Statement of Nancy Altman to the U.S. Senate Committee On Finance

 

In 1982, I had the honor to serve as the top assistant to Alan Greenspan in his capacity as the Chairman of the so-called Greenspan commission, whose recommendations formed the basis for the Social Security Amendments of 1983. Prior to that, I had the privilege to serve as a legislative assistant to Senator John C. Danforth (R-MO.).

 

Those arguing for the inclusion of Social Security in comprehensive deficit legislation often seek to justify their position by asserting that “everything” should be “on the table.”   But that facile phrase fails to recognize that Social Security is a pension plan.   For sound reasons, the law requires that private employers who sponsor pension plans keep plan income and assets segregated from the company’s general operating fund. For the same sound policy reasons, the law requires that Social Security’s income and assets be kept segregated from the general operating fund of its plan sponsor, the federal government.    

 

Both private pensions and Social Security are required to keep plan assets in pension trusts overseen by plan trustees.   Like any prudent plan sponsor, the federal government carefully accounts for those plan assets.  Several dozen civil servants at the Department of Treasury and the Social Security Administration keep precise and meticulous track of the income and assets of Social Security.   Every year, the trustees of the Social Security trust funds are required by law to report to Congress on the program’s current and projected operations. In addition to those measures, Congress has required that Social Security’s income and outgo not be part of the federal budget. The law unambiguously states that Social Security “shall not be counted…for purposes of - (1) the budget of the United States Government as submitted by the President, [or] (2) the congressional budget….”[2] 

 

Social Security’s primary revenue has always been pension contributions of employers and employees. Today, those contributions are sometimes referred to as payroll taxes, but they are, more accurately, pension insurance contributions. This is precisely why the statute mandating these payments is entitled the Federal Insurance Contributions Act (FICA). 

 

That title is no political spin. Congress enacted the Federal Insurance Contributions Act in 1939, well before the current fashion of Madison Avenue-styled legislative titles like the “Economic Growth and Tax Relief Act” or “Repealing the Job-Killing Health Care Law Act.” In stark contrast, Franklin Roosevelt named his bills plainly and straightforwardly. His tax bills were labeled “Revenue Act”, his legislation to protect the right of workers to unionize, the “National Labor Relations Act”, and his “Federal Insurance Contributions Act” specifies the contributions workers must make in exchange for pension annuities, life insurance, and since 1956, disability insurance. From the beginning, contributions not needed for current benefits and related administrative costs have been invested and kept in trust as a reserve for the exclusive purposes of paying benefits and associated administrative costs.

 

The injection of Social Security into the broader deficit debate obscures the fact that by law Social Security lacks the authority to add to the federal deficit.[3] By law, it can only pay benefits, if it has sufficient revenue to cover the costs. Its budget must be balanced, but Social Security cannot accrue the revenue needed to balance its budget through borrowing, because it has no borrowing authority. Social Security lacks the legal authority to deficit-spend, and so, cannot run a deficit. Because it cannot run a deficit, it cannot add to the federal deficit [4]  

 

As the members of this Committee know, the federal government will reach the limit on federal debt, or debt limit, in a matter of months. In that regard, it is crucial to understand that cutting Social Security does not reduce the United States’ debt subject to that limit.   This sharply differs from cuts to agricultural subsidies, defense, or other expenditures from the government’s general fund.

 

If a program paid for from general-fund revenue were cut by $100 billion and nothing else changed, the federal government’s borrowing needs would go down by $100 billion. As a consequence, the federal debt subject to the debt limit would also go down (or more realistically, given the current large deficits, would go up less than it would have, without the cut). If the savings from that hypothetical cut were offset dollar-for-dollar by a cut in income taxes or an increase in other expenditures funded from general revenues, the federal debt subject to limit would be unchanged. 

 

In stark contrast, if Social Security benefits were cut by $100 billion, the federal debt subject to limit or total debt would remain unchanged. If the $100 billion savings from cutting Social Security benefits were offset dollar-for-dollar by a cut in income taxes or an increase in general-revenue spending, the total federal debt would increase!  

 

For those who are used to thinking about Social Security as just another spending program and about Social Security contributions as just another tax, the relationship between Social Security and the federal debt may be counterintuitive. To grasp that relationship, it is important to see that Social Security is a defined benefit pension plan with its own separate income, outgo, and reserve fund.   

 

The following thought experiment may help. Imagine a private pension plan whose assets are invested solely in Treasury obligations. Imagine further that the plan sponsor, Company XYZ, cuts the benefits the plan provides, but does not decrease the plan’s funding in any way. In that case, the plan would have more income in relation to its expenses than it had before plan benefits were cut. The plan accordingly would use that additional income to purchase additional Treasury obligations (or to pay plan costs, if that were necessary). The plan’s increased income would have no effect on the federal deficit or debt. The federal government would have exactly the same general-fund income and outgo, and so, the same borrowing needs, irrespective of the cuts to the pension plan benefits. Consequently, the Department of Treasury would issue debt instruments totaling the exact same value, irrespective of the actions of the pension plan.

 

In the exact same way, if Social Security’s plan sponsor, the federal government, cuts the benefits Social Security provides but does not decrease the level of contributions employers and employees are required to make under FICA, Social Security’s income would increase in relation to its expenses, and Social Security, accordingly, would purchase additional Treasury obligations. Social Security’s additional income and its purchase of additional Treasury bonds would have no effect on the federal deficit or debt. The federal government would have exactly the same general-fund income and outgo, and so, the same borrowing needs, irrespective of the cuts to Social Security. Consequently, the Department of Treasury would issue debt instruments totaling the exact same value, irrespective of the changes to Social Security.

 

Cutting Social Security’s benefits, like cutting the benefits of a private pension plan, does not reduce by even a penny the federal deficit or the total value of debt instruments issued by Treasury.   The only way to reduce the amount of federal debt Treasury issues is to reduce the expenditures of the government’s general operating fund or increase its income.

 

Some policymakers are proposing a so-called universal cap as a mechanism to control federal spending. It is important to understand that unlike the general fund, Social Security already has an automatic spending cap. If Social Security were ever to lack sufficient revenue to cover the cost of scheduled benefits, the law provides that those benefits be reduced automatically. 

 

In order to allow Congress ample time to avoid Social Security’s automatic trigger, the law requires that Social Security’s Board of Trustees report annually regarding the program’s financial operations, projected over a 75 year valuation period. According to the most recent Trustees Report, issued last August, Social Security is projected to have a surplus in 2011 of $113 billion, and to be able to meet all scheduled obligations, even with no Congressional action whatsoever, for the next quarter of a century. If no action were taken by then, Social Security’s cap on spending would automatically cut its expenditures across-the-board so that beneficiaries would receive, according to the actuaries’ projections, only 78 percent of their scheduled benefits at that point.

 

 

Notwithstanding the fact that Social Security does not and cannot contribute to the deficit, the proposal put forward by the co-chairs of the president’s National Commission on Fiscal Responsibility and Reform included changes to Social Security, though the report explains that Social Security was included “for its own sake, and not for deficit reduction.” The president and others have similarly discussed a so-called “parallel” track for Social Security.  This approach is ill-advised.

 

Including Social Security in a comprehensive deficit package, irrespective of the rationale, is highly likely to create deep suspicion, and perhaps even anger, among the American people.  The suspicion and anger that would ensue from including Social Security in deficit reduction legislation – no matter the rationale for its inclusion -- is foreseeable and understandable. 

 

By law, Social Security’s income can only be used for benefits and associated administrative costs. That requirement is not just the operation of law; it represents the solemn, long-standing, fiduciary responsibility of the government, as the plan sponsor.

Historically, Congress has been extremely diligent and careful in executing its fiduciary responsibility with respect to Social Security’s income and assets. From the program’s origin, Congress has required Social Security’s trustees to invest all surpluses in the safest, most conservative investment possible -- interest-bearing debt instruments backed by the full faith and credit of the United States. Congress has also required those trustees to report annually, no matter the circumstances, even during World War II and other times of war, on those contributions and those surpluses which are in reserve, available whenever the monies are needed to pay scheduled benefits.    Currently Social Security has an accumulated reserve of $2.6 trillion.  

 

Diverting Social Security’s dedicated income and assets from their intended purpose is legally and morally wrong. Not surprisingly, numerous polls indicate that the American people do not want their Social Security contributions diverted to debt reduction or governmental purposes other than Social Security. Yet, polling and focus group data from a number of sources, including our own, reveal that many Americans believe that the government has already stolen their contributions or fear that it will. Too many Americans are convinced that their Social Security contributions have been stolen. Too many others are uncertain or worried that Congress will steal Social Security’s income and assets to use for other unauthorized purposes.

 

The reason for this widely-held anxiety is easy to understand. The American people are constantly bombarded with irresponsible rhetoric about Social Security. For example, some policymakers casually refer to the interest-bearing United States Treasury bonds purchased by Social Security as “just IOUs.”   These policymakers fail to acknowledge that the expression could be used for all Treasury obligations backed “just” by the full faith and credit of the United States.   Similarly, some elected officials have warned ominously that Social Security’s reserves have already been spent, again not acknowledging that whenever a corporation or governmental entity issues bonds, it does so to raise needed funds, which it plans to spend; investors understand and expect that the funds will be spent and repaid out of future revenue. Even more reprehensibly, some policymakers have argued for cutting Social Security by quoting Willie Sutton, a notorious bank robber, who, when asked why he robbed banks, replied, “because that’s where the money is." The quip presents an unintended but revealing picture – bank robbers and politicians, all eager to grab the money that hardworking Americans trustingly hand over every payday to what they believe is a safe institution.

 

All of this casual, irresponsible rhetoric is a serious disservice to the American people and explains why so many Americans believe that their contributions have been stolen. Past policymakers have understood their fiduciary responsibility for the funds which are held in trust for the trusts’ beneficial owners, American workers and their families.  With the notable and disastrous exception of 1981,[5] a time that should serve as a cautionary tale to all politicians, policymakers have understood that, to avoid even the appearance of impropriety, deliberations over Social Security’s future solvency should be kept completely separate from broad deficit-reduction efforts.  

 

To include Social Security in deficit legislation, even with the explanation that the inclusion has nothing to do with deficit reduction, risks reinforcing the widespread belief that Congress is improperly commingling Social Security’s dedicated monies with the government’s general operating fund. 

 

The foreseeable suspicion and anger on the part of the American people can easily be avoided by addressing Social Security in legislation devoted to it alone, at a time after the current deficit debate is concluded, so that Social Security deliberations are totally divorced from general budget discussions. This approach will avoid the appearance of wrong-doing. As discussed below, it is likely to produce better policy outcomes, as well.

In addition to the advantage of avoiding even the appearance of wrong-doing, prudence suggests waiting until after the deficit deliberations are concluded to take up the issue of Social Security.  As part of the current deficit deliberations, this Committee has jurisdiction over, and so responsibility for, important programs funded by general revenue, as well as over income taxation and other forms of general revenue. 

 

Social Security is too complicated and too important to the American people to be addressed as part of other complicated legislation, when full attention will necessarily be diverted, and when there is no compelling or urgent reason to do so.   There is no need for haste in addressing Social Security. The latest Trustees’ Report projects that Social Security can pay all benefits on time and in full until 2037, without any Congressional action whatsoever. While Social Security’s projected deficit should be eliminated in a timely manner, waiting until after the current debate over deficits and the debt ceiling is both timely and prudent, given the program’s complexity and importance.

 

Social Security, which has been carefully crafted over its 75 year history, provides vital economic security to virtually every American -- not only to the more than 54 million beneficiaries who receive monthly benefits but also to the more than 165 million workers who contribute and who, together with their families, are insured against the loss of wages in the event of disability, death, or old age. Current beneficiaries include millions of widows, widowers, seniors, .children who have lost parents, and people with disabilities, as well as their children and spouses.

 

Our brave soldiers wounded in Iraq and Afghanistan receive Social Security benefits, as do their spouses and children. So do the families of soldiers who have given their lives in defense of the nation. Though little noted, Social Security continues to provide benefits to the families of those who lost their lives in the 9/11 attacks. Social Security’s benefits are crucial to the vast majority of its beneficiaries and the communities in which they live and spend.

 

 

 

 

 

 

Historically, policymakers deemed Social Security solvent if its income and outgo were in actuarial balance or even close actuarial balance for a prescribed valuation period. Social Security’s actuaries have used valuation periods as short as 35 years, and as long as 80 years, but since 1965, the valuation period has been 75 years.

 

Recently, some have advocated even tougher tests of solvency. Some argue that, in addition to projecting balance for three-quarters of a century, Social Security must be found to be sustainable in the 75^th year or, even more extreme, that Social Security be solvent over an infinite time horizon. 

 

Others appear to reject the entire concept of actuarial balance and instead want to require that the annual cash flow from Social Security’s income from outside the federal government equal or exceed its expenditures. The effect of this goal would be to ignore Social Security’s investment income and reserves -- in essence, to have the government effectively default on legal instruments backed by the full faith and credit of the United States.   This approach represents the precise sort of diversion of worker contributions which Congress should take great pains to avoid and indeed to vociferously discredit.

 

To provide perspective on what the appropriate goal should be, it is important to recognize that three quarters of a century is a longer valuation period than that used by private pensions and, indeed, by most other nations with respect to their Social Security programs. Moving the goal posts even further away – requiring an infinite time horizon or even sustainability in the 75^th year – simply makes the job of policymakers harder, without commensurate gain in security, because the farther out one projects, the less trustworthy those projections become. Even more pernicious is the so-called cash flow argument. Social Security has always had a reserve to smooth out differences between contributions and benefits. Between 1958 and 1983, for example, Social Security drew on its investment income or drew down principal in fourteen different years to cover the cost of benefit payouts. It is the effort to negate the existence of these reserves and the accompanying claims that Social Security is in deficit -- when it actually is in surplus when all of its income is appropriately counted -- that has understandably caused Americans to be suspicious and angry toward politicians whom they suspect of stealing their Social Security contributions.  

 

Before policymakers begin to focus on solutions, they should be in clear agreement on how they wish to define solvency   In particular, unless the cash-flow argument is clearly and vociferously put to rest, Congress will be unable to convince the American people that Social Security is solvent, even if legislation is enacted which the actuaries project restores Social Security to long-run actuarial balance.

 

Most fundamentally, it is important to remember that solvency is not the ultimate goal.   The goal is the provision of some measure of economic security to the American people. Deciding how to finance that goal is crucial, but simply the means to that end. 

 

 

Social Security’s scheduled benefits are completely affordable. The gap between Social Security’s projected benefits over the next 75 years and its projected income is just 0.7 percent of GDP. At its most expensive, once the baby-boom generation is fully retired, Social Security is projected to cost just 6.1 percent of GDP, considerably less than the current percent of GDP that a number of industrialized countries are spending today on their counterpart old-age programs. The issue of how to eliminate Social Security’s projected deficit is a political question, not one of economics.

 

There is much polarization in the country today, but Social Security is a program about which the American people are united. Poll after poll indicates that the American people by overwhelming percentages support Social Security and do not want it to be part of deficit discussions. They overwhelmingly believe that Social Security’s benefits, if anything, are too low, and want its projected deficit closed by increasing its revenue, ideally progressively. They do not want benefits cut, and they do not want the retirement age increased – an approach which is mathematically indistinguishable from an across-the board cut in benefits for retirees, even with respect to workers who work until age 70 or beyond.[6]

 

According to polling we have conducted, as well as polls of other organizations, these are the views held by Democrats, Independents, Republicans, union households, tea partiers, the young, the old, and every other age and demographic.

 

Some policymakers seem to believe that Social Security spending is out of control, but as discussed above, it is subject to its own spending cap. It would be paradoxical to cut Social Security deeply now to avoid less deep cuts in the future, as the co-chairs of the president’s commission and others have proposed. 

 

What most Americans support -- eliminating Social Security’s manageable shortfall solely through increased revenue -- is the best policy solution, as well. Social Security’s benefits are modest by virtually any standard, yet vitally important to the vast majority of American workers and their families. Moreover, Social Security’s administrative costs comprise less than one penny out of every dollar spent, a much higher efficiency than that experienced by private sector retirement plans.    In addition, with the termination and freezing of traditional pension plans and the documented serious shortcomings of 401(k) plans, Social Security is likely to be an increasingly important source of retirement income for the vast majority of Americans in the future.

 

Some on this Committee knew the late Robert M. Ball who, at the time of his death in 2008, was the world’s foremost expert on the U.S. Social Security system.   He devoted seven decades of his life to the protection and improvement of Social Security. His words and recommendations are still highly relevant today. In an Op Ed in the Washington Post published shortly before his death, Ball stated unequivocally that in today’s world, it is “the essence of responsibility to insist on no benefit cuts.” That same view is shared by numerous other experts. I have appended a letter, for the Committee’s information, signed by 276 academics and other Social Security experts who “recommend strongly that Social Security’s manageable shortfall, still decades away, should be eliminated without cutting benefits, including without raising the retirement age.”

 

Fortuitously, the best politics with respect to Social Security is also the best policy.

 

 

 

 

 

 

Explanatory Note: This chart illustrates the impact on monthly benefits that results from changing Social Security’s statutory “Retirement Age.” It is based on a hypothetical worker whose wage record entitles him or her to $1,000/month at the statutory “Retirement Age.” The dollar amounts will vary with a worker’s particular wage record, but the percentage reductions shown are the actual reductions for all workers. They do not vary with earnings. The dollar amount shown is the benefit paid monthly for the rest of the worker's life, adjusted only for inflation once it has begun to be received.