Waiting for a Social Security
Disaster in 2013
by Jerome F. Winzig
In 1970, mortgage bankers began making 30-year mortgages that matured in the year 2000 and beyond. As a result, computer programmers first began dealing with problems caused by the use of two-digit years on computer files. Thirty years before Y2K, they knew there was a serious problem ahead.
However, there was an easy fix. Programmers simply changed their programs. They converted two-digit years to four-digit years automatically, adding a "20" in front of any year less than, say 50, and a "19" in front of the rest. At the time, this was far cheaper than adding additional computer storage capacity. It worked so well that most companies postponed more permanent solutions until the late 1990s. But the delay made a lot of people nervous as Y2K drew near.
Today, the United States faces a much more serious problem. Like Y2K, this one has also been known far in advance. In 2013, Social Security expenditures will begin to exceed Social Security revenues. According to the Social Security Trustees, this deficit will grow rapidly. In 2020, it will exceed $200 billion annually. In 2030, the annual deficit will be $600 billion. In 2040, it will be $1 trillion. The total deficit forecasted by the Social Security Trustees is $9 trillion. That's 30 times the $300 billion estimate for the total costs of all the Y2K conversions worldwide.
In spite of that astounding deficit, many retirees will never recover as much in benefits as they will pay in Social Security taxes. (That's assuming only a modest interest rate, without any gains they might have earned from private investments.) By 2025, according to the Congressional Research Service, some retirees will have to live to 120 to break even.
This is a staggering problem. It has massive potential for generational conflict, civil unrest, fiscal collapse, and social turmoil. Yet the response from Congress, led by both Democrats and Republicans, has been to foist a fraudulent solution upon the American people. Congress increased the Social Security tax rate until it began to generate a surplus over current expenditures. Then it claimed to have "set aside" the surplus in the Social Security Trust Fund.
This created an intentionally false impression that these funds, which are invested in U.S. Treasury bonds, can be "drawn down" when the system begins running a deficit in 2013. But the Social Security Trust Fund is really nothing but an accounting gimmick. It has actually enabled Congress and the President to spend Social Security funds on popular programs and pork-barrel projects that have nothing to do with Social Security.
This can only be called a massive, deliberate fraud of unprecedented proportions. While the Social Security Trust Fund's balance increases on paper, that money is not invested somewhere. It has already been spent. In 2013 the government will have to begin raises income taxes to pay back the money "borrowed" from the Social Security Trust Fund. Then it will have to raise Social Security taxes. Eventually, this will mean $9 trillion in additional federal taxes or cuts in other programs.
In the fiscal year 1999 federal budget, the President's Office of Management and Budget described the situation with these grim words: "Unlike the assets of private pension funds, [the trust fund balances] do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims against the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing money from the public, or reducing other expenditures. The existence of large trust fund balances, therefore, do not by themselves make it easier for the government to pay benefits."
Suppose, back in 1970, computer programmers had conspired among themselves to tell everyone they were adding expensive extra disk space to allow for four-digit years in order to solve the Y2K problem well in advance. Then suppose that, after users agreed to purchase additional disk space and extra programming for all their computers at a huge cost, the programmers did nothing whatever about the Y2K problem. Instead, they used the extra disk space and extra funding for their own pet programs while telling everyone the Y2K problem had been fixed. Suppose further, that when a few people raised concerns, they simply said - quite loudly - that they had "saved" all computers from the Y2K bug.
That is exactly what is happening with Social Security today. The government is collecting surplus Social Security taxes. It is using those surplus funds for other purposes while claiming the surpluses are being "saved" for the future.
The people paying the most as a percentage of income are the poor and the middle class. A majority of Americans never pay more than 15% of their total gross income on federal income taxes. But the total Social Security/Medicare rate is 15.3%, counting both employee and employer contributions. (Self-employed individuals pay the full 15.3% themselves.) Social Security alone is 12.4%. The poorest Americans - those who qualify for the Earned Income Credit - may receive an income tax credit, but they still pay 15.3% in Social Security/Medicare taxes on all of their earned income.
In the face of this astounding fraud, the response from Washington is amazing. Congress ignores the problem. President Clinton and all the major presidential candidates talk about "saving Social Security." But they provide no solutions.
Bill Clinton says we should "set aside 62 percent of the surplus for 15 years for Social Security." Al Gore talks mostly about Medicare and "extending the life of the Medicare Trust Fund." Bill Bradley says we must "protect the Social Security Trust Fund" and must "not change the Social Security eligibility age." George Bush calls for "dedicating all Social Security money to Social Security" and calls this a "lock box." John McCain says, "I will keep Social Security Trust funds out of the hands of politicians."
The only way to fix this problem is to stop the "pay as you go" approach and invest for the future, just as all pension funds, 401K programs, and IRA accounts do. But the government cannot invest for the future. Some special interest groups might welcome the opportunity to influence how a government commission should invest hundreds of billions of dollars in the private stock and bond markets. But most Americans would be terrified of the prospect.
The only possible solution is to begin taking it out of the government's hands. This can be done in several ways.
First, stop collecting excess Social Security taxes for use on other programs by cutting the Social Security tax rate from 12.4% to 10%. Instead, require workers to put this 2.4% into a Roth IRA via payroll deductions and reduce their promised future Social Security benefits accordingly. This would replace a phony promise with a real investment.
Second, allow workers to opt out of half (5%) of the remaining Social Security tax if they invest that 5% in a Roth IRA via payroll deductions. In return, these workers would lose a fair, prorated portion of their guaranteed Social Security benefits.
Third, to encourage workers to save and invest in the private sector beyond these mandated programs, exempt the first $10,000 in interest and capital gains from all income taxes.
This solution will not solve the entire problem. For years, the government has promised more than is possible. It has created huge unfunded liabilities. The false promises about Social Security have helped reduce our savings rate below that of most other nations. So other changes to Social Security will also be needed. But action is required. In the words of the Concord Coalition, which has been examining the future of Social Security for years, "doing nothing is the worst option." If we continue to wait, the problem will be far more difficult to fix than the Y2K problem was.