Joe Economist
Council Member
(MarketWatch Article) — Recently, the president announced that he is willing to reduce the promises of Social Security to seniors. This change acknowledges what the Trustees of Social Security have said for years. Social Security is in need of immediate reform.
The change to the chained consumer price index is a benefit cut, one which will lower the buying power of seniors as they get older. Chained CPI does not measure inflation more accurately than the consumer price index. Chained CPI measures in part the behavioral response to inflation. Jargon aside, this change is a benefit cut.
While most Americans understand that Social Security is a vital program, there is very little consensus on its financial condition. Some experts say that the system has no problems. Others say that even if the system had problems, they can be fixed easily. While the perception of the problem may vary, we need to acknowledge some facts about the system.
According to the 2012 report of the Board of Trustees of the Social Security Trust Funds, the system has a $20.5 trillion shortfall, which should start affecting beneficiaries in 2033. That statement means anyone who is 47 or younger will retire after the trust funds are gone. It means anyone who is 64 or younger expects to live long enough to be affected by the forced benefit cuts. Also keep in mind that the trustees also offer less optimistic projections in which the trust fund is gone by 2027.
The shortfall of $20.5 trillion is larger than one year’s gross domestic product. That sum is more than Social Security has collected in all forms since inception. That figure will fall on someone. So the idea to change the CPI adjustment of Social Security is not throwing granny under the bus. It actually will save a granny in the future from a much larger bus.
Social Security the system is mostly financed not funded
It is false to say that Social Security has sufficient funds to pay full benefits until 2033. The $2.7 trillion held by the OASDI trust funds are the only funds that exist for Social Security, and would pay for about 3 ½ years of full benefits. The rest of the funding comes from paygo financing in which the system takes in payroll taxes in exchange for promises to pay future benefits. This is exactly the same as getting a loan from a bank in exchange for promises of future interest and principal payments.
The surplus exists only to the extent that you ignore the financing cost
The trust funds hold $2.7 trillion in the highest quality investments available. That money is however held against more than $20 trillion unfunded promises embedded in Social Security. The discussion of a surplus is a left-pocket, right-pocket argument where the left pocket has a lot of money and the right pocket has even more bills. The politicians want you to focus on the left pocket as though it doesn’t have to pay the bills in the right pocket.
Social Security benefits are not guaranteed
The Supreme Court ruled in Flemming v. Nestor that Social Security benefits are not a binding obligation of the federal government. Every worker in 1983 found out that Social Security benefits could be cut. The only reason that writers can claim that Social Security has paid every penny owed is because the system can reduce what it owes at the will of Congress.
Solvent is not the same as fixed
Most writers use the words solvent and fixed interchangeably even though the concepts are about $12 trillion apart. The 75-year solvency shortfall is $8.6 trillion, whereas the infinite shortfall is $20.5 trillion. To understand the difference: For $20.5 trillion, Social Security has no problem; $8.6 trillion dollars is the cost of making our problem a problem for our grandchildren. This change will not fix Social Security or even make it solvent.
Some writers find these facts troubling, and some don’t. The one thing that we know for certain is that the longer we do nothing, the bigger the bus grows.
The change to the chained consumer price index is a benefit cut, one which will lower the buying power of seniors as they get older. Chained CPI does not measure inflation more accurately than the consumer price index. Chained CPI measures in part the behavioral response to inflation. Jargon aside, this change is a benefit cut.
While most Americans understand that Social Security is a vital program, there is very little consensus on its financial condition. Some experts say that the system has no problems. Others say that even if the system had problems, they can be fixed easily. While the perception of the problem may vary, we need to acknowledge some facts about the system.
According to the 2012 report of the Board of Trustees of the Social Security Trust Funds, the system has a $20.5 trillion shortfall, which should start affecting beneficiaries in 2033. That statement means anyone who is 47 or younger will retire after the trust funds are gone. It means anyone who is 64 or younger expects to live long enough to be affected by the forced benefit cuts. Also keep in mind that the trustees also offer less optimistic projections in which the trust fund is gone by 2027.
The shortfall of $20.5 trillion is larger than one year’s gross domestic product. That sum is more than Social Security has collected in all forms since inception. That figure will fall on someone. So the idea to change the CPI adjustment of Social Security is not throwing granny under the bus. It actually will save a granny in the future from a much larger bus.
Social Security the system is mostly financed not funded
It is false to say that Social Security has sufficient funds to pay full benefits until 2033. The $2.7 trillion held by the OASDI trust funds are the only funds that exist for Social Security, and would pay for about 3 ½ years of full benefits. The rest of the funding comes from paygo financing in which the system takes in payroll taxes in exchange for promises to pay future benefits. This is exactly the same as getting a loan from a bank in exchange for promises of future interest and principal payments.
The surplus exists only to the extent that you ignore the financing cost
The trust funds hold $2.7 trillion in the highest quality investments available. That money is however held against more than $20 trillion unfunded promises embedded in Social Security. The discussion of a surplus is a left-pocket, right-pocket argument where the left pocket has a lot of money and the right pocket has even more bills. The politicians want you to focus on the left pocket as though it doesn’t have to pay the bills in the right pocket.
Social Security benefits are not guaranteed
The Supreme Court ruled in Flemming v. Nestor that Social Security benefits are not a binding obligation of the federal government. Every worker in 1983 found out that Social Security benefits could be cut. The only reason that writers can claim that Social Security has paid every penny owed is because the system can reduce what it owes at the will of Congress.
Solvent is not the same as fixed
Most writers use the words solvent and fixed interchangeably even though the concepts are about $12 trillion apart. The 75-year solvency shortfall is $8.6 trillion, whereas the infinite shortfall is $20.5 trillion. To understand the difference: For $20.5 trillion, Social Security has no problem; $8.6 trillion dollars is the cost of making our problem a problem for our grandchildren. This change will not fix Social Security or even make it solvent.
Some writers find these facts troubling, and some don’t. The one thing that we know for certain is that the longer we do nothing, the bigger the bus grows.
