The Trust Fund and the Baby Boom

Recently, I suggested a legislative deal in which repair of Social Security's finances would motivate Congress to enact economic stimulus. Surprisingly to me, given the fragile state of the economy, there was little reaction to the need for stimulus -- and part of what reaction there was, was skeptical. Most of the reaction was negative toward repairing Social Security.

The number of arguments raised would fill a book, and many will be worth discussing later. But one kept recurring: The Social Security trust fund was built up by the 1983 law to finance the retirement of the baby-boom generation. That trust fund can be redeemed to pay benefits through 2037.

There is a lot of misunderstanding of both Social Security's history and economics here. Let's review both.

Was the Social Security trust fund beefed up to pay for the retirement of the baby boom? Well, no. Here are the words of Robert J. Myers, who was the Executive Director of the National Commission on Social Security Reform (the "Greenspan Commission"):

This false premise is that in 1983, the financing provisions were developed to build up a mammoth fund to take care of the baby boomers. This is not so at all.

Rather, the major effort in 1983 was to solve the short-run problem by using pessimistic assumptions for the financing provisions. Then to solve the long-range problem, on the average -- and I emphasize on the average -- you might ask why didn't Congress and the National Commission do a more thorough job in 1983? Well, the situation was that the ship was about to hit the iceberg. At that time, you worried about dodging the iceberg not how to redecorate the dining salon, namely, long-range funding procedure.

I would challenge anybody to find anything in the Report of the National Commission on Social Security Reform that said the intention of developing the financing of the program was to build up a mammoth fund to take care of the baby boomers. Nor will you find any of this in any of the Congressional discussions, the debates, the Committee reports. All the fabric has been made up subsequently.

[Language inaccuracies are in the official transcript).

In terms of the ship-and-iceberg metaphor, the Social Security Amendments of 1983 were enacted on April 20, and the previous year's estimate was that Social Security could not write benefit checks in July. So given the uncertainties and delays inherent in the legislative process, it is no surprise that the Commission and the Congress were rushed.

So the Greenspan Commission did not intend to build up a large trust fund that could be used to finance the retirement of the baby boom, nor did it design its proposals to do that. Still, could they work to achieve that result? Well, again, the answer is no -- unfortunately.

As noted perhaps too briefly in my original post, the problem with the federal budget is that we need to borrow far too much money for the health and safety of our economy. Anything that increases the amount of money that we need to borrow makes that problem worse. This year, and again in 2016 and thereafter, Social Security will need to redeem its Treasury securities to pay benefits. The Treasury has no cash because of the massive budget deficit, and so to raise the cash for Social Security, it must borrow. This means more total borrowing, which threatens the economy. (This problem obviously would not apply if we had a surplus, or only a small deficit.)

Does Social Security have the legal right to that cash? Absolutely. But will it have adverse consequences for the economy? Sadly, that too. That is why, once they had the chance to digest the unexpected trust-fund implications of the 1983 law, economists quickly concluded that the trust fund accumulation could not be drawn down in large amounts to maintain the program after its revenues started falling short of the program's benefits - which they are doing right now.

For part of the time when I was working in the executive branch, the head of my office was a very bright non-economist who was charged for a time to work on Social Security. Like most normal people (that is, non-economists), he believed that Social Security could draw down its trust fund in any large amount. When I told him why economists had concluded to the contrary, he at first did not believe me. The next day, he came to me and told me that having thought more about it, I was clearly right. Not long thereafter, he had a private meeting with one of the lead members of the Greenspan Commission. I suggested to my boss that he ask the commissioner what he thought about this question now, and what the Commission had thought at the time. This member of the Greenspan Commission also had subsequently concluded that Social Security could not make an unlimited draw on the trust fund. As to what the Commission thought at the time? "You know, we never thought about it." (So it turns out that Robert J. Myers was right about that.)

There were many more questions and arguments. Can we exempt current and near-term retirees from any change and still make Social Security's financing sound? (Yes.) Can we protect low-wage workers? (Yes.) Can we raise the ceiling on the payroll tax to finance Social Security? (Yes, but it won't be enough.) Should we cut defense to reduce the deficit? (We will have to cut everything.) More on all of those questions later.

But can we, or should we, run the Social Security trust fund into the ground? Unfortunately, no.