Thanks
-- John K. Taber
DRAINING THE TRUST FUND
I do hate sums. There is no greater mistake than to call arithmetic
an exact science. There are ... hidden laws of number which it
requires a mind like mine to perceive. For instance, if you add a
sum from the bottom up, and then again from the top down, the result
is always different. -- Mrs. La Touche, quoted in Donald E. Knuth,
The Art of Computer Programming, Vol 2.
The 2% privatization proposal threatens to drain the Social Security Trust Fund, precipitating a real crisis in a more immediate future. To see why let's begin with the year-by-year Trust Fund balances, estimated by the Social Security Administration actuaries.
>From Table II.F13. Comparison of Estimated Income Rates and Cost Rates
by
Trust Fund ... Calendar Years 2000-75
[As a percentage of taxable payroll, intermediate estimate]
Calendar Income Cost Balance year rate rate ------------------------------- 2000 12.65 10.34 2.31 2001 12.67 10.36 2.31 2002 12.67 10.42 2.25 2003 12.67 10.51 2.16 2004 12.68 10.62 2.06 2005 12.68 10.74 1.95 2006 12.69 10.87 1.82 2007 12.70 11.02 1.69 2008 12.71 11.17 1.54 2009 12.73 11.35 1.37 2010 12.74 11.55 1.18 2015 12.81 12.91 -.10 2020 12.91 14.66 -1.75 2025 13.00 16.24 -3.24 2030 13.08 17.35 -4.26 2035 13.14 17.86 -4.72 2040 13.16 17.87 -4.71 2045 13.18 17.85 -4.67 2050 13.21 17.96 -4.76 2055 13.24 18.27 -5.03 2060 13.27 18.63 -5.36 2065 13.30 18.95 -5.65 2070 13.32 19.24 -5.92 2075 13.34 19.53 -6.18
We need to explain a few things about these numbers. Because inflation distorts dollar amounts, the SSA actuaries use ratios instead of dollars to show income and costs. A common trick that propagandists use is expressing future dollars as nominal dollars (also called "current" not because they are current for today but because they are current for the year talked about). That is, the dollars are a future (or past) year's dollars, unadjusted for inflation. That is how they get those scare-you-to-death numbers. If dollar figures are used honestly, they have to be indexed to a particular year. These dollars are called "real", or "constant". But in time, inflation makes figures computed from the index year unwieldy, so that estimators will used a later year for indexing. But changing the index year makes comparison between years difficult without recalibrating figures in the former index year. In short, ratios save a lot of work, and keep year-to-year comparisons possible.
Of course, ratios are difficult for you and me because we are used to thinking in dollars. But give it a try.
INCOME
In this table, the SSA actuaries use the tax ratio for Social Security and Disability Insurance on the estimated wages subject to Social Security, plus the income for taxes on Social Security benefits.
Now, we know the tax rate on payroll is 12.4%. How come this table shows the income as 12.65% for the year 2000? The answer is, it also includes taxation of benefits.
Let's break the income figure of 12.65 for year 2000 down.
Old Age and Survivor Insurance 10.60 Taxation of benefits 0.23 Disability Insurance 1.80 Taxation of benefits 0.02
Total insurance tax 12.40 Total benefit taxation 0.25 Total income 12.65
A few words on benefit taxation. The computation is a little confusing so I will simplify.
If your total income is below a certain amount, Social Security benefits are tax-free. Basically, if Social Security is your major income, it isn't taxed. For income (such as interest) higher than about $16,000 for a married couple, 50% of Social Security benefits are taxable as income. Finally, income higher than about $28,000 (for a married couple) 85% of Social Security benefits are taxable as income. The amounts from taxes on 50% of Social Security benefits go to the OASDI Trust Funds. The amounts from taxes on 85% go 35% to the Medicare Trust Fund and 50% to the OASDI Trust Funds.
The payroll tax is fixed at 12.4% but the taxation of benefits increases a little year-by-year.
So, that's how we get 12.65% income for the year 2000.
COST AND BALANCE
Now, look at the cost. It is also expressed as a percentage of taxable income. Notice that it is less than income until 2015. Thus in 2000 there is a positive balance of 2.31% of OASDI taxable income. In other words, there is a large amount of money collected for Social Security that is beyond what is needed to pay benefits. It is 2.31% of everybody’s earned income up to $76,000. Where does this excess go? It goes to the Trust Fund, held in savings, to help defray the retirement cost of the baby boomers.
As you all know, in 2015 the balance goes negative, -0.1% of OASDI taxable payroll. This is the year that the number of baby boomer retirees catches up with Social Security income. 0.1% is the amount that will be taken from the Trust Fund. Alternatively, OASDI taxes could be increased 0.1%. that year to pay the benefits. Or, benefits could be reduced that year by 0.1% so that the 2015 cost ratio would be 12.81 instead of 12.91. And so on.
THE EFFECT OF 2% PRIVATIZATION
Now let’s look at the same figures but deduct 2 from the income, and look at the balance. Since privatization can’t take place this year, and will probably take a couple of years to enact and another to implement, let’s pick 2004 as the first year money is diverted to a personal savings account. Overall, it is a huge erosion of income. We have:
Calendar Income Privati- Net Cost rate Balance year rate zation Income --------------------------------------------------- 2000 12.65 12.65 10.34 2.31 2001 12.67 12.67 10.36 2.31 2002 12.67 12.67 10.42 2.25 2003 12.67 12.67 10.51 2.16 2004 12.68 -2.0 10.68 10.62 0.06 2005 12.68 -2.0 10.68 10.74 -0.06 2006 12.69 -2.0 10.69 10.87 -0.18 2007 12.70 -2.0 10.70 11.02 -0.32 2008 12.71 -2.0 10.71 11.17 -0.46 2009 12.73 -2.0 10.73 11.35 -0.62 2010 12.74 -2.0 10.74 11.55 -0.81 2015 12.81 -2.0 10.81 12.91 -2.10 2020 12.91 -2.0 10.91 14.66 -3.75 2025 13.00 -2.0 11.00 16.24 -5.24 2030 13.08 -2.0 11.08 17.35 -6.27 2035 13.14 -2.0 11.14 17.86 -6.72 2040 13.16 -2.0 11.16 17.87 -6.71 2045 13.18 -2.0 11.18 17.85 -6.67 2050 13.21 -2.0 11.21 17.96 -6.75 2055 13.24 -2.0 11.24 18.27 -7.03 2060 13.27 -2.0 11.27 18.63 -7.36 2065 13.30 -2.0 11.30 18.95 -7.65 2070 13.32 -2.0 11.32 19.24 -7.92 2075 13.34 -2.0 11.34 19.53 -8.19
First, the 2% does not remain 2%, that's just starters. Everybody expects it to increase progressively until all of Social Security is privatized. But the schedule is not public yet, so I have to use 2% for the entire 75-year forecast.
Second, the positive balance until 2004 remains the same under our assumptions, and still feeds the Trust Fund, which continues to grow per estimates. But at 2004, the balance is reduced from 10.62 to 0.06. That is 10.56% of OASDI income that does NOT go to fatten the Trust Fund. That is a large amount.
Third, the next year, 2005, there is not enough net income to pay benefits. We begin tapping the Trust Fund. Notice that this is ten years earlier than now estimated.
Also, under the current system without privatization, the Trust Fund is still fattened for a few years after 2015, though at a greatly falling rate. The Trust Fund is estimated to reach $6.5 trillion.
But, under privatization, we begin draining the Trust Fund ten years sooner than expected, and it never gets close to the $6.5 trillion now estimated.
So far as I know, nobody has done the work to figure when the Trust Fund would be exhausted under privatization. By eyeballing the chart shown in the Report, Figure II.F6, I estimate between 2010 and 2015.
Privatization would bring on a real crisis closer to believable estimates.
Of course, this objection has occurred to everybody. It is called the "transition" (from pay-as-you-go to pre-funded). It is costly because the taxpayer is supporting two different systems at once. Thus, most privatization plans impose a tax increase (usually 2%), or cut benefits severely, or both. Even money from the general revenue has been suggested to help fund the transition.
We don't know what Bush's proposal will do about transition. If his secret plan does nothing, there will be a crisis.