The Social Security fund isn’t in bad shape. It’s on life support without enough life or support. When Obama’s Debt Commission previewed its thinking a few days ago, it made a point of emphasizing the current Social Security mess. Too many claims, too little money, especially after the baby boomers check in for payment. According to one member, the boomers will “crush the system” within a very few years. So, the Commission is considering both cut backs in benefits and increasing the retirement age.
For sure, if we stay the current course, the Social Security fund will become cash negative in 2015 and completely depleted by 2037. But, laying the blame on people who’ve paid into the system all of their working lives is not merely a minor misdirection. It’s a major sleight of hand and a slight to our intelligence, as well, because, at this late date, the boomers can’t crush the system. Social Security was crushed decades ago by three unmitigated government actions. Since 1980, it’s been Dead Fund Walking, with a current execution date in twenty-seven short years. Tick tock.
The Government’s first major misstep in the undoing of Social Security occurred in the Program’s infancy. In 1935, each person’s contributions were supposed to remain in a Government Fund to be repaid to him or her, with interest, upon retirement. In 1939, this prefunded, “forced savings” plan changed to pay-as-you-go. Contributions from current workers fund payments to current retirees. This change tied the Fund’s fortunes to unpredictable changes in both the size of the workforce and the economy’s productivity. The Government gambled Fund contributions on a future it could not control. The change was a windfall to the first retirees, of course, but it also whipped up the first winds of a perfect fiscal storm.
The storm picked up significant force when the purpose of Social Security transformed from insurance into entitlement. The metamorphosis during Lyndon Johnson’s “Great Society” was the kicker. It expanded the benefits-eligible population far beyond those paying into the system. Although payroll taxes were increased at the same time, the rise in revenue was overwhelmed by the increase in payout. Attempts by later Presidents to fix the problem by taxing some Social Security benefits and reducing payments couldn’t make up for it. Fiscal irresponsibility just seems to be in our Government’s DNA.
The storm surged in 1980. In that year, the Government started grabbing every dime of net Social Security revenue in exchange for unmarketable “special issue” Treasuries only. Prior to 1960, the Government borrowed from the Fund mainly through marketable public debt instruments, which meant the Fund could sell the instruments for cash. Beginning in 1960, the shift to unmarketable special issue paper began. Since 1980, the Fund has received only the special issue debt paper as evidence of the Government’s loans. It also gets more of the same paper as interest payments on the obligations. With less outstanding public debt, the Government’s budget looks better but the Fund’s ability to collect became problematic.
By the end of next month, the Government will owe Social Security $2.595 trillion. Since it already borrows 37 cents of every dollar it spends, there’s no money to repay the debt to the Fund. Unless, of course, the Government raises taxes and/or cuts spending elsewhere, which is not likely to happen in sufficient amounts.
So, here we are today. Social Security has been battered onto life support by a perfect fiscal storm created by the Government when it knew better. The storm’s been in the Fund’s forecasts for seventy years. Public advisories have been posted along the way: A large population about to claim benefits. A small population, decimated by unemployment and lower paying jobs, trying to support the payout. A Government that sucked every net penny from the Fund on a daily basis for decades and now lacks the means to repay the debt. It doesn’t get anymore perfect than that if you’re aiming for a fiscal catastrophe.
What will happen? If you’re 55 or older, you’ll probably survive with your Fund payout pretty much in tact. But for everyone else, the warning could not be clearer. Get another retirement plan. Even if the Government started acting responsibly today, and we know that won’t happen, the storm destroyed the plan it sold you decades ago.
See you in the mirror.