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Sunday, September 30, 2007

The debate will not be televised?

The U.S. Treasury recently released the first in a series of briefing documents concerning Social Security reform. Those who decided to dismiss President Bush's discussion in early 2005, which would have been naturally pushed off the front burner by Hurricane Katrina, did us all a disservice by kicking the can down the road to the next election, and probably five to ten years closer to the system beginning its inevitable decline to insolvency.

Thanks a lot.

The discussion is necessary if also painful and wrought with partisan bickering, yet the first document seems to have some reasonable (from an economist's perspective) conclusions about what the problems are (and perhaps how to solve them):
  • Social Security faces a shortfall over the indefinite future of $13.6 trillion in present-value terms, an amount equal to 3.5 percent of future taxable payrolls. Looking at the gap over a shorter horizon provides only limited information on the financial status of the program.
  • Social Security can be made permanently solvent only by reducing the present value of scheduled benefits and/or increasing the present value of scheduled tax revenues. Other changes to the program might be desirable, but only these changes can restore solvency permanently.
  • Delaying changes to Social Security reduces the number of cohorts over which the burden of reform can be spread. Not taking action is thus unfair to future generations. This is a significant cost of delay.
  • By itself, faster economic growth will not solve Social Security’s financial imbalance—realistically, there is no way to "grow out of the problem."

  • On page ten is an interesting paragraph:
    The fundamental reason Social Security must be reformed is that the benefits promised to the public have a present value that is $13.6 trillion greater than the present value of the revenues that the system is projected to receive. Relative to scheduled benefits and taxes, therefore, the present value of benefits less taxes (what might be referred to as "net payments to the public") must be reduced by $13.6 trillion. This can be done by increasing revenues relative to what is provided for under current law and/or by lowering benefits relative to what is currently promised (but not actually payable given that the system is insolvent). There is no alternative to these two choices.

    What this is saying is that all the surplus that has been paid into the social security system has been "loaned" to the federal govenment, which has spent in all sorts of ways. The problem is that this "debt" is not included in the public debt level that is typically reported, currently approaching $9 trillion. Thus, when the social security system knocks on the door of Congress and says, "hey, you owe me principal and interest on this loan I made you a while back," Congress will have to cut a check at that point or go to the public and sell bonds to write a check. Thus, the debt the Congress has quietly undertaken with the social security system will eventually be transferred from below-table to above-table debt.

    [Update 10/2/2007: Colleague Richard Buttimer points out that I might be mis-interpreting the paragraph clipped from the report. The mistake might be in the interpretation of "revenues that the system is projected to receive." I interpret that as meaning the payroll taxes collected, but Dr. Buttimer suggests that the revenue might also include the principle and interest from the trust fund bonds. If his interpretation is correct, then the situation is a lot worse than even I imagined. I have always heard that the unfunded liablities were in the area of $13T, but perhaps the total is closer to $26T+. Oh my...]

    The first document in this form of the "debate" seems to be a good start. It would be better if the debate could be "in public" and simultaneously reasoned and civil. Unfortunately, this doesn't seem to be possible at the moment.

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