TheAgitator.com
Because It Can’t Be Said Enough
Tuesday, March 2nd, 2004This article in today’s New York Times outlines the approaching Social Security meltdown.
“The Medicare trust fund will start running deficits in 2013 and run out of money by 2026. Starting in 2018, the Social Security System starts paying out more than it takes in and will have to dip into its trust fund. By 2044, the trust fund will be exhausted.”
The trick is that the Social Security “trust fund” isn’t really there.
When Social Security revenues exceed payments, the surplus is used to buy bonds from the Treasury and the money is spent to finance the government’s general operations. The Treasury covers it’s bond obligations from taxes, or by issuing more bonds. The idea, of course, is that the government will be able to pay that money back at some future date, with interest.
Currently The Treasury can meet it’s bond obligations for Social Security, because there are more Social Security taxes coming in than payments going out. However, as noted in the article, that won’t be the case much longer.
When Social Security payments begin to exceed the Social Security taxes coming in, the difference will have to come from the general fund. Even if we had a balanced budget today, this would be a huge problem. Unfortunately, a Congressional Budget Office estimate pegs the 2004 budget deficit at $478 Billion, with a 10-year projection of $2.75 Trillion.
“In 2002, two senior economists at the Treasury Department were asked by Paul H. O’Neill, then the Treasury secretary, to come up with a comprehensive estimate of the federal government’s long-term fiscal problems. The total, calculated Kent Smetters, then a deputy assistant secretary for economic policy, and Jagadessh Gokhale, an economist on loan to the Treasury from the Federal Reserve Bank of Cleveland, was an almost unthinkable $44 trillion.”
“Adding in the new prescription drug program, (Professor Kotlikoff of Boston University) said, the imbalance is closer to $51 trillion.”
Clearly, something has to give.
Get more info on Social Security choice
UPDATE: Steve comments that Paul Krugman has an op-ed today that looks at the issue from another side. In a way, Krugman helps to illustrate part of the problem with the Social Security debate. His article rests on the premise that Social Security and the federal budget are independent of one another.
All the more reason to support privatized savings accounts.
Oh, but don’t tell that to Paul Krugman, whose semi-weekly disotrtion today calls it a “non-crisis.” Seriously. And privatization is a right-wing plot to give Social Security the axe.
By the way, Alan Greenspan eats babies.
Er, distortion. Why can’t I spell today? Damn you public education!
OK, so let me get this straight. General revenue owes Social Security a mess of money. If you look at that money as an asset to Social Security, then Social Security is fine and general revenue is completely screwed, and this is Paul Krugman’s point of view.
If you look at Social Security and general revenue as one big Uncle Sam, then Social Security is a lot more screwed, and general revenue is slightly less screwed. This is Brian Kieffer’s point of view.
Am I right so far?
If so, I don’t think either view is completely accurate. Banks regularly treat money they’re owed from loans as assets, so Krugman isn’t totally wrong. On the other hand, those loans are generally issued to people who can show they have a plan to pay it back, so Social Security’s bonds are not nearly as reliable.
“The Medicare trust fund will start running deficits in 2013 and run out of money by 2026.”
Doesn’t surprise me. I turn 65 in 2026.
I started saving for my retirement when I was 22 because I knew this would happen.
Everybody else knows this is going to happen too, but whenever somebody talks about doing something with Social Security/Medicare, they get voted out of office.
“In 2044, the trust fund will be exhausted. . .”
trust fund. Ha. If it weren’t so damned angering, it would be funny.
I’ll be 65 in 2042. Me = SOL.
Guess I’ll just have to start saving now. Yes, I’m starting late, but that’s the sorry fate of a poor microbiology graduate student. Man, I really am SOL.
Bronwyn–
Substitute “neuroscience” for “microbiology” and everything you just said applies to me as well. Even the age.
Freaky.
Oh yeah, and I feel your pain.
Something’s gotta give. Trouble is, I haven’t the slightest idea what. That scares the hell out of me.
Switzerland sounds nice. I think I’ll start learning German now.
65 isn’t retirement age for you guys…its later. feel free to apply for Island citizenship, I might have some pull with your application…
“Privatising” Social Security will only bring the system into gross default much sooner unless part of the “privatisation” plan includes cutting benefits and raising the retirement age, which Cato’s people seem to be adamant won’t happen or need to happen.
Question: What happens when a system nearing deficits suddenly has half its revenue cut off?
Answer: A whole lot more deficit.
End Social Security completely and immediately.
- Josh
It amazes me how I can agree with Krugman one day and think he is a total whack-job the next. “nonexistent crisis”? “willing to accept a regressive tax”? “deficits offer an excuse to squeeze government spending”?
Alright Paul, here’s the story:
1) SS is doomed due to simple numbers. It’s a pyramid scheme, and as the ratio of worker to old fart approaches 1, it is simply unsustainable without the worker signing over most of their check.
2) These taxes get snuck in so that few people notice them. And all those AARP farts have no incentive to cry about it anyhow, since they are the ones benefiting.
3) Oh yeah, the Republicans needed deficits as an excuse…it’s not as though they got to the deficits by RAISING spending 25% in three years. Oh, and BTW, the economy tanked too.
it’s not y’all i’m worried about. you folks are informed, you have the ability to make changes in your life now and start to save more so that you can provide for your own retirements in a few decades. it’s those people who are completely unknowledgeable, don’t watch the news or read, and plan to rely on the safety net of SS that make me really nervous. not the folks who are already in their 60s and even 50s, it was a different mentality for those generations i think, but those that are younger, that need to become adjusted to the idea of saving/providing for own retirement. i don’t know quite how to address the issue though…michelle
Michelle, even scarier is how dependent we’ve become on credit and debt. Our children (I’m 29) will hardly know how to only spend what you have much less the value of savings.
On the other hand, we are intelligent beings. And someone will come up with a great answer (at least it will seem great until 5 generations later when people start reaping the “benefits” of said answer, ie social security/welfare/foodstamps/medicare). Half of us may starve to death before it happens, but man-kind has a way of sustaining. And HEY, the environmentalist wackos won’t have to worry about over-crowding for another 500 years. Far-readching point, I know.
i wrote a paper on privatizing social security 2 years ago. my grad school professor put his hand on his forehead and just looked at me when i mentioned that was going to be my topic. i knew i had hit a hot button then….i got an A-. :) i think the most important thing i took away from the research at the time was saving via 401K and if your company does not have it, definitely IRA. you really really have to. even if it means eating mac and cheese and ramen noodles 5 times a week…michelle
Here is my personal nightmare, as a 27-year-old.
I have been planning as if Social Security will not exist when I retire. In part this is because that’s the sensible thing to plan, in part it’s because taking government handouts is filthy. So I’m confident that if SocSec dies and no hyperinflation intervenes, I’ll do okay if I ever retire.
But what if it’s worse than that? The rhetoric we’re hearing from the left and to some extent the right is increasingly dismissive of private savings. When means-testing for Social Security isn’t enough to stop the bleeding but those of us who saved rationally are still getting by, when demographics puts a trillion dollars into private tax-free retirement accounts at the same time that the economy is sputtering, it’s going to look awfully tempting to the government to socialize retirement completely. What if the government decides to start taxing all of those notionally tax-free savings?
My increasing worry is that by walling of my savings in a “retirement account” I’ve really just walled it away from any chance I might have to get it out before the government swipes it. It looks to me as though 401k and the like might not be so clever as I had thought after all.
–G
I have two more words to contemplate:
“Peak Oil”, Just do a Google or Vivisimo search on it and Social Security will seem like a second-rate problem
Imagine my embarrassment when I read that Ms. Dani was younger than I. All this time I have been picturing her looking like my kindergarten teacher (the last women I remembering going by Ms.) a 50 (now 75) year old women wearing a shawl. As for life savings, I am in the same boat as Brian, except exchange neuroscience for medical student. I â??reinvestedâ? my savings (250k) into my education with hopes that it would pay off, thatâ??s looking slim with socialized medicine on the horizon. But as most leftist, and a majority of the academics at my University keep reminding me, I should only be doing this because I love the work, not because of the money.
devin-socialized medicine! say it ain’t so! them’s awful dirty words…
there is no doubt that the age one begins to receive benefits from SS must increase. i would raise to age 70 in the next 2 years, and continue to increase until SS is phased out completely. this concept in some shape or form needs to be plastered on the front page of every newspaper. some peeps really do need a shake up/reality check about the viability, lack thereof, of this massive government entitlement program. michelle
Grant’s comment struck me. All the finance mags and sites tell me that at my age (26), I should be doing Roth (pay taxes now to be tax-free later) rather than Traditional (tax-free now, pay taxes later as I pull the money out of the account).
But I can’t shake the feeling that Roth won’t *quite* be tax-free upon distibution in 40 years, meaning I’d essentially be paying taxes on that money twice. Better to take the deduction now. If things look reasonably ducky in 25-30 years, *then* I might put my trust in the “tax-free” status of Roth withdrawals in 40.
First off, let’s dispel with the ridiculous myth that the Social Security Trust fund doesn’t exist.
The total federal debt is around $7 trillion, which includes over $2 trillion in “intragovernmental debt”, or some jargon like that. The majority of this is the SS trust fund.
Therefore, the trust fund is filled with U.S. Treasury debt, which currently yields about 4% for 10-year notes. Treasuries only yield 4% because they are the safest investment in the world – there is absolutely zero chance that the US government will default on any dollar denominated debt.
Secondly, although this trust fund is projected to be depleted by 2040 or so, that does not mean that retirees will not receive any SS payments. Those under retirement age will continue to contribute, and these funds will be available for retirees. Admittedly this will be less than retirees are getting now, as longevity has increased at a far faster rate than the SS retirement age(the real cause of the coming SS crisis), creating a much lower ratio of workers to retirees, as someone mentioned above.
Greenspan, though having wrecked his credibility by supporting Bush’s tax cuts, is actually correct regarding his social security suggestion. Lowering benefits by decreasing the annual increase to a truer measure of real inflation is definitely one way of partially dealing with the problem.
Neither party, in an election year, is going to pay any heed to his call, unfortunately.
Wallster:
Let’s say I receive one million dollars. I take the money, loan it to myself and give myself an I.O.U. promising to pay myself back the million plus 4% in interest. Then I blow the money on a $1 million party.
Do I actually still have a net worth of $1 million plus interest? That’s Social Security “accounting” for you!
Here’s the bottom line: It doesn’t make a damn bit of difference whether the S.S. trust “fund” has NO money or $46,000 trillion dollars. It’s a sham. A fraud.
Michelle-Dani,
I’m a recipient of SS and fortunately it has been a good thing, but the politicians we’ve elected did things that were foolish and we not only allowed them to perform foolishly we even encouraged them.
In 1937 Roosevelt swore a holy oath that the SS fund would never be touched, but we were subsequently sold on the idea that the country needed to borrow it so we have a bunch of IOU’s and the fund trully no longer exists. So much for empty oaths. Then it was again affirmed that it was holy and untouchable for any other reason than retirement. Kennedy needed votes and began espousing that the sick and infirm should be elgible to receive benefits, so much again for oaths never to touch the back up fund.
LBJ was in trouble with the electorate and began to preach Medicare. We fell for the same line again, but we did raise enough hell that he swore that medicare would never exceed 65 Billion per year. The first year blew that figure right out of the water, just like his Gulf of Tonkin incident.
I don’t know what the democrats were smokin’ at the time or since, but they are masters of puttin’ their arm around us and tellin’ us what we like to hear, then kinda’ sneakin their hand into our great grand children’s pocket and blamin’ it on the Republicans who are not sure of what game we’re playin. Both parties are certain of one thing, neither one is to blame for anything. That’s why democracy was invented so no one is responsible for anything and the taxpayer is the one with their foot in our ass.
Brian! Devin! Mi compadres :-)
So now that we all know each other a little better, it appears that most of us are 20-something intellectuals with no hope of ever seeing one red cent of our SS contributions. No wonder we get along so well.
*tongue planted firmly in cheek*
And yeah, I know we wouldn’t see OUR contributions. . . just sayin’
Mark – our federal debt is $7 trillion. Do you believe that we’re good for that $7 trillion? Investors do, otherwise the long bond wouldn’t be yielding under 5%.
The bottom line – the SS trust fund is fully invested in US treasury securities. At some point, general revenues will have to exceed expenditures in order to pay down our debt, or we’ll have to roll more treasuries over into the open market – this may cause some dislocation, however the trust fund is less than 30% of the overall federal debt – we’ll run into the same issues dealing with the other 70%+ as well.
Think of it this way: trust-fund non-believers would prefer that it was invested in non-treasury securities, such as corporate or municipal debt, equities, or foreign securities. That way they could look at a quarterly statement, see all the tangible assets owed the trust fund by outside parties, and be comfortable. Perhaps they are right, as the trust fund could probably be earning a higher return on a more diversified portfolio, but the federal debt would still be $7 trillion. The treasury would have simply turned to the financial markets for the extra $2 trillion in financing rather than the trust fund.
Wallster:
The current debt is $7 trillion. Can the government pay this? Of course. They always have the printing press if they can’t pay it from tax revenue. However, unfunded future Social Security liabilities for this century are over $40 trillion or more. Is the government good for that? Well, not without huge tax increases, benefit reductions or inflation, or a combination of all three. An unanticipated major ecomonic boom also might solve the problem, but nobody is counting on that.
I still maintain that the amount of money in the “trust fund” is irrelevant.
I don’t want the government to invest money in private investments, I want Social Security abolished. (Yes, I know that will happpen when pigs fly.)
Is the Brian Kieffer that went to Dunwoody High School?