Social Security: OASI and DI

A brief response to a comment from yesterday’s post. When CBO projects the point at which the Social Security trust fund will be “exhausted” that means there are no more securities to redeem to pay benefits that are now greater than payroll taxes flowing into Social Security, and under current law when this occurs benefits must equal taxes flowing in. Thus,  if we do absolutely nothing, there will be an ~ 25% benefit cut in about 20 years (shown as 2033 in table below, 3rd column OASDI, last row). As an aside, while this would be a big cut, it also means that people saying “Social Security won’t be there at all when you retire” don’t understand the program’s finances. I don’t suggest doing nothing and allowing such a cut, but ~75% of benefits is a lot greater than 0% of benefits, obviously.

However, something must be done to Social Security (2012 Trustees report from which above table taken) within the next few years, because the trust fund that back stops the Disability Insurance portion of the program will be exhausted in 2016 (DI column above, last row). Again, this doesn’t mean there will be nothing, but there will occur an automatic benefit cut within the next few years sans action. When CBO provides a date of 2033 for OASDI trust fund exhaustion, they are assuming that Congress and the President will pass a law that will allow the co-mingling of the OASI (old age, survivor) with the DI (disability) trust funds, thus allowing Disability benefits to not be cut around 2016. It has long been assumed they would act in this way, but it is my understanding that it will take legislative action for this to occur.

Comments

  1. Ron E. says

    “However, something must be done”

    The key thing is that “something” doesn’t have to be benefit cuts. We could have a small increase in the payroll tax. We could do various things to increase economic growth which would end up increasing payroll tax collections. We could let in more young documented immigrants and/or grant amnesty to more undocumented ones which would result in a higher ratio of payroll payers to benefits receivers. Or we could simply fund the gap from other sources or even with deficits. There’s no metaphysical requirement that we only finance retirement benefits with FICA taxes just because we’ve always done it that way.

    • Don Taylor says

      Of course. However, I think key to any SS reform is putting the OASDI cap back to the 90th percentile, invoking the Gipper/O’Neill, etc politically as that was the essence of the 1983 deal. However, it needs to be indexed to 90th percentile going forward, because the gap between current level and 90th due to wages at top growing much faster than at the median and that seems unlikely to stop.

  2. npm says

    Your understanding is correct:
    “In 1994, legislation redirected revenues from the OASI trust fund to prevent the imminent exhaustion of the DI trust
    fund. In part because of that experience, it is a common analytical convention to consider the DI and OASI trust funds as combined. Thus, CBO projects, if some future legislation shifted resources from the OASI trust fund to the DI trust fund, the
    combined OASDI trust funds would be exhausted in 2034.” (http://www.cbo.gov/sites/default/files/cbofiles/attachments/43648-SocialSecurity.pdf)

  3. Herschel says

    I think any discussion of this subject ought to include a reminder that building up a huge surplus in the trust funds, and then drawing them down as the boomers grow old, is a feature, not a bug, in the 1983 SS reform. This is how it was designed to work.

    I think it’s also important to point out once in a while that our society as a whole has become vastly wealthier since 1935 and even vastly wealthier than it was in 1983. Our retirements should come earlier and our retirement benefits should be more generous; the attempt to convince us that we must accept later retirement ages with less generous benefits is, once again, class warfare being waged by the über-rich against the rest of us.

    • Kenji says

      Herschel, this is a fact-based website, and therefore we have to deal with fiscal reality, which is dictated by the current OASI and DI benefit and tax structure, and demographics. Oh, and by the inconvenient truth that the “trust fund’ for both those programs is an accounting fiction. Last year (2012) Social Security ran a $40 billion + deficit, and this deficit was financed by more federal government borrowing. The trust fund is nothing but IOUs, so when the SS programs pay more in benefits than they receive in payroll taxes, as is now the case, the only way the federal government redeems the trust funds’ bonds is to sell Treasury bonds and pass the money along to the SS Administration. This exchanges (on the federal government’s books) trust fund IOUs for actual Treasury bonds that have real interest bills that have to paid, be it to pension funds, bond funds, individual investors, China, or whomever, adding to the now-famous $16 trillion federal debt. That’s reality, and the OASI and DI income vs outgo deficits and their impact on the overall federal budget deficit are going to get worse due to demographics, with huge numbers of baby boomers entering retirement, unless something changes with benefits, taxes, or both. Because OASI / DI is a paygo system, maintaining benefits at current levels in the face of a decreasing ratio of contributors to benefit collectors requires increasing taxes on active workers to onerous levels.

      • Herschel says

        The Social Security trust funds are an accounting fiction only to the extent that my checking account is an accounting fiction. I take a stack of money to the bank and deposit it; the bank takes the money and lends it to someone else, with the understanding that they will give me some other stack of money when I ask for it. Social Security collects great piles of money, and buys bonds from the U.S. treasury with it; the treasury spends the money on what it needs to spend money on, with the understanding that Social Security can redeem the bonds with interest when they mature. As the whole world has been demonstrating for the last few years, U.S. Treasury bonds are the safest investment on earth, quite possibly the safest investment in history. Calling the trust funds’ bonds IOUs is kind of silly, since ALL bonds are, in essence, IOUs.

        Last year, Social Security ran a deficit only if you don’t count interest income, which more (quite a lot more) than covered the shortfall in payroll tax receipts. The Treasury bonds held by the Social Security trust funds are just as real as bonds held by the public; they are a commitment to repay with interest. As the economist Dean Baker puts it, “The trust fund is held in the form of U.S. government bonds, which are indeed sheets of paper. However, investors everywhere eagerly seek out these ‘sheets of paper’ as the safest asset in the world.”

      • Herschel says

        A couple of other things:

        Please bear in mind that if the Treasury hadn’t borrowed money from Social Security, it would have had to borrow the same amount by selling bonds to the public. Whatever strain repaying the debt to Social Security entails, it has nothing to do with Social Security and everything to do with government spending from the general fund. And since the debt held by the public is vastly greater than the debt held by Social Security, why is it that somehow the money owed to the trust funds is the big problem?

        On your point about demographics, you might want to read this article, also by Dean Baker, which seems to indicate that your “facts” might need re-examining:

        http://www.cepr.net/index.php/blogs/beat-the-press/the-demographic-crisis-aint-what-its-cracked-up-to-be-thomas-edsall-edition

  4. bobbyp says

    Don,

    My outburst was fueled by this comment on the link provided: “There is not likely to be much deficit reduction gotten from Social Security over the long run, nor should there be.” The statement contains the implicit normative claim that, somehow, Social Security will or can, in some sense contribute (admittedly a “little”) to some imagined long term fiscal deficit that is further assumed to be a “problem”. Under current law, this cannot happen although, under the high cost or intermediate cost assumptions used as the basis of the report there will be significant cuts in benefits at some time in the future. Overall, it is important to consider the following:
    1. What are the assumptions of the intermediate cost scenario and how realistic are those assumptions? Compare to the low cost scenario.
    2. What is a “sustainable” budget? Why is it “necessary”?
    3. Why is Social Security and its relatively minor actuarial “problems” even brought up to begin with?
    4. As Dean Baker points out tirelessly, if our health care spending as a percentage of GNP was approximately the same as most other industrialized countries, we would have budget surpluses as far as the eye can see. With that we have a totally different problem…the need to either reduce taxes or increase spending, and what good liberal does not have a long list of desired spending programs? I sure do.

    I continue to submit that your belief in the need for ‘sustainable budgets’ is either ill defined or not supported by economics, and that the entire trope is a political miscalculation of monstrous proportions, but as always…….

    Best Regards,

    • Don Taylor says

      These are fair points, and of course I could be wrong! The biggest uncertainty in all this is economic growth. More makes all these issues easier. Health care is by far the biggest issue, however, my worry on SS is that if we don’t undertake some reform while we have relatively more power, then something may happen later that is worse. I realize anything on the benefit side is avoiding a potentially large benefit cut later with a guaranteed (and sustained) smaller one sooner. Further, technically SS is a much simpler program to reform, meaning if there were a political deal it will go mostly as planned whereas any health reform is highly speculative and uncertain (and hard as hell). For me if we (1) raise OASDI cap back to 90%ile (2) inc minimum benefit and perhaps move toward some type of older age protection, then I would go for chained CPI/other generalized benefit cut. I also think there is some intangible value to actually doing something.

  5. Igloo says

    Don, raising the payroll tax to cover more of the upper middle classes’s income is bad economics. First, the labor income of the upper middle class is already very heavily taxed. Someone self employed in California with a 120-150k income range you are seeming to advocate a marginal rate of over 60%.

    This is bad economics, and morally unjust so long as the rate on capital gains and “carried interest” is 20%.

    A much more progressive measure, and also more economically efficient and just, would be to subject dividend and capital gains to the OASDI taxes.