The Social Security Fairy Tale
In days of yore, your financial choices for old age were severely limited and mostly unpleasant. A very few had enough wealth to support themselves in style. Everybody else had to work until they died or be supported by offspring. The three reasons for having lots of kids were lack of easy/effective birth control, high rates of infant/child mortality, and old age insurance. Social Security was supposed to add a helpful alternative. Like unto the Book of Love, this saga has multiple chapters.
The concept emerged from FDR’s merry band of idealists. Taxpayer generosity was initially hedged by fiscal constraint. The idea was that workers would be taxed until there was a large enough reserve to render the system actuarialy sound. The pressure of Depression suffering pushed the commencement of disbursements into action before savings were accumulated. It was a pay-as-they-went system. Working folks were taxed to pay benefits to retirees who had not paid into the system. The actuarial realities were easy to ignore. You had to be 65 to qualify for benefits. Average life expectancy was less than 65. There were 16 workers for every retiree.
Once the system was in place, it became an election year Christmas tree. Every few years, benefits were increased. Eligibility was expanded. Cost of living increases were added. Any politician seeking the retiree vote knew which legislative knob to turn. Ugly math was ignored. Life expectancy is now approaching 80. The worker/retiree ratio will hit 2/1 during the working life of those currently entering the work force. That’s right, buckaroos, you will soon have to pack yourself plus 1/2 an old goat.
During the 1980s, some far sighted politicians (yes, there were such things once upon a time), looked ahead to the inevitable crunch that would be created by the retirement of the baby boom generation. They dramatically raised the SS tax (half paid by employees and half by employers) with the idea that a trust fund would be established to cover baby boom retirees. That tax regime indeed produced a major surplus. Unfortunately, it was all spent . . . every dime. The so-called Trust Fund is full of IOU’s (Treasury Bills). Al Gore’s lock box is, and always was, a myth.
As of a few years ago, the amount collected from workers has been less than the amount paid to retirees. Interest from the T-bills in the Trust was used to cover the shortfall. Lest you think that is a free lunch, remember that you, dear taxpayer, paid that interest. More accurately, you will pay. It was added to the deficit/debt.
So, this tale had the fiscally sound chapter, the compassion chapter, the Christmas tree chapter, the Trust chapter, and the Trust looting chapter. We now come to the final and tragic chapter of our tale: the jig is up! As of this fiscal year, interest on the fake Trust will no longer suffice. Principal must be dipped into (T-bills sold to the public to cover the shortfall). That chapter will end in 2026 or sooner. At that point, we will have run out of fictional road down which to kick the can.
According to current law, benefits will then have to be modified to match collections. Current calculations project a cut of 20–25%. Given the rate at which old people vote, I doubt that any politician wishing to be reelected will allow that to happen. The result will be a combination of higher taxes and bigger deficits. Social Security and Medicare (which is in even worse shape) will eat the whole budget and then some. The Welfare State chickens will be firmly on the roost.
Each and every passing day renders the problem harder to solve. Please remember that when you vote.
