Sunday, January 6, 2013

Coming soon: means testing for Social Security

In a new study published in Demography (a journal published by the Population Association of America), academics Samir Soneji and Gary King investigate how the SSA forecasts its future spending needs as a means of properly structuring current spending and revenue sources. They determine that the SSA estimates are flawed, that longevity is essentially being low-balled (meaning people are living and likely will continue to live longer on average than the SSA predicts). Thus, the point at which the SSA Trust Fund (theoretical though it may be, but more on that in a moment) will be depleted is coming sooner than expected:
For example, by improving only mortality forecasting methods, we predict three fewer years of net surplus, $730 billion less in Social Security Trust Funds, and program costs that are 0.66% greater for projected taxable payroll by 2031 compared with SSA projections.
Currently, the Federal Government and the SSA are operating under the belief that 2033 is the "drop dead" date for Social Security, when the Trust Fund zeros out and when revenues from the Payroll Tax (which fund Social Security payments) will need to be supplemented directly by the Federal Government in order for the SSA to meet its obligations (assuming no changes are made to the current system).

This is a critical moment, not only for the tangible realities that will impact the SSA and the Federal Government, but also for what it means from a theoretical standpoint. Heretofore, the Social Security system has been a self-funded one, supposedly a supplemental retirement program for the citizenry at large. Everyone--who is working--pays into the system and with those funds, people who have retired are provided with a stipend (varying in amount, based on how much one put in to the system prior to retirement). As a separate system, Social Security monies are not tabulated as a part of the Federal budget, per se; they're essentially "off-budget."

And that's the correct way to manage the SSA, it's exactly why the SSA has been able to function properly for so long. This is no mean point. Regardless of one's ideological opinions about the existence of Social Security as a mandatory program, it cannot be denied that the program has been effectively structured and managed since basically it's inception. In 1983, the increasing longevity--current and projected into the future--of the citizenry was addressed by increasing FICA taxes slightly, upping retirement ages more quickly than previously planned, and adjusting payouts based on the last. The current huge balance in the Trust Fund (some 2.7 trillion dollars) was a direct consequence of these adjustments, minor though they were.

At this point it's worth noting the fiscal myth that is the Social Security Trust Fund. Some say it doesn't actually exist, that its a mere accounting gimmick, since the monies collected by the SSA via increased FICA taxes since 1983--the $2.7 trillion--have all been spent by the Federal Government. Others--on the Left, like Kevin Drum and Paul Krugman--insist the Trust Fund does actually exist, but their arguments in this regard are more descriptive of a notation on a P&L report than of a "Trust Fund," as most understand the term. Because in that light, there can be no argument: there is no Social Security Trust Fund from which one might buy and sell assets, manage a portfolio, or anything like that. And this is because the Trust Fund contains unmarketable securities. They cannot be sold to just anyone, no matter the offered price. They can only be sold to the U.S. Treasury. In other words, the Trust Fund is nothing but a big pile of IOUs, from the Federal Government to the SSA.

But regardless, what is of primary concern here is what happens when the Federal Government is forced to use general funds in order to meet SSA obligations on a month to month basis. Simple, Social Security will no longer be a separate system from the rest of the Federal Government. Since FICA taxes would cease to be the only source of funding for Social Security payments, such taxes would necessarily become nothing more than another budget line, another tax in the litany of those already imposed by the Federal Government.

We all know how people in power act, by and large: they grab more power whenever it is convenient for them to do so. Ask yourself this question: when Social Security costs fall to Congress and the President to meet with general revenues, will they want to exercise more control over its structure or less? Just as FICA would become just another tax, Social Security would become just another entitlement program; think "welfare for the elderly." And if that happens, its revenue problems will be solved "easily" by simply limiting the pool of beneficiaries. Because populism plays better, especially when there's a crisis to avert. Of course, changing the structure of Social Security in such a manner would also necessitate a new layer of bureaucracy to "manage" the program, which means greater internal costs as a matter of course, thus necessitating more taxes or more limiting (or both).

So, the issue is how to avoid this coming calamity, which is again coming quicker than the SSA and the Federal Government are anticipating, probably even quicker than the authors of the above study are anticipating. For their analysis doesn't take into account the added drain on the Trust Fund of the Payroll Tax Holiday, nor does it allow for future occurrences of such "holidays." Because let's face it, now that this card has been played, it will be used again as a temporary fix during future economic downturns; that's how precedents work.

The authors--in a NYT op-ed--do offer some solutions of their own to the problem (to avoid the depletion of the Trust Fund):

  • One option is to continue raising the retirement age, perhaps to as high as 69 or 70. While the full retirement age is gradually increasing to 67 (for people born in 1960 or later) from 65, this increase is not enough to counterbalance the gains in longevity. 
  • A second option is to increase payroll taxes, for example by taxing wages over $113,700, the current earnings limit. 
  • A third is to limit the annual cost-of-living adjustments, possibly by changing how those adjustments are calculated. 
  • A fourth is to reduce benefits — for example, by lowering the initial benefits for workers whose lifetime wages are above the national average (currently $43,000 a year). Other choices, in numerous combinations, are possible, too.

All of these options will be opposed by some and championed by others. But of the four, the second and fourth are the ones that will--in my opinion--but pushed for by progressives and liberals, because the other two are just not "fair" (as both will be spun as choices that punish retirees). Of course, these--options two and four--are also the ones that violate the principals and the promises behind the establishment of the Social Security system, which was basically a forced retirement saving program for all; those who saved more (paid more taxes) benefited more. Thus, the income cap on FICA taxes is about preserving this goal. If it were lifted, the proper course of action would be to increase benefits for those who would then pay even more into the system.

But that was the America of yesteryear. Now, supposed social and economic justice are the rule; simple and true justice has been tossed out of the window.

In the very near future--perhaps before President Obama completes his second term--the call will come to get rid of the income cap on FICA taxes (with no corresponding increase in benefits), as will the call to limit who is allowed to receive Social Security benefits. Once again, success will be targeted and punished, with nary a thought to the consequences of doing so for the nation in general.

Cheers, all.