The Friday Letter / Issue #179

Social Security trustees assume a rosy picture

Brenton Smith / for The Federalist Review

The one thing missing from the Social Security debate is a discussion of the assumptions on which the Trustees have projected the soundness of the system. Today’s debate reduces hundreds of pages of data into 4 digits – 2033 in this case – without  asking a single question about the assumptions that went into creating that number.

2033 is only as good as the underlying assumptions. If the Trustees say that the system will last until 2033 based on the idea that leprechauns will spit out gold coins to pay benefits, no one should be surprised if the system collapses long before 2033. While many people quote the 2033, no one is questioning the assumptions – some of which are very generous.

The most generous assumption is that Social Security is a closed-system, unaffected by the outside world. For example, the Trustees Report ignores the impact of the pending insolvency of the Medicare Trust Fund. According to the Social Security Administration, the calculation of the Old Age, Survivors and Disability Insurance (OASDI) exhaustion date does not reflect any impact of potential exhaustion of the Medicare trust funds, as the two programs are separate entities.

Social Security does not exist in a vacuum as the Trustees portray. Social Security consists of three “separate” systems, Old-Age/Survivors (OAS), Disability (DI), and Medicare (HI). They aren’t separate – all three draw on the same tax base, payroll taxes. So anything that affects payroll taxes will affect Social Security’s OAS program.

The Trustees project that Medicare will reach insolvency in 2024. At that time, Congress will have three choices.

1. Pull payroll tax resources away from OASDI – leading to an earlier date of exhaustion in OASDI

2. Pull general tax resources away from deficit control or debt reduction – leading to higher levels of debt

3. Redefine Medicare benefits.
Social Security will not be immune to this debate or its outcome.

Another example of an unrealistic assumption is the impact of cutting Social Security benefits on payroll taxes. As benefits to seniors drop by 25%, the spending of seniors will drop. That will lead to lower GDP, on which payroll taxes depend. As aggregate spending drops so will payroll taxes and so will payments to seniors.

On the other hand, the Trustees may be right. They are assuming that aggregate spending will not be affected by a reduced benefit structure. They assume that seniors will continue to spend despite lower benefit checks. If so, Social Security should be able to provide roughly 75% of scheduled benefits until 2086.

Some will suggest that it isn’t possible to incorporate behavior responses to exogenous changes. But the fact is that the Trustees do selectively include foreseeable events. For example, the Trustees tell you about the impact of insolvency in disability – just not in Medicare. For example, the Trustees’ forecast anticipates lower income tax revenue (which is rebated to SSA) – just not lower income from a drop in spending.

This article is not to suggest that the Trustees have failed in their duty. The point is to provide clarity to the Social Security reform debate. If you hear “Social Security will take in enough revenue to keep all of its promises for over 30 years, without any changes at all,” you might believe that leprechauns spit out gold coins.
The media should be asking questions rather than repeating results.

The Federalist Review welcomes comments on this story. Letters intended for publication must include the writer’s full name and town. Send to combs@fridayletter.com. Contact Brenton Smith at joetheeconomist@gmail.com.