Wikinvest Wire

So much for the Social Security surplus

Tuesday, March 31, 2009

Among the plethora of new ills plaguing the U.S. economy as it goes stumbling toward its uncertain future is a problem that, until very recently (meaning two days ago), was believed to be one reserved for the latter half of the next decade - the dwindling social security surplus.

Recall that, for decades, incoming payroll taxes have gone directly to government expenditures while IOUs piled up in a filing cabinet somewhere, famously visited by former President George Bush in early 2005 after an election win compelled him to boldly go into his second term as a reformer before he began quacking like a duck.

The initiative to reform the nation's second largest entitlement program and undo the marvelous mid-1980s accounting change that would make the U.S. budget deficit look deceptively small for decades was a resounding failure and the quacking started long before most had ever dreamed.

In retrospect, if the nation couldn't forge some sort of fundamental reform to its entitlement programs back in early 2005, when household wealth had soared to once unimaginable levels just before the housing bubble met its pin, is there any realistic possibility that substantive reforms will ever come voluntarily?

In any event, word now comes from the CBO (Congressional Budget Office) that yet another fallout of the recent economic tailspin is that payroll taxes have fallen off a cliff along with home values and stock prices leading to the real possibility that the Social Security surplus will turn into a deficit much sooner than originally thought, all but vanishing next year according to the most recent calculations.

Last year, the CBO figured the surplus would be $80 billion this year and next, rising from those levels before falling to zero in about ten years. The most recent projections are for a slim $16 billion surplus this year and just $3 billion next year but, given the rosy predictions that usually come out of Washington, a deficit is certainly within the realm of possibilities.

While this will have no impact on current recipients as incoming funds will about equal the monthly payments to more than 50 million senior citizens, it will have an untoward impact on funding the government's budget deficit, a shortfall that has been masked by these surpluses for years.

In what some refer to as the biggest Ponzi scheme of them all, the Treasury Department has been borrowing money from the Social Security trust fund to pay today's bills leaving behind just slips of paper stored in that file cabinet above.

When the surplus eventually turns into a big deficit as retiring Baby Boomers start collecting their checks sometime in the next decade, someone has to make up the difference, but since the surplus has already been spent, this leaves only a few options for the government - borrow more money, print more money, raise taxes, or cut benefits.

This was the least of our short-term problems up until yesterday.

In theory, the Treasury Department is supposed to repay the money borrowed from the trust fund (with interest) in order to provide what two-third of all retirees count as their primary source of income - it now looks like they'll have to start doing that a lot sooner than expected.

For the first time in 25 years, the government will have to start subsidizing social security instead of the other way around.

Also see:


Mathlete said...

The important thing was the peak surplus. Congress already spends every penny, so there isn't any surplus in reality. For example, if every year the surplus grows, Congress can increase spending without increasing the deficit. Once the suplus peaks, say at $200 billion, and falls to $190 billion the next year, Congress has to cut $10 billion in spending, increase taxes by $10 billion, or borrow $10 billion. 2008 was forecast to be the peak when everything was humming along a few years ago.

This is what happens when one generation doesn't make enough babies. Even if things were privatized, we'd have this crisis. Boomers fertility rates meant they should be the largest savers in world history, instead they were the most spendthrift.

Nick said...

This is a national disaster long in the making, and probably the one issue which will ultimately doom the country in the next 50 years or so: there's just no politically feasible way to recover from such an enormous Ponzi scheme. I would bet that when SS was established in the 30's, it was under the same kind of pretenses at the $10+ Trillion current "bailout" (payout) which will probably collapse the US dollar: fixing the short term problems in the short term, and waiting until after the crisis is over to address the long term problem. Unfortunately, nobody ever addresses the long term problem, and so it continues to grow until there's no resolution other than total collapse. You know, kinda like Madoff borrowing a little bit from new investors to keep his returns high as a short term solution, with the same inevitable conclusion.

For what it's worth, I wrote what I would do to "fix" social security in a blog post recently. It's not really a fix, so much as a partial improvement to the accounting and benefits scheme to facilitate possibly addressing the actual problem, and try to prevent the scheme from being leveraged into more of a wealth distribution mechanism under socialist leadership. I don't think the problem will be ultimately fixed, though; and I'm somewhat sad that I'll probably live long enough to see the culmination of all these "short term" socialist "solutions" from the 30's and today, and the corresponding end of the United States of America as we have known it.

Turfkiller said...

Everybody is in a hurry to end the benefits. That won't happen of course but the benefits will shrink down to near nothing. If the benefits were to end so would the tax.

It's not that everyone was the most spend thrift as in large part the profits have been funneled into poor investments with short term profitability at best.

Support said...

The solution is simple. Same solution used in the 30's. Totally devalue the dollar.

That's what they can and seem bent on doing. Not much choice I guess, but it's savers that will be punished.

Mathlete said...

Devaluing the dollar only works if SS is not indexed to inflation. The current system could be maintained with two simple tweaks because there's X dollars paid annually and there's Y retirees. Divide X by Y and you get a per person benefit. Kick the rich off and raise the retirement age until there are no benefit cuts.

staghounds said...

None of those limits to benefits will happen. Retirees will still get the full amounts. The Govt will just print more money, and SS will provide exactly what it was meant to provide- enough money to stave off destitution, a lower working class income.

To support a 1930s style lower working class life.

Popular democracies ALWAYS moneti2e debt, unless some miracle intervenes to pay it off. ALWAYS.

Aaron Krowne said...

A reader wrote in with an important clarification to our pickup of this article on ML-Implode. I thought I would relay that here for everyone's benefit. The upshot is the "IOUs" are not, as I had always assumed, run-of-the-mill Treasurys -- they are formally no different than the ad hoc IOU sticky notes from the movie "Dumb and dumber". The reader writes:

... there are no accumulated Treasuries in the Trust Fund. The Trust Fund is nothing more than a collection of interdepartmental markers, and is considered non-negotiable debt. It is not part of the national debt, and does not pay interest. If it was negotiable debt (Treasuries) it would be an asset to the fund, and could be sold on the open market to pay for future obligations just like any other retirement plan (and also would have sky rocketed in value during the greatest bond market rally in at least a generation). In 1980 the real change was to place all of the proceeds from Social Security into the general fund, replace it with non-negotiable markers in filing cabinet somewhere and call it unfunded pension liabilities. This has the advantage of making the national debt look lower. If it was funded by Treasuries then no new debt would need to be issued by the Treasury, but since it is not funded with negotiable debt, new debt will need to be issued (or benefit decreases, or increased taxes). Social Security is a pay as you go system, and the massive tax increases in 1980 to save it were nothing more that a middle class tax increase. When suckers will no longer fund the national debt, this program will be under serious pressure for massive change..

Kenna Wickman said...

A solution to this would be to get rid of the tax cap - and tax all income for Social Security, not only the first $90K as is the current system.

It seems unfair that most of us should have to pay out 14% of our income, whereas someone making $1mil or more only has to pay out 14% on the first $90K, but none on the rest!

Nick said...

The "solution" of removing the cap, oft discussed primarily by Democrats, transforms Social Security from a nominal retirement and social assistance program into an explicit and deliberate socialist wealth redistribution program. Now, obviously, there are a lot of people in the country (again, primarily Democrats) who think that would be a good thing, but I personally would prefer the government not to hijack what is conceptually a worthwhile social and retirement safety net program, and nefariously co-opt it for their own purposes.

I would counter-propose that they should change the program as I described in my blog post, then introduce a new bill to add a massive new wealth redistribution tax on everyone. That way we wouldn't have to pretend it's related to the "social" or "security" parts of Social Security, and people would be able to debate the merits of socialist wealth redistribution openly and transparently, instead of pretending that tacking something like that onto social security is a "fix", or anything equally ridiculous.

Pegasus said...

America! do not worry.
John McCain,Harry Reid,T Kennedy will give all of the SS money to the Illegals.
John McCain loves America..that`s why he hid the POW papers from you.
I wonder why John McCain,aka (Songbird) didn`t use said papers to enhance his chances of winning the election..I mean the POW papers would have made him a HERO right?....Wrong!!
If he would have released the papers,he would have been hanged by the neck until dead.
Now! he wants to give our hard earned SS money to Illegal,Law Breaking,Invaders of America.
He has lots of help from people like "Harry Reid","Nancy Pelosi",and fugitive from justice, T Kennedy.
It`s very hard to believe just how Stupid the American people really is unbelievable!!..but true.

Anonymous said...


Increasing the cap is ridiculous and a simple-minded response as usual.

How bout this one: what is fair about the gov't taking SS surplus and spending it????

When are we going to realize that we haven't had "capitalism" in this country.

And I'm still waiting to learn of a socialist system that works...yeah Europe is so great.

Give me a break.

AJ said...

Ah, blog comments and their silly black-and-white, with-us-or-against-us mentality. Haven't you ever heard of middle ground?

Pure capitalism sucks. It is incapable of accounting for the excessive greed that human beings are capable of.

Pure socialism sucks. It does not encourage people to maximize their potential.

Maybe, just maybe, the best solution is a mixture of the two?

  © Blogger template Newspaper by 2008

Back to TOP