Wednesday, January 12, 2005

The White House on Social Security

There have been several posts around the blogosphere on President Bush's recent remarks on Social Security and commentary by Rex Nutting of CBS Marketwatch, by Brad DeLong, Max Sawicky, and Angry Bear. The title of Nutting's article is, "Fact-checking Bush on Social Security: President exaggerates problems in retirement system." It is true that there are some statements that are easily misunderstood in the President's interview, and they all do go in the direction of making the problem more rather than less urgent. But the headline is overkill. Let's take a look at the article.

Here's the introductory material:

WASHINGTON (CBS.MW) - President Bush made several factual errors Tuesday about Social Security's long-term financing problems at a photo op event designed to educate the public about the retirement system.

Bush is expected to offer a plan in the next few weeks to cut future benefits and to divert about one-third of Social Security's tax revenues into individual private savings accounts in order to "save Social Security." See full story.

Before a specific plan is unveiled, the White House is holding a series of events to convince the public that the system must be radically altered to prevent a crisis.

According to the Social Security Administration and the Congressional Budget Office, the retirement system faces long-term funding problems, amounting to about 0.7 percent of gross domestic product over the next 75 years, or $3.7 trillion. Read the Social Security trustees report here. Read the CBO's analysis here.

The SSA says the system's trust fund, financed by payroll taxes and interest payments, will probably be exhausted in 2042, requiring the government to reduce benefits by about a fourth or a third. The CBO says the fund will be exhausted by 2052.
Nutting loses points for looking only at the next 75 years, knowing full well that the system has collected taxes during that period on earnings that generate benefits after that period. He hasn't misstated anything that's in the Trustees Report, but he is using an incomplete measure of the program's projected financial shortfalls. His ability to accurately use these terms to convey something incomplete is partly due to the imprecision of the language that is routinely used in these discussions. In the glossary of the Trustees Report, we find:

Long range: The next 75 years. Long-range actuarial estimates are made for this period because it is approximately the maximum remaining lifetime of current Social Security participants.

I would prefer that he say 1.2 percent of GDP, acknowledging that the annual shortfalls are projected to continue rising after the 75-year horizon. (Both numbers are shown here.)

He then starts in with a "Bush v. facts" section:

Bush: "As a matter of fact, by the time today's workers who are in their mid-20s begin to retire, the system will be bankrupt. So if you're 20 years old, in your mid-20s, and you're beginning to work, I want you to think about a Social Security system that will be flat bust, bankrupt, unless the United States Congress has got the willingness to act now."

The facts: The Social Security system cannot go "bankrupt," for it has no creditors. By law, the trustees will continue to pay reduced benefits even if the trust fund is exhausted. Payroll taxes will continue to come in and benefits will continue to be paid.

According to the trustees' intermediate economic forecast (neither doom nor boom), the trust fund will be able to pay about 73 percent of scheduled benefits in 2042 and about 68 percent of scheduled benefits in 2078.

Future presidents and Congresses could also choose to fully fund scheduled retirement benefits from general tax revenue.
If he has to put the word "bankrupt" in quotes, then he knows he is stretching his point that there has been an exaggeration or a factual error. Informally, I certainly think of myself as one of the program's creditors--I'm paying FICA taxes now and being told that I'll get benefits later. Sounds a lot like a creditor/debtor relationship to me. We could look up the definition of bankrupt and find that it includes several usages, ranging from "legally declared financially insolvent" to "impoverished." We could then look up "insolvent" and find that it can mean "Insufficient to meet all debts, as an estate or fund." Note the word "all" in that definition.

The President used the term "bankrupt" in accordance with its common usage. The common usage just permits more than one interpretation. The system will not be "impoverished" and I don't think that "flat bust" is helpful language, but this does not strike me as a case of a factual error. Nutting accurately describes what the system's shortfalls are projected to be in 2042 and 2078.

Bush: "Most younger people in America think they'll never see a dime."

The facts: Social Security says younger people will see a lot more than a dime. Their retirement benefits - even under a "flat-bust" system -- will be significantly higher than today's benefits in real terms.

For low-income Americans, currently scheduled benefits for those who retire in 2080 are $19,906 per year in 2004 dollars. If Social Security can pay only 68 percent of those benefits, that would be $13,536 per year, compared with benefits of $8,804 for low-income retirees who retired last year.

For the highest earners, Social Security is currently promising $53,411 per year for those who retire in 2080 (or $36,319 per year if Social Security can pay only 68 percent). Current maximum benefits are $21,891 per year for those who retired last year.

The appropriate fact-check isn't whether the people will see more than a dime, it is whether that's what "most younger people in America think." It turns out that there a lot of people who, quite incorrectly, believe that the system goes away when the Trust Fund runs out of money. (I don't know if the polls would make this "most younger Americans.") It may in fact be true that, because of the imprecision of the language that is used in describing trust funds and bankruptcies, the popular discussion of the issue has led to that misconception. Nutting gets his discussion of what actually happens in the "flat bust" scenario right, and I do think it is incumbent on the President to explain what would happen in this scenario.

Bush: "In the year 2018, in order to take care of baby boomers like me and -- (laughter) -- some others I see out there -- (laughter) -- the money going out is going to exceed the money coming in."

The facts: According to the SSA, costs are projected to exceed income, including tax revenues and interest income from the trust funds' bonds, starting in 2028, not 2018. The 2018 date is when tax revenues alone no longer meet costs; workers have been paying extra taxes since 1983 to build up the trust funds' assets for just this

It seems to be a safe bet that the President was paraphrasing this statement in Section II.E of the Trustees Report:

Based on the Trustees' best estimate, program cost will exceed tax revenues starting in 2018 and throughout the remainder of the 75-year projection period.

The President said "money coming in" when he should have said "tax revenues." This one is definitely minor.

Bush: "The problem is, is that times have changed since 1935. Then, most women did not work outside the house, and the average life expectancy was about 60 years old -- which for a guy 58 years old, must have been a little discouraging. Today, Americans, fortunately, are living longer and longer. I mean, we're living way beyond 60 years old, and most women are working outside the house. Things have shifted."

The facts: According to the SSA, the life expectancy for a 65-year-old man in 1940 was 76.9 years. Today, a man aged 65 can be expected to live to 81. Most of the increase in life expectancy in the past half century has been for infants, not for the elderly.

The increase in the percentage of women working outside the home has boosted Social Security's resources, rather than depleted them. Today, many women who worked receive a widow's pension rather than their own earned benefits. All the payroll taxes they paid are funding someone else's retirement.

Life expectancy both at birth and at age 65 have improved over the past half century, and Nutting has cited the figures from this table correctly (assuming half century refers to 1940-2003). The distinction may matter because there is a difference in the implications for Social Security financing between improvements in life expectancy at birth and life expectancy at 65. If the improvement is in infant mortality, then the change is equivalent to an increase in the population growth rate, and this has a positive effect on Social Security's finances. The later in life the improvements occur, the less positive the effect, leading ultimately to a negative effect if the improvements occur only after retirement. (Imagine the effect if the only improvement was that no one died between ages 89 and 90.)

However, there is no discussion in the Trustees Report that validates the assertion, "Most of the increase in life expectancy in the past half century has been for infants, not for the elderly." In earlier posts, I've cited the exact opposite statement from an article in the New York Times. Where is Nutting's evidence on this point? In fact, one could hardly blame the President if he were again paraphrasing Section II.E of the Trustees Report:

Under current law the cost of Social Security will increase faster than the program's income, because of the aging of the baby-boom generation, expected continuing low fertility, and increasing life expectancy.

The growth of costs relative to income is, in fact, "the problem," and the Trustees are the ones who cite increased life expectancy as a driving factor. One could quibble with the President's statement of the problem as being in the present rather than the future (if Nutting's assertion is accurate), but even that seems like a stretch if it is to claim that he made a factual error or an exaggeration.

It's less obvious to me what the President's reference to women working outside the home means in this context. Nutting has explained the impact of women working outside the home on the system's current finances accurately. I can see two possibilities. The first, which is a big stretch, is that this was a reference to the decline in fertility rates, which is in part caused by women working outside the home to a greater extent than in the past. The second is that the President has another talking point in his head about how the current system can be unfair to women working outside the home (for exactly the reason that Nutting discusses) and could be made more fair through personal accounts. My guess is that the President just confounded the two points that he wanted to make here.

Okay, so what do we learn from this? If Nutting stripped out all of the "gotcha" language, it would be a pretty good article, like the ones I often read from It would fill in some of the gaps in what the President said and help clarify the issues that are relevant.

It's worth pointing out, as well, that the President isn't a specialist in the area, and non-specialists in any area are prone to making imprecise statements. The President does have several specialists working for him, including Chuck Blahous, a Special Assistant to the President on the National Economic Council. He was featured yesterday in the "Ask the White House" forum, where he took questions on Social Security reform. That discussion may provide some clarification.

Other blogs commenting on this post


Anonymous said...


Anonymous said...

The President's comments are unethical. They might be viewed as good politics by some, but they are intended to deceive, not inform. I consider him a liar and a thief.

Read them again as if they came from one of your students. Would you have cut them the same slack on a mid-term as you cut President Bush? I would have thought you would hold our fearless leader to a higher standard.

Anonymous said...

The current SS system guarantees you won't get back what you paid inIs this true? Here's a quiz for the economists here: assume that SS benefit levels are proportionally adjusted so that the payout each year is equal to the collected tax (while keeping everything else the same), and assume that I am a 30 year old median income earner who is going to retire in 2042 and live to age 85, how do my total benefits compare to my total tax payments?

jult52 said...

About younger workers not believing that they will receive any promised Soc Sec benefits: I think that is a rational view. The Medicare system has an unfunded liability somewhere north of $60 trillion. If one views the Soc Sec "lockbox" as a political fiction-- which it surely is -- one can't really trust the Soc Sec system will be a reliable source of income with other gov't programs projected to run a massive deficit. And massive is understating it.

The Democrats need to stop lying about the state of the Soc Sec system and start realizing that the popularity of the Social Security system -- premised on huge giveaways to previous recipients -- will disappear. I don't trust Dubya to make an intelligent effort to reform the system either but saying "everything is OK" is fatuous.

CalculatedRisk said...

One of the more amusing aspects of the Bush propaganda push is the simultaneous cries of "crisis" mixed with arguments for looking at a time horizon of more than 75 years.

What is a crisis? Webster defines it as:
: An unstable or crucial time or state of affairs in which a decisive change is impending; especially : one with the distinct possibility of a highly undesirable outcome (a financial crisis)
: a situation that has reached a critical phase

Have we reached a critical phase? Is a decisive change impending? No. Social Security will take in more tax revenue than it will pay out in benefits until at least 2018 - another 14 years. If you include the interest income from the trust fund, Social Security will run a surplus until at least 2026. By definition, that is NOT a crisis.

So why does the Bush propaganda machine want to use a time horizon of longer than 75 years? It appears the purpose is to create the false impression of a crisis.

This does not mean we shouldn't reform Social Security. But if created a Pareto diagram, by government program of financial shortfalls, Social Security would be a blip on the chart. The largest problem (and a current crisis) is the General Fund deficit. Over the last 12 months the deficit was $604 Billion. Even if Bush achieves his goals of deficit reduction over the next 5 years (unlikely) the General Fund will still run a 5 year deficit close to $2.7 Trillion. That is Trillion with a "T"!

Next up is the Medicare problem. Although not a full blown crisis, this program has a significantly larger projected shortfall than Social Security. Those are the first two fiscal problems that need to be addressed.

A final comment: When Reagan addressed Social Security in 1983, the program was within 5 months of running a deficit (benefits would have been reduced by law since the current benefits would have exceeded the tax revenue). That was a crisis. The current problem, a potential shortfall in 2026 (21 years from now) or in 2018 (for those that think the trust fund is a fraud) does not qualify as a crisis.

Anonymous said...

"Democrats need to stop lying..."

Can you please quote a "Democrat" who says SS doesn't need fixing?

"...huge giveaways..."

Do I take you to mean that SS recipients haven't earned their benefits?

Anonymous said...

It's time for Professor Samwick to defend the indefensible again. Please take a crack at Cheney's lies today. I'm sure the good Professor will find a way to conclude there was nothing wrong with what he said and all the critics of the administration are at fault.

Anonymous said...

Rex Nutting here: My evidence that increased life expectancy since 1940 is primary due to lower infant mortality:
According to the CDC, the death rate for those under 5 in 1940 was 5,782 per 100,000. It's now 725 per 100,000. For those in early retirement age (65-74) the death rate in 1940 was 4,838 per 100,000. It's now 2,321 per 100,000. Seems like there's been a dramatic decline in infant mortality, but not quite so dramatic for geriatric mortality.
My point was not that old folk aren't living longer and therefore collecting more lifetime Social Security benefits, it was that the president was exaggerating the improvement in longevity for old people to make the funding problem seem worse, implying that the typical person in 1940 lived to 60, never to collect any Social Security at all, while all of us baby boomers will live into our 80s and bleed the system dry. (Note how this story conflicts with the other story about how it was the early retirees who got the great deal from Social Security's Ponzi scheme while baby boomers will never live long enough to get back what they put into the system.)
Yes, Mr. President, we ARE living "way beyond 60." But our grandparents typically lived "way beyond 60" as well, just not quite so beyond.
A long life is a good thing, especially if you have a comfortable and secure retirement.

Anonymous said...

If you buy Bush's contention that Social Security will go "flat bust" and "bankrupt" when its benefit bill exceeds its revenues, then you would have to agree that the federal government as a whole is currently "flat bust" and "bankrupt."

CalculatedRisk said...

If it was my choice, this debate wouldn’t be about Nutting criticizing Bush, Samwick criticizing Nutting, etc.

Instead we would start by asking:
1) Is Social Security the biggest fiscal problem? The answer is No. The General Fund crisis is far larger and a more immediate problem. In fact, I would call the current General Fund deficit of $600+ Billion per year a crisis right now. Next up would be the Medicare shortfall. Why don’t we drop the Social Security debate and talk about those two issues?

2) When we get back to Social Security, I would ask: Why do we have Social Security? What is its purpose? That would be an interesting discussion and would probably lead to better policy.

It seems to me that everyone is arguing over the best way to fix the backyard deck without asking why we have a deck and do we really want one. Maybe we want a patio and a pool. :-)

Meanwhile the house (the General Fund deficit) is burning down.

I originally bookmarked Professor Samwick’s “Vox Baby” hoping to read some insightful remarks on Bush’s proposed Social Security reform. I would enjoy that discussion ...

Anonymous said...

Advice to Jult52:
The Social Security Trust fund currently holds something like $1.2 trillion in US government bonds. This is because the managers of the trust fund - and millions of other investors worldwide - believe US government bonds to be a very solid security. The US government has the unparalleled record of having never missed a debt payment since the founding of the country.

If you believe the US government is about to start missing those payments (not an entirely irrational worry given Bush's prodigality with the general fund debt), you should not be worrying about a fractional reduction in Social Security payments 20 years from now - you should be stocking up on guns and gold.

JG said...

somebody wrote:

"'...huge giveaways...'"

"Do I take you to mean that SS recipients haven't earned their benefits?"

Well, past recipients certainly got much *more* than they earned, far more than they paid into SS plus a market return.

While future recipients will get back much *less* than they've earned, they -- even the poor among them -- will get back less than they put in.

So the answer is:

No, past recipients didn't earn their benefits; and

Yes, future recipients have earned their benefits and alas much more, but they are being screwed for the benefit of the past recipients -- as per the 1983 deal that raised taxes on and cut benefits for the young to preserve higher benefits for older.

Such is the intergenerational compact. ;-)

JG said...

Somebody wrote:

"'The current SS system guarantees you won't get back what you paid in'"

"Is this true?"

Yes, it is. Of course all past generations got back much more than they put in.

This historic change in the basic nature of SS -- now having it give the young much less than they put in -- is what liberals call "preseving Social Security". ;-)

" ...assume that I am a 30 year old median income earner who is going to retire in 2042 and live to age 85, how do my total benefits compare to my total tax payments?"

The SSA actuaries say that among workers entering the labor force in 1994, and thus around age 30 today, the statutory benefits will give low-wage individuals 2% less than they contribute, average-wage individuals 15% less, and high-wage individuals 50% less.

But these benefits are 30% underfunded. So if SS stays paygo then by the laws of arithmetic these numbers become a 30% loss, 40% loss, and 65% loss respectively.

This is what dooms SS as we know it politically.

Anonymous said...

Your numbers are distorted. This is the problem with arguing with liars (or those who defend them).

JG said...

Someone wrote:

“The Social Security Trust fund currently holds something like $1.2 trillion in US government bonds. This is because the managers of the trust fund - and millions of other investors worldwide - believe US government bonds to be a very solid security.”

This is patent nonsense. The SS Trustees have never in the history of the program even pretended that’s why the fund holds gov’t bonds. The bonds are merely an accounting tally that’s supposed to track how much has been added to national savings via the SS surplus – an idea long since exploded.

For the story on that see

The SS Trustees have never, ever made any pretense that the bonds guarantee or secure any level of benefit payments. Because they don’t – they secure zip, nada, nothing.

“The US government has the unparalleled record of having never missed a debt payment since the founding of the country. If you believe the US government is about to start missing those payments … you should not be worrying about a fractional reduction in Social Security payments 20 years from now - you should be stocking up on guns and gold.”

Foolishness. The gov’t has *already* missed payments on those bonds. They are 15-year bonds and the gov’t hasn’t redeemed any in 21 years. It fails to redeem another issue every year. Default!!!!

But no – they are demand bonds that automatically roll over when not needed, yet when needed can be cashed in before they mature. No other T-bonds are like them. They are unique.

Now, to cash in $5 trillion of trust fund bonds to pay promised SS benefits from 2018 to 2042 Congress is going to have to raise income taxes by something like 20+%.

Supppose that, as in 1983, reflecting the will of the voting public, Congress doesn’t want to raise taxes enough to pay all promised SS benefits, and cuts benefits instead.

Now the bond proceeds aren’t needed so the Treasury doesn’t pay them off.

Default???? No more than last year!

Benefits are cut, the bonds can roll over until the year 5,000 or whenever, and there is no default at all.

The idea that these bonds guarantee any level of promised benefits after 2018 is just plain, well, “dim” is a polite word.

Anonymous said...

Come now, the problem isn't that you "ascribe no sinister motives" to the President's language, it is that you seem unwilling to discuss his likely motives at all.

To deny that it is in the interest of the President and other privatization supporters to overstate the problems with the current Social Security system strikes me as either somewhat naive or rather disingenuous. Recognizing this, it seems perfectly fair to interpret the President's remarks in this light. I wouldn't call what he is doing sinister - politicians of every stripe do this sort of thing. But the language the President is using toes the line between mere salesmanship and something closer to a disinformation campaign. Whether it crossed that line is an interesting argument to have, and to have it in a way that is not completely divorced from reality we must be free to question motives.

The more intemperate posts, I would guess, are frustrated because defending the President's language here hardly seems worth the intellectual effort required to do it. Why not just admit that the President exaggerates the problem, say something to the effect of 'all's fair in politics', and move on to more substantive issues? What's more, admitting that the President's language is overheated does nothing to undermine the merits of private accounts, so this option is basically costless - why not exercise it?

Anonymous said...

Jim wrote: "Benefits are cut, the bonds can roll over until the year 5,000 or whenever, and there is no default at all."

Ah. This makes slightly more sense. The hypothesis is that SSA will simply "choose" never to redeem the bonds it holds. There is then technically no default (and thus no need for Moody's to downgrade the USA's debt rating and touch off worldwide financial collapse).

I hadn't considered it from this angle before. This tacit forgiveness is a slightly more plausible and less apocalyptic scenario than outright default, but it amounts to exactly the same thing: a massive transfer payment (swindle!) from lower income (primarily payroll tax paying) taxpayers to those with higher incomes (who primarily pay income tax).

The conclusions to draw remain the same as well: the only dangers to Social Security are crooked politicians and runaway general fund debt...

Patrick Sullivan said...

"To deny that it is in the interest of the President and other privatization supporters to overstate the problems with the current Social Security system strikes me as either somewhat naive or rather disingenuous."

It's not in W's political interest to even be talking about this. He's not the President who is going to get hit with the budget squeeze when the first of the Boomers start to retire. It seems rather obvious that he's trying to do the right thing now so a future President won't have a much more difficult row to hoe.

And if Mr. Nutting is still reading, here's the context of the President's 'never see a dime' remark:

"Most younger people in America think they'll never see a dime. That's probably an exaggeration to a certain extent, but a lot of people who are young, who understand how Social Security works, really do wonder whether they'll see anything."

It sure looks like a very cheap shot on your part.

Anonymous said...

In the long term, and when every generation is roughly the same size, there is no transfer. A system of current workers paying current retirees is exactly equivalent to workers saving for their own retirement at a rate equal to growth+inflation (say, in the stock market...). Of course, generation size varies somewhat, but that's usually a relatively minor problem, and such inequalities can be ironed out with, yes, mechanisms like the Trust Fund.

Defaulting on (or having SS forgive - it amounts to the same thing for our purposes) the Trust Fund is quite a different matter. This means that for 20 or 30 years a large chunk of Social Security taxes should have been labelled as general fund taxes. This would mean the tax system is quite a lot more regressive than it nominally appears. It depends on the year in which the default occurs, but the amount of transfer could easily exceed $1 trillion from the bottom 95% to the top 5%. That's not "legislated benefit reduction". It's reneging on a deal made to help soften the "legislated benefit reduction". It's a back door retroactive tax increase on lower income brackets.

There's a demographic lump working its way through the system. The Trust Fund was designed to help deal with this, by timeshifting the surplus for the leaner period to come. It's possible some workers will still not end up receiving back quite as much as they put in. This is certainly unfortunate, but it's not a crisis. The crisis only comes in when George Bush comes along and says, "Well, since you're already bent over..."

JG said...

"There's a demographic lump working its way through the system. The Trust Fund was designed to help deal with this, by timeshifting the surplus for the leaner period to come"

Nonsense on both counts.

It's not a "demographic lump".

First, Social Security didn't go broke in 1983 because of demographics, but because Congress had hugely raised benefits ahead of taxes for 20 years -- and then found that *politically* it couldn't raise taxes enough to catch up and fund the benefits it had promised to near-term retirees.

So to avoid their wrath and that of taxpayers too, it came up with a split-the-differnce poltical compromise under which the benefit gap was cut by hitting *future retirees* 50% by increasing their taxes and 50% by cutting their benefits.

The result of this calculated deal was to push today's under-40 workers into being the first generation ever to get *negative* returns from SS -- so that 1983 generation could get *positive* ones.

Second, the people who made that deal knew full darn well that they were leaving the future of SS every bit as underfunded as it is for us. They never pretended they had a permanent fix. They just wanted to get past the elections *they* had to face.

Third, the trust fund doesn't "time shift" a penny. Every dollar "financed" by the trust fund -- all $5 trillion of them come 2018 -- will be collected in income taxes to pay SS benefits through the fund just EXACTLY like income taxes would have been used to cover the payroll tax shortfall to pay benefits if there had been no trust fund. Net benefit: $0

Come 2030, income taxes will have to be 22% higher than they are today as a pct of GDP just to finance the SS trust fund! Some "time shifting" that! ;-)

Fourth, if there was a "demographic lump" there would be an *other side* to it. But there *isn't*. The numbers just get worse and worse into the future...