David R. Henderson  

Blahous on Social Security

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The Metaphorical Fallacy... The Tautological Fallacy...

Charles Blahous, a research fellow with the Hoover Institution, a senior research fellow with the Mercatus Center, and the author of Social Security: The Unfinished Work, is a "public Social Security trustee." He has an excellent piece laying out how the options are narrowing for dealing with the huge Social Security mess in our future. The piece is titled "Is it Becoming Too Late to Fix Social Security's Finances?"

The whole thing is worth reading and the graphs are illuminating.

Some excerpts:

Social Security's future, at least in the form it has existed dating back to FDR, is now greatly imperiled. The last few years of legislative neglect -- due to a failure of national policy leadership coming just as the baby boomers have begun to retire -- have drastically harmed the program's future financial prospects. Individuals now planning their financial futures, whether as taxpayers or as beneficiaries, should be pricing in a substantial risk that the federal government will not be able to maintain Social Security as a self-financing, stand-alone program over the long term. If Social Security financing corrections are not enacted in 2013, or at the very latest by 2015, it becomes fairly likely that they will not be enacted at all.

And:
Thus if Social Security finances are to be repaired, someone must dramatically compromise: either progressives must accept substantial benefit growth reductions, conservatives substantial tax increases, or both. Unfortunately as I will show below, we are already long past the point where there is precedent for a compromise of this magnitude.

Notice that he wrote "benefit growth reductions," not "benefit reductions." Could the system be saved with no tax increases and simply a freezing of real benefits? He doesn't say but my gut feel is that the answer is yes.

Getting more specific:

The historical high-water mark for a comprehensive bipartisan rescue was the 1983 Social Security amendments. The program was then saved from the brink of insolvency. Benefit checks had literally been just months away from being interrupted. Both sides agreed on the urgency and immediacy of the crisis, yet very nearly failed to reach agreement.

The program's long-term shortfall in 1982 was measured as 1.82% of the program's tax base. Today it's measured as 2.67% -- much larger even on the surface. Yet many don't realize that the trustees' methodologies were changed in 1988 to make the shortfall appear smaller. If we still measured as was done in 1983, today's shortfall would be 3.5% of the tax base -- nearly twice as large as the 1983 gap.


HT to Tyler Cowen.


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CATEGORIES: Social Security



COMMENTS (6 to date)
rjs writes:

dale coberly at angry bear answered the blahous piece:

http://www.angrybearblog.com/2012/09/reply-to-charles-balhous-on-social.html

MingoV writes:
Is it Becoming Too Late to Fix Social Security's Finances?
Social Security has no finances. It's a pay-as-you-go system. The problem Social Security faces is that the ratio of beneficiaries to workers continuously rises. The choices are simple: reduce benefits, raise FICA payroll taxes, let in tens of millions of immigrants to increase the number of workers, or end the Ponzi scheme.


Individuals now planning their financial futures, whether as taxpayers or as beneficiaries, should be pricing in a substantial risk that the federal government will not be able to maintain Social Security...
My wife and I did exactly that shortly after we married in 1985. We expected Social Security to either end completely or be 'means-tested' before or during our retirement.


Could the system be saved with no tax increases and simply a freezing of real benefits? He doesn't say but my gut feel is that the answer is yes.
And after a generation of inflation, retirees would be receiving a pittance. It would be better to end the Ponzi scheme ASAP.

David R. Henderson writes:

@MingoV,
And after a generation of inflation, retirees would be receiving a pittance. It would be better to end the Ponzi scheme ASAP.
Your first sentence is incorrect. Notice that I said “real benefits.” I agree with your second sentence.

john hare writes:

I'm 55. My opinion of SS ROI is so bad that I would be willing to walk away from everything I have paid in to date in exchange for keeping the deductions over the next several years to invest as I wish until I retire. 6.2%+match is 12.4% of gross income to invest for the next 15 or so years, oh yeah.

Floccina writes:

SS is a way for the recipients (old people) to tax workers, therefore the more people getting SS the stronger the program is. The FICA tax is just a smoke screen. SS will end if and when Government cannot tax more nor borrow more. That could be a long time seeing that a new tax like a VAT could greatly increase revenue.

patrick writes:
Program: If a financing solution cannot be reached, then Social Security’s self-financing construct would need to be abandoned. Assuming the program continues to pay benefits, it would have to permanently rely on subsidies from the general fund as Medicare now does. This would be a valid policy choice, but it carries unavoidable consequences. It would mean an end to one of the program’s foundational principles: the requirement that Social Security pay its own way through a separate trust fund. It would also mean an end to FDR’s conception of an “earned benefit” program in which workers were seen to have paid for their own benefits.

That's where it is all headed. Actually that's where it has always been.

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