Economics

The Facts About Social Security

Separating economic myths from economic truths

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Editor's Note: Reason columnist and Mercatus Center economist Veronique de Rugy appears weekly on Bloomberg TV to separate economic fact from economic myth.

Myth 1: There is no crisis. Social Security will never be insolvent.

Fact 1: Under the best-case scenario, the trustees report finds that the probability of Social Security never becoming insolvent is less than 2.5 percent.

The only scenario under which the Social Security trust fund will never go insolvent is based on projections which the Treasury Department itself considers to be extremely unlikely.

The above chart plots the trustees' projections of the future balance of the Social Security trust fund under three scenarios (expressed as a percentage of the annual cost of Social Security).

The purple line plots the trust fund balance under high-cost assumptions, the red line plots the trust fund balance under intermediate assumptions, and the blue line plots the trust fund balance under low-cost assumptions. Which of these projections is most likely to occur?

To determine the likely balance of the trust fund in the future, the Social Security trustees performed stochastic modeling, estimating the likelihood of various exhaustion dates under different assumptions. This modeling concluded that there is less than a 2.5 percent chance that the trust fund will continue to exist beyond 2048. Instead, the middle of the road estimate is that the trust fund is exhausted by 2036.  

Myth 2: Social Security won't contribute to the federal deficit for decades.

Fact 2: Starting this year the program will run a cash flow deficit which will add to the federal deficit.

In theory, Social Security benefits are self-financing with a 12.4 percent payroll tax, but that doesn't mean the money collected will pay for benefits. This is because when Congress changed the law in 1983 so that in any given year, current taxpayers pay more in taxes than the program needs to pay out benefits, Congress also required that the program invest the difference, or surplus, into a trust fund, which can only invest money in special-issue Treasury bonds.

So what has the Treasury done with the money? Well, the federal government has spent it on its daily consumption: education, loan guarantees, wars, etc. In other words, the government has already spent the money it received in exchange for the IOUs. The most recent projections say that, beginning in 2014, the program will begin permanently paying out more in benefits than it collects in taxes. At that point, the program will start redeeming the IOUs in the trust fund and use them to pay benefits to current seniors until they run out. But remember, the money is not there anymore. So then what? In order to repay the program so it can continue to pay out benefits at the promised levels, the federal government will have to borrow more money, increase taxes to get more revenue, or print more dollars.

The only way Social Security payments to seniors won't increase future deficits is if the federal government prints more money or taxes the American people a second time to pay back the money it owes to the trust fund. My guess is that the government will borrow more money.

Myth 3: The Patient Protection and Affordable Care Act fixed the funding problems related to Medicare.

Fact 3: Under the best economic assumptions, less than half of all future Medicare spending will come from dedicated sources.

Medicare is funded by two trust funds, HI (Hospital Insurance) and SMI (Supplementary Medical Insurance).

As we can see on this chart, even under the best assumptions about the success of the Patient Protection and Affordable Care Act, over 50 percent of all Medicare spending will come from dedicated sources (premiums, tax on benefits, and payroll). By law, SMI spending comes from the general fund. Considering the growth in revenue needed for it, this means that other parts of the budget will have to be reduced or we would have to find other sources of revenue

Also, the HI program is already spending more than it collects while drawing on the assets in its trust fund. Contrary to last year's projections, the trustees report finds that by 2024 (not 2029) the HI trust fund will be exhausted (see the purple above). At this time dedicated HI funds will be sufficient to cover 90 percent of HI costs, meaning that either taxpayers will be forced to make up the difference or the program will be underfunded by 10 percent.

The trustees—including Secretary of Health and Human Services Kathleen Sebelius and the secretaries of the Treasury and Labor Departments—say "nearly all" of the improvement in the outlook of the HI trust fund is due to health-care overhaul legislation, which cut some costs, and will raise new revenue via an increased payroll tax and a new tax on investment income.

While Medicare costs over the next 75 years are projected to be 25 percent lower due to the health care law, these cost savings rest primarily on drastic reductions in the reimbursement rates for Medicare services—reductions in reimbursements that are extremely unlikely to happen in a world where politicians are subject to powerful pressures from their constituencies.

Therefore, as the trustees note, "actual future costs for Medicare are likely to exceed those shown by the current-law projections in this report."

Contributing Editor Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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  1. FUCK YOU, VERONIQUE!

    1. Though, that accent of yours did make me jiz by sweatpants.

    2. PIRS|5.18.11 @ 3:31PM|#
      Max,

      We all know your life would be empty and meaningless without Reason’s Hit & Run. This is why you keep comming [or given the content of your last post perhaps I should say cumming] back here even though you claim to hate it. Perhaps you are a masochist and are into BDSM?

      reply to this
      Max|5.18.11 @ 3:39PM|#
      Fuck that! I’m done posting here you libertardian losers.

    3. Max|6.24.10 @ 3:29PM|#

      Go suck ron puals dick, morons. You peeple are fucking retarded. I`m done coming to this wingnut sight. this is my last post.

      1. Obviously another fake Max.

      2. Max, you illiterate, the word is “site,” not “sight.” That says a lot about you, and it’s not complimentary at all…

  2. So the point is that maybe death panels are the only way to go?

    1. Carousel.

      1. If you’re on a Death Panel, do you get an exemption?

        1. Sorry, all those positions are filled. We always need more participants though!

        2. Sorry, all those positions are filled. We always need more participants though!

    2. There are no death panels retard. That was a dumb-ass Koch brothers lie.

      1. Max|5.20.11 @ 6:00PM|#
        “There are no death panels retard. That was a dumb-ass Koch brothers lie.”

        And we have as authority for this statement the noted liar Max:
        “Max|6.24.10 @ 3:29PM|#
        Go suck ron puals dick, morons. You peeple are fucking retarded. I`m done coming to this wingnut sight. this is my last post.”
        So, Max, what other bullshit are you shoveling?

        1. ignore it, and it goes away

      2. No, but we really need them. I support a DNR form on our Driver’s Licenses. I’d imagine a range of options from “do nothing” to “do everything;” and “look for letter,” as perhaps the most important. Totally voluntary.

        Another, is that we need to encourage hospice, and simply redline some care for very aged. We spend half our medical dollars in the last 6 months of life. Perhaps less heroic efforts would be more prudent, especially in the acutely aged.

        1. What’s this “we” shit kemosabe?

          1. When you think about it, Medicare covers essentially everyone. So, yes, WE. What is really sad is to consider how little private insurance covers. On average, no one gets sick, nor dies till they move to the Medicare roles. What’s disturbing is that private ins. takes half our dollars, while doing little to nothing.

  3. so what’s the over/under on them removing the cap on the wage tax?

  4. Ponzi schemes always fail.

    1. Funny, Madoff is in jail and the many profiteers of his ill gotten gains are now being sued to pay those other idiots that fell by the wayside when his scheme came undone. I wonder what it would take to sue Congress and put all of those charlatains in prison?

    2. The Federal government like a robber took the money in the trust fund and left IOU’s in its place. Looks like the criminal in this is “Uncle Sam”!

  5. I’ve heard that when the program started in 1935, there were 16 people paying in for each recipient, and it has worked its way steadily to 3 people per recipient at present.

    Does anyone know where this can be verified?

    1. Take 3 people… One makes say 20K a year and pays a total combined amount of around $2500, the next worker makes around 40k a year and pays around $5000 a year total. The last workers makes around 75K so they pay around $9,300 total.

      Add these three up and its around $16,800 a year contributed by 3 workers from three different income levels of society.

      Divide 16,800 by 12 months and you get $1400 which is just a little bit more than what the average SS payment probably amounts to. With the extra just going to cover the administrative costs to run the program.

      And just think they are this broke and in debt even after they have confiscated untold billions from those unfortunete enough to die before they could collect a dime. Where is all that money?

      1. It went to subsidize the Income tax payers.

  6. Veronique, Veronique – you and your “facts”!

    The tide comes in, the times go out….you can’t explain that.

  7. Anyone else love the argument that if the government stopped raiding social security, it would be perfectly solvent?

  8. Max has made his last post|5.20.11 @ 5:13PM|#
    “Max|6.24.10 @ 3:29PM|#
    Go suck ron puals dick, morons. You peeple are fucking retarded. I`m done coming to this wingnut sight. this is my last post.”

    I seem to recall even earlier “I QUIT!” posts.
    How many times has max sworn to go away?
    If max weren’t such an insignificant twit, Vegas would have a line on how long it takes max to prove he’s lied once again.

  9. What say you good people here about this?: http://www.epi.org/analysis_an…..ust_funds/

    1. It shows people still believe in the fairy tale of the SS trust fund.

      1. How is it a fairy tale? It exists, and it is providing for people. It is reality. A small tax increase could keep it going, and I’m fine with that. I’m 30 years old. The generations prior to mine have screwed up social security, along with a lot of other things in this country. I’m fine with it falling to my generation to fix what they ruined, and hopefully we will do better with it than they did.

        1. Remember when the SS trust fund was only supposed to go negative in 2017? Remember when it was only supposed to be negative one year (2010) and then go back to positive this year until 2017? Go look at the chart now. It’s negative and will stay that way. How many more “revisions” before it becomes clear to you that they’re lying.

        2. There is no trust fund. Benefits are paid out of current FICA taxes. The so called “Trust Fund” consists of federal government promises to pay. Where do you think the feds get the money to have their right pocket pay their left pocket? FICA taxes have exceeded this obligation since inception. The government consumes the surplus; it doesn’t buy real assets that would produce a future cash flow to provide benefits later. When current taxes are insufficient, then benefits will come from general taxes.

  10. Myth 1: There is no crisis. Social Security will never be insolvent.

    A claim nobody anywhere has ever made, I’d suggest. Though, the part about there not being a crisis is true. That’s a relative thing I guess: it would be a crisis if we’d already solved unemployment, climate change, and 100 other actual crises. Minor adjustments in policy can save SS–the claim that it’s in crisis because of projections 50 years out is patently agenda-driven.

    1. “But I can’t even read the figures on the charts!” I say to the nonexistent person who would respond with a straight face, “but look at de Rugy’s charts!”

    2. Tony|5.21.11 @ 3:19AM|#
      “…Minor adjustments in policy can save SS…”

      “Minor” like cutting benefits by half or doubling the tax. That sort of “minor”.

    3. Though, the part about there not being a crisis is true.

      So what’s the definition of a ‘crisis’? I submit that as long as we can kick the can down the road and screw over the next generation, it’s not a crisis.

    4. Social Security’s problems are due to thief of the trust fund by Congress. Medicare’s problem are due to the greed of our medical providers. Why do you think the US spends 18% of its GNP on health care where the average for the rest of the developed world is 12%?

  11. Veronique,
    Your analysis treats Social Security like a retirement plan with contributions that are invested for the benefit of the recipient. The Supreme Court affirmed in Nestor v Flemming that Social Security consists of a welfare program (not a retirement plan), and a separate tax. Therefore it makes no sense to talk about the solvency or insolvency of Social Security. The welfare and tax are completely independent, there is no property right in the welfare benefit, and Congress can elect to discontinue the welfare program and any time and still continue to collect the tax.

    1. These programs should always be referred to as ‘welfare’ programs. ‘Entitlements’ is Newspeak.

    2. That’s when the pitchfork carrying brigades will make there ways up Pennsylvania Ave.

  12. Why is Veronique talking about “assets” when she points out that all of the money was spent? It would have been more honest to come out at the beginning and make it clear that shortfalls have to be made up by new taxes or more borrowing each year.

  13. the IOUs are perfectly valid. The government sells t-bills. If the market really thought that t-bills were worthless, interest rates would be sky high…

  14. Item two’s conclusion is missing something. Yes, SSI just this year failed to bring in more $ than it paid out. Let’s recall for a minute the GOP’s funny equivocation regarding Payroll vs Income taxes.

    Workers pay payroll taxes, Professionals and the wealthy pay income taxes. Yet, for 40 years workers have been overpaying their payroll taxes. During that span the income tax earners have been borrowing from the low workers. Now that their note is due they rich are telling us, there’s no way they can pay us back.

    You’re buying a total deception. We should raise taxes on the rich at least until the $2.5 trillion the rich have borrowed from the SS trust is repaid.

    Finally, you miss another point, THE TAX RATE IS THE DISCOUNT RATE ON INVESTMENT AND HIRING. High tax rates are good for the economy. It forces the wealthy to engage their money–to avoid those taxes. Tax rates don’t hurt businesses. Businesses don’t pay taxes, not because they get passed on, because they get avoided. If an entrepreneur, or business has a boon year, they will invest those extra profits to avoid taxes–that’s good.

    1. Here, here…

    2. So high tax rates are good because this gives government more control over where businesses invest their funds, not because it will bring in more revenue. Do I understand that right?

      1. No, it forces them to invest their money, not squander it as profits, taxed and vanished. Gov’t does sometimes tell us “where” to invest, that is something we should have much trepidation over. Taxes drive behavior, mandates are features of command economies. So, I want to keep those two ideas separate. Just as, we need to look at revenue (taxes) and spending differently–while I am for smaller, more efficient gov’t that is a different question from asking how our tax burden should be structured.

  15. Again, I’m not saying you can expect to soak firms with high taxes, they will avoid them. But, that avoidance is good, as the first and broadest refuge is to invest.

    High taxes on big earners is important too. It’s ludicrous to treat someone making $200K/yr the same as someone making $2M/yr. One guy can send his children to Harvard, buy a house without borrowing a dime. The other must plan. These high earners should be discouraged with high income tax rates.

    Again, this wouldn’t hit entrepreneurs and small businessmen, as I’ll repeat profits will be turned into wealth via investment, to avoid those taxes. The only people who don’t have a boss in our economy are corporate execs, media stars and athletes. Their pay rises exponentially, while the rest of us are on a much different trajectory. High tax rates discourage or captures only these guys. We had a top rate from WW2 to Reagan between 93%-70%. That economy was better for more people than ours.

    Corporate execs didn’t make these outsized incomes; something stockholders should like.

    1. Under the 93% tax rate, about 70% of government spending went to the military. And I like how you think that “investing” is this completely tax-free zone.

      Also, please spare us the canard about the 50s-70s being halcyon days of american growth and prosperity where everybody along. All that came crashing down starting in the 70s due to a variety of factors – war spending, increased foreign competition, over-paid manual labor union jobs replaced by machines, etc etc.

      Also, you realize that the wealthy pay more into social security than they could ever hope to get back, right? In that sense the SS tax IS progressive.

      1. You overstate your case on both points. War debts and price controls did create much of the inflation of the 70s. But, the stagflation of the 70’s was better for the average Joe than today or the oughts.

        Again, the rich not funding retirement packages for the unions is the reason for high domestic labor costs for Detroit. Actually, American auto plants are more efficient than their foreign non-union competitors.

        SS, is totally regressive. The benefits for everyone will exceed their pay in if they live more than 10 years. The cap at $106K means that while it’s 12.5% of someone making 0K/yr it’s only 1.25% for someone making $1M/yr. Explain away.

        1. SS is totally a RIP OFF. If these funds you pay into the system are indeed for you then why does the government hit BINGO and cash in on all the contributions a person made their entire life? Why doesn’t this money that has accrued interest over say 40 years get sent to the heirs of the decest? My dad died at 63 and never collected a dime. From what I calculate to roughly equal around $300,000 in contributions and even a small ass interest rate of return we received a whopping $250 and not even so much as a thank you note.

          So please tell me why it is ok for the feds to force you into paying when they are not forced to pay out? If this money was forced and put into a account for the individual paying and that person died before collecting the account would go in full to the rightful heirs.

          How are we supposed to pass on wealth when it is confiscated at 12.5% for your ENTIRE FUCKING LIFE and then you get NOTHING from it NOTHING!

          Honestly I am surprised we don’t have more cases of people taking the $250 check from SS and going buy a pawn shop 12 gauge and making a trip to the local SS office and wax some of those employees (who will also then not get their pension, oh WELL you died to soon!)

          Think about it, who here wouldn’t kill someone that was stealing 300k from you and your family? Last time I checked grand theft was only like $250.

        2. Unproven assertion #1: “But, the stagflation of the 70’s was better for the average Joe than today or the oughts.” Present day, maybe. The oughts – no. In terms of standard of living (not just looking at wage growth inequality/decline), most people are better off than they were in the 70s.

          Unproven/brazenly false assertion #2: “Again, the rich not funding retirement packages for the unions is the reason for high domestic labor costs for Detroit. Actually, American auto plants are more efficient than their foreign non-union competitors.”

          I don’t even know where to begin on this one. You place the blame on everywhere except where it belongs – the UAW. How about instead of either the rich OR the consumer funding absurd retirement plans for jobs that can be done with half a highschool degree, we just, you know, DON’T fund those plans, or put more of the burden on the workers themselves? You draw the strawman of foreign competitors while forgetting that the non-union plants in the Southern states seem to be doing pretty well. Oh, PS: I’m a lifelong Detroiter, northwest side. I’ve spent a few part time gigs working at plants around here, and I can vouch firsthand for their insane inefficiencies.

          1. Yes, the UAW went to Congress and asked that the corporate execs could attain a variance to underfund the pensions. We don’t hear about IBM’s pension obligations, because they properly funded the pensions back then. For those who properly funded their pensions, those pensions remain an asset for the firm.

            In 2008 the auto industry ranked the 10 most productive plants in the US. The top nine were all Detroit 3, number 10, a GM/Toyota joint venture. Your anecdotal evidence is wrong.

            I was wrong to blame the rich for underfunded pensions, it was the corporate execs.

          2. Yes, the UAW went to Congress and asked that the corporate execs could attain a variance to underfund the pensions. We don’t hear about IBM’s pension obligations, because they properly funded the pensions back then. For those who properly funded their pensions, those pensions remain an asset for the firm.

            In 2008 the auto industry ranked the 10 most productive plants in the US. The top nine were all Detroit 3, number 10, a GM/Toyota joint venture. Your anecdotal evidence is wrong.

            I was wrong to blame the rich for underfunded pensions, it was the corporate execs.

  16. If I were in Congress I’d make the point that the rich need more tax cuts so that the Real Hosuecunts of Orange County can take yet another trip to wherever the fuck it is that these people are off to on a weekly basis.

    “America, we cannot tax the wealthy fairly as they need the money for spa treatments.” ~ I’m Razor Ray and I approve this announcement.

  17. I don’t think SS will become insolvent in the traditional sense. Banking and fiat money has alot to do with computers. Cashing an SS check mainly changes balances on a sheet. Its not like the SS account will deny the transaction. As people withdraw more money than is put in, inflation will result from the almost automatic printing of new money to make up the difference.

    Then again, I’m somewhere between post-Keynesian and Austrian, so perhaps the bloody boxing match within me has scrambled my brains. Pay me no mind. =P

  18. lots of facts missing. What percentage of ss spending is:
    retirees?
    dependants?
    disabled?
    administrative overhead?

  19. Great post. I appreciate you bringing this forward.

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