The opening paragraph of Saturday morning's Associated Press report by Stephen Ohlemacher and Ricardo Alonso-Zaldivar on the state of Social Security and Medicare and an additional sentence from the third paragraph give away the fact that theirs will not be a missive that should be taken seriously (bold is mine):
The bad economy is worsening the already-shaky finances of Medicare and Social Security, draining the trust funds supporting them faster than expected and intensifying the need for Congress to shore up the massive benefit programs, the government said Friday.
... The Social Security trust funds are projected to be drained in 2036, one year earlier than the last estimate.
This post will concentrate on Social Security. By referring to the idea that its trust fund is being "drained," the pair are perpetuating the myth that the Social Security system has a stash of cash and investments just sitting there ready to be redeemed and distributed as benefits when needed. This of course is false. What follows are four fundamental truths about Social Security.
First, for years, Social Security collected more in taxes than it paid out in benefits. A normal "trust fund" or investment account would invest these excesses and allow them to grow, so that funds would be there to keep paying benefits in years when taxes are lower than benefits paid (like now, thanks to the retirements of baby boomers).
Second, but that's not what happened. Since the 1960s, when President Lyndon Baines Johnson decided to present a "unified" budget which included Social Security instead of treating it as a separate, dedicated program, trust fund surpluses were lent to the rest of the government for the rest of its operations. The amounts involved didn't become significant until the late-1980s. From 1986-2007, the rest of the government wrote over $2.3 trillion in IOUs (i.e., it issued "special bonds" to Social Security, routinely emptying its coffers annually.
Third, the annual surpluses, which peaked in fiscal 2007 and 2008 at about $186 billion each, started to rapidly shrink in 2008 as the recession hit. Now, quoting from this year's Trustees Report summary, "Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983." That means tax collections aren't covering benefits, meaning that the rest of the government is having to add to its already harrowing deficits to fund the annual shortfalls, which are forecast to continue and grow as far as the eye can see. Somehow, this isn't considered news by the nation's gatekeepers at the Associated Press.
Fourth, perhaps the AP pair's excuse is that the rest of the government should have no problem paying back its IOUs when it has to over the next 25 years until 2036. Anyone even remotely aware of the $1 trillion-plus deficits run up during the past three years would have be asking: "Really?" As I noted in a column I wrote several weeks ago:
... the nation’s “debt held by the public” — really amounts owed to individuals, corporations, and other countries — ... is over $9.6 trillion, an amount that is roughly 65% of the nation’s annual output, or Gross Domestic Product (GDP).
... there is a consensus that a country reaches “a critical insolvency threshold” once its public debt hits 90% of GDP. At that point, lender cutoffs and interest-rate premiums become real possibilities.
How far are we from the 90% ... threshold? Not far at all.
The Congressional Budget Office's latest projections believe that unless there is serious reform, we'll hit the 90% threshold in just 10 years, in 2021. Economist Larry Kotlikoff, however, noted in an April column that the budget deal made in late 2010, which extended the current tax system for another two years (the leftist press insists on referring to this as "extending the Bush tax cuts," even though the current system is now in its ninth year mostly unchanged) and which lowered the employee portion of Social Security by two percentage points for calendar 2011, moved the 90% threshold date to 2017, just six years from now. If the economy doesn't start picking up pretty soon, the government will cross the 90% threshold even sooner. Regardless for the exact crossover date, it's obvious that the country has serious issues with Social Security right now because of its cash deficits and the rest of the government's awful condition. Social Security's deficits are hastening the day when either no one will want to lend to it or will start charging higher interest rates for doing so.
Only someone who is breathtakingly ignorant of Social Security's and the federal government's true fiscal situations or is engaged in deliberate deception would try to pretend that it will have no problem paying back its IOUs to the Social Security system for the next 25 years. Someone should ask Stephen Ohlemacher and Ricardo Alonso-Zaldivar a simple question: Which is it, guys?
Cross-posted at BizzyBlog.com.
