[ExI] The Myth of the Social Security System's Financial Shortfall

Damien Broderick thespike at satx.rr.com
Tue Aug 10 17:41:55 UTC 2010

The Myth of the Social Security System's Financial Shortfall
MICHAEL HILTZIK - Los Angeles Times

The annual report of the Social Security Trustees is the sort of rich 
compendium of facts and analysis that has something for everybody...

In recent years, during which conservatives have intensified their 
efforts to destroy one of the few U.S. government programs that actually 
works as intended, the report's publication has become an occasion for 
hand-wringing and crocodile tears over the (supposedly) parlous state of 
the system's finances.

This year's report, which came out Thursday, is no exception. Within 
minutes of its release, some analysts were claiming that it projected a 
"shortfall" for Social Security this year of $41 billion.

Before we get to the bogus math behind that statement - which doesn't 
actually appear in the report - let's look at the encouraging findings 
by the agency's trustees, who include the secretaries of Labor, the 
Treasury, and Health and Human Services.

The trustees indicated that the program has made it through the worst 
economic downturn in its life span essentially unscathed. In fact, by at 
least one measure it's fiscally stronger than a year ago: Its projected 
actuarial deficit over the next 75 years (a measurement required by law) 
is smaller now than a year ago.

The old age and disability trust funds, which hold the system's surplus, 
grew in 2009 by $122 billion, to $2.5 trillion. The program paid out 
$675 billion to 53 million beneficiaries - men, women and children - 
with administrative costs of 0.9% of expenditures. For all you 
privatization advocates out there, you'd be lucky to find a retirement 
and insurance plan of this complexity with an administrative fee less 
than five or 10 times that ratio.

This year and next, the program's costs will exceed its take from the 
payroll tax and income tax on benefits. That's an artifact of the 
recession, and it's expected to reverse from 2012 through 2014. The 
difference is covered by the program's other income source - interest on 
the Treasury bonds in the Social Security trust fund.

That brings us back to this supposed $41-billion "shortfall," which 
exists only if you decide not to count interest due of about $118 billion.


And that, in turn, leads us to the convoluted subject of the trust fund, 
which for some two decades has been the prime target of the crowd trying 
to bamboozle Americans into thinking Social Security is insolvent, 
bankrupt, broke - pick any term you wish, because they're all wrong. The 
trust fund is the mechanism by which baby boomers have pre-funded their 
own (OK, our own) retirements. When tax receipts fall short, its bonds 
are redeemed by the government to cover the gap.

Despite what Social Security's enemies love to claim, the trust fund is 
not a myth, it's not mere paper. It's real money, and it represents the 
savings of every worker paying into the system today. So I'm going to 
train a microscope on it.

What trips up many people about the trust fund is the notion that 
redeeming the bonds in the fund to produce cash for Social Security is 
the equivalent of "the government" paying money to "the government." 
Superficially, this resembles transferring a dollar from your brown 
pants to your gray pants - you're no more or less flush than you were 
before changing pants.

But that assumes every one of us contributes equally to "the 
government," and by equal methods - you, me and the chairman of Goldman 

The truth is that there are two separate tax programs at work here - the 
payroll tax and the income tax - and they affect Americans in different 
ways. The first pays for Social Security and the second for the rest of 
the federal budget.

Most Americans pay more payroll tax than income tax. Not until you pull 
in $200,000 or more, which puts you among roughly the top 5% of 
income-earners, are you likely to pay more in income tax than payroll 
tax. One reason is that the income taxed for Social Security is capped - 
this year, at $106,800. (My payroll and income tax figures come from the 
Brookings Institution, and the income distribution statistics come from 
the U.S. Census Bureau.)

Since 1983, the money from all payroll taxpayers has been building up 
the Social Security surplus, swelling the trust fund. What's happened to 
the money? It's been borrowed by the federal government and spent on 
federal programs - housing, stimulus, war and a big income tax cut for 
the richest Americans, enacted under President George W. Bush in 2001.


In other words, money from the taxpayers at the lower end of the income 
scale has been spent to help out those at the higher end. That transfer 
- that loan, to characterize it accurately - is represented by the 
Treasury bonds held by the trust fund.

The interest on those bonds, and the eventual redemption of the 
principal, should have to be paid for by income taxpayers, who reaped 
the direct benefits from borrowing the money.

So all the whining you hear about how redeeming the trust fund will 
require a tax hike we can't afford is simply the sound of wealthy 
taxpayers trying to skip out on a bill about to come due. The next time 
someone tells you the trust fund is full of worthless IOUs, try to guess 
what tax bracket he's in.

It should come as no surprise that one of the leading advocates for 
cutting Social Security benefits or raising payroll taxes is the Wall 
Street billionaire Peter G. Peterson, who has pumped millions into an 
alarmist campaign about the federal deficit.

But ask Peterson, who made his money as a hedge fund manager, about 
closing the enormous tax loophole enjoyed by hedge fund managers - it 
costs the Treasury a couple of billion dollars a year - and he warns 
that it would force hedge funds to move overseas, which would be bad for 
the U.S. economy. This is the sort of argument my mother used to 
describe as: "I like me, who do you like?"

The trust fund may not last forever, but reports of its demise are 
certainly premature. The trustees say it will be drawn down to zero in 
2037, at which point the program will only have enough money coming in 
from taxes to pay 78% of the benefits due under current law. So sometime 
in the next quarter-century - but by no means right now - does anything 
have to be fixed, say through a hike in the payroll tax ceiling (or, 
better, its elimination)?

That 2037 deadline, in truth, is a moving target. It's based on 
long-term projections, which become more uncertain the further out you 
look. The estimated date is very sensitive to forecasts of immigration, 
wage and economic growth, and birth and death rates, all of which are 
uncertain. Over the last 10 years, it has fluctuated between 2037 and 
2042, mostly due to economic factors. It has held steady at 2037 for two 
years despite the downturn, but that's still better than the projection 
in 1998, which was for exhaustion in 2032.

In short, if the new trustees report gets examined wisely and 
responsibly, it should put an end to all the current talk about raising 
the retirement age or cutting benefits. Social Security doesn't 
contribute a dime to the federal deficit, and in these days of market 
stagnation and cutbacks in pensions, it has never been more important to 
millions of Americans. The Pete Petersons of the world should find 
themselves a different target.

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