E-Newsletter No. 8
August 2014
If not us, who?______If not now, when?

This past month the trustees of the Social Security and Medicare “trust funds” released their annual report on the current and projected status of these federal government programs. The trustees’ Summary Annual Reports can be found at www.ssa.gov/OACT/TRSUM/index.html

In this month’s newsletter, we will focus on Social Security. (Medicare is next month). On our Foundation’s website (in the Conversation Piece about Social Security) we discuss the fact that this federal government program is not a Ponzi scheme, but it is not the same as a funded pension plan. Instead, it should be viewed as being an “intergenerational social contract”. Unfortunately, many citizens have been misled by the terminology used by our public officials, when they read about Social Security’s “trust fund assets”. They incorrectly believe that their payroll tax withholdings (along with their employer’s contributions) have been set aside in a separate investment pool that will be used to pay future benefits (to which they are “entitled”) once they retire. The inconvenient truth about Social Security is that the only “assets” owned by the trust are intergovernmental loans receivable. The payroll taxes paid into Social Security have already been paid out for past benefits, or have been “loaned” (spent) for other federal government purposes.

To make matters worse, the annual expenditures for Social Security now exceed the program’s inflows, and this adds to the cumulative US debt. In addition, based on President Obama’s 2015 budget and the projections through 2024, the annual shortfall grows and compounds each year.

So…. How did this “well intentioned” government program, which was established during the height of the Great Depression, evolve into its current state? There are two key issues – – one “actuarial” problem and one “demographics” problem. The actuarial problem is that people are living longer lives, compared to when Social Security was established in 1937. This “actuarial problem” is not unique to Social Security – it has the same, significant effect on any type of retirement/pension plan. If Social Security were to be accounted for in a manner similar to what is required for corporations’ pension plans, the estimated present value of the unfunded future benefits that have been promised is approximately $11.1 trillion. This liability for this “pay as you go” program is over and above the “on book” US debt of $17.6 trillion, which already equates to $55,273 per citizen. (And keep in mind that this amount is for Social Security benefits only – – it excludes the “off book” liability for Medicare, which is a much bigger number – – but that is the topic for next month’s newsletter).

The demographics problem is that the relative number of retirees continues to grow as the Baby Boomers move into their retirement years. Once the country got past the Great Depression and World War II, the number of workers for each retiree in 1950 was 16 workers per retiree. In 2014, that ratio is now down to approximately 3, and by 2030 will be down to approximately 2.

Here are some key passages from the trustees’ annual report –

For the past several years, the annual Trustees Reports have warned lawmakers and the public of the financing shortfalls facing the Social Security and Medicare programs, emphasizing that continued delay in legislating corrective measures is likely to make the challenge ever more difficult to resolve…

While Social Security has not been the object of significant financing reforms since 1983, its need for additional measures has been recognized for over two decades. Now, in the middle of the second decade of the 21st century, the adverse consequences of delaying necessary corrections in both programs are beginning to be realized.

Lawmakers should address the financial challenges facing Social Security 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 more time to prepare.

It is interesting to note that the “average Joes” and the “average Jills” who understand these issues (and the associated math) are justifiably concerned about the status of these programs and the country’s finances. Unfortunately (as we noted in last month’s newsletter) our Editorial Board believes that because many of our elected officials are more concerned about their own re-election issues, it is easier for them to kick this can down the road to future generations (some of whom cannot even vote yet) rather than pursue the implementation of policies that they know are vitally important to the country’s future.

US Debt Clock (the “on book” debt) – – July 1st – $55,149 per citizen / August 1st – $55,273