Is There a Social Security Crisis?
Posted by Chris Martin at 4/26/2008 4:02 PM 
Categories: Alan Greenspan, Retirement, Fiscal Crisis of the State
Categories: Alan Greenspan, Retirement, Fiscal Crisis of the State
So in the past weeks, in the Democratic Presidential Debate in Philadelphia and in two separate opinion columns, one by David Brooks in the New York Times and another by San Francisco's own Debra J. Saunders — yes the effete liberal bastion does have a crusading conservative pundit — we have heard dire warnings about the solvency of Social Security. I expect that some time, after the election of course, we will have a full discussion of this issue. In the belief that it might be better to begin this discussion now, this incurable wonk offers his humble initial contribution.
It is, quite simply, all about accounting. There are two methods of accounting. Cash basis accounting recognizes income and liabilities as they occur. If I were to operate on an extreme cash basis I would spend this week's paycheck on a party because the rent is not due till next week. People who use this accounting method often get payday loans.
It is, quite simply, all about accounting. There are two methods of accounting. Cash basis accounting recognizes income and liabilities as they occur. If I were to operate on an extreme cash basis I would spend this week's paycheck on a party because the rent is not due till next week. People who use this accounting method often get payday loans.
The other method of accounting, accrual accounting, tries to estimate and recognize revenue and expenditures into the distant future and bases financial decisions on these estimates.
Before 1983 Social Security operated on a cash basis. Payroll taxes were used to fund pension payments. The system accumulated a trust fund but this was intended to smooth things out from year to year. It was not large. After 1983, following recommendations made by a commission led by Alan Greenspan, Social Security was placed on an accrual basis.
In order to accomplish this, payroll taxes were doubled. This paid off the pensions promised to older generations, which were really unfunded, while it increased the assets held by the Social Security Trust Fund so that they would suffice to pay pensions for the Baby Boomers. After 1983, Boomers were told, we were saving for our retirement through the payroll tax
The 1983 reform worked pretty well but it was not perfect. The actuaries who planned the reform expected that payroll income would grow about as fast as it had in previous years. This did not happen, except during the eight years of the Clinton administration. As a result the Social Security Trust fund is a bit short. This could be easily solved by collecting Social Security taxes on payroll income over one hundred thousand dollars. On an accrual basis the system is close to solvent.
Before 1983 Social Security operated on a cash basis. Payroll taxes were used to fund pension payments. The system accumulated a trust fund but this was intended to smooth things out from year to year. It was not large. After 1983, following recommendations made by a commission led by Alan Greenspan, Social Security was placed on an accrual basis.
In order to accomplish this, payroll taxes were doubled. This paid off the pensions promised to older generations, which were really unfunded, while it increased the assets held by the Social Security Trust Fund so that they would suffice to pay pensions for the Baby Boomers. After 1983, Boomers were told, we were saving for our retirement through the payroll tax
The 1983 reform worked pretty well but it was not perfect. The actuaries who planned the reform expected that payroll income would grow about as fast as it had in previous years. This did not happen, except during the eight years of the Clinton administration. As a result the Social Security Trust fund is a bit short. This could be easily solved by collecting Social Security taxes on payroll income over one hundred thousand dollars. On an accrual basis the system is close to solvent.
Note that this tax increase is precisely what Barak Obama has proposed to fix Social Security.
This is not enough for the prophets of doom and the simple reason for this is that they are using the other accounting method. On a cash basis, Social Security will soon be in terrible shape. Pensions will rise and payroll taxes will drop so that the system will need to begin to draw on the trust fund. In other words, Social Security will need to ask the Federal Government to pay back IOUs held by the trust fund.
Indeed, the need to pay back these IOUs was one of the reasons that the Clinton administration cut the deficit and accumulated surpluses. They argued that lower debt would require lower future interest payments. This would make it easier to pay the government's future obligations to its own citizens.
But over the past eight years, in part at the prompting of Alan Greenspan, the Federal Government has operated on a cash basis. It has "invested" current income and more on tax cuts for the well to do, dubious wars and other projects for the politically well connected. These "investments" have not produced any appreciable increase in government revenues. Now, when the time has come for Boomers to draw on their retirement savings, the proponents of these policies want to convert Social Security back to a cash basis so that they can avoid making the promised payments.
One should not, however, accuse these policymakers of complete lack of foresight. If Social Security is placed on a cash basis then it will be reasonable to require that payroll tax revenues always exceed benefit payments. Retirement funding for working people will once more become a cash cow for the Federal Government.
This is not enough for the prophets of doom and the simple reason for this is that they are using the other accounting method. On a cash basis, Social Security will soon be in terrible shape. Pensions will rise and payroll taxes will drop so that the system will need to begin to draw on the trust fund. In other words, Social Security will need to ask the Federal Government to pay back IOUs held by the trust fund.
Indeed, the need to pay back these IOUs was one of the reasons that the Clinton administration cut the deficit and accumulated surpluses. They argued that lower debt would require lower future interest payments. This would make it easier to pay the government's future obligations to its own citizens.
But over the past eight years, in part at the prompting of Alan Greenspan, the Federal Government has operated on a cash basis. It has "invested" current income and more on tax cuts for the well to do, dubious wars and other projects for the politically well connected. These "investments" have not produced any appreciable increase in government revenues. Now, when the time has come for Boomers to draw on their retirement savings, the proponents of these policies want to convert Social Security back to a cash basis so that they can avoid making the promised payments.
One should not, however, accuse these policymakers of complete lack of foresight. If Social Security is placed on a cash basis then it will be reasonable to require that payroll tax revenues always exceed benefit payments. Retirement funding for working people will once more become a cash cow for the Federal Government.
This piece was originally submitted to the SF Chronicle in a slightly different form. As the Chronicle has refused my generous offer I now publish it here.
Perhaps the piece was rejected because it offered no constructive suggestions for saving Social Security. While Wonks Anonymous believes that the beginning of a solution should be obvious to anyone with common sense, he is willing to spell it out here. The first law of holes is: If you are in one, stop digging. In this case that would mean that we should allow all of the tax cuts passed in the past eight years to expire. Then we can wait a few years and see what else we need to do.
Please note that this will increase Wonks Anonymous tax bill. Obama's payroll tax proposal will as well. I would rather retire.
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