Social Security only needs a few “tweaks” … really?
During last week’s presidential debate, President Obama — while responding to a question regarding entitlements — indicated that Social Security (SS) is fundamentally sound and only needs a few tweaks. And what was the response of Republican presidential candidate Mitt Romney? A smile in apparent agreement.
Amazing — truly amazing!
One has to wonder who precisely these two gentlemen should be compared to in this almost inexplicable answer. Are we dealing with Tweedle Dee and Tweedle Dum(b) since they both seem totally unaware of the dire problems of SS? Or perhaps they can best be represented by the three monkeys who wish to see/hear/speak no evil. Whatever the comparison, the American public is once again seeing politicians stonewalling an issue, since any solution happens to present unpleasant choices to voters, whom politicians need to put together a winning coalition.
Just to review a matter this column has addressed a number of times in the past, SS is — and will continue to be in its present format — a pay-as-you-go program. By its original design, the premiums paid by present workers are used to fund the benefits of current retirees.
During the early 1980s, SS was beginning to develop funding problems, so a number of changes were made in contribution rates, applicable income limits and required ages for access to full benefits. One consequence of these changes (which was fully recognized at the time) was that far more would be paid into the system than the amount needed to pay current retiree benefits. The excess funds went into a “SS Trust Fund” which were supposed to be set aside in secure investments until needed in the future (which is to say, now).
Wanting to guarantee that these excess funds would be “invested” in a super-safe vehicle meant that the excess dollars were required to be invested in U.S. Treasury securities. The borrowed funds could then be spent by the U.S. Treasury (another name for the federal government in this case), with the federal government paying the Trust Fund back, with interest, as time progressed. Of course, with the funds already spent by the federal government to support on-going general fund expenditures, the loaned funds could only be repaid with additional monies borrowed by the U.S. government.
As matters stand, according to the annual Trust Fund report issued earlier this year, SS booked an “operational” deficit in 2010 (the amount by which non-interest income was exceeded by expenditures) of $48.9 billion. Moving into the future the “intermediate” projections (that is to say, not too optimistic and not too pessimistic) are for operational deficits to continue indefinitely into the future. Under these assumptions, the “Trust Fund” will be depleted somewhere around the year 2036. After that time, the SS System becomes insolvent and will only be able to cover about 70–75 percent of its obligations based upon future anticipated income from workers.
But the year 2036 is, functionally, a federal government fairytale. Between now and 2036, SS is supposed to meet its obligations with current worker contributions, interest income on Trust Fund holdings, and the eventual sale of the Trust Fund assets. But keep in mind, the Trust Fund assets are simply Treasury securities, which thus represent one entity of government (the U.S. Treasury) owing funds to another government entity (the SS Trust Fund).
But government (the U.S. Treasury) can only meet these obligations by borrowing more funds in financial markets; thereby producing ever-larger deficit/debt positions that present or future taxpayers will be required to repay. Were this kind of financial flimflam undertaken by anyone other than the federal government, the result would almost certainly result in a court case involving an accusation of massive consumer fraud. Compared to the federal government, Bernie Madoff is a slacker when it comes to bilking the American public.
To be fair, President Obama was correct when he indicated that Medicare is a far more significant future budgetary problem than SS. What he (and by his silence, Governor Romney) did not say is that the biggest problem of all is Medicaid. Particularly significant is the potential for some 15 to 17 million newly covered Medicaid recipients coming into the government’s funding requirements under ObamaCare; causing both federal and state government budgets to be busted as time progresses.
Perhaps given comparisons to Medicare and Medicaid, the changes needed under Social Security may seem like mere “tweaks” to our nation’s politicians and bureaucrats, but to the taxpayers who will pick up the tab, this is real money.
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.