So should we be thinking about expanding the program and/or cutting the payroll tax?

First and foremost we have to remove the ambiguity from the debate. Under ordinary economic growth Social Security is fully funded, needing no changes in retirement age, payroll tax or benefits. I am not suggesting we do anything until that battle is won decisively and privatizers are laying in the bloody dust clutching their torn copies of Ayn Rand. They declared war on Social Security 70 years ago, and it wasn't because they were concerned with Solvency 110 years out. There is a wing of the Republican Party that hates FDR to its very sole. They hate him, the hate the New Deal and everything associated with it, and that especially includes Social Security. For that matter you have the Rove/Norquist who hate Teddy Roosevelt and who dream of returning to a day before Trust Busting and National Parks. Business had it sweet in 1898 and they just want to wipe the 20th century off the map as if it had never happened, at least as far as regulating business goes.

But their are other alternatives than an immediate cut in payroll taxes. Under Low Cost Social Security is fully funded, but that does not mean there is no drag on the General Fund long term. Adjusted for inflation it is no big deal, but it sure looks big in current dollars. The problem is the interest on the interest. As the Trust Fund is building it is all just funny money, the Treasury simply credits the Trust Fund with bonds in place of money. The problem is when current contributions hit current expenditures, the Trust Fund continues to grow and grow but a fraction of the interest owed has to be paid in by the General Fund. Most of the interest credited is still just funny money, about 12% is real money.

We can say so what? They borrowed the money. Or we can structure the Trust Fund in such a way that it doesn't expand without limit.

And one way of doing that would be to diversify the portfolio. And I am going to start a new thread on that topic. Another would be to divert the excess payroll tax to Medicare. A third of course would be simply to cut the rate.

But there is a category of investment for which that is not necessarily true. I am talking about state, municipal and school bonds. What if at some point we simply ordered Treasury to no longer credit the Trust Fund with the Special Bonds, but instead to invest in a politically neutral way in munis and school bonds. That is all excess contributions and all net interest would be diverted into a balanced portfolio. This would have several consequences.

One) it stops the borrowing. This would effective freeze the current Trust Fund portfolio and require coming up with $93 billion in real dollars each and every year. Then again this figure never goes up, each year it gets cheaper as adjusted for inflation and the growth in the overall economy. This will be painful, but the effect of three) will make it less so.

Two) it invests in state and local governments and schools in financially sound ways. These are not grants or loans, but actual interest earning investments. On the other hand it should have the effect of lower their borrowing costs by keeping interest rates on munis lower than they would be if they were relying totally on the private market

Three) it is politician friendly. The borrowing can be structured so that equal amounts are made in every Congressional district. (The more socially conscious out there may squawk about lending Westminster County the same as some County in Mississippi. But this isn't about social investing, it is about retirement security.) Sure the check will probably be delivered by a delegation of Senators and the local Congressman, as long as the bonds end up back in Social Security's portfolio who cares who takes the annual credit for delivering.

I have not totally fleshed this one out, and there are probably some political/economic effects I am missing. As long as the returns from the Munis are reinvested the net value of the overall portfolio should not shrink, while the General Fund responsibility shrinks in relative years each year that passes. Alternately the General Fund could transfer extra to redeem the actual Special Treasuries, and these dollars could be invested in outside bonds. The question is what is the appropriate level of Treasury Bonds to manage economic risk. That is a question for the economists, but generally the bonds I am talking about have relatively secure income streams, and if picked carefully fairly low levels of risk.

I don't know nearly as much about the numbers in Medicare. I have scanned the Reports. But you need to know four things.

One) The Medicare Trustees simply adopt the Intermediate Cost economic assumptions of the Social Security Trustees. Not surprising, they are the exact same people. What this means that any projection of Medicare insolvency is building in some pessimistic income numbers. There will be more income going into Medicare from payroll, maybe lots more.

Two) If Low Cost comes to pass, there may be an opportunity to lower Social Security payroll tax and simply add that same amount onto Medicare. Same overall tax burden, but a big chunk of extra cash.

Three) The debate assumes that we as a nation are simply helpless in the face of rising medical costs, that they go wherever they go. Well to a certain point that is true, but there will be a breaking point where collectively we say "Basta, there just isn't enough money to pay at the current rate"

Four) A lot of medical procedures have dropped in price. We are spending a lot more money in gross because conditions that were essentially untreatable have become treatable. We have expanded the range, but the range of health conditions is not without limit. At some point you start perfecting your craft and prices start to level off or drop.

And finally a thought experiment. How many billions in dollars of productivity could be saved if a drug that stopped the onset or progress of Alzheimers was introduced tomorrow? Lots of lots of billions, not just from the productivity regained from the patient but also from the producivity regained from the care-givers. Does anyone doubt that some sort of systematic cure for some of these senility and genetically based diseases won't be coming down the road.