Understanding the bizarro world of 'STRENGTHENING' SOCIAL SECURITY: Link and SIMPLE analogy

[ProgressiveEconomist]

Imagine you and your spouse put away tens of thousands of dollars a year over DECADES for your retirement. You target $3000 a month in retirement income starting at age 65, and you actually accumulate $2 million in your IRA by the time you hit age 65.

Then you request monthly withdrawals in the amount of $3000. But the brokerage administering your IRA says, "Sorry. We're only going to give you $1500 a month. But just think how fast your account will grow!"

Outrageous? Not in the bizarro world of Social Security finance. As Chairman of Ronald Reagan's "Social Security Commission", in 1983 Alan Greenspan moved Social Security from a "pay as you go" system where FICA revenues each year just covered benefit payouts that year. Instead, Greenspan and Reagan raised FICA payroll taxes were raised dramatically, to generate a long-term "Trust Fund" something like a huge national IRA.

But instead of giving Social Security trustees publicly traded Treasury bonds they could cash at will when FICA revenues fell short of benefit payments, Greenspan saw to it that Congress would have to take specific budget action each year to fund any shortfall.

Thirty-eight years later, the Social Security Trust Fund stands at almost $2.7 TRILLION; see the projections of revenues, outlays, and assets at http://www.ssa.gov/oact/tr/2011/lr6f8.html .

Subtract "costs" (payments to the elderly and disabled) from "income excluding interest" (FICA payroll tax revenue) to see year-by year Social Security cash flow. Thanks to Dubya's deep recession, SS cash flow already has turned negative, years ahead of schedule, and stands at $45.6 billion just for the year 2011. Projected future shorfalls grow rapidly, reaching almost $200 billion for 2022. This is the amount Congress must authorize to start paying back the $2.7 trillion "accumulated in the Trust Fund" since 1983, (and squandered, mainly for income tax cuts for the very wealthy, by Reagan, Daddy Bush, and Moron Bush).

Do you see clearly now why "strengthening Social Security" by raising retirement ages, increasing penalties for early retirement, or un-capping FICA payroll taxes is "on the table" for deficit negotiations? "Just think how fast the Trust Fund will grow!"

[robinlynne]

1. ok. I was able to understand the first 3 paragraphs. then you lost me.

There is a huge social security trust fund. Then what? I'm not being sarcastic at all; I just want to understand.
There is 2.7 trillion in the trust fund. How much is social security paying out per year?

[ProgressiveEconomist]

2. THANKS! Did you open the LINK and then follow the next-to-last paragraph?

You won't understand the whole post if you don't click through the LINK to the Social Security Administration. I provided the "simple analogy" to help readers uderstand the table at the link.

The last column is the size of the "Trust Fund",

The two columns I mentioned in the next-last paragraph of the lead-in show total FICA revenue and total payout to retirees and the disable each year.

Don't hesitate to post again if you've actually clicked through to the Social Security Actuaries' table and still don't understand it. This system is so bizarre it's truly difficult to understand.

[robinlynne]

16. ok. The cost is higher than the revenue, but the fund is still huge. Is that it?

[ProgressiveEconomist]

17. No--the fund is non-tradable bonds Treasury gave to Trustees in exchange for

trillions of dollars from our paychecks. aLL those trillions already have been spent!

That's how Reagan (the Gypper, not the Gipper) and Dubya Yhe Squanderer could bestow so much largesse on the walthy and on "defense" waste. Forget the "interest" too--that also is money Congress OWES to the Social Security Trust Fund.

"Follow the money"--money going out to seniors and the disabled, and money coming in to be spent by Treasury. That's what'r real.

From 1983 until recently, TRILLIONS more dollars came in through FICA payroll taxes than went out to seniors and the disabled. But now that people born since 1946 are turning 65 in droves, tens of billions more are going out to retirees than is coming in from paychecks. That's going to continue and intensify into HUNDREDS of billions a year, unless something is done to slow down eligibility for retirement benefits or to collect more FICA by "uncapping" payroll taxes for people making six fiigures. Every 21st Century President has to cope with the future budget sinkhole Greenspan and Reagan put in place 38 years ago.

Demography is very predictable. Greenspan and the rest of Reagan's "brain trust" could see today's predicament coming, but what did they care? All they wanted were huge income tax cuts for the very wealthy, "Star Wars" and "Homeland Security" boondoggles for corporate donors, and vastly increased payrolll tax burdens for the poor and middle class.

Don't ever underestimate Greenpan's evil genius. Millions of "Reagan Democrats" who've continued to buy into Rush Limbaugh and Fox Noise still don't realize they've been suckered out of TRILLIONS of dollars from their puny paychecks.

[robinlynne]

18. got it.

[ProgressiveEconomist]

19. I'm glad! Thanks for posting

[ProgressiveEconomist]

22. Kick!

[reformist2]

28. Can SS at least go to the treasury and cash in the bonds???

[PoliticAverse]

3. The claim that the bonds can't be "cashed at will" is technically incorrect.

One of the features of the Special Issue securities issued to the trust funds is that the
securities can be redeemed at any time by the fund.

http://www.ssa.gov/oact/progdata/specialissues.html

No permission or authorization from Congress is necessary for the trust fund to redeem
any of the securities.

The only action that is necessary on the part of Congress is to make sure the debt ceiling
doesn't stop the government from issuing bonds if necessary to cover the redemptions.

[ProgressiveEconomist]

4. Huh? The link you provide does not substantiate the apparently erroneous claim

in your post.

If Social Security Trustees can cash non-tradeable bonds at will, then why haven't they established a portfolio of cash and laddered bonds to take advantage of predictable changes in interest rates? The Trustees cannot operate like John Paulson to generate trillions in bond-trading profits.

[PoliticAverse]

5. Because they aren't running a bond speculation/trading operation...

the purpose of the securities is to provide funds for Social Security's operation when needed.

Whenever they need additional funds to provide for social security payments they redeem securities
necessary and no permission from Congress is needed to do so.

If total government borrowing remained below the debt ceiling in the future no action of
Congress would ever be necessary for the Special Security issues to be redeemed.

Any excess cash Social Security takes in is used to purchase the Special Issues.
They're not suppose to hold cash.

[ProgressiveEconomist]

7. "They're not supposed to hold cash". At least we agree on that

The point I was making is that the only way the "Trust Fund" can be paid out to retirees and the disabled is through Congressional appropriation or Congressionally-approved Treasury bond auctions.

By fiddling with age requirements, payroll-tax rates/caps, and other aspects of Social Security, Congress always can manipulate the rate at which funds in the "Trust" are paid out.

Greenspan would not allow Social Security Trustees to control the kind of Sovereign Wealth Fund many other countries have, because that would have enabled political considerations to influence government "investments". For example, Social Security Trustees might put "too much" into the municipal bonds of struggling cites rebuilding their infrastructures.

But privatizing Social Security into individual accounts would have been OK with Greenspan, because individuals would have incentives for return-maximizing allocations of retirement savings.

In Greenspan's mind, it was far preferable to allow FICA payroll tax revenues to be squandered by Republican administrations than to allow centralized management of a flexible sovereign Social Security Trust Fund.

[PoliticAverse]

8. See the only part of your post(s) I take issue with is the "Congressional authorization" part.

Congress doesn't have to specifically authorize anything for the trust fund special-issue securities to be redeemed.

The already existing law permits the trust fund to redeem them at any time they need the cash and Congress doesn't have
to authorize any additional money.

If the government has a surplus it will just transfer the cash to the trust funds in exchange for the security and if
they are running a deficit they'll just add some bonds/notes/bills as necessary to the next auction. But no additional
Congressional authorization is necessary.

In a sense what the trust fund special issues are are a pre-existing legal authorization to call on funds from the Treasury.

[ProgressiveEconomist]

14. But no obscure law is absolute. Suppose the unthinkable happens next month

and Treasury has to pay out $300 billiion in outlays on $172 billion in revenues, and pay off or roll over $500 billion in mature publicly-traded bonds. What would happen to any special bonds Trustees want to redeem? IMO it's likely Treasury would oblige the Trustees, but by no means as certain as you seem to imply.

[ProgressiveEconomist]

15. 'Social INsecurity:' When did the Trust Fund last hold publicly-tradable Treasury bonds?

I noticed am intriguing historical reference at the link you provided, http://www.ssa.gov/oact/progdata/specialissues.html :

"Trust funds and types of investments

Since the beginning of the Social Security program, all securities held by the trust funds have been issued by the Federal Government. There are two general types of such securities:

Special issuesavailable only to the trust funds

Public issues--marketable Treasury bonds available to the public.

The trust funds now hold only special issues, but they have held public issues in the past. ..."

When in the past, and in what amounts? Before the 1983 changes that ended "pay as you go"? Trivial amounts?

IMO, if a large part of the $2.7 trillion Trust Fund were held as publicly-tradeable bonds, Social Security would become much more transparent and less subject to manipulation.

It seems to me that what we've had since 1983 to a large extent is not Social Security, but rather Social INsecurity!

[Fire1]

6. Excellent!!!! Perhaps we'll have more sober thinking. K&R

[ProgressiveEconomist]

9. Thanks! IMO, very few people really understand the Social Security issue, although

that doesn't hinder widespread expression of off-target viewpoints

[Fire1]

11. See, THIS needs to be on the greatest page. Too much

conjecture, misinformation, misrepresentations and out right lies strewn around this board just so folks can make a point. I've seen some stupid shit in my time and the threads I'm reading are definitely in the top ten.

[ProgressiveEconomist]

20. Kick!

[Fire1]

12. kick. n/t

[ProgressiveEconomist]

21. Kick!

[ProgressiveEconomist]

23. Kick!

[ProgressiveEconomist]

10. Thank you, anonymous recommenders.

You got this thread to the Greatest Page in short order

[Fire1]

13. Forgot to bookmark. n/t

[ProgressiveEconomist]

24. Kick!

[ProgressiveEconomist]

25. Kick!

[ProgressiveEconomist]

26. Kick!

[reformist2]

27. SS surplus has covered for the income taxes the rich should have been paying.

[ProgressiveEconomist]

29. YES! That was Reagan's Social Security "reform". When Greenspan was Reagan's

campaign economist in 1980, he was reported to have opined that the poor paid "too little" in taxes. Once in office, Reagan made Greenspan Chairman of his Social Security Commission, where Greenspan could and did put his ideas about taxes for the poor into action. Greenspan create a payroll-tax slush find to fill the huge budget holes Reagan was creating by slashing top income tax rates.

[ProgressiveEconomist]

30. Kick!