The day I got my first corporate position, I was handed a welcome letter that specified that my retirement would be in April 2012. I was 22-years old, and I thought that I would be lucky to live that long. I envisioned a very old me, stooped and tired, like my grandpa working the field as a septuagenarian, as I checked the mailbox for my little social security check.
This article will attempt to dispel some of the myths about Social Security and update the current status of that important cornerstone of many American retirement plans.
My grandpa had advantages to a long life that I did not. Modern technology has heaped daily stress on me to go faster and do more, when he could use the old excuses, "it's in the mail" or "a Norther blew down the phone line." I have had to absorb chemicals into my system from various fad diets and unregulated vitamins in support of a Rubenesque wife's effort to reclaim her runway model figure. I lived a life thinking the ketchup on my fries was made from grandpa's fresh Central Texas tomatoes and cane sugar, not Chilean vegetables nibbled by unknown tropical insects and cut with toxic corn syrup, a byproduct of some refinery.
Despite the hazards of advanced technology, constant physical altering of our systems with designer pharmaceuticals and pervasive addictions to various vices, I am told that we live longer now than ever before. Many think they will outlive the Social Security system.
The following chart indicates the projection for a growing cash deficit between the money collected each year and the money required to fund the benefits that year, and some readers will note that their retirement year is "off the chart."
It appears at first glance that there is definitely a problem with the cash flow for this system, but the whole story may not be as ugly as the chart. The solutions may not be as drastic as sensationalist news agencies want us to believe.
I survived to Social Security age somehow, and now I can apply for benefits if I so choose. From the day I got that letter, I never expected to actually collect any Social Security check, and I never really took time to seriously think about that "entitlement." So during a recent trip, I stopped at the airport news stand and bought a Barron's, a Wall Street Journal and an Investors Business Daily, as I wanted to catch up on whatever was happening with the Social Security system. On the international flight, I read every page and not one word about Social Security.
The Social Security system is the main retirement plan for millions of baby boomers, and I am surprised that it is not a top priority for financial journals and news outlets alike. I decided that the reasons for the lack of discussion are the following:
1. It is the "third rail" in politics and no one wants to touch it.
2. Like me, people consider the Social Security system is like the moon...it is always there until it is not, and there is nothing anyone can do about it.
3. It's dynamics are considered too complicated for many to understand.
4. It is not really an immediate problem, so nobody cares.
Social Security - The Political "Third Rail." In a subway system, the third rail is the one that carries the electrical charge. Some have compared the Social Security system as the untouchable subject for politicians. Generally, everyone knows that the system is expected to develop the cash deficits in the above chart, but the solutions are not considered popular. The two most commonly considered are to charge more SS taxes on paychecks and businesses or to reduce benefits. The main issue to that there are fewer people contributing and more people becoming eligible for benefits.
Although the cash flow is not adequate, the money that was contributed in the years before 2011 were more than adequate and those excess funds were invested in the Social Security Trust Fund, which currently holds more that $2.5 trillion dollars of Treasury securities. If you add all those deficits, we find that the Trust can fund the benefits until 2036.
This $2.5 trillion has been added to the National Debt of the Federal Government, because it has been diverted to other uses due to general budget deficits. One question is: how will the Federal Government repay the Social Security Trust? This is where the politics get really sticky.
Essentially the workers who contribute the Social Security funds from their paychecks are financing the deficits in the general fund that theoretically should be paid from income taxes on businesses and individuals. Right or wrong, for years the workers have been financing lower income taxes for everyone, even though those with incomes over $110,100 do not pay any SS tax on wages over that ceiling. This seems to be an argument for higher income taxes.
Nobel Laureate economist Paul Krugman, deriding what he called "the hype about a Social Security crisis", wrote:
"There is a long-run financing problem. But it's a problem of modest size. The Congressional Budget Office report finds that extending the life of the Trust Fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of GDP. That's less than 3 percent of federal spending - less than we're currently spending in Iraq. And it's only about one-quarter of the revenue lost each year because of President Bush's tax cuts - roughly equal to the fraction of those cuts that goes to people with incomes over $500,000 a year. Given these numbers, it's not at all hard to come up with fiscal packages that would secure the retirement program, with no major changes, for generations to come."
Obviously, Tea Party members object to tax hikes for anyone, but they may have a different outlook if they were aware that their retirement could be secured indefinitely with that policy change affecting the half-million-dollar earners. Politicians on the GOP side are dead set on avoiding any issue that raises taxes, so the debates were curiously quiet about the fate of Social Security and specific solutions.
The democrats are no more courageous about facing their constituents with the notion of lowering present benefits to have more funds available for future generations. Raising the retirement age has occurred before, and is not a popular choice going forward. The single most effective solution to eliminate the deficit may be to index benefits to prices, rather than income. That policy would lower costs by reducing present benefits to people that may not actually need the safety net. However, drastic reductions to the amounts "promised" would create chaos for many retirement plans, and it would be political suicide for proponents of those changes.
Myth: No Solutions in Sight. Politicians fearful of addressing the Social Security issue like to shrug off the problem as not curable. That is far from the truth. The Congressional Budget Office indicates that a reduction in benefits or increase in revenue equal to an annual impact of 0.6% of the GDP would eliminate the funding issue for the next 75 years. Following are some ideas that it has analyzed and the projected GDP impact of each one.
It is clear that any one of five solutions with an impact greater than 0.6% of GDP could be enacted if there were political support, and that would allegedly solve the problem. A combination of smaller policy changes could add up to the required adjustment by balancing some less drastic revenue and benefit options.
The Social Security System is too complicated. By the time you get to this point in the article, it may be a foregone conclusion that this statement is true. Actually, the SS system is big, but the concept is pretty clear. Employers and employees take some of their income and give it to the Federal government to invest and hold for workers until the designated date, when they can have a defined lifetime income from that principal and investment income.
That is an oversimplification as a variety of amendments have been added, but the general concept remains the same. The Fund is invested in unmarketable Treasury securities, giving the impression that the hard-earned funds are now no more than a nebulous accounting entry. It would be great if we could get a listing of securities, values, etc., like a brokerage portfolio statement, but that would just create administrative complications and costs.
The basic system is also complicated by arbitrary and subjective limits on minimum and maximum benefits, as well as ceilings on contributions. It would be more easily understood if there were more of a direct relationship between contributions and benefits, but that probably would defeat the goal of providing something meaningful for the poorest citizens. I am not a socialist, but I recognize that poverty is a cost to our society one way or another, and I prefer a plan in place that defines the amount that the government will provide to help this situation.
I am a businessman, and I have had to make projections for up to ten years, and it is not an exact science. Making 40-year or 100-year projections should be considered theoretical at best and not "cast-in-stone." I think it has always been reasonable to expect the numbers to change a little, and I do not begrudge small adjustments to keep things flowing, once a problem has been identified.
The Social Security system is a future problem, but not today. If you go back to the graph at the top of this article, the cash deficit was scheduled for 2017, based on the 2007 Trustee report. The 2010 Trustee report indicated that a $7 billion deficit would occur in 2011, six years earlier than projected in 2007. The takeaway is that after all these years of surpluses, we have now hit the tipping point, probably with negative cash flow from here on.
A $7 billion deficit is miniscule in terms of Federal Budget expenditures, and the $2.5 trillion Trust Fund should handle the deficits for another 25 years. Maybe the problem is not immediate after all. Since it is a small problem now, a small solution could extend the stability of the fund a little longer.
In my article on the Zero Interest Rate, I suggested elimination of the tax credit for expats helping to export jobs to foreign lands, and applying the added tax revenue to the Social Security fund. The idea was to make a statement in support of the Social Security system, to improve consumer confidence. After reviewing the status of the SS system, it appears that that action on one loophole alone may be sufficient to wipe out a $7 billion dollar deficit.
Conclusion. It is probable that the main reason there is not more discussion about the Social Security system is that it simply is not a large and urgent problem, compared to other economic issues, such as unemployment and the housing market. What is not commonly considered is that the solution to these problems may be tied psychologically to the health of the Social Security system.
It is commonly known that the most important component of the economy is consumer spending. In the US about 65% of the GDP is generated by consumer spending. When the consumers don't spend, the economy does not grow. At this time, consumers are pulling in their purse strings and paying down debt, rather than spending. The chart below indicates the recent and drastic reduction in consumer confidence as represented by paying down debt instead of buying on credit.
Of course, the crisis in 2008 fed this trend with foreclosures and refinancing, but the average US family is obviously convinced that it is the time to build the nest egg, not spend on credit. The key to making the US economy flourish is to start consumers borrowing and spending. That is where the Social Security system can provide the sure safety net that will give consumers the confidence that, no matter what, they will have an income for life. Think about it..."Social Security" is synonymous with "Public Confidence."
Congress and the President agreed to reduce the Social Security tax this year to dribble a little cash into the consumer pocket. Of course, that only makes the Social Security system less stable, and the money will likely go to paying debt rather than purchases. The better solution is to take steps to make the Social Security system the solid and reliable cornerstone of many American's retirement plan. The consumer needs assurance that the SS fund is going to be there so he or she can shed the fearful attitude that restrains spending.
Let's say the problem is small. Maybe it is only a $7 billion deficit this year. What if our elected patriots said, "we will not stand for any deficit, and we will solve this little problem right now?" I think consumers would celebrate the good feeling of true "SECURITY." Make no mistake, the problem gets bigger the longer the action is postponed, and the solutions get more painful.
What if we established a congressional tradition that on a certain date every year the amount of SS deficit or surplus be corrected by adjustments 50/50 in revenue collection and benefit adjustments, plus or minus? Each year that may be a small change or even a refund on the good years. The point is that the American consumers would know that no matter what, the system is being regularly adjusted and stabilized. Such a policy could be the biggest bang for the buck to the economy.
Of course, there is one other solution to the Social Security shortfall problem...eliminate the baby boomers. Maybe my generation will start dropping off like flies for some unknown reason, taking the burden off the Social Security system. When that happens, I expect to see the headline: "Microwave Popcorn...the Silent Killer."