If that isn’t a “crisis,” I don’t know what is.
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Well, what would happen if, as Luskin claimed, eligable Americans were only recieving about 80% of their SS benefits beginning in 2042? I mean, surely chaos would reign, milk will curdle, and retirees will all live in poverty? Well, there is a lot Luskin is leaving out.
Remember when I told you that allowing Bush's tax cuts to expire would more than pay for whatever amount of money the government needs to raise in order to pay its debt to SS? Well, that would easily cover the last 20% or so of benefits that SS needs to make up beginning in 2042 - and keep SS providing full benefits until somewhere around 2080. Even if it didn't, those 80% of benefits are,
according to this article, actually worth more in real money than retirees get in full benefits currently (thanks to wage-indexing). Think of it this way: retiree A gets, say, $20 a month from Social Security in 2005. In 2042, retirees may only be receiving 70-80% of what they should be getting, but even so, the amount that retiree B - who lives in 2042 - gets is equivelant to $25 for retiree A. So nobody will be in that much trouble, really, even if the system pays out less than it should in 2042.
Which leaves Luskin in trouble. Social Security doesn't face a crisis in 2009, because it has its Trust Fund specifically set up to ensure that retirees get their checks. There is no crisis in 2018, because the government can easily get the cash it needs to pay back Social Security everything it owes in Treasury bills. Even if Social Security doesn't provide 100% of benefits in 2042 - it easily could, but just for the sake of argument - if it gives out only 70-80%, everyone receiving that money would actually betting getting more in real money than people getting all of their benefits in 2005. The earliest time that Social Security faces a real crisis, therefore, is around 2080. That sure as hell isn't imminent and, despite all of Luskin's pretty rhetoric, misdirection, and half-truths, is no crisis.