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In the Nation's Interest

The Annual Rite of Aging

No sooner did I leave town on vacation than the Social Security and Medicare Trustees released their annual report (a little late, but no Trustee has ever gone to Social Security jail over that; if the deadline had been enforced rigorously, that institution would be full of distinguished Americans).  And as usual, a highly controversial pair of programs has been greeted with highly extreme and partisan statements.  Let’s try to think about these issues dispassionately and logically.

The point of the annual report is the state of the trust funds for those programs, and that is the focus of this post.  Social Security is today the larger program, and its trust fund has been the subject of debate for decades longer.

Some deride the Social Security trust fund as a sham, and even as a premeditated plot.  How dare those policymakers of the 1930s, who failed to foresee World War II, the subsequent baby boom, and every other major economic fluctuation in the decades that followed?

Others believe that the trust fund is as good as gold, and that as long as it retains a positive balance, Social Security can remain on cruise control.  For that reason, there is considerable focus on the precise date at which the trust fund is projected to reach total exhaustion – as though we could know the future today any better than could the creators of the program 80 years ago.

Of course, each extreme has just enough of an element of truth to manage to stand through a gentle breeze.  But we should think about what the Social Security trust fund really is.  It is not a store of value, and a positive bookkeeping entry will not pay benefits in the future.  However, it has been a useful disciplinary device for the program, and understood in that way, it served us well over decades of history.

It is no great secret that Presidents and Members of Congress fell all over one another to increase Social Security benefits in many past election years.  However, paying for any increase was a universally accepted prerequisite.  To be sure, estimates of future economic growth were sometimes overly optimistic, including notably in 1972, but one can only imagine how the program might have been abused without the fundamental consensus that the trust fund needed to be maintained in a long-term actuarial balance.  And that consensus led to a painful political compromise to rescue the system in 1983, after that 1972 miscalculation.  So, one could complain that the trust fund has created an illusion of a store of value.  But no one should deny the corresponding beneficial behavioral guideline that the trust fund imposed.

However, it was that 1983 rescue that greatly strengthened that illusion of a store of value.  Overly optimistic economic assumptions – no one’s plot, but rather a widely accepted misconception – led to the misplaced conviction that if Social Security could just make it to the 1990s, it would be secure for the long haul.  Obviously, that was not the case.  The 1983 estimates were that the trust fund balance would be far larger than it ever became.  And now, in a world of slower growth and constrained spendable incomes, people are looking for a painless way out of Social Security’s bind.  A commonly cited escape route is spending down the stated balance in the trust fund instead of increasing revenues or reducing benefits.

There are perhaps two world views that suggest that the trust fund balance could pay for future benefits all by itself.  One view is that the trust fund holds Treasury securities, which are backed by the full faith and credit of the United States of America.  Of course, paying benefits using those Treasury securities requires that the securities are sold to the public, who probably would see no difference between securities sold by the trust fund and securities sold by the Treasury.  The second view is that the trust fund has been raided by past Congresses and Presidents, and that the thieves should be tracked down and required to make restitution.  However, the true beneficiaries of those raids, through lower taxes and higher spending than otherwise would have been possible, were all of us.  It sounds like a general tax increase or spending cut to me.

Those who hold either or both of those world views will not be persuaded otherwise.  But there is one legal issue that might suggest to a wider audience that we should steer well clear of exhaustion of the trust fund – that is, to address and fix the program shortfall early.  Commentators say blithely that if the trust fund is exhausted, then benefits must be cut back to the amount of tax revenues flowing in – which under this year’s Trustees’ report would require a 21 percent benefit cut in 2034.  But consider the consequences.

First of all, forecasts through 2034 are not necessarily precise.  Bad news could create problems sooner.

And second, although there is no question that benefits would have to be cut upon exhaustion of the trust fund, no one really knows how that would be accomplished.  It never has happened before, and the law is not specific.  Some people I know say that the law does not authorize distributing checks for less than the actual benefit amounts prescribed, and that therefore full payment checks would have to be held until the tax revenue came in to cover them.  In other words, checks would go out in full, but would be increasingly late over time.  Others disagree, but the best informed voices I hear confess that they cannot say for sure.

Finally, when the typical citizen hears about an across-the-board reduction in benefits because of the exhaustion of the trust fund, he or she probably thinks in terms of a cut in benefits for new retirees as of that date.  Nope.  The benefit reduction would have to apply to all retirees at that time – including the proverbial 85-year-old widow in the walk-up cold-water flat.  If the Congress in 2034 somehow could summon a consensus to restrict the benefit cut to new retirees at that time, the cut would have to be much greater than 21 percent.

There are many compelling economic arguments why we should deal with the Social Security funding issue soon.  But even for those who are inclined to believe that Social Security is somehow immune to the laws of physics, there are human reasons as well.  Current and future retirees would be better off, in both financial and peace-of-mind terms, if we could avoid running the trust fund into the ground.