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Social Security Trustees and Funds
Joel is probably responding to this article where I said Bush's plan to reform Social Security was fascist. I think it's the only time (recently, anyway) that I've linked to anything of Luskin's.
I'm confused by Joel's letter. He's criticizing me for using Luskin's numbers, but Luskin was himself citing the Social Security Trustees:
If the Trustees' report is good, and Luskin's numbers are bad, but Luskin's numbers are from the Trustees' report… well, maybe Joel is the one who is confused.
This page of the Trustees' report has some lovely graphs that illustrate the problem. You can see for yourself in Figure II.D2 that 2009 is the year when the Social Security surplus begins to shrink. (Alan Greenspan, in his recent testimony before Congress, actually cited 2008 — but I'm not going to quibble over a single year.)
Luskin's numbers are unassailable, if you believe the Trustees' report. Only his assertion that there's a crisis could be arguable, but Joel curiously doesn't make that argument.
Back to Joel's letter:
Stop right there. I take offense at the implication that I'm a right-winger. My preferred epithet is "procapitalist extremist." Right-wingers are emphatically not advocates of capitalism.
I always read Luskin with caution, and I have had some minor disagreements, but I do read him regularly. He's absolutely a better source than, say, Paul Krugman. [you're just inviting flames, you know - ed]
No, the report does not say that income exceeds payouts until 2028. The year is 2018 — a decade earlier. See Figure II.D4 (same link as before).
The year 2042 is correct, but betrays a fundamental misunderstanding of the nature of the Social Security Trust Fund. Considering the Social Security system on its own, it is correct to say that it's funded until 2042. But the bonds in the trust fund are an obligation of the government, and Social Security is part of the government, so the bonds in the trust fund are the economic equivalent of owing money to oneself. The value of the bonds as assets to the Social Security system is exactly offset by the liability of the bonds to rest of the government. Considering the government as a whole, those bonds are worth exactly nothing. That's why the "lockbox" is such a howlingly funny joke.
If you "owe yourself" a thousand dollars, the only way to pay it is to earn a thousand dollars. You have to get that money from somewhere. The government's options are to tax, borrow, inflate, or spend less on other things — that's it. In 2018 it has to start diverting general revenue to Social Security. But I agree with Luskin's conclusion that 2009 is the year that really matters, because that's when Social Security stops contributing more and more every year to the general fund. That's the year when the government's budget deficit will, ceteris paribus, get worse every year automatically.
Incidentally, the roughly 30% cut in benefits forecast for 2042 should not be tossed aside lightly. Joel, if you had invested in a company that went bankrupt and could only get 70 cents on the dollar back, wouldn't you be upset? Do you think beneficiaries in 2042 will roll over and peacefully accept a 30% benefit cut? That's a lot of money.
Joel, I have a thought experiment for you. How would total government revenues and total government spending be impacted over the next forty years if the interest rate on the Social Security bonds was (a) 0%? (b) 10%?
If you understand that the answer is "total revenues and spending would be completely unaffected in either case", you understand the economic nature of the Social Security trust fund. Otherwise, you don't.
If you might better learn this lesson from satire, I recommend this. The Social Security system could be made "solvent" by increasing the interest rate on the bonds. But that doesn't help the government's financing problem in the slightest. It is this financing problem, involving the total government budget, that is the Social Security crisis. The crisis is not evident in the Social Security system when considered in isolation from the rest of the government.
If I spend $1000 but write myself a bond promising to pay myself back $1000 at 10% interest, that interest income doesn't help me at all. It's irrelevant. The interest, like the principal, is simultaneously an asset and a liability that exactly cancel each other. Simply put, the interest doesn't help me because I have to pay it!
This situation is inapplicable to private accounts because in that case the investment income is a transfer between two different people.
Your confusion is that you attacked Luskin's numbers — you called them "completely phony" and that they "do not represent what the Social Security financial reports say" — but in fact they were the numbers from the Social Security Trustees' Report.
I wholeheartedly endorse Joel's recommendation that my readers look at the Trustees' Report. Indeed, I think these graphs make the situation very clear. The important dates — 2009, 2018, and 2042 — are all clear from Figure II.D2.
I do not think I am misinterpreting Figure II.D2 in any way. The Trustees' have done the numbers correctly by excluding interest income on the Social Security bonds in the calculation of the date when payments exceed revenues.