Social Security Crisis

Over at Calpundit I see a post on what Kevin calls the Social Security Non-Crisis. I’m not going to dispute the data he uses, not because I think that the Trustee’s have perfect data, but because even the numbers he is using suggest that there is a crisis. I link to his argument specifically because it is a fairly good explanation of the standard non-crisis argument.

The Social Security crisis is really a budget crisis with three major components that are Social Security-related. For purposes of this post I am using data from the same report that Kevin uses. But first you have to understand something about Social Security. It is common knowledge, but I want to make it explicit. Social Security is not a retirement fund. It is principally an age-based income subsidy which uses a special tax system to ear-mark funds to support it. For quite a few years, the revenues raised by the ear-marked funds have exceeded the mandated benefit levels. The US government spends that money and issues Treasury bonds to the Social Security Trustees. From the point of view of the Social Security System these bonds are investments. From the point of view of the US government as a whole they are not investments. They are not investments because the US government is both payor and payee of the same bonds when the Social Security trustees hold the bonds.

The above paragraph is completely uncontroversial. Seriously, the politically charged stuff doesn't come in till below.

Also for the purposes of this post I am assuming that not one single non-Social Security budgetary item increases over the next 20 years. (A ridiculous assumption if you have heard of Medicare)

The Social Security crisis has three major components, all of which are based on the fact that the baby boomers are retiring very soon.

First the current ear-marked tax will not cover ear-marked expenditures in the fairly near future. In order for the Social Security expenditures to be met with the incoming revenue stream Kevin notes that we will probably have to do all of the above: cut the cap on the tax, raise the minimum retirement age, and engage in means testing. That is fine, and I agree with all of it (though I want far more extreme means testing) but it only solves the first part of the crisis. Also, considering the extreme (though in my mind inexplicable) Democratic aversion to means-testing I don't find even the easy fix that likely.

Second, the Treasury Bonds 'owed' to the Social Security Trustees have to be paid back in order for the above solutions to be enough to allow expenditures to equal the incoming revenue stream. In Table II.B1 of the link above, you will see in the Total Income section of the report a $71.2 billion entry labeled "Interest". From the point of view of the US Government as a whole, this is not income at all. It is a liability to be paid through taxation. I have been unable to find data indicating likely interest payments in the future. These interest payments have to be paid out of new taxes. Furthermore in order for Kevin's supposedly easy plan to work, Social Security will be cashing out the principal of these bonds. If I am reading the chart correctly that totals out to $1.07 trillion dollars. This too will have to be covered by new taxes.

Third, Social Security cash has been used for decades to support the general budget. In 2002 Net Contributions (the ear-marked tax) were $455.2 billion. Total expenditures were $393.7 billion. That is $61.5 billion in cash that has to be replaced in the budget, every single year. (And before someone mentions Iraq, please realize that the Iraq expenditure is in the $80 billion range over multiple years (I believe 20)).

In short there is a Social Security budget crisis. And that doesn't even touch on the other demographic bombs waiting in our future: the effect of baby-boomer retirements on the economy (slower growth as experience leaves the market), Medicare (so scary I don't even want to touch it right now), unexpected expenditures (who would guess), or medical advances which make the Social Security expenditures dramatically increase as people live even longer while causing ballooning Medicare expenses (likely I would think).

Posted by Sebastian Holsclaw at March 15, 2004 1:01 PM