Last week, the authors of the Simpson-Bowles plan released an updated version of their plan.  The part pertaining to Social Security can be found in Appendix A on page 41.  The key phrase is : Unfortunately since the Fiscal Commission proposal was released, the 75 year shortfall actuarial shortfall has increased significantly" 

In football, we throw to where the receiver will be.  In DC, we throw to where the problem looks smallest and most remote.  This is why we measure Social Security by the 75 year solvency. 

The 75 year window is a bad measure of Social Security's security because it makes the problem appear smaller and far away.  How? The figure does not include the financing costs of the system.  It shows the payroll taxes we collect today as revenue, but does not include the cost of benefits associated with taking that revenue.  

Solving the problem for 2010 through 2085 is completely different from 2013 through 2088 because you are bring on the cost of future benefits. In five years, fixing Social Security will be defined by 2018 through 2093 and once again we will have a problem.  Soon enough we will be right back where we were in 2010. 

This is why Social Security has been 'solvent' three times in my life.

This statement by the Trustees is easily the most misunderstood in the entire Social Security debate. The media has misread what the Trustees have said, and then place their translation well out of context. Readers and bloggers subsequently surround that misconception with words like guarantee which do not even appear in the original text.

This statement is part of a much larger report which is a cautionary tome. The Trustees are providing this guidance to the public as a reasoned warning. “This year’s Trustees Report contains troubling, but not unexpected, projections about Social Security’s finances. It once again emphasizes that Congress needs to act to ensure the long-term solvency of this important program.” They are warning people who are as old as 63 that they can expect to be affected by the problem in the system.

In contrast, some pundits have taken the guidance out of the cautionary context, and replace it in an upbeat tale of success. Paul Krugman has reframed this warning as “It’s also worth noting that even if the trust fund is exhausted and no other financing provided, Social Security will be able to pay about three-quarters of scheduled benefits”. The guidance is transformed from a caution to a measure of success.

What does the Trustees statement really mean? Once the Trust Funds are exhausted, benefits cannot exceed the inflow of the system. Since inflows will vary from week to week and month to month, one has to assume that benefits will likewise vary. One week you may receive 80% of your scheduled benefits, and 70% a different week. In the statement, the Trustees project that Social Security will distribute to all recipients on average 75% of scheduled benefits over the course of a year.

This statement does not mean that an individual’s benefit check will be reduced by 25%. What the system can pay in aggregate is completely unrelated to what you can expect to receive as an individual. There is no law which allocates the reduction caused by insufficient payroll tax collections. According to IBD, public trustee Charles Blahous has said that low-income and elderly beneficiaries would have to be protected from cuts, meaning the possibility of a bigger impact on others . If so, your check might be 100% or 50% of your scheduled benefits.

2033 is not a hard date nor is 75% of scheduled benefits a hard number. These are projections which the Trustees have provided to demonstrate to Congress the seriousness of the problem. Both of these numbers are estimates based on assumptions which may or may not materialize. In fact, the Trustees have provides scenarios in which the Trust Fund is exhausted as early as 2027 . The exhaustion date has changed over the past few years as previous assumptions have proven overly optimistic. 2033 assumes a good economy. If the economy is less than good, Social Security will run out of resources sooner.

One of the assumptions that enable Social Security to meet 73% of its obligations in 2086 is that workers will continue to pay 10.6% of wages in payroll taxes for retirement benefits . This assumption is optimistic. Social Security isn’t just retirement insurance. It also provides parental support costs. Once the Trust Fund is exhausted, workers will be faced with a system that doesn’t provide the same level of insurance at a time when they are paying more to support their parents. So the Trustees are assuming that the working generation will pay the same price for a system which delivers less at a time when disposable income is going down. There is virtually no economic model that explains that assumption.

Workers today enjoy a holiday from payroll taxes. It started in 2011, and was continued in 2012. The problem with ending this holiday is that politicians have an exceedingly difficult time explaining to 160 million voters why their payroll taxes should return to the former levels. If you can’t explain increasing taxes today, imagine trying to explain maintaining payroll taxes to someone who is losing not only personal benefits, but paying incremental support for their parents because the system has failed.

In the net, the Trustees do not know when the system will lose the capacity to pay full benefits nor can it tell you how much you will receive once the Trust Fund is exhausted. You cannot plan when your benefits will be reduced or by how much. The guidance is a warning about the problem in the system, not a testament to its success.

This plan is what is wrong with Washington.  No one in Washington wants to fix Social Security; they just want to find a way to pay for it.  This plan is not reform.  It is reshuffling the same cards, doing what Washington does best: moving money from pocket to pocket.  What Washington doesn't understand is that this solution is how we got into the mess, not how we can get out.

Washington is not even looking at the right problem.  The solvency of the system is not the root problem.  It is a symptom caused by a more serious disease.  The real cause is the poor economic returns of Social Security which cause people to flee the system.  The Simpson-Bowles plan treats the symptoms with a cure that makes the disease worse.  

 The plan is virtually a complete replay of the past 70 years.  It cuts benefits of future generations.  It raises taxes on the high-income earners.  It increases the number of people who must participate.  And it makes the system more progressive by giving more money to Americans who may or may not be low-income.  It makes one recall Will Rogers who said, "Just because stupidity got us into this mess, doesn't mean that stupidty can get us out of it".

The majority of this plan is benefit cuts and more taxes.  This approach will lower the economic return of the system, thus encouraging more Americans to avoid the system.  Washington thinks the system is mandatory.  Wages are not mandatory.  People can choose to work less.  They can choose to take more benefits.  They can choose to take stock options instead of cash.  This isn’t evasion.  It is avoiding a system burdened with incompetence.

The tax increases in the plan are narrowly focused on a small number of Americans, high wage Americans.   As taxes increase, the cost of American workers goes up.  As that cost goes up, employers shift work overseas.   Fewer jobs and more avoidance is not the answer to the problems of Social Security.  These are the cause.

This plan will make the system even less appealing to younger workers, and the plan compensates by forcing more workers to join.  Washington just doesn't get it.  Until this system is a good investment, no one will participate willingly.  How many people call Social Security and ask to make a deposit?  No one does.  This is the problem - and this plan does exactly zero to improve the system.

This plan does nothing beyond juggling dollars between pockets.  It doesn't fix the investment policy of the Trust Fund.  We continue to ask more of workers and give less to retirees so that the Trust Fund can continue to be poorly invested.  In 2010, Social Security took your money and invested it in 2 7/8% bonds.  In all likelihood, you didn’t do that with your money.  Your congressman didn’t do that with his money.  Why should we continue to penalize American workers just so that the Trust Fund can be so poorly managed?

Instead of asking whether Social Security is effective at distributing welfare, this plan increases the progressive mandate of Social Security.  This plan increases the minimum benefit to 120% of poverty level for current voters.  So the logic of the plan is to take money from people who ARE in poverty and give it to people who are well above poverty.   Ironically enough, when we take money from younger workers in poverty, we increase the likelihood that these people will be in poverty at retirement.  So are we creating poverty or curing it.  Washington does not care about this question because it is beyond the next election. 

Mind you, there is no proof that we are curing poverty today.  The plan would increase the minimum benefit to people who were formerly low-income Americans.  Understand these people may continue to be low-income, but there is no guarantee of it because Social Security has no visibility who is and who is not low-income.  Social Security is a poor tool to distribute welfare because the system has no idea who is in need.  

The Simpson-Bowles plan asks Social Security to increase its mandates at a time when its solvency is in question.  It expands what Social Security does not do well.  So how does this fix the system?