Social Security is, and will be, a much debated part of our national debate for some years to come. What happened was World War II and a post war population explosion that skewed the nation for all time. We “Boomers” who were beginning to be born in 1946 and continued to be born in large numbers until 1961, made a massive impact on the nation. We caused a housing boom, a school building boom, a marketing boom, an education boom, a business boom, and now threaten a Social Security Bust. Or do we?
In the initial phase of Social Security it was little more than a Ponzi-scheme wherein many people paid in at the bottom while a few drew out at the top. Of course, it wasn’t designed to be a massive blessing as the average individual wouldn’t live long enough to collect a pension, or if they did, wouldn’t receive one for very long. But, as the law of unintended consequences was also applied, it didn’t work out that way.
Almost immediately old folks started living longer than the actuarial tables predicted. This was, in large part, because they now had that extra money which allowed them to live a bit longer. We still aren’t exactly sure what happened, but old folks started living longer, thereby putting a strain on the Social Security system.
In each successive decade, the congress has modified the way Social Security operates. Taxation rates were adjusted, additional classifications of workers added, a limit placed on maximum taxation of salary and wages, and even a change in the eligibility age for benefits. But it was, until the Reagan Presidency, a system wherein the amount coming in pretty much equaled the amount going out in benefits. Realizing that the “Boomers” were going to retire, and live a fairly long time, FICA taxes were raised considerably to create a “Trust Fund” that was designed to assure benefits to the boomer generation when they retired. There were other changes that stopped the old practice of federal government employees (who were all covered by the Civil Service Retirement System – CSRS) of retiring from federal work at age 55, getting a civilian job for the next 10 years (while pulling in a federal pension) and then getting Social Security at age 65 – a.k.a., Double Dipping.
The amazing thing was that the public didn’t scream, and the change worked. Immediately, the amount of benefits paid out was much less than the FICA taxes coming in. The Trust Fund was working – well sort of working. The only glitch was that the Trust Fund was lumped into the greater federal budget so that the positive balance of the trust fund would offset the math of the ever growing federal debt. This was also part of the Reagan presidency changes to the system. The growing trust fund hid a lot of federal debt. Of course, the trust fund could only be invested in Treasury Bills so, in effect, the trust fund was supporting the debt.
During the Clinton presidency, the economy grew to the point where there was a surplus sufficient to “buy-out” the trust fund and allows it to be removed from the federal budget. While the money would still be in Treasury Bills, it would be a separate entity. However, that did not happen. And we are faced with the prospect that, beginning in 2015 the trust fund will cease to grow and the effect on the federal deficit will be immediate.
While I cannot predict the exact shape of the decline, I will assume that the first thing to happen is that the interest paid to the trust fund will no longer be used to purchase additional Treasury Bills. That reduction in demand will probably translate into higher interest rates for new Treasury Bills. The next phase will be the failure to roll-over existing Treasury Bills as they mature. This will have a direct impact on the deficit as the government’s assets will not be offsetting the liabilities. The trust fund finally disappears in 2042, the same year that the last of the boomers reaches the age of 81 and the oldest remaining boomers are celebrating their 96th birthdays.
The big question is “how many boomers will be alive at this time.” While the projections of the US Census Bureau show a fairly large number of people in the 85+ category, there is no assurance that these numbers will be realized. The successive generations in the income earning categories are still pretty large. Again, using the census data there will be about 3.2 wage earning age people for every retirement age person. While not the six to eight of the initial phase of the Social Security System, it isn’t the one-to-two that the administration is currently quoting. (Actual numeric projections are for 37,845,022 retirement age people against 122,197,639 working age people.) The population remains pretty stable going forward from there.
So, what are we to do? Clearly the system, in it’s current form, is headed for a collapse. So, something must be done. The question is what must be done.
The 43rd President’s administration is proposing an “ownership” solution. Simply put, that there will be an end to the government program that will be replaced by individual accounts. That has a nice sound to it and, in the long run, can work. However, the fly-in-the-ointment is that withdrawing the FICA taxes from the trust fund will only cause the trust fund to run out of money sooner. That will place the boomers benefits in jeopardy during the last years of their anticipated lives.
We have a double problem: Funding a retirement for all the boomers, while at the same time managing the federal debt load. The funding of retirement benefits can be accomplished by a combination of raising FICA taxes, reducing benefits, and increasing the initial retirement age for the back end of the boomer generation. We could also put a means-test on receipt of benefits that would assure that the payments go to those most in need while not paying benefits to multi-millionaires who just happen to be of retirement age. Not an easy solution to be sure, but one that can be done.
The difficult problem is that of avoiding the realities of the federal deficit. Using current accounting with the trust fund in the calculation, there is about $1.2 Trillion that is not seen as a liability. Therefore, the actual debt is $1.2 Trillion larger than calculated. Ouch! Using the current methods, the deficit will grow progressively as the trust fund gets smaller and smaller.
The real issue, underneath all of this is: how much do we spend on health care for senior citizens? It has been studied and proven; time-after-time that the amount of money spent on health care for the last 30 days of the life of the average senior citizen is greater than the total spent during their entire lifetime. Or, put another way: the ‘grand’ gets really sick, the family tells the doctors to ‘leave nothing undone’ and the grand dies sometime in that same30 day period. Okay, sometimes the heroic efforts pay off, most often they don’t. Considering that, by this time in life, most every senior is getting health care through Medicare and/or Medicaid the government is paying for all of those heroic efforts. Since a 30 day hospital stay using the latest care can easily run into the millions of dollars, this is an area that we will have to address, and it will not be an easy one.