How quickly we forget. Slightly more than 10 years ago, the nation’s economy was put on the brink of “financial Armageddon” – remember?
This reflection arises because yesterday I came across an article about a product innovation company pioneering a new service in “Social Security protection.” Essentially, they want to sell workers a “credit default swap” on the program’s ability to pay its bills.
At this point, you should ask yourself, did you really enjoy the financial crisis that much? It is difficult for me to imagine a worse idea, or a less socially productive product. (Details, here)
Here is the company’s position: people insure their home, cars and other valuables; why not insure retirement from a reduction in Social Security benefits? In case you are wondering, the difference is one of these things is protection from an unplanned expense, and the other is a bet on political dysfunction where the only value that the bookie adds is computing the spread such that he makes money.
Here is my position: This sounds too much like AIG pondering the idea of insuring the subprime loan market.
Here is the part that is missing from the equation. Insurance, whether it is a car or your health, only works when the insurance company brings a wealth of knowledge about the risks associated with the protection that they are offering. Believe it or not, car insurers know a lot about car wrecks so that you can generally get a reasonable price for the protection.
That is not the case in Social Security where the challenges and risks change every year. Given the latest information from the trustees, about 30% of the problem we face today didn’t exist 2 years ago. This means that we now face a new problem, one no one in Washington has even considered.
The hard truth about the latest numbers is that we have entered a new world. To illustrate, Rep. Larson put forward a proposal in 2019 – just two years ago – that claimed it solved the issue of Social Security. Done; no problem. Unfortunately, it solved a problem that was $6 trillion dollars smaller in an economy that had 2% inflation. That plan is now irrelevant.
The pieces and parts of the plan are not even relevant anymore because the yardstick of the future was sharply changed by the trustees last month. Sure, we can say that rising payroll taxes is a policy option, but we have no idea how that change would perform in the new world. Even when the trustees update the results, the new projections will be based on a yardstick that is already $500B out of date.
In comments about the 2021 Trustees Report, Rep. Larson reiterated his commitment to deliver legislation with the Biden Administration that will fix the program. The challenge he faces has grown by $6 trillion. As I will explain in the comments, his job will never get easier than this year.
Let’s go back to AIG. At some point in their history, someone put forth the idea that they should insure the subprime market because housing never declines. It is not hard to believe that this company is run by someone who wants to insure the payment of Social Security benefits because Congress will never let them decline.
The one thing about which we can be reasonably certain: the company didn’t look at the level of change over the past two years and decide on an informed basis that it understands the risks better than everyone else.
The outcome of insuring Social Security benefits only ensures that we will have more voters detached from the state of the program. The average citizen would say, “I really don’t care about the system because I will get what is mine whether the system works or not.” In fact, they likely have an incentive to vote for the person who promises to cut payroll taxes and cut benefits.
This isn’t a sign that the program’s finances are manageable. It is likely a sign that very few people are watching the rate of change in the program’s stability.