Social Security: A Thimblerig Game

 After the Great Depression, many elderly constituents had lost their retirement funds and lived (or prematurely died) in poverty. To ensure this would never happen again, Congress passed the 1935 Social Security Act as part of Franklin D. Roosevelt's New Deal.

After successfully running a complex maze of legal obstacles, social security payroll deductions began in 1937 and the money was (figuratively) placed under a cup on the Thimblerig table. The first social security payments to workers began in 1940. Payments were paid from a trust fund accumulated from payments made by workers created to make social security self-supporting. By 1939  the pea under the "money" cup was worth $2B and Congress began to shuffle them. The trustee of the fund, the Secretary of the Treasury, was authorized to invest the assets of the fund in securities for the benefit of the workers who had paid into the trust.

Fast forward to 1968. Under the Johnson administration, the federal budget was consolidated as a "unified budget" that portrayed the government's deficit as a single number lumping social security trust reserves with all other government assets. The federal deficit thus appeared smaller than it otherwise would. This mathematical sleight of hand reduced the negative political consequences of increasing the deficit, let first-grade arithmetic be damned.

In isolation, short-term surpluses in the social security trust encouraged Congress to gain political favor with their constituents by making generous increases in social security benefits. But in the late 1970s (as I taught in my economics classes at UCSD) the long-term prospects for a self-supporting social security trust fund were darkening: projections showed a persistent decline in the trust assets that would run out in a very few decades.

Fast forward again to 2017. Today the social security trust fund of about 2.8 trillion dollars is invested in non-marketable securities (loans to the U.S. government) paying a modest interest rate just under 4%. But the loans to the government are spent as if they were freely available to the general budget. To keep the trust fund solvent IOUs were deposited in the trust fund in place of real assets. In other words, our social security trust fund is largely made up of promises that can be broken by changing federal laws. The pea is no longer under the cup; it is in the hands of Congress which may or may not produce the pea when the cup is lifted to pay retirement benefits. Incidentally, Medicare has a similarly convoluted history that has its own dark projections of solvency. 

So how important is this Thimblerig game in the big picture? Here's the bottom line: mandatory spending including social security benefits plus defense spending exceeds our tax revenues. If we were to eliminate all other discretionary items such as education, homeland security, energy, housing programs, etc. we could not balance the budget; we would still run a federal deficit.

I focused on social security here because it is 1/4 of our entire government spending. Add health care and you get half our entire spending. Look at the pie chart below: the green cannot be reduced without a change in the existing laws; the yellow is more than half military spending which is most likely to be increased under the current and future administrations. That leaves precious little room to cut spending and negative room to balance the budget. Indeed, the present focus on cutting programs like food stamps indicates how dire the problem is; food stamps would be a tiny sliver of yellow on the pie chart. You likely would need a magnifying glass to see it. The currently proposed budget (admittedly in its draft stages) could avoid a catastrophe only if tax revenues grow at unprecedented rates -- an unlikely prospect given the nature of the proposed tax cuts and historically sluggish (even nonexistent) reaction to tax incentives.

An objective as stated by the present majority of the present Congress -- balancing the budget in 10 years -- can only be met either by relaxing the existing laws governing the integrity of the existing social security and health care trust funds or by deftly playing new and dangerous versions of the Thimblerig game. If future events such as military spending or unforeseen catastrophes require unplanned increases in spending, or if there is political pressure to avoid raising taxes or even reduce taxes, we could lose the Thimblerig game.

If your future health care and retirement funds are under the cups; watch carefully how the cups are shuffled.