Social Security

Op-Ed: The $2.5 trillion Slush Fund

CNN Money | August 9, 2010

The Social Security trustees released their updated projections last week detailing the financial health of the nation's retirement system.
Bottom line: The program is running a deficit this year, and is projected to run growing deficits after 2015. But it will have money in the trust funds to pay full benefits until 2037.
Some maintain that the findings reinforce the claims that Social Security is basically on sound footing -- no need to rush to make changes and nothing a few minor tweaks won't fix. Others say the need to make changes has grown even larger.
I'm in the latter camp: Changes to Social Security must be made -- and the sooner the better.
The difference, in many ways, boils down to how you think about Social Security's "trust funds."
The trust funds hold the assets that have accumulated within Social Security from the annual surpluses the program has built up over the years. Right now, the funds (there is one for retirement and one for disability) have a whopping $2.5 trillion.
That's pretty fabulous news when looking at Social Security in isolation. The program can make good on all of its promises for a quarter of a century, first by relying on the interest owed to the funds, and then by redeeming the assets in them.
The big problem is the other side of the ledger. When Social Security runs a surplus, the extra money is used to purchase U.S. Treasurys, and the dollars are used to help finance the rest of the government, which is almost always running a deficit.
So when those assets to Social Security -- and liabilities to taxpayers -- come due, we have to find a way to raise the money, which has already been spent.
You know what that means: Raising taxes, cutting spending or borrowing. And because the downturn has drained Social Security surpluses more quickly than expected, that strain on the rest of the budget will begin even sooner.
Not our problem, say defenders of the trust fund concept. The money is owed to Social Security; it must be paid to Social Security. Legally, that's true.
But the entire federal budget needs to be rethought as the nation stares at the mountain of debt accumulated from years of our not paying our bills.
And the question is how?
Let the young pay it back
The unfortunate reality is that the trust funds proved to be ineffective at saving the money meant for Social Security in any economically meaningful way. Having used those Social Security surpluses as a slush fund for the rest of government has indeed complicated things.
First, it allowed Congress to keep all other taxes lower than it otherwise would have been. By using Social Security money to fill the gap, current and soon-to-be retirees got an effective discount on their share of the cost of government. By contrast, the responsibility for repaying the trust funds that they used is going to fall fully on today's younger workers. Not the best deal imaginable -- at least for those on the other side of the deal.
We urgently need to shift our attention to what to do to strengthen Social Security. There are a number of sensible solutions:
  • gradually raise the retirement age since we are living longer;
  • slowing the growth of benefits for high earners to preserve them for those who depend on the program;
  • correct the inflation formula, which overestimates annual cost of living adjustments.
The rhetoric surrounding the issue is likely to heat up. Instead of trading accusations or competing over promises of what not to do to fix the program, policymakers from both parties agree that changes need to be made to strengthen Social Security and rebalance the budget. We should get started as quickly as possible.
After all, as the program trustees said: "The projected trust fund shortfalls should be addressed in a timely way so that necessary changes can be phased in gradually and workers can be given time to plan for them. Implementing changes sooner will allow the needed revenue increases or benefit reductions to be spread over more generations."
That is a point everyone should be able to understand.


Copyright 2010, CNN

CRFB Reacts to Trustees Reports

Bill Frenzel
Tim Penny
Charlie Stenholm

Maya MacGuineas
Barry Anderson
Roy Ash
Charles Bowsher
Steve Coll
Dan Crippen
Vic Fazio
Willis Gradison
William Gray, III
William Hoagland
Douglas Holtz-Eakin
Jim Jones
Lou Kerr
Jim Kolbe
James Lynn
James McIntrye, Jr.
David Minge
Jim Nussle
Marne Obernauer, Jr.
June O'Neill
Paul O'Neill
Rudolph Penner
Peter Peterson
Robert Reischauer
Alice Rivlin
Charles Robb
Martin Sabo
Gene Steuerle
David Stockman
Laura Tyson
Paul Volcker
Carol Cox Wait
David M. Walker
Joseph Wright, Jr.

Elmer Staats
Robert Strauss

CRFB Reacts to Trustees Reports
August 5, 2010

Today, the Social Security and Medicare Trustees released their annual reports on the financial status of the two programs. The Trustees are projecting that Social Security will face a cash flow deficit of $41 billion (excluding interest) this year, a cash flow deficit of $7 billion next year, will then run small surpluses from 2012 to 2014, and will again return to deficits thereafter. Deficits will reach 0.4 percent of GDP in 2020 and 1.2 percent by 2030. The Medicare deficit in the Hospital Insurance program is projected to reach $33 billion this year, before running small surpluses by mid-decade. But deficits will resume an upward path by 2020.

The report states “The projected trust fund shortfalls should be addressed in a timely way so that necessary changes can be phased in gradually and workers can be given time to plan for them. Implementing changes sooner will allow the needed revenue increases or benefit reductions to be spread over more generations.”

“When the programs’ own Trustees tell the nation reforms need to be made sooner rather than later, we ought to listen,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “The clock is ticking; our ongoing delay has already made strengthening the program much more difficult. Do we really want to tell participants down the road – sorry for the abrupt benefit cuts and tax increases—the Trustees warned us year after year, but we chose to delay taking action? It just doesn’t make sense that when it comes to Social Security, one of the nation’s most successful programs, we are unwilling to make the necessary changes to avoid insolvency even in the face of repeated warnings.”


Click here for a pdf version of this release.

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In Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt, The Peterson-Pew Commission on Budget Reform calls on policy makers to stabilize the national debt through a six-step plan. Crafted over the past year by former heads of the CBO, OMB, GAO, and the congressional budget committees, the plan reflects a bipartisan approach to avoiding the tremendous global risks of America's expanding debt, without destabilizing the economic recovery. Red Ink Rising is the first of two major reports to be released by the commission.

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