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Social Security is based on sound principles

 
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Published July 31, 2015

In announcing his presidential candidacy, New Jersey Gov. Chris Christie had some strong criticism of the Social Security program, especially its solvency. He claims that those who defend the system are liars. Sen. Marco Rubio, also running for the presidency, likens Social Security to a Ponzi scheme. Their rhetoric reflects a serious misunderstanding about how the system functions as well as its role in fostering economic growth.

Social Security derives most of its revenue from a "pay-as-you-go" system in which the payroll taxes of those currently employed pay benefits to retirees. Pay-as-you-go works well as long as the number of workers is sufficiently large relative to the number of retirees.

When that is not the case, an adjustment is required. For example, in 1983, the Reagan administration recognized that the retirement of the Baby Boom generation would mean that sole reliance on pay-as-you- go would impose an onerous burden on future workers. Reagan was determined to reduce that burden by increasing the payroll tax.

This action generated cash surpluses, which the Social Security Administration invested in a special issue of Treasury bonds. The plan was to buy bonds with surplus cash when boomers were working and to sell those bonds to augment insufficient cash receipts when the boomers retired. In years when payroll tax receipts are more than sufficient to meet that year's retirement payments, Social Security buys bonds; in years when scheduled retirement payments exceed payroll tax receipts, they sell bonds back to Treasury.

Critics have asked, "How does buying and selling bonds by one branch of government to another branch constitute 'savings' for future retirees?" As with any bonding, the issue is one of timing.

During years of surplus, cash flows in to the Treasury, which can then use this money to reduce other taxes and/or to reduce the national debt by reducing the need to borrow elsewhere. Both options constitute investment in the nation's economic growth; at retirement, workers will get a share of a larger pie in the form of pension benefits.

The original plan was for the bonds to last until about 2060, when all but the most persistent Boomer would be dead. However, significant events (9/11 and the 2008 financial meltdown) intervened, causing the economy to grow more slowly than projected, with the result that Social Security purchased fewer bonds. The new end date now is 2033; most boomers will still be alive and collecting Social Security benefits when this occurs. What happens then?

Actually, no major changes are called for. Scheduled retiree benefits can continue right on schedule even after the bonds run out. The bond redemptions are merely an intermediate accounting when the Treasury buys back its bonds. Whether buying back bonds from Social Security in exchange for cash, or simply providing Social Security with cash, the Treasury will continue to get its money the way it always does, that is, by taxing and borrowing. It need not change any tax rates to continue financing the deficiencies in revenue from payroll tax receipts.

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Why not cut benefits when the bonds run out? Doesn't the exhaustion of the bonds mean the Boomers didn't save enough? Such actions would be unfair to Boomers because the events and decisions responsible for the slowdown in economic growth accrue to the whole nation. They are not solely the responsibility of the Boomers. Raising income taxes is a more appropriate remedy in this instance.

When trying to evaluate commentary on Social Security, such as that proffered by Christie and Rubio, we should remember that all pension systems create a reciprocal responsibility between those paying in and those receiving payments; it is not simply a one-way transfer of money from younger workers to older retirees.

The pension created by the deferred compensation of today's workers makes possible the greater productivity of future workers. These future workers get to enjoy higher wages and a higher standard of living; in turn, they become obligated to pay retirement benefits to the older generation. In effect, the young pay for the old out of the enhanced productivity made possible by the old when they were young.

William L. Holahan, left, is emeritus professor of economics at the University of Wisconsin at Milwaukee. Charles O. Kroncke, retired dean of the College of Business at UW-M, is also retired from USF. They are co-authors of "Economics for Voters." They wrote this exclusively for the Tampa Bay Times.