Snoopy and the Fiscal Downfall of America, Part 1: Social Security

Many years ago there was a Sunday Snoopy comic that sets up today’s post. Seems Snoopy was going out for jog on a cold, dark winter morning. Before long his knees started complaining because they were taking all of the pressure from the jog steps on the hard frozen ground. The feet chimed in to complain that the knees did not know what they were talking about since the feet got the initial shock of each step. Before long, the lungs started to complain from sucking in the cold winter air.

This went on for a while, with each body part complaining that they did not want to be out on an early morning winter jog. Finally one of them asks, “Whose idea was this anyway, to go jogging on this early and on this very cold morning?” At that point, the heart spoke up and said: “It was my idea because jogging is good for me and if I go, you all go.”

There are many serious issues facing America today. Failing public schools, a lost war on drugs, a leaky border, inept and lazy politicians, the constant battle for gay rights, etc. These are all important and need to be worked. However, relative to the Snoopy story, these are just body parts that need attention on a cold, dark winter morning relative to the basic fact: the United States Federal government is on a dangerous and fast track to fiscal ruin and collapse, i.e. the fiscal heart is about to give out. 

And if that fiscal and financial integrity collapses, much like the heart, every other issue becomes secondary in the face of an economic collapse, a collapse that trashes all of our freedom and liberty. We are going to take a few days to look at how dangerous that track is and how close we are to having a fatal financial heart attack that will make the other body parts, i.e. national issues, wilt in comparison to the dire consequences.

Today we will focus on the dire situation of the Social Security program. The basis of our analysis and discussion comes from recent Congressional testimony given by Boston University economist Laurence Kotlikoff. His diagnosis of the system is not good and his testimony included the following realities:

• In his view, the Social Security system is already insolvent, paying out more in benefits than it takes in via tax revenue.
• This contradicts the view of many in the Washington political class that have this half baked notion that we are 20-30 years away from the system being insolvent.
• He based his conclusions on Social Security’s own data, drawing the information from Table IVB6 of the 2013 Social Security Trustee’s Report which Kotlikoff says: "This table reports that Social Security has a $23 trillion fiscal gap measured over the infinite horizon.” 
• He goes with this frightening comparison: “Twenty-three TRILLION dollars is 32 percent of the present value, also measured over the infinite horizon, of Social Security’s future revenues. Hence, Social Security is 32 percent underfinanced, which means it is in significantly worse financial shape than Detroit’s two pension funds taken together.”
• This $23 TRILLION deficit is $10 TRILLION more than the Federal government’s current public debt level and more than $5 TRILLION more than the total national debt.
• That 2013 estimate of $23 TRILLION has already grown to $24.9 TRILLION in the first half of 2014 according to another official Social Security report for this year.
• Kotlikoff’s conclusion: Social Security cannot “sustain projected long-run program costs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers,” as the trustees state.
• Kotlikoff also testified that Social Security is now in “worse financial shape today than when the Greenspan Commission ‘fixed’ it” 31 years ago.
• He also had some harsh words for the political types that operate the Trustees Board: “To their great credit, Social Security’s actuaries have been reporting the system’s infinite horizon fiscal gap every year since 2002. And to their great shame, Social Security’s Trustees have been ignoring this comprehensive measure of the system’s insolvency every year since 2002.” In other words, experts knew twelve years ago that we were heading down a path of financial destruction and those in charge did nothing about it, wasting twelve years and making the situation even more dire than it had to be. 

If we assume that the GDP of the entire nation is about $16 TRILLION, we would have to take the entire economic output of every citizen and every company for about one and a half years to cover the $24.9 TRILLION deficit of Social Security. Depressing. Things are so bad that Kotlikoff testified that “nothing short of a fundamental reform of the system” will save it.

How would he save the system? Here are his numbers that are quite devastating to either the economy via higher taxes or retirees via lower Social Security benefits:

• To pay the current level of promised benefits, payroll tax revenues must immediately be raised by 32%.
• If this tax rate is not an option politically, then there needs to be a 22% across the board decrease in benefits.

Neither of these are politically attractive to the less than courageous politicians sitting in office in Washington today. Thus, it is highly unlikely that an action that is bold and displays leadership in tough times is likely anytime soon, which will make the problem get even worse. 

There is another approach, a three step approach that was proposed in “Love my Country, Loathe My Government:”

• Step 10: Uncap the maximum amount of income that is subject to the Social Security payroll tax but reduce the overall tax rate to more equitable across all income levels.
• Step 11: Prohibit any citizen with more than three million dollars in wealth or asset from drawing a Social Security check until their asset levels fall below that level in order to save scarce Social Security funds and resources for those that truly need it for the basic of living.
• Step 12: Raise the retirement age over time to seventy years ago to reflect the longer life spans of current citizens.

These steps would save the limited revenue for those that truly need it. However, as with Kotlikoff’s recommendations, these steps would require leadership and courage in Washington, assets that are sorely lacking.

By the way, if you were thinking that government surplus revenue in other government budgets could be used to stave off the collapse of Social Security, think again. According to Kotlikoff, while Social Security is woefully under funded at 32%, the overall Federal government is far worse. 

Based on his calculations, the entire government is under funded by 58%, which brings the total Federal government revenue and financial shortfall to a min numbing $205 TRILLION. To put this number in context, let’s do some simple math:

• $205 TRILLION is more than 12 times the size of our annual GDP numbers, meaning that raising taxes a little bit would do absolutely nothing to cover the large and growing $205 TRILLION gap.
• Every American family would have to write a check for about $1.8 million to cover the shortfall. Obviously, no way that is going to happen.

Back to Snoopy. Ignoring this fiscal problem since at least 2002 is like knowing you were overweight twelve years ago and did nothing to change that situation. You are probably that much more overweight and putting that much more stress on your heart that any jogging we do now will have no impact on our health, cardiac or financial. 

Like Snoopy’s heart, if the fiscal integrity of the country is allowed to continue down this path to ruin, other issues (i.e. Snoopy’s other body parts) will totally become insignificant since the country will be gone along with the freedom we have enjoyed for well over two hundred years. 

And the really scary part: name me one Washington politician that has the understanding, the political courage, the personal integrity, and the smarts to fix what these same people have broken. Trying to answer that futile question is enough to give anyone a heart attack, regardless of how much they jog. 

And the fiscal bad news continues tomorrow.

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