Social Security Heading for the Red

In an article on Foxnews.com, they report that financial analysts are predicting that Social Security and Medicare will run out of money earlier than has been previously thought. According to the article, last year the Social Security trustees predicted that the program payouts would exceed revenues beginning in 2017, and the Social Security Trust Fund would be depleted in 2041. Evidently it's worse than that. Last year, the Congressional Budget Office predicted a surplus of $86 billion for 2010, now it's predicting a surplus of only $3 billion.

As bad as these numbers sound, the reality is worse. In fact, I think most people really don't understand how the Social Security system works. If they did, I think they would be outraged. The numbers above make it sound as if the real problem date comes when the "trust fund" is depleted. But the simple fact is, there is no trust fund. The trust fund is an accounting trick. Most of the revenue from the Social Security tax goes to pay current beneficiaries. In fact, if the predictions noted above are correct, in 2010, the tax will bring in only $3 billion more than it pays out to current beneficiaries in 2010.

The Social Security system has existed now for more than 70 years. And in those years the system has always brought in more revenue than it pays out. In theory, the surplus has been placed into a trust fund. But there is no big treasury full of Social Security money. The Federal Government has "borrowed" against the Social Security trust fund to increase revenue in the general budget. In return, the trust fund has received U.S. bonds. But these bonds can only be redeemed and paid back into the trust fund from other federal government revenues. In other words, once the program begins paying out more than it takes in, there will be nothing to draw on from the trust fund. The program will, instead, require additional spending from the rest of the federal budget in order to make Social Security payments.

Imagine you had two separate bank accounts. You borrow from one account to fund the other, and write yourself an IOU. That, in sum, is the situation you have. Social Security, is, and always has been, pay as you go. The trust fund is nothing but a collection of IOUs that the Federal government has written to itself.

Entitlement spending has, for years, been a ticking time bomb. Analysts and politicians have known for decades that, without significant reform, these program would come under greater and greater strain. Costs continue to go up. People live longer, and we are only now seeing the very first baby boomers begin to collect benefits. As that huge generation retires, the costs to Social Security and Medicare will grow dramatically. These costs will go up against a backdrop of a shrinking Social Security tax base; fewer workers per retiree to keep the program afloat.

While policymakers have taken no action to reform these programs, they have nevertheless described these programs as "entitlements" and made promises that they may not be able to keep that these programs will be available to retirees. However, while these programs have been characterized as entitlements, these benefits are not legally guaranteed to current or future recipients. As a matter of fact, the Supreme Court has held that beneficiaries have no legal claim to these benefits, and that Congress may alter or amend the program as it sees fit. See Flemming v. Nestor, 363 U.S. 603, 610-611 (1960).

A number of policymakers and policy experts have presented possible reforms, including partial or complete privatization of Social Security. Congress and the White House have dodged this politically sensitive issue for far too long. Reform is needed, but they are running out of time. If they don't address it soon, they may face a real crisis. Hopefully wisdom will win out over political expediency.

Real Money?

I guess it's relative. Sure, $17 billion seems like a lot of money, even by Washington standards. As the congressman (not sure which one) once said, "a billion here, a billion there, pretty soon you're talking about real money." The President has dramatically announced $17 billion in spending cuts for next year's budget. This, from a projected budget of over $3.4 trillion. As Fox News noted these cuts would be roughly one half of one percent of the total budget. And of course this is from a budget that was dramatically increased in the past year, and a budget that may still be over a trillion dollars in the red. Consider a household with a total budget of $50,000. An equivalent cut would be $250. That ain't much. While the President's budget director Peter Orszag says this is not "chump change," it sure seems like it.