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We Don't Have a Social Security Crisis.
We Have a Debt Crisis.
2005 article

I hear that the Bush administration has decided not to use the word crisis with respect to Social Security-it doesn't poll well. And they've abandoned the term privatization in favor of personal retirement accounts -I'll have more to say about that in a moment. Of course, they were ultimately going to face a greater problem with the crisis word than its popularity, and that is that their privatization scheme won't fix the supposed crisis, and if passed, will indeed exacerbate it.

There is an imminent financial crisis in the United States, which will threaten the retirement security of Americans. But it is a not a Social Security crisis; it is the crisis created by our decades-long reluctance to operate our government on a pay-as-we-go basis. It is the National Debt.

OK, this gets a little complicated, but unlike the President, who seems to think you're pretty stupid, I'm sure you are smart enough to follow it.

Here are the big pieces:

  • Social Security has plenty of money right now.
  • More money is coming into the system than is going out.
  • That will be true until about the year 2020.
  • There's enough trust fund money to pay benefits from 2020 to about 2045.
  • But woops, the trust fund money is invested in U. S. treasury securities.
  • The Treasury will have to return the money to the trust fund, with interest.
  • No problem, if we have eliminated the deficit by 2020.
  • Big, expensive, but solvable problem if we haven't eliminated the deficit.
  • Eventually, the trust fund may be exhausted, possibly about 2045.
  • We can easily solve the 2020 problem and the 2045 problem.
  • The solution will involve small increases in the retirement age and small increases in Social Security contributions.
  • Those increases are reasonable and rational.
  • Nothing about the President's scheme helps solve the problem at all.

Now the details:

Social Security Works

Social Security was conceived as, and still is, a pay-as-we-go plan. Actually, it's more of a pre-pay plan. Almost the entire work force, and their employers, pay into the system, all the time, through payroll deductions. Then, a smaller group of people-retired and disabled folks, mostly-draw benefits out of the system on a monthly basis. So, you pay in all of your working life, and draw out when you retire.

The system has always worked because, from its very beginning, more money has flowed in than has flowed out. It still does. The money has been accumulating for more than six decades.

Where Is The Money?

And where is that money? It has been put into two funds, called the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund . But it's not physically sitting around someplace. Just like your savings account isn't really in a vault at your bank-it has been invested-the Social Security trust fund money has been invested. All of it. And it has all been invested in the safest thing available, U. S. Treasury securities (bonds, bills, notes, etc.). You can get a whole lot more info on the trust funds at , and on the various Treasury securities at

And just like the savings account money invested by your bank, the Social Security trust funds earn interest, that's interest paid by the full faith and credit of the United States Government. Wait, what's that sound?? Oh, that's a bunch of my readers screaming over that last statement. Never mind, I'll explain it all in good time.

Today, counting the money collected from working people over all the years, and the interest, there is more than $1.6 trillion in the two trust funds. Or to be more precise, the U. S. Treasury owes the funds that amount of money. It is part of what is commonly called the National Debt. In fact, it's about twenty-one percent of the $7.6 trillion dollar debt. Want more info on the National Debt? Go here .

The System Is Cash Flow Positive Until About 2020

Now, back to that part about more money coming into Social Security than is going out-like it has been since 1937. Here's where we find the first of two problems with the current structure of Social Security. Sixty years ago, after World War II a whole bunch of people had a whole bunch of babies in hurry-we call it the baby boom. The first of those baby boomers will begin to collect their Social Security retirement benefits in 2007, and the numbers of these retirees will increase steadily for years to come. About the year 2020 by the latest estimates, the boomers will be drawing more money from the system than the workers of that day will be contributing. For the first time in its long history, the Social Security system will be paying out more than it takes in (unless we take some action to change that—stay tuned).

This is where that matter of the trust funds comes into play. The trust fund surplus is more than $1.6 trillion now, but it will be much bigger in 2020 (over $3 trillion), because the boomers will still be paying money into the system until they each retire, and the funds will collect interest on those payments. That will still be happening, even after 2020. The funds don't go broke in 2020; they just start becoming smaller-slowly at first, then faster as they are depleted further.

The problem is that the trust funds will have loaned all of the money to the U. S. Treasury. The Treasury will have to begin paying the money back. How that will happen-and it will happen -depends on how we run the government between now and then. If we get struck smart and responsible before 2020, and have big annual surpluses instead of big deficits, we won't have a problem. What are the odds?

We Can and Will Pay Back the Trust Funds

Suppose we don't get smart? What happens if we have big deficits, like we do today? Well, we'll do exactly what we are doing today. That is, we'll borrow more money to pay what we have to pay. The U. S. Treasury actually pays back money on the debt every business day. People and institutions that hold Treasury notes and bonds cash them in, all the time. But the government doesn't have the money to pay, so every month, they (that's really we) go into the money markets and borrow more. It's really expensive; the interest on that borrowing is currently costing the average working person in America more than $200 per month. If we have deficits in 2020, that kind of expensive borrowing is exactly what we'll have to do to begin paying back the Social Security trust funds. If on the other hand, we have surpluses, we can use the surpluses to repay the trust funds.

So, let's make the silly assumption for a minute that we do get smart, do have surpluses by 2020 (It's possible; remember that we actually did have surpluses in 2000) and can repay the trust funds without borrowing. If that happens, there is no problem for quite a long time. The trust funds will pay Social Security benefits-that, after all, is exactly what they were designed to do.

The Trust Funds Don't Run Out of Money for At Least Forty Years

Ultimately though, we encounter the second of the two problems with the current Social Security structure. That is that the trust funds do run out. By the time the boomers begin to die of old age, the first of their children will be retiring and collecting benefits. The drain on the system may get a little less severe, but it never goes away. In about forty years, maybe around 2045, the trust funds will be empty-assuming that we keep doing things as we're doing them now.

It's probably important here to note that there's a big difference between our ability to predict what the system will be like in 2020 and what it will be like in 2045. All the retirees who will be collecting benefits in 2020, and all the workers who will be paying into the system then, are alive today. Nothing can increase their numbers, and nothing is likely to significantly decrease their numbers. We can make reasonable projections of life expectancies between now and then. So we can see fairly accurately, fifteen years into the future.

Forty years is another matter. A lot of the workers who will be supporting the system in 2045 haven't yet been born, and birth rates can be highly unpredictable. We can anticipate that medical progress will increase life expectancies significantly over the next four decades, but we don't know by how much-life expectancies could rise enormously. And of course many other variables are difficult to forecast. Think back to forty years ago-1965. There were no personal computers or cell phones, birth control pills were new, most cancers were untreatable, most heart attacks weren't survivable, and no one had heard of AIDS. Surely the next forty years will be even less predictable than the last forty.

So Let's Recap

There is no crisis in Social Security today. There are two crisis points in the foreseeable future-the first about 2020 when the system becomes cash-flow negative for the first time in its history-the second about 2045 when the trust funds will be depleted.

The 2020 problem isn't even a problem if we don't have deficits. That's why I say we don't have a Social Security problem-we have a debt problem. It's important to understand the relationship between deficits and the debt to understand that the current debt is a huge part of the deficit problem, but that's beyond the scope of this article. I do engage in that discussion elsewhere .

We Can Fix This

The 2045 problem is very treatable, and anything we do to treat it will also delay the onset of the cash-flow problem beyond 2020.

One more side-trip before we look at the cure for the trust fund depletion: It's entirely possible that this remarkable Social Security system, that has greatly enhanced the lives of hundreds of millions of American citizens for nearly seven decades will ultimately become unworkable. That will happen if life expectancies increase to the point that people's retirement withdrawals simply can't be offset by their children and grandchildren's working-life contributions. That's very possible, maybe likely, but we certainly aren't to that point now, and we won't be there in the foreseeable future.

Now, let's solve the trust fund depletion problem that could leave Social Security insolvent by about 2045. The cause of this problem is easy to understand; more money will be leaving the system than will be going in. There are two possible fixes: reduce the amount going out, or increase the amount coming in. Both are practical, and the best plan is probably to do a bit of both.

A Small and Reasonable Adjustment in Retirement Age

First, let's look at the outflow. We've already made one adjustment to it, and we can easily make more. Full benefits had originally been paid to people when they reached age 65. In 1983, we made modest increases in the retirement age. Now, people born after 1959 will not receive full benefits until age 67. New retirees who were born before 1960 have their retirement ages adjusted on a sliding scale. If you haven't retired yet, and were born before 1960, you can look up your retirement age on the Social Security website .

We could easily make further adjustments to the full retirement age. When Social Security was created, the average retiree lived to about age 77. Today, the average retiree lives to about age 83. People are also healthier and more active in their sixties and early seventies today than they were in 1937, or even in 1983 when we last adjusted retirement ages. And finally, many jobs are less physically demanding now than in earlier years. Today's construction, farming, mining and manufacturing jobs employ machinery and robotics that didn't exist a few years ago, and fewer people work in those jobs.

So, based on life expectancy, health and working conditions, it's reasonable to make some adjustments in the retirement age. Fortunately, small adjustments make big differences in the cash flows. And we don't have to change the retirement age for people nearing retirement now; we can make these minor adjustments for people retiring after some reasonable year, say 2015. If we do this, it will only be the second such adjustment in nearly eighty years.

A Small and Reasonable Adjustment in Contributions

Next, it is reasonable to adjust payments into the system. Why should we expect to get eighteen or twenty years of retirement at the same cost we once paid for a dozen years? Again, small increases will produce big changes in the cash flows.

With these very practical adjustments to the payment and benefit structure, we can easily push the crisis point for negative cash flow from 2020 to 2030 or later, and push the crisis point for depletion of the trust funds from 2045 to 2070 or beyond-even to the point that the funds will never be depleted (assuming that life expectancy increases follow current trends).

Time For Another Recap:

  • There is no short-term Social Security crisis.
  • There is a short-term (and long-term) national debt crisis.
  • Possible long-term problems with Social Security can be averted by minor and reasonable changes in its structure-increasing retirement age and fund contributions.
  • That's it. There's no fine print, no hidden costs, no big surprises. That is it.

So What About Those Personal Accounts?

But what of all this talk about personal retirement accounts? Is that a better deal? Is it something that only crazy left-wing pinko commies would oppose?

First, these proposed accounts do absolutely nothing to solve the future Social Security Problem. They don't add money to the system; in fact they take money out of the system. And they do nothing significant for decades to change the payout structure-in other words they don't save any money, at least not before the first potential crisis point, in 2020.

So, what does this scheme do? Several things:

The biggest is that it does a lot of harm by removing contributions from the system. Some estimates say the scheme will remove $2 trillion from the system over several decades. That means that we'll reach the negative cash flow crises before 2020, not after-maybe by 2017 or so. It also means that we'll exhaust the trust funds earlier, maybe by 2030, instead of 2045. All of this is a lot of guessing, because as of this writing, the administration hasn't presented a plan, so in addition to the problems of predicting anything about retirement three or four decades into the future, we're projecting only on what the administration has said the plan might look like.

Next, the personal retirement accounts scheme goes part way down the road of dismantling the Social Security system. Is that good or bad? Well, if life expectancies increase by another ten or fifteen years, a replacement for the Social Security system might become necessary, but that is a distant possibility.

Who Does Social Security Hurt?

Some folks just seem to have a visceral dislike of the Social Security system. I've heard it called everything from a Communist conspiracy to a ponzy scheme.

It's been around for more than six decades. Let's look at who it's helped and who it's harmed. It's helped hundreds of millions of people have a better retirement. Some of them-I've known many-have had a quality of life in their retirement years that they simply would not and could not have had without Social Security. And it's helped millions of people who became disabled during their working lives. Again, some of them have had nothing else to rely on.

So who has it hurt? Well, it's hurt.umh, I guess it did some harm to., well, maybe it cost some. Oh come on, surely anything does some harm to someone-doesn't it?

Now let's look at who the personal retirement accounts will help. And first, let's look at who will get the biggest benefit. Who will handle the two trillion dollars that this scheme will remove from the Social Security system over the next twenty or thirty years? It will have to be invested somewhere, won't it? Who will do that investing, and who will get the investments? Well, it's a reasonable to guess that brokers will handle the investments, and that private enterprise will get the investment money, in the form of bond proceeds and capital investment. So banks, brokerages and investment firms will get huge commission windfalls. And the funds they all invest will become money supply for business-for large and small business, for sure-but which business do you think will benefit more, your uncle's flower shop, or Exxon Mobil? Is this making sense now?

Are U. S. Securities the Safest Place to Invest Social Security Funds?

Oh, and one last thing. When I heard that sudden caterwauling a few minutes ago—readers screaming at the idea of the Social Security trust funds being sustained by the full faith and credit of the U. S. Government-I promised I'd get back to that. As I've said, the matter of the national debt and the deficit are the subject of other articles . But consider this: nobody has ever lost one penny investing in U. S. securities-not one penny-not ever-in the more than two centuries of our history. And as onerous as the debt problem is, and it is critically serious indeed, it is a problem that must be solved and will be solved, for reasons that are much bigger than Social Security. If the U. S. defaults on its debt, it's likely that the worldwide economic system will collapse, and Social Security won't matter anyway.

So let's stop whistling and snorting about Social Security. Let's take the modest steps that will really fix it for the next sixty years or so. And let's get on to solving this national debt problem-the one we absolutely must solve.


copyright © 2010, J. C. Adamson