Can Social Security, which is on a steepening glide path toward insolvency, be described as “structurally sound?”
According to President Obama, the answer is yes - and I think Obama, like most of his fellow Democrats, believes it. Most Republicans do not, but since saying so puts the onus on them to say exactly what they would do about it (always a politically dicey exercise), they tend not to talk too much about it at all.
I thought the contrast was one of the most illustrative points to come out of this week’s presidential debate between Obama and his challenger, Mitt Romney.
Setting aside assessments about who “won” or “lost” the debate (and there was a remarkable consensus that Romney outperformed Obama), the president, intentionally or otherwise, clearly illustrated the differences in the two sides’ approaches to entitlement reform. Democrats see Social Security as a social contract in which each generation assumes responsibility to provide for the one that came before it. Republicans see Social Security as both an empty promise and an unfair obligation that older generations seek to foist upon their children and grandchildren.
So I believe the president meant it when he said “Social Security is structurally sound. It’s going to have to be tweaked the way it was by Ronald Reagan and Democratic Speaker Tip O’Neill. But […] the basic structure is sound.”
He was talking about the Reagan-era National Commission on Social Security Reform, headed by Alan Greenspan, who later became a household name as chairman of the Federal Reserve. The commission’s approach was to gradually raise the retirement age from 65 to 67, to increase the self-employment tax and allow for partial taxation of benefits to upper income retirees, and to expand Social Security’s coverage (and, more importantly, its income from payroll taxes) to include federal civilian and nonprofit organization employees. These are the sort of tweaks that, presumably, the president has in mind for the future.
In reality, Social Security is an unfunded promise, despite the accounting gimmick of a having its own trust fund. Taxes paid by today’s workers are used to cover the benefits of today’s retirees. The government is not putting aside any of the taxes that today’s workers pay to fund their own future benefits.
From Obama’s point of view, this state of affairs is not a problem in and of itself, because Social Security’s struggles are, to him, fundamentally a function of its social obligation. Today’s younger workers are taking care of their parents; in turn, their children (many of whom are, as yet, unborn) will one day take care of them.
Unfortunately, the math on this theory doesn’t work, as the Social Security trustees point out regularly. In their yearly report this spring, the Board of Trustees announced that the combined trust funds are currently projected to run out in 2033. Most 2012 college graduates will be in their early 40s then. The new deadline is three years sooner than the one the trustees predicted in last year’s report.
But Obama wants to rely on tweaks to keep Social Security afloat. Doing so will inevitably mean today’s young workers will retire later and pay higher taxes in order to cover the government’s promises. The trustees say that, after 2033, the program’s income will cover about 75 percent of promised benefits. The extra 25 percent will have to come from workers in the form of higher taxes, retirees in the form of lower benefits, or both.
For Republicans, rather than a fundamentally sound plan that faces social problems, Social Security is an inter-generational Ponzi scheme. What happens if today’s workers don’t have enough children? Or if those children don’t have enough jobs? Or if those jobs don’t pay enough to support the promised benefits for long-lived baby boomers then still collecting their checks, let alone for the Gen Xers and millennials eventually retiring behind them?
During the same debate, Romney said that the country’s deficit is “a moral issue.” He meant that it is not only impractical, but immoral for today’s older adults to leave their children with tens of trillions of dollars in federal debt and, at the same time, to refuse to fix Social Security in any way that would make the program self-sustaining - or, alternately, to take the plunge and make it the welfare program in name that it always has been in practice.
For the second year in a row, Social Security benefit payouts have exceeded the program’s income through tax revenue, thanks to the temporary cut in the FICA tax. The government only “balances” the program with fictitious interest, which is really just a pile of governmental IOUs. Those IOUs are not very useful when it comes time to pay benefits to retirees who expect them. The gap between today’s FICA tax receipts and today’s retirement benefit payments is being plugged by money that the Treasury is borrowing, mostly from foreign countries and the Federal Reserve.
To Obama and his party, Social Security can never go broke, and hence it is fundamentally sound. His generation (which is also mine) has paid for our parents’ retirement; our children can be counted upon to pay for ours. If such reciprocity doesn’t actually work, just tweak it. Their theory is that with enough tweaks, Social Security can continue to be the most structurally sound Ponzi scheme in the world.
Posted by Larry M. Elkin, CPA, CFP®
Can Social Security, which is on a steepening glide path toward insolvency, be described as “structurally sound?”
According to President Obama, the answer is yes - and I think Obama, like most of his fellow Democrats, believes it. Most Republicans do not, but since saying so puts the onus on them to say exactly what they would do about it (always a politically dicey exercise), they tend not to talk too much about it at all.
I thought the contrast was one of the most illustrative points to come out of this week’s presidential debate between Obama and his challenger, Mitt Romney.
Setting aside assessments about who “won” or “lost” the debate (and there was a remarkable consensus that Romney outperformed Obama), the president, intentionally or otherwise, clearly illustrated the differences in the two sides’ approaches to entitlement reform. Democrats see Social Security as a social contract in which each generation assumes responsibility to provide for the one that came before it. Republicans see Social Security as both an empty promise and an unfair obligation that older generations seek to foist upon their children and grandchildren.
So I believe the president meant it when he said “Social Security is structurally sound. It’s going to have to be tweaked the way it was by Ronald Reagan and Democratic Speaker Tip O’Neill. But […] the basic structure is sound.”
He was talking about the Reagan-era National Commission on Social Security Reform, headed by Alan Greenspan, who later became a household name as chairman of the Federal Reserve. The commission’s approach was to gradually raise the retirement age from 65 to 67, to increase the self-employment tax and allow for partial taxation of benefits to upper income retirees, and to expand Social Security’s coverage (and, more importantly, its income from payroll taxes) to include federal civilian and nonprofit organization employees. These are the sort of tweaks that, presumably, the president has in mind for the future.
In reality, Social Security is an unfunded promise, despite the accounting gimmick of a having its own trust fund. Taxes paid by today’s workers are used to cover the benefits of today’s retirees. The government is not putting aside any of the taxes that today’s workers pay to fund their own future benefits.
From Obama’s point of view, this state of affairs is not a problem in and of itself, because Social Security’s struggles are, to him, fundamentally a function of its social obligation. Today’s younger workers are taking care of their parents; in turn, their children (many of whom are, as yet, unborn) will one day take care of them.
Unfortunately, the math on this theory doesn’t work, as the Social Security trustees point out regularly. In their yearly report this spring, the Board of Trustees announced that the combined trust funds are currently projected to run out in 2033. Most 2012 college graduates will be in their early 40s then. The new deadline is three years sooner than the one the trustees predicted in last year’s report.
But Obama wants to rely on tweaks to keep Social Security afloat. Doing so will inevitably mean today’s young workers will retire later and pay higher taxes in order to cover the government’s promises. The trustees say that, after 2033, the program’s income will cover about 75 percent of promised benefits. The extra 25 percent will have to come from workers in the form of higher taxes, retirees in the form of lower benefits, or both.
For Republicans, rather than a fundamentally sound plan that faces social problems, Social Security is an inter-generational Ponzi scheme. What happens if today’s workers don’t have enough children? Or if those children don’t have enough jobs? Or if those jobs don’t pay enough to support the promised benefits for long-lived baby boomers then still collecting their checks, let alone for the Gen Xers and millennials eventually retiring behind them?
During the same debate, Romney said that the country’s deficit is “a moral issue.” He meant that it is not only impractical, but immoral for today’s older adults to leave their children with tens of trillions of dollars in federal debt and, at the same time, to refuse to fix Social Security in any way that would make the program self-sustaining - or, alternately, to take the plunge and make it the welfare program in name that it always has been in practice.
For the second year in a row, Social Security benefit payouts have exceeded the program’s income through tax revenue, thanks to the temporary cut in the FICA tax. The government only “balances” the program with fictitious interest, which is really just a pile of governmental IOUs. Those IOUs are not very useful when it comes time to pay benefits to retirees who expect them. The gap between today’s FICA tax receipts and today’s retirement benefit payments is being plugged by money that the Treasury is borrowing, mostly from foreign countries and the Federal Reserve.
To Obama and his party, Social Security can never go broke, and hence it is fundamentally sound. His generation (which is also mine) has paid for our parents’ retirement; our children can be counted upon to pay for ours. If such reciprocity doesn’t actually work, just tweak it. Their theory is that with enough tweaks, Social Security can continue to be the most structurally sound Ponzi scheme in the world.
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