A friend emailed me a question about Social Security, and I have to confess that I don’t know the answer. Here’s the question, or the observation:
Social security is it’s own fund. Money comes in though payroll taxes and goes out through benefits. I thought the only reason that it even shows up as a line item on the overall budget is that the excess funds are used to purchase US bonds, which is “income” for the general budget.
So I don’t understand how raising income taxes (or rolling back the Bush tax cuts) helps Social Security at all, unless we dump some general fund money into it.
What’s the answer here? As my friend points out, Social Security is its own fund. Here’s what AARP (who better to comment on Social Security) has to say:
How is that possible? Today, 65 million boomers are paying into the system and, along with about 89 million other employed Americans, are helping build that reserve. In fact, Social Security trust funds currently hold more than $1.4 trillion in U.S. Treasury Bonds. So even though people are living longer, more money is going into Social Security than is being paid out. Now, of course, when the boomers start to retire, the money built up will begin to be drawn down. But even if we just sit back and watch the program, without any kind of change at all, Social Security will be able to pay 100 percent of promised benefits until 2042. After that, it will still be able to pay nearly three-quarters of the benefits promised today in tomorrow’s dollars.
The operative question, then, is how does the deficit threaten Social Security? Here’s what Alan Greenspan said in his Congressional testimony on February 25:
In 2008–just four years from now–the first cohort of the baby-boom generation will reach 62, the earliest age at which Social Security retirement benefits may be claimed and the age at which about half of prospective beneficiaries choose to retire; in 2011, these individuals will reach 65 and will thus be eligible for Medicare. At that time, under the intermediate assumptions of the OASDI trustees, there will still be more than three covered workers for each OASDI beneficiary; by 2025, this ratio is projected to be down to 2-1/4. This dramatic demographic change is certain to place enormous demands on our nation’s resources–demands we almost surely will be unable to meet unless action is taken. For a variety of reasons, that action is better taken as soon as possible.
The budget scenarios considered by the CBO in its December assessment of the long-term budget outlook offer a vivid–and sobering–illustration of the challenges we face as we prepare for the retirement of the baby-boom generation. These scenarios suggest that, under a range of reasonably plausible assumptions about spending and taxes, we could be in a situation in the decades ahead in which rapid increases in the unified budget deficit set in motion a dynamic in which large deficits result in ever-growing interest payments that augment deficits in future years. The resulting rise in the federal debt could drain funds away from private capital formation and thus over time slow the growth of living standards.
Greenspan mentions the CBO projections, they can be found here. Back to Greenspan:
Today, federal outlays under Social Security and Medicare amount to less than 7 percent of GDP. In December, the CBO projected that these outlays would increase to 12 percent of GDP by 2030 under current law, using assumptions about the growth of health-care costs similar to the intermediate assumptions of the Medicare trustees; when spending on Medicaid is added in, the rise in the ratio is even steeper. To be sure, the rise in these outlays relative to GDP could be financed by tax increases, but the CBO results suggest that, even if other non-interest spending is constrained fairly tightly, ensuring fiscal stability would require an overall federal tax burden well above its long-term average.
He then goes on to explain some ways that we can cut Social Security benefits and save cash down the road.
In reading Greenspan’s testimony, one thing that comes through loud and clear is that the real worry is not Social Security but rather Medicare and Medicaid. As the AARP and Paul Krugman will be glad to tell you, Social Security is funded through 2042 through its trust fund (I have no idea what “lock box” Al Gore was talking about in 2000). Medicare and Medicaid are not funded in the same way.
Getting back to my friend’s original email, I guess the issue is that given the current revenue base and mandatory expenditures, we’re not going to be able to fund Medicaid and Medicare without blowing out the deficit even more. Is that what’s at issue here? If someone could forward an article to me that lays this all out in layman’s terms, I’d appreciate it. I feel like most of the articles on this assume a base level of knowledge that I don’t have.
Update: Here’s The Economist article on Greenspan’s testimony. Elsewhere, Brad DeLong confirms that the problem is Medicare.
Further update: Another friend wrote to make the point that the massive Social Security trust fund is all owed by the government. As it gets spent, the money to pay back the principle and interest will come out of the debt service category of the federal budget. Hence the comparisons to Enron accounting. (The Federal government is borrowing money from itself to make the deficit look smaller, and we’ll be paying for that with our income taxes in the future.) That also explains the lock box question — I assume that the there is some fear in a crisis the government will not make good on its commitment to the balance in the Social Security trust fund.