Putting the Security Back in Social Security

(April 27) — Social Security needs fixing, most analysts agree, but supposedly we had a few more years to work out the details. Now the crisis is upon us. This year, Social Security will pay out more in benefits than it collects in employer and employee contributions, but the problems don’t stop there.

If the economy suffers a “double dip” — meaning the current recovery soon turns into recession — Social Security may never return to the black. Worse still, the “trust fund” is an accounting gimmick and doesn’t represent a genuine pool of savings. On top of all the other bleak news, Americans need to accept that Social Security is already broke.

Analysts have been warning that the annual surpluses — the difference between how much the government collects for the Social Security component of FICA versus the total benefits paid out in any given year — would gradually shrink to zero. It was inevitable that Social Security would eventually slide into deficit, because of the underlying demographics and because it was a Ponzi scheme from the beginning.

The first Social Security retirees collected benefits far in excess of what they paid in during their last working years. Over the decades, the chain-letter process continued: Current workers would pay for current retirees, and the only way to keep the system going was to hope that a new crop of young workers would arise to fund the next batch of retirees as they in turn started collecting checks.

Relatively fewer workers now support the population of retirees. The officially estimated year at which the system would go permanently into the red has bounced around, but the depth of the current recession took analysts by surprise. Because of high unemployment and early retirement, this year the system is already in deficit.

The Congressional Budget Office now estimates that Social Security will briefly return to the black in 2014 and 2015, before plunging — permanently — back into the red. Yet even this projection assumes that we will avoid another downturn.

Defenders of the current system argue that Social Security is still solvent, because of the $2.5 trillion “trust fund.” They argue that there is no emergency, because the system can draw down these savings to fund the annual deficits between payout and pay-in, allowing the system to stay afloat until 2037. Yet this is an illusion.

In past years, the Social Security system typically took in more revenues than it paid out. If the trustees had used those annual surpluses to buy, say, shares of mutual funds or bonds issued by foreign governments, then the accumulated $2.5 trillion in the trust fund would indeed provide a large cushion during which the system could be reformed.

Instead, the federal government raided the surplus and took that extra money and spent it. Of course, Uncle Sam is “good for it”; the Social Security trustees have $2.5 trillion worth of IOUs issued by the Treasury, and they will cover their annual deficits (at first) by selling off these assets.

Yet from the point of view of the taxpayer, the Social Security trust fund is an accounting gimmick. If an intern accidentally dropped the entire contents of the trust fund into a paper shredder, the taxpayer would be unaffected. Either way, taxpayers are on the hook for paying all the Social Security benefits.

In 2010, the crisis is upon us and we are still in search of a solution. Ultimately, the only way to fix the actuarial insolvency of Social Security will be to increase taxes, cut benefits or both.

Robert P. Murphy is a senior fellow in business and economic studies at the California-based Pacific Research Institute. Contact him at [email protected].

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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