Later On

A blog written for those whose interests more or less match mine.

More on the non-crisis of Social Security

with 3 comments

Thanks to Sean for pointing out this article:

Presidential candidate Barack Obama got himself into hot water with some in his own party when he recently said that Social Security faces a “crisis.”

Senator Obama’s problem is that the nation’s most popular social safety net program is actually in pretty good shape.

“The whole problem is exaggerated,” says Mark Weisbrot, codirector of the left-leaning Center for Economic and Policy Research (CEPR) in Washington. “Nobody needs to talk about it.”

The Trustees of the Social Security system, in their report last spring, calculated that the system’s income would be inadequate to pay the full benefits promised to seniors in 2042. By then, 35 years hence, many baby boomers will be gone. For those still living, the payroll revenues that provide the basic income for the system will be sufficient to pay 75 percent of promised benefits. The next generation of retirees will also get 75 percent – not zero, as so many of them believe because of the false talk about the system being “bankrupt.” And unless the nation’s productivity stalls for decades (Social Security benefits are linked to wage levels), that 75 percent will have a buying power perhaps 30 percent greater than the Social Security benefits received by seniors today.

An analysis of the Congressional Budget Office puts the shortfall – not bankruptcy – at 2046, a few years later, when the Social Security Trust Fund runs out of the Treasury bonds it has been stockpiling because current payroll revenues each year exceed benefits paid.

A professional actuary, David Langer in New York, sees a brighter picture. He figures Social Security’s finances are actuarially sound and able to pay full benefits for the next 75 years.

Mr. Langer reaches his conclusion after examining a decade’s worth of 75-year projections made by the trustees. He found that the most optimistic of the three annual projections has been most accurate. Those more cheerful predictions show Social Security completely sound, with even a small surplus at the end of 75 years. “There is no problem, actuarially,” Langer says.

He blames conservatives and their think tanks – including the CATO Institute and Heritage Foundation – for a long “propaganda campaign” that has foisted on the public the idea that Social Security is in deep trouble. He also criticizes the media for accepting the gloomy view of these critics, many of whom advocate privatizing Social Security.

The Trustees’ middle projection, which the Trustees see as most likely, indicates that Social Security’s financial shortfall over 75 years amounts to $4.7 trillion. By comparison, the war in Iraq and Afghanistan is expected to cost at least $1 trillion and the Bush tax cuts another $1 trillion over time.

The shortfall in Medicare finances is far more serious: about $40 trillion.

One difficulty: Most long-term economic forecasts have proven decidedly inaccurate. Dean Baker, also a CEPR economist, points out that many aspects affecting Social Security costs in the future are unknown. For instance, will workers retire earlier or later?

There are other unknowns: fertility and mortality rates, immigration levels, real interest rates, the level of economic prosperity, and so on.

“There is uncertainty surrounding these,” says Gary Engelhardt, a Syracuse (N.Y.) University economist. But he accepts the view that Social Security is in “crisis,” regarding the Trustees’ middle projections as “the best estimates, given what we know now.”

From an economic standpoint, fixing Social Security is “really very doable,” he says. It is another matter from a political standpoint.

Democrats tend to talk about eliminating any financial gap by raising taxes on the well-to-do. Sen. John Edwards, for instance, suggests making those earning more than $200,000 a year pay Social Security taxes on the amount over $200,000. Next year, earnings up to $102,000 are subject to the payroll tax.

Sen. Hillary Clinton has refused to say what she would do about Social Security, except appoint another commission. “That’s realistic,” holds Mr. Baker.

Republicans Rudolph Giuliani and Fred Thompson rule out Social Security tax increases. But Mr. Thompson does have a plan to cut benefits over time by indexing benefits to inflation, not the level of wages.

Research by Professor Engelhardt and Jonathan Gruber of the Massachusetts Institute of Technology affirm the basic merits of the Social Security system. They find that Social Security pensions reduced the poverty level among elders from 30 percent in the late 1960s to less than 10 percent in 2004. After inflation, Social Security benefits have doubled in generosity in that same time span.

That’s one reason that Social Security remains the “third rail” of politics, as President Bush found out when his partial privatization proposal failed.

And that generosity is why, in the future, politicians will find Social Security benefits cuts hard to sell to the public.

Written by Leisureguy

3 December 2007 at 4:15 pm

Posted in Daily life, Government

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3 Responses

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  1. Whether the problem is exaggerated or not is impossible to determine for sure. Individuals on both sides of the debate are capable of spinning as they see fit by using assumptions and projections that further their positions. We need to start with an objective public education as to just how the system works in terms of benefits and funding. Then and only then will the public be able to listen to politicians and lobbyists and seperate the facts from assumptions.

    Anyone interested in such an education should email me and i will send them a short no nonsense book on Social Security, written to educate and not to push any agenda. NO CHARGE

    Like

    mark shemtob

    3 December 2007 at 7:33 pm

  2. What I’ve noticed is that those who say the system is in crisis and will fail never refer to any specific studies or analysis—they just say, “It’s a Ponzi scheme” or “Baby boomers will be retiring” or the like. Or they carefully lump in Medicare with Social Security and say that the pair is in bad shape.

    But those who say the system is in pretty good shape usually refer to the Trustees report, the Congressional Budget Office Analysis, the Langer actuarial analysis, and the like.

    Like

    LeisureGuy

    4 December 2007 at 9:39 am

  3. There are certainly those that claim the program is in crisis without actually understanding the financial issues. Nevertheless if one were to read the report of the Social Security Trustees (ignoring any medicare benefits or funding) the middle of the road actuarial projections predict the following:

    By the year 2018 the amount of social security taxes coming in to the program will be less than the amount of benefits that will be paid out. The choices that will be available at that time will be one or both of the following 1. reduction in benefits
    2. increase in funds needed to pay benefits which can obtained in several different ways
    a. increase social security taxes either by raising the wage base or the tax rate
    b. requiring that the federal government repay to the trust fund the money it had borrowed when the program had positive cash flow. This can be accomplished by either raising non social security taxes, borrowing funds elsewhere or cutting other government expenses. The first and last are terribly unpopular. the second is just adding more debt which potentially can be a problem.

    If one were to assume the more optomistic actuarial projections the date of occurrence is beyond 2018. The more pessimistic ones would cause the date to be before 2018. What is clear is that this event is inevitable. Whether we should plan for it now or wait till it happens is the question

    Like

    mark shemtob

    4 December 2007 at 3:58 pm


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