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January 28, 2005

The Bush Administration Is Even Crazier Than You Imagined

I just wrote something about the Social Security Trust Fund. The point was that a default on the Trust Fund would be a massive transfer of money from the poorer 95% of Americans to the richest 5%.

Because that's so, it's easy to assume the Bush administration's privatization plans would involve such a default. I know I assumed it. And Matthew Yglesias assumes it here.

Interestingly enough, though, this assumption is wrong. (I didn't figure this out myself; someone explained it to me.) Bush's plan would not require a default on the Trust Fund. On the contrary, in fact; the Trust Fund would be redeemed and then some.

If you want details (including exciting graphs!), they're below. If not, the point is that in this instance the Bush administration is not wholly driven by crazed greed. They're also driven by crazed ideology.

The Congressional Budget Office recently compared the current Social Security system to a privatization plan endorsed by Bush (called "CSSS Plan 2").

Under current law, the CBO projects outlays (ie, benefits) won't overtake revenue (ie, payroll taxes) until 2019. When that happens, the Trust Fund kicks in. This will entail either lowered government spending elsewhere, rolling the Trust Fund debt over in private markets (ie, increased federal deficits), higher income taxes, or some combination of the three. The CBO projects the Trust Fund will be exhausted in 2052.

Under CSSS Plan 2, the revenue coming into the Social Security system would be reduced immediately, because a big chunk of payroll taxes would be diverted into private accounts. Thus, the Trust Fund would be needed just about as soon as the plan is enacted... meaning lowered government spending, higher deficits, and/or higher taxes.

Benefits would also be cut, but slowly at first. So the CBO projects the Trust Fund would be exhausted by 2036. At that point, the rest of the government would have to come up with more money for Social Security... meaning more cuts in government spending, increased deficits, and/or higher taxes. It would only be after 2050 that benefit cuts would be large enough so that outlays would be lower than revenues.

So to summarize, here are the dates the CBO projects:

2018 Social Security outlays exceed payroll tax revenues; Trust Fund kicks in
2052 Trust Fund exhausted

2007 Social Security outlays exceed payroll tax revenues; Trust Fund kicks in
2036 Trust Fund exhausted; additional revenue from general fund required
~2050 Social Security benefits lower than payroll tax revenue, so additional general fund transfers no longer required

This can be seen in Figure 1B from the CBO report, below. In both graphs, "Outlays" is higher than "Revenues" for many years. When this is true, the difference has to be made up by the Trust Fund (or for CSSS Plan 2, additional revenue when the Trust Fund is exhausted).

Under CSSS Plan 2, the difference made up by the Trust Fund is somewhat smaller than under current law. But this is because the Trust Fund is smaller under CSSS Plan 2, because contributions cease in 2007 rather than in 2019. It is not because of a partial default on the Trust Fund. (Again, not only is the Trust Fund completely redeemed, more money is required for CSSS Plan 2 after 2036.)

The CBO has also helpfully provided this graph, which compares the effect on total government finances of changing to CSSS Plan 2 from current law.

As you can see, CSSS Plan 2 actually makes the government's finances somewhat worse from now through 2064. And this bill would mostly be picked up by richer households. That's how crazy the Bush administration is.

You are now encouraged to take a short nap to recuperate.

Post edited for clarity.

Posted at January 28, 2005 07:27 PM | TrackBack

I would argue that the area under the "hump" is smaller in plan 2 than in that dictated by law - a defacto default on the Trust Fund.
And still, revenues are lowered immediately, I imagine largely from corporate tax breaks. There is some method to the madness.

Posted by: mk at January 28, 2005 09:12 PM


I realize I wasn't clear about this. It's true (I think) that the area under the hump for Plan 2 is smaller. But that's because under Plan 2 the Trust Fund doesn't continue to build up from now through 2018. It stops in 2007. Thus, there's less to redeem.

So what matters is not the size of the hump. It's whether or not the Trust Fund is ever exhausted. And as I said, Plan 2 not only exhausts it, it requires additional income tax revenue.

Also, it's true that revenues are lowered immediately. But these graphs have to do only with Social Security, and except for the Trust Fund, all Society Security revenues are from payroll taxes. So the lowered revenues are lowered payroll tax revenues. Raising or lowering other taxes wouldn't change the graphs.

Posted by: Jonathan Schwarz at January 28, 2005 09:24 PM

why does csss#2 have revs > outlays for 50 years beginning in ~2055? (and with no end in sight?) is that believable?

Posted by: anon at January 29, 2005 12:39 AM


It's not believable. In fact, if you extended the projection further into the future, revenues (payroll taxes) would stay at about the same level while outlays (benefits) would asymptotically approach zero percent of GDP.

So if this plan actually were passed into law, it's certain that eventually benefits would be increased or payroll taxes would be lowered to bring them more in line with each other. That is, assuming we remain something akin to a democracy.

Posted by: Jonathan Schwarz at January 29, 2005 01:16 AM

the lowered revenues are lowered payroll tax revenues
of course. now that it's pointed out to me.
So, a major goal is to break what ain't broken? It's hard to believe that some default on the Trust Fund is not (ultimately) in the plans.
I will try to revisit this in the morning over a cup of coffee.
thank you, Jonathan.

Posted by: mk at January 29, 2005 02:25 AM


Well, look at it from their perspective. It's not that Social Security is broken. It's that the existence of Social Security means their ideology is broken. So they are trying to fix something that's broken. But that something isn't Social Security.

Posted by: Jonathan Schwarz at January 29, 2005 12:26 PM

I always assumed that will be NO default, but rather the benefits will be cut and/or payroll taxes will be increased so that the trust fund will have no reason to redeem those T-bills. Thus the T-bills will be sitting in that safebox forever. It's a cleaner way to achieve the same thing.

I don't think they (or any politician for that matter) care much about ideology, ideology is a means to an end. The end is, of course, to serve their main constituency - corporate fat cats.

Posted by: abb1 at January 29, 2005 12:40 PM

"The Bush Administration Is Even Crazier Than You Imagined"

Not Possible!!!

"After listening to his inaugural speech, anyone who thinks President Bush and his handlers are sane needs to visit a psychiatrist."

Sadly True!!!

Posted by: Terrible at January 30, 2005 12:00 PM