Tinkering With CPI Won't Erase Social Security's Insolvency

Real Clear Markets ^ | 01/17/2013 | Victor Nava

[SeekAndFind]

2031 is likely the next 2012. No, the Mayan calendar hasn't been reinterpreted -- but the Social Security Administration's statistical projections have, and it's not looking good.

A new study by professors Gary King of Harvard University and Samir Soneji of Dartmouth College finds that the Social Security Administration's (SSA) $2.7 trillion trust fund that is supposed to fund the retirement of baby boomers, will be exhausted in 2031 -- two years earlier than the SSA's original projection. Indeed, 2010 was the first time in more than 25 years that Social Security ran a deficit; spending $49 billion more in benefits than revenues generated, and this will become a permanent state ofaffairs unless something is done.

The Congressional Budget Office (CBO) last November warned that "the federal budget is on an unsustainable path under current policies." Even though Social Security's unfunded liabilities are some of the biggest drivers of this fiscal unsustainability (after Medicare), the recent fiscal cliff deal did nothing to address them. That must change come March, when the next round of deficit reductions talks take place, and the changes must be substantial if fiscal apocalypse is to be avoided. As of now, the lame ones that Republicans have proffered won't cut it.

The big Republican idea for putting Social Security spending on a fiscally sustainable footing involves changing the way the program calculates Cost-of-Living Adjustments (COLAs) for beneficiaries. Essentially, Republicans suggest switching the price index used to determine COLAs from the current one to a chained Consumer Price Index (CPI), something that CBO estimates could save $100-$220 billion over the next 10 years.

Here's why:

[Wolfie]

I don’t imagine any kind of “tinkering” can make up for the $2.5 trillion that the federal government stole and spent on other things.

[gunnut]

It is all one big joke anyway. There is no money in the Social Security Trust Fund. All that exists is IOUs from the US Treasury. Benefits are being paid out of current receipts and from general funds. It is broke now.

[kabar]

Even if the $2.7 trillion in the SSTF contained real assets rather than the current non-market, interest bearing T-bills, SS would still not be solvent. It is actuarially unsustainable.

Our aging population, and specifically the baby boomer generation that is like a pig going thru a python, will consume the $2.7 trillion and still need an additional $30.5 trillion, in 2012 dollars to remain solvent for the next 75 years.

[PGR88]

This is confusing, partisan article

1) It attacks Republicans attempts to adjust benefits basis a change in CPI calculation. I am curious - is Obama or anyone else proposing any reforms or changes?

2) It talks about the “trust fund” being depleted in 2031. There is NO true trust fund. It is only an on-paper accounting concept. Social Security covers present expenses with present income and “repayments” from the Federal Govt. What really should be examined is the size of the yearly gap in Soc. Sec. receipts vs. outlays, and the ability of the Federal Gov’t to cover those.

[kabar]

There is NO true trust fund. It is only an on-paper accounting concept. Social Security covers present expenses with present income and “repayments” from the Federal Govt.

There is a real SS trust fund. It's $2.7 trillion in non-market, interest bearing T-bills are part of our $16.4 trillion national debt and held under "Intragovernmental Holdings," as distinct from the publicly held portion of the debt, which is about $11.4 trillion.

SS is a pay as you go system with today's workers paying the benefits for today's retirees. SS has been running in the red since 2010 and will continue to do until all of the SSTF is exhausted and benefits cut to just what the revenue will provide. Right now, the shortfall in revenue is being made up by cashing in the T-bills from the SSTF using the General Fund. Since we borrow 42 cents of every federal dollar spent, SS is contributing to the publicly held national debt.

[Venturer]

If we keep allowing people whose Unemployment has run out to go on to Social Security disability, we will probably run out in 2016.

[Go_Raiders]

T-Bills are a piece of paper that says the Federal Government will pay the face value, in other words it is not an asset, it is a token of debt. To make this easy for you to understand, I will use as an example a token of debt you may have yourself - a mortgage note.

You would not consider your mortgage note to be an asset, because it represents money you don’t have. The only difference between your mortgage and Uncle Sam’s T-Bill is that the Government can print money to pay it off. Only problem is printing money just lowers the value of everyone’s money.

Calling T-bills an asset is crazy. Go sell crazy someplace else, we’re all stocked up here.

[etcb]

There is a real SS trust fund. It's $2.7 trillion in non-market, interest bearing T-bills are part of our $16.4 trillion national debt and held under "Intragovernmental Holdings," as distinct from the publicly held portion of the debt, which is about $11.4 trillion.

Thank you for reemphasizing this point. This debt is just as legitimate as that owed to investors in T-Bills including Chinese, Japanese, American, and other investors in government securities. A major factor in the early turn of Social Security receipts from surplus to deficit was the long term high unemployment rate. While our government is clearly on an unsustainable financial path, demagoguing the Social Security program is not going to solve the spending problem. Like it or not, a major segment of the population participated in the Social Security program for all of their working lives with the expectation of a certain return and they do not have the time left to go in another direction. They are not going to just lay down and die.

[kabar]

T-Bills are a piece of paper that says the Federal Government will pay the face value, in other words it is not an asset, it is a token of debt. To make this easy for you to understand, I will use as an example a token of debt you may have yourself - a mortgage note.

The T-bills held by the SSTF are no different than the T-bills held by the Chinese. In order to receive interest or redeem them, you depend on the good faith and credit of the USG. Here is what the SSA says about the Trust Fund T-bills:

Far from being "worthless IOUs," the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.

Calling T-bills an asset is crazy. Go sell crazy someplace else, we’re all stocked up here

I never called the T-bills an asset. In fact I said just the opposite. They are included in our $16.4 trillion national debt and held under the category "Intragovernmental Holdings." They must be considered as part of the debt ceiling cap.

I suggest you get better informed about how SS operates before you call someone crazy.

[kabar]

Like it or not, a major segment of the population participated in the Social Security program for all of their working lives with the expectation of a certain return and they do not have the time left to go in another direction. They are not going to just lay down and die.

The reality of SS is that the contributions you make into the program don't belong to you. The Supreme Court decided this, Flemming vs Nestor, some time ago. Moreover, Congress can change the rules anytime they want, e.g., in 1983 they changed the age for full benefits from 65 to 67.

Someone could pay into SS for 50 years, die the day before starting to collect benefits, and not receive a dime except for a small burial allowance. It is not a pension scheme nor does one's estate have any claim on one's contributions.

[etcb]

The reality of SS is that the contributions you make into the program don't belong to you. The Supreme Court decided this, Flemming vs Nestor, some time ago. Moreover, Congress can change the rules anytime they want, e.g., in 1983 they changed the age for full benefits from 65 to 67.

I agree, there is no legal individual ownership of amounts paid into the Social Security fund. There is, however, a current legal obligation to pay benefits at a specified level to qualified recipients. As with almost all government expenditures, Congress has the power to make changes or even eliminate the program entirely. There is such a thing as political reality and considering the size of the voting block dependent of Social Security, reduction or elimination of payments to current and imminent beneficiaries is about as likely as me riding my bicycle to the moon. As with the change of retirement age from 65 to 67, any further changes will be at the margins and will only impact future beneficiary who will have time to make other arrangements.

[kabar]

There is such a thing as political reality and considering the size of the voting block dependent of Social Security, reduction or elimination of payments to current and imminent beneficiaries is about as likely as me riding my bicycle to the moon.

No doubt there will be resistance to any changes in the entitlement programs, which is why this country is in such dire fiscal straits. These programs are unsustainable and unaffordable. They must be reformed or they will bankrupt the country. We are placing the tab on our children and grandchildren.

The average Medicare recipent receives three times in benefits compared to their contributions.

This graph shows that the average man and woman (average defined in the study as average income over their working lives and living to the average life expectancy) who start receiving benefits in 2010 get over 3 times more in benefits than they pay in to the system! Of importance, the study accounts for inflation by calculating all past taxes and future payments in 2010 dollars to provide an accurate comparison.

If the notion that Medicare recipients are simply "getting back what they paid in" is false then where is the money coming from? Simply, the excess received is being borrowed from younger generations and the cost is more than we can bear.

[etcb]

No doubt there will be resistance to any changes in the entitlement programs, which is why this country is in such dire fiscal straits. These programs are unsustainable and unaffordable. They must be reformed or they will bankrupt the country. We are placing the tab on our children and grandchildren.

I am sorry I did not reply earlier but I had a couple of more pressing things to take care of.

I agree that as a country, we are in dire financial condition and I would suspect that most beneficiaries or near beneficiaries of the social security programs would also agree. The problem lies in getting from that understanding to a solution.

First: While they were working and paying into the system, it supported their parents and grandparents and built up considerable surpluses thus they don't consider themselves to be a burden on their children and grandchildren.

Second: They see on a daily basis the excess, duplication, waste and outright fraud in all aspects of our federal government with no concerted sustainability analysis being undertaken on that spending.

Third: After a lifetime of working and playing by the rules as they were at the time, they see themselves now unfairly and unjustly cast as the primary problem.

People receiving Social Security benefits may have gotten old, but they have not gotten stupid. They know we have problems that must be solved and most are willing to do their part but they are not going to go to the front of the line. When the "Spending Reform Line" is formed, Social Security beneficiaries want to see the food stamp people, the federal education industry, the illegal immigrant group, the unemployment compensation programs, the federal grant programs, the foreign aid programs, the military industrial complex, the bailed out bankers, and a multitude of other questionable and wasteful spending beneficiaries in line ahead of them. Unless and until that happens, I am afraid the raw political power reflected in their numbers will prevail.

[Go_Raiders]

There is no way to fix Social Security. It will either be phased out with a private program to replace it, or it will collapse, there is no third option. The demographic trends and the laws of mathematics are immutable.

Right now everyone seems to be voting to pretend there isn’t a real problem, which just means the collapse will be put off for a little while longer and thus far more epic.

The real tragedy is that the taxes contributed to this abomination of a program fueled a Government bubble that made possible all the moronic wasteful programs you want to see cut first to ‘save’ the precious Social Security program. Oh the irony.

BTW kabar, a trust fund is not a ‘fund’ if it has no assets, and you admitted in your response to me that T-bills are not assets. I didn’t call you crazy, I was calling your statement that there is a trust fund crazy.

[kabar]

First: While they were working and paying into the system, it supported their parents and grandparents and built up considerable surpluses thus they don't consider themselves to be a burden on their children and grandchildren.

Right most of them are clueless as to how the system works. I say that as someone who receives SS and Medicare. In 1950 there were 16 workers for every retiree; today there are 3.3, and by 2030 there will be just two workers for every retiree. By 2030 one in every five residents of this country will be 65 or older--twice what it is now. Those "surpluses" are going to be long gone in 20 years. SS has been running in the red since 2010 and Medicare Part A (HI Trust Fund) since 2008.

Most people don't realize that Medicare Parts B and D are taking more and more money out of the General Fund. By law, the premiums paid for Medicare Parts B and D (SMI) cover only 25% of the costs of the programs. The remaining 75% is paid by the General Fund. In FY-2011 the GF paid $222 billion for Medicare Parts B and D. These amounts will continue to increase as 10,000 baby boomers a day retire and will continue to so for the next 20 years.

Second: They see on a daily basis the excess, duplication, waste and outright fraud in all aspects of our federal government with no concerted sustainability analysis being undertaken on that spending.

There is no doubt plenty of waste, fraud, and abuse in these programs as well as other government programs. But the idea that some deus ex machina is going to make these programs more efficient and cost effective is smoking something. And now we are adding another huge entitlement program, Obamacare, that will increase the cost of government. It is pure insanity.

Third: After a lifetime of working and playing by the rules as they were at the time, they see themselves now unfairly and unjustly cast as the primary problem.

Yep, they want their stuff, but the reality is that they are getting much more out of these Ponzi schemes than they contributed to them. I am receiving a federal pension that I started receiving at age 56. I have already received ten time more in payments than I contributed and I am just 69.

I am familiar with what Germany did to rein in its social benefit programs. They cut benefits to the elderly. It was a painful decision, but they have a society that accepts such decisions in the interests of the national good. I doubt that will happen in this country. We will react like the Greeks when their seniors received 20% reductions in their pensions. We can't even come up with $100 billion a year in real cuts (sequestration) from a $3.7 trillion annual budget.

People receiving Social Security benefits may have gotten old, but they have not gotten stupid. They know we have problems that must be solved and most are willing to do their part but they are not going to go to the front of the line.

SS is actually fairly easy to resolve in terms of making it solvent. You must cut benefits and/or increase payroll taxes. It really isn't that much of a problem. Personally, I would like to see most of it privatized leaving a small defined benefit program to cover disability and survivor benefits. It can be phased in thereby reducing the USG's future liability and allow individuals to create wealth for themselves.

The people who are at the back of the line are the young and future generations. We are stealing from them and creating a huge burden that will cause a decline in their standard of living.

When the "Spending Reform Line" is formed, Social Security beneficiaries want to see the food stamp people, the federal education industry, the illegal immigrant group, the unemployment compensation programs, the federal grant programs, the foreign aid programs, the military industrial complex, the bailed out bankers, and a multitude of other questionable and wasteful spending beneficiaries in line ahead of them.

They will all be fighting over the scraps of a failed economy. There are currently 57 million on SS and 47 million on Medicare. But there are also large numbers on food stamps (48 million), Medicaid (70 million counting the CHIPs program), unemployment, crony capitalists receiving government contracts etc. Counting state and local government along with the federal government, government expenditures amount to 42% of the GDP. About one out of every two people in this country receive a government check of some sort. And Obamacare will add to those numbers once it is fully implemented. It will add another 18 million to Medicaid.

Immigration, legal and illegal, is killing us. We bring in 1.2 million legal immigrants a year. 25% of the adults lack even a high school degree. 57% of immigrant headed households with children are on welfare. We are importing poverty. Add to that number the 300,000 to 400,000 anchor babies born each year to illegal aliens. Most of these children are on Medicaid and food stamps.

Unless and until that happens, I am afraid the raw political power reflected in their numbers will prevail.

You are exactly right. I blame the voters more than the politicians who are giving them exactly what they want. There still is no political will to make the painful decisions that will be necessary to get our fiscal house in order. It will take a collapse to bring the message home the same way it did in Greece. And even then the Greeks still wanted their stuff.

[kabar]

BTW kabar, a trust fund is not a ‘fund’ if it has no assets, and you admitted in your response to me that T-bills are not assets. I didn’t call you crazy, I was calling your statement that there is a trust fund crazy.

You are entitled to your own opinion, not your own facts. Trust funds (and the federal government actually labels them as such) do exist. There is a SS Trust Fund, an HI trust fund, a federal pension trust fund, etc. They hold non-market, interest bearing T-bills and are accounted for in our national debt as an obligation of the federal government to pay (Intragovernmental Holdings) just like the publicly held debt. The SSTF is the biggest holder of US T-bills.

Do you think the Chinese consider the $1.1 trillion it holds in US T-bills as an asset?

As far as the SS program is concerned, the T-bills in the SSTF are assets. They can be redeemed to pay benefits, which has been the case since 2010. SS is a pay as you go program and it is now in the red and will be permanently. Once the T-bills in the SSTF are exhausted, benefits must be, by law, reduced to revenue received.

Source: CBO “Combined OASDI Trust Funds; January 2011 Baseline” 26 Jan 2011.

Note: See “Primary Surplus” line (which is negative, indicating a deficit)

But as far as the USG is concerned, they are an unfunded liability, which is why they are included in the $16 trillion national debt. They are not assets in terms of the total federal budget, but rather, debt. It really isn't that difficult a concept to comprehend.

Trust Fund FAQs

[dalereed]

i’m a greedy basatard, give me my ligitimate yearly increase, to hell with future generations!!

In any ponzi scheem it pays to get in early and screw the late comers!

[etcb]

I have really enjoyed this discussion. Apparently we have a somewhat similar working history and have observed this old world turning for about the same number of years. I may be naive, but I still have faith in the good sense of the American people. It will be difficult but we will find our way. Take care and continue the good fight.

[kabar]

I may be naive, but I still have faith in the good sense of the American people.

If the American people still had good sense, there is no way a failed President like Obama could have ever been reelected. The laws of political gravity no longer apply. We have reached a tipping point.

We are no longer the same people. Our rapidly changing demographics have resulted in a nation that no longer believes in the vision of our Founders. Demography is destiny.

Be of good cheer.