Demographics do not lie and neither does the following analysis from the Heritage Foundation. Now, some of my Democratic friends and family might object to the analysis just because it comes from the Heritage Foundation, traditionally a conservative think tank. However, I challenge any of them to come up with a different set of numbers or scenarios. I believe that will be impossible, based on the different data sources and analyses I have examined from other sources, independent of the analysis below. Of particular validation is the fact the Obama's Deficit Reduction Commission came up with the same basic conclusions.
Please read the following paragraphs, it is sure to depress you. However, afterward, there are three steps from "Love My Country, Loathe My Government," that if undertaken soon, would ease the payment burden of future Americans while preserving as much of the current levels of benefits for those Americans that really need the support.
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Trustees Show Permanent Deficits for Social Security
How Will This Report Affect the Social Security Debate?
The debate about whether Social Security faces a problem and needs to be fixed is over. The 2011 trustees report, which was released this afternoon, shows that the program already faces massive permanent annual deficits. In 2010, Social Security spent $49 billion more in benefits that it took in from its payroll tax. This year, that deficit will be approximately $46 billion.
Now is the time to focus on solutions. Instead of just blindly defending the current program, both Congress and the Obama Administration should propose comprehensive programs that permanently fix Social Security. It is one thing to oppose a solution; it is another to come up with a plan and fix the problem.
Social Security Problem $1.2 Trillion and One Year Worse
In net present value terms, Social Security owes $9.1 trillion more in benefits than it will receive in taxes. The 2011 number consists of $2.6 trillion to repay the special issue bonds in the trust fund and $6. 5 trillion to pay benefits after the trust fund is exhausted in 2036—a year earlier. This is an increase of $1.2 trillion from last year’s report, which also reflects several changes to assumptions and methodology.
A key change in this year’s report is that Social Security is predicted to run cash-flow deficits from now on. The immediate cash-flow deficits are largely due to the effects of the recession on its finances. The recession increased the amount of benefits paid out by Social Security as older workers who have lost their jobs choose to file for benefits earlier than they might have otherwise. Meanwhile, younger unemployed workers are unable to pay Social Security taxes, while workers who suffer a drop in their income pay lower amounts.
Net present value measures the amount of money that would have to be invested today in order to have enough money on hand to pay deficits in the future. In other words, Congress would have to invest $9.1 trillion today in order to have enough money to pay all of Social Security’s promised benefits through 2085. This money would be in addition to what Social Security receives during those years from its payroll taxes.
The trustees report’s perpetual projection extends beyond the usual 75-year planning horizon. In net present value terms, the perpetual projection is $17.9 trillion, including money necessary to repay bonds in the trust fund. Last year’s number was $16.1 trillion. If the assumptions and other details were the same as last year, this year’s number would still have grown to $16.9 trillion.
This means that the net present value deficit of Social Security after 2085 is $8.8 trillion. These projections show that Social Security’s total deficit continues to grow well beyond the 75-year projection period. Any reform that eliminates deficits over the 75-year window must also solve the program’s problems beyond then, but not all proposals do.
Many opponents of reform claim that raising payroll taxes by about 2 percent (the average percentage difference between revenues and outlays over the 75-year period) would solve Social Security’s problems. The reality, however, is that the program’s future deficits are projected to be large and growing, so this tax increase would still leave a huge shortfall. These new projections should end the claims that Social Security’s impending financial crisis can be resolved with modest changes to the current system.
In actuarial terms, Social Security’s long-term financing declined sharply from a 75-year deficit of 1.92 percent of taxable payroll in last year’s report to a deficit of 2.22 percent. This 0.3 percent change resulted mainly from increased longevity projections for workers over the age of 65. However, another cause was the economy’s continued weakness.
Social Security spending started to exceed projected tax collections in 2010. These deficits will quickly balloon to alarming proportions. After adjusting for inflation, annual deficits will reach $81.5 billion in 2020, $288.4 billion in 2030, and $343.6 billion in 2035.
Is the Important Year to Consider 2036 or 2010?
Starting in 2010, Social Security began to permanently spend more than it takes in. This is by far the most important year. From now on, Social Security will require large and growing amounts of general revenue money in order to pay all of its promised benefits. Even though this money will technically come from cashing in the special issue bonds in the trust fund, the money to repay those bonds will come from other tax collections or borrowing. The billions that go to Social Security each year will make it harder to find money for other government programs or require large and growing tax increases.
Compared to these two dates, 2036—the year that the Social Security trust fund is projected to run out of its special issue bonds—is of little importance. Even though the end of those bonds will require approximately a 25 percent benefit reduction, Congress would have been paying about $250 billion a year (in 2011 dollars) to repay those bonds for about seven years by the time the trust fund runs out. Congress will have to do this through some combination of other spending cuts, new taxes, or additional borrowing. These are the same choices Congress would face without the trust fund.
When Will Social Security Begin to Run a Cash-Flow Deficit?
The short answer is now. According to the 2011 trustees report, Social Security began to spend more in benefits than it receives in payroll taxes in 2010 and will continue to run cash flow deficits from now on. The year the trust fund is exhausted is 2036, one year earlier than in last year’s report.
What Are the Old Age and Survivors’ Insurance Operating Numbers from the Current Year?
The trustees report includes detailed information about the aggregate amount of payroll taxes paid in the previous calendar year and the aggregate amount of benefits paid in that year. It also includes data on operating expenses. In 2010, the Old Age and Survivors Trust Fund, which pays for retirement and survivors’ benefits, took in $677.1 billion and paid out $584.9 billion. Its annual surplus was $92.2 billion, but after subtracting out $108.2 billion that came from a paper transaction that credited interest to the trust fund, the trust fund actually lost $16 billion in 2010 alone. Additional losses were suffered by Social Security’s disability program.
What Does It All Mean?
Bad News for Younger Workers. Unfortunately, younger workers have a great deal to worry about. Even though their parents’ and grandparents’ benefits are fairly safe, theirs are not. Any worker born after 1970 will reach full retirement age after the trust fund is exhausted. Unless Congress acts soon, younger workers can look forward to paying full Social Security taxes throughout their careers but receiving only about 75 percent or less of the benefits that have been promised to them. In addition, they will have to repay the Social Security trust fund, an expense that will total almost $6 trillion by the time the trust fund is exhausted in 2036.
Improving Retirement Savings Is a Must. Allowing American workers to save and invest a portion of their income in accounts that they would own is the lowest-cost way to ensure that they have an adequate retirement income. Increasing the ability of workers to save for retirement will reduce their dependence on Social Security for retirement income and enable them to increase retirement security.
The Crisis Is Here Now
It takes about 22 years to grow a taxpayer. Almost every new taxpayer who will begin a career after graduating from college in 2033 is living today and can be counted. Similarly, all people who will face approximately 25 percent across-the-board benefit cuts starting in the year 2036 (if Congress does nothing to fix the program) are alive now, and most of them are paying taxes.
Social Security’s problems are based on demographics, which do not change from year to year. The people who will be hurt if nothing is done to fix Social Security are not unknown people of the future: They are our children and grandchildren of today
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Two more scary things about the current and evolving insolvency situation is the reaction of two leading politicians, Harry Reid and Nancy Pelosi, to this reality. Harry Reid recently commented that there is no need to worry about Social Security until 2036, exhibiting an incredible ignorance on how Social Security is running a cash deficit now, not in 25 years. Unbelievable misunderstanding of the reality of wealth and finance from the leader of the U.S. Senate.
Pelosi is not much better. Before the ink was dry on the President's Debt Reduction Commission report, a commission that correctly recognized that retirement age had to rise to save Social Security, Pelosi issued an immediate and ignorant statement and press release that she would never allow the retirement age to rise. Never mind that she obviously had not read the report. Never mind that she had no understanding of cash flow and the negative status of cash flow of Social Security. Never mind that some very smart people had worked months and months analyzing the situation. She was going to throw out their suggestions without debate or intelligent discussion.
Thus, everyone seems to recognize the danger zone we are already in except the political class. Based on analysis such as the one above, "Love My Country, Loathe My Government," proposes three steps to fix Social Security and put it on a firm financial basis. steps that many analyses and organizations have also concluded are needed:
1) Increase the retirement age to 70 - life expectancy for Americans has increased significantly over the years. However, the retirement age has not. Thus, the basic assumption set that underpins the Social Security System is now invalid. This is simple demographics, something that Reid and Pelosi cannot grasp. Thus, the retirement age must rise to ease pressure on the financials. However, there would be an escape clause that would allow the less financially fortunate to draw Social Security benefits earlier than age 70 However, if an American had a predetermined level of assets (not income), they would not be able to draw Social Security checks until their wealth fell below that level or they reached the age of 70.
2) Rich Americans might never draw a Social Security check. In order to keep the system solvent for those Americans that truly need a check in retirement, this step would deny benefits to rich Americans. The book proposes that this asset level be $3 million. In other words, if an American had more than $3 million in assets, they would never be able to draw a Social Security check until their asset level was below $3 million. Thus, people like Warren Buffet, Bill Gates, and similar folks might never get a check. However, their sacrifice would be small relative to their overall wealth and their sacrifice might help another, less fortunate American to continue to draw their benefits. Is $3 million the right level? I do not know but you get the idea.
3) The financing of the Social Security System would change so that the Social Security tax rate is reduced but the amount of earnings and type of earnings would be uncapped. The problem with the system today is the unfairness of the math. Let's assume that you earn about $100,000 dollars year in wages. Your personal Social Security taxes would be about $6,200. However, if another American earned ten times as much, $1,000,000, that American would pay the same amount, about $6,200. A third American, earning ten times as much as the second, or $10,000,000, would also pay the same amount of about $6,200.
This step would reduce taxation rate far below the current level of about 6% but would apply that lower rate to all income, wages, interest, dividends, etc., and not just wages, in order to have everyone pay at about the same tax rate.
Several other steps from "Love My Country, Loathe My Government" are also necessary to fix the Social Security System. The inability of Pelosi and Reid to grasp the simple math and demographics of the failing Social Security System makes one realize that we need to drastically change our political processes in order to get some people into office that can recognize and understand some simple math and demographic concepts and have the courage and leadership to act decisively to fix the system.
Our book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at http://www.loathemygovernment.com/. It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect
freedom for both yourselves and others everyday.
Please visit the following sites for freedom:
http://www.cato.org/
http://www.robertringer.com/
http://realpolichick.blogspot.com/
http://www.flipcongress2010.com/
http://www.reason.com/
http://www.repealamendment.com/
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