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Neil H. Buchanan

Social Security Scare-Mongering and Trust Between Generations: There is No Crisis, Either Short-Term or Long-Term


Thursday, April 1, 2010

Retirement security is a compact across generations. The generations that are currently working take care of those who are no longer working, and they in turn expect that the generations that follow will take care of them when the time comes. Although this compact is not a formal contract, it is an agreement that crosses generations, with each generation committing to pay first and receive benefits later.

Because each generation must believe that the other generations will fulfill their part of the bargain, trust between generations is essential to allow any system of retirement security to function. The Social Security system is certainly no exception.

Social Security, of course, has long had its opponents. The easiest way for those who oppose Social Security to bring it to an end is by sowing distrust among the parties to the compact. If one or more generations can be convinced that other generations are opportunistically rigging the system, then political support will dissipate, and the system can then be dismantled.

The opponents of Social Security have, in fact, been surprisingly successful in the last few decades in convincing younger workers that they are being cheated. Polls show, for example, that many young people do not believe that Social Security will pay them any benefits at all in the future. Many believe that the system is going to go "bankrupt," and they are convinced that Social Security's trust funds are an accounting gimmick.

This manufactured cynicism has become so pervasive that respectable media outlets now regularly trumpet anything that seems to confirm the belief that Social Security has been hijacked by current retirees and Baby Boomers, to the detriment of younger people. Last week, for example, The New York Times published a misleading and inaccurate front-page article proclaiming that Social Security had reached a "tipping point," moving from annual surplus to annual deficit "years ahead of projection." Other leading media outlets quickly followed suit.

The problem is that those conclusions were simply incorrect. While there is no reason to believe that the author of the Times article consciously chose to hype a non-event out of animus toward Social Security, we appear to have reached the point where any apparently bad news about retirement security is considered newsworthy.

In this article, I will begin by explaining why the underlying facts do not support the pessimistic conclusions in the Times article. The real question is whether Social Security will – if its opponents are unable to bring it down politically – still be able to support current younger workers when they retire. The answer to that question is clearly yes.

The Hype About a Meaningless Statistical Blip

A few weeks ago, the Congressional Budget Office (CBO) issued updated projections of what Social Security's finances will look like over the next several years. Those new projections showed that, from 2010-13, the system is likely to run small annual deficits rather than small annual surpluses, as had been projected. In the previous report, the first year in which Social Security was projected to show an annual deficit was 2016, The Times article concluded that this was "the first step of a long, slow march to insolvency."

But is this change in the short-term picture truly a sign of an unhealthy system. as the Times article claimed? Hardly. We have long known that the system would change from annual surpluses to annual deficits, because the system was designed precisely to accumulate surpluses for several decades, followed by several decades of deficits. Shifting from annual surpluses to annual deficits is not a tipping point but rather, quite simply, a continuation of a planned trend that has been in place for over thirty years.

Still, is it not bad news that this change happened in 2010, rather than 2016? Again, the answer is no. In fact, 2010 is not the date on which annual surpluses will permanently shift to annual deficits. That will still happen in 2016. The CBO's report merely shows that the current recession – the worst economic downturn since the Great Depression, with chronic unemployment projected to persist for the next several years – has reduced annual revenues and increased annual retirement benefits enough to turn small surpluses into small deficits. If this had happened five years ago, the change would not have been large enough to erase the then-larger annual surpluses. Now, however, because we are closer to 2016, the short-term fluctuations caused by the recession were just large enough to make the forecasts for 2010-13 turn slightly negative. Even so, the projections for 2014 and 2015 show a return to annual surpluses, before the planned move into the annual deficit range begins after 2016.

It is possible, of course, that even this short-term change could have unfortunate long-term effects. The important question, after all, is not when the system turns from annual surplus to annual deficit, but whether and when the system might be required to reduce benefits. This is known as the trust funds' "depletion date." As I discussed in a FindLaw article last Spring, the Social Security Trustees' 2009 report projected three possible scenarios for when that might happen: in 2029, in 2037, or never. That reflected a change from the 2008 report, which showed possible depletion dates of 2031, 2041, or never.

If either of the two more pessimistic scenarios were to play out, then future benefits would have to be reduced to the level that could be covered by annual revenues. Note that this is not the same thing as "bankruptcy," because the system would at that point still be paying out (under the Trustees' preferred scenario) 76% of scheduled benefits. Those scheduled benefits will, however, be significantly higher than the benefits that today's retirees receive, making it rather difficult (even after the projected reduction) to describe the system as failing to support future retirees. (Moreover, Congress could, in those future years, restore all or some of the reduced benefits, if it believed that the long-term costs of doing so were acceptable.)

Even if one believes that the depletion of the trust funds is a seriously bad possibility, however, the CBO's report simply does not suggest that the date has changed. The Times article itself quotes Social Security's Chief Actuary as saying that the depletion date will not "lurch forward" again this year, even with the recession-induced change in the system's finances over the 2010-13 period.

In short, we have now reached the point where one of the nation's leading newspapers feels comfortable publishing a news article – not an editorial – saying that a short-term statistical blip is evidence of a major shift in Social Security's long-term prospects, even though the article contradicts itself on that fundamental point. It is no wonder that young people are suspicious about the long-term prospects of the system.

Why Did We Run Surpluses, and What Did We Do With Them?

Even if the depletion date never comes, however, readers may ask, how can a government that is already running deficits afford to pay for a retirement system's annual shortfalls?

One of the least well-understood aspects of how Social Security works is whether the system has "saved" the money that it accumulated by running surpluses for all these years. If it has not saved the money, after all, then things could be much worse than we are being led to believe. Former President George W. Bush said that the funds had not, in fact, been saved, because the funds were merely "pieces of paper" – specifically, the Treasury securities in which Social Security's annual surpluses were invested.

When an individual buys a Treasury security, she is lending money to the U.S. federal government. The Social Security trust funds, however, involve the federal government lending money to the federal government. This seems odd, even troubling.

What, however, are the alternatives? If we did not want Social Security to put its surpluses into Treasury securities, then we could have required that the system purchase the securities of foreign governments. This would, however, have put us at political risk, since we would then be dependent on foreign politicians' decisions regarding whether they would pay us the money when it was due.

Alternatively, we could also have required that Social Security put its excess funds into private financial markets. This, of course, would have resulted in the U.S. federal government owning a total of over two trillion dollars' worth of private stocks and bonds. Those who are currently worried about "government takeovers" of the economy could hardly have wished for that outcome.

More importantly, putting Social Security's annual surpluses into anything other than Treasury securities would have been a meaningless exercise. Imagine a year in which the rest of the federal government ran, say, a $500 billion deficit, while Social Security ran a $100 billion surplus. We can either have the federal government lend (through Social Security) $100 billion to private entities while borrowing $500 billion from other private entities, or the federal government as a whole can borrow $400 billion from private entities. Either way, the government's net borrowing is the same.

What the Social Security surplus did do, therefore, was to reduce the amount of money that the federal government needed to borrow from private lenders. This is "saving" in a very important sense: Social Security's surpluses served to reduce the total indebtedness of the federal government below what it would otherwise have been. Being, for example, $7 trillion in debt is better than being $9 trillion in debt; and Social Security reduced our public indebtedness. Reductions in debt are, in fact, a form of saving.

The Effect of Social Security Surpluses on Real Living Standards

Yet readers may have another follow-up question: Even if Social Security's surpluses reduced overall government debt, is it not true that the surpluses were "spent," and therefore will not be available to support future retirees?

Far from it. A change in government debt changes the amount of money available to private borrowers, meaning that reductions in government borrowing will be associated with greater private borrowing. If, as economists generally assume, private borrowing is used to invest in the productivity of the economy, then Social Security's surpluses will have financed a larger and wealthier economy than would otherwise have come into being.

When 2016 comes, therefore, and we start to draw down the Social Security trust funds, what we will really be doing is adding to the overall borrowing by the federal government. That extra borrowing, however, will be easier for the economy to withstand, precisely because the economy is (and forever after will be) larger as a result of Social Security's previous surpluses.

Admittedly, this is all rather complicated and indirect. It might be helpful, therefore, to consider a counterfactual: What would it mean if the Social Security surpluses really had not been saved? Shockingly, this would mean that the Baby Boomers had spent their entire working lives paying more in Social Security taxes than they should have paid, since the system's benefits during those years were much lower than revenues.

If, in other words, the benefits that the Boomers are to receive are not being supported by a wealthier economy – an economy that is wealthier because Social Security's surpluses were "saved" in the form of lower government debt – then it is actually the Boomers who are the victims of a scam – not younger generations, as many in the media keep insisting. The Boomers would have massively overpaid taxes, because (under this incorrect assumption) the economy's ability to support those benefits would not be meaningfully tied to the three-plus decades of surpluses that the Boomers supported. If all of that were true, which generation would really be the "suckers"?

Fortunately, this scenario does not reflect reality. Social Security's surpluses have in fact helped to create an economy rich enough to support the retirements of the Baby Boomers, as well as the eventual retirements of their children and grandchildren. While we might choose in the future to adjust benefits and taxes, there is no reason to believe right now that the system is in trouble, either in the short term or the long term. And the headlines to the contrary are inaccurate and irresponsible.

The truth is that the compact between generations is being honored. To see that, we need only ignore all the scare-mongering, look at the facts, and realize that Social Security is working as it should.

Neil H. Buchanan, J.D. Ph. D. (economics), is a Visiting Scholar at Cornell Law School, an Associate Professor at The George Washington University Law School, and a former economics professor.

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