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  #951  
Old 06-17-2018, 05:38 PM
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https://taxfoundation.org/social-sec...eid=4737d05e09

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Social Security in Deficit: Why and What to Do About It

Spoiler:
The new Social Security Trustees Report has just been released. As always, it contains a wealth of information about the Social Security retirement and disability programs, and Medicare, and is well worth reading. There are two startling facts in the report.

First, this year for the first time since 1982, the combined retirement and disability parts of Social Security (OASDI) is running a deficit, and it will continue to do so throughout the 75-year projection period. Its outlays now exceed its tax revenue and the interest on its trust funds.

Second, in the face of these impending and growing deficits, the system is promising to raise benefits faster than inflation, promising real benefit increases of over 160 percent over the next 75 years. Upper-income recipients could be getting as much as $87,303 a year, in real 2018 dollars, when they retire in 2095 (and more for married or two-worker couples). These benefits would require more than a four percentage-point hike in the payroll tax for all workers, including lower-paid workers, to balance the system. Instead of remaining a social safety net, focused on keeping the elderly out of poverty, the program is set up to give huge raises to people of all income levels, even as the generations get richer over time. It is threatening to take over the bulk of personal retirement saving and pensions, retarding investment and economic growth, and holding down wages.

The Short-run Financial Issue, and the Sad Truth About the Trust Funds
OASDI is the combined Old Age and Survivors Insurance program, OASI, and the Disability Insurance program, DI. Its current tax revenue (payroll taxes and income taxation of benefits, plus interest on the trust funds) is now less than its current outlays. The system is still authorized to pay full benefits, up to the OASDI trust fund amounts, so there is no immediate threat to recipients.

The OASI and DI trust funds reflect past surpluses in the system, but those monies were used as they accrued in the past to pay for other government spending. Any outlays currently “covered” by the trust funds require money from other sources. Therefore, using the trust fund authority means that the Treasury will have to borrow or use general revenue to pay a portion of the benefits. Medicare Part A (Hospital insurance or HI) has been running deficits for some time, and has been drawing down its trust fund spending authority for several years. The OASI trust fund spending authority will be used up by 2036, and the DI trust fund by 2032, by which times the Social Security Administration (SSA) will need more spending authority from Congress to continue to pay full benefits. The HI trust fund will be exhausted by 2026, and Medicare will need new funding before then.

An Unrealistic Benefit Formula Drives Perpetual Deficits
Benefits at all levels of income – lower than average, average, and above average or at the maximum covered earnings – are set to grow forever in line with wages. As wages double in real value over time (the actuaries assume this by about 2070), so will promised real benefits. As wages grow by more than 160 percent by the end of the trustees’ planning period in 2095, real benefits will grow by more than 160 percent. For example, single workers earning medium lifetime earnings over their working lives, and who retire today in 2018 at the normal retirement age[i], are projected to receive $20,662 in annual benefits. Medium wage earners retiring in 2095 will receive $53,724 in annual benefits, in 2018 inflation-adjusted dollars, 160 percent more real purchasing power than today’s retiring workers’ benefits, and almost as much as today’s total average family income just from Social Security. Add 50 percent for a spousal benefit, and double that for a two-worker medium income couple, and it is easy to see why the system’s costs are rising.

Workers who always earned the maximum covered earnings, and who retire this year, are projected to get $33,428 in annual benefits; those who retire in 2095 are projected to receive $87,303, in real 2018 dollars. Add 50 percent for a spousal benefit for a married couple, $130,955, or up to double these numbers for a two-worker household, $174,606. The richest households could receive as much as two or three times the current average household annual income, just from Social Security.

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As this is happening, the number of retirees is projected to grow faster than the number of workers, due to demographic changes, unless we significantly boost immigration. The native population fertility rate is well below replacement levels. The replacement rate is an average of 2.1 children per woman over her lifetime. The current fertility rate is under 1.9. The Social Security actuaries are hoping and assuming it rises to 2.0 in their best-guess assumption set, but that may be wishful thinking. The demographics and the promised real benefit increases are why the system is projected to run larger and larger deficits. There are just not enough future workers to pay into the system to maintain that pace of real benefit growth.

Social Security was initially envisioned as one leg of a three-legged stool, the other legs being pensions and personal saving. No one in the 1930s and 1940s envisioned a time when fertility rates would plunge and real incomes would soar. No one worried at that time about Social Security tax rates rising so high as to choke off private saving, nor that the system would take over the bulk of retirement income for a very large portion of the population. It is past time to return the system to its anti-poverty mission, as a true, focused safety net. Let the other two legs of the stool become a ladder that people can climb to a richer retirement by expanding and simplifying tax-friendly retirement accounts, such as Individual Retirement Accounts (IRAs) and 401(k)s.

Fixing the Problem
There is no need for panic, but there is need for action. All that is needed to curb the out-year deficits is to make the real benefits grow more slowly than average wages. To accomplish that, the benefit formula and earnings histories used to set a worker’s benefits when he or she first retires should be prospectively adjusted annually by the growth of prices, instead of wages (or for the lesser of price or wage increases, to be safe), starting a few years hence. This would gradually reduce the “replacement rates” while letting benefits continue to grow in real terms, but at a slower pace. An added year of increase in the normal retirement age to qualify for full benefits would finish the balancing act.[ii] (There are many alternative ways to achieve similar ends, with options to reduce the impact on lower-income workers. See the endnote below.[iii])

Price indexing was recommended to the Senate Finance Committee by the Hsiao Commission in a report to the Committee in 1975.[iv] It warned that wage indexing was unsustainable as slowing birth rates increased the ratio of retirees to workers. President Ford and Congress opted for the more generous wage indexing ahead of the 1976 elections. That decision added over $3 trillion in unfunded future liabilities to the system (now much larger). I presented price indexing to the Greenspan Commission before the 1983 Social Security Amendments, but the Commission focused only on the short run and failed to deal with the distant future. Had price indexing been adopted then, along with the increases in the normal retirement age that were eventually put in place, OASI would now be in balance, and could be maintained that way with one more year’s increase in the normal retirement age going forward.

It is not too late to use these techniques for long-run solvency. They only slow future real benefit growth. They never cut benefits from one cohort to the next (no “notch” issues). They do not punish current retirees. They give ample warning to young people to take advantage of retirement saving plans. They are certainly superior to hitting current retirees with frozen COLAs,[v] or freezing initial benefit growth for new retirees with no warning. However, the gradual changes would take time to bring the system into surplus, and would not cure the deficits projected for the next 30 years or so. The system should be allowed to borrow from the Treasury to deal with these interim deficits, and repay later after the changes begin generating surpluses. That is the price we pay for the 40-year delay in the adoption of the superior indexation mechanisms.

Biting the Bullet Might Be a Tasty Treat
Fixing the system in a manner that encourages more real saving for retirement, and less reliance on an ever-growing tax-transfer system, would do wonders for economic growth and job creation. It would avoid a jobs-destroying payroll tax hike. It would provide additional domestic saving for increasing the U.S. capital stock, which would boost wages, and would increase interest and dividend income for retirees. “Biting the bullet” would be biting a sweet bit of candy.

[i] “Normal retirement age” is defined by law as the age at which one can get full benefits. This was originally 65, but legislation has raised it gradually to 67 for those born after 1959.

[ii] For a more complete analysis of price indexing and the benefit formula, see Stephen J. Entin, “A Simple Change to Restore Social Security Solvency,” Tax Foundation Fiscal Fact No. 478, September 2015, https://files.taxfoundation.org/lega...tion_FF478.pdf.

[iii] There is an infinite variety of ways to reduce the impact of slower growth of benefits on lower-wage workers, if it is desired to give them a raise in relative terms, and make the program focus more on relieving poverty. One method would be to adjust the components of the benefit formula that determines what a retiree gets on first claiming benefits. (This formula for the starting benefit has nothing to do with the annual COLA adjustments of benefits after retirement. Those can be left alone.)

The benefit formula has a set of “bend points” (like brackets in the income tax) with replacement factors (like marginal tax rates, only going down for higher incomes instead of up). To determine benefits, a worker’s monthly earnings are averaged over his or her working life (with past wages adjusted by wage growth to age 60 levels, and by price growth to later years) to get an “average indexed monthly earning,” or AIME. The AIME is then put into the bend point formula to determine the worker’s “primary insurance amount” (PIA). For workers reaching age 62 in 2018, the PIA is 90 percent of the first $895 of monthly earnings, plus 32 percent of additional earnings up to $5,397, and 15 percent of any excess AIME. The sum is then adjusted upwards by inflation to the age the worker retires to produce the first benefit payment the worker gets. (An early retirement penalty, if benefits are taken below normal retirement age, or delayed retirement credit, if one waits beyond normal retirement age, may also apply.) The 2018 formula’s $895 and $5,397 “bend point” boundaries are what are increased each year by increases in average wages, which is why benefits rise in line with wages over time. Price indexing would slow the growth of the bend points, and thereby slow the growth of benefits, as real wage increases in excess of inflation cause the AIME to spill a bit more into the lower replacement factor brackets.

To give a relative raise to the lower-income retirees, Congress could gradually raise the lowest bend point bracket replacement factor of 90 percent to 100 percent, and pay for it by trimming the replacement factors on the second bend point bracket from 32 percent to 30 percent, and the top factor from 15 percent to 12 percent. This could be done over a decade at a fraction of a percent a year.

Alternatively, or additionally, Congress could allow the faster wage growth to continue for a few years, while capping the maximum annual benefit at $35,000 or $40,000 for a single retiree (50 percent for a spouse, and double for a two-worker household), adjusting upwards only for inflation. This would implicitly create a new price-indexed “bend point” with a replacement factor of zero. These levels would not be reached by the highest-income workers for several years, not by the medium-income workers for four decades, and not by lower-income workers until the 2100s. A cap would eventually result in a very flat benefit payout at all income levels. The drawback is that it would make the payroll tax more of a disincentive to work by giving no additional benefits in exchange for the tax on the highest wages.

[iv] See the “Report of the Consultant Panel on Social Security to the Congressional Research Service, Prepared for the Use of the Committee on Finance of the U.S. Senate and the Committee on Ways and Means of the U.S. House of Representatives,” 94th Congress, 2nd Session, August 1976, http://www.socialsecurity.gov/histor...siaoIntro.html.

[v] To see why COLAs are not the issue, see Stephen J. Entin, “Leave the CPI and COLAs Out of the Budget Talks,” Tax Foundation Fiscal Fact No. 345, Dec. 6, 2012, https://files.taxfoundation.org/legacy/docs/ff345.pdf.


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  #952  
Old 06-17-2018, 06:00 PM
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https: //www.marketwatch.com/amp/story/guid/5A354748-709F-11E8-85D0-DF48613A70B2

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Opinion: The financial hole for Social Security and Medicare is even deeper than the experts say
2 reasons official projections are probably optimistic

Spoiler:
The trustees for the Social Security and Medicare trust funds released their annual reports last week. And the takeaway? Despite a strong economy, both programs have large and growing financial deficits. Unfortunately, the gap between spending and revenue for these programs is likely even larger than the official projections show because of assumed but unrealistic cuts in medical-care payment rates and the persistently low birth rates of recent years.

The Social Security report estimates the program will run out of reserves in 2034, after which benefits would have to be reduced by about 25% to keep spending within available annual revenue. Over 75 years, Social Security has an unfunded liability of $13.2 trillion. Restoring permanent solvency to the program would require raising the payroll tax rate immediately from today’s combined employer-employee rate of 12.4% of taxable payroll to 15.2%. Alternatively, Social Security benefits would need to be cut on a permanent basis by about 17%.


The financial hole for Medicare is even deeper. The Medicare hospital insurance trust fund will run out of reserves in 2026. Last year, the trustees expected the program’s reserves to last until 2029. Medicare has a second trust fund, for physician and outpatient services and for prescription drugs, that is permanently “solvent” because it has an unlimited tap on the general fund of the Treasury.

What this really means is that premiums paid by the beneficiaries will cover only about 25% of program costs; the rest of the spending is unfinanced. Income and corporate taxes fall far short of what is needed to cover these costs along with the rest of the government’s obligations. Medicare’s overall unfunded liability over 75 years is more than $37 trillion.

Taken together, the combined unfunded liabilities of Social Security and Medicare are more than $50 trillion, according to official government projections. Unsettling as these estimates are, they are probably optimistic — for two reasons.

First, the Medicare projections assume deep, permanent, and ongoing cuts in payment rates for physicians and hospitals that are difficult to believe will be implemented.


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In 2015, Congress passed the Medicare Access and CHIP Reauthorization Act (MACRA), which revamped how physicians are paid by Medicare. The law scrapped the despised Sustainable Growth Rate (SGR) budgeting mechanism and put in its place stringent restraints on annual payment increases.


In 2018, physicians got a boost in payments of 0.5%, and will get one next year of 0.25%. For 2020 through 2025, current law provides for no inflation increase at all for physician fees paid by Medicare. Beginning in 2026, physicians who participate in what are called “alternative payment models” can get annual fee increases of 0.75%, while those who don’t will get increases of 0.25% each year. These payment increases would be well below the expected medical inflation rate of 2.2%, which means physicians would get a real cut in payment rates from Medicare each and every year.

Over time, Medicare’s payments for physician services would plummet compared to what private insurers have to pay for the same services.

Actuaries warn that Medicare’s low payment rates could lead to facility closures and harm access to care for the elderly
Similarly, in 2010 as part of the Affordable Care Act (ACA), Congress imposed deep cuts on payments for inpatient hospital services and other forms of institutional care through a “productivity adjustment factor.” The productivity adjustment factor is a measure of economy-wide improvement in output per worker. The authors of the ACA assumed hospitals and other facilities could match this level of productivity improvement each year, and so they reduced the annual inflation increases paid to these facilities by the assumed productivity increase.

As an example, if inflation and hospital costs rise 3% and productivity goes up 1%, then hospitals get a 2% inflation bump instead of a 3% increase. The ACA imposed this cut starting in 2011, and it is to occur every year into the future. The compounding effect of the annual cuts means this is one of the largest payment-rate reductions in the program’s history.

The actuaries responsible for the financial projections of the Medicare program continue to warn that it is unrealistic to assume these cuts can be implemented every year into the future. Among other things, they project that the physician cuts would push Medicare’s fees from about 75% of private insurance payments today to less than 60% in 2030. Medicare’s payments to hospitals would fall from just above 60% today to below that threshold in 2030, and to around 50% in 2050.


The actuaries warn that these low payment rates could lead to facility closures and harm access to care for the elderly.

As the bad news on entitlement spending and the fiscal outlook rolls in, the silence among the nation’s political leaders is deafening.
More realistic assumptions would add trillions of dollars to Medicare’s unfunded liabilities.

The actuaries estimate that if, first, the productivity adjustments for hospitals were set at 0.4% (instead of the higher level found in the wider economy), and, second, the annual payment increases for physicians were based on actual measured input costs, then Medicare’s overall spending would be 11% higher in 2050 than what is forecast in the trustees’ report.

The second reason that both the Social Security and Medicare projections may be optimistic is the recent news of declining birth rates. Last month, the Centers for Disease Control and Prevention released data showing that the birth rate in the U.S. is now at its lowest level in 40 years. In 2017, the total fertility rate (measured as total births per 1000 women of childbearing age) was 1.76, down from 2.07 in 2008 and far below the population replacement level of 2.1.

The birth rate fell in the aftermath of the deep recession of 2008 to 2009, which was expected. But it has not yet started to rise again to pre-recession levels. This is worrisome because pay-as-you-go systems like Social Security and Medicare depend heavily on future growth in the labor force to remain solvent.

If the birth rate remains at the current level indefinitely, the problems for these retirement programs will be much worse than the 2018 reports indicate. The Social Security projections assume a long-term total fertility rate of 2.0. If, instead, the rate is 1.8, the financial hole for the program will be about 25% deeper than is projected in the 2018 report.

The deficit for Medicare’s hospital insurance trust fund will also get much worse with fewer births, as fewer taxpayers will be paying into the program in future years.

As the bad news on entitlement spending and the fiscal outlook rolls in, the silence among the nation’s political leaders is deafening. But they can’t say they haven’t been warned. The trustees’ reports have been sounding the alarm for years. When the crisis hits — as eventually it will — political leaders will have no one to blame but themselves for not acting when they had the chance to do so.

James C. Capretta is a resident fellow and holds the Milton Friedman Chair at the American Enterprise Institute, where he studies health care, entitlement, and U.S. budgetary policy, as well as global trends in aging, health, and retirement programs. This was first published by RealClear Policy — The Bad News on Entitlements Piles Up — and is republished with permission.


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  #953  
Old 06-18-2018, 04:14 PM
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http://www.metrowestdailynews.com/op...urity-medicare

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EDITORIAL: Avoid a depression: Fix Social Security, Medicare

Spoiler:
When we’re old and sick and poor, we might be forced to keep warm by burning all the government reports that we ignored, warning us that Social Security and Medicare are running out of money; the latest such report was issued last week.

According to the Social Security Administration, the Medicare trust fund will run dry in 2026 and Social Security funds in 2034. They will still be supported by payroll taxes, but those taxes will not cover full benefits, and recipients will likely experience severe benefit cuts if the funds aren’t replenished.

The implications are dire.

Marketwatch.com put it best, saying that if the funds aren’t replenished, “we will soon be facing rates of elderly poverty unseen since the Great Depression. Of the 18 million workers between ages 55 and 64 in 2012, 4.3 million were projected to be poor or near-poor when they turn 65. That grows to 20 million in 2035 and 25 million in 2050.”

This isn’t a new warning. But since pensions are disappearing and Americans aren’t saving enough money to cover their retirements, the consequences could be disastrous. The Harvard Business Review reports, “Among Americans between 40 and 45 years of age, the median retirement account balance is just $14,500 – less than 4 percent of what the median-income worker will require in savings to meet his retirement needs.” Increasingly, retirees are depending on Social Security in the absence of pensions, but also because wages have not kept pace with everyday living expenses, leaving workers less able to save enough for retirement.

But the situation can be fixed. In a study based on 2011 figures, the American Association of Retired Persons proposed a dozen ways Social Security could be mended. Of all 12, the most efficient would be to lift the cap on income subject to the Social Security tax. Right now people stop paying the 6.2 percent Social Security tax on incomes above $128,700. That would fill 86 percent of the shortfall. Other suggestions like raising the retirement age to 68 would fill 18 percent of the shortfall; cutting benefits would fill less than 13 percent of the gap.

Fixing Medicare, however, is a lot trickier. Medicare’s hospital-care trust fund is sagging, in part because payroll taxes were lower than expected in 2017 and because President Trump’s changes to the Affordable Care Act are raising hospital costs. In particular, his abandonment of the requirement that people get insurance or pay a fine means hospitals are going to be seeing more uninsured patients, for which paying and insured patients bear the burden.

The administration has yet to rein in drug costs, another drain on Medicare, and Republicans did away with the ACA’s requirement to reduce overall Medicare costs by deriding cost review boards as “death panels.”

The long cold winter of retirement will hit us all. How long and how cold depends on who takes leadership now on fixing these critical systems. Let’s start with elected officials from aging states – like Massachusetts, where, according to a 2014 Tufts Health Plan Foundation, the senior population is growing so fast that by 2030, more than 1 in 5 of us will be 65 or older.

— The Philadelphia Inquirer (Massachusetts statistics added)
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Old 06-19-2018, 11:38 AM
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https://www.barrons.com/articles/smo...ity-1529332406

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Smoke, Mirrors and Social Security

Spoiler:
There is a persistent myth that the Social Security program is supported by a huge trust fund valued at nearly $3 trillion, money accumulated from the surpluses generated by the system’s payroll taxes over the past few decades. But there is no trust fund in the sense that ordinary people use the term.

Here is how there could have been a trust fund. The government could have used the surpluses to create a sovereign wealth fund--investing the money in, say, a global stock index, and in a diversified basket of high-grade debt of domestic and foreign multinationals and governments. But that is not what happened: All the surplus was spent by the government to help finance its operations.

NEWSLETTER SIGN-UP

The government then created an accounting fiction. Every time that cash was spent, IOU’s were issued in the form of Treasury debt. And it called that Treasury debt a trust fund. But Treasury debt is a claim on--the U.S. Treasury itself. As the Congressional Budget Office once put it with characteristic delicacy, referring to the so-called trust funds that included the much smaller one credited to Medicare, “[T]he resources to redeem government bonds in the trust funds and thereby pay for benefits in some future year, will have to be generated from taxes, other government income, or government borrowing in that year.” In other words, it won’t be generated by the sale of assets in a trust fund, because there is no trust fund.

“That future year” just arrived for Social Security, The Wall Street Journal reported last week: The program’s costs will exceed its income this year. But unfortunately, the Journal story was headlined, “Social Security Expected to Dip Into Its Reserves This Year,” while the story’s lead referred to the program being forced “to dip into its nearly $3 trillion trust fund to cover benefits.”

There is no “reserve.” And as for the “dip ... to cover benefits,” a little dance will occur that merely keeps bureaucrats busy. The trust fund will submit its Treasury bonds for payment to the U.S. Treasury. And with no means of paying those bonds out of taxes or other government income, the U.S. Treasury will then issue debt of its own to the public. If, on the other hand, there were actual assets in the trust fund--which would make it a trust fund--the money could be raised through the sale of those assets, and the debt of the U.S. Treasury would not have to climb.

The Journal story went on to report that “The trust fund will be depleted in 2034.” You can’t deplete what doesn’t exist. The Social Security system is now generating red ink, and the Treasury will have to add to its already gargantuan borrowings to staunch the flow.

This fiscal emperor has no clothes. As George Orwell once wrote, “Political language ... is designed to make lies sound truthful.”


Gene Epstein, who wrote the Barron’s column Economic Beat from 1993-2017, is director of the Soho Forum, which meets monthly in Manhattan. Send comments to gene@thesohoforum.org and stephen.garmhausen@dowjones.com.


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Old 06-20-2018, 10:01 AM
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Originally Posted by msydlaske View Post
Print & website reporters and TV news readers, for their audiences, and retired or nearly retired actuaries, for their own financial planning, might already be reacting to the possibility that SS benefits will be reduced starting around 2034. Who else?

I don't think you have to wait until 2034. That date is a totally artificial construct. We have been having general deficit spending by the government for most of the lifetimes for everyone here. We have been deficit spending as a nation EVEN AFTER the surplus in SS revenues generated by the 1980's OASDI tax increases. Now the SS administration has hit the time where it needs to start collecting money back. With their backs against the wall, congress will need to do one or more of the following:

tax more
grow the economy more to generate more tax revenue
borrow more
spend less
push for the introduction of inflation to devalue liabilities relative to assets & income (inflation benefits the debtor)


The government cannot make due without that extra influx of OASDI revenues. How are they going to use IRS revenues to pay it back? The special purpose bonds/trust fund (whatever they are called - Bruce please help me out here) are simply a claim against the future revenues of government taxation outside of OASDI. Do you think it is remotely possible that the govt's IRS revenues are sufficient to cover regular govt spending AND the payback to OASDI ?

Of the list above, the first two we have had limited but occasional successes on. Borrowing is something we are good at. We don't have a good history of ever spending less. I think the secret sauce is the last item. The govt will give out every (nominal) dollar that everyone is expecting. And they will hope nobody will blame them when a loaf of bread costs $25.

So, once again, 2034 is not a meaningful number because it is predicated on the misinformation that the trust fund is a real asset when it is just an IOU note from taxpayers future, not a bank account from taxpayers past.

TLDR: SS benefit cuts WILL happen before 2034


Edited to add: I started this message yesterday but posted it today, and Cambell's posts ninja'd me with basically the same message
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Old 06-20-2018, 10:13 AM
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That's a very good (and basically fair) analysis. I might quibble here and there:

1. As long as the Treasury is willing and able to redeem Social Security's "special-issue" securities, then 2034 really is meaningful because that's when the bonds are expected to run out. In other words, while the fund holds bonds, the possibility exists that Treasury will allow their redemption, using the various strategies described above. After 2034, there are no bonds to redeem, so something different must happen.

2. I do not see inflation as some kind of secret sauce. That's a valid point with respect to most kinds of obligations, but Social Security benefits are inflation-adjusted. Inflation doesn't help to reduce the future obligation -- and it actually makes things worse by reducing the "value" of assets held in the trust funds.

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Old 06-20-2018, 11:01 AM
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Originally Posted by bdschobel View Post
That's a very good (and basically fair) analysis. I might quibble here and there:

1. As long as the Treasury is willing and able to redeem Social Security's "special-issue" securities, then 2034 really is meaningful because that's when the bonds are expected to run out. In other words, while the fund holds bonds, the possibility exists that Treasury will allow their redemption, using the various strategies described above. After 2034, there are no bonds to redeem, so something different must happen.

2. I do not see inflation as some kind of secret sauce. That's a valid point with respect to most kinds of obligations, but Social Security benefits are inflation-adjusted. Inflation doesn't help to reduce the future obligation -- and it actually makes things worse by reducing the "value" of assets held in the trust funds.

Bruce
Regarding inflation: It could help (or hurt) if the inflation formulas for benefit calculation are not in lock step with the inflation for the revenues.

Right now I think the benefit formula is tied to the National Average Wage Index. But suppose it was tied to some sort of CPI on the things that old people buy.

It would be theoretically possible to have an increase in wages without a corresponding increase in the Senior Citizen CPI. Like if the price of real estate and smart phones and laptops increases 20% and wages increase 10% and the cost of everything else remains the same... the Senior Citizen CPI would barely budge, 20-60 yos would end up in roughly the same place they are now, but revenues would increase ~10%.

Now why real estate and technology would increase 20% and everything else would remain the same and whether the govt can/should make that happen is a different question of course.

And as long as the Social Security inflation index is the NAWI, then the benefit increases and the revenue increases are pretty much in lock step. Which does have some downside protection, so it's not all bad.
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Old 06-20-2018, 11:07 AM
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Originally Posted by bdschobel View Post
That's a very good (and basically fair) analysis. I might quibble here and there:

1. As long as the Treasury is willing and able to redeem Social Security's "special-issue" securities, then 2034 really is meaningful because that's when the bonds are expected to run out. In other words, while the fund holds bonds, the possibility exists that Treasury will allow their redemption, using the various strategies described above. After 2034, there are no bonds to redeem, so something different must happen.

2. I do not see inflation as some kind of secret sauce. That's a valid point with respect to most kinds of obligations, but Social Security benefits are inflation-adjusted. Inflation doesn't help to reduce the future obligation -- and it actually makes things worse by reducing the "value" of assets held in the trust funds.

Bruce

Your point # 1; I agree with you, but your valid point is beyond my context. I perhaps did not state my context very well. My point was that 2034 is not the year that benefits might get reduced. It will happen before then, as the treasury struggles to make any paybacks. We weren't getting by with the influx of extra OASDI cash into the Treasury during the 1980's and 1990s. It is hard, even foolish, to assume that we can begin paying that back without some pain points.

Your Point # 2: What would happen if the OASDI COLAs did not keep up with real inflation? The COLA's are still upward "inflation adjustments." My thought is that it makes things better by reducing the value of the liabilities of the trust fund.
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Old 06-20-2018, 01:44 PM
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OASDI COLAs under present law are tied directly to the CPI-W. There is no perceptible difference from the usual measures of inflation.

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Old 06-20-2018, 01:57 PM
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Originally Posted by bdschobel View Post
OASDI COLAs under present law are tied directly to the CPI-W. There is no perceptible difference from the usual measures of inflation.

Bruce
Whether you chose a different (lower) index or simply applied some kind of reduction to the current one - e.g., 90% of the actual increase - your political opponent will claim you are cutting SS benefits and your chances of re-election will similarly be reduced.

Remember, in D.C. reducing future increases is always considered a cut.
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