Misunderstandings surrounding Social Security are on a scale comparable to its size and impact on our national life. Millions of Americans believe that they only recover in benefits what they paid in taxes; that their taxes are “invested” in a “trust fund” accumulating assets to pay “insurance”; that benefits are “bought and paid for,” an “earned right” which is “guaranteed.” This misunderstanding, “the most serious threat to Social Security in the immediate future,” prompted A. Haeworth Robertson, Chief Actuary of Social Security from 1975 to 1978, to produce an excellent handbook for taxpayers.
In clear, readable text, assisted with numerous helpful charts and tables, Robertson first describes the basics of Social Security: the benefit system, costs, the payroll tax system, and the two basic methods for financing Social Security: current-cost financing (“pay-as-you-go”), whereby current taxes pay current benefits; and advance payment, whereby current taxes accumulate a large trust fund to pay future benefits. The next 17 chapters address selected topics, e.g., actuarial assumptions, inflation and cost of living adjustments, how Social Security determines behavior, and Medicare.
Robertson masterfully describes two key measures of Social Security’s financial condition, “actuarial deficits” and “accrued liabilities,” often confused in the public mind. “Actuarial deficits” are the excess of projected future costs over projected future income. Social Security’s total actuarial deficit, including Medicare, is an eye-popping $13.2 trillion over the next 75 years. “Only the foolhardy would continue to ignore the longer range financial problems projected for the Social Security program . . . . It is a question of whether we are making promises we will not be able to keep.”
“Accrued liabilities” are the present value of future benefits which have accrued as of a certain date. As of January 1, 1990, Social Security’s unfunded accrued liabilities were $12 trillion. That is, “we have made promises worth $12 trillion more than we have collected in taxes [to honor them].”
The situation is even bleaker than Robertson reports. The 1990 annual report of Social Security’s Board of Trustees, which he consulted, predicted exhaustion of Social Security’s trust funds in 2043 (2023 under pessimistic assumptions); 1993′s report projects exhaustion sooner: in 2036 (pessimistically, in 2017). Medicare’s 1993 report projects trust fund exhaustion in 1999 (pessimistically, in 1998).
Social Security’s looming financial crisis is rooted in demographics. As the huge baby-boom generation retires, Social Security’s costs will soar, but our falling fertility rate means fewer and fewer taxpaying workers will support each beneficiary. Thus the enormous actuarial deficits. “Unfortunately these long-term projections and their significance do not appear to be widely known and understood by the public or the Congress or the Administration.”
Social Security is widely misunderstood partly because its low initial cost fostered complacency. Also, being poorly informed about the program, the media misleads the public. And government use of insurance terminology (“trust fund,” “contribution,” etc.) creates a false impression of Social Security’s nature. Hence, government and public alike take an unacceptable “head in the sand” approach.
For example, the Supplementary Medical Insurance program myopically estimates costs only three years ahead. And in a valuable discussion of the actuarial assumptions about our future fertility rate, productivity, and death rate which the Social Security Administration uses to project Social Security’ s future status, Robertson cogently argues that the SSA’s assumptions are too optimistic, and that pessimistic projections should be used, to avoid unforeseen negative developments.
Discussing Medicare, Robertson acknowledges that the “third party payer” principle contributed heavily to our soaring health care costs by destroying incentives for cost control, and cautions against national health insurance: “it is questionable whether there is anything inherent in a nationally designed and managed system that would not also work in a decentralized, free- enterprise system . . . . If individual freedom of choice is relinquished to attain a uniform social insurance structure, it may soon be relinquished in other areas of life as well.”
Social Security’s march to the abyss prompts the thought that dismantling it would be the wisest policy. Unfortunately (if understandably), Robertson asserts that abolishing Social Security is “out of the question,” that social insurance is “absolutely necessary” in modern society. He does call for change, which might entail a separate scheme for young people.
Also, Robertson inadvertently illustrates the philosophical muddle of America’s welfare state. He argues that Social Security will give us our money’s worth if designed on the principles of maximum individual freedom of choice consistent with the national interest, maximum individual opportunity and incentive, and government provision of only those benefits an individual cannot provide for himself. Yet he also contends that “Social Security is a program of social insurance. It emphasizes social adequacy. It pays benefits according to presumed need,” and that in such a program “no attempt is made” to relate a given group’s benefits to the taxes it paid to qualify for them. That this is an admission that America’s largest welfare program applies the evil Marxist principle “From each according to his ability, to each according to his need,” escapes his notice.
Nevertheless, Social Security’s merits outweigh these flaws. Its thoroughness, accessibility, and comprehensiveness make it indispensable for everyone concerned about Social Security, including opponents.
Best of all, Robertson is unflinchingly honest. He repeatedly warns taxpayers that they face substantially higher taxes unless Social Security is radically altered; that the notion of entitlement is dangerous; that misunderstandings about Social Security are abetting an “alarming” decline in a sense of responsibility for oneself; that future costs will probably exceed the SSA’s “most likely” projections; that general revenue financing would encourage disregard for the future; and that “It is clearly inappropriate . . . to rely upon some undefined good fortune to enable us to continue our present Social Security program without paying substantially higher costs.” He emerges as a believer in Social Security haunted by a vivid awareness of its costs and perils, and blessed with an honest man’s determination not to disserve his reader by minimizing them. After so much calculated deceit in federal budget policy in recent years, Robertson’s courage and candor are just what the doctor ordered,
John Attarian is a freelance writer in Ann Arbor, Michigan, with a Ph.D in economics, and an adjunct scholar with the Midland, Michigan-based Mackinac Center for Public Policy.