“Every member of Congress knows these programs are unsustainable in their current state…They can be fixed, but the lies have to stop. Nobody’s proposing that we end Medicare or Social Security,” Heller said. “If some in Washington would stop campaigning long enough to do their jobs, we could fix both and ensure their existence for generations to come.” [LVSun]
Don’t you just love it when a politician says “everyone knows…?” No, Senator Heller “everyone” does NOT “know” that Medicare and Social Security are unsustainable. This may be a statement of the received wisdom of Republicans who want to privatize Social Security and eliminate Medicare as we know it today, but “everyone” isn’t convinced — nor should they be.
Let’s begin with the Social Security issue. The “unsustainability” issue takes its nourishment from the long term and 75 year projections made by the Social Security Trust administrators. First, we need to recognize that these are projections, and projections are first and foremost nothing more nor less than educated conjecture predicated on a given set of fiscal indicators. The assumptions may be valid, or the underlying assumptions may be invalid, or the assumptions may be somewhere in the midst — but the conclusions should be read as conjecture based on a set of economic assumptions which may or may not be valid.
Secondly, the Trustees’ Report contains not one, but three projections: (1) low cost, (2) intermediate, and (3) high cost. [SSA faq] Just to make generalizations a bit more complicated, there are not one, but two Social Security Trust Funds, one for Old Age and Survivor’s Insurance (OASI) and one for Disability Insurance (DI). These are often combined in report summaries as OASDI. As of the 2011 Trustees Report, the OASI fund is now deemed healthier than the DI fund.
Third, yes, the funds as currently projected can be enhanced by legislative action. This is the point at which the Republican and Democratic proposal part company. The Republican version of “enhancement” is contained in the Ryan Roadmap:
Personal Choice in Retirement Accounts. Beginning in 2012, the proposal allows each worker younger than 55 to shift a portion of his or her Social Security payroll tax payment into a personal retirement account, chosen from a group of investment funds approved by the government (see below). When fully phased in, the personal accounts will average 5.1 percentage points of the current 12.4-percent Social Security payroll tax.
The personal investment component is phased in to allow a smooth transition. Initially, workers are allowed to invest 2 percent of their first $10,000 of annual payroll into personal accounts, and 1 percent of annual payroll above that up to the Social Security earnings limit. The $10,000 level will be indexed for inflation. After 10 years, the amount that workers can invest will be increased to 4 percent up to the inflation-adjusted level, and 2 percent above that. After 10 more years, these amounts will be increased to 6 percent and 3 percent. Eventually, by 2042, workers will be able to invest 8 percent up to the inflation-adjustment level, and 4 percent of payroll above that, for an account averaging 5.1 percent.
The choice of personal retirement accounts is entirely voluntary. Even those under 55 can remain in the current system if they choose. Further, those who choose to enter the personal account system also have an opportunity to leave the system, and those who initially opt out of the system of personal accounts can enter into it later on.
There are numerous ways to say “privatization” and the Ryan Plan is definitely one of them. The first clue is the word “personal” and the second clue is “choice.” Put these two words together and what we have is a plan to privatize Social Security in the form of optional private retirement accounts. The Congressional Budget Office (pdf) summarized the effects:
After two decades, the effect of individual accounts on benefits would become significant. CBO assumed that individual accounts would be invested in a mix of stocks and corporate bonds and that the value of an account at a person’s retirement would be paid out as a life annuity. Under the Roadmap, a federal guarantee would ensure a rate of return of at least the rate of inflation. With such individual accounts, total annual benefits would, on average, exceed those projected under the alternative fiscal scenario, but those payouts would also be more uncertain, despite the guarantee, because returns on stocks and corporate bonds are risky.
This is a lovely case of having one’s cake and attempting to eat it at the same time. The private retirement accounts would be invested on Wall Street, and be paid out as a “life annuity…at a rate of return of at least the rate of inflation.” If the rate of return happens to fall (see S&P, or DJIA volatility) then the federal government would make up the difference? And when might this happen? According to the CBO:
Voluntary individual accounts would probably also increase the economic cost to the government relative to a plan similar to the Roadmap but without such accounts. People would tend to opt for individual accounts when it was in their economic interest to do so, which would be when the value of taxes redirected to individual accounts exceeded the present value of forgone Social Security benefits. The guarantee of a rate of return on contributions at least equal to the rate of inflation would also involve a cost to the government. Although the probability of the returns on equities and bonds falling short of inflation over a period as long as a worker’s career is small, such an outcome would be more likely to occur during periods of economic stress, when resources were scarce and, hence, the guarantee most valuable.
It is not “prevarication” to contend that the Ryan Plan does, in fact, offer a form of privatization of the Social Security program. One may seek to sugar-coat this pill with notions like the ‘privatization’ is ‘optional,’ and that the Ryan Plan doesn’t affect those who are already at or near retirement age. However, the basic fact remains that what the Ryan Plan does is offer a private retirement account scheme. In order to make this scheme palatable to the general public a little paving needs to be accomplished.
First, younger workers must be convinced that the Social Security system is now or soon will be bankrupt — and there has been no small amount of GOP propaganda to this effect; and, older workers must be convinced that there has been a raid on the Social Security Trust Funds such that their benefits are in peril. The latter has also been a veritable fountain of GOP and radical right wing talking points. Both these contentions are patently false.
There are those who will gnash teeth and wail, “But…but…but…look at the Trust Fund Reports,” and to those we could say “yes, there is a deficit in the DI trust fund” and there are ways to fix the issues without resorting to privatizing the program. To wit:
OASI is fully funded through 2039, according to the Congressional Budget Office (2037 according to the Social Security Trustees); DI is fully funded through 2016, according to CBO (2017 according to the Social Security Trustees). Combined, both programs are fully funded through 2037, according to CBO, and through 2035, according to the Social Security Trustees.
To avoid the near-term shortfall in the DI program, Congress can simply pass legislation to reallocate funds between the OASI and DI programs in order to extend the full funding of the DI program for two more decades, consistent with the program’s overall solvency that is projected for the next 25 years or so. Such reallocations occurred most recently in 1994, when funds were reallocated from OASI to DI, and in 1982 when funds were reallocated from DI to OASI. [SSocSec.org]
There is another fix that isn’t so redolent of accounting treatments, the earnings cap for Social Security was raised every year from 2000 to 2009 in a range from 1.0% to 5.6%, increasing the cap from $76,200 in 2000 to $106,800 in 2009. The cap has not been raised in the last two years — and if solvency is truly the crisis du jour, then why not raise the cap now as was done throughout the Bush Administration?
Yes, Senator Heller, there are ways to “fix” the Social Security system, and they don’t involve privatizing the system with “personal choice private retirement accounts” — one of the prime items on the Wall Street Wish List.