Simcivic Briefing Book, continued . . .

B. How to critique the Democratic strategy

Democrats evade the solvency challenge in four ways:

Evasion #1. Social Security can still pay seventy percent of current law benefits once the Trust Fund goes dry. This proves Social Security’s long-run health.

Evasion #2. All benefits must be protected. No cuts. No increase in retirement age.

Evasion #3. Nothing wrong with “Grow Assets, Liquidate Assets” as a solvency strategy.

Evasion #4. Solvency is only “a two percent problem.”

Evasion Number One. The “insolvency crisis” isn’t real because Social Security can still pay 70% of scheduled benefits once the Trust Fund is empty.

• In the actuaries’ forecast our Simulator uses, the insolvency occurs in the late 2030’s.
• Regardless of whether Trust Fund assets run out in 2038, or 2042, or 2052, though, the pattern is much the same.
• An enormous gap opens up between the benefit schedule written into current law, and the expected receipts from Social Security’s current payroll tax formulas.
• Calling Social Security “healthy” under these circumstances is Evasion Number One.

Evasion Number Two. It would be wrong to make any adjustments to Social Security’s current benefit schedule. No adjustments in the benefit formula. No increase in the retirement age.

Here’s what 100% of promised benefits would look like, if the money were there to pay.

• Democrats rally their supporters by saying they’re opposed to any benefit cuts.
• And they’re opposed to any increases in the retirement age.
• In other words, currently scheduled benefits should be honored, in full.
• This, from the same Democrats who think that Social Security’s ability to pay only 70% of current law benefits shows the program is healthy.
• Democrats are OK with 70%, they’re OK with 100%, everything in between would be awful. Hmmm.

Evasion Number Three. A Trust Fund strategy that “Grows Assets, then Liquidates Assets” is perfectly reasonable.

• Chart 3A, Benefit Sources as a Percent of GDP, shows the forecast gap between “Tax Receipts” (in gray) and the “Benefit Target” (the blue line at the top).

• Payroll Tax Receipts are roughly 5% of GDP now. They slowly decline to an amount a bit below 5% of GDP.

• Meanwhile, Benefit Target rises from little more than 4% of GDP to nearly 7% of GDP, and remain at that level in perpetuity – a gap greater than 2% of GDP.

• This funding strategy, first recommended by the Greenspan Commission in 1983, seems just fine to the Democrats. After all, isn't the Social Security Trust Fund currently loaded with assets? Isn't it still growing?

• Read Chart 1A, immediately above (“Total Assets: Pct of GDP”), in connection with Chart 3A, “Benefit Sources as Pct of GDP”, further up the page.

• As long as the blue line Benefit Target, in Chart 3A above, remains below the gray Tax Receipts level, Total Assets will continue to grow. The entire surplus is invested in Treasury bonds, and its interest earnings are reinvested in more Treasury bonds.

• At some point, ten or fifteen years from now, the amount of Target Benefit being paid out will overtake the amount of Tax Receipts being collected.

• How will Social Security respond when Tax Receipts are no longer sufficient to pay its full Benefit Target?

• Instead of being a buyer of Treasury bonds, as it is today, Social Security will temporarily become a collector of interest on Treasury bonds. In Chart 3A, above, note the section in pink, “Trust Fund Earnings.” That represents interest payments from the Treasury to Social Security. For five years or so, these interest payments make it possible for Social Security to satisfy its full obligations to beneficiaries.

• As Boomers retire, the “Target Benefit” line continues to rise. To meet its expanding obligations, Social Security now begins to sell its assets. In other words, it sells its Trust Fund assets back to the Treasury, then uses the proceeds to pay benefits. The Total Assets graph, Chart 1A, shrinks steadily.

• Eventually, Social Security runs out of bonds to sell. When Social Security's Total Assets drop to zero, Social Security’s actuaries will pronounce the program “insolvent.” Tax Receipts alone won’t be enough to pay Target Benefits.

• What name might one give to an asset management strategy that behaves like this? At Simcivic, we call it “Grow Assets, Liquidate Assets.”

• “Grow Assets, Liquidate Assets” seems just fine to the Democrats. They haven’t a critical word to say about it.

Evasion Number Four. “It’s a two percent problem.”

• The late Congressman Bob Matsui, the ranking Democrat on the House Ways and Means Committee before his death, regularly characterized the Social Security solvency problem as “a two percent problem.”
• In other words, if the payroll tax were two percentage points higher, solvency would be restored. Full benefits could be paid, all the way to the end of the forecasting period.
• But is it “only a two percent problem”? If we simulate a payroll tax rate of 14.4%, is Social Security’s long-run solvency genuinely assured?
• No.

• Chart 1A shows what happens to the Trust Fund in a simulation that uses a 14.4% payroll tax rate – Social Security’s “two percent solution.” *
• The Trust Fund reaches the end of the forecasting period with a few pennies still left in the till. It isn’t completely insolvent . . . not quite yet.
• Nonetheless, the Trust Fund is only months away from insolvency. It’s not 'officially' headed toward insolvency, though, because the forecasting period ends just before insolvency occurs.
• How much would it really cost to produce genuine solvency? Let’s use the simulator to find out. We’ll raise payroll taxes till the Trust Fund is permanently stabilized.

• Lasting solvency requires a payroll tax of 15.9%. (Employee – Employer Combined Rate)
• With payroll taxes set at this level, the Trust Fund passes Chart 1B’s lasting solvency test. The Funds-to-Benefits Ratio remains rock steady in the out-years, neither gaining nor shrinking. That’s what lasting solvency requires – a permanently stable Trust Fund.
• Note, though, that the required tax increase is seventy-five percent greater than the “two percent solution” of which Democrats so frequently and so glibly speak.

Evasion Recap:
• That benefits could drop overnight by 30% is a sign of Social Security’s health.
• It’s a betrayal of seniors if benefits are cut at all.
• Grow Assets, Liquidate Assets is a fine way to run a Trust Fund.
• Restoring solvency is “only a two percent problem.”
In other words, Democrats are stonewalling the issue.

A) Flaws in Republican Approach
C) Solvency Strategy for Republicans
D) Solvency Strategy for Democrats
E) Faster GDP Growth: Impact on Both Strategies

Briefing Book Summary

HOME

Revision Date 2005-05-02