Sunday, October 28, 2007

Social Insecurity

It seems odd that so many pundits and politicians continue to push for "reform" and even "rescue" of the Social Security system. The latest silliness comes from otherwise clear-thinking Barack Obama, who claims that Hillary is behind the curve on saving Social Security from a Baby Boomer bust. The fact is Social Security is not just "solvent" today -- it is solvent for the foreseeable future. It even runs an annual surplus that is used to offset the deficit run by almost every other function of the federal government.

The so-called "crisis" in Social Security is that sometime around the year 2017 the revenues generated by the Social Security tax will not cover the current year costs (primarily benefits paid out) of the system. At that point, whenever it actually arrives, Social Security will begin to cash in some of the Treasury bonds it has accumulated over the decades.

According to the Social Security Administration, the "Trust Funds" had income of $745 billion ($626 billion in net contributions, $17 billion from taxation of benefits and $102 billion in interest) in 2006. Total expenditures amounted to $555 billion in 2006 (paid benefits amounted to $546 billion, demonstrating that it is an efficiently run program). The assets of the Trust Funds increased by about $190 billion in 2006 to a total of $2 trillion. Under the theory that present trends will continue forever into the future, fearmongers assert that by the year 2041 -- yes, 2041 -- the Social Security system will have wiped out the accumulated surpluses.

By law, excess Social Security revenues are used to buy US Treasury bonds. In 2006, this generated a return of 5.3 percent. Not a bad rate for the safest investment in the world. Yet this is the hook that conservatives use to lure people into supporting privatization. First claim that the system is in "crisis" and then argue that the private sector (primarily Wall Street brokers and their friends) could generate higher annual returns to keep the system "solvent." In other words, the same people who brought us the Savings & Loan crisis, various hedge fund crises and, most recently, the subprime loan crisis, are to be placed in direct control of the national retirement Trust Fund. Perhaps they can invest it for us in the Brooklyn Bridge....

The real crisis is not due to the Social Security surplus -- it's due to the astronomical deficits generated by the rest of the federal government's operations, particularly defense spending at the expense of investments in the nation's infrastructure and productivity. Somehow, in the midst of this "crisis" in future Social Security payments, America is able to find over $100 billion per year for the Iraq war and an additional $450 billion for "ordinary" defense spending. That's essentially the equivalent of the defense spending by the rest of the world combined.

So we are being asked to make greater sacrifices to "protect" Social Security. Even though most Americans already pay more in Social Security taxes than they do in income taxes, we are told that Social Security (but not income) taxes must be increased. And we also "must" raise the retirement age for Social Security recipients. And we might as well cut benefits while we're at it.

Yet none of this is necessary. Immigration and overall economic growth are two factors likely to exceed the low-ball forecasts favored by the administrators of Social Security. Immigrants are typically young workers with decades of earning (and, therefore, paying into Social Security) ahead of them. And economic growth (assuming we can avoid another Bush in the White House) should exceed by at least a few tenths of a percent the amount presumed by the Trust Fund managers. Combined, these two factors alone are enough to fix the "problem" -- possibly forever. One potential problem could arise if politicians succumb to the temptation to raise benefits faster than incoming revenues. Yet even if the system ends up with a shortfall at some point in the future, simply removing the income cap for Social Security taxes would add billions more to annual revenues without the need to postpone eligibility or reduce benefits.

The bottom line is that the Social Security system is the single-most successful federal program in history. It is fiscally solvent far into the future. And there are far more important problems that need our attention today.

No comments: