State of the Onion

A few points to remember about Social Security.

1. Just because a system exhausts its trust fund, and has annual liabilities in excess of its funding, doesn't mean it's bankrupt;
2. Projections that this will happen to Social Security in 2042 take a very pessimistic view of likely economic (and population!) growth between now and then;
3. Projections that private accounts will provide a reasonable substitute to Social Security, by contrast, depend on a very rosy view of the economy over that time period (to wit, Krugman);
4. These warring pessimistic and optimistic views of the economy cannot both be correct (the Law of the Excluded Middle strikes again!);
5. Social Security provides a defined-benefit annuity; it is insurance, not a retirement account;
6. As such, it provides an income for whatever remains of your life, once you retire; it is not a fixed pot of money;
7. As such, it is less risky than any retirement account could possibly be, since in spending down your own capital you must somehow contrive not to spend "too slowly" nor live "too long";
8. Part of the President's plan will therefore require people to purchase their own defined-benefit annuity on retirement, to make up for their lost Social Security benefits;
9. No such annuity (insurance) can possibly be as affordable, in an actuarial sense, as that provided by insuring the entire US workforce at once - as the Social Security system does;
10. Hence the problems faced by, for example, the Chileans, who typically make do with 1/2 the pension they used to have under the government plan, in spite of seeing an incredible 10% average return on their private retirement accounts;
11. No matter what you think of Social Security's finances, realize that the President's plan will immediately decrease its annual income by 1/3, greatly accelerating any reckoning unless these losses are made up;
12. All estimates of these losses, aka "transition costs," put out by the Administration to date are lies; the true cost is estimated to be $4.5 trillion over the first 20 years - which only gets us to 2031, not 2042;
13. Any proposal to reduce these costs - for instance, by means-testing benefits, reducing cost-of-living increases or the wage-indexing of benefits, raising the income cap for the payroll tax, or even simply borrowing money - can be more easily applied to the current Social Security system, to increase its solvency; taking away 1/3 of its income can, again, only make things worse;
14. This was precisely the reason Social Security payroll taxes were raised (regressively!) in 1983, for example.

Finally, always remember that the President could save many trillions of dollars if he just gave up on either (1) the Medicare prescription drug benefit ($8.1 trillion over 75 years); or (2) the tax cut he and his party passed in 2001, under the premise of never-ending budget surpluses, with built-in sunset provisions to allow them to expire should the country's budget fall back into the red ($11.6 trillion over 75 years). These numbers compare to a $3.7 trillion shortfall in Social Security over the same time period, under the pessimistic projections mentioned earlier.