Tuesday, August 30, 2011

Perry's Iowa Remarks Reveal Republican Strategy on Social Security

Rick Perry’s full remarks on Social Security reveal just as much about the Republican Party’s strategy for cutting Social Security as they do about Perry himself.

So much of what people 'know' about the Social Security system and its Trust Funds is just wrong, and in too many cases this includes supporters who have unwittingly bought into some mythical narratives originally promoted by the Right. This is an attempt to begin to set the historical record and so the present context straight: With some myth-busting along the way.

Social Security was first established by the Social Security Act of 1935 but its current structure was only put in place by the Social Security Amendments of 1939 which also added the Survivors benefit. The Federal Old-Age and Survivors Insurance Trust Fund went into effect on Jan 1, 1940 and the Trustees made their first Report to Congress on Jan 3, 1941. I am going to quote some extensive passages here and below the squiggle, in part to show how little has changed since.
The Federal old-age and survivors insurance trust fund was created pursuant to section 201 of the Social Security Act Amendments of 1939, approved August 10, 1939. This trust fund became effective on January 1, 1940, and superseded the old-age reserve account established under the Social Security Act of 1935. The trust fund is held by a Board of Trustees composed of the Secretary of the Treasury, the Secretary of Labor, and the Chairman of the Social Security Board, all ex officio. The trust fund so held is available for the payment of old-age annuities and survivors insurance benefits and the necessary expenditures incurred by the Social Security Board and the Treasury Department in the administration of the program. The Secretary of the Treasury is designated as the Managing Trustee.

Resources made available to the trust fund included the securities held by the Secretary of the Treasury for the old-age reserve account, accounts standing to the credit of the old-age reserve account on the books of the Treasury as of January 1, 1940, and interest on the investments. The appropriation to the trust fund for the fiscal year ending June 30, 1941, and for each fiscal year thereafter, are required by section 201 of the Social Security Act, as amended, to be equivalent to 100 percent of the taxes (including interest, penalties, and additions to taxes) received under the Federal Insurance Contributions Act and covered into the Treasury. Interest on and proceeds from the sale or redemption of any securities held by the trust fund are required to be credited to the fund.
Some preliminary bullet points in Extended.

One. The Trust Fund was not some creation of the legislation that came out of the 1982-83 Greenspan Commission. Instead it has existed since the dawn of the program we know as Social Security today, which as we will see below was not the only Social Security retirement program set up by the Social Security Act of 1935, a key point to be developed.

Two. The Trustees were not and are not some independent body as such. From the beginning they were Presidential appointees and originally being two thirds represented by cabinet officers ex-officio. While the Trustees have done a very fine job over the decades fullfiling their duties to the Trust, their pronouncements are not inherently sheltered from the political programs of the President. Currently there are six Trustees: the Commissioner of Social Security, the Secretary of Treasury as Managing Trustee, the Secretary of Labor to whom were added the Secretary of Health and Human Services with the introduction of Medicare (which shares the same Board of Trustees) and the two so-called Public Trustees who by law have to be of separate parties but are selected solely by the President.

Three. The funds devoted to Social Security are not fungible, the credit to the Trust Fund of all contributions, interest and redemption are required by law and not subject to the annual appropriations process. But this will be qualified a little bit below.

The old-age and survivors insurance trust fund provides a financial margin of safety for the system against the first impacts of unforeseen changes in the upward trend of disbursements as well as against these short-term fluctuations and contingencies. At the end of June 1940 approximately 50 million persons already held social security account numbers and about 42 million workers had made contributions toward benefits under the system. In the future, millions of additional workers will come under the program as they obtain jobs in covered employments. Most of the rights now being accumulated toward benefits by these contributors and insured workers will not mature for many years. Consequently, benefits under the program are expected to increase markedly over a long period. This results from the fact that larger numbers of workers will be eligible and will qualify for benefits and from the expectation that the proportion of the population in ages 65 and over, estimated at 7 per-cent in 1940, may eventually rise to perhaps 14 to 16 percent. Hence the essential assurance of future financial soundness of the system, with its rising rate of disbursement, rests on a graduated increase in contribution rates or provision of income from other sources, or both.

Lots to unpack here.

One. The fundamental function of the Trust Fund is as a reserve, a 'margin of safety' to buffer fluctuations in income and the growth of the program, it is not an investment fund as such, the bulk of payments from the beginning were from continuing contributions (or premiums or taxes depending on your taste).

Two. The program was designed for growth both in total numbers, and this is crucially important in proportion to the population: "may eventually rise to perhaps 14-16 percent". This number projected in 1941 has shown to be spot-on, particularly since at this point in time the Disability program was not in existence. Currently Social Security covers 17% of the population, and once the DI recipients are subtracted out that beneficiary pool falls dead on into the middle of the projection. The notion that the actuaries simply missed the aging of the population that would go on in the decades to follow and that this has put some unimagined strain on the system is just a myth. Something highlighted by Krugman in this post (citing me by name-blush) from January Early Social Security Projections.

Three. There was never any expectation that rates would never rise, the myth that FDR promised rates would never go above 2% is just that-a myth, in the very first Report the Trustees tell us the solvency of the system in the future "rests on a graduated increase in contribution rates or provision of income from other sources, or both".

Throughout the first 3 fiscal years of the program, disbursements from the account consisted exclusively of lump-sum payments to the estates of deceased insured workers and to persons reaching age 65. These lump-sum payments increased from $27,000 in the first 6 months of operation (January 1 to June 30, 1937) to $13.9 million in the fiscal year 1939. Monthly benefits under the original set were not scheduled to begin until January 1, 1942.

The amounts in the account not needed to finance current withdrawals were invested by the Secretary of the Treasury as prescribed in the Social Security Act of 1935. The investments of the account were exclusively in special issues of Treasury notes bearing the 3-percent interest.

One. Monthly checks did not start right away, instead there was a planned period of six years to build up the account, a period ultimately shortened so that payments could start on Jan 1, 1940. The notion that the earliest beneficiaries didn't pay in at all and that everything got leveraged forward (and so launching accusations of 'Ponzi scheme' and 'intergenerational theft') are not quite right, early beneficiaries had at least some years of paying in and in fact had their subsequent checks very much squeezed until major changes were made with the Amendments of 1950. Moreover all those early beneficiaries were not only contributing to the Insurance program established under Title 2 of the 1935 Act, they were also paying taxes to fund the separate retirement program established under Title 1 (subject of a later post).

Two. Even before there was a Trust Fund all surplus dollars were invested in interest earning "special issues of Treasury notes", or if you prefer ultimately lent to the  General Fund in the case of surplus FICA contributions. This is not some under-handed innovation introduced by Reagan to fund his wars, the whole 'Social Security Raid' narrative is the biggest myth at all. Social Security and its Trust Funds once established in 1939 and 1956 (DI) have ALWAYS HAD THEIR EXCESS FUNDS BORROWED. And no I am not apologizing for shouting, people need to get this particular story-line right out of their heads once and for all.

Enough for now, I have Parts 2 & 3 preliminarily planned out, expect them soon.

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