Sunday, July 25, 2010

Pay As You Go (updated)

One of the canards regarding the Social Security system is that it is a “pay as you go” system, and that today’s workers are paying for today’s retirees. The problem, the saying goes, is that we used to have a couple dozen workers paying for each retiree, and now we have only a six to one ratio and even that is diminishing, or something like that.

The problem is, that the picture is simply not true. I have been paying into the Social Security trust fund since I was eighteen. I just looked at the statement of my payments over those years provided to me by the SSA, and with even minimum interest accruing on that payment amount I can draw on that balance at my current rate until I am 87 and not use it up. Nobody working for a living today is contributing to my Social Security income and, with my health complications, nobody is ever likely to.

And yet that talking point continues to echo, not just from Republicans but from Democrats as well. We need to trim Social Security, supposedly, because retirees are outnumbering workers and today’s workers cannot continue to pay the freight for all of these current retired people.

As people live longer we may need to do something about rates withheld, or maybe we need to develop some kind of graduated retirement process. I don’t pretend to have the answers for the issues raised by longer life, but the argument about the ratio between workers and retirees is bunk.

Social Security is not and was never designed to be a “pay as you go” system. It existed that way initially only out necessity and is functioning now, as it was designed to do, on a trust fund basis. The funding ratio of that trust may need adjustment, it certainly appears that it does, but it has nothing to do with the ratio between former and current workers.

Update: Monday, 6:30am, responding to comment

But isn't the trust fund at a zero balance, because the politicians raided it &/or used to to mask budget deficits?

No. The balance in the fund is the largest it has ever been because from the day it was created it has been collecting more in payroll deductions than it has been paying out in retirement benefits. It has been claimed that due to the current spike in unemployment that has finally reversed, but I'm not sure I believe it.

Politicians have used SSA cash flow to mask the deficit by counting that cash flow as federal revenue, allowing the SSA excess to "pose" as an offset to the federal revenue deficit, but that has had no functional effect on Social Security at all. (I'm actually writing a post on that for today or tomorrow.) The "surplus" of the Clinton years was, in fact, just such a ploy and his budget was actually deficit spending, albeit the smallest functional deficit in decades.

and the $$ in the trust fund is replaced by IOU's from the treasury?

Yes, and your point is? The government is borrowing to fund its operation and it has borrowed some of that money from the SSA. Conversely, the SSA needs to invest its funds and needs to invest it in a safe manner, and nothing is safer than "IOU's from the treasury" which are called US Treasury bonds. So where is there a problem?

Did you think the SSA was going to just keep that cash under a mattress?

It is going to cause a massive problem for the government when the SSA says, "Hey, we need to start getting our money back." Not only will the government actually be spending more, but it won't have the cover-up of the SSA surplus any more and will have the repayment to boot, and the visible deficit will be huge and really unpopular. Current politicians don't care about that, of course, because they will be retired by then and different people will have to take that on.

And the number of payers-into may be decreasing, while the number of payees-out is increasing and will become huge in the coming years. The baby boomers born in 1945 are now turning 65 and it only gets bigger from here.

Again, where is the problem? Do you think that the people who designed Social Security were stupid? This is precisely how it was designed to work. That the fund would at some point be paying out more than it is taking in is absolutely part of the plan. That point is getting closer; last I heard it was 2035 but, again, claims are being made that high unemployment has not only moved that date forward but has brought it upon us. I have my doubts about much of that, regarding it mostly as fear mongering. That's when SSA says, "Hey, we need to start getting our money back," by the way, and when people in Congress start announcing retirement on a large scale.

The people responsible for running it now are stupid, of course, because as things change the ratios need to be "tweaked" and modern politicians have been willing to do so for the payments but not so much for the collections. As a result the fund will at some point in the not terribly distant future run out of money. So rather than the minor adjustments that we should have been making all along we need to make some significant ones now. But we don't need to massively alter the system, and none of what is happening now has turned a trust fund system into "pay as you go."

2 comments:

bruce said...

But isn't the trust fund at a zero balance, because the politicians raided it &/or used to to mask budget deficits? and the $$ in the turst fund is replaced by IOU's from the treasury? And the number of payers-into may be decreasing, while the number of payees-out is increasing and will become huge in the coming years. The baby boomers born in 1945 are now turning 65 and it only gets bigger from here.

I don't pretend to have the answers, either.

bruce said...

You don't have to be snarky about it. And your last paragraph is what I think I was getting at.

The people who designed it may not have been stupid, but a progression of ones after them might be.

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