Fuzzy Math

Here's a long snippet from the LA Times about the fuzzy math employed to alarm people about the fairly healthy social security fund program.

The myth of the Social Security system's financial shortfall
by Michael Hiltzik

The annual report of the Social Security Trustees is the sort of rich compendium of facts and analysis that has something for everybody, like the Bible.

In recent years, during which conservatives have intensified their efforts to destroy one of the few U.S. government programs that actually works as intended, the report's publication has become an occasion for hand-wringing and crocodile tears over the (supposedly) parlous state of the system's finances.

This year's report, which came out Thursday, is no exception. Within minutes of its release, some analysts were claiming that it projected a "shortfall" for Social Security this year of $41 billion.

Before we get to the bogus math behind that statement — which doesn't actually appear in the report — let's look at the encouraging findings by the agency's trustees, who include the secretaries of Labor, the Treasury, and Health and Human Services.

The trustees indicated that the program has made it through the worst economic downturn in its life span essentially unscathed. In fact, by at least one measure it's fiscally stronger than a year ago: Its projected actuarial deficit over the next 75 years (a measurement required by law) is smaller now than a year ago.

The old age and disability trust funds, which hold the system's surplus, grew in 2009 by $122 billion, to $2.5 trillion. The program paid out $675 billion to 53 million beneficiaries — men, women and children — with administrative costs of 0.9% of expenditures. For all you privatization advocates out there, you'd be lucky to find a retirement and insurance plan of this complexity with an administrative fee less than five or 10 times that ratio.

This year and next, the program's costs will exceed its take from the payroll tax and income tax on benefits. That's an artifact of the recession, and it's expected to reverse from 2012 through 2014. The difference is covered by the program's other income source — interest on the Treasury bonds in the Social Security trust fund.

That brings us back to this supposed $41-billion "shortfall," which exists only if you decide not to count interest due of about $118 billion.

And that, in turn, leads us to the convoluted subject of the trust fund, which for some two decades has been the prime target of the crowd trying to bamboozle Americans into thinking Social Security is insolvent, bankrupt, broke — pick any term you wish, because they're all wrong. The trust fund is the mechanism by which baby boomers have pre-funded their own (OK, our own) retirements. When tax receipts fall short, its bonds are redeemed by the government to cover the gap.

Despite what Social Security's enemies love to claim, the trust fund is not a myth, it's not mere paper. It's real money, and it represents the savings of every worker paying into the system today. So I'm going to train a microscope on it.

What trips up many people about the trust fund is the notion that redeeming the bonds in the fund to produce cash for Social Security is the equivalent of "the government" paying money to "the government." Superficially, this resembles transferring a dollar from your brown pants to your gray pants — you're no more or less flush than you were before changing pants.

But that assumes every one of us contributes equally to "the government," and by equal methods — you, me and the chairman of Goldman Sachs.

The truth is that there are two separate tax programs at work here — the payroll tax and the income tax — and they affect Americans in different ways. The first pays for Social Security and the second for the rest of the federal budget.

Most Americans pay more payroll tax than income tax. Not until you pull in $200,000 or more, which puts you among roughly the top 5% of income-earners, are you likely to pay more in income tax than payroll tax. One reason is that the income taxed for Social Security is capped — this year, at $106,800. (My payroll and income tax figures come from the Brookings Institution, and the income distribution statistics come from the U.S. Census Bureau.)

Since 1983, the money from all payroll taxpayers has been building up the Social Security surplus, swelling the trust fund. What's happened to the money? It's been borrowed by the federal government and spent on federal programs — housing, stimulus, war and a big income tax cut for the richest Americans, enacted under President George W. Bush in 2001.

In other words, money from the taxpayers at the lower end of the income scale has been spent to help out those at the higher end. That transfer — that loan, to characterize it accurately — is represented by the Treasury bonds held by the trust fund.

The interest on those bonds, and the eventual redemption of the principal, should have to be paid for by income taxpayers, who reaped the direct benefits from borrowing the money.

So all the whining you hear about how redeeming the trust fund will require a tax hike we can't afford is simply the sound of wealthy taxpayers trying to skip out on a bill about to come due. The next time someone tells you the trust fund is full of worthless IOUs, try to guess what tax bracket he's in...

The thing that always has irritated me about the payroll tax is that darn ceiling. While average working stiffs must pay the tax on every dollar earned, the vast majority of money earned by the wealthy is not subject to the tax at all! How is that fair?

To my way of thinking, the simplest way to insure the system remains solvent long into the future is to get rid of the ceiling. That would put everybody on equal footing.