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.

Posted by Jim Newton on Oct 9 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.