Tuesday, September 25, 2007

Fine Work by the Treasury on Social Security

The U.S. Treasury Department has released its first of six issue briefs on the Social Security and its potential reform, "The Nature of the Problem." It is a very good overview of the projected future shortfall based on the latest Social Security Trustees Report. It is particularly gratifying to see these passages in a Treasury brief:

Viewing Social Security from the perspective of how it affects current and future individuals and generations explains why reform can be fairer to future generations the sooner it is implemented. Delay reduces the options for distributing the financial burden of reform across generations because delay exempts additional generations from sharing in the financial consequences of reform.

To make this point more concretely, consider a policy of closing Social Security’s permanent financing gap by immediately increasing the payroll tax rate by 3.5 percentage points. This policy would affect all current and future workers. If the tax increase were instead delayed until 2041, when the trust fund is projected to be depleted, the requisite tax increase would be 5.8 percentage points rather than only 3.5 percentage points—the difference being that there are fewer cohorts (and therefore less resources) to tax the longer one waits. Similarly, all retirees’ benefits would have to be cut by 20.4 percent in 2007 to make Social Security permanently solvent—but this would rise to a benefit adjustment of 30.4 percent if reform were initiated in 2041. These examples show that fairness to future generations requires that action be taken sooner rather than later.

They appeared here (my first post on Social Security) nearly three years ago. The teaser for the next of the six briefs, from footnote 4 of the current brief:
The special Treasury securities in the present trust funds represent claims on the government and—ultimately—the public, in the form of future general tax revenues. Whether these trust fund accumulations constitute true pre-funding is an open question, and is discussed in Treasury’s second issue brief.

I'll look forward to seeing it.


Anonymous said...

I eagerly await your posts on Medicare (the unmentioned elephant in the room), rather than the Social Security mouse, whose blood has been drawn repeatedly to make the general fund look more pleasant than it actually is.

xtra said...

Mr. Samwick,

I have a question, potentially stupid, all of these social security proposals seem to view 2041 as the operative year, that is when the trust fund revenues are exhausted. However, my understanding is that we spend the social security surplus, i.e. the revenues that are supposed to be dedicated to the trust fund, every year. Do these plans/projections assume that the trust fund claims will be funded through the general fund? Shouldn't the amount of revenues currently attributed to the trust fund also count towards the debt in Social Security?

Best regards,
Richard Conrad

Andrew Samwick said...

The balance in the trust fund is the current value of the claims of the Social Security system on the General Fund. It is an asset to Social Security, so the Treasury brief on the finances of the Social Security system is describing them accurately. The trust fund is also a liability of the General Fund, so if one were to then analyze all of the government's finances, the relevant metric would be total debt, not just debt held by the public.

In terms of cash flows, 2041 doesn't look any different from the 2040 and 2042. Deficits are projected to be about 4 percent of taxable payroll (1.6 percent of GDP) in each of those years. The year is relevant only because the Social Security system can pay full benefits (without another act of Congress) only as long as there is a positive balance in the Trust Fund. So if nothing has happened by 2041, and if the projections are borne out, then something will have to be done at that time.

I go into this accounting in more detail in an earlier post.

Anonymous said...

This is nothing but a new Greenspan committee. There is no reason whatever to ever collect a single payroll tax dollar in advance of paying it out. Anyone who claims that the SS Trust Fund is anything for which solvency even has a meaning is either ignorant or lying. The future funding of SS is no more or less difficult if every single present and future pseudo-bond were to be completely destroyed or, alternately, the SSTF were to be continuously filled with new pseudobonds enough to keep the total at 100 trillion dollars forever.

Shortfall funding comes from the Treasury, and whether it borrows to redeem pseudo-bonds or to directly make outlays is entirely insignificant, the amount will be the same.

Calling SSTF balances 'claims' is like saying that your pants are being held up by your suspenders in spite of wearing two belts. The real claims are the future outlay mandates. The SSTF is,and has always been, a political subterfuge.

Regards, Don Lloyd

Lord said...

This assumes the 'reform' is the right one, but as it can only be very roughly judged in the distant future, it is nearly equally plausible that such a premature action could actually be less fair to current generations than delaying it to a more predictable time.

If we really want to worry about such remote prospects, then perhaps we should be establishing 50 year war making budgets rather than using the current paygo scheme.

Anonymous said...

You said a mouthful, Mr. Samwick. Thank you. It's time we got serious about the real choices facing Americans. Social Security, Medicare, and all the federal entitlement programs MUST be fixed. The Treasury Department's attempt to highlight areas of the debate on which the different sides agree may or may not work, but it's to the Department's credit to try.

xtra said...

Is it really prudent to "pre-fund" Social Security through raising the payroll cap if all congress does is piss away the money. Isn't the result just boost Social Security's claims on the General Fund by the amount of payroll taxes raised and then spent to plug general fund gaps? Wouldn't such a scenario worsen our structural deficit?

save_the_rustbelt said...

I am a Republican and I don't trust anything that comes from the Bush administration.

The federal government is the only organization in the entire country that can committ accounting fraud and have it be legal (the crooks, in this case, make the rules).

The "trust fund" is a means of disguising the real deficit and was a 1983 flim-flam to make the tax system more regressive.

My fear is that in a mad rush to "fix" SS we will create a fix based on more fictions from the Bush-ites. We may do brain surgery to fix a sprained ankle.

Best wait until 2009.

xtra said...

"To the extent that new revenues are brought in, they are directed to personal accounts, so that they do not get commingled with the rest of the government's revenues."

I think for republicans that has to be the politcal tradeoff for higher taxes, that they get personal accounts in return to safeguard those revenues. Is such a compromise really viable on the hill. Republicans seem allergic to any tax hike, even if it's actual consequence would be to smooth tax rates over time. Democrats seem to view Social Security as it is currently constructed as untouchable.