Monday, December 26, 2005

Is Social Security Reform Dead?

IN August 2000 leading Democrats got together and produced the Hyde Park Declaration. Among other things the Democrats pledged to confront the fiscal problems that big entitlements will face in the future and to deal with the fact that their continued growth will bankrupt the programs. They also pledged to "honor our commitments to seniors". And they pledged to find a way to contain future costs acknowledging that Social Security and Medicare needed to be modified to reflect realities not envisioned when the programs were created.

Bill Clinton also stated that there should be greater emphasis on people creating their own wealth and their own retirement for the future. In fact the impending crisis in Social Security was one of the reasons given at the time for no new tax cuts.

Now these same Democrats claim there is no problem and so far have refused to offer any ideas for reform. Other than the usual raising taxes.

History did not begin when Bush took office and it will not end when he leaves office. The problems confronting the entitlement programs, once the baby boomers retire, could destroy the programs for future generations if not dealt with.

The question is, is government up to it? Or will we be like France? And once my generation retires and creates the largest voting block on Social Security in the nation's history...will it be too late?


Anonymous said...

How did this happen? Every time an SS number is assigned some actuary should note just when they are to retire. Boomers on the leading edge have been paying into this system for forty years. Boomers' SS payments have ratcheted up over the years to levels the founders of SS would not believe.

Where did the money go?

chuck said...

Where did the money go?

Into general spending. There is no way to actually *save* surplus monies, no way to invest it or put it in bonds, so it gets spent and congress writes an IOU. The 12.4% FICA deduction from your payroll is pretty much just another tax, adding some $400B are year to government revenues. Note that the Federal budget hasn't been anywhere near balanced recently if FICA revenues are discounted, not even during the Clinton administration at the height of the bubble.

The whole mess is why Moynihan thought the increased FICA rate, supposedly putting aside money for the boomers' retirement, was a scam. It is also why Bush's idea of investing the money makes a lot of sense. We can argue over *how* to invest it, but if your FICA deduction is to somehow contribute to your retirement income, then the surplus money currently being collected needs to be invested somehow.

I do miss Moynihan, I do.

Morgan said...

The SS surplus gets borrowed by the federal government, which means that it is forced into low-earning treasury securities. It's essentially a mandatory loan to the government.

Because all of it has been borrowed, there is no cushion to fall back on when the surpluses end (which I think is projected to occur in about 2014), so they'll need to start paying off those securities at that point.

There are five ways I can think of to do that:

1) Raise tax revenue either by
a) Raising tax rates
b) Contriving to have the economy grow more rapidly than projected
2) Increase voluntary lending from the public (private citizens and foreign governments)
3) Print money
4) Spend less elsewhere
5) Reduce the amount to be paid out in SS benefits, so that there is still a surplus

Of course, some combination is also possible.

However, these approaches are often in opposition to one another. For example, #3 (printing money) works against #5 by increasing the rate of inflation, which in turn increases the amount you need to pay out - it also works against #2 (increasing voluntary lending), because it's a "gotcha" tactic - I got 4%, and lost it all to inflation. If you want me to lend in the future, you'll have to pay more, and even then you'll have more difficulty convincing me to lend to you. #1a (raising taxes) works against #1b (increasing growth), and means that less money is availble to borrow.

I'm pretty sure we'll see some form of #5 (decreasing the amount paid out); raising the age at which benefits become available, eliminating wage indexing (which causes the inflation-adjusted benefit to rise over time, so that benefits today are much "nicer" than they were 30 years ago, and benefits 30 years from now will be much nicer still), or similar tactics.

I know that someone calculated that simply switching from wage indexed to cost-of-living indexed benefits calculations would immediately render the system solvent. I can't remember who that was, nor can I vouch for the calculations.

But if they're going to do that, I wish they'd tell me now. It would make planning easier.

Doug said...

Govt.'s Big SpendingSocial Security, Medicare and Medicaid consumed nearly half of all federal spending in 2004.

Spending on Medicare, the federal health insurance program for the elderly, is set to increase with the introduction of a drug benefit in January.

The federal government estimates it will spend about $724 billion over 10 years to provide the Medicare drug benefit

chuck said...

How many Americans are really going to retire in their 60s? This is especially true of the so-called white collar professionals.

Yet guys who do physical work still get worn out. Construction, farming, even driving trucks, all take a toll that starts to show by the time folks hit 50. Try shifting through all the gears of a truck with incipient arthritis. Remember that not all of us have sitting jobs. Maybe the key is having easier, less physical jobs available for the ageing.