Last week, the annual report on the Social Security and Medicare programs were released. The following are some of the highlights.
'In the 2008 Annual Report to Congress, the Trustees announced:
'The projected point at which tax revenues will fall below program costs comes in 2017 -- the same as the estimate in last year's report.
'The projected point at which the Trust Funds will be exhausted comes in 2041 -- the same as the estimate in last year's report.
'The projected actuarial deficit over the 75-year long-range period is 1.70 percent of taxable payroll -- down from 1.95 percent in last year's report.
'Over the 75-year period, the Trust Funds would require additional revenue equivalent to $4.3 trillion in today's dollars to pay all scheduled benefits.
''Social Security is at a crossroads. We face enormous challenges to shore up the system,' said Michael J. Astrue, Commissioner of Social Security. 'I will continue to work with President Bush, Congress and our stakeholders to develop policy solutions. I also look forward to working with the next administration, since the challenges that face the Social Security system will undoubtedly require a bipartisan and multi-year effort.''
There has been an incredible amount of fear mongering over the subject of Social Security. The fact is that it is in far better shape than almost any defined benefit plan in the country. Most private defined benefit plans just have to show the projections for the next 30 years, not the next 75.
There is a political agenda out there to try to cut Social Security when there is no real need to do so. Since 1983, the dedicated taxes which support it have far exceeded the amount paid out, and have done so at an accelerating rate. That surplus has been invested in T-notes. The budget deficit most commonly referred to is the combined deficit, and that has been greatly reduced by the Social Security surplus.
Next year, the amount of the surplus will actually begin to fall. In 2017, it falls below the zero line, and the trust fund will start to be utilized for its intended purpose. To claim as some have that this represents a crossroads and that we face enormous challenges to shore up the system is frankly absurd. It is sort of like saying that when you reach age 70½ and have to stop paying into your IRA and start withdrawing funds that you are somehow bankrupt.
Even when the trust fund is exhausted in 2041, 33 years from now, Social Security will still be able to pay 78% of all scheduled benefits, and do so forever. Those scheduled benefits will be larger in real terms than the current benefits. Also keep in mind that the actual report looks at three different scenarios: the Low Cost (LC), Intermediate Cost (IC) and High Cost (HC) scenarios. All of the headlines are based in the IC. However, over the last decade, the actual progression has come in far closer to the LC than the IC scenario. Under the LC assumptions, Social Security is solvent forever!
Social Security has a dedicated revenue stream, one funded by an extraordinarily regressive tax. The vast majority of people pay-in all year round; highly paid professionals get a boost in their take home pay after they have earned about $100,000 for the year. That means that most CEO's are done by the time they shake their hangovers from New Years Eve.
For years now, that tax has been subsidizing other government spending (and tax cuts). The bonds in the trust fund are just as valid as the T-bonds held by a bank, an insurance company, a bond mutual fund or a foreign central bank. Those that argue that it is just a bunch of 'worthless IOU's' are, in fact, arguing for the U.S. government to default. If you thought the failure of Bear Stearns (BSC) would shake the financial system, just think of what a default by the U.S. government would do.
Yes, when the government borrows it has to pay the money back, even if it has borrowed the money from average working Americans who pay into Social Security. So, starting next year, the reported budget deficit will be a little bit bigger than it would have been, because Social Security will be papering over less of it than it is this year. Come 2017, it will not be papering it over at all.
In that sense, yes, either spending will have to be cut, taxes increased, or funds borrowed from elsewhere. However, there is nothing that says that the tax that has to be raised is the most regressive tax in the country. There is nothing that says that the spending that has to be cut is Social Security benefits.
If a private insurance company decided that after years of your paying into a deferred annuity program, when it came to the time for you to receive your payout it would unilaterally cut the amount simply because of losses at another division (or because it paid out too much to its CEO over the years), it would be committing fraud. It's not Social Security that is going broke, it's the rest of the government. The Commissioner of Social Security, a political appointee, is laying the groundwork for the largest fraud in the history of mankind.
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