Wednesday, October 15, 2003
A cool story. When we need to, we can.
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Hope you've got something socked away.
"I know it's hard to get excited about the long-term solvency of Social Security, even if you are among the few Americans who has noticed that the Social Security and Medicare "trust funds" are slated to run dry sometime around 2040. After all, if you're over fifty, you probably won't live to see the day that the "trust" is exhausted. And if you're under thirty, you probably have emotional trouble actually imagining yourself needing a walker and a pillbox full of heavily subsidized drugs. That leaves a very narrow band of our citizenry willing to spend precious time worrying about the solvency of our old age programs.Not to mention that the retiring Baby Boomers will leave a hole in the workforce. Suddenly there will be millions of people who stop producing and become just consumers relying on the government to provide for them. This is not a stable situation. Though it's still not as bad as France, where shortly there will be one worker per retiree.
But if you are having difficulty keeping your mind focused on the problem, I think I can help: the problems won't start in some comfortably far off time. They'll start in less than ten years.
I imagine I now have your attention. Let me explain.
How Trusty Is the Trust?
Right now, the extra money that Social Security and Medicare take in is not, as many imagine, stuck away in a vault somewhere. Any excess Social Security taxes not needed to pay current benefits are lent to the government, which gives the "trust fund" special purpose bonds in return. The "trust fund," in other words, is a big fat IOU written from Uncle Sam to itself.
Why is this a problem? The AARP, which seems to have as its main purpose ensuring that Social Security remains "the third rail of American politics" -- touch it and you die -- alleges that the Social Security trust fund is "a sure thing," because after all, US Treasury debt is the safest investment there is. To see why this is nonsensical, let's consider two scenarios for Social Security, one without the trust fund, and one with.
Without the trust fund, when the baby boomers begin to retire, and the cost of their benefits begins to exceed the amount of money everyone else is paying into the system, the federal government will have to make up the shortfall. The government has four ways of doing this. It can cut benefits, so that the amount paid out in benefits matches the amount paid in in contributions. It can raise taxes, to cover the extra spending. It can cut other spending in order to make up the shortfall. Or it can borrow the money from someone else.
But we do have the trust fund, the AARP argues; therefore, we don't need to worry about reform just yet. It's safe for quite some time.
Well, let's see what happens when the baby boomers start to retire under scenario two.
Before the baby boomers retire, when the federal government pays "interest" on those special purpose bonds, it's really just an accounting entry: because the Social Security Administration doesn't need the money, the "interest" is promptly lent back to the federal government, increasing the value of the bonds the SSA has on the books.
When the baby boomers retire, however, the surplus of taxes over expenses quickly vanishes. While interest "income" may still be increasing the accounting entry for bonds on the SSA's books, in the real world cash flows suddenly reverse direction. In 2002, the SSA received $78.7 billion more in taxes than it paid in benefits, money it forwarded to the federal government. When the boomers retire the money starts going the other way, and a gaping hole opens up in our budget.
That money will be sent as interest payments, which somehow reassures the advocates for the Social Security status quo. But it doesn't matter whether we send it as a check for interest, or as a big pile of cash wrapped up in a pretty bow; what matters is that in the not-so-distant-future, the federal government has to come up with north of $100 billion to make up Social Security's deficits, and the deficit in its own books left when the cheap money from the SSA disappears.
Now, how can the government do this? It has (ahem) four options. It can cut benefits so that outlays for Social Security and Medicare don't exceed what's collected in payroll taxes; it can raise taxes; it can cut other spending; or it can borrow the money.
In other words, with or without the trust fund, when the expenses of Social Security and Medicare exceed the value of our contributions, our budget is suddenly going to have more holes than a warehouse full of Jarlsberg. And when does this happen? According to the Social Security trustees, Medicare's expenses start to exceed benefits in 2013, less than ten years from now. Social Security follows suit in 2017. 2040 isn't the date when we need to start worrying; it's the date when we finally give up pretending that Social Security is anything other than a gigantic Ponzi scheme, and the suckers revolt.
Violating Fiduciary Responsibilities
And where does this gigantic, worrying liability appear in our budget forecasts? Nowhere, yet. The White House Office of Management and Budget's figures go only as far as 2008. The Congressional Budget Office's budget projections go to 2013, but in the first year of Medicare deficit the effect is too small to show up. The ticking time bomb is still comfortingly out of sight -- but it will blow up, as Gokhale and Smetters have illustrated.
And what are our elected officials doing about this looming crisis? Why, with the able assistance of groups like the AARP, they're actively looking for ways to make it worse. Congress is currently labouring assiduously to increase our Medicare costs by $400 billion in the next decade with a new prescription drug benefit. Even if the new program manages to keep from going over budget -- an event which the history of Medicare spending renders unlikely in the extreme -- it will drastically advance the date when the hidden liabilities of our old age programs reveal themselves, with a vengeance.
That seniors groups should agitate for such programs, and labor to mislead the public about their costs, is understandable, if reprehensible. But that congress should abet them when Social Security and Medicare are already pushing us into insolvency, is lunacy. We are long past the day when any of us can ignore the issue, hoping that someone in some comfortably distant future year will solve the problem for us. Many of the legislators voting for the prescription drug bill will still be in Congress when its finances start to fall apart; most of their constituents will be alive and working when the taxman comes to collect on a debt they didn't know they'd guaranteed. There's no excuse for such profligacy. When they promise money they don't have to special interest groups on such a titanic scale, our legislators violate their fiduciary responsibility to the taxpayers. Its time that we called our lawmakers to account, and forced them to live within our means."
Of course it's impossible for any politician to tell people that they have to eat cat food because they were either too unfortunate or too stupid to save for their retirement. Or to tell them that if they want medicine they have to pay for it, so act like a grownup and use generics or do without.
The problem is that there are genuinely blameless individuals who rely on these programs for their lives. There is also a whole generation who'll ruin it for everyone because they were too whatever to make provisions for themselves while they were able. I don't begrudge paying into Social Security myself because I know that some people need it because they are unable to pay for themselves. But I do begrudge every penny that goes to people who made no effort. I will begrudge it if they raise taxes or borrow the money.
Regardless of blame there are millions of people who are going to be out in the cold one way or another. Which of course makes the AARP and the politicians and the older voters even more reprehensible for making it worse. Selfish bastards.
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Oh lord. Their economy is headed for the toilet and they're feeling like victims. Never a good thing.
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Oh good. Now please hurry up and declare the "Spending Clause" unconstitutional. We may be on the road to a more libertarian government.
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