Archive for June, 2011

Three Things You Can’t Say About Social Security

“Social Security needs a big fix, and soon.   If you have any doubt, take a look at this week’s analysis of Social Security’s annual trustees report, by Alicia Munnell of the Center for Retirement Research at Boston College.” — Eric Schurenberg, The Fiscal Times

The year in which Social Security will no longer be able to pay all of its promised benefits is 2036 (Last year, they thought it would be 2037).

Social Security began running at a deficit in 2010.  This wasn’t supposed to happen until 2015.  This means that every year, Social Security pays out more in benefits than it collects in taxes.  It theoretically has enough in its Trust Fund to continue paying benefits until 2036, but there is no money in the Trust Fund.

The Trust Fund has IOU’s from the federal government.  Tapping the Trust Fund means that Social Security presents a bill to the US Treasury, and the Treasury has to pay.  Of course, the Treasury has to get the money from somewhere, and that means higher taxes, reduced spending elsewhere, or more borrowing.

These facts, reported by Eric Schurenberg on July 28, 2011, publicly expose points I made in my previous posts about Social Security.

Schurenberg lists Three Things You Can’t Say about Social Security:

1. You can’t say that Social Security doesn’t increase the deficit. As of 2010, we are permanently running in the red.

2. You can’t blame it on the boomers. The usual explanation for Social Security’s funding problems is that the baby boomers are too big a load on the system.  But the program doesn’t get any better after the boomers die off.  The reason:  The boomers’ kids aren’t having enough kids themselves.

Remember, Social Security is a pay-as-you-go system: today’s workers’ taxes pay today’s retirees’ benefits.  [I told you, Social Security is Welfare.]  To keep going, the program needs a lot more workers than retirees.  Or as financial writer Jane Bryant Quinn put it, “It’s a saving program in which you deposit children.”  The younger boomers and Gen-Xers haven’t been depositing enough future workers to take care of their parents.

3.  You can’t say the payroll tax cut is temporary. You and everyone else with a paycheck got a two percentage point cut in your Social Security payroll tax this year.  Taxes, once cut, are hard to reinstate.  (Remember the Bush tax cuts that were supposed to expire in 2010?)  And, in fact, the main topic among policy makers regarding this year’s Social Security tax cut is not when to restore it, but how long to extend it and whether to stretch it to three percent and maybe to offer it to employers as well as employees.  That’s great for your pocketbook, possibly helpful for the economy, but it, too, widens the deficit.  The law says the payroll tax cut  has to be replaced by general revenues, so the tax cut doesn’t change Social Security’s accounting, but that’s just fiscal sleight-of-hand: you the taxpayer eventually cover the cost, whether it comes out of your FICA taxes or your income taxes.

More to the point, the shifty accounting dodges the “Big Question about Social Security.”  While Social Security’s shortfall is manageable, it is also real.  The long-run deficit can be eliminated only by putting more money into the system or by cutting benefits.  There is no silver bullet.

[I have quoted extensively from an article by Eric Schurenberg.]

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I am not a registered financial advisor. I only offer opinions, and sometimes these opinions veer off at weird angles from conventional wisdom (That's probably why you are here). My advice is, "Don't take my advice." Read my sidelong glances at economic issues and form your own conclusions.

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