Just the facts about Social Security

Dustin Siggins Contributor
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On May 26, 2010, Rep. Anthony Weiner (D-N.Y.) wrote an op-ed in Politico defending Social Security’s solvency, and refuting many concerns cited by critics. Intrigued, I contacted the Congressman’s press secretary by phone the following day to interview the Congressman about his assertions, and to contrast them with what I have heard and read from critics of Social Security. His press secretary and I exchanged several phone calls, and I sent two follow-up e-mails regarding an interview. After receiving no response, I moved forward.

I decided to interview James Agresti, the founder of the non-profit think tank Just Facts, about the very dark future Social Security faces. I intended to write a full article, as opposed to a simple transcript, but without the Congressman’s perspective and given the critical information James provided, I decided to stick with a simple transcript. The audio of the interview can be heard here.

(Full disclosure: I met James at a Leadership Institute seminar last April, and we have kept in touch since. I am a regular caller on his Tuesday evening radio show, Just Facts Radio.)

Dustin Siggins: Anthony Weiner, the Rep. from New York, wrote a piece supporting Social Security as a vital part of retirement for Americans. He said the program was in very little to no trouble, and was perfectly solvent. This was a couple of weeks ago, in a Friday’s [Correction: The op-ed was written on a Wednesday] Politico. I called the Congressman’s office twice, I traded e-mails with his Press Secretary- they did not get back to me. So, I’m writing the article, because I’m past my deadline.

Now, your website, JustFacts.com, you’ve done a lot of work on Social Security; on the National Debt; and how Social Security affects the National Debt. Is that correct?

James Agresti: That is correct.

DS: I just have a few questions, I guess based upon the assertions the Congressman made in his Politico column. The first is that he said Social Security will be solvent for many, many years. My question to you is, are seniors receiving at least an equal payback? They’re putting 6.2 percent, I believe, of their income, plus the 6.2 percent from their employer, into their retirement- essentially, through Social Security. Are they receiving an equal number, an equal amount, back?

JA: Well, that depends on what seniors you are talking about. Under the current system, some will get absolutely nothing back, while others will get back far more than they put in. The way the system is currently structured- let’s take an example of someone who dies right when they are ready to receive benefits, let’s just say 65 years old. They have no surviving heirs, no surviving children—I shouldn’t say heirs, I should say they have no surviving minor children. They may be adults, and may be self-sufficient, they’re not dependent on him- that person will have worked their entire life, paid into the system—and it is 6.2 percent, but that money from the employer ultimately comes from the employee’s paychecks. The Obama administration has been clear about that in other contexts, such as the health care bill, where they say, “Hey, if your employer’s spending less on insurance, on health insurance, on health benefits, that’s more money in your paycheck; that’s more money they can give to you.” So that money, even though they say the employer is paying it, you’re paying it, the employee’s paying it. The market rate for a person, when they calculate how much it’s going to cost to have an employee, they bill that into it. I know that from running a small non-profit organization. It’s built into the paycheck.

Now for seniors as a whole, which is often the way people look at this, they look at it as a generation, not as an individual- which, by the way, under the personal ownership that have been put forward, that would not be the case. If you put that money in it would be your property, and you could will it to whoever you wanted, whether that be a child or a charity, whoever that may be, your friend. But if you look at seniors as a whole, I’ve looked at such performing rate of return calculations, in other words, when you look at a generation- what the generation put in, and what they’ll get out- it’s a very difficult calculation because of the numerous tax increases for Social Security over the years, plus the cost-of-living adjustments, the earned-income tax credit, the nature of the tax-to-benefit ratio, make this a very complicated calculation, and thus I haven’t done it. But another important variable in all of this is what constitutes a reasonable rate of return? If these current retirees had taken their money that was put into Social Security and places this into moderately conservative investments over their working years, I would estimate they would get a lot more money back. However, if they simply put the money into bank accounts or CDs, the opposite may be true.

The point I usually make when explaining the Social Security system to retirees is the fact that the government has already spent all of the money they have paid into the system. They say, “Well, I’m due this money back, I paid it into the system.” Yeah, you paid it in, but it’s gone! Okay, either they spent it- either they paid it into the system and it was spent by the Social Security system, or the Social Security Administration [SSA] took that money, loaned it to the federal government, who then spent it. But the money’s gone, so all the money the current retirees are receiving is coming directly from the pockets of younger workers, and often these younger workers have far less money than a retiree they’re forced to support, and furthermore these workers, these current workers- guys like you, young guys like you- cannot possibly receive your full Social Security benefits unless workers younger than you are forced to pay even more in taxes. Far greater than these people put in, and far greater than you’ve put in.

DS: So, essentially, what you’re saying is it’s a vicious cycle of increasing poverty and increasingly lost revenue for each continuous worker.

JA: Not necessarily poverty, and not necessarily ongoing. The projections of the Social Security system show it eventually stabilizing, but we’ll get into that a little bit down the road. The thing people have to realize is Weiner says the program is solvent- first of all, it’s only solvent because of the massive tax increases of the past. At the outset of this program, the federal government published an informational pamphlet that said the following in regard to taxes- I’m quoting here- “And finally, beginning in 1949, 12 years from now, you and your employer will each pay three cents on each dollar you earn, up to three thousand dollars a year. That is the most you will ever pay.” Okay? This is a direct quote- this is a pamphlet put out by the federal government, and after adjusting for inflation, the maximum tax collection, the most you will ever pay, right now, is more than seven times this amount. So they have just basically- well, I don’t want to say “lie,” because that implies that they knew this would happen, but it seems pretty obvious to me, looking back with hindsight, which I guess isn’t a fair comparison, that there was no way this was going to hold out the way they projected it would, or promised it would.

DS: Okay. Well, related to that, the 2008 SSA report to Congress stated that-

JA: Dustin, I’m sorry for interrupting, I just want to make one more point on this. My fault- I told you to move on, and I wasn’t ready. We did some calculations here at Just Facts, and what we found is that if extra money had not been added to the Social Security program by increasing the tax rate above the levels specified in the original Social Security Act, the system would have been unable to pay full benefits since about 1980- or, the word that is used is “insolvent,” I’m not sure that is a proper word, but it wouldn’t have been able to pay the promised benefits. So I just wanted to add that in.

DS: The 2008 SSA report to Congress matches the Congressman’s claim in his column, which is that they will be able to pay 78, or 73, percent of promised benefits in 2080. [Correction: The actual quote from Rep. Weiner’s column was “Without any change, Social Security could cover three-quarters of benefits until 2083 — when people born today will be 73.”] That is what he claimed, and that is what the report said in 2008. But that, obviously, was before the crash, before the major disaster that happened in the economy in the last two years. Have you seen an updated report on whether those numbers are going to be changed?

JA: An updated report was due out earlier in 2010. The Obama administration delayed it until June 30. That is when the 2010 report will come out, which will contain information on Fiscal Year 2009, which runs from October 2008 until September 2009. That report is not out yet.

DS: All right. I was just curious. I guess I’ll just have to follow back up with you in about a month. The last question—could you just clarify your statement from earlier, about the program eventually being solvent? How would that happen, given that we are going to have 10,000 people a day retire for the next 20 years, and they are going to increasingly live longer, and use more money?

JA: Give me a moment here- I want to pull up the exact numbers.

DS: Sure, sure.

JA: If you look at the ratio of people paying taxes to the people receiving benefits, it has gone from 41.9 workers in 1945 paying into the system to one person receiving benefits. By 1970, that had dropped to 3.7 to one; in 2000, 3.4 to one; in 2007 3.3 to one; around 2030 it’s going to drop to 2.2 to one; and 2070 2.1 to one. According to projections.

Now, let me add that there are reasons to be suspicious of these projections. First of all, their track record from the past is not that great. Secondly, even- and I’m talking long-term track record—their short-term predictions have aroused my suspicions. Let me give you an example: in 2001, the Social Security Administration projected the trust fund balance would reach $2.54 trillion by the end of 2007. It actually reached $2.24 trillion- 13 percent lower than projected. Yet, if you compare the projections from the 2001 report and the 2008 report, they’re more optimistic in the 2008 report than in the 2001 report. So the financial condition of the Social Security program is worse than they projected, from sitting back from eight years before, but yet they are saying it’s going to be better in the future. All right? So in 2001 they were saying, by the time – let me see here- the expected annual deficit in 2075, we’d have to increase Social Security taxes by about 49 percent to cover that deficit. In 2008, they said we’ll only have to increase taxes by 32 percent.

When you dig deep into those reports, you see that the actuarial calculations- in other words, based upon the demographics; how many people are going to be working; how many people are going to be living; life expectancy- there are a whole bunch of variables that build into that- they change those numbers and say, “Well, we’re going to have more immigration, so there will be more people paying into the system.” But what these calculations don’t show is what will it then cost to pay those people when they retire? Does that make sense?

DS: Right, because they are assuming the immigrants won’t be receiving Social Security, not paying into it. They’re not double-counting.

JA: Well, they’re not assuming they won’t be receiving it- what they’re doing is they’re backloading the calculations and- let me get the quote here from the U.S. Treasury Department- the simple time horizon calculations (in other words, the 75-year unfunded liability, whatever it may be)- I’m quoting here, “Understates financial needs by capturing relatively more of the revenues from current and future workers and not capturing all of the benefits that are scheduled to be paid to them.” So, there are numerous ways of calculating what kind of shape the Social Security system is in. Weiner is doing his calculations, but there are other ways, more accurate ways, of doing this. I, personally, think the best way to look at it is the way private corporations are forced by law to look at their pension obligations, which is called the “Closed Group Unfunded Liability,” and when you look at these numbers, they are far more than the numbers that are commonly cited in the media, and by people like Congressman Weiner.

You’re looking at approximately $16 trillion projected shortfall. If you who’s in the system right now, what they’re going to take out in benefits, and what they’re going to pay in taxes, the Social Security system is about $16 trillion in the hole.

DS: Is that from the Treasury Report earlier this year?

JA: That is from the 2009 Treasury Report, yes.

DA: And that Treasury Report was very devastating.

JA: It’s an Obama administration document, okay, so we’re using his numbers.

DS: James, I really appreciate your time. If I have any more questions, may I follow up by e-mail?

JA: Of course.

Dustin is a political commentator who contributes to www.race42012.com and is the editor-in-chief for www.thelobbyist.net. He is a former intern with The Heritage Foundation, the former Assistant Director of Communications for a health care trade association, and is currently an intern for The Laura Ingraham Show.