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January 06, 2005

Scheming Social Security

I've been having a bit of a back and forth today here on the blog with Scott about Social Security.

Scott (and please feel free to correct me if I'm mischaracterizing what you're saying) believes that Bush is out there tackling Social Security...trying to save it from the jaws of imminent doom. Scott also sees Social Security as an entitlement..and that somehow Democrats aren't serious about entitlement reform, so therefore aren't serious about dealing with Social Security. Scott concedes that Bush may not have the right answers..but he says Kerry and Dean and the Dems only want to raise retirement age.

Hopefully I've covered all of Scott's bases here.

Firstly...Social Security is quite healthy and sustainable for the next forty years, at least. There's no urgency to fix it right this minute. It's not improbable that it would be completely stable without any changes...but there's a possibility that it wouldn't be. So it's wise to look at the alternatives for adjusting Social Security to ensure it's long term viability.

The first thing we must do is understand what Social Security actually is and what it is not. SS is not an entitlement. It's an insurance policy. We pay that money into Social Security so that when we retire, there is supplemental income to keep the bottom from falling out from under us financially as we age.

Social Security by law has a budget that's completely outside the rest of the US government. A couple of decades ago, a law was passed that raised the payroll tax in order to generate a SS surplus, or Trust Fund. That surplus is still running today. The Social Security Administration says that the surplus will run until 2042. The Congressional Budget Office says that the surplus will run until 2052. Economists are mixed..saying it might never run out...as projections assume that the economy will grow at a slower pace that it previously has.

At the point when benefit payments begin to exceed revenues from payroll taxes (projections are that will happen around 2018), the Trust Fund kicks in. The Trust Fund is in the form of bonds (which naysayers say are worthless) which is discussed in an excellent essay by Paul Krugman here (PDF required).

In a nutshell, Krugman says that the only thing that would keep the US from defaulting on the Trust Fund bonds is a fiscal crisis that led the US to default on it's debts. Or legislation that would specifically allow nonpayment of the general fund's debts to retirees.

One of the options considered is Bush's privatization plan. Kevin Drum has a good analysis of why that plan is going to make retirees worse off.

This piece in the Post says that Bush's plan will cut benefits by a third. The White House hopes that the money will be made up by the private accounts. But if you read Drum's piece...that's an extremely optimistic hope. Further, Bush says that he will add language into the privatization scheme that won't allow for "frivilous" investing. So not only is it not a free market concept..the government is going to tell you what you're allowed to invest in. Can you see the line of lobbyists for THAT one?

So if not privatization..then what? Some Democrats have proposed raising the age that benefits begin. That would certainly save some money. But it seems to me that the logical answer would be a slight raise in the payroll tax, to increase the Trust Fund surplus enough to cover the 2042(2052) insolvency.

Posted by Carla at January 6, 2005 01:54 PM