Sunday, March 28, 2010

Social Insecurity


One of the numerous side-effects from the financial meltdown and the heavy and sustained levels of unemployment and underemployment that followed is the earlier-than-expected retirement of many Social Security beneficiaries. We are now at the point – perhaps the tipping point of the entire system – where the system will pay out more in benefits than it receives in contributions. The Social Security Administration, in its annual report, had predicted unemployment rates below 9% and the Congressional Budget Office had projected the beginning of this imbalance between pay-ins and pay-outs as occurring in 2016 instead of 2010. They didn’t expect that the numbers would be worse.

This is not a threat of imminent insolvency, and we have time to right the ship. However, the costs that are currently overwhelming the nation – which taxpayers will cover either in higher taxes, reduced buying power of their dollar or both – leave less flexibility for repairing this retirement program. Legally, the Social Security Administration cannot pay out more than its balance in any one year, and projections are that without adjustment, the current fund will be depleted by 2037. Because there were surpluses that began in the 1980s, that “balance” is currently about $2.5 trillion – the difference between all of its contributions less all of its payments. This balance is carried as U.S. Treasury securities, and the interest generated from these instruments has more than covered the current imbalance between money received and money paid out to beneficiaries.

If the recession ebbs, the Congressional Budget Office sees the possibility of small surpluses returning in four or five years, but in the not-too-distant future, absent retooling, the whole system begins a long slow road to insolvency. While we all know that the dependency on Social Security is so intense that it can never go away, we also see writing on the wall that will probably result in reduced benefits, delays in the start of benefits, possibly higher contributions and the factoring in of other considerations in who qualifies for the benefits (why pay a rich person funds that he or she doesn’t need?).

According to an article in the March 25th New York Times, sometime after 2015, “demographic forces are expected to overtake the fund, as more and more baby boomers leave the work force, stop paying into the program and start collecting their benefits. At that point, outlays will exceed revenue every year, no matter how well the economy performs… [Former Federal Reserve Chairman Alan] Greenspan recalled in an interview that the sour economy of the late 1970s had taken the program close to insolvency when the commission he led [prior to his appointment to the Federal Reserve] set to work in 1982. It had no contingency reserve then, and the group had to work quickly. He said the re were only three choices: raise taxes, lower benefits or bail out the program by tapping general revenue… The easiest choice, politically, would have been ‘solving the problem with the stroke of a pen, by printing the money,’ Mr. Greenspan said. But one member of the commission, Claude Pepper, then a House representative, blocked that approach because he feared it would undermine Social Security, changing it from a respected, self-sustaining old-age program into welfare.

The Obama administration has “has appointed a bipartisan commission to examine the [overall national] debt problem, including Social Security, and make recommendations on how to trim the nation’s debt by Dec. 1, a few weeks after the midterm Congressional elections.” The Times. The issues surrounding our national borrowings are going to be political hot buttons for the foreseeable future, but as this nation gets grayer, there is another battle looming: the willingness of younger active taxpayers to fund retirees.

I’m Peter Dekom, and the big issues never go away.

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