THE BLOG
01/21/2011 05:22 pm ET | Updated May 25, 2011

Deficit Commission Chairs Change Tune: No Longer Assert Social Security Causes Deficit

Immediately after appointment to chair the Fiscal Commission, Erskine Bowles and Alan Simpson opened fire on Social Security. Their theme: reining in the federal deficit requires reducing Social Security benefits. Bowles assured North Carolina bankers that the commission would battle the deficit "cancer" and "mess" with Social Security. Former Senator Simpson continued his long battle against allegedly prosperous greedy geezers whose appetite for Social Security benefits would, he claimed, imposes unbearable deficits on their grandchildren. But the plan they announced last December features a different theme: Social Security is wonderful but can be sustained only by reducing benefits. They went from attacking the Social Security as an ogre to praising it fulsomely -- and then attacking it. How come?

Social Security Defenders Discredit Linking Social Security to Deficit

Well, the defenders of Social Security repeatedly insisted that Social Security does not cause one dime of debt but pays its own way with income from three dedicated revenue streams -- the Federal Insurance Contribution Act, taxation of a portion of high-income recipients' Social Security benefits and interest payments on U.S. Treasury obligations purchased with trust fund surpluses. Further, they said, to assure the public that future benefits would be paid, the 1983 Social Security legislation purposely designed the program so that revenues would exceed benefit payout for several decades. Those surpluses now amount to over $2 trillion and are projected to exceed $4 trillion. More than that, Social Security is permitted to pay benefits only to the extent that it has resources to do so. Further, it cannot borrow. Those real life facts shredded the charge that Social Security contributes to the federal deficit. It does not and cannot.

Bowles and Simpson Mumble Away from Deficit Theme

Curiously, commission members never voted on the chairs' proposed report, The Moment of Truth, although many, but not the required 14 members, indicated their support of the package. The chairs' report declares that:

Social Security is the foundation of economic security for millions [indeed more than 53 millions] of Americans.....it is far more than a retirement program - it is the keystone of the American social safety net, and it must be protected. [They counsel that we] Reform Social Security for its own sake, and not for deficit reduction.

Thus they abandoned the deficit theme.

Bowles and Simpson Advocate Multiple Cuts in Social Security

However, the chairs do not really come to praise Social Security but to bury it. They would cut benefits by: changing the benefit formula, raising retirement age and diminishing the cost-of-living adjustment (COLA). The chairs nowhere note the demonstrated unreliability of private pension plans, the withering away of the defined benefit plan and the substitution of the defined contribution plan -- mostly means 401(k)s -- whose values tanked when the stock market swooned. Nowhere do they discuss the adequacy of the diminished benefits they advocate. Nowhere do they mention how modest current benefits are. So, for example, retirement benefits average not quite $14,000 a year, about $1,100 a month per retiree. Women receive even smaller benefits because they earn less and leave the labor market periodically to tend other family members.

Bowles and Simpson Warn of "Crisis" -- in 27 Years

That's a champion slow motion "crisis". The 2010 Social Security Trustees report shows that, for the next 27 years, Social Security revenues from its three dedicated sources exceed Social Security benefit payout and program costs. (The latter come to a mere 1% of benefits. Compare that to private plans that incur as much as 30% in non-benefit costs.) Further, they assert:

Over the long run, as the baby boomers retire and health care costs [that's not Social Security] continue to grow, the situation will become far worse. By 2025 [governmental] revenue will be able to finance only interest payments [on the federal debt] Medicare, Medicaid and Social Security.

But hold on -- lumping together Medicare, Medicaid and Social Security implies that all contribute to the deficit. Each of the three programs has its own character: Social Security pays its own way; Medicare FICA income and premiums pay for much of its costs, with a significant portion derived from general revenues -- for Part B (physician services) and D (prescription drugs); all Medicaid funds come from general revenues.

After 2037, Bowles and Simpson point out, actuarial projections show, the trust fund supplementation will end, the program will be able to pay olnly 78% of promised benefits. But, that will not be permitted to happen because Social Security is too important for so many people in all generations - that's what the chairs just said. And providing the necessary revenue is not difficult.

Chairs' Claim That Social Security Is Unsustainable Does Not Hold Up

They claim that Social Security on its current course will fall "to its knees... it is spending more on benefits than it receives in revenues." They reach that conclusion by limiting "revenues" to FICA receipts and ignoring the two other income streams. Further, the chairs undermine the unsustainability argument by explaining that the long-term, 75-year Social Security shortfall is only 1.92 percent of payroll. In other words, merely increasing the FICA rate by one percentage point for both employee and employer would put the program into long-term 75-year actuarial balance. That's all. It would be that easy. Indeed, employee earnings are projected to surpass that; as a result, the 1% boost would not diminish their living standards. Increasing the employee and the employer FICA rate by 1/20th a year for 20 years would do the trick. And, the chairs embrace a proposal made by Candidate Obama to restore the amount of pay subject to FICA to the 90% of total national pay it was meant to cover. That alone would reduce the shortfall by a third. In combination, the two measures would enable Social Security to fully fund currently promised benefits for 75 years and, indeed, improve benefits. Far from being unsustainable, modest measures would fully fund the program and enable increased benefits. Unsustainability charges dismissed.

Improved Education and Technology Offset Aging of Workforce

But the chairs trot out the red herring argument that, because the elderly population is expanding more rapidly than the under-65 group, the "dependency ratio" will bear too heavily on the younger group. So, they intone:

In 1950, there were 16 workers per beneficiary; in 1960 there were 5 workers per beneficiary. Today (2010) the ratio is 3 -1 -- and in 2025, there will be just 2.3 workers 'paying in' per beneficiary

This is bad news only if one assumes, incorrectly, that the 2025 and the 2010 workers produce no more and earn no more than those in 1950. But that is not so. Those in 1950 were less educated and trained than their later counterparts and had less advanced technology in their work. So, the Census Bureau notes... the educational attainments of young adults (25 to 29 years), which provide a glimpse of our country's future, indicate dramatic improvement by groups who have been historically less educated. "Educational Attainment in the United States: 2003 (Census Bureau report, June 2004). Further, technology has advance dramatically in many ways since 1950 - just think of computerization and the fabulous developments in transportation and communications. Nobel laureates Paul Samuelson and William Nordhaus quote Nobelist Paul Krugman that Production isn't everything, but in the long run is almost everything. A country's ability to improve its living standards over time depends almost entirely on its ability to raise output per worker. (Economics, 15th edition, page 650)

And we have done that steadily since 1950. For example, between 1990 and 2009, output per business hour went from 94.6 [in comparison with 100 in the 1992 base year] to 148.4 - an increase of roughly 50%. And from 2000 to 2008, average annual wage and salary rose from $39,243 to $561,187, a boost of about 25%. (2011 Statistical Abstract of the United State, Tables 641 and 642) Such earnings translate into higher FICA sums, all the more so if the caps are improved.

B and S Propose Less Social Security, More Private Plans; That's Privatization

And this is how the chairs close their discussion of Social Security on page 48 of their report:

Americans need a fiscally responsible personal retirement savings system that is advance funded, supplementing the pay-as-you-go Social Security system, and accumulates funds for investment in business and infrastructure.

In other words, reduce Social Security benefits and put more money into private accounts. Friends, that's the recipe for privatizing Social Security.