Posted on 01/11/2005 10:19:34 AM PST by Hank Rearden
The C-Word: Say It
The Social Security crisis begins in just 5 years.
The leftist opponents of Social Security reform want you to believe there’s no “crisis,” and that whatever problems the system may have won’t materialize for more than 35 years. Funny how such equanimity and patience seems to elude them when the subject is global warming.
It’s even funnier when you realize the objective fact is this: The Social Security crisis actually starts a lot sooner than advocates of reform are saying. The Social Security crisis begins to materialize in just 5 years.
Here are the facts. You decide whether they amount to a “crisis.”
Right now the Social Security program collects more in taxes — both FICA taxes from current workers and income taxes on benefits from current retirees — than it pays out in benefits to retirees. That surplus goes into Social Security trust funds, where it is used to buy Treasury bonds that are held as an investment toward the payment of future benefits. The purchase by the trust funds of those Treasury bonds is no different than if you or I bought them. The Treasury issues the bonds in exchange for cash, which is used to finance the current expenditures of the federal government.
According to the latest annual report of the Trustees of the Social Security Trust Funds, the surplus in 2004 was $64.4 billion dollars. It will be higher this year — at $87.7 billion. The surplus will keep getting bigger and bigger through 2008, when it will reach $108 billion. Each year, that’s more and more money that the federal government won’t have to raise from the world capital markets. It’s a captive audience of bond buyers — and a growing one.
But in 2009, just 5 years from now, the surplus will start to shrink. In 2009 it will fall to $103.7 billion, and in that year the federal government will have to go to the capital markets to raise $4.3 billion that it didn’t have to raise the year before. That’s not a lot of money in the grand governmental scheme of things. But it’s an important turning point for Social Security — it’s the year the crisis begins.
Every year after that the crisis will deepen. Each year the government will get several billion dollars less from the Social Security surplus than it did the year before, and it will have to make up that difference by tapping the capital markets, or by raising taxes or trimming spending.
Most observers point to 2018 as the earliest year for the Social Security crisis to begin. But that’s only the year the crisis will pass an especially attention-grabbing milestone. That’s the year, according to the trustees, that the Social Security surplus will disappear entirely and become a deficit. In other words, for the first time tax revenues will be less than the benefits paid out that year. From the standpoint of public finance, though, it will just be another painful year in which the federal government had to raise more money from capital markets — or raise taxes more or trim more spending — than it did the year before. By 2018, the Treasury will have already received $359 billion less cash each year, cumulatively, than it received in the peak year of 2008.
Starting in 2018, as soon as Social Security tax revenues are insufficient to cover benefit payments, the gap will be made up as the trust funds redeem the Treasury bills they have been hoarding. Not only will the Social Security system no longer give cash to the federal government in exchange for Treasury bonds. Starting in 2018 the situation will be just the opposite: The Social Security system will give back the Treasury bonds held in the trust funds — and the interest on those bonds, which is held in the form of more bonds — and demand cash for them.
According to the Social Security actuary, in 2018 the trust funds will demand $23.4 billion in cash from the federal government. The trust funds will redeem the last of their bonds in 2041 — demanding from the government $1.003 trillion that year. From 2018 through 2041, the trust funds will redeem bonds worth, cumulatively, $11.9 trillion. Once again, just to be perfectly clear, let me emphasize that the federal government will have to come up with this $11.9 trillion somehow — either by tapping the capital markets, raising taxes, or trimming spending.
This should illuminate the debate on whether the trust funds are “real” or not. They are perfectly “real” in the sense that the Treasury bonds they hold are valid legal claims on the government. But they are not “real” in the sense that they, as a June, 2004, Congressional Budget Office report put it, “contain no financial resources” in and of themselves. For their value to be realized, the Treasury bills they hold must be redeemed for cash by the government — and that cash has to come from somewhere.
From the standpoint of public finance, the crisis ends in 2042 when the trust funds’ hoard of bonds is completely exhausted. Under current law, Social Security benefits will then be trimmed such that they will be payable out of current tax revenues. According to the trustees, benefits will have to be cut 27 percent from their present scheduled levels, with the situation only getting worse as time goes by. So, yes, the drain on the Treasury will end in 2042 — but at that point the crisis will simply be inherited by retirees in the form of lower benefits.
Those are all simple facts. Yes, they are estimates. They might be off a little bit one way or the other. But the general pattern is clear. Social Security will start to become a drag on the budget of the federal government in 2009. The state of affairs will get progressively worse through 2042, by which time Social Security will have consumed $11.9 trillion from the federal budget. And after that, Social Security benefits will be automatically cut. If that isn’t a “crisis,” I don’t know what is.
The opponents of reform claim that the Social Security crisis is, in fact, a crisis of general public finance — not one of the Social Security system itself. They see Social Security as an entity separate from the federal government, and maintain that its own dedicated stream of tax revenues and trust-fund assets will keep it going for more than a third of a century.
That’s a fair point of view, as far as it goes. At the same time, it is dangerously myopic to treat Social Security in isolation from the overall finances of government. That would be like finding nothing troubling about a factory that dumps pollutants into a river. That may be no problem for the factory itself, but it can be a major problem for everyone downriver. And when it comes to Social Security, we’re all downriver.
But the case of Social Security is even worse than that. By 2042 the pollution will back up into the factory itself. Unless the opponents of reform don’t think it’s a problem to automatically cut benefits by 27 percent all at once in 2042, then Social Security itself has a “crisis” — maybe not right now, but surely by then.
Don’t be too hard on the advocates of reform when they throw the C-word around. It’s fully justified. In fact, I’d even dare to use that most dangerous of all political words to describe the crisis. Yes, the I-word: imminent.
— Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your comments at don@trendmacro.com.
Maybe if you cook up a scheme to throw "free" pills at the Sheeple, they won't notice.
Gee, too bad Bush stole the election from aLgOrE. Social Security would be safe in a lockbox right now....
His "fix" IS shuting it down. It is called privitization.
You fix a ponzi scheme by neutering the perpitrator, with a blunt chainsaw.
Sure it does - that money has been purloined by our "representatives" and any "surplus" is on paper.
IOW, there will be no social security after 2018. We already know that.
Two percent?
Shut it down completely; Ponzi schemes are illegal, right? Or not when run by Our Rulers?
Money sitting in a government "lockbox" is just like money stuffed in a mattress--your money is not earning any interest or growing in any real sense, nor is it being used to help the economy, in fact, it is losing ground to inflation. Yes, the government is paying interest on treasury bonds, but this doesn't come from anywhere but the government itself. This is like you putting your retirement savings in a sock and putting a little extra in the sock for 'interest'. The money hasn't really earned any income from outside sources. We would be better buying CD's from a bank, at least we would be earning some interest.
There is no "Trust Fund", there is no "Lock box" and there is no "Surplus". Every cent the Government collects in taxes today was spent long ago. Filling up file cabinets with Treasury Bonds that will have to be redeemed with newly collected money, aka taxes, is not a surplus, it's a debt.
Perhaps if the Treasury invested in Canadian, Mexican, French or German government bonds the system could be saved.
Flip side: the money under the matress or in the sock is hard real spendable cash, not bits in a computer or (more relevant to SS) an accounting trick.
Yes, of course. Scams piled on top of scams, on top of scams. An unworkable scheme, with unlimited obligations, created by political parasites who were dead before I was born.
Good thing we're Free.
Chain letters always have a way of coming to an end. Too bad the rulers pulled this on an unsuspecting public. They will pay the benefits if they have to let the presses roll 24/7, you can have confidence in that. Of course, 1 loaf of bread will bring 40 dollars by then.
Actually, it's more like writing an IOU to yourself for retirement, then blowing the cash. Trust fund my a$$. If I took out a collateral loan, then spent the collateral I'd get screwed. If the government does it, it's SOP and no one wants to rock the boat.
The thing that caught my attention in this article was the 5 year time frame.
And this is precisely what the conservatives who voted against Social Security predicted would happen. They would have been right long before this had the feds not been juggling the books the past 45 years to keep this scam going. Aborting 25% of the next generation of taxpayers while lengthening the life of the elderly only made the end come a little sooner.
That's why I posted it. The people getting the loot, and the politicians handing out the loot to buy votes, are desperate to keep the music playing as long as possible. But we're still a few chairs short.
Personally, I've been planning for the real crunch to begin somewhere in the 10 to 15 year time frame.
And Bush thinks he can "fix" this scam, instead of shutting it down. Sure, George; how, exactly, do you "fix" a Ponzi scheme?
Maybe if you cook up a scheme to throw "free" pills at the Sheeple, they won't notice.
1 posted on 01/11/2005 10:19:35 AM PST by Hank Rearden
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Chain letters always have a way of coming to an end. Too bad the rulers pulled this on an unsuspecting public. They will pay the benefits if they have to let the presses roll 24/7, you can have confidence in that. Of course, 1 loaf of bread will bring 40 dollars by then.
11 posted on 01/11/2005 10:57:04 AM PST by Goreknowshowtocheat
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So true! If you die before you start collecting social security, your family gets NOTHING!! A wife can collect from her husband's share, but other than that -- ZILCH!! That has always bothered me. I am supporting everyone else, and maybe, just maybe, there will be something left for me -- NOT!
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