Sunday, March 06, 2005

Social Security: The Transition to SSPAMA

You can't throw a brick these days without hitting someone talking about Social Security.

What I haven't heard, however, is anyone commenting on what I think the actual problem is. The scariest part of it all is that I'm actually starting to think that something like the Bush partial private accounts plan would be help things. But I'm not going there just yet.

First off, the problem isn't that the Social Security Board made payments to people who didn't pay into the system. The first payments were made to workers who retired shortly after the Social Security program began. Thus the problem isn't that the SSB started paying out to already retired workers who never paid in. SSA (the name was changed, Board to Administration) is a get what you give program; it is not a pyramid scheme, it is not a Ponzi scheme, it is a mandatory retirement savings plan.

At any rate, at first glance we should expect the SSA to have a huge wad of cash sitting around. There are three main reasons that there is no huge wad of cash.

The first there is administrative costs for all this; issuing cards and keeping track of everyone's earnings. This accounted for $8.5 billion for FY 2004 (numbers taken from the FY 2006 budget, which has 2004 actuals.)

The second is that other benefits are paid out; the total for General Fund payments (mostly Suplemental Security Income (SSI)) was $36.4 billion for FY 2004. One might count Disabilty Insurance (DI) in this category too, that would add $78.6 billion.

I don't consider these first two reasons to be problems. The Old Age and Survivors Insurance (OASI) payouts (i.e. payment to workers, their spouses and minor dependants) were $417.3 billion, or 77% of the total. The SSA Income is still much higher than those Outlays [for 2002 (the last year I can find data for) we have income at $615 billion and outlays t $490 billion; for 2001 it was $597 billion against $465 billion.]

The third reason is that the system requires money to be saved. This, in government, does not work. Charles Krauthammer described the situation thusly:
Let's start with basics. The Social Security system has no trust fund. No lockbox. When you pay your payroll tax every year, the money is not converted into gold bars and shipped to some desert island, ready for retrieval when you turn 65. The system is pay as you go. The money goes to support that year's Social Security recipients. What's left over is "lent" to the federal Treasury. And gets entirely spent. It vanishes. In return, a piece of paper gets deposited in a vault in West Virginia saying that the left hand of the government owes money to the right hand of the government.
It is only a "pay as you go" system because the money isn't saved. The surplus goes to the the federal treasury. Money taken in for Social Security goes to fund other government programs. This is the heart of the problem. The surplus is drying up which means less funding for other governmental programs. SSA money is from an established, accepted tax rather than a new and unpopular tax.

The sideshow on whether or not there is a trust fund is a meaningless diversion on accounting. First off, there would be a large trust fund had the surpluses been loaned out to responsible debtors but this didn't happen; the money went to the U.S. government. That $132 billion in 2001 and $125 billion in 2002 was spent on whatever the hell else the government does.

Anyway, if you choose to view the trust fund as imaginary (i.e. that the government is the government) then it doesn't matter that SSA will have more Outlays than Incomes in 2018 (or whenever) as you are ignoring this internal accounting. The "pieces of paper" that matter are not what one part of the government owes to another but what the government owes to it's citizens. That is people have been paying into a system (not by a direct choice) that has promised post-retirement and other payments. The issue is this government debt to the workers of the nation, not intra-government accounting. The money has to come from somewhere (i.e. cuts to other government programs or increased revenues.)

If you choose to view the trust fund as real (i.e. viewing seperate government programs as seperate) then, well, it doesn't really change anything. The money still has to come from other government programs or increased revenues... it's just we have IOUs which explicitly state which programs are going to get cut (or will have to borrow from elsewhere.)

I don't know of any easy solution to the problem that SSA cannot save the money workers pay in payroll taxes. I no longer think that minor changes to SSA are the solution. SSA shouldn't have a surplus if it can't actually save it. I don't want the benefits paid to me to consist of papers that read "The money that would've gone to you was used to fund a national park in Utah" or "Your retirement benefits were used to buy ammunition for the training of Navy Seals" or "A donation was been made in your name to the Human Fund."

Someone said "I will keep Social Security in a lockbox, and that pays down the national debt and the interest savings I would put right back into Social Security. That extends the life of Social Security for 55 years" almost five years ago and got ridiculed for it.

The current plan by the man who beat him calls for allowing workers the option of sending some of their payments into private accounts. I can't find any good details on this but (a) he keeps emphasizing that benefits will not be reduced for those over 55 which says to me that benefits probably will be reduced for those under 55 and (b) the reason benefits will be reduced is that sending money into private accounts will take money away from the general fund.

If these would be literal private accounts it could be a good thing in that the government would have less funds to loan to itself and then threaten to default on. If there cannot be a lockbox then the government shouldn't get the damned money. My quick and dirty attempt at mapping out a solution would go like this (essentially a mirror of the start of Social Security):
  • Starting in 2010 the money the SSA gets in payroll taxes drops to 1.43%; enough to fund SSI, DI and administration (i.e. 23% of 6.2%) with the following exception:
    • Those 50 (as of 01/01/10) and over may choose to continue to pay Social Security taxes at the old rate and receive their retirement benefits as if nothing ever changed.
  • OASI benefits continue to be paid out to those who have paid in with no changes except for the exception noted below. Funds come from general Treasury. This will be a crippling amount for a while it will whittle away to nothing.
    • Those who have paid Social Security taxes for less than 5 (or 10) years (as of 01/01/10) will receive their benefits (accrued over only a few years) as a lump sum paid upon retirement.
  • SSI and DI benefits continue as before.
  • The SSA spawns off SSPAMA (Social Security Private Accounts Managment Administration) and will oversee the private retirement accounts. Workers will continue to get their 6.2% deducted from their paycheck but most of it (4.77% of their paycheck) will be put into a private retirement account. The worker will have some choice as to how to invest the funds but it'll have to be low-risk (in aggregate, at least) so that there's something left upon retirement even if you make stupid decisions.
I'm not, however, sure why I bothered writing that out. I made it effective in 2010 because it has some nice zeros and should give enough time to work out the details of the changes but it's still not going to happen even if someone comes up with a better name.


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