Provisional
Truth |
Essays | December 2005 Saving Social Security
2006
The ticking is growing louder.
In 1998 then-President Clinton
proposed plans to "save" Social Security in his State of the Union
speech. 2000 Presidential candidate Al Gore pledged to create a Social
Security “lockbox.” Last year, President George W. Bush stumped for his
version of Social Security solvency by creating private retirement
savings accounts for younger Americans after making the issue a
centerpiece of his 2004 campaign. Ironically, it was the grandparents –
those already receiving benefits – who most loudly shouted down
the administration's proposals.
Yet with 80 million baby boomers
still hurtling toward retirement and promised social security benefits,
many remain anxious to hear how the government will address a ticking
time bomb set to go off beginning in sometime after 2012. That time bomb
is the crossover point at which annual payments to social security
recipients may begin to exceed annual receipts from employee and
matching employer contributions.
Nearly eight years ago,
President Clinton pledged to protect forecast future national budget
surpluses (gee, a funny thing happened on the way to that
trillion-dollar surplus) to "save" social security from the demographic
swarm of Boomers whose
voracious financial appetite in the 21st century threatens to overwhelm
the diminishing stream of contributions from fewer workers.
A wonderful idea, speaking for
me and my fellow baby boomers, but before we "save" the system let's
examine why it needs “saving” in the first place.
First, the Social Security
system is solvent. It now takes in more than it sends out. It ends each
year with a surplus, and has for many years (thank you Alan Greenspan,
who helped “save” the system the first time more than two decades ago).
Next, the notion of federal
budget surpluses. There weren't any – ever - despite what we heard in
the late 1990s. Apparently only the U.S. government can twist accounting
rules sufficiently to generate a budget "surplus" out of continuing
deficits. Hope you're in good shape because it takes some strenuous
mathematical gymnastics to understand.
Most of us are intimately
familiar with one of the more important generally accepted personal
accounting principles -- namely, if we spend less than we earn in a year
we have a surplus (savings in the bank or a mutual fund or stocks,
whatever) but if we spend more in a year than we earn, we run a deficit,
more often than not funded by credit cards or home equity loans.
Our government accounting and
budgetary wizards, however, apparently never have felt constrained by
such quaint private sector theories. When confronted with the latter
scenario above (spend more than earn) these geniuses also must borrow to
balance the books – in the form of government bonds, but also by
appropriating the Social Security Trust Fund annual surplus. In the late
1990s then, the budget “surpluses” arose soley from the government's
ability to borrow the leftovers from Social Security.
Mind you this practice has been
going on at least since the early 1980s when Social Security began
generating regular annual surpluses and the government was generating
regular mammoth deficits to fund the explosion in programs of vital
national interest such as midnight basketball, grasshopper research and,
lately, bridges to Nowhere, Alaska, zip code $250,000,000. And also,
lately, a very expensive war in Iraq.
How can this happen? What most
Americans do not realize, and most politicians conveniently choose to
overlook because it's too embarrassing to explain (and because
they've got a much better retirement plan), is the Social Security
system essentially has always been a payment transfer mechanism
and not a pension fund.
Employee and matching employer
withholding taxes collected by the government largely are paid out
monthly to Social Security recipients. Any annual surplus of collections
minus payments (roughly $100 Billion in fiscal 2005), however, is not
set aside in a "fund," (or a “lockbox”) but is borrowed by the
government to finance its day-to-day operations.
The government in turn gives its
IOUs, in the form of Treasury bonds, to the Social Security system,
which now holds considerably more than a trillion dollars worth of these
obligations. Funds “borrowed” from Social Security in any given year
represent that much less new national debt (interest-bearing government
securities) the government has to offer to investors, which has helped
keep interest rates down in recent years.
The problem, of course, is that
sometime after 2012 or so the Social Security system may have to begin
redeeming those IOUs. If annual Social Security payments to us newly
retired baby boomers begin to exceed annual withholding taxes deducted
from the paychecks of our working children and grandchildren and the
matching employer contributions, the party will be over.
That would mean the government
would have to begin issuing more interest-bearing bonds to cover those
IOUs which in turn could drive up interest rates, derail the economy and
hurt the stock market exactly when the Boomers want to start cashing in.
Alan Greenspan, the outgoing Fed chief, has warned us of the likely link
between higher deficits and higher interest rates.
If it sounds like a grand scheme
of Peter robbing Paul so our hard-earned social security checks don't
bounce...it is.
But back to the so-called budget
surpluses for a moment. Let's bring the government's tortured accounting
methods down to an individual level and examine their absurdity.
Say someone earning $40,000 a
year spends $28,000 on luxuries like food, shelter, heat, etc., pays
$10,000 in various taxes and manages to save $2,000 in an IRA or 401(k)
plan. Bingo! A balanced budget in which a $2,000 surplus goes into a
long-term savings vehicle.
Someone else earning $40,000,
paying the same $10,000 in taxes, but spending $35,000 on living
expenses has created a $5,000 deficit that must be funded by borrowing.
Now suppose our deficit spender decides to borrow that $5,000 from his
401(k) plan. A balanced annual budget to be sure but at the expense of
our deficit spender's future retirement. (Now if he borrows $7,000 from
his 401(k), he'll then have a $2,000 "surplus" and a likely rosy future
in the government's budget office.)
Taking this farfetched analogy
about 20 years down the road, our deficit spender is ready for
retirement, only to discover that he has now borrowed the entire balance
of his 401(k) plan and there is no nest egg for those golden years. He
probably will have to move in with his children because he won't be able
to afford a place to live on his Social Security benefits which have
been dramatically reduced because too many baby boomers are straining a
government retirement system that really wasn't a retirement system in
the first place.
The only difference between the
government and our deficit spender is the government can issue new bonds
(new IOUs) to pay off the old ones. Hopefully Germany or Japan or who
knows -- maybe China --will be able to buy all that new government debt
that may have to be issued to keep Social Security solvent.
In 1998 President Clinton
also suggested the idea of setting aside a portion of Social
Security contributions into privately managed individual accounts. A
raging bull market in stocks creating a nation of internet-trading
millionaires made that idea seem plausible at the time. The disastrous
impact of a five-year bear market in stocks apparently has left
President Bush's version of that idea “dead on arrival.”
Regrettably, eight years now
have passed, and the ticking is getting louder. As we once again have
learned from the experience of hurricane Katrina, which we saw coming
for days and still didn't
adequately prepare for all
the contingencies, we have seen the Social Security Crisis coming for
years and have done precious little to alter the inevitable.
If I'm not going to receive
those annual retirement benefits projected on the Social Security
Statement Prepared Especially For Me that I received a year ago, frankly
I would rather be told now, while I still have a chance to do
something about it, than to be out of luck 6-12 years from now.
And given that the other
"solutions" include reducing retirement benefits via "means testing,"
and raising the full-benefit retirement age (already soon to be 67),
Baby Boomers, especially those 50 and under, and Generations Xers must
act now to provide for their own retirement by maximizing 401(k)
contributions, making annual traditional or Roth IRA contributions and
by any other means of saving money --now-- because as a recent mutual
fund commercial intoned, "Later is sooner than you think."
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