Social Security retirement benefits are far more important to upscale Baby Boomers than they were during the stock market and home price highs of a few years ago.
Perhaps as early as this year, Social Security, at $580 billion the nation's biggest social program, will be transformed from an operation that's helped finance the rest of the government for 25 years into a cash drain that will need money from the Treasury.
With the government spending untold trillions to bail out incompetent banks, faddish mortgage borrowers, Generous Motors, Chrysler, AIG, GMAC and Wall Street, it should damn well bail out Social Security old-age benefits---the ones who'll benefit from the bailout have played by the rules and paid Social Security taxes for decades. It would be immoral to tell them, "Sorry, we have to trim your cost-of-living adjustment because we can't afford it," while expecting them to continue footing the bill for bailing out imprudent people and institutions.
Did you know....
...that Peter Orszag, director of the White House Office of Management and Budget, is a noted Social Security scholar? He's co-author of an influential 2004 book, "Saving Social Security: A Balanced Approach," that advanced substantial tax increases (and a few benefit trims) to preserve the program.
What is Social Security?
Social Security doesn't lie about what it is: an intergenerational social-insurance plan, with today's workers supporting their parents (and disabled and survivors) in the hope that their children will support them. It's not a pension fund. It's not an insurance company.
According to the Tax Policy Institute, five out of six U.S. workers pay more in Social Security tax (including the employer's portion) than in federal income tax--something that makes it especially important (and only fair) to preserve the program for lower earners, who get old-age benefits of up to 90% of their covered wages.
Social Security currently holds about $2.5 trillion of Treasury securities and is projected to grow to more than $4 trillion, even as Social Security begins to take in far less cash in taxes than it spends in benefits. For instance, in 2023 it projects a cash deficit of $234 billion of Treasury IOUs as interest--the Treasury pays its interest tab with paper, not cash. However, it's Social Security's cash flow that determines what the system can actually pay. It's really a pay-as-you-go system.
The cash that Social Security has collected from you and me and our employers isn't sitting at Social Security. It's gone. Some went to pay benefits, some to fund the rest of the government. Since 1983, when it suffered a cash crisis, Social Security has been collecting more in taxes each year than it has paid out in benefits. It has used the excess to buy the Treasury securities that go into the trust fund, reducing the Treasury's need to raise money from investors. What happens if Social Security takes in less cash than it needs to pay benefits?
Think about this for a second. The Treasury has to borrow money to make good on the Social Security trust fund's obligations. Remember that the Treasury and Social Security are both part of the government. The trust fund is of no economic value to the government as a whole (which is what really matters), because the government has to borrow from private investors the money it needs to redeem the securities. It would be the same if the trust fund sold its Treasury securities directly to investors--the government would be adding to the publicly held national debt to fund Social Security checks. The trust fund isn't a savings vehicle--it's nothing but a bookkeeping entry.
"The trust fund has no financial significance," says David Walker, former head of the General Accountability Office and now president of the Peterson Foundation, which advocates fiscal responsibility. "If you did [bookkeeping like] that in the private sector, you'd go to jail."
Bottom Line: Social Security has evolved from an explicitly pay-as-you-go program into one that produced huge cash surpluses for years, followed by huge cash deficits. This problem has been metastasizing for 25 years. Now the day of reckoning may finally be here, as Social Security goes cash-negative....as earily as this year.
Source: FORTUNE, August 17, 2009
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