Given that the only one who can accurately estimate the true cost of paying Social Security benefits is God (since only God knows exactly how long each of us, including the yet-to-be-born, will live), it isn’t surprising that people would differ on whether or not Social Security is solvent.
What is kind of interesting is that we can find this difference of opinion within one book: Get What’s Yours: The Secrets to Maxing Out Your Social Security.
The book has three authors. One is a professor of economics at Boston University. He says that the system is broken and bankrupt:
Our Social Security system is a disgrace, not in its objectives or in the tremendous help it has provided older people over the years, but in the way it’s been designed and the way it’s been financed. Its complexity is beyond belief. The formula for the Social Security benefits of a married spouse involves ten complex mathematical functions, one of which is in four dimensions! It leads all kinds of people to make all kinds of mistakes in deciding when to take benefits and what benefits to take. And the good folks at Social Security will far too often tell you things that are one hundred percent untrue with one hundred and fifty percent conviction.
Democracy is collective choice by the people. But having indecipherable institutions, be they our Social Security system, our tax system, our health-care system, or our financial system, deprives the people of the knowledge they need to make choices. Instead it leaves social choice not to the people but to the bureaucrats, who get to decide what’s best. The way the new Social Security law was passed is about as good an example as one can have of the incredibly nondemocratic processes that suffuse “America’s democracy.” I say bureaucrats rather than elected officials because our representatives are also at the mercy of the bureaucrats. Indeed, there is, I’d wager, not a single member of Congress with detailed knowledge of Social Security’s 2,728 rules or its tens of thousands of rules about those rules. And when it comes to Social Security, the big picture is the sum of all the small pictures.
Radical change in our Social Security system is inevitable for the simple reason that the system is broke—indeed, in worse fiscal shape than Detroit’s pensions when that city declared bankruptcy. My evidence for this? It’s the $26 trillion infinite-horizon fiscal gap shown in table IVF1 of the 2015 Social Security Trustees Report. This present value shortfall is net of the system’s trust fund and is almost $1 trillion larger than the system’s fiscal gap reported in 2014. The table shows that Social Security is 31 percent underfunded.
The economics labeling problem is the reason that the Inform Act has been endorsed by more than 1,200 economists, including 17 Nobel laureates (see www.theinformact.org ). The Inform Act mandates infinite-horizon fiscal gap accounting by government agencies for the entire fiscal enterprise. My own estimate based on the Congressional Budget Office’s Alternative Fiscal Scenario Projections puts the country’s overall fiscal gap at $199 trillion for 2015. This is 53 percent of the present value of all future federal taxes, so our federal government, taken as a whole, is 53 percent underfunded. Stated differently, we need a 53 percent hike in all federal taxes to permit our federal government to meet all its expenditure commitments. And if one focuses just on Social Security, the requisite immediate and permanent Social Security FICA tax hike to ensure that Social Security pays all scheduled benefits is 31 percent!
The less our generation pays, the more your kids and grandkids will have to pay; mine, too. And we are moving full speed ahead to leave our kids and grandkids with fiscal bills that are far, far beyond their capacity to pay.
The other two authors are journalists and they are quite sanguine about the system; it just needs a couple of tweaks:
even the darkest official forecast still assures people as young as 18 today something like 75 percent of the paychecks their elders are currently receiving. Official forecasts, however, are deeply misleading. That’s because they rely on the notion that there’s a Social Security “trust fund” that is running out of money; that a so-called Social Security lockbox has been “raided” to pay for other expenditures. Such palaver is misleading, if not arrant nonsense. First of all, the so-called trust fund is an accounting fiction: the money supposedly stashed away for future generations is nearly $ 3 trillion worth of U.S. government bonds— Uncle’s Sam’s IOUs that he gives as a legal promise to pay back what he’s borrowed.
Many of us will give a little. Some will give more than others— presumably Americans who earn enough not to need Social Security’s checks. There will be a huge outcry, as there always is when people are asked to pay more or get less.
if we changed, starting in 2021, the way in which benefits are indexed— from using average wage growth to using inflation as the basis— the actuary reports that we would not only wipe out the entire Social Security deficit over the next 75 years but in fact build a substantial surplus. Indeed, even over the infinite time horizon Larry favors, 89 percent of the deficit would be eliminated by this one change alone.
Alternatively, according to the actuary, we could increase the normal retirement age three months per year starting for those aged 62 in 2017 until it reaches 70 in 2032 and increase it one month every two years thereafter. Deficit reduction? Sixty percent over 75 years; 48 percent, infinite horizon.
Larry has interesting ideas for replacing Social Security with a fairer and better program. They’re never going to happen. We’re not going to replace an eighty-year-old program that has become an enormous bureaucracy, with rules to match, and that touches the lives of virtually every American.
Only someone with a crystal ball can say who is right, of course. Certainly Detroit had plenty of actuaries who signed off on its fiscal vitality. The last word from the economist:
Yes, Paul, I know you and Phil feel this will never happen and that small adjustments will be made and that all will be fine. This is Panglossian in the extreme, as a quick glance at Argentina’s century-long economic decline confirms. Yes, things that can’t go on will stop. But they will stop too late. The fact that the Social Security actuaries raised their, not my, measure of the system’s unfunded liability by almost $1 trillion in one year shows how quickly things are changing and why small, slow changes won’t work any better for Social Security than they did for Detroit.
More: Read Get What’s Yours: The Secrets to Maxing Out Your Social Security.
Related:
The feared population shrinkage is showing no signs of happening. Our population shrank with generation X, but millenials were the largest generation in history & they’re a lot more conservative in behavior, if not in politics. They married at much younger ages than generation X & are having a lot more babies.
@lion
That’s because of the immigrant mothers help, primarily from Mexico: “The increase in U.S. births since 1970 has been driven entirely by births to immigrant mothers”:
http://www.pewresearch.org/fact-tank/2016/10/26/5-facts-about-immigrant-mothers-and-u-s-fertility-trends/
No miracle here: locals do want to multiply as much as baby boomers’ parents did. However, even with immigrant help, there’s been a perceptible decline in birth rate, from about 2.1 to 1.88, below replacement level, since 2009.
So the Fed is running a negative real interest rate policy but we can’t give money to old people who will spend it on food and rent? Social Security is the permanent economic stimulation program that we desperately need. Old people don’t spend money so give them money and maybe we won’t sink into deflation as the boomers retire and cut back on their SUVs and vacations.
SS is an unsustainable Ponzi scheme. Plenty of people have proposed solutions (removing the tax cap on higher salaries, raising the retirement age, etc ). All of this ignores that it nothing more than a transfer of wealth from the young to the old. And that approach extends to everything – including our $20 trillion in debt. It is simply the old stealing from the young. Yes, we have increased the productivity of workers with technology, but there comes a time when you cannot squeeze any more blood out of the younger generation.
And I sometimes question the idea that lifetime productivity per individual has increased overall. In the past, people would work from 18 to 65 and die at 70, if lucky. Now the baby boomers worked from 20 years old to 65, but die close to age 90.
When the robots finally come and increase productivity even further, I suppose the locust generation (boomers) will benefit, but I’m not sure about the next generations.
Reasonable people differ on the future of Social Security because the key variables, growth in population and productivity, are hard to predict. And like all government benefits people today want what they see as theirs and are indifferent as to future generations. Bankruptcy of Social Security does not seem like a realistic prediction because taxes can be raised or benefits cut.