Neil H. Buchanan

More Good News on Social Security: Reality Collides With Calls to "Fix" the System Sooner Rather than Later

By NEIL H. BUCHANAN
Thursday, August 12, 2010

Last week, the Trustees of the Social Security system released their 2010 annual report.  Unsurprisingly, this news event served as an opportunity for many long-time opponents of the system to argue that Social Security is doomed and must be either dismantled, privatized, or significantly revamped.  Once again, however, the report itself shows that the nation's retirement system is fundamentally healthy.

This year's annual report was delayed for several months, because the report on Medicare's finances is issued at the same time as the Social Security report.  Because of the passage of the health-care bill earlier this year, the Trustees needed additional time in order to produce estimates of the effects of that legislation on Medicare.  As it turned out, the new health-care law has extended the exhaustion date of the Medicare trust fund from 2017 to 2029.

That good news was amplified by forecasts showing that Social Security's long-term financial picture has not changed, compared to last year's forecasts, even though the recession has continued its grim hold on the economy.  If anything, Social Security looks slightly better this year than it did a year ago.

In this column, I will first describe the major findings of the Social Security Trustees' report.  I will then turn to the arguments that the system must be "fixed" as soon as possible -- arguments that stubbornly refuse to go away, even in the face of the clear facts about Social Security's continuing viability.

Most importantly, I will argue that adopting unnecessary fixes today will actually worsen the cynicism among younger workers, too many of whom already believe that Social Security will not be there when they retire.  They are wrong in that belief, but efforts to change Social Security will only make their cynicism grow.

The Short-Run Forecasts: Focusing on an Unimportant Issue

This year, the release of the Trustees' annual report was accompanied by a discussion of the short-term finances of the Social Security system.  As the headline in The New York Times put it: "Medicare Stronger, Social Security Worse in Short Run, Report Finds."  The way in which Social Security's short-run situation is worse was described by Treasury Secretary Geithner, who said that Social Security's benefits "are expected to exceed tax revenue for the first time this year, six years earlier than was projected last year."

As I discussed in a FindLaw column earlier this year, this supposed short-run problem is completely meaningless.  The recession has caused a short-term blip in the system's finances, turning very small annual surpluses into very small annual deficits for the next couple of years.  This should have surprised no one.  What is important to remember is that the system's long-term health is completely unaffected by this short-term anomaly.

Indeed, we should wonder why anyone would even care about the short-term annual financial flows into and out of the Social Security system.  The system is, and always has been, all about long-term financing.  We have long known that the system was designed to collect more in revenues than it would pay in benefits for several decades, and that those decades would be followed by several more decades during which those accumulated surpluses -- memorialized in the trust fund -- would be spent down.

During the years when Social Security was running large annual surpluses, no one talked about the short-run finances of the system.  It is difficult not to suspect, therefore, that the sudden focus on the meaningless short-term numbers is an opportunistic response by Social Security's foes to grab hold of anything that can be cast as bad news.

Even if those who are suddenly focused on the short-term numbers are acting in good faith, however, they are simply missing the point.  The only thing that matters with regard to Social Security's fiscal health -- the only thing that has ever mattered in this respect -- is whether Social Security will be able to pay its promised benefits in the long run.  On that question, nothing has changed since last year's good news (which I described in a FindLaw column last Spring).

Social Security's Long-Term Picture: Small or Nonexistent Financing Challenges

For decades, policy-makers have known that the difficult issue facing Social Security relates to the aging of the Baby Boomers.  As that generation, typically identified as those Americans born between 1946 and 1964, inevitably ages into its retirement years, there will be relatively more retirees receiving retirement benefits than workers paying taxes to support those benefits.

What is often forgotten, however, is that future workers are going to be much more productive than today's workers. This is because of improvements in technology -- knowledge and machines -- that will continue to accumulate over the coming decades.  Even small annual improvements in workers' productivity accumulate substantially, with even the most pessimistic forecasts showing inflation-adjusted living standards more than doubling over the next seventy-five years.

These improvements in technology mean that, several decades from now, it will be possible for fewer workers to support both themselves and their elders.  As the Trustees' annual report itself continues to show (buried in the statistical minutiae), the increases in long-term living standards will be more than enough to make everyone -- workers and retirees alike -- much wealthier than they are today.

The headlines, however, focus each year on the "exhaustion date" of the Social Security trust fund.   As was the case last year, this year the trust fund is forecast to become depleted in 2037.  That does not, however, mean that Social Security, as one Republican Senate candidate put it in a recent interview, "isn't going to be around in 27 years."  Last year, the Trustees forecast that revenues collected from 2037 forward would cover 76% of scheduled benefits.  This year, that forecast has improved, showing that 78% of scheduled benefits will be payable after 2037.  While this is a small difference, that the long-term news has improved at all, despite the country's continuing economic pain, is remarkable.

Even more important, news reports fail to point out that a cut in benefits of that magnitude would still leave Social Security's recipients in 2038 and thereafter receiving higher benefits, in terms of buying power, than today's retirees receive.  It is difficult, therefore, to paint a credible long-term picture of a crisis affecting Social Security.

Three Alternative Forecasts of Social Security's Long-Term Finances

Moreover, few people realize just how contingent these long-term forecasts are.  The Trustees continue to provide three scenarios for Social Security's long-term finances, labeling them "high-cost," "intermediate," and "low-cost."  Only the intermediate estimates are generally discussed in news articles about Social Security.  Yet, while the focus on the middle path might be intuitively appealing, it is misleading.

All three long-term scenarios are, in fact, based on conservative economic assumptions.  Although the low-cost scenario includes the least pessimistic assumptions, it is anything but pie-in-the-sky, while the high-cost scenario includes extreme assumptions that would be a truly remarkable departure from U.S. economic experience.  Even the most pessimistic scenario, moreover, shows Social Security's trust fund being depleted in 2029, exactly the same date as was given in last year's prediction.

In addition, even if we ultimately reach the point where changes are necessary, it will still be possible to phase in changes over the space of decades.  There is nothing magical about the year of depletion as the date by which all changes to Social Security must be phased in.  So long as the overall changes bring the system into long-term balance, such changes can be initiated under appropriate legislation any time we choose.

The low-cost (least pessimistic) assumptions, meanwhile, continue to show that Social Security could continue to pay full scheduled benefits indefinitely, without the trust fund ever being depleted.

While one could take the simplistic (and misleading) view that two out of three scenarios show the Social Security trust fund ultimately being depleted, the question is whether there is a reason today to believe that we must "save" Social Security.  When one set of conservative assumptions shows no financing difficulties at all, while the other two show manageable problems beginning either nineteen or twenty-seven years from now, it is at best contentious to suggest that taking action today is vital to "save" the system.

Some Issues Must Wait: Why the "Prudent" Course is to Leave Social Security Alone

Even so, it is always possible to take the most cautious course possible.  If Social Security might be in crisis at some point, readers may wonder, then why not do something about that possibility today?  This seems like especially wise counsel if, as some economists and politicians never tire of repeating, it is easier to deal with a long-term problem sooner than later.

As many have pointed out, there are relatively simple changes to Social Security's tax and benefit structures that would erase even the contingent problems that show up in the intermediate and high-cost forecast scenarios.  As an editorial in The New York Times earlier this week put it, "Technically, Social Security is an easier fix. To put the program on a sound footing will require a combination of moderate benefit cuts and tax increases, which could be distributed fairly and phased in over decades."

The flaw in that argument is that changing the Social Security system is not a cost-free exercise.  The "easier fix" carries with it some highly problematic side effects.  To open up the Social Security system to legislative tinkering, in the current political environment, all but begs politicians to go far beyond what would be necessary to prevent the trust fund from being depleted.

Social Security is, after all, a ripe target.  Some politicians hate it for being government-run, while others attack it for its size.  It is no coincidence that so many politicians have embraced the label "entitlements" to describe Social Security, Medicare, and Medicaid.  If the public can be convinced that these highly-successful government programs are merely something to which people presumptuously feel entitled, then it will be easier to suggest that those people should be taken down a notch.

The idea that we can simply open up the Social Security system, apply an easy fix, and close the matter is thus little more than an appealing fantasy.  Given the number of other issues facing federal policymakers, and given recent experience showing how impossible it is to do anything in Washington quickly and cleanly, the prudent course is to leave the least pressing problems on the back burner.  And contrary to the politically-motivated claims, Social Security simply does not present a pressing problem.

Cutting Social Security Benefits: The Effect on Young People's Attitudes

One of the most successful public-relations efforts of the last few decades has been the concerted campaign to convince young people that Social Security will not be there for them when they retire.  Polls now regularly show that fewer than half of younger Americans say that they ever expect to receive any of their scheduled Social Security benefits.  This attitude is understandable (though completely wrong), given that both Republicans and Democrats have been saying for years that Social Security is broken.  (Remember former President Clinton's call to "save Social Security first"?)

It might be tempting to think that younger people are already so disillusioned that there is no way to make matters worse.  As one economist said recently, in advocating cuts in Social Security: "We could make changes and still have people collecting more in benefits than they're expecting to see."  The idea, apparently, is that disillusioned younger workers will be delighted to learn that there is a way to collect at least something from Social Security, given that they are currently expecting nothing.

In this context, however, with cynicism running so high among younger workers, announcing any change to the Social Security system is extraordinarily dangerous.  There is an enormous difference between harboring the strong suspicion that a system is a sham, and actually being faced with the reality of future benefit cuts and tax increases.  "Saving" Social Security today, therefore, seems likely to permanently destroy younger workers' ability to trust in the future viability of Social Security.

That, indeed, might ultimately be the point, at least for some politicians.  It would be difficult to imagine a more reliable way to destroy the public's waning faith in the government's ability to do anything effectively, than to announce that Social Security is going to be cut back.  We should not take that risk without having a very strong reason to believe that we have no other choice than to do so.

The happy fact, however, is that we do have a choice.  There may come a day when the long-term picture of Social Security's finances calls for immediate action.  We are not at that point today, however, and we might -- even by the Trustees' own reckoning -- never get there.  Waiting has consequences, but so does acting sooner rather than later.  Given the continued stability of the Social Security system, the best course for now is to leave the system alone.


Neil H. Buchanan, J.D. Ph. D. (economics), is a Visiting Scholar at Cornell Law School, an Associate Professor at The George Washington University Law School, and a former economics professor.

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