Social Security Trustees Reports, 2009
The big news last week was that the annual Trustees Reports for Social Security and Medicare were released, and the financial condition of the programs worsened compared to the prior year's report. When I read the Trustees Report for Social Security, I go straight for Table IV.B7, which shows that the unfunded obligations for the program over the infinite horizon are projected to be $15.1 trillion, which is equivalent to 3.4% of taxable payroll or 1.2% of GDP in perpetuity. (Those numbers are up from 3.2% and 1.1% in last year's report.) For an excellent set of comments on the reports, see the handouts from this panel convened by the National Academy of Social Insurance.
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Andrew, The amount of
Andrew,
The amount of "unfunded" obligations is not really what is relevant to the problem of our overall long-term fiscal imbalance. First, projected spending is unfunded, but moreover, even if we are thinking of "unfunded" as the gap between projected spending and projected revenues, the relevant gap is between OVERALL spending and OVERALL revenues, not the gap between projected spending for a particular program like Social Security and it's projected revenues from a combination of its dedicated tax revenues plus the allocation of a particular amount of general fund tax revenues to that program (to "repay" a "trust fund"). The latter is the product of an artificial, bookkeeping construct.
Look at it this way: If the "trust fund" were greater or if income tax rates were lower and Social Security FICA higher (in a revenue-neutral way) such that Social Security were projected to be "solvent" forever, would that mean we have less of a problem with regard to our overall long-term fiscal imbalance? Nope. We'd still have the same gap between overall spending and overall revenues. There would be distributional issues (the tax burden of FICA is distributed differently than that of the individual income tax), but on an aggregate level, there would be no difference. Our projected deficits would be just as great, as would our debt held by the public and all accompanying problems.
The conceptual confusion over this issue seems to be rooted in erroneous treatment (1) of the "trust funds" as accounts sitting on piles of cash or income producing assets (other than claims against future general fund tax revenue), and (2) of Social Security's dedicated tax (FICA SS) as some money tree or premiums paid by beneficiaries or source of income from outside our tax system. Needless to say, all of the above are complete misconceptions. Social Security spending and FICA SS and "repayment" of the Social Security "trust funds" are all part of the whole.
We could set up a dedicated "Defense Tax", carving it out of general fund taxation (i.e., not overall increase in taxation, just separating out taxation for spending on Defense). Would it then make sense for us to focus on the balance in the "Defense Trust Fund" and on Defense "solvency" as if these figures were meaningful in the context of our overall budget and related trade-offs and policy alternatives? No. A dedicated tax, coming from the same population, for spending on a program on a pay-as-you-go basis, does not mean that the program is somehow on a financial island. It is still part of the whole, internal bookkeeping devices notwithstanding.
The relevance of reports from Trustees regarding "solvency" is only insofar as these "gaps" reflect changes in projected revenue and in projected spending for a particular program indicate corresponding changes in OVERALL revenue and OVERALL spending, and thus a change in the size of our OVERALL fiscal imbalance problem. The "gaps" in the internal, artificial "finances" of the particular program are not, in themselves, meaningful in an economic, rational sense. The only relevance is in an irrational (but pervasive) political sense, because so many people are fundamentally confused on this stuff.