It is no mystery why it has been almost two years since I have written about Social Security here on Verdict. September 2016 was pretty much the last time that it was convenient for the Republicans to sow confusion about their least favorite social program—which, not coincidentally, is also the most successful government program in history. In the time since then, they have moved on and put their damaging stamp on other areas of policy while bowing to Donald Trump’s every whim.
Trump, of course, is the even more obvious reason that Social Security has disappeared from the headlines. The world has gone crazy, and there have been much more pressing issues dominating the public space. When the most powerful man in the world has the attention span of a toddler and the neediness of an insecure teenager—combined with the vindictiveness of a tinpot dictator—there is precious little that one can do to try to focus on serious policy issues.
But there is actually a much better reason for everyone to have ignored Social Security, which is that the program is in fundamentally good shape and need not be a policy priority. More to the point, if it were to become a prominent issue again, we would surely be hearing Republicans return to their dishonest claims about the system’s finances in order to justify their longstanding efforts to turn the nation’s retirement system over to Wall Street firms.
During the presidential campaign in 2015 and 2016, of course, Donald Trump said that he would not touch Social Security or Medicare. We must remember, however, that he also said that he would not touch Medicaid, yet in 2017 he furiously tried to get Republicans to pass a health care bill that would have slashed Medicaid as part of a scheme to take away health care coverage from more than twenty million Americans.
Even though the effort to repeal the Affordable Care Act failed, the Trump administration included plans in its most recent annual budget proposal for significant cuts to Medicaid. More significantly, Trump’s people have embraced a proposal from conservatives in the Senate to turn Medicaid into a block grant, which would further wash away the foundations of Americans’ minimal health care security.
Therefore, we should not take the current political inattention to Social Security to mean that the program is safe from Trump or his Republican enablers. With that in mind, I offer here a primer to explain why Social Security is so important—and why the Republicans’ longstanding fearmongering about the program is so dishonest.
The Bad Old Days of Republicans’ Social Security Bashing
For quite a few years starting the 1990s and continuing into the current decade, there was an annual feeding frenzy created by the issuance of the legally required annual report from the Social Security system’s trustees. That report contains a wealth of information, but the only thing that reporters or politicians wanted to talk about every year was “when Social Security will go broke.”
That completely false framing of the story reached its nadir in 2005, when the Republicans’ highly unpopular president (by pre-Trump standards) decided to make partial privatization of Social Security a priority in his second term. George W. Bush continually lied about the nature of the program and especially the trust fund, and he did everything he could to make it seem that younger people would “never see a dime” of the money they contributed to the retirement system through their payroll taxes. He asked, in essence, “Why keep if it is broke?”
Even though that public relations disinformation campaign did meet with some unfortunate success in scaring young people, the system was saved by Democrats who were buoyed by the efforts of groups like AARP. Defying the disparaging label “greedy geezers” that had been applied to Social Security recipients by the spin-meisters on the right, AARP and other groups firmly refused to be bought off by Bush’s offer to delay implementation of his dismantling of the program so that it would not affect most Baby Boomers.
If older generations were looking out only for themselves, they would have been willing to exit the political playing field after protecting their narrow immediate interests. That they did not do so, expending political capital entirely to protect people younger than themselves, is one of the unsung moments of generosity and heroism in American political history.
The Trustees’ Report
But what about that annual report from the trustees, the one that supposedly says that Social Security will go “belly up” at some point in the future? By law, the trustees are required to skew their estimates conservatively, and their written reports tend also to be written with a focus on negative-sounding pronouncements that do not do justice to the realities of Social Security.
For example, in the 2018 report that was issued earlier this month, the trustees note that “Social Security’s total cost is projected to exceed its total income [including interest] in 2018 for the first time since 1982.” That sounds like reason for concern, but as I will discuss below, it simply confirms that the system is following the path that we have always planned for it to follow.
The more politically salient point is that the date that reporters and politicians have long focused on, the so-called depletion date of the retirement trust fund, continues to be the source of serious misunderstanding by all but a very few people who have actually studied the system.
The current framework of Social Security was adopted in the early 1980s, when a Republican president and a Democratic Congress agreed on a plan to finance the retirements of Baby Boomers. At that point, the Boomers had all fully entered the labor force, which meant that the fiscal picture was going to be very flush for decades to come. If we had wanted to do so, we could have cut payroll taxes and still easily paid all promised benefits to the World War I and II generations. Instead, Boomers paid more in taxes without being promised any increase in their future benefits.
This excess of revenues over benefits every year added up to trillions of dollars, and the idea was to keep track of that extra money by calling it a “trust fund” from which money could be withdrawn when the time came that Boomers started to retire in significant numbers.
Of course, there was no vault (or, in former Vice President Al Gore’s once-infamous word, a “lockbox”) into which the excess money was deposited. That fact—that the money is not sitting somewhere, waiting to be pulled out for use later—has caused much misunderstanding, and it has been the hook on which dishonest Republican (and a surprisingly nontrivial number of Democratic) politicians have tried to hang their efforts to foment unrest about Social Security.
The fact is that no sensible financial system works by pulling money out of the system and letting it sit somewhere unused for decades. When a person deposits money into her 401(k) and IRA accounts, she might casually imagine that a bank somewhere is holding her money, but that is not what happens. Among other things, it would be impossible for people to earn interest if their deposits sat forlornly in a vault somewhere.
Just as banks pay depositors’ principal and interest by lending out their money to borrowers, the Social Security trust fund “saved” its money by allowing the federal government to borrow less money to pay its other bills than it otherwise would have had to borrow. Yes, the government obviously borrowed money during this time period, but the important point is that the amounts borrowed were smaller than they otherwise would have been, because of the excess tax payments that we call the Social Security trust fund.
And because the government did not borrow as much as it would have had to borrow, the economy was able to grow faster than otherwise, which provides a larger economic base from which the needs of current and future retirees can be served.
How does the possible depletion of the trust fund fit into the story? As part of this decades-long plan, we have known all along that at some point, the annual surpluses would turn into annual deficits within the system, when large numbers of Boomers would start the last stage of their lives. That time is right about now, which is why the quote above from the trustees’ report—“Social Security’s total cost is projected to exceed its total income [including interest] in 2018 for the first time since 1982”—is so unremarkable. Of course this would happen! That was the plan from the beginning.
So what is the hysteria all about? If we reach the point where the trust fund has a zero balance, we will have “used up” all of the money that the Baby Boomers overpaid during their prime earning years, which means that their benefits will no longer be supplemented by the credit for those overpayments that the trust fund has always represented.
Will the Trust Fund Reach Zero, and If So, What Does That Mean?
The financially conservative trustees’ reports have always included an estimate of the date on which the retirement trust fund might reach zero. Because the trustees use three forecasting techniques—the first based on outright pessimistic assumptions, the second based on conservative assumptions, and the third based on moderately optimistic assumptions—the press and politicians have tended to focus on the second, or “intermediate,” forecasts, even though those are hardly middle of the road.
In any case, the latest forecasts show (as they have shown every year for what seems like forever) that under the least pessimistic assumptions, the trust fund would never reach zero. Under the intermediate assumptions, the trust fund is forecast to hit zero in 2034. (The most pessimistic scenario pegs that date as 2030.)
So let us imagine that the trust fund reaches zero, in 2030 or 2034 or on some other date. What then? Many people are led to believe that this would make Social Security “insolvent” or “bankrupt” or some such thing. As even the trustees report again makes clear, however, that is not at all true.
The fundamental genius of the Social Security system has always been that it is set up as a pay-as-you-go (PAYGO) program, where the bulk of benefits each year are paid out of that year’s revenues. The creation of the trust fund allowed us temporarily to finance the extra expense of the Baby Boomers’ retirements, as I discussed above, but otherwise the system is set up to match revenues and benefits on an annual basis.
Therefore, if the trust fund (which, again, represents the extra credits that boomers have built up over time) goes to zero, the system will have to match benefits and revenues once again on a strict annual basis—unless we choose not to let that happen, because this is only one of several ways that we might respond.
The trustees’ forecast means that—if we choose not to increase revenues or otherwise to divert non-payroll revenues into the system—Social Security benefits would have to be reduced. However, and this is the most important part, they would have to be reduced, not eliminated. All of the talk about the system “going away” after 2034 is simply nonsense.
How much would the benefits be reduced, if we decided to allow them to be cut at all? (Again, this is a policy choice. There is no law of nature at play here.) The latest estimate is that the system would pay about 77 percent of benefits that it could otherwise pay if the trust fund is never depleted.
If that day comes, and if the political decision is to allow such cuts to be imposed, there will surely be a lot of unhappiness. That is why, by the way, I have never believed that this will ever happen. But even if it did, the system would then be completely balanced and sustainable going forward, with benefits paid every year from annual revenues.
Would we want benefits to be 23 percent lower than otherwise? The average benefit for current retirees is a bit over $1,250 per month, or $15,000 per year. Seventy-seven percent of that is just under $1,000 per month, or a touch above $11,500 per year. (Actually, future benefits will be adjusted upward from today’s levels in excess of inflation, so the buying power of future retirees will be somewhat higher than current ones. But these numbers are at least in the ballpark, albeit on the low side.)
Neither $15,000 nor $11,500 is lavish, to say the least, but both contribute toward a retirement with some dignity. I am the first to say that the system should be changed in a way that progressively guarantees higher benefits for the middle class and the poor, but even without such changes, the system is by no means in danger of being liquidated.
This is why I was pleased to see that The Washington Post’s personal finance writer, rather than falling for the negative hype that Republicans have pushed for years, summarized most of these facts correctly after this year’s report was issued.
Indeed, that reporter quoted a financial self-help writer, who wrote that “Social Security is one of the soundest financial systems in the nation and the world. Americans can take pride in this achievement.”
He is right. If and when Trump and the Republicans decide to use their precious regressive tax cuts as an excuse to go after our retirement system, we should all remember that we must again defend this achievement for the sake of both current and future generations.