The Coming Social Security Crisis

There is an enormous amount of misinformation about Social Security being put out of late, primarily by Democrats who oppose George Bush’s reform of the program. However, the Wall Street Journal does an admirable job of correcting the record. Here are the relevant parts from their editorial….

“Back in the 1930s, when the country was shaking off the Great Depression, it became apparent that the elderly were especially suffering–not only had they lost income and assets but there was no time for them to recoup. And so was born FDR’s greatest contribution to the welfare state. The notion was that Social Security would nick a little bit off everybody’s paycheck with a payroll tax and then redistribute that money to anybody over retirement age. The holding pen for this pay-as-you-go transfer was called, brilliantly if dishonestly, a “Trust Fund.”

Demography made the whole arrangement work for a long time. In the 1930s there were 41 workers for every retiree; the payroll tax could thus be set at a low rate–about 2% for the first $3,000 of earnings. It was quite a deal for the beneficiaries–the average rate of return for people retiring in 1940 was 114%.

And like all income redistribution programs, Social Security presented politicians with lots of incentives for sweetening. In the 1950s, Congress started increasing both benefits and the number of people covered. At the same time, however, the demographics were turning sour. Life expectancy was rising to the 78 years it is today, from 69 for men born in 1940. And fertility rates were declining, from 2.2 children per woman in 1940, to a peak of 3.7 in 1957, to two per woman right now.

No surprise, then, that the ratio of workers to retirees began to fall–in 1950, it had dropped to 16 workers to one retiree and now it is just three to one. Payroll taxes have had to rise accordingly–they are now 12.4%. And real rates of return have gone into a free-fall; real returns for workers born in 1960 and retiring in 2025 are less than 2%.

Bad enough, but it is all about to get much worse. Over the next 20 years, as the Baby Boomers start retiring, the number of retirees will jump to around 77 million from 47 million today. The worker-to-retiree ratio will drop to two to one, and real returns for some could be negative.

The Social Security system will start running a deficit by 2016 when benefits exceed annual payroll tax revenue. The “Trust Fund” surplus will be totally eaten up by 2042 (or a decade later, depending on economic and demographic assumptions). Then Social Security will have to rely solely on revenue from the payroll tax that will not be sufficient to pay benefits.

The immediate problem is that payroll taxes during the surplus period that began in the 1980s were not saved in the mythical Trust Fund; instead the taxes were used to finance other government spending. The Fund is merely the repository for special-issue bonds that are a liability to the federal Treasury. In order to redeem these bonds, the government must increase taxes or borrow (thus making concrete, or recognizing, the debt the bonds do in fact represent). And we’re talking about huge amounts: Bonds credited to the Trust Fund now exceed $1.5 trillion. By 2016, when the shortfall begins, that figure will have grown to over $3.2 trillion in today’s dollars.

This isn’t just an accounting crisis. According to figures from the Congressional Budget Office, Social Security is running at about 4.4% of GDP and revenue at about 5%. While revenue is expected to stay fairly constant, outlays will rise to 6.1% of GDP in 2030. Combine Social Security with Medicare and Medicaid, and spending is running at 7% of GDP. By 2030, when most of the boomers are retired, spending on these three programs will shoot up to almost 15% of future GDP.”

Here’s the key paragraph from that excerpt…

“The Social Security system will start running a deficit by 2016 when benefits exceed annual payroll tax revenue. The “Trust Fund” surplus will be totally eaten up by 2042 (or a decade later, depending on economic and demographic assumptions). Then Social Security will have to rely solely on revenue from the payroll tax that will not be sufficient to pay benefits.”

Here’s what you have to understand: there is no trust fund, no lock box, no Social Security account with your name on it. All the money that has been taken in has been spent. People get confused about that because there are “special-issue bonds” that are supposed to be used to pay off Social Security. But in this case, those bonds are nothing but IOU’s.

Think about it, if taxpayers give the government their taxes and the government spends all of that money, how can they be saving it in a “trust fund” at the same time? Well, they’re not saving it, they’re just making bonds that will have to be paid off by future taxpayers. So when the program starts running in the red in approximately 2016, there isn’t going to be any pile of money to dip into. The shortfall will have to be met by running a deficit, raising the age limit, or reducing the amount that’s paid out.

That’s why George Bush is trying to change the program. He’s looking to privatize (I know the Bushies hate that word, but that’s what he’s doing) a small portion of the accounts, somewhere between 2%-6% of the money for each person. My guess is that, sadly, Bush will fail at trying to reform the program in large part because the Democrats are going to lie through their teeth and play this as a purely partisan issue (He’s going to try to take your Social Security away!). Just take a look at what Tom Daschle’s replacement Harry Reid said about it,

“(A)ll experts say that Social Security beneficiaries will receive every penny of their benefits that they’re entitled to–100 percent of them–until the year 2055. After that, if we still do nothing, they’ll draw 80 percent of their benefits. I want those beneficiaries after year 2055 to draw 100 percent of their benefits. But this does not require dismantling the program. For heaven’s sakes, they’re crying wolf a little too regularly here. There is not an emergency on Social Security. We can do this. The president should not try to jam this private accounts in an effort to destroy Social Security.”

Lol, “all experts” say that huh? It’s good until 2055, huh? You know the sad thing isn’t just that Reid is willing to lie about this or that so many people who don’t know any better will believe him, it’s that so many liberals and Democrats who do know better will allow these sorts of lies to go unchallenged in order to stick it to Republicans, no matter how many average Americans end up getting hurt by it.

You want to know what’s probably going to happen with Social Security because we’re not willing to act now? Congress will end up waiting until the program goes in the red a few years down the road and then they’re going to jack up the age, slash the benefits, and then rinse & repeat every few years. We could do better than that if we took action now, but my guess is that in a climate where Democrats in Congress largely define themselves as being “not Republicans,” it’s just not going to be possible.

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