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The Unsoundness of Social Security   October 7th, 2012
There is no simple fix for Social Security       


More observations...

"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."

So said Obama in his first presidential debate with Mitt Romney before moving onto another topic that he was more interested in discussing.

But the reality is that Social Security--the federal government's largest program--is not sound. And the "tweaks" Obama spoke of (from the Reagan-O'Neill years) include raising the retirement age, increasing social security taxes, and delaying cost of living adjustments. And those "tweaks" in 1983 weren't the only changes that have been made to Social Security: the program has suffered many "tweaks" that purposefully expanded its scope throughout its existence, and the Social Security tax has been increased and applied to a larger and larger tax base since its inception.

So Social Security is "sound" if you reduce benefits, increase taxes, and offer benefits to fewer people.

In other words, it's not structurally sound.

The problem is exacerbated by the fact that there's no Social Security trust fund. The "surplus" funds collected by Social Security over the years were used to buy U.S. Government bonds. Now Social Security is paying more in benefits than it's collecting in taxes so it has to "cash in" its U.S. Government bonds to cover those benefits.

The problem is that the U.S. Government doesn't have the money it owes Social Security. Instead of saving it, the U.S. Government spent Social Security's money each year on other programs politicians wanted. Now that Social Security needs to cash in its bonds, the U.S. Government doesn't have the money to pay it back.

Social Security started running deficits in 2010--that is, it hasn't been collecting enough money from workers to pay current benefits of retirees. Since Social Security has amassed a large stash of government bonds, it's been cashing in those U.S. Government bonds (which the federal government has to pay) to make up the difference. In 2010 Social Security demanded $49 billion from the Federal Government, in 2011 it demanded $45 billion, and it's projected to average $66 billion per year from now through 2018 before the deficit increases even faster.

So how is it that Social Security is still functioning? How has the government been paying back money it doesn't have?

By borrowing the money from someone else.

The federal government doesn't have enough money to pay for its own expenses, much less pay back money it borrowed from Social Security years ago. So when Social Security has needed to cash in tens of billions of dollars in bonds each year, the federal government sells new bonds to the public in order to pay off the old bonds that Social Security is cashing in. The federal government is using one credit card to pay off another.

The belief that Social Security is "solvent" through 2034 is nonsense. Social Security is already running deficits and is only being sustained by cashing in government bonds--and those bonds can only be paid by the federal government as long as it can borrow the money from the public. Social Security is only as "solvent" as the federal government, and it's very unlikely that the federal government will be able to make good on all the money it owes to Social Security through 2034. And once the federal government is unable to make good on those obligations, Social Security is bankrupt.

So it is that, once again, politicians like Obama will advocate for "tweaking" the Social Security program by increasing retirement ages, reducing benefits, and increasing taxes. By doing some "tweaking," they hope to reduce benefits or increase taxes just enough so that Social Security doesn't have to cash in its bonds. The goal of these politicians is to make sure that the federal government doesn't actually have to ever pay back the trillions it borrowed from Social Security.

But just as the "tweaks" in 1983 didn't permanently solve the problem, neither will similar tweaks today. They merely kick the can down the road and put off the day that we have to fundamentally address the unsoundness of the structure of Social Security.

When Obama suggests that Social Security can be fixed by making minor tweaks, he's being disingenuous. Yes, minor tweaks can kick the can down the road for a few years. But it will come at the cost of increasing taxes, decreased economic growth, higher unemployment, and a much more difficult day of reckoning when we can't kick the can any further down the road.

To fix Social Security will require a fundamental restructuring of the program. It won't be minor. And, thanks to demagoguery and denial of fiscal reality by Democrats, it will be difficult to accomplish.

Maybe even impossible.

And at the presidential debate last Wednesday, Obama dismissed and ignored the problem once again.

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