Social Security in Simple Terms

It has become routine for some members of Congress and presidential candidates to describe Social Security as a piece of financial flim-flam. Texas Governor Rick Perry is not the first opponent to label it a "Ponzi” scheme. And some of the attacks are premised on a more fundamental disapproval of the very idea of government sponsored social insurance

So it’s especially important when discussing what to do about Social Security to keep a firm grip on reality. In the future, barring some movie-scale contagion, there will be more older Americans than there are today. They will be consuming the goods and services produced at that time, not the ones we produce today. At one extreme they could have a very small slice of the pie and live the last years of their lives in poverty, with limited health care. At the other extreme they could be relatively affluent—so-called greedy geezers—consuming large amounts of the pie. Under the current system in the United States, most seniors should be able to live just above the poverty rate. 

But the basic fact remains that they will be living on of the goods and services of the future. We do not freeze some beef and orange juice now and then defrost it in 20 years. In fact, our retirement system, like that of most advanced nations, is essentially pay as you go (or “paygo”). Traditionally, the payroll taxes that are collected have gone to pay for the Social Security and Medicare costs of retired workers. (You pay for your parents and your children pay for you, etc.) Increases in payroll taxes enacted during the 1980s exceeded current needs and thus extra funds were accumulated for future use. By law those trust funds must be invested in U.S Treasury bonds. These Social Security trust funds will be spent by about 2036.

This prospect underpins the false claim that the system is going bankrupt. Absent other changes, the program will simply revert to its former paygo character. Without other changes, Social Security would then be able to pay 75-80 percent of the level of current benefits. That would tip some older Americans into poverty, but it would be less destructive than eliminating the program. It is estimated that today 50 percent of retirees would be below the poverty line without Social Security. The average benefit—about $1,200 a month—doesn’t make anybody affluent. 

Too often in debates about the federal deficit and the national debt Social Security is lumped together with other issues. It shouldn’t be. It’s a special case. It has its own dedicated revenue stream and it represents a social compact among the generations. Retirees really did earn the right to be beneficiaries.

So the fundamental question now and in the future is how much of the pie do we allocate to those who, largely because of age and/or health, can no longer work? What standard do we want to employ?  What is the minimum amount of acceptable resources we want them to have? What is unacceptable from a humane or humanitarian or patriotic point of view? Frankly, if we were able to incorporate that much reality into the debate, it would be miles ahead of where it is today.

 

Comments

[Don Levit]

Richard:
You got half of it right: Social Security is pay-as-you-go.
The excess FICA taxes and interest have been lent to the Treasury and spent on current expenses.
How can those dollars be in the Treasury, and spent, and in the trust fund, at the same time?
As collateral, special Treasury securities were issued.
But, to redeem these securities requires new money, AS IF THE TRUST FUND DID NOT EXIST.
For example, the $40 billion cash shortfall of the trust fund last year could easily be met by the $2.6 trilion in the trust fund, right?
Wrong, because the "interest" was not liquidated, as an insurer would do with a prefunded reserve. Instead, the interest was redeemed with general revenues, the same way we pay for battleships.
So, the trust fund is pay-as-you-go also. It represents no more a store of wealth than current expenses, whether part of a trust fund or not.
I can provide reputable government links and excerpts to suppport specific statements, for anyone who is interested.
Don Levit

[Robert Mitchell]

The current political challenge is that payments exceed taxes in this program, and will do so for a long time. The dedicated stream of income is simply not adequate, so it requires other govt revenue. Now the politicians must make a choice of where the money comes from, and what gets sacrificed when the money runs out.
Currently, we act as if the money cannot run out, because we will just print/borrow more. If that is what Century Foundation is pushing, just say so.

[Kerry Pechter, Editor, Retirement Income Journal]

First, Social Security benefits return immediately to the economy when spent; they are not wasted. Second, Congress should have used the surplus for education and infrastructure, which would have paid for themselves; if they didn't, shame on them, not on Social Security. Third, if we borrow the money to pay SS beneficiaries, we just turn cash savings into Treasury bonds and back into cash; that's a change in state, not substance. Fourth, it won't hurt to give retirees what they were promised as long as the rest of the workers are productive enough to provide all of the goods and services that we need without shortages. Finally, we are not bankrupting our grandchildren by running up a national debt; those obligations all exist in real time as savings, i.e., wealth. Our wealth and our debt are two sides of the same coin, no pun intended.

[Don Levit]

Kerry wrote:
If we borrow the money to pay SS beneficiaries, we just turn cash savings into Treasury bonds, and back into cash, that's a change in state not substance.
How do we get the cash savings? You wrote that the surplus was spent.
Does the savings come from print/borrowing more as Robert wrote?
Even a 5 year old kid knows that if his funds in Piggy Bank A is borrowed from Piggy Bank B, and Piggy Bank B spends the money, that to pay Piggy Bank A back, new monies must be generated from Piggy Bank B.
Don Levit