Imagine a system where most every working American and their employer contribute money every pay period to a retirement program and, upon retirement, that money is paid back to the worker.
To make this system work, only two things have to happen: the workers and their employers must participate regularly and the paid benefits must not be so high that they drain the fund.
That’s the way Social Security is supposed to work. It’s not rocket science. Insurance companies and private sector businesses do it all the time. Even some state and local governments find the courage to stick to the principles of actuarial science.
The federal government, however, has administered the Social Security Trust Fund more in the spirit of the notorious con man Charles Ponzi.
This week’s annual report by the Social Security and Medicare Trustees predicts that the retirement trust fund reserves will be exhausted in 2033, three years earlier than projected last year.
The trustees attribute the accelerated demise of the fund to several factors, including a surge in energy prices in 2011 that lowered earnings and the assumed slow growth during the recovery. Since wages won’t increase as fast, the growth in the money paid into the trust fund will also slow down.
When the trust fund is empty, the Social Security tax will only provide enough money to pay about three-quarters of the promised benefits through 2086. If people demand full benefits, the government will have to borrow more money or raise taxes.
But it gets even worse.
The federal government has been “borrowing” from the Social Security Trust Fund for years. A government office in Parkersburg, West Virginia holds the government’s IOUs. In just a few years, Social Security will have to dip into the trust fund to help cover the checks and the federal government will have to borrow, tax or cut from someplace else to get the money.
(Al Gore was ridiculed during the 2000 presidential campaign for his often-repeated promise to put the Social Security contributions in a lockbox so Congress couldn’t spend the money, but he was on the right track.)
Now what?
Jason Fichtner, the former Deputy Commissioner and Chief Economist for the Social Security Administration, says the answer is pretty simple, but it does involve some pain; raise the retirement age and change the annual cost-of-living adjustment to slow the increase in payments.
Those moves, however, would take political will. Additionally, advocates of the tough choices will risk their political futures because they will be excoriated by their opponents. After all, in this political climate, who has the courage to be depicted as wanting people to work longer and get less money?
The trustee’s report is marked by an absence of inflamed rhetoric. In a dispassionate tone, it says simply, “Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible. Taking action sooner rather than later will leave more options and more time available to phase in changes so that the public has adequate time to prepare.”
If only the public policy debate could be so honest.