Tuesday, August 24, 2010

Social Security Modernization: Part 1

By Scott Burns

As a subject, Social Security ranks somewhere between Britney Spears and vampires. Google told me so. It revealed more than 50 million references to Britney, but millions fewer for “Social Security.”

Vampires were real underdogs. With fewer than 20 million links, they will need some fresh programming to stay in the competition for our diminishing attention span.

But here is a daring prediction. By 2012, Social Security will be as important as Britney Spears. At long last, maybe then we can make some headway on its problems.

Let’s start with your annual letter from the Commissioner of Social Security. It recaps your work record and projects your future retirement benefits. It also warns that benefit payments will exceed employment tax collections by 2016. Worse, it says the Social Security Trust Fund will be exhausted by 2037. When that happens, employment taxes will cover only 76 percent of promised benefits.

As it turns out, the letter is optimistic.

Benefit payments already exceed employment tax collections. According to the Congressional Budget Office, a crush of retirees and fewer workers has turned the expected surplus of employment taxes over benefit payments into a shortfall.

Fortunately, it’s estimated at only $29 billion this year, piffle in government finance.

The piffle, however, is expected to continue. There will be a need to find cash and we will be talking about it in 2012.

Some readers will say, “Gee, isn’t that what our Social Security Trust fund is for?”

It’s a reasonable, if na├»ve, idea. While it is true that anyone who worked between 1983 and today has shoveled some extra money into the trust fund, it’s not sitting there like dollar bills in Scrooge McDuck’s vault. The trust is just a collection of IOUs from the U.S. Treasury.

Back in 1983, when Alan Greenspan led a commission that reformed Social Security, total Federal debt was only $1.4 trillion. Our reformed Social Security was supposed to be solvent for a full 75 years. Its accumulating surplus, held in trust, would cover the hefty cost of the baby boomers when they retired.

But as with a few other things, Alan Greenspan missed the mark. Today the unfunded liabilities of Social Security alone are $5.3 trillion. And the surplus is no more. Worse, U.S. Treasury debt is now $12.4 trillion— which includes $2.3 trillion of IOUs held by the Social Security Trust Fund. So when Social Security goes to redeem its IOUs and cover that $29 billion shortfall, it will go to the Treasury. Sadly, the Treasury is empty except for its tax revenue and whatever it can borrow. It’s a real hand-to-mouth operation.

So, instead of subsidizing other government spending, as it has for decades, employment tax funded Social Security will be just another program in need of cash.

And what does that mean?

No one knows yet. But my bet is that it will be called “modernization.” (Remember, they’ve already done “reform.”)

You can get an inkling of what it really means by reading a recent report from the Senate Committee on Aging. It provides an extensive menu of steps to address the problem. Here are two extremes on the list:

“Increase Worker and Employer Contributions by 1.1 percent.” Since worker and employer now pay 12.40 percent of payroll in employment taxes, the 2.2 percentage point increase in the tax would be a 17.7 percent increase on all workers, including those working short shifts at McDonald’s.

My bet: Public reaction, whether left or right, will be, “Sorry, we won’t go for that trick twice.”

—“Reduce benefits by 5 percent for New Beneficiaries in 2010 and Later.” That’s a hefty cut, but hardly enough. It would cover only 30 percent of the projected 75 year shortfall. So the weasel pack would have to look for additional cuts.

Between those two extremes, the Senate Committee lays out a list of weaseling and finagling tools and calls it “modernization.” They are careful to say they don’t favor any particular option and dislike some, but the reality is that this is the political menu. They are in the kitchen, getting ready to cook.

We’re going to be hearing about increases in taxes, decreases in benefits and changes in formulas. Whatever.

The big sucking sound you’ll hear is 535 weasels, hard at work, but the bottom line is that more will be going in and less will be coming out— at least to the people who paid it in.

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