In his recent press conference, which was dominated by discussion of the administration’s budget proposal and its failure to address rising entitlement costs, President Obama was careful to distinguish Social Security from the other main entitlement programs. Responding to a reporter’s question, he said: “You talked about Social Security, Medicare, and Medicaid. The truth is Social Security is not the huge contributor to the deficit that the other two entitlements are.”
This has become a more or less standard talking point on the left, and it is likely that Obama echoed this statement in part to placate the liberal wing of the Democratic party, which fears the president may go too far in accommodating those who wish to get present and future budget deficits under control.
Advertisement
The argument has some merit. Over the long term, Medicare and Medicaid costs do outstrip the growth of Social Security. But it’s wrong to conclude, as Senate Majority Leader Harry Reid apparently has, that Social Security has no role to play in budget or entitlement-reform negotiations.
Social Security’s cost increases will be largest in the short term as 10,000 Baby Boomers per day shift from work to retirement. Medicare and Medicaid’s cost increases are largest over the long term, as the compounding effects of rising health costs produce mind-boggling levels of program outlays. But these long-term costs are in a way academic: If lawmakers do not find a way to address entitlements within the coming decade, a budgetary or currency crisis seems inevitable. The long term matters less when the short term is sufficient to do you in.
Moreover, saying that Social Security isn’t a big part of the budget problem isn’t to say that Social Security doesn’t have a budget problem. Put simply, the non–Social Security federal budget faces a significant shortfall, driven in the short term by the recession (and new spending justified by it) and in the long term by rising Medicare and Medicaid costs. Social Security, likewise, has a significant long-term budget shortfall due to the aging of the population.
To make Social Security permanently solvent without benefit cuts would require an immediate and permanent increase in the payroll tax from 12.4 percent of earnings to 15.7 percent, a more than one-quarter increase. If we wait, which appears to be what President Obama and Senator Reid want to do, then the required tax increases only grow: to 16.2 percent of pay if implemented in 2020, or 16.8 percent if we wait until 2030. The short story is that when you know you have a gap to fill, the sooner you start, the easier it will be to finish.
Moreover, the root cause of Social Security’s insolvency — population aging — also lies behind a good chunk of Medicare and Medicaid’s rising costs. Over the next two decades, the simple graying of the population accounts for around two-thirds of the total increase in entitlement costs. Rising per-person health-care outlays, which the administration likes to target as the main culprit, don’t become the main driver of entitlement costs until the 2050s.
To the degree that we succeed at countering the effects of population aging — such as through policies to encourage larger families, longer work lives, and increased saving — we will benefit not only Social Security, but other entitlements and the budget as a whole. And, as it happens, many of these policies could work through Social Security. For instance, increasing the Social Security retirement age would keep Americans in the workplace longer, during which time they would pay Medicare and income taxes. Likewise, if a cut in payroll taxes for workers with children encouraged larger families, the budget as a whole would benefit from increased future labor forces. Social Security is such a large program that its policies affect individual decisions on how much to work, how much to save, and when to retire. But the effects of these decisions extend far beyond the Social Security program itself.
Under current law (which is how we are ruled in the USA) Social Security cannot add a penny to the deficit.
The only way Social Security can add to the deficit and debt is if the both the House and Senate pass a law to allow Social Security to defict spend and the law is then signed by the President.
Anyone of working age who is planning on using Soc. Sec. As a portion of their retirement portfolio, will be in for a rather rude awakening when they try to cash in. When these Boomers descend like the plague of locust they are, devouring any assistance or benefit program they can utilize, with no thought for those who came before or who will come after- there will be little, if anything, remaining of the so called "entitlements".
Geoph, you mean the evil boomers who have funded it at what to them is a punitive level for others for so long. Those greedy people who are expecting to be paid a return on their "investment", since we all know Social Security isn't a tax?!?
You better save your money, your going to need it to buy a clue someday.
"Entitlement" has come to signify "preownership" rather than "ownership." There is a crippling effect of the welfare state mentality at work here. So, yes, a collision of reality with the dream world is inevitable. It would be far better to correct this now than to continue to endlessly debate. It will be unpleasant, but less so now than 10 or 20 years from now.
The Social Security trust fund is invested in special non-public US treasury bonds. They aren't included in the current national debt.
But, as the trust fund is tapped to pay benefits (starting this year, about 5 years earlier than originally expected), those bonds must be redeemed. The money to redeem those bonds must come from the current federal budget: either raised from revenue or by selling additional US Treasury bonds, which will add to the public debt.
For the past 20 years or so, Social Security has "reduced" the federal deficit "on paper", because the excess Social Security taxes were spent in the current year and an accounting entry was made "off the books" to add to the trust fund. Likewise, the compounding interest in the trust fund has never really been "paid": it's simply added to the trust fund balance.
This practice of kicking the can down the road has simply deferred the pain to future generations. And now the bill is coming due, and it WILL increase the deficit every year that any amount is "redeemed" from the trust fund in order to pay benefits.
While it won't solve the problems caused by redemption of the trust fund, we have to address the discrepancy between expected revenues and outlays in Social Security after the trust fund is exhausted.
The Social Security trustees have been reporting the program is not in actuarial balance for years. The size of the imbalance keeps growing, and it's now about 25% -- expected revenues will only pay about 75% of currently legislated benefits in 2037 when the trust fund is exhausted.
That's 36 years away. We could put the program back in balance simply by reducing the COLA each year by 1%: i.e. 4% would be lowered to 3%. Presumably, there will be some years that the COLA would be less than 1%, and it would be set to 0%.
Once Social Security is back in actuarial balance, the COLA reduction could be suspended. If we had applied this reduction 20 years ago, it could have been only 1/2% per year. But if we continue to ignore the problem, the required annual reduction will only get bigger.
My latest Social Security statement says that given current conditions, my benefits will be funded at 79%. In other words I will get $.79 for every %1.00 that is currently promised to me when I retire.
Obviously Social Security will have to change. For me, I just keep on trying to work and save and plan to do so for a long time.
Oh and also vote out politicians that got us into this problem. That gets harder to do though because the problem is so old and so many of the guys that messed this up are dead.
Here's a thought, and I mean it only half-facetiously.
Suppose the entitlement shortfalls were made up with IOUs just like Cali gave out a few years ago. These IOUs would only be legal tender for government services like registering your car or paying property tax.
The reason social security is nearly in balance is it takes 15.4% of payroll. And that does not suffice to pay out everything promised. The ages have to be increased and especially the COLA formulas adjusted to CPI rather than the wage index, or benefits trimmed, or all three.
But it is irresponsible to mention cutting payroll taxes as supposedly a way to encourage higher revenue or larger families. The program is out of balance as it is and it is acturial malpractice to suggest lowering the payroll contribution when we can see the demographic wave ahead.
It was also irresponsible that everyone agreed to a one year 2% reduction late last year, and to $250 giveaways in years without a CPI adjustment because the price level did not move. These pandering financially irresponsible games have to end yesterday. Both parties.
As for the main reason medicare is a financial disaster, it starts with the ridiculously low 2.9% payroll contribution rate. Which doesn't remotely cover the program's current costs. Sorry folks, but that rate needs to go up not down. And by a lot. You can't make medical care cheaper by refusing to pay for it or trying to shift it onto the general ledger.
In the long run you also can't make medical care more affordable by pouring giant subsidies of half a trillion a year into the industry without regard to price. Only a government could delude itself into thinking that sort of thing can make anything cheaper. All it does is goose aggregate demand and shift the price curve relentlesly upward.
Medical care needs to be rationed by price like every other scarce good conceivable. Sentiment cannot dispense with the laws of economics.
That means all the services provided need to be paid for in full by payroll contributions. And it means the government needs to be reducing its role in the sector, restricting to catastrophic coverage and narrow means testing for other benefits, instead of piling on platinum care for everyone and new trillion dollar subsidies like nearly free drugs.
Both parties have messed all of that up royally, and need to buy an economic clue yesterday.
When the doctors own the entire future income stream of the country through their professional incomes or the payments on the bonds they will accumulate on their past services, maybe they can devise a more rational system to administer their servants. That is all any of the rest of us will be if the present system is continued further into absurdity.
Would somebody please read a basic economics textbook and buy a clue already?
social security is a ponzi scheme - there I said it. there is no other way to describe it without changing the definition of a ponzi scheme. Madoff is a small minnow of a ponz-master compared to our blue-whale like elected representatives when it comes to size of ponz.
Grandman1a
I don't believe it was I who cast them as evil, though I'm not saying I could not be convinced.
I assume you are referring to my depicting them as a plague of locust?
How are they different?
By their sheer numbers they affected every aspect of our National existence and yet failed to responsibly plan for that impact. The least of which being an insufficient personal savings rate and, to address your comment on funding SS, failing to altering the specs of these entitlement Programs such as SocSec. to account for the smaller populace they left to fund them.
What do you define "punitive" as, and compared to whom? In 1975 the OASDI plus HI rate was 5.85%. In 2010, 6.2% and 4.2% in 2011.
When this current generation (hopefully) does alter the structure of these Programs, they shall (at worst) return to the safetynet they were designed to be and lose the aura of an investment.
As I think Geoph and Grandman1a are illustrating perfectly, the battle boils down to who gets shafted. I think most people realize that Social Security in its current form is unsustainable. Social security is either going to have to cut benefits (boomers get shafted) or require more money (current generation get shafted). Even these solutions, I suspect, will only postpone the inevitable collapse of the entire program (my children get shafted).
I would propose that the boomers and my generation share the pain. The boomers accept benefit cuts so that social security taxes will not have to be raised on the rest of us. The current generation agrees not to take social security and the whole system is dismantled. My kids will not be burdened by the collapse the world's largest ponzi scheme.
Geoph I take it you are not the son of a Baby Boomer since you have such a sorry opinion of them.
Do what I did, I planned on Social Security going belly up and took the pittance the government left me out of my wages and invested in my own retirement fund.
Putting your faith in anything a politician/government tells you is foolish - very foolish.
Here's another stubborn fact: SocSec, Medicare, and any Fed involvement in welfare, Medicaid, and a long list of other programs are unConstitutional. We are a nation of scofflaws, ignoring or denying the foundational law of the land. We've been doing it for generations. We're going to hit the wall. Will we do it at 90 mph (Dems at the wheel) or 70 mph (Repubs as they are now)? Or will we be granted a completely undeserved reprieve by God, as a wave of knowledge and respect for the Constitution sweeps thru the land, resulting in, amongst other things, the election of legislators who will dismantle OSHA, EPA, and numerous other regulatory agencies that, besides being unConstitutional, favor big business vs small and med-sized, thus retarding entrepeneurship? Will we see a substantial swell in all kinds of businesses, employment, wealth? Will we have a national discussion on how to most equitably end SocSec etc?
If not, we go down. Bang or whimper, we go down. And please don't complain about how helpful any of the above programs/agencies are; if they're so all-fired necessary, then you should be able to get a Constitutional amendment passed to empower the feds to regulate in that area. Otherwise, it doesn't matter how good you think it would be: congress is not empowered to legislate in any but strictly enumerated areas.
JD
Though not technically a Boomer myself, as I was born in 1965, I can recognize the impact and lament the Damage of their Footprint on history.
If not the Boomers who actually enacted the behaviors, we could blame their parents, "our greatest generation", for not teaching them responsibility, patience, sacrific, as well as the value of a dollar and the clarity that can be gained from a strong ethical base.
I Understand that I have cast a wide net, and that 100% of these generalities do not apply to 100% of Boomers. Yet, enough were placed in powerful positions to advance the flaws.
Mr Biggs--Please read JMK83's comment. Memorize it. How can you write your article without including the most important point? Your article sort of ambles toward the light, but if you don't explain the number of taxpayers to beneficiaries ratio, you will be overwhelmed by the nonsense the democrats spout. Better yet, look up the word "actuary", then the phrase "actuarially sound". The so-called projections that social security benefit payments won't go south before 2037 were shown to be foolish in 2010. In 2010 the government took in less in social security taxes than it payed in benefits. Blaming it on high unemployment is the equivalent of whistling while walking past the graveyard. Increasing the tax rate does not solve the problem. It makes it worse.
Please use FACTS, not opinions and generalizations you've heard from others.
The root cause of the SS problem is not the aging population. The root cause is the government's highjacking of all the money all of us paid into the program.
I have posted this elsewhere, and I'll post it again and again.
GET OUT YOUR PENCIL AND DO SOME WORK: the facts are really clear here:
WHAT IS NOT THE PROBLEM WITH SOCIAL SECURITY
I’m sure some will want to generalize and attack this, but please run some real numbers before you go off?
This year I turn 66 and will probably claim SS benefits. My Father did that at 62. My father took more out of SS than he put in because he never paid in until 1937. I paid in to it all my working life, over 40 years.
I put on my certified beancounter hat and ran all the numbers. MY numbers (mine are probably similar to a lot of folks). I used real numbers and real historical interest rates; the calculations are not very complicated.
Here’s what mine looks like:
At age 66, after 48 years of contributions and earnings at treasury rates, my “lockbox” fund totals only $560,584. It should be a lot more, but my fund managers (US Government) were investing only in low-rate government securities when they could have been earning lots more in other markets.
If I begin drawing benefits from that lockbox at age 66, assuming the payout SS is promising me, then I have to live to age 89 to break even. If I die before that, you win, if after, I win. My Dad died at 78, my Mother at 80; you figure.
TWO MAIN POINTS:
POINT 1: I understand that there is a problem with Social Security, and that I may not get what I was promised. But my benefits are NOT more than I paid in. DON’T LIE TO ME, and don’t even try to send me on guilt trip like I’M the problem for taking out more than I put in.
POINT 2: Bernie Madoff is a crook. He took people’s money and didn’t do with it what he promised. When they caught him, remember what he did? He told the truth - he admitted he was a crook, that he had lied about the money, he did something else with it, and it was gone.
I know the answer, but I still want to ask all my government representatives, present and past – Where’s my $560,584?
I, for one, am ready to lose some portion of my “earned” and “rightful” benefits (like SS), as long as everyone gives up proportionately.
For a very long time, we as a nation have been spending money we don’t have to buy things we don’t need to impress people we don’t like. The gig is up. We will now move back to some semblance of sanity, whether we like it or not, whether we fight about it or do it in a civil way.
Many of us have seen the government show such favoritism, such as help with mortgages for people who bought more house than they can afford, or "bailouts" for irresponsible rich guys, or privileged treatment of union pensions in bankruptcy ,,,, I just don't trust the government to be fair or even-handed.
Am I the only one who does not trust the government to fix the biggest part of the problem – the part the government caused?
