Dead Boom
Dead Boom
Everyone's in a tizzy about the looming collapse of the Social Security System (SSS). This panic is based on the generally-agreed-upon unsustainable burden that retirement entitlements paid by the system will put on current and later generations of workers.
The concern has been exacerbated by the recent news that the Social Security Trust Fund (SSTF) is now in a negative cash-flow, that is, it is now paying out more than it is taking in. Only two years ago, this watershed was projected to occur in the year 2016, but it occurred instead in 2010, fully six years earlier than expected. This is in large part due to the weakness of the national economy and the high unemployment rate.
It would be good to keep in mind, though, that the Social Security System does not now, nor has it ever, relied on debt or contributions from the general fund to pay current benefits, in spite of what you no doubt have heard from conservative commentators who simply detest the whole idea of Social Security.
That it has recently started to pay out more than it is taking in is just another way of saying that, since its inception in 1935 up to last month (March 2010), a period of 75 years, the SSS has run a net surplus. In some recent years, that surplus has exceeded $150 billion. In the past decade, the SSS surplus exceeded the entire, astronomical Wall Street/banking bailout amount.
Starting this month, (April 2010), the system is now drawing down reserves to pay benefits. It is currently estimated that these reserves will continue to pay benefits at the current level (including adjustments for inflation) to current and new retirees through the year 2037, a date which is certainly just as subject to change as was the watershed cash-flow projection.
But, assuming that projected 2037 date holds, the Social Security System will have been self-funding for over 100 years! No other Federal Government program can make that claim. Up until last month, SSS reserves were invested in U.S. Bonds and T-Bills. As such, they have been invested very conservatively, earning a low but reliable interest for the SSTF.
On the other hand, as a holder of government securities, the SSTF is in essence a lender to the Federal Government, and the SSS bonds and t-bills represent a small share of the National Debt. As these assets are sold to pay current obligations, the SSTF will will decline in value, but the National Debt will also decline at exactly the same rate.
When conservative commentators say that "there is no Trust Fund," or that "current benefits are paid for by current earners," they are fudging the truth to make their case. Up to 1965, the SSS was kept "off the books," that is to say, it was not accounted for as part of the federal budget. It neither contributed to the deficit nor to the surplus, and was truly a trust fund, separately accounted for.
But due to the large deficits during the Johnson administration attributable to the expense of the Viet Nam War and a recession, the Congress decided to end that practice and thereafter to include the SSTF in the federal budget. This was a very cynical ploy to help mask the depth of the general-fund deficit by offsetting a large part of it with the annual surpluses then being run by the SSS. This has been the case ever since, a period of 45 years.
All the presidents and all the congressmen who have served since Lyndon Johnson was president have quietly accepted the financial smoke-screen provided by the SSS. The change was, and is, of course, merely a book-keeping trick, but far from Social Security being a drag on our national budget, it has in fact been a cash cow, and every politician in Washington knows it. The passion for privitization of the sysyem only gained traction once it became apparent that at some point the system would no longer be available to subsidize Congress's voracious appetite for ear-marked spending.
It is very common that front-end expenditures by Government pay for all the research and capital investment of new industries until they are shown to make a profit, then market zealots insist that they be turned over to private industry. (Railroads, aircraft, mineral exploration, internet, etc.)
This is a case of the mirror-image. Cynical politicians have wanted to keep the SSS in-house only so long as it was making money. As soon as it started to lose money, they wanted no part of it.
But, without a doubt, the system cannot continue as it is now. We have approximately 27 years to make some systemic changes, and again, in spite of what is commonly said about Social Security, it is not the fatal third rail that it is claimed to be. It has been claimed throughout its history that the SSS would "run out of money" soon, meaning in the 40's, the 50's, the 60's, the 70's and most notably, the 80's when the system came as close as it ever had to negative cash flows. In each case, the president and the congress hammered out revisions and adjustments to the FICA payroll taxes and benefits schedules necessary to ensure the system survived.
Unfortunately, three trends have conspired to overcome these corrections and imperil the system. First, of course, is the baby boom. There is now a much larger cadre of retirees receiving benefits as a percentage of current workers paying into the system than there has ever been in the system's history. And this ratio will only increase in the future.
Second, Americans' life spans have significantly increased during the period in which Social Security has existed. This substantially increases the total benefits individuals will receive from the system over time.
Third, it has been politically expedient to make changes to the system to increase rather than decrease benefits, and to broaden the population eligible for benefits.
Each of these trends is reversible, and each is somewhat self-correcting.
As the end of the SSTF looms nearer, the political liabilities of not acting to fix the system will become greater than the political benefits of increasing benefits. There are already indications of this happening. In system corrections in the past, incremental changes including reductions of benefits have been accepted by program recipients without disastrous consequences for the politicians of the time, so long as the changes have been cast as non-political and necessary for the survivial of the system.
The life span increases of the past century have substantially slowed down, and show signs statistically of leveling out. It is unreasonable to assume that the 25% to 30% increases in life expectancy experienced by working Americans in the last century will be repeated. On the other hand, it perfectly reasonable to raise the retirement age such that the period of retirement (and thus dependency on the system) as a percentage of their overall life-span remains constant (or, if fiscally necessary, even declines). Should life-spans continue to increase, this adjustment can be made repeatedly.
Finally, at some point, the "baby boomers" will be dead. I expect everyone will be relieved, if only because they won't have to hear about them (us) all the time! Although there is an "echo boom" or bulge in population in the next generation due to the children of the boomers coming of age, and eventually of course, retiring themselves, the "echo boom" is statistically a much less prominent bulge than the original boom, and any second-echo boom seems not to be materializing at all, due in part to a general decline in family size.
The "Dead Boom" of the passing of the baby boomers will be accompanied by the largest inter-generational transfer of wealth in the history of man. My grandparents supported their parents into retirement with virtually no outside help, but the effort left them with little beyond their basic needs. My parents supported my grandparents in their retirement with some help from the Social Security System, which began during my grandparents' lives. My parents' lives, therefore were somewhat less burdened by the retirement of their own parents than the generations which preceded them, and their retirement while not luxurious, was comfortable. My parents retired, completely without help from my generation. Thus I and my parents have benefitted substantially from the existance of the Social Security System by way of the reduced burden placed on us by aging parents, whether or not my generationreceives benefits directly.
Boomers, for the most part, are not only retiring with an unprecedented prosperity and negligible dependece on their children, but when they die, we will leave behind us assets substantially greater than the contributions made by their children to the Social Security System. For at least the third generation, boomers' children will be beneficiaries of the Social Security System well before they themselves will retire.
Yes, it is necessary to make some changes in the Social Security System. But the system has worked a social and financial miracle on the opportunities for the freedom and independence of both working families and the elderly in our nation for nearly a century.
Don't panic, and don't throw the baby out with the bath water.
posted by Mique @ 9:42 PM
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