Social Security as a Milk Cow, and Other Fallacies

Social Security is our most important intergenerational promise, and there’s no reason to let the deficit commission break it.

Alan Simpson, co-chairman of the President’s deficit commission, recently unloaded on supporters of Social Security: “We’ve reached a point now where it’s like a milk cow with 310 million tits! Call when you get honest work!”

I grew up with cows and recall that each cow has got four milk-giving organs. Our cow easily fed a family of six, including four growing kids, with plenty of milk and cream to spare. The 77.5 million cows to which Simpson refers ought to be able to suckle well over 500 million seniors — if they share teats. Just take a look at the 2010 OASDI Trustee’s Report, which projects 100 million OASI beneficiaries in 2070 – up from well under 50 million today. Simpson’s off by at least a factor of ten in terms of the number of teats required today — and we already have far more than what seniors will need in the future.

More seriously, let us turn to the issue of Social Security’s solvency. I want to be clear. This is not a partisan issue. The President’s deficit commission has presented a unified front against budget deficits, and there has been a lot of talk about “infinite horizon” deficits that result from “entitlements.” The thinking goes like this: If we project Social Security benefit payments and payroll taxes through infinity, and subtract revenues from spending, we get a big deficit number. If we then project Medicare spending and tax revenues through infinity we get an even bigger number. Tens of trillions of dollars.  It sounds scary and unsustainable. But there are a number of things wrong with this calculation.

Let us begin with Medicare. It is critical to note that Medicare’s infinite horizon deficits result from the assumption that healthcare expenses will rise faster than production and income, forever. But this kind of projection is misguided — it implies that healthcare will absorb 100% of everyone’s budget. Think about it: Every firm in the country that provides medical insurance will go bankrupt if this kind of projection proves correct. Every household in America will go bankrupt. Not likely, is it? Yes, we must and will do something about healthcare costs — we will, eventually, adopt a single-payer system to control escalating costs, just like all other developed nations. These projections of Medicare shortfalls of tens of trillions of dollars will never come to pass.

What about Social Security’s infinite horizon deficits? First, the whole exercise is wrong-headed. Let us say for a moment that a half-century down the road the US will find that current law benefits resulting from Social Security (and Medicare) exceed payroll tax revenues. What can we do? Cut benefits now? Why? Today, revenues and expenditures are actually in balance. Today’s seniors have worked for thirty or more years, paying taxes, working hard, maybe saving a bit on their own, with the expectation that they could have a decent retirement in 2010. Do we tell them it was all a lie? That government will default on its promises? Not going to happen.

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More probable is a cut to future benefits. We will tell today’s young people that their benefits will be lower in, say, 2050, than their grandparents are receiving today. Why? Because today’s infinite horizon projections show future deficits. Really? Let us say we pass such a law. Will it reduce benefits a half century from now? Are the next 50 years of policy making going to be bound by today’s decision?  Unlikely. Today’s Congress cannot tell our grandchildren’s Congress what to do. In 2050, policy makers will react to the democratic demand of voters to provide for seniors. Projections will — with certainty – prove to be wide of the mark. Maybe they will be overly optimistic; more likely they will be overly pessimistic. In any case, we cannot bind policymakers of the future.

We could, purely for today’s misguided budgeting procedures, reduce future benefits and raise future taxes. But in that case, why not go whole hog — mandate elimination of Social Security benefits in 2050, but raise the payroll taxes on that date? We could then discount the stream of revenues and expenditures back to today. As a pure accounting procedure, we would eliminate the infinite horizon deficits. All is fine and dandy, job well done, no “unfunded entitlements.” We have pushed the decision about caring for tomorrow’s elders into the distant future — something that we have no control over, anyway. Maybe voters in 2050 will decide to support them; maybe they will decide to starve them; maybe they will decide to eat them in a sort of reversal of a Swiftian Modest Proposal. It is not our concern and there is nothing we can do about it.

What about raising taxes now, on the supposition this could relieve burdens fifty years from now? Let’s take a closer look at that idea: Social Security typically runs huge surpluses (as it has done since the early 1980s). It uses them to buy (unmarketable) government bonds (really just a reminder that Treasury promises Social Security that it will cover future shortfalls). When, and if, Social Security runs deficits in the future, it turns those back to Uncle Sam to cover the shortfall. But Uncle Sam must then either raise taxes or run a deficit to cover Social Security’s shortfall. What would happen if Social Security does not run surpluses now? Then, in the future, to the extent that Social Security runs a deficit, Uncle Sam will raise taxes or run a deficit to cover it. Do you see any difference?  No. Today’s Social Security surplus makes no difference at all with respect to what the Treasury must do in 2050. It just accumulates claims on the US government, like one family member owing another. If your kid accumulates your IOUs, you will still need to get hold of money out of your income or by borrowing in order to cover your kid’s spending.

Simpson’s statement appears to imply that Social Security recipients are little more than newborn calves, seeking to suckle the teats of our hard-working cows. But wait a minute. About three quarters of all Social Security recipients are retirees — those who have worked hard all their lives, contributing to American production. They gave us the living standard we now enjoy. Since 1935, government has held out the promise to all workers: work hard and long and you will enjoy a decent retirement. How can we possibly compare that to the suckling of cows?  The other quarter of recipients are dependents — widows, children, and people with disabilities.

In reality, the President’s deficit commission does not have within its mandate the responsibility to examine or discuss the solvency of Social Security. It is not in the commission’s charter. President Obama must remind the commission of its tasks, and stand up for Social Security. This is our most important public insurance program, our most important safety net. It has contributed more than any other government program to poverty reduction, and it is the most important source of income for the majority of American seniors. It is an intergenerational promise, our most important one: if you work hard during your working years, tomorrow’s workers will take care of you in your old age. And if you should become disabled or should die, your co-workers will take care of your family. This is a promise we have kept for 75 years. President Obama should renew this promise, without watering it down, for the next 75 years. To be sure, such a promise is precisely that — no more, no less. We cannot hold future generations to such a promise. But we can protect Social Security and Medicare today from those who want to dismantle it.

L. Randall Wray is Professor of Economics at the University of Missouri-Kansas City.