Saving Social Security: Basic Principles for a New Approach John Atlee, 3/29/98

This analysis applies to the "Social Security Crisis" a conceptual framework developed by the Institute for Economic Analysis (IEA). It also summarizes, and expands on, key aspects of two IEA articles,

The fight to save Social Security is largely a battle of ideas, and those who define the terms of debate tend to win. Friends of SS urgently need to put forward an imaginative bold new approach to the alleged "crisis" which will put opponents on the defensive and correct the many confusions which now give them an advantage. Two basic reforms are needed:

• The whole SS account must be completely separated from the rest of the federal budget.
• The financial soundness of the SS System must not be held hostage to government mismanagement of the whole economy.

Section I:  How Social Security Works

To protect SS from political tampering and restore public confidence in it, the public needs to understand much more clearly how the system really works. This is a brief simplified summary, with comparisons to private pension plans, mainly for use in public education programs:

• SS as a financial asset
• it ’s based on individual accounts
• progressive benefit amounts
• a self-financing system
• not basically an "inter-generational transfer"
• no need for full funding except Baby Boom bulge
• key role of the Trust Fund

Section II:  Completely separating SS from the operating budget would

• Safeguard the Trust Fund (and reduce youth cynicism on SS)
• facilitate comparisons with private pension and insurance programs
• clarify the confusions over funding, "entitlement," "contributions" vs. "taxes," and FICA as a "regressive tax"
• encourage more rational discussion of budget allocations
• focus attention on the real budget deficit
• help clarify the key economic relationship between the federal deficit and the economy and help pave the way for separating the "Policy Deficit" from the "Stabilization Deficit"

Section III:  SS should not be held hostage to economic mismanagement

The 2029 "bankruptcy" is a fiction of the SS Commission’s inappropriate economic assumptions. With 5% unemployment (instead of their 6%) SS is financially sound for the foreseeable future -- see chart. Recessions and high unemployment are man-made disasters. Rational discussion and management of SS finances should separate the effects of policy decisions and demographic assumptions from the effects of economic fluctuations and forecasts. The SS account should be based on a "stabilized employment" budget (CBO), using the 4% unemployment rate mandated by the 1978 Humphrey/Hawkins act.

The most important and urgent legislative goals:

• Completely separate the SS account from the operating budget.
• Require the SS Commission to shift its projections from 7/6/5% unemployment to 6/5/4%, emphasize the 5% version, and give the 4% version serious analysis.
• Require that economy-caused deviations of actual benefit payments and FICA contributions from the stabilized-employment-budget values are reflected in the "stabilization" component of the operating budget deficit rather than the SS Trust Fund.

Many current developments are creating a "window of opportunity" for this offensive. Friends of SS need to form an effective coalition to win this decisively.

Section IV: Effect of Unemployment-Rate Assumptions on Social Security Financial Projections

The Social Security Trust Fund's own report shows that under reasonable unemployment-rate assumptions, the system is financially sound into the indefinite future: