Why SS Is Not “Broke” And How The Trust Fund Works

For at least two decades the “very serious people” in Washington have insisted that the Social Security system is “broke”. They’ve been screaming “bankrupt, bankrupt I tell you!” for so long that unfortunately an entire generation of young people and even middle aged workers are convinced that Social Security won’t be there for them when they retire.

If true, it would be seriously problematic especially since it’s true that to some degree people are living longer (though not as much as the screamers would have you believe). The absence of Social Security would be disastrous since those same young and middle-aged people are finding it near impossible to save adequate amounts for their retirement through private savings and 401K’s. It’s not really their fault they can’t save enough since their real wages have been stagnant or declining for decades and periodic financial markets collapses like the 2001 dot-com bubble and 2008 total Wall Street meltdown decimates their feeble retirement accounts.

decorative image of "no"So let’s look at the question of the viability of Social Security. The short answer is NO. No it’s not broke. No it’s not bankrupt. And no, it’s not going broke in the future. And in fact, it cannot go “bankrupt” in the sense that most people understand “bankrupt”.  The idea that the Social Security system will collapse – will go “bankrupt” – and not be able to pay benefits to beneficiaries is simple false. It is a lie told either from ignorance or to further another less popular agenda. is

The claims that Social Security will go “bankrupt” are based upon three premises that taken together, would appear to bring impending doom.  Closer examination reveals a gross misunderstanding of how the SS system works and a deliberate attempt to play on words to exploit people’s fears. The doom-and-gloomers essentially argue that the following syllogism:

  1. SS is a retirement pension system that depends upon the monies retired workers paid in while younger in order to pay benefits when retired. This fund of monies is called a “trust fund”.
  2. The SS Trustees annual report regularly projects that the Trust Fund will be “insolvent” at some point in the future – usually 18 to 25 years away.
  3. The doom-and-gloomers twist the on woirds to transform two technical government accounting terms “trust fund” and “insolvent” to play on fears of “bankruptcy” and zero balances in retirement accounts.

In reality, only #2 above is true and it doesn’t mean at all what people think it means. The reality is that the fear mongers misrepresent how the Social Security system works. The reality is there are only two ways that today’s workers and young people will not have Social Security benefits available to them when they retire:

  • Congress deliberately decides to break promises to them and end the Social Security program for ideological or class war reasons while the program is still feasible.
  • The U.S. GDP and employment drop to zero. Nobody is working and nobody is producing anything. No food. No shelter. No heat. No nothing being sold. If that happens then payrolls drop to zero and with it payroll taxes for Social Security drop to zero. But that’s probably the least of our worries under this kind of post-apocalypic Mad Max scenario. So this isn’t worth discussing.

diagram of flow of payroll taxes through SS Administration to beneficiariesThe reality is that Social Security in the U.S. is an intergenerational transfer program. It is not dependent at all on the “trust fund”. In fact, if the trust fund were zero, zilch, empty, the system would still be able to pay benefits every month. That’s because Social Security benefits this month are paid from the taxes that workers and employers paid this quarter. Yes, it’s a basically a flow-through transfer system. We take money from today’s workers to pay today’s older people. Yes, so-called millenials (the generation currently in their 20’s) if they are fortunate enough to have found a job in this slack economy and the millenials’ working parents pay taxes each paycheck. To be precise, 6.2% is deducted from their paycheck and then matched with an equal amount from their employer’s pockets. Their tax money is sent to Washington each quarter by their employer.  That money then goes straight to pay the grandparents of those millennials (and anyone else eligible of that generation). The tax money paid this quarter goes directly to pay the monthly benefits of this quarter.

So why would today’s workers give up part of their incomes to pay money to older people?  Simple. Because it’s in their best interest and because the society, through the government, has given them a solemn promise to make sure that no matter what happens in the uncertain future the government will ensure that when today’s workers get older they will be partially supported by the next generation after them. In addition, there are numerous other benefits such as a faster growing economy, more entreneurship, and risk-free retirement accumulation, but I’ll detail those benefits in another post. The key is the intergenerational promise. As long as there are workers and payrolls in the economy, there is money to pay social security benefits. “Bankruptcy” in the popular sense of an enterprise that is no more, that is defunct, and that cannot pay anything is a lie. The claim of impending Social Security bankruptcy is fear mongering at its worst.

But you, the skeptical reader, might ask “what about the Social Security trustees’ assertions of insolvency in 15-20 years”? The Social Security Administration Trustees in their annual report do frequently report of projected “insolvency” of the trust fund – not the system itself. And “insolvency” has a specific legal definition in this context that is vastly different from the popular understanding of bankrupt or broke.

In a nut shell, Social Security is a government entitlement benefit program with a dedicated tax stream. As an entitlement program, people who pay and meet the currently legal defined requirements acquire the legal right to be paid benefits later. Because these benefit levels are legally defined, it is possible to project, albeit with a very fuzzy and changing forecast, what total benefits will be necessary in the future. At the same time, it is possible to project the future tax receipts of the dedicated tax (the FICA payroll tax) assuming no changes to the tax levels in the future and assuming a wide range of guesses about future payrolls in the U.S.  If, these projections indicate that at some point in the future the dedicated tax flow at today’s tax rate and projected future payrolls should result only enough money to pay less than 100% of the amount projected needed to pay the full currently promised benefit, then we have the technical warning of “insolvency”. The most recent report, the 2014 report, projected that this point where payroll taxes will be short of promised future benefits will come in 2033. This is a few years earlier than projected a few years ago, but that’s because Congress lowered the payroll tax for two years in 2013.

The projected “insolvency” means that, assuming all the projections actually come true (a tricky business by itself), Social Security will find itself in 2033 with payroll taxes only being enough to pay for 78% of the benefits we currently project/promise we will pay in 2033.

Even if we do nothing AND all the projections come true exactly as predicted, Social Security will continue paying 78% of the benefit that we are currently promising to people who will retire in 2033. People should keep in mind that the average benefits we are currently promising for retirees in 2033 are substantially larger in real terms than the benefits today’s average new retiree is receiving. So even if we do reach the “insolvency” point, Social Security will continue to pay benefits at a very substantial level when compared to today’s benefits. The future benefit, in real terms, would be greater than 78% of today’s average real benefit.

So what’s all this talk and concern about the trust fund? The trust fund isn’t necessary to pay benefits. The trust fund serves two purposes. The first and primary purpose is it’s the Social Security “checking account” and it’s good practice to have a cushion – especially when outgoing payments might not match incoming taxes each period. And that’s what happens. We like to keep benefit payments a level amount each month. Iimagine grandpa’s panic if the SS check changed each month! But remember that taxes are collected quarterly. The trust fund exists so we can cushion a quarterly income flow against a monthly payment flow.

However, in the last two decades, the trust fund was allowed to build up to very large balances, balances much larger than necessary to match quarterly cash inflow against monthly cash outflow. This was done deliberately. The Social Security system was facing “insolvency” back in the early 1980’s. In fact, it was at one point, only approximately 3 months from technical insolvency, the same kind of insolvency we now project is 15-16 years away. The reason for the impending insolvency in 1983 was because Congress had raised benefit calculation levels in the early 1970’s but didn’t adjust payroll taxes to sufficiently cover them. In particular benefit levels got adjustments for inflation but the payroll tax rate and the cap on taxable payrolls wasn’t adjusted.

Baby boomers pre-paid part of their own retirements by paying excess payroll taxes into trust fund in 1990's and 2000's

Baby boomers pre-paid part of their own retirements by paying excess payroll taxes into trust fund in 1990’s and 2000’s

We survived that brush with insolvency. Politicians from both parties at that time agreed to make an adjustment. They effectively doubled (approx) the payroll tax rate and phased it in. By the late 1980’s and early 1990’s the trust fund had fully recovered to comfortable levels. A comfortable trust fund level is defined as having a cushion in the “checking account” of enough money to pay 12 months’ of projected benefits. But once the trust fund recovered, we had switched to the opposite “problem”. Instead of not collecting enough taxes each quarter to cover benefit payments, we were now collecting too much in payroll tax due to the higher payroll tax rates. In effect, the Social Security system was over-taxing in the 1990s’ and up until today. The result is a skyrocketing “cushion” in the trust fund. Right now the trust fund has over $2.8 trillion dollars of US government bonds in it. That’s a “cushion” equal to approximately 4 years worth of benefits!.  That’s hardly “broke”.

So why didn’t the government lower the payroll tax rate in the 1990’s when the trust fund had recovered? The idea was that the Baby Boom generation, which was working and paying taxes at the time, would start to retire around 2010 and that for a 20-25 years, the period 2010-2035, demands for benefit payments would be higher than they would be after 2040.

Trust fund balance scenarios. A lot depends on assumptions of future growth, population, retirement age trends, productivity, and even technology. - The percent vertical axis represents the trust fund balance as a % of one-year's benefits.

Trust fund balance scenarios. A lot depends on assumptions of future growth, population, retirement age trends, productivity, and even technology. – The percent vertical axis represents the trust fund balance as a % of one-year’s benefits.

In truth the problem was not that there so many baby boomers, but rather that baby boomers didn’t have as many children as their parents. So it was decided that the baby boom generation would be the exception to the solemn promise of younger workers pay for their elders benefits. Instead, the children of baby boomers would partially pay for their elder boomer parents’ benefits and the boomers themselves would partially “pre-pay” their own benefits from their own over-tax payments in the 1990’s and 2000’s. Thus the bubble in the trust fund. It was always intended to rise way up until around now and then to deplete back down to ordinary “cushion” levels.

But now we’re facing a situation where the planned return of the trust fund to more ordinary “cushion” levels has become the basis for a fear mongering campaign designed to convince voters to accept the reduction or elimination of the very successful Social Security program. The reality is there may be a problem in 18-20 years, if all the assumptions about population, labor force participation, unwillingness to adjust tax rates, productivity, retirement trends, and real wage levels all come true. But we dealt with this problem once before when it was only 3 months away. There’s no need to move now to address a moving, uncertain problem in 15-20 years. Further, the rhetoric about “we need to cut benefits NOW in order to avoid cutting benefits in the future” doesn’t make sense.  The reality is we have many options to address, what will in likelihood be a necessary “tweak” to the system. But that is for another post.

CAA May 2014 – Economics of Intergenerational Transfers

I’m speaking to today to the Council on Action for Aging at Henry Ford Senior Living Village. I’ll be talking about the economics of intergenerational transfers and how, contrary to the views put forth in much of the news media, the Social Security system is actually doing quite well and “will be there” when even the youngest among us retire.

Understanding The Social Security Trust Fund – It’s More A Checking Account and Less of A Trust Fund

Now that the Republican-Democratic budgetary battle that shut down much of the U.S. government earlier this month has been resolved  delayed for 3 months.  Once again the hope of the politicians from both sides is to achieve some kind of “grand bargain” on the budget that continues to reduce the federal budget deficit.  Now the expectations are only for maybe a two-year deal instead of the ten-year deal the President sought in 2011.  But regardless of the length of the deal, the renewed negotiations have put Social Security, and with it, the economic well-being of seniors at risk.  For example, Senater Dick Durbin, an alleged Democrat, has offered up cuts in Social Security claiming:

“Social Security is gonna run out of money in 20 years,” Durbin said. “The Baby Boom generation is gonna blow away our future. We don’t wanna see that happen.”

It is most unfortunate that Senator Durbin, along with many of his colleagues, continue to repeat what is utter nonsense.  They endanger not only the well-being of seniors in the U.S. but all of us. For many years enemies of Social Security and the Wall Street banks that lust to have siphon fees from the hundreds of billions of dollars that currently flow efficiently through the Social Security Administration have propagated the idea that Social Security is going bankrupt – that it won’t be here in 20 years.

Much of the problem comes from people only having a superficial understanding of how Social Security (or any other intergenerational transfer program) works.  Combine a superficial understanding with misunderstood and ill-defined terms and scary but shallow projections of demographics and you get fear and hysteria – exactly what the enemies of Social Security want.  There are many aspects that I could talk about, but the most misunderstood aspect of Social Security is the Trust Fund, so I’ll focus this post on explaining the Trust Fund.

The Social Security Trust Fund is, in fact, actually two separate trust funds, each with its own share of the payroll tax and its own purpose. One fund is involved in the old age and survivors benefits and the other for disability insurance.  Nonetheless, I will lump them together since that’s what most commentators do.  The root of confusion and deception lies in the names of the funds.  They’re called “trust funds”.  And since the largest fund is used in the payment of old age insurance payments, which most folks liken to pensions, they tend to assume that the SS funds work like a private, personal trust fund.  After all, we know about people called “trust fund babies”  – they’re people who live off the interest and dividends of some big pile of money that somebody (usually parents) left them.  We also know that private savings for retirement works in a similar fashion except that we put the money away ourselves during working age and then deplete the account when we’re older – and often retirement accounts are established in some sort of “trust” account.

The people who argue we need to cut Social Security benefits usually claim it is because we are going to deplete the Social Security Trust Fund at some date a couple decades into the future.  They claim that Social Security itself will be bankrupt when that happens.  This is absolutely not true and it plays on a misunderstanding of what the SS Trust Fund is, what it does, and why it exists.

The Social Security Trust Funds are not what enables benefits to be paid.  Current payroll taxes are what enable benefits to be paid, not Trust Fund balances.  Social Security is an intergenerational transfer system.  Each month workers, people who are most likely aged 18-65, and their employers pay a payroll tax.  Then that same month, the money collected is paid out to Social Security beneficiaries.  .  Under current conditions, the payroll tax amounts to a 6.2% tax on worker earnings up to $113,700.  The employer pays a matching amount.  Earnings over $113,700 are payroll tax-free. As long as people are working and getting paid, there are payroll taxes being collected and money available to pay benefits – even if the Trust Fund were zero.  The Trust Fund isn’t really necessary to the basic functioning of Social Security.  This is why Social Security can never go bankrupt and unable to pay benefits.  For Social Security to be unable to pay any benefits, the U.S. would have to have nobody working – zero employment.  If we ever get to the point where there is nobody working in the economy, we have much greater problems on our hands than Social Security – problems like no food to eat.

Social Security Receipts and Benefit Payments by MONTH.So if the Trust Fund isn’t what is funding benefit payments – what is it?  The way to think about the SS Trust Fund is to think of it as a checking account.  This graph which shows the the income (payroll taxes collected) and the outgo (benefit payments) by month illustrates the problem and why the Trust Fund exists.  See how erratic and variable the income is.  This is because it’s a payroll tax and payrolls (employment) varies enormously from month-to-month.  In November and December we employ a lot of people and pay them something extra – it’s called Christmas and bonus season.  In January and February employment drops.  So the income received by the SS Administration varies greatly too.  But this income is used to pay benefits.  But we want benefits to be relatively constant.  Grandma and grandpa should expect the payment each month.  We don’t want to have tell all our senior citizens in January  “hey sorry, but the check’s a little short this month, we’ll make it up next December”.  So what to do when the income is both variable and a bit uncertain but the payments need to be relatively constant and fixed?  The answer is to do the same thing any private individual facing an uncertain and variable income but constant outgo:  keep a nice buffer balance in the checking account.  That’s what the Trust Fund was created for – to keep a buffer balance so that monthly payments can be held constant against variable and unpredictable income.

By law, the law creating the system, Social Security cannot use general funds of the government.  It can only use the payroll taxes it collects for Social Security.  And vice versa.  Social Security payroll taxes cannot be used for other government purposes (although George W. Bush once proposed doing that).  Also by the same law, the buffer balance- the trust fund balance – is supposed to always be at a minimum of 100% of projected one year’s benefit payments.   Today, the SS Trust Fund balance is approximately 350% of each year’s benefits and it’s growing.

Why is the Trust Fund so much bigger than it is (was) supposed to be originally?  Because in the early 1980’s it wasn’t so big.  In the 1970’s Congress increased Social Security benefits by indexing them to inflation (a good move), but they didn’t increase the payroll tax enough to pay for it.  The moment of truth came in the early 1980’s when the Social Security had to dip into the Trust Fund to help pay some of the current benefits.  The Trust Fund then stood at less than the legally-mandated 100% of projected benefits.  A commission was appointed by President Reagan and Congress to develop a solution.  The resulting deal increased the payroll tax from the then 5.4% gradually until in 1990 it stood at the present 6.3%.  By the early-mid 1990’s, the Social Security Trust Funds were well-replenished and beginning to significantly exceed the 100% of benefits level.  Yet the payroll tax was kept at the 6.2% level ever since even though it has generated a significant surplus every year.  Every year since, the Trust Fund has grown as payroll taxes collected have significantly exceeded benefits paid.

Since the mid-1990’s Social Security has, in effect, been over-taxing workers compared to what was needed to pay current benefits. One option in the 1990’s would have been to cut the payroll tax slightly – perhaps not back to the 5.4% level but maybe to 5.9%.  But the decision was made to keep “over-taxing” so as to deliberately build up the Trust Funds to extremely high levels in anticipation of an eventual wave of baby boom retirements.  That has happened. As mentioned above, today’s Trust Fund includes both the 100% of benefits buffer balance and another 2.5 years worth of benefits.  The additional money will be drawn down to help pay for baby boomer retirements.  Instead of bankrupting the Social Security system, the baby boomers are effectively the first and only generation to not only pay for their elders’ benefits but to also pre-pay a portion of their own benefits.  The baby boom generation may be faulted for man things but bankrupting Social Security is not one of them!

So what about all these scary projections of the Trust Fund depleting at some time in the future?  At the present, the Trust Fund continues to grow.  All projections about the future of Social Security are subject to some uncertainty and the farther out you project the more uncertain they become.  To project the precise future balances of Social Security funds, benefits, and taxes, we need to project and know with a high degree of certainty changes in the  following:  birth rates, death rates, changes in productivity and wages, labor force participation, retirement age preferences, and even immigration.  Nonetheless, the Trustees of the Social Security Administration take a stab at updating their projection of the future for the next 75 years. In fact, they make at least 3 projections: an optimistic, pessimistic, and most expected case.  In looking at recent expected case projections, the Trust Fund will continue to grow until somewhere around 2019.  Then the “wave” of baby boomer retirements combined with expected lower labor force participation will result in monthly benefits that exceed monthly taxes collected.  Withdrawals from the Trust Fund will make up the difference to pay the promised level of benefits.  Then, somewhere a decade or so later, the Trust Fund will be back down to it’s legally mandated minimum. Of course this is only once scenario.  If the optimistic scenario happens (slightly faster economic growth between now and then, more labor force participation, and more folks delaying retirement), then there is never a problem in the entire 75 year horizon.

But let’s suppose the expected case happens, at that point a choice must be made: Reduce the benefits paid below the promised level? Or increase the payroll tax?  Or, remove the earnings cap on the payroll tax so that high-income earners pay taxes on amounts above the $113,700 cap.  How much of a tax increase would be needed?  Approximately a 1% increase in the payroll tax would make the system totally solvent and ensure minimum balances in the Trust Fund for the entire 75 year horizon.  That’s not much really.  It’s easily doable and more important, we can delay the time to raise the tax until the mid-2020’s when we have a much clearer picture.

It’s very important to realize that Social Security is not going bankrupt.  Even if we refuse to raise the payroll tax in 2030 and even if the expected case happens and we have to cut benefits in early-mid 2030’s, we won’t have to eliminate the program.  Benefit payments will still happen.  They will simply have to scaled back.  How much?  We will still be able to pay 75-80% of what we are currently projecting the benefit payments to be at that time.  And our currently projected benefits for that time period are greater in real dollars than today’s benefits because people will be earning more money entitling them to larger benefits.

Social Security is not going bankrupt. It can’t.  It will be there for my current students when they age and retire, and it will be there for my students’ kids.  The only reason Social Security might not be here is because politicians surrender to an anti-Social Security ideology and the desires of Wall Street banks to get their hands on billions more.

For those interested, here are some good references for continued explanation on this topic:

No Social Security Is Not Going Bankrupt from Center on Policy and Budget Priorities

Five Huge Myths About Social Security from Daily Finance

Why Social Security Can’t Go Bankrupt from Forbes

Social Security Trustees Report 2013




Social Security Receipts and Benefit Payments by MONTH.

Not Retiring Is the New Retirement Plan For Many

CalculatedRiskBlog tells us about a new major study of American workers and their retirement plans.  The study is published by the Transamerica Center for Retirement Studies [note for students: the center is an excellent source of research data and analysis].  CalculatedRisks summarizes:

From Rachel Ensign at the WSJ: For Many Seniors, There May Be No Retirement

Already battered nest eggs took another beating this month with the market’s wild swings. With interest rates essentially at zero since 2008, income from Treasurys and certificates of deposit is pretty paltry. … On top of that, housing prices [leave] homeowners with much less equity to tap.

Here is the survey mentioned in the article: The New Retirement: Working

• The survey found that for many Americans, the foundation of their retirement strategy is simply not to retire, to work considerably longer than the traditionalretirement age, or work in retirement:
–39 percent of workers plan to work past age 70 or do not plan to retire
–54 percent of workers expect to plan to continue working when they retire
–40 percent now expect to work longer and retire at an older age since the recession

• Workers’ greatest fears about retirement include “outliving my savings and investments” and “not being able to meet the financial needs of my family.”

• Most workers will continue working out of financial necessity:
–Workers estimate their retirement savings needs at $600,000 (median), but in comparison, fewer than one-third (30 percent) have currently saved more than $100,000 in all household retirement accounts
–Most workers, regardless of age or household income, agree that they could work until age 65 and still not have enough money saved to meet their retirement needs
–Of those who plan on working past the traditional retirement age of 65, the most commonly cited reasons are of need versus choice
–Many workers (31 percent) anticipate that they will need to provide financial support to family members

When I looked at the report myself, I was struck by this line in the executive summary:

Workers’ greatest fears about retirement include “outliving my savings and investments” and “not being able to meet the financial needs of my family.”

This is related to the point I’ve tried to make in the past (and also here  and here):  Social Security is not a pension plan. Social Security is an insurance program that insures all of us against the possibility of “outliving our savings and investments”.  It is particularly disturbing to hear politicians and those least likely to outlive their investments be in such a hurry to cut Social Security (or Medicare) at a time when uncertainty about investments and savings is rising (just look at the uncertain stock market and housing markets)!

Social Security Facts

From Ezra Klein via Mark Thoma of Economists View:

Ezra Klein on Social Security:

1) Over the next 75 years, Social Security’s shortfall is equal to about 0.7 percent of GDP. Source (PDF).

2) For the average 65-year-old retiring in 2010, Social Security replaced about 40 percent of working-age earnings. That “replacement rate” is scheduled to fall to 31 percent in the coming decades. Source.

3) Social Security’s replacement rate puts it 26th among 30 Organization for Economic Cooperation and Development nations for workers with average earnings. Source.

4) Without Social Security, 45 percent of seniors would be under the poverty line. With Social Security, 10 percent of seniors are under the poverty line. Source.

5) People can start receiving Social Security benefits at age 62. But the longer they wait, up until age 70, the larger their checks. Waiting to 66 means checks that are 33 percent larger. Waiting to 70 means checks that are 76 percent larger. But most people start claiming benefits at 62, and 95 percent start by 66. Source.

6) Raising the retirement age by one year amounts to roughly a 6.66 percent cut in benefits. Source.

7) In 1935, a white male at age 60 could expect to live to 75. Today, a white male at age 60 can expect to live to 80. Source.

8) In 1972, a 60-year-old male worker in the bottom half of the income distribution had a life expectancy of 78 years. Today, it’s around 80 years. Male workers in the top half of the income distribution, by contrast, have gone from 79 years to 85 years. Source.

Among his comments, my preferred solution:

Social Security’s 75-year shortfall is manageable. In fact, it’d be almost completely erased by applying the payroll tax to income over $106,000. Source (PDF).

I would add another fact to the list:  There is no shortfall in Social Security under the expected scenario for at least 27 years.  All of the minute 0.7 percent of GDP shortfall happens after 2038 at the earliest. This means Social Security actually reduces the government net deficit for the next 27 years.

Unfortunately Washington D.C. is a fact-free zone.

Recessions Are Matters of Life and Death

I think it’s always important for policy wonks, politicians, and tenured professors to careful when discussing recessions and unemployment.  It’s very easy from the safety of a secure income to focus on the data and the numbers.  But behind the data and numbers are real humans.  Recessions and high unemployment have real, human costs. It’s truly a matter of life and death.  This recently reported from Calculated Risk Blog shows suicides rising in connection with a poor economy:

From the CDC: CDC Study Finds Suicide Rates Rise and Fall with Economy

The overall suicide rate rises and falls in connection with the economy, according to a Centers for Disease Control and Prevention study released online today by the American Journal of Public Health. The study, “Impact of Business Cycles on the U.S. Suicide Rates, 1928–2007″ is the first to examine the relationships between age-specific suicide rates and business cycles. The study found the strongest association between business cycles and suicide among people in prime working ages, 25-64 years old.

• The overall suicide rate generally rose in recessions like the Great Depression (1929-1933), the end of the New Deal (1937-1938), the Oil Crisis (1973-1975), and the Double-Dip Recession (1980-1982) and fell in expansions like the WWII period (1939-1945) and the longest expansion period (1991-2001) in which the economy experienced fast growth and low unemployment.

• The largest increase in the overall suicide rate occurred in the Great Depression (1929-1933)—it surged from 18.0 in 1928 to 22.1 (all-time high) in 1932 (the last full year in the Great Depression)—a record increase of 22.8% in any four-year period in history. It fell to the lowest point in 2000.

• Suicide rates of two elderly groups (65-74 years and 75 years and older) and the oldest middle-age group (55-64) experienced the most significant decline from 1928 to 2007.

There is no data yet for the recent recession, but suicide rates probably increased significantly. This is another impact of the housing bubble – and there is no recovery for the families who lost someone to suicide.

The good news in this study is the long term decline in elderly suicide rates, probably because of improved access to medical care.

I agree with CR that the decline in suicide rates among the elderly from 1929 to 2007 is partly due to improved access to medical care (read Medicare), but it’s also no doubt due to Social Security.  The future seems less overwhelming when you have the confidence and security that Social Security can provide.  Unfortunately many in Washington today want to turn back the clock to an earlier era when the elderly didn’t have such security or medical care.  If that happens, we can expect suicide rates among the elderly to go back up.

I think it’s noteworthy that the connection is between suicides and recessions/higher unemployment.  It is not between suicides and inflation.  Just another reason why I think unemployment is the more serious and damaging problem of a macroeconomy.

What Budget Crisis? Let’s Do Nothing Now

My Mother was a big advocate of patience. She was the anti-crisis.  In response to any panicked concerns I had about the some “crisis” that was coming, we always counseled “we’ll cross that bridge when we get to it”.  And sure enough, there was usually either no problem eventuallly crossing the bridge or there was no river to cross.  I wish Congress and the President could heed the same counsel.

The last couple weeks have built on the hysterical “budget crisis” talk of the last few months.  Politicians of both parties have trotted out grand “plans” for how to “fix the budget” crisis. Of course, by “budget crisis” they claim to mean the deficits that the government is currently running. Make no mistake, the plans being proposed are radical changes to America’s social structure, safety net, and political economy. The Republicans in the House yesterday voted a budget to phase out Medicare. The cuts both parties are proposing will be drastic.  Education spending will be slashed. Let’s consider another approach though.  Let’s think of it as my Mother’s cross-that-bridge-when-we-get-to-it approach.  The essence of this approach is that if we do nothing at all right now or for the rest  of this decade, the problem will solve itself.  In other words, the current laws on the books will eliminate the problem.

I will explain, but first I want to make a disclaimer.  First, as an economist, I do not buy into the “budget crisis” rhetoric to begin with.  As I’ve tried to explain in other posts about MMT, fiscal policy, and the government budget, I’m not worried about the government’s current deficit at all.  In fact, if anything, I’m concerned that the deficit is too small right now.  The signs are clear that we need more government spending, not less right now.  I likewise do not think eliminating the deficit completely is a worthwhile goal. Such a goal is likely to be harmful.  

But, for the sake of argument and understanding, let’s assume for the moment that we should eliminate the deficit eventually.  What do we need  to do? Cut Medicare and let seniors eat up their entire limited incomes in healthcare costs? Hand Social Security over to Wall Street?  Close all the schools? None of this kind of radical nonsense is necessary. I will let Annie Lowery of Slate Magazine do the explaining with emphasis added by me:

 The overarching principle of the Do-Nothing Plan is this: Leave everything as is. Current law stands, and spending and revenue levels continue according to the Congressional Budget Office’s baseline projections. Everyone walks away. Paul Ryan goes fishing. Sen. Harry Reid kicks back with a ginger ale. The rest of Congress gets back to bickering about mammograms. Miraculously, the budget just balances itself, in about a decade.

I know. Your eyebrows are running for your hairline; your jaw is headed to the floor. You’ve had the bejesus scared out of you by deficit hawks murmuring about bankruptcy and defaults and Chinese bondholders. But don’t take it from me. Take it from the number crunchers at the CBO. Look at the first chart here, and check the “primary deficit” in 2019. The number is positive. The deficit does not exist. There’s a technicality, granted: The primary deficit is the difference between spending and revenue. The total deficit, the number more commonly cited as “the deficit,” includes mandatory interest payments on the country’s debt. Even so, the total fiscal gap is a whisper, not a shout—about 3 percent of GDP, which is what economists say is healthy for an advanced economy.

So how does doing nothing actually return the budget to health? The answer is that doing nothing allows all kinds of fiscal changes that politicians generally abhor to take effect automatically. First, doing nothing means the Bush tax cuts would expire, as scheduled, at the end of next year. That would cause a moderately progressive tax hike, and one that hits most families, including the middle class. The top marginal rate would rise from 35 percent to 39.6 percent, and some tax benefits for investment income would disappear. Additionally, a patch to keep the alternative minimum tax from hitting 20 million or so families would end. Second, the Patient Protection and Affordable Care Act, Obama’s health care law, would proceed without getting repealed or defunded. The CBO believes that the plan would bend health care’s cost curve downward, wrestling the rate of health care inflation back toward the general rate of inflation. Third, doing nothing would mean that Medicare starts paying doctors low, low rates. Congress would not pass anymore of the regular “doc fixes” that keep reimbursements high. Nothing else happens. Almost magically, everything evens out.

These are the CBO’s baseline projections. But, of course, Congress is not likely to let the Bush tax cuts fully expire, or slash doctors’ payments. So the CBO also prepares an “alternative fiscal scenario” that looks more like the path we expect Congress to take. It’s the alternative scenario that has the horror-show deficits. But Congress doesn’t have to act. It just has to do nothing. Or when it does do something, it has to pay for it.

That last bit is important: We want the numbers of the do-nothing path but not necessarily the policies. The fiscal future written in current law is hardly the best of all fiscal futures. For one, health care spending would comprise an enormous portion of overall spending. Right now, the United States spends about $1 in every $6 on health care. In a decade or two, based on the do-nothing plan, it would spend $1 in every $5, then $1 in every $4, and not get better health outcomes, either. Those dollars would be better spent in other industries or on other priorities. Moreover, under the do-nothing plan, the government would tax a much bigger share of GDP than it currently does, and the tax burden on the middle-class would be uncomfortably high.

But the do-nothing plan proves the point that the budget revolution does not need to be particularly revolutionary. Yes, the dollar figures are enormous, so big that it would appear to require “bold” plans that include massive new taxes or cruel new cuts. But, in fact, we don’t really need to end Social Security, sell Alaska, or ship the poor to Canada to get back in the black. We just need to stick to current law—particularly the tax and health care provisions—and then we can tinker our way toward a better, healthier economy.

That is because, by and large, the hard work of fixing the fat part of the the budget has already happened—through health care reform. The Social Security crisis you sometimes hear about is essentially a myth. The trust fund will run out in 2037, “at which point tax income would be sufficient to pay about 75 percent of scheduled benefits through 2084.” Full Social Security solvency would require only about 0.7 percent of GDP, which you can get to by exposing income above $107,000 to the payroll tax. There is no debt crisis, either, as long as the U.S.’s lenders remain confident in the country. The crisis lies in spiraling health care costs. The Obama health care reform bill might not work, but it does contain programs that could turn the tide over time. The big wheels of deficit reduction are already turning—and it might be better for Congress to step back, stick to pay-as-you-go, and let them turn.

Yes. Annie is right. And Mother was right.  If we do nothing, then the deficit disappears because of laws already on the books and what Annie doesn’t mention: regaining full employment.  The sooner we regain full employment, the sooner the deficit disappears, assuming we leave the tax code and Medicare and healthcare and Social Security laws as they are right now.

So why is everyone in D.C. all agitated about the “budget crisis”? Two reasons. First, what they really want to do is to continue to lower tax rates for the very rich and the wealthy. The rich, after all, pay for lavish parties through lobbyists and pay for campaigns.  You and I don’t.  Lowering tax rates for the rich will create larger budget deficits. The Republican/Ryan plan to end Medicare is not a plan to “save” Medicare or to “fix the budget”.  It’s  a plan to cut medical care for seniors so that taxes can be cut on the highest income bracket payers, the rich.  Second, some people, particularly the Republican/Tea Party/Libertarian side of the aisle are actually trying to accomplish an ideological agenda.  They don’t like the welfare state. They are ideologically opposed to government services for anyone other than elites and wealthy. They have no chance of getting political support if they actually tell the truth about their agenda.  So, we have a fake crisis to solve.