Myths and Misperceptions

Social security is now facing a $10.4 trillion "crisis"

First we have to define the nature of the problem and, only then, can we look at the various measures of the size -- and why the $10.4 trillion is no more meaningful than the $3.4 figure, although it sounds a lot worse -- and what both figures actually mean, in context.

Nature of Problem

There are actually two stages to the "problem".

In about 2017, Social Security will begin paying out more in benefits than it receives in taxes and interest. At that time, the Social Security Trust funds will have about $3.3 trillion in reserves, invested in Treasury debt. (By comparison, the total national debt, owed in part to private investors and in part to the Social Security and other trust funds is expected to reach $8 trillion in 2005.

This drawdown was not only expected, it was a planned part of a 1983 plan to keep Social security solvent as the Baby Boomers retired. Simply, since that time, the plan called for workers to deliberately pay in more than necessary to cover the benefits at the time, so a reserve could be build up to help cover the anticipated bulge in recipients. Recent recipients are the first ones who can claim that they are, in part, receiving their own money back.

To mark 2017 as the start of a problem, when it is the start of a deliberately planned drawdown of the Trust Fund reserves is, in some ways a bait and switch.

The second, larger problem, will occur somewhere around 2047. At that time, the the benefits being paid will still exceed the revenues, but the reserves will be exhausted and ongoing benefits will have to be reduced (to about 70% of those projected according to today's benefit calculations), revenues will have to be increased (either by transfers from general tax revenues, or some combination of the two.)

The Size of the Problem

John Allen Paulos, a mathematician, noted that we can present images that may may be accurately based on the facts, but give very different impressions. His example involved world population. For those who found the population a problem, one could point out that, if we lined up every living human head to toe, they would the moon and back 5 times. For those who found the population to be no problem, they could note that every human being could be given a cube measuring 20 feet on each side (8000 cubic feet -- the volume of a fairly large apartment in New York or a small private home) and all of the cubes would fit into the Grand Canyon.

Similarly, we can describe the size of the Social Security problem in a way that is factually accurate, but tilts perception to suit our own agenda. If we want to call the problem a crisis, we talk about the long term consequences of doing nothing -- $3.7 trillion over 75 years or $10.4 trillion over an "infinite horizon". But that overlooks the fact that the debt is cumulative, so the more years, the greater the size and a far less impressive "change in direction" today, will eliminate that cumulative debt. How big a correction? a simple increase in payroll taxes of 1.89% --- less than 1% to employee and employer, each) will eliminate the $3.4 trillion.

The long term forecasts also impart a level of certainty that just isn't there. While they are best estimates, honestly arrived at, that's all they are -- estimates. Consider the unforeseen events that occurred since Social was initiated (less than 75 years ago) -- World War II, with it's consequence of creating the Baby Boom bulge, the entry of women in large numbers into the work force, the growth spurts during the 1960's and 1990's. In the past year alone, the Social security Administration has lowered the 75 year shortfall by .03%, based on changes in assumptions - based on just one year's changes in experience. (It would have risen by .07%, if previous assumptions had remained constant.)

So how should we look at the problem? Probably the best way is to use more "personal" numbers as an analogy. If an individual makes $50,000 per year and spends $51,000 per year, each year, that person will have a shortfall of $1000, or 2% of income. If that same situation persists for 45 years, the cumulative shortfall will be $45,000 dollars -- or 90% of your annual income. If one lives for 75 years, that debt will equal $75,000 (150% of income). Someone making $50,000 will not consider, $1000 in debt a big problem, but when that same person considers a debt equal to 90% his annual income, it is a serious problem, and 150% of income is, truly, a "crisis." But the higher figures result from doing nothing for 45 or 75 years. The real problem is a manageable 2% reduction in spending (or increase in income), starting now (or within a couple of years).

Finally, when judging the size of the problem, one needs to note that, if the tax cuts enacted in the past several years become permanent, they will reduce federal "income" by three to five times the amount necessary to cover the shortfall. We could have had both a tax cut (albeit a smaller one) and solved the Social Security "crisis."