I wondered just how long it would take for you to crawl out of the woodwork to add to that Wall of Ignorance you tried to throw up around this thread.tharkûn wrote:Because there aren't any differences about the definition of the problem. The only real difference is in the proposed solutions. You view privatization as evil whereas others view perpetual tax increases as evil.And of course it blithely ignores the distinct difference between "action to fix problems now will avert a future crisis" (the approach of Clinton and predecessors —including Reagan, BTW) and "the crisis is NOW, therefore we must end Social Security as we know it!!!" (the Bush approach).
The nuts and the bolts of it come down to thus:
The past stellar returns of social security rested upon an expanding income base built by unsustainible population growth and increases in real wages.
The present fiscal situation in the US will NOT be sustainable in the long term. If nothing else redeeming the social security debt is going to require massive changes in the budget (more interest on new debt floated at a higher premium, more taxation, or shifted budgetary allotments).
I am not saying that the US population will necessarily decline, nor that real wages will fall; just that the system is not robust enough to weather the storm should they do so.
Take a simple trend, the increasing prevelence of kids not to work right out of highschool. Okay what does that mean in the longterm? Well for one it will lower the percentage of the population who are workers and increase the median worker age. So one could conclude that this is a bad thing? No, because by delaying entry into the workforce individuals gain skills which have a dramatic increase in their market value. So it is a good thing? Again not necessarily so higher education seems to track along with higher life expectancy plus the education gap between the US and the rest of the world is falling - the value of being an American with an advanced degree may not remain quite so large.
The point? That predicting the impacts of every sociological change possible or even just likely to hit the social security system is hard if not impossible. The system should be designed to be robust with a large margin of safety. Indeed part of the margin should be ways to prevent stupid governments from dicking it over, Bush is not the first, nor will he be the last to try to overhaul the system.
The basic suspicion that I have of the social security system is that private firms offer the same basic services, but NONE of them use a pay as you go model. You can buy insurance to cover long term retirement costs, nobody locks out investment. You can buy inflation adjusted inuities, nobody offers that as a contract for a certain percentage of your income. Despite having customer bases larger than entire countries, only the government works with a pay as you go system. If the pay as you go system were reliable, robust, and effective someone, somewhere in the private sector would make a killing selling it - nobody does.
Well, as you still refuse to learn your lesson, it wil be necessary to start off with a basic rundown of the myths commonly floated about Social Security:
Now for the more comprehensive body of evidence against your claims:The Basics
5 myths about Social Security
System reform is a hotbed of controversy. But to move ahead, we've got to identify the myths, toss them aside and refocus on realities.
By Liz Pulliam Weston
You can’t write about Social Security and not get flooded with angry e-mails representing all points of the political spectrum. From those who dub it “Socialist Insecurity” to those who hold their checks to be an inalienable right, people often have passionate and firmly held beliefs about the system.
Unfortunately, sometimes those beliefs are based on myths. In the interest of more honest debate, let’s review some of these legends.
Myth No.1: There is no Social Security trust fund. You may have heard this assertion so often that you’ll be surprised to learn that there really IS a Social Security trust fund that collects our payroll taxes and invests the surplus. It’s called the Old-Age and Survivors Insurance and Disability Insurance Trust Funds.
What isn’t in the trust fund is a big hoard of cash.
Three-quarters of the money that’s collected in Social Security taxes goes right out the door again in the form of benefits to Social Security recipients. The surplus that isn’t needed to pay benefits is loaned to the federal government to pay for other programs.
In return for this loan, the trust fund gets IOUs in the form of special-issue, interest-paying Treasury bonds. The interest isn’t paid in cash, however; the Treasury department issues the fund additional bonds for the interest amount. Last year, the fund was credited with $80 billion in interest; the total value of the securities is about $1.5 trillion.
Critics often deride these bonds as “a bookkeeping entry” or a fiction, but they’re real obligations of the U.S. government, said Steve Goss, Social Security’s chief actuary. In the past, they’ve been cashed in when Social Security or its sister program, Medicare, temporarily ran low on funds. The last time was in the early 1980s.
“They’re backed by the full faith and credit of the U.S. government,” Goss said. “They’re every bit as real . . . as any savings bond or Treasury bond any individual might hold in society.”
The problem, of course, is that the government now owes the trust fund so much money -- and relies on its surplus so heavily -- that real problems will be created when it comes time to cash in those IOUs. Uncle Sam is going to need to find another source of income to replace the surplus (or cut spending, or borrow money from somewhere else), plus come up with cash to pay the bonds it’s already issued.
Myth No.2: Congress doesn’t pay into Social Security, so it doesn’t care about fixing the crisis. The idea that U.S. lawmakers don’t pay into Social Security is 20 years out of date. Before 1984, U.S. representatives and senators -- like all other federal employees -- weren’t covered by Social Security and didn’t pay into the system. Congress passed a law in 1983, which took effect the next year, requiring all its members (and all federal employees hired after that year) to participate in the system.
This myth is often accompanied by the assertion that Congress participates in a private pension scheme that pays them their salaries for the rest of their lives. In fact, the Civil Service Retirement System, which covered federal employees in earlier decades, was closed to new participants after 1983. The pensions available under this old system depend on the federal worker’s pay and tenure with the government, but by law can’t exceed 80% of the final year’s pay. Benefits paid under the system are reduced by the amount of Social Security the participant receives.
The reason Congress hasn’t fixed the Social Security crisis is politics. The most likely solutions -- raising taxes, cutting benefits, establishing private accounts or some combination of the three -- all face strong opposition. In addition, the people currently receiving benefits are represented by one of the strongest, most politically-connected lobbies in existence: AARP. The 20-something workers who likely will pay the cost for Congressional inaction don’t have nearly the same clout.
Life expectancy and disappearing assets
Myth No.3: Age 65 was picked as the retirement age because when Social Security was started in the 1930s, most people were dead by then. The average life expectancy for a baby girl born in 1935 was about 63 years. For a baby boy, it was about 59 years.
But those statistics reflect the higher infant and child mortality rates of the times. If you survived childhood, you had a good shot of living beyond retirement age. Men who lived to age 30 in 1935 could expect to last another 37 years. Women at 30 had a 40-year average life expectancy.
If you actually reached retirement age, your prospects for a relatively long retirement were good. Men who were 65 in 1935 could expect to live another 12 years, while women faced an average 13 more years. (Today, men of the same age can expect to live another 16 years, and women 19 years.)
In fact, about half of the 30 state pension plans that existed in 1935, and many of the private pension plans, used 65 as a retirement age. Most of the others used age 70. Social Security’s creators thought 65 was the more reasonable age and believed the system could be self-sustaining if they chose that age.
Myth No.4: Social Security will run out of money in 2042. Social Security will still be receiving payroll taxes from workers in 2042. What may have disappeared by then are the assets in the Social Security trust fund.
Even that isn’t cast in stone, however. The Congressional Budget Office in June projected that the trust fund wouldn’t dry up until 10 years later, in 2052. The CBO used different assumptions than those used by the Social Security Administration, projecting faster growth in worker earnings, higher interest rates and lower inflation.
Here’s how the Social Security Administration projects the timeline:
* In 2018, Social Security will begin paying out more than it takes in. For the first time, it will have to use the interest being paid on the securities it holds in order to meet its obligations.
* In 2028, Social Security would have to start redeeming the securities themselves.
* By 2042, Social Security would have cashed in the last security, and the system would have enough revenue to pay out only 73% of promised benefits. That percentage would drop over time if Congress failed to act.
Demographics and add-ons
Myth No.5: Social Security wouldn’t be having problems if foreigners weren’t able to claim Social Security benefits. The number of checks sent overseas in 2002 totaled 404,640 -- a tiny fraction of the 53 million or so checks Social Security issues annually. Many of those folks may well be Americans who retired abroad (some of whom I profiled in “Retire like royalty in a low-cost paradise”). Social Security doesn’t break down the overseas checks by citizenship.
In any case, foreign workers who live in the United States have to work and pay taxes into the system for at least 10 years to qualify for Social Security benefits, just as U.S. citizens do.
What will really hurt Social Security are two factors: demographics and the scope of Americans who are covered.
In 1950, there were 16 workers for every person receiving Social Security benefits. By 2015, there will be only three workers for each beneficiary. Fifteen years after that, the ratio will be down to 2.2 to 1.
Even that demographic shift wouldn’t be such a disaster if Social Security hadn’t expanded far beyond its original mandate of providing retirement benefits for workers. About 30% of Social Security’s total benefits are paid to retirees’ dependents and survivors and to disabled workers.
Here’s a summary of the add-ons over the years:
* In 1939, five years after Social Security began, Congress added payments for the families of workers who died, and for retirees’ dependents (such as stay-at-home spouses).
* In 1956, Congress added disability benefits for workers.
* In 1974, Supplemental Security Income or SSI was established as a welfare program for low-income seniors and people with disabilities.
* In 1965, Congress established Medicare to pay health-care costs for seniors.
Of these add-ons, however, only the first two -- disability benefits and payments to dependents, widows, orphans -- actually affect Social Security’s bottom line.
SSI benefits are paid out of the federal government’s general revenues. Medicare is paid for with its own tax and has its own trust fund.
(Medicare is in far worse shape than Social Security. Medicare’s trustees project insolvency in 2019, 23 years before the earliest date Social Security is scheduled to run aground. Medicare has an unfunded liability of $27.7 trillion over the next 75 years, while Social Security’s unfunded liability for the same period is $3.7 trillion. To put this in perspective, the entire national debt is currently about $7 trillion.)
Like Medicare, the disability insurance program also has its own tax and its own trust fund. But the disability fund’s results are combined with that of the retirement system when Social Security insolvency projections are made, Goss said, and account for $700 billion of the $3.7 trillion unfunded liability.
If the disabled, the dependent and the survivors were booted out of the system, Social Security could pay for itself --assuming tax levels remained the same.
“The system would be more than adequately funded,” Goss said, “if only retirees were receiving benefits.”
That’s not a solution Goss -- or anyone else who really thinks about it -- could endorse. Even if it were morally viable, kicking out all the widows, orphans, disabled and stay-at-home spouses is politically untenable.
So we’re back to choosing from the same controversial list of options: cutting benefits, raising taxes, privatizing some or all of the system. What we choose, though, should be based on the realities of the system -- not the myths.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
THIS is the summary of conclusions from the CBO report on Social Security he insists points to a situation of "perpetual shortfall":
Congressional Budget Office wrote:An alternative that accounts for the imbalance between projected Social Security revenues and outlays is the ratio of trust-fund-financed benefits to payroll taxes, shown with solid lines in Figure 2-6. Because trust-fund-financed benefits decline after the trust funds are exhausted, that ratio also declines in later years.
In Social Security, as in any pay-as-you-go social insurance system, earlier generations of participants received very high benefits relative to the taxes they paid. As a result of that windfall, later generations will receive total benefits that are lower, on average, than the total taxes they paid. That low benefit-to-tax ratio is not an indication of inefficiency in the system; it merely reflects a transfer from current and future beneficiaries to earlier generations.
The benefit-to-tax ratio is higher for workers with lower lifetime earnings than for those with higher earnings. That outcome results in part from Social Security's progressive benefit formula. Low lifetime earners are also more likely to include recipients of disabled-worker, spousal, or survivor benefits--who receive benefits in excess of the payroll taxes they pay, reflecting the insurance nature of the Social Security system. (The effect of disabled-worker benefits on the benefit-to-tax ratio can be seen by examining ratios for DI and OASI workers separately. Figures showing that information are available here.)
Conclusions
Those different measures of the benefits received and taxes paid, broken down by age and income group, lead to different insights about the impact of Social Security under current law.
* High earners receive higher benefits than low earners do, and future generations will receive larger benefits than current beneficiaries do, even after adjustment for inflation and even if benefits cannot be paid as scheduled once the trust funds are exhausted.
* Conversely, low earners have a larger percentage of their earnings replaced by Social Security than high earners do, and current beneficiaries have a larger percentage of their earnings replaced than future generations will.
* Future beneficiaries will not only receive higher annual benefits than today's beneficiaries but will live longer, on average; thus, they will receive greater total benefits over their lifetime.
* The payroll tax is a constant percentage of taxable earnings, which means that because taxable earnings are projected to rise over time (even after adjustment for inflation), future generations will pay higher taxes.
* For workers with low lifetime household earnings, total Social Security benefits received over a lifetime are higher, on average, than dedicated taxes paid over a lifetime. For workers with average and above-average earnings, the reverse is true. If benefits were reduced across the board because of the projected shortfall in revenues, the general pattern of taxes paid relative to benefits received would remain similar for each income group.
And THIS is a comprehensive analysis of the CBO report which isn't saying that the system is facing eventual collapse at all:
And THIS analysis also disputes the ideology that Social Security is facing "perpetual shortfall" and is therefore unfixable:Centre for Economic and Policy Research wrote:Basic Facts on Social Security and Proposed Benefit Cuts/Privatization
Dean Baker and David Rosnick1
November 16, 2004
1) Social Security is Financially Sound
According to the Social Security trustees report, the standard basis for analyzing Social Security, the program can pay all benefits through the year 2042, with no changes whatsoever. Even after 2042 the program would always be able to pay retirees a higher benefit (in today's dollars) than what current retirees receive. The assessment of the non-partisan Congressional Budget Office is that Social Security is even stronger. It projects that Social Security can pay all benefits through the year 2052 with no changes whatsoever. By either measure, Social Security is more financially sound today than it has been throughout most of its 69-year history.
Source: SSA, CBO, and authors’ calculations.
2) President Bush's Social Security Cuts Would Be Large
The proposal that President Bush is using as the basis for his plan phases in cuts over time. A worker who is 45 today can expect to see a cut in guaranteed benefits of around 15 percent. A worker who is age 35 can expect to see a cut in the guaranteed benefit of approximately 25 percent. A 15 year old who is just entering the work force can expect a benefit cut of close to 40 percent. For a 15 year old, this cut would mean a loss of close to $160,000 in Social Security benefits over the course of their retirement.
Private accounts will allow workers to earn back only a small fraction of this amount. For example, a 15 year-old can expect to make back approximately $50,000 from the $160,000 cut with the earnings on a private account. If this worker retires when the market is in a slump, then it could make their loss even bigger.
Source: SSA and authors’ calculations.
3) Imaginary Stock Returns Don't Offset Real Benefit Cuts
Proponents of private accounts have often used highly exaggerated assumptions on stock returns to argue for the benefits of private accounts. For example, even at the height of the stock bubble in 2000, when the price to earnings ratio in the market exceeded 30 to 1, many proponents of private accounts assumed that stocks would generate 7.0 percent real returns annually. This assumption was absurd on its face - it implied that price to earnings ratios would rise to levels of more than 100 to 1. Unfortunately, even the Social Security Administration has used these unfounded assumptions in assessing privatization plans.
Given current price to earnings ratios and the Social Security trustees' profit growth projections, real stock returns will average less than 5.0 percent annually. Some proponents of private accounts are still using exaggerated stock return assumptions to advance their case.
Source: SSA and authors’ calculations.
4) Social Security is Extremely Efficient, Private Accounts Are Wasteful
On average, less than 0.6 cents of every dollar paid out in Social Security benefits goes to pay administrative costs. By comparison, systems with individual accounts, like the ones in England or Chile, waste 15 cents of every dollar paid out in benefits on administrative fees. President Bush's Social Security commission estimated that under their system of individual accounts 5 cents of every dollar would go to pay administrative costs.
In addition, under Social Security workers automatically get an annuity (a life-long monthly payment) when they retire. By contrast, financial firms typically take 10 to 20 percent of workers' savings to provide an annuity when they reach retirement.
Source: SSA and authors’ calculations.
5) Social Security Pays the Most to Those Who Need it Most
Social Security benefits are highly progressive, so that low wage workers get a much higher share of their wages in benefits than do high wage workers. A worker who earned $10,000 a year during their working lifetime can expect to see a benefit that is equal to approximately 75 percent of their average wage. A worker who earned $33,000 a year will get a benefit that is equal to approximately 45 percent of their wage, while a worker who earned $50,000 on average will get a benefit that is equal to 39 percent of their wage.
While poorer workers do not live as long as higher paid workers, the progressive benefit structure largely offsets differences in life expectancy (as do disability and survivors benefits for those who do not live to normal retirement age). Furthermore, since plans are being made for the distant future, the United States could reduce the gaps in life expectancy by income and race, as other countries have done.
Source: SSA and authors’ calculations.
6) The Projected Shortfall is No Larger Than What We Have Seen In Past Decades
It has been necessary to raise Social Security taxes in the past, primarily because people are living longer than they used to. The tax increase that would be needed to make the program fully funded over its seventy five year planning period is actually smaller than tax increases we have seen in prior decades. In other words - it would have made more sense to talk of a Social Security "crisis" in 1965 than in 2005. In fact, according to the Congressional Budget Office estimates, Social Security can be made solvent throughout its seventy five year planning period with a tax increase that is less than one quarter as large as the one in the eighties.
While tax increases are never popular, the fact is that prior tax increases did not prevent decades like the fifties or sixties from being periods of great prosperity. Of course, if the economy maintains anywhere near its recent pace of growth, any tax increases can be put off for many decades into the future, and possibly forever.
Source: SSA and authors’ calculations.
7) Young Workers Will Still See Much Higher Wages If Taxes Are Increased
If it proves necessary to raise more money for Social Security through taxes, workers will still see large increases in their after-tax wages. This is true even if they end up paying a larger share of their wages in Social Security taxes. According to the Social Security trustees' projections, the average after-Social Security tax wage for a worker in 2050, will still be more than 70 percent higher than it is today, even if taxes are raised to keep the program solvent. The CBO projections imply an even larger increase in after-tax wages.
Raising payroll taxes is not the only way to increase the revenue for Social Security. An alternative is to raise the ceiling on taxable wages. Currently, no Social Security taxes are paid on income earned above $87,900 in any given year. If the ceiling were raised to $110,000 to cover 90 percent of the country's income from wages (the level set by the Greenspan commission in 1983), it would eliminate approximately 40 percent of the projected funding shortfall. Using the CBO projections, this change alone would be almost enough to make the program solvent through the seventy-five year planning period.
Source: SSA, CBO, and authors’ calculations.
8 ) The Bush Proposal Phases Out Social Security as We Know It
President Bush's proposal gradually shrinks the traditional guaranteed Social Security so that it will eventually become irrelevant for middle income workers. For today's twenty year old average wage earners, the guaranteed benefit will be equal to just 15 percent of their annual earnings when they reach retirement age. The guaranteed benefit will be equal to just 7 percent of annual earnings for a child born ten years from now.
As the traditional Social Security benefit becomes less important for middle-income workers, Social Security will increasingly become a poor people's program. This may be a clever strategy if the purpose is to undermine political support for Social Security; it is not a good way to structure the program if we expect it to be there for our children and grandchildren.
Source: President’s Commission to Strengthen Social Security and Author’s Calculations.
Footnotes:
1. Dean Baker is the co-director of the Center for Economic and Policy research., David Rosnick, provided research assistance and or comments on earlier drafts of this paper.
Centre on Budget and Policy Priorities wrote:THE IMPLICATIONS OF THE SOCIAL SECURITY PROJECTIONS ISSUED BY THE CONGRESSIONAL BUDGET OFFICE
by Robert Greenstein, Peter Orszag and Richard Kogan
A new Congressional Budget Office analysis released today, which has been several years in the making, projects that the long-term shortfall in Social Security financing is 47 percent smaller than the Social Security Trustees have projected.
* The Trustees project that the Social Security shortfall over the next 75 years equals 1.89 percent of taxable payroll over the 75-year period. CBO projects the shortfall to be 1.0 percent of taxable payroll, or 47 percent less than the Trustees project.
* Measured as a share of the economy, the Trustees project that the shortfall equals 0.7 percent of GDP over the next 75 years. The CBO figures reflect a shortfall of about 0.4 percent of GDP.
* Similarly, the Trustees project that the trust fund will be unable to pay full benefits starting in 2042. CBO’s estimate is 2052; after that time about 80 percent of benefits could be paid.
These differences are due primarily to differences in economic assumptions, along with methodological differences.
CBO’s report emphasizes other measures of the imbalance in Social Security. The figures reported above reflect the traditional 75-year actuarial measure, which has long been used to examine Social Security’s finances.
Implications for Social Security
Two important books written by four of the nation’s leading Social Security experts — Countdown to Reform: The Great Social Security Debate by Henry Aaron and Robert Reischauer, and Saving Social Security: A Balanced Approach by Peter Diamond and Peter Orszag — have shown, using the Trustees’ projections, that long-term Social Security solvency can be restored by modest benefit and payroll tax changes that are phased in over a number of years. These books, as well as proposals developed by other experts, have shown that radical changes in Social Security’s structure — including the replacement of part of Social Security with private accounts that carry greater risk for individual beneficiaries — are not necessary to restore long-term solvency.
The new CBO estimates strongly underscore this point. Under the CBO projections, the benefit and tax changes needed to restore long-term solvency would be still more modest.
The Size of the Bush Tax Cuts and
the Size of the Actuarial Imbalance in the Social Security Trust Fund
As a percent of GDP
Year trust fund will be unable to pay full benefits
Social Security trust fund 75-year actuarial imbalance:
March 2004 Trustees’ Report
0.7 %
2042
June 2004 CBO report
0.4 %
2052
75-year cost of 2001-2003 tax cuts, if extended as proposed by the President:
Total cost of tax cuts
2.0 %
Tax cuts for the top one percent
0.6 %
Note: Estimates of the costs of the tax cuts derived from data supplied by the Congressional Budget Office and the Joint Committee on Taxation, and assume that the tax cuts are continued the Alternative Minimum Tax is indexed for inflation. Share of the tax cuts for the top one percent based on estimates provided by the Tax Policy Center
Implications for the Federal Budget as a Whole
If CBO is ultimately proved right and the Social Security shortfall is only about three-fifths the size previously thought, the required changes to restore financial balance to Social Security will be significantly smaller. Unfortunately, this will not have large implications for the budget as a whole. The nation’s long-term budget problems will be little changed if the new CBO Social Security projection is used, because Social Security is responsible for only a modest fraction of our long-term fiscal problems. Projected increases in Medicare and Medicaid costs, due to the aging of the population and the relentless rise in health care costs throughout the U.S. health care system (including the private sector), constitute a much larger factor. So do tax cuts. As the next section of this brief analysis indicates, if the 2001 and 2003 tax cuts are made permanent, their cost will dwarf the Social Security shortfall.
Social Security’s modest impact on the nation’s long-term budget problems are confirmed by projections of the long-term “fiscal gap” — the amount by which revenues must be raised and/or spending cut in order to stabilize the federal debt as a share of the economy and prevent a debt explosion that could cause serious economic damage. Economists Alan Auerbach of the University of California at Berkeley and William Gale and Peter Orszag of Brookings have estimated the size of the fiscal gap over the next 75 years to be an alarming 7.2 percent of GDP.[1] Their estimate incorporates the Social Security Trustees’ projection of the Social Security shortfall. If the new CBO projection of the Social Security shortfall is used instead, the size of the long-term fiscal gap drops only a few tenths of a percentage point and remains close to 7 percent of GDP. Stated another way, at least 95 percent of the projected long-term fiscal gap remains.
Cost of the Tax Cuts Compared to the Size of the Social Security Shortfall
If the 2001 and 2003 tax cuts are made permanent as the Administration has proposed, their cost over the next 75 years will be more than five times the Social Security shortfall over this period, as projected by CBO. In fact, the cost over the next 75 years of the tax cuts just for the one percent of households with the highest incomes — a group with average incomes of about $1 million per year — exceeds the entire 75-year Social Security shortfall that CBO projects.[2]
This does not mean that policymakers should avoid Social Security reform and simply cancel the high end of the tax cut instead. Given the need to reduce the very large long-term deficits the nation faces and to address other costly problems, such as how to finance health care programs and deal with the growing numbers of uninsured Americans, the bulk of the savings that would be achieved from scaling back the tax cuts will be needed elsewhere. Simply filling Social Security’s financing hole with funds from the rest of the budget, and avoiding making any changes in Social Security itself, would not be responsible.
Nevertheless, this comparison showing that the cost of the tax cuts for the most affluent one percent of taxpayers exceeds the entire Social Security shortfall is useful in illustrating why the tax cuts are unaffordable, and why making them permanent does not represent sound or responsible policy. This comparison also should cause ideologically driven claims made by those who assert that the tax cuts are reasonable and prudent but that the Social Security shortfall is gargantuan and catastrophic to be viewed with skepticism.
Estate Tax Reform Can Contribute to Social Security Solvency
Although the bulk of savings from scaling back the tax cuts should not be dedicated to Social Security and other Social Security reforms are essential, it is reasonable to consider dedicating the revenue that could be secured from one specific change in the 2001 tax cut to a larger Social Security reform effort. CBO’s new projections should spark increased interest in the idea of reforming rather than repealing the estate tax, by limiting the estate tax on a permanent basis to the tiny number of very large estates that will still be subject to the tax in 2009, and dedicating the estate tax revenues that remain to the Social Security Trust Fund. Diamond and Orszag, in their recent book on Social Security reform, suggest consideration of this option. Under the new CBO estimates, adopting this approach would reduce the size of the Social Security shortfall by about 40 percent.
* In 2001, before the large tax cut enacted that year took effect, estates worth less than $675,000 for an individual and $1.35 million for a couple were exempt from the estate tax. As a result, the estates of about 98 percent of Americans who died were exempt from the tax.
* By 2009, estates worth up to $3.5 million for an individual and $7 million for a couple will be exempt from the estate tax. Data from the Urban Institute-Brookings Tax Policy Center show that the estates of 99.7 percent of Americans who die will be exempt from the tax in 2009.[3]
* This means that going beyond the estate tax parameters that will be in effect in 2009 and repealing the estate tax altogether would benefit the estates of only the wealthiest 0.3 percent (i.e., the wealthiest three of every 1,000) people who die. Those would be the only estates that otherwise would still be subject to the tax.
* If instead, the estate tax is retained for this very small group of estates and the estate tax proceeds are dedicated to Social Security, approximately 40 percent of CBO’s projected Social Security shortfall would be closed.
Tax Policy Center data show that if this step is not taken and the estate tax is repealed, more than half of the tax-cut benefits that result from repealing the tax rather than retaining it at its 2009 parameters will go to roughly the 500 biggest estates each year. These very large estates will reap a tax-cut benefit worth an average of more than $15 million per estate.
Closing about 40 percent of the Social Security shortfall that CBO projects (or about 25 percent of the shortfall that the Social Security Trustees project) seems a much sounder use of these resources than eliminating the estate tax entirely in order to provide lavish tax-cut benefits to the estates of the nation’s richest individuals. It also should be noted that under the estate-tax reform proposal described here, the small number of very large estates that would continue owing estate tax would themselves receive a hefty reduction in the estate tax that they must pay, compared with the amounts that such estates pay today, since the first $7 million of the assets in these large estates would be exempt from the tax.
Conclusion
CBO’s projections of a substantially smaller Social Security deficit over the next 75 years are an important addition to the Social Security debate. It is not possible to determine at this point whether the CBO projection or the Trustees’ projection is the better one. The sources of the differences between the two projections are the subject of active examination and debate by Social Security experts.
Even under the Trustees’ assumptions, Social Security solvency can be restored with modest program reforms. The CBO projections only underscore this point. Radical changes in the program are not necessary to restore solvency. The CBO projections also underscore the fact that Social Security is responsible for only a relatively modest share of the nation’s serious long-term fiscal gap. The recent tax cuts, if made permanent, will be a significantly larger contributor to our long-term fiscal problems. Indeed, as this analysis explains, the cost of the tax cuts just for the top one percent of households will be larger over the next 75 years than the entire 75-year Social Security shortfall under the CBO projections. Finally, as discussed above, consideration should be given to retaining the estate tax at its shrunken 2009 parameters rather than repealing it altogether, and dedicating the remaining estate tax revenues to Social Security as part of a larger reform that shores up the program for the long term.
End Notes:
[1] Alan J. Auerbach, William G. Gale, and Peter R. Orszag, “Sources of the Long-term Gap,” Tax Notes, May 24, 2004.
[2] The figures cited here for the cost of the 2001, 2002, and 2003 tax cuts represent their cost (in present value, as a percentage of GDP) through 2078 if the 2001 and 2003 tax cuts are extended and made permanent in the way that the Administration has proposed. Our estimate of the cost of the tax cuts — 2.0 percent of GDP — is based on estimates by CBO and the Joint Committee on Taxation. The estimate also assumes that the Alternative Minimum Tax is indexed for inflation, using CBO figures published in January 2004 in its baseline report. Although CBO’s estimate of the cost of indexing the AMT is not directly added to our figures, CBO’s data show that under an indexed AMT, the 2001 and 2003 tax cuts would be more expensive because the AMT would “take back” less of these tax cuts. It is this incremental cost that is included in our estimate. We assume that after 2014, the cost of the tax cuts remains a constant share of GDP, an assumption that is very likely to be conservative. The resulting estimate of the long-term cost of the tax cuts (2.0 percent of GDP) is slightly smaller than the estimate of 2.2 percent of GDP from the Auerbach, Gale, and Orszag paper, op cit. The difference mostly arises from small methodological differences in how the AMT is reflected in the figures.
[3] The Tax Policy Center data estimate the number of estates that will still be subject to the estate tax in 2009. This figure represents 0.3 percent of the number of deaths projected to occur in 2009. For the purposes of determining total deaths (estates) in each year, the TPC model uses the 1996 U.S. Annuity Basic Tables available on the website of the Society of Actuaries (http://www.soa.org) combined with age-specific population data reported by the Bureau of the Census.
This website offers a few quick-reference charts and figures indicating that U.S. population is projected to increase by 47% from its 2000 level over the next 46 years taking into account both birthrate and immigration. Without immigration, that increase would be only 16%. As this note at NPG outlines:
Oh, and if you wish to indulge an Attacking the Messenger Fallacy against NPG on ideological grounds to try to discount the facts given, this little dynamic population pyramid graphic at the U.S. Census website should underline the facts quite effectively.Negative Population Growth wrote:FAST FACTS ABOUT U.S. POPULATION GROWTH
The United States has the highest growth rates of any industrialized country in the world.
*The U.S. population is growing by about 3.2 million people each year.
*Using the Census Bureau's medium projections, U.S. population is expected to grow to 400 million by the year 2050. Eight states have population growth rates over 2.0%, which means their population will double in less than 35 years. Florida’s population has grown from 1.9 million in 1940 to 15 million today. That is over a 600% increase in just 50 years.
And to reinforce the point, from the tables at this page from the U.S. Census website:
From there, the tables break down into population by sex and age groups. Furthermore, even the application of basic mathematics shows that the retirement-age percentage of the population will comprise only about 20% of the total U.S. population by 2045, with the working age percentage hovering around 53%; sufficient base to support the Social Security system.United States/2005
Total, all ages 295,734,134
United States/2010
Total, all ages 309,162,581
United States/2015
Total, all ages 322,592,787
United States/2020
Total, all ages 336,031,546
United States/2025
Total, all ages 349,666,199
United States/2030
Total, all ages 363,811,435
United States/2035
Total, all ages 378,113,238
United States/2040
Total, all ages 392,172,658
United States/2045
Total, all ages 406,089,392
United States/2050
Total, all ages 420,080,587
The numbers clearly undercut the Chicken-Little bullshit that the U.S. population is going to flatten out or go into steady decline and that therefore Social Security will become untenable due to a shrinking base.
To sum up the basic facts and figures:
• Social Security is projected to remain quite solvent through 2052, and that even if there are no changes in the structure of benefits as defined in current law, retirees will still be receiving higher proportions of benefits than the generations which proceeded them. The Congressional Budget Office report is in no way suggesting that the system is facing eventual collapse or that it is unfixable, but merely projecting possible trends as a guide to legislation, as has been done numerous times in the past.
• To fix the present projected imbalance would require little more than rescinding the more irresponsible of Bush's tax-cuts to the top 1% of earners (which threatens a general budgetary shortfall five times greater than the projected Social Security shortfall) and to raise the cap on the payroll tax to the $110,000 mark, while reforming the Estate Tax to asses only those estates valued at $7 million or above. These are, at most, minor adjustments to the present tax system which would more or less restore the pre-Bush status-quo.
• The payroll-tax increases required to support Social Security's long-term solvency at this point would amount to less than a quarter of the tax increases passed by Congress in the 1980s and signed into law by Ronald Reagan to ensure the solvency of the Social Security Trust Fund twenty years ago.
• The present condition of the Social Security system, even with the projected shortfall, is far better than what was projected back in 1965.
• Projected population trends clearly show the the U.S. population will increase by about 47% beyond the 2000 census level to a population of 408 million, factoring in both birthrate and immigration. Furthermore, the proportion of retirees to working-age members of the society of 2045 and 2050 is going to remain very clearly slanted in favour of the working age percentile. There is no demographic time-bomb ticking away which will explode the contributor base for Social Security.
In short, there is no immediate or looming crisis which requires the radical solution of privatisation, no matter how much you scream hysterically to the contrary and ignore, distort, or outright misrepresent the evidence. And if you insist on continuing to pile up your Wall of Ignorance ever higher, it will simply be necessary to keep burying you with the truth until you've had enough.
