(Update: two complaints that the link in the Main post didn't work due to permission problems. Well I think I have that fixed on Google Docs. If not THIS one should work
https://spreadsheets.google.com/pub?key=r49_nOHQG4QdHuwcbMGmP0Q same doc minus some column labels. If neither work I'll get back and if necessary put up an image file of the PDF)
No I have not gone over to the Dark Side. But this will take some patient explanation from me and maybe some assumption scrapping by you.
My starting point is a question: under current law what would a healthy Trust Fund look like under ideal circumstances? And the formal answer is that it would be in Actuarial Balance over the Short Term and Long Term, defined by the Trustees as 10 years and 75 years respectively. In fairly recent years a refinement has been added, pushed in large part by Steve Goss, the current Chief Actuary of Social Security (and so the chief numbers guy) called Sustainable Solvency which effectively extends Actuarial Balance to the indefinite future. In both definitions the key number is called Trust Fund Ratio and in coming to an understanding of TF Ratio we can also grasp a very odd and counter-intuitive result, that Trust Fund balances including the current $2.6 trillion were never intended to be redeemed, and that that result is a very good thing. "But, but, it is OUR money! We paid it in, we want it back!". Well yes you paid it in and for a very good reason, and in real terms will get the value of all that extra money coming back to you, but you won't get it back directly and once you understand why you won't even want it. Repayment of Trust Fund principal being a sign that Social Security was actually in crisis as opposed to the phony one it is stuck in today.
Resolution below the fold.
Social Security is set up in a way that has its cost in nominal dollars go up every year. This isn't a bad thing it is the simple product of three factors: demography, inflation, and real wages. The fact is that our population is projected to increase each year overall and this has nothing to do with Boomers as such, as I say God isn't making any more Boomers, they are already with us, and furthermore they are mostly aging out of their child bearing years, whatever you want to blame them for collectively FUTURE population growth isn't it. Secondly even a healthy economy will have SOME amount of inflation, though it is very much a Goldilocks thing, you don't want that particular pot of porridge to be too hot or two cold, and most macro economists would find a permanent warmish 2-3% rate just right. And thirdly as workers we want real wage to increase, because in general that increases standards of living across the board, that is workers should neither desire that the economic productivity stop growing nor that all such gains get retained by capital, instead we want a fair share for us and our children (and for many of us for other peoples children as well-the essence of Social Democracy).
Okay what does this nominal cost increase, in ideal cases totally benign, do for Actuarial Balance and Sustainable Solvency? And the answer is that it raises the bar. Because Actuarial Balance is defined on a next year basis, the Trust Funds are in balance any year in which they end the year with 100% of more or NEXT year's projected cost. Which means that Trust Fund principal has to grow sufficiently to compensate for the triple action of population growth, inflation and real wage as each project to interact with initial and continuing benefit levels at each future year of the respective projection period whether that be Short Term, Long Term or the indefinite period underlying Sustainable Solvency.
Which means that over the long run we neither expect nor should even want to pay down Trust Fund principal to a point that the Trust Fund ratio goes under 100, by official definition Social Security is broken at that point, which gets us to the paradox, while we can and should expect the current Trust Fund ratio of around 350 to be steadily reduced to a target range of just over 100, if this is done in such a way that achieves Long Term Actuarial Balance and Sustainable Solvency actual Trust Fund balances would never decline in nominal terms, or at least not so much that you would notice, which means in the end NEVER PAYING BACK THE TRUST FUND.
To see how this works using real numbers we could take the Northwest Plan for a Real Social Security Fix, designed by me and a couple of friends. I can talk about the Plan itself later, for now I just want people to focus on the results as shown in the last columns of the following spreadsheet (in Google Docs):2009 OASDI Trigger Column N shows Trust Fund Ratios in each year after applying whatever fix was needed in that year and the result is a Trust Fund that stabilizes at the 375 range for a couple of years and then slowly shrinks down to its ultimate long range target of 125-130. But the tell here is in Column M, final Trust Fund balance in then current dollars. And there we see the Trust Fund Balance topping out at $4.964 tr in 2026 and then stalling at that point but never dipping below the $4.826 tn of 2034. And year by year we see that the largest single year over year dip in that balance would be the $31 billion in 2030, an amount that is still under 1% of principal.
Net result we never pay back the principal at all, at least not in any meaningful way.
Does this mean the FICA increases in 1983 were not needed? Well no, it does explain why they were phased in with the final increase not coming until 1990 and retirement age changes still being phased in today, there is no point in unduly building up the Trust Fund just for the hell of it, but we needed to get the TF Ratio back from its low of around 14 or seven weeks of reserve to a point where it met the test of Short Term Actuarial Balance, a feat achieved in 1993 and maintained since even as we have yet to fix the system in a way that would also do that for Long Term Actuarial Balance and Sustainable Solvency.
There are many alternative paths to Sustainable Solvency, the Northwest Plan seeks to get there while delivering 100% of the current scheduled benefit while not changing the delicate finance balance that has protected Social Security up to now, i.e. the current cap formula. Others would get to Solvency simply by slashing benefits to meet projected income, others by boosting income by lifting the cap, but all such fixes in order to be effective and meet current tests for Actuarial Balance require retaining almost all or all of current TF principal along the way. That is under none of them do you ever get your deposit back. Instead your return comes in the form of a real benefit scheduled to almost double in real terms between now and the end of the 75 year actuarial period.
As an end note. The Northwest Plan actually is a win-win for everyone. Workers get 100% of the scheduled benefit at a cost of a fraction of real wage increases over that period, progressives get to target the retained wealth of the top 2% for purposes other than Social Security (it is not like we don't have a long list of priorities), and those wealthy people are not called to subsidize Social Security, instead they just need to finance the interest on the money borrowed mostly on their behalf. And due to an odd quirk in the mechanics they actually get a discount on the debt service itself. The only downside? The wealthy don't get to piss on FDRs grave in the process of dismantling the heart of the New Deal.
Which is what this has all been about anyway, it never was about solvency as such, that was and is easily attainable at minimal cost to anyone, it was all about hatred for Social Democracy in all its manifestations. Same as it ever was.