Friday, March 26, 2010

Hyping a Non-Event: Social Security and the NYT

-- Posted by Neil H. Buchanan

With the passage of the big health care bill, the media is beginning to ask: What will fill the void? One favorite candidate is Social Security. In my FindLaw column next week (and, most likely, my DoL post next Friday), I will discuss the current state of the Social Security debate more broadly. Here, however, I will focus on a news column in yesterday's New York Times, an article that I described in an interview on a San Francisco radio show as "completely irresponsible," adding that "[t]here's no reason why it should have been written at all, much less put on the first page."

The article in question, "Social Security to See Payout Exceed Pay-In This Year," included a subtitle in the print edition: "At Tipping Point Years Ahead of Projection." After I describe the underlying facts and the report from the Congressional Budget Office on which the article is based, I will explain why my assessment of the article was so harsh.

Starting in 1983, the Social Security system was set up to collect far more in tax revenues than it paid out in benefits for several decades, followed by several more decades in which benefits would (by design) exceed revenues. Year after year since then, the system has collected tens of billions of dollars more than it needed, with the difference credited in the "trust fund." The trust fund would, in turn, later be drawn down to zero as the Baby Boomers moved through their life cycles.

The idea was to make it unnecessary to raise taxes significantly when the Baby Boomers started to retire. The system would thus collect much more than needed at first, with the annual difference between revenues and expenditures shrinking as the Boomers began to retire, then crossing over into slowly growing annual deficits, which would later shrink again and go to zero when the Boomers stopped collecting benefits (i.e., died).

With a plan that is to be carried out over the course of decades, of course, it is possible to overestimate or underestimate the amount of money needed. The possibility of coming up short is described as the system becoming "insolvent," which really means the possibility that revenues will fall short of annual expenditures at some point, even after crediting the system for the funds (plus interest) that it provided to the rest of the federal budget in the early decades of the plan.

As noted, however, the natural consequence of a plan that would first collect too much revenue for its annual needs, then too little, is that a year would come when the system would switch from annual surplus to annual deficit. The most recent estimates had that happening in 2016. Recently, however, the CBO issued forecasts that showed very small annual shortfalls in 2010-13, followed by very small annual surpluses in 2014-15, and finally growing shortfalls from 2016 onward. In other words, the Great Recession has reduced tax revenues and increased expenditures sufficiently to make the annual balance turn slightly negative for the next four years, before returning to the pattern that had been predicted all along. The permanent shift to annual deficits will still happen in 2016.

In short, there is no news here. More accurately, the news is so minor that it should either be deemed unworthy of publication or printed on the bottom right corner of page 16 of the Business Section. All we are being told, after all, is that the worst economic downturn since the Great Depression will lead to several years in which Social Security's finances are somewhat worse than they would otherwise have been. If anything, the news is good, since the changes in the system's finances are so minor -- even in the face of a historically deep and prolonged slump.

The Times, however, referred to this as an "important threshold it was not expected to cross until at least 2016." Even more provocatively, the article states: "Analysts have long tried to predict the year when Social Security would pay out more than it took in because they view it as a tipping point — the first step of a long, slow march to insolvency, unless Congress strengthens the program’s finances." (Note the unmodified "analysts." Are we to infer that "all analysts" agree? They do not.)

There is no "tipping point." "Tipping point" implies that there is some fragile balance that we are trying to maintain, and if we err and upset that balance, we will inexorably be pushed into an abyss. That is not what is happening with Social Security. There is an inevitable year when, completely as planned and expected, annual surplus must turn to annual deficit. Crossing from small annual surpluses to small annual deficits does not change the long-term prospects of the system, and it certainly does not tip the system into a situation that it would not otherwise have faced.

Again, the numbers from CBO bear this out. As noted, the four years of small deficits are followed by two years of small surpluses, at which point the system resumes its predicted course -- with the shift from annual surplus to persistent annual deficit predicted in exactly the same year (2016) that had been predicted before this report was issued. Nothing tipped, and nothing was "years ahead of schedule."

Moreover, the article elsewhere claims that the important date -- or "year of reckoning" -- for the system is the year in which the trust funds are depleted. That is only partially true, but let us accept that claim for a moment. The article itself quotes the Chief Actuary of the Social Security Administration as saying that this year's Trustees' report will not show the date of trust fund depletion changing significantly from last year's report. In other words, "the long, slow march to insolvency" will not be any shorter, even with the change in the short-term, recession-driven numbers with which the article is obsessed.

When it comes to fixing the supposed problem with the system, the article dutifully describes the three possibilities: raise taxes, cut benefits, or use general revenues. Yet is quotes Alan Greenspan twice as saying that "you have to cut benefits." No, you don't. You can raise taxes, cut benefits, or use general revenues.

Note that this distortion of the underlying facts is being offered in a news column, not an editorial or even a quasi-editorial "news analysis" that the Times runs on its news pages. The unmistakable messages from reading the article, however, are that the system is in trouble, that it is in bigger trouble now than we thought it was, and that we must fix it by cutting benefits (sooner rather than later, if possible). All of those assertions are highly contestable, and they are certainly neither "news" nor "facts." Moreover, none of those conclusions is supported by the new numbers in the CBO's report.

Notwithstanding my strong reaction to the article, however, I am not convinced that the writer actually had a political agenda. It has become such an article of faith among the mainstream press that there is a big problem with Social Security that reporters seem to be succumbing to confirmation bias, i.e., filtering any news that they receive about Social Security as proving the conventional wisdom. It is, apparently, not possible for them to believe that some information about Social Security is not only not bad news. It is not newsworthy at all.


Tam Ho said...

Joe Biden's response upon reading the article? "Big fucking deal."

egarber said...

Good stuff Neil.

A couple of points:

1. I didn't read the article, but a lot of folks fail to understand -- partly because it's under-reported -- that even when we start hitting the trust fund, existing revenues will still cover gigantic chunks of the outlays. If revenues still pay for 80, 85, 90% for some span of time, the system is much more "solvent" than folks want to believe.

Instead, there's a whole bunch of conflation, especially in political circles -- where people like to say SS is "bankrupt" merely because revenues don't cover ALL the costs.

2. I'm convinced Al Gore's lockbox, for all the fun-poking, was right. Had we paid down debt with those surplusses, the interest savings within annual budget outlays would have easily bought us many additional years of solvency.

Paul Scott said...

Your point 2 only makes sense if to cost of lending exceeds the cost of borrowing. That, of course, is impossible. Overall, to all parties, the cost of lending must be equal (an opposite) to the cost of borrowing. For any one party, of course, that can differ. Presumably, however, there is no better debtor in the world than the U.S. government. As such, the U.S. government should be able to borrow money at the lowest rates available. Likewise, it should be able to lend money at market rates.

On the whole, the US should be in a winning proposition for borrowing money to invest (which is the effect of not releasing surplus funds to pay down debt). It has nearly unlimited resources and should, as a result, be able to structure its debts in a manner that is money making for itself.

Now, I have no idea if it actually takes advantage of this, nor do I have any idea if it even thinks it is in its best interest to do so. But I am fairly sure that merely using a surplus to pay off a debt is not an inherently winning proposition.

egarber said...

Paul, I sort of get what you're saying.

But even folks who are pro-debt acknowledge that at some point, the ratio to GDP isn't sustainable.

Had those interest savings been pumped into treasuries, the country would have found a way to shore up SS further within the current budget. Instead, we'll have to act sooner, but in an environment where we're running out of borrowing room -- to the extent one agrees with the thinking about debt / gdp ratios.

egarber said...

And I also don't think it's accurate to assume borrowing rates will always be favorable for the U.S. At some point, if the market is flooded with treasuries, that has to drive up rates, given the inverse relationship between price and yields.

Charles said...

Neither do I suspect a "political agenda". And I tried to construct an argument that discounted ignorance as an explanation for all the factual errors since the concepts aren't particularly challenging, and clear explanations like yours have been readily accessible for years. But after rereading the article with a focus on style rather than substance, I think I'll vote for simple incompetence. Even ignoring the overly dramatic language, the article is very poorly written.

More confirmation of my suspicion that our society's complexity has so far outstripped human capabilities that almost all of us are in way over our heads. (I'm inclined to exclude myself, but only because being a retired hermit I'm not even in the pool.)

Phil said...

Visiting in Russia, soon after the dissolution of the Soviet Union, I was witness to what appeared to be total collapse of confidence...confidence in the economy, in the currency, in the government, in the future.

Everywhere in evidence there, were dejected seniors...who had worked all their lives under the promise that "the state" would take care of them in their later years, but who had found the treasury empty and the currency worthless when the time came for the state to make good on its promises.

When confidence evaporates, as it is threatening to do here, I fear a similar economic result.

Topeka KS

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