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Crisis Begins With Social Security

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By Lowell L. Kalapa
(Released on 7/18/10)

For younger members of the workforce, the idea of depending on Social Security to be there when they retire is something of a joke as more new workers realize that the odds of Social Security benefits being available when they retire are less and less likely as shortfalls in the system are forecasted.

One reader chimed in that Social Security is not a part of the federal budget but apparently read the earlier column incorrectly as this commentary specifically pointed out that Social Security and Medicare contribute to what is known as federal outlays or expenditures. And that is the problem. These two programs were set on auto pilot years ago and were supposed to be self-sustaining with the contributions made by workers and their employers. However, over the years presidents and Congress have sweetened the benefits without raising the contributions. Meanwhile, the ratio of workers to retirees and disability beneficiaries has been shrinking. The result is the forecasted shortfalls.

This possibility takes on a grain of truth as many realize that the ratio of workers to retirees has grown from 16 workers to one retiree in 1950 to 3.3 workers to one retiree today. And as the baby-boomers begin to retire, that ratio will shrink even more. Policymakers first saw the red flags go up in the mid-1970’s when it was forecast that unless something was done, the government would not be collecting enough payroll taxes to pay the benefits promised under Social Security. As a result, Congress raised the Social Security tax enough and trimmed benefits to stave off disaster.

In less than ten years after Congress undertook that first rescue plan, the bells and whistles were going off again when President Reagan appointed another commission to rescue Social Security, and fast, as it was forecasted that the plan would have run out of resources to make benefit payments within a matter of weeks. The solution was to tax Social Security benefits received by beneficiaries who had substantial other sources of income and to add federal workers to the system. That plan was supposed to insure the viability of the Social Security system for the next 75 years or approximately three generations. While the commission came up with the idea of taxing certain beneficiaries and adding federal workers to the system, the idea of gradually increasing the retirement eligibility age from 65 to 67 came as a result of an amendment made by Congress. Though it was not popular at the time, many members of Congress realized that as a result of advances in medicine, people were living longer and, therefore, working longer. As a result the amendment passed.

Although there have been other attempts to strengthen the system and add reforms since that time, none has been successful. Perhaps, the last few efforts were undertaken when there was no crisis as had been the case of the reforms enacted in the 1970’s and 1980’s. But that is about to change. According to the Social Security Trustees’ Report, the program was in the hole to the tune of $7.7 trillion at the start of last year 2009. With an aging population, that big black hole will get even bigger as the federal government attempts to make good on the promises it made to workers for the last forty years. It is estimated that as of January 1, 2009, the federal government would have to invest more than $15.1 trillion to ensure the sustainability of Social Security for the next 75 years.

So you might say, how much has the federal government actually invested to keep the Social Security program above water and insure there will be benefits for you and me as we retire? How much? Nothing, zero.

Well, what happened to all those contributions made by workers? Supposedly those moneys are sent to the federal government who has put those contributions into Social Security “trust funds” to invest in a diversified pool of real and readily marketable assets. Instead, the federal government has spent those funds on other government activities and programs and in return issued “special issue” government securities. It is estimated that as of 2009, $2.4 trillion of these “special issue” securities have been credited to the Social Security trust fund. However, unlike other federal debt instruments like saving bonds, these securities cannot be sold but instead are locked away in some federal filing cabinet. These are IOU’s that the government has issued to itself to be paid back later with interest.

This has allowed the federal government to contain public borrowing and keep interest rates down. More on this charade next week.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.

 

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