The Financial Times and the London Economist Lose Their Minds
High International Finance

The Future of Social Security

If the Social Security program remains as specified in current law, then sometime between 2032 and 2070--call it a 50% chance of happening by 2042--the Social Security Administration's trust fund balance at the U.S. Treasury hits zero.

At that point, one of three things happen:

  1. The Social Security Administration continues to write Social Security checks as usual, the Treasury continues to pay them, and the Treasury begins sending the SSA notices that it is overdrawn...

  2. The Commissioner of Social Security announces that inasmuch as the Social Security Administration does not have the funds to pay Congressionally-mandated benefits and cannot spend money it does not have, that he or she is reducing all checks proportionately so that the amount of money to be paid out matches what is flowing into the trust fund. At first, this is a benefit cut of 24% relative to what the law envisions, and the size of the relative benefit cut grows over time...

  3. The Commisioner of Social Security directs the SSA to continue to write checks as usual, and the Secretary of the Treasury directs that Social Security checks in excess of what is in the trust fund are to be dishonored and returned for insufficient funds. One in four Social Security checks than start bouncing...

Which of these scenarios will actually occur in 2042 (or whenever) if no changes are made to current law depends on politics and personnel in the future. We don't know what will happen. But that is what the threat point appears to be if no agreement is reached on reforming the Social Security system over the next generation.

Now comes Jane Hamsher to write that House Budget Committee Chair is a bad person:

Budget Hawk John Spratt and the “Grand Bargain” on Social Security: John Spratt, Chairman of the House Budget Committee, was recently appointed by President Obama to the Debt Commission... “secret meetings” in 1997 authorized by Clinton Chief of Staff Erskine Bowles... negotiating a deal between Clinton and Newt Gingrich that included  partial privatization of Social Security.

Last week... Bill Clinton spoke openly about the secret agreement... in 1997... to take money out of Social Security and place it in private accounts.... Clinton agreed to take the political heat for privatization, and the plan only fell through when the Monica Lewinsky affair exploded and Clinton was afraid to take the hit in the polls.... Clinton initially reached out to Bill Archer, the Republican head of the Ways & Means Committee, while Bowles contacted Gingrich.  “They both believed that any effort to update Social Security would require government to incorporate some measure of choice, and that meant some form of privately managed account,” writes Gillon.... It’s unknown what position Spratt took in those talks.  But around that time, in  April of 2008, the Charlotte Observer covered a speech by Spratt before the Rock Hill Chamber of Commerce (Lexis):

Spratt favors supplementing Social Security with a private savings plan that would either be mandatory “or else so attractive that everyone would sign up for it.” He also advocates investing about 20 percent of the Social Security trust fund in the stock market....

Early in 2009 Robert Kuttner wrote in the Washington Post that Pete Peterson was helping the White House  in that effort, as were “leading ‘blue dog’ (anti-deficit) Democrats such as House Budget Committee Chairman John Spratt of South Carolina and his counterpart in the Senate, Kent Conrad of North Dakota.”  Kuttner said that “the deficit hawks are promoting a ‘grand bargain’ in which a bipartisan commission enacts spending caps on social insurance as the offset for current deficits.” Put Spratt down as “open to Social Security benefit cuts” and a history of support for some type of privatization.

As I understand Spratt's position now and back in 1997 and as I understand Clinton's position back in 1997, it is that:

  1. Congress enacts option (1) above: if and when Social Security taxes are not sufficient to pay traditional Social Security benefits, traditional benefits will be cut so that they can be paid by taxes.
  2. Some of the Social Security trust fund will be invested in the stock market in hope of getting a higher rate of return--but the Treasury will guarantee to make the Social Security trust fund whole if and when its stock market investments ever turn out to be net losses.
  3. Congress also raises Social Security taxes--only it calls them "contributions" to "private accounts."
  4. Social Security taxpayers get some choice as to how to invest their "private account" "contributions"--accepting more risk in the hope of higher return, or not.
  5. Any gains or losses from investments in "private accounts" stay with the taxpayer in whose name the investments were made.

This deal would allow (1) Democrats to say that they have no allowed the diversion of a single dollar of Social Security taxes away from the current system; (2) Democrats to say that they have strengthened the Social Security system as a whole by reinforcing its finances and raising its financial resources; (3) Republicans to say that they have kept the Democrats from throwing more money down the well that is the unsustainable and outmoded twentieth-century Social Security system; (4) Republicans to say that they have created private accounts for every American.

It seems to me that this position would be a fine place to wind up--but that it is not a bargaining position from which Democrats should start. This is, in fact, where I envisioned and hoped we were going in 2005: with private accounts as an "add on, not a carve-out" to the Social Security system as it currently exists.

It also seems to me that this position is not well-described by Jane Hamsher's characterization of it as "some type of privatization" and "Social Security benefit cuts." It is more complicated than that. If you think that the 2042 outcome if no change is made in the law is option (2) then it is a benefit cut. If you think that the 2042 outcome if no change is made in the law is either option (1) or option (3) it is not. And it is "privatization" only if funding "private accounts" with money not currently earmarked to flow to the Social Security system is "privatization"--which seems to me to simply be not the case.