Social Security - The Most Neglected Crisis
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. Trustees Report: Same Song, Umpteenth Verse
2. Making the Case for a Crisis
3. Crisis? What Crisis?
4. Politicians: On the Fence (As Usual)
5. The Fix Won’t Be Easy – or Popular!
In what has now become an annual rite, the Social Security Trustees issued their annual report last week saying that the prospects for the “trust funds” are worse than they were last year and that Social Security, Disability and Medicare are all in need of repair. The American people answered with a rousing “ho-hum.” Perhaps the public is getting numb to bad news about Social Security, or maybe it was the result of the mainstream media devoting only 72 seconds of airtime to the Trustees report the day it was issued, according to the Media Research Center.
I have written about the current state of our national entitlement programs on several occasions through the years. One thing they all have in common is that the latest analysis always seems to be worse than the one before it. This year is no different and, in fact, could be seen as much, much worse.
In this week’s E-Letter, I’m going to discuss the findings of the Social Security Trustees and also review their warnings about the future if nothing is done to fix our ailing entitlements. After that, I’m going to briefly outline two schools of thought concerning Social Security’s perceived problems. Unfortunately, we’re going to find that those who can actually do something about entitlement reform will likely only give lip service to the idea.
This is an E-Letter that you need to read and pass on to your friends and relatives because everyone needs to get busy and contact their Congressmen to make sure they don’t use short-term solutions that will create long-term problems.
Trustees Report – Same Old Song
Each year, Trustees of the entitlement trusts established for Old Age and Survivor Income (OAS), Disability Income (DI), Hospital Insurance (HI) and Supplemental Medical Insurance (SMI) make a report to the public regarding the operations of the trusts over the past year and their outlook for the future. As I noted above, each year the situation becomes more dire, yet no one seems to want to do anything about it.
Since the combined Social Security Old Age and Disability Income (OASDI) Trust Funds are the most frequently referenced, I’ll limit my comments to those two in this article. This year’s report shows that the combined Social Security and Disability Income Trust Funds increased a net $68.9 billion to a total of $2.678 trillion as of the end of 2011. Not bad, eh? Well, actually it is. That’s because the $68.9 billion gain includes payments of “interest” of $114.4 billion on the special Treasury bonds held by the Trust Funds.
There are two important factors needed to put this “gain” in perspective. First, interest payments on the Trust Fund debt are made by issuing more of the special Treasury bonds that they already hold. So when the Trustees say interest earned, what they mean is that the government is making an accounting entry to issue itself more IOUs.
Second, without this ledger-entry income, benefit payments and expenses outpaced Trust Fund non-interest income in 2011, as they did in 2010. Total revenues from payroll taxes and other sources came to $690.8 billion while benefit payments and expenses were $736.1 billion. That’s a shortfall of $45.3 billion. Not a huge amount compared to today’s trillion-dollar budget deficits, but the Trustees warn that this deficit will continue throughout its 75-year projection period.
Here’s a link to a summary of the Trustees report, which includes tables supporting the numbers I have quoted above as well as lots of other charts and graphs:
And the bad news doesn’t stop there. According to the Trustees, the combined Social Security and Disability Income Trust Funds are going to be depleted by 2033, two years earlier than predicted just last year. If you don’t combine the two, the DI Trust Fund will be exhausted as soon as 2016.
So what happens on that sunny day in 2033 when the Trust Funds run out of money? Since, by law, benefit payments are not supposed to come from general revenues, the most obvious result is that benefits will have to be immediately cut to a level that can be supported by ongoing tax revenue. The Trustees report estimates this haircut to be in the 25% range, such that benefits will fall to 75% of their previous levels. Of course, this assumes that no remedial action will have taken place by then, which is probably a pretty good assumption.
So here’s the situation in a nutshell:
Raising the Alarm
In this year’s report, the Trustees again go on record saying that a solution to Social Security’s funding problems needs to be found, even though it may be politically unpopular. The Trustees put it this way in their 2012 Report:
“Lawmakers should not delay addressing the long-run financial challenges facing Social Security and Medicare. If they take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare. Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits.”
When I wrote about Social Security back in 2004, I discussed Alan Greenspan’s warning about its future solvency (or lack thereof). No matter what you think of Greenspan’s legacy, his Social Security Commission in the 1980s led to meaningful reforms, passed by a Congress that actually took some action regarding the program’s future solvency. Of course, they subsequently spent all the money and replaced it with government IOUs, so let’s not give them too much credit.
As Congress has now seen fit to spend all of the money in the trust funds, Greenspan’s warnings from 2004 still ring true. Back then, he told Congress that the then-upcoming retirement of Baby Boomers would lead to Social Security experiencing “one of the most difficult fiscal situations” in its history. “This dramatic demographic change is certain to place enormous demands on our nation’s resources – demands we almost surely will be unable to meet unless action is taken.”
Congress’ response then? None (What a surprise!). I do believe that there are members of Congress today who are in favor of reforming Social Security, but the political consequences of trying to do so are very high. Even debating the issues can be risky from a political standpoint.
Numerous other conservative writers and think tanks have also written about the recent Trustees report but, as I noted above, the mainstream media has largely ignored it.
Crisis? What Crisis?
While you might assume everyone would be on the same page in relation to the Social Security Crisis, there are those who are adamant that no such crisis exists. These folks consider the payment of interest in government IOUs to be just as good as gold. One such organization is the National Committee to Preserve Social Security & Medicare (NCPSSM).
While NCPSSM is certainly not alone in having this opinion, I’m going to use its position as an example in this section as it is representative of many other organizations and politicians who firmly believe that Social Security is in no danger of becoming insolvent.
In a recent USA Today article, NCPSSM CEO, Max Richtman” declared, “There’s no Social Security crisis.” In a separate article discussing the latest Trustees report, the NCPSSM noted how positive the report was regarding Social Security’s finances saying the program “remains strong” and is “well-funded.” Did they read the same report that I did? I don’t think so!
Rather than future solvency, NCPSSM’s biggest concern is the talk about changing the automatic cost of living adjustment (COLA), a benefit that was not even part of Social Security until 1975. (Before that, benefit increases literally took an act of Congress.)
Most interesting, however, is the disconnect when talking about cuts. NCPSSM and others contend that changing the way automatic COLAs are calculated would represent a serious cut in future benefits for Social Security recipients. Benefits would still be adjusted upward, just not as much as under the current COLA formula. So, a decrease in an increase is a cut, in their opinion, even if it helps maintain the long-term solvency of the program.
In the very same article, however, NCPSSM notes that “Social Security remains strong, despite the lingering effects of the recession, and will be able to pay full benefits for decades to come - until 2033. Thereafter, there will still be enough revenue coming into the program to pay 75 percent of all benefits owed.” It’s almost like it’s no big deal that benefits might drop 25% after 2033, a short 21 years from now. Other sources maintain that COLA adjustments will have increased benefits to a point that in 2033, the benefit received after a 25% cut will still be more than today’s benefit level, so it’s not really a cut.
Sorry, but that IS a cut and it’s a lot bigger than modifying the COLA formula. It’s like your employer reducing your salary by 25% today but pointing out that you still make more than you did 21 years ago, so it’s not really a cut. It’s one of those arguments that you just have to read and say “Huh???”
So what’s the difference? Isn’t a cut a cut? Well, not when one comes in 2033 and the other would be more immediate. In fact, as you continue to read, you’ll find that this distinction between now and later pretty much outlines much of the debate about Social Security reform.
Politicians: On the Fence (As Usual)
So where are our leaders on this issue? Some can be easily identified as helping to raise the alarm while others are confident that there’s no problem. Many, however, fit in a category that’s all talk and no action (what else is new?). They give lip service to wanting to reform Social Security but do little or nothing to bring it about. Even so, their soothing words are supposed to comfort us as we hurtle toward retirement.
Tim Geithner is one example, who is on record as saying, “The best thing to do is a long-term solution.” Wow, what insight! That’s kind of obvious, isn’t it Tim? The Obama administration is also on record as supporting changes to Social Security that would improve the program’s solvency, but as a recent Wall Street Journal article pointed out, Obama has yet to propose any concrete steps to greater stability of our entitlement programs.
In fact, the same Journal article said that Social Security is yet to emerge in the political debate in this election year because its financial problems remain decades away. Translation: It’s a problem for a future Congress. Plus Gray Americans vote and in large numbers. As Baby Boomers continue to age, the gray generation will just become larger and larger, meaning more and more likely voters.
This brings about a sobering thought: We may have already passed the age demographic where meaningful reforms to Social Security and other entitlement programs are even possible, due to the voting habits of those who would be most affected by any changes.
The Fix Won’t Be Easy – Or Popular
There are a variety of "fixes" for Social Security, some of which I have written about before in past E-Letters. As I have noted above, however, each proposal would hurt someone by either increasing taxes or decreasing benefits (or both), none of which are politically palatable.
Below I have briefly listed some of the major fixes that have been proposed over the years. While these are not my ideas, I have provided some comment here and there. Each of these suggestions could be an E-Letter on its own, so my brief descriptions are not intended to be complete reviews, but rather just an idea of alternatives available to Congress:
Again, these are the most common suggestions for reforming Social Security. There are others such as moving Social Security under the general budget to cover its shortfall, but space doesn’t permit mentioning all of the various alternatives. Almost certainly, it will take some combination of the above noted reforms if Social Security is to be saved. The last president to push for Social Security reform was George W. Bush, and he was roundly dismissed.
Of course, options are just that until someone makes the effort to review, analyze and debate which single or combination of solutions is best. There’s no alternative that will result in no one paying more taxes or having benefits cut, so none will be universally popular. However, it’s time for someone to show some leadership. Someone should take a page from President Ronald Reagan’s playbook when, in 1981, he established a commission led by Alan Greenspan to reform Social Security.
Some two years later, as a result of that commission’s work, amendments to Social Security included a provision for raising payroll taxes AND the full retirement age from age 65 to 67, phased in over time. At the time, the Congress cited improvements in the health of older people and increases in average life expectancy as primary reasons for increasing the normal retirement age.
There isn’t much to say in conclusion about a problem that is getting worse every year, except that it is unlikely to be fixed before it becomes a true crisis. My prediction is that I’ll be writing another article about the same subject next year about this time, except that the future prospects will be even worse.
It is for this very reason that my firm often counsels clients, especially those with large nest eggs, to minimize any reliance on Social Security benefits in their retirement planning. That way, if means testing reduces or eliminates their benefit, it won’t derail the plan. And if that doesn’t happen, then retirement income is higher than expected, which is always better than being lower.
Hoping for meaningful reform,
Gary D. Halbert
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.