By Robert Casey, Editor of Bloomberg Weath Manager
We feel that this article is a good start to understanding the Social Security situation. This article originally appeared in the November, 2004 issue of Bloomberg Wealth Manager. Reprinted with permission from the publisher. Statistical information contained in this article was valid at time of printing.
Social Security Reform will reappear on the political agenda in Washington whatever the outcome of the election. As has been the pattern, Republicans will push for reform and Democrats will oppose it. Also apart of the pattern: The two sides have long been unable to agree on the facts at issue, even though it all comes down to demographics and dollars.
One big reason is the fog of myths, misnomers, and financial shell games that has come to surround the Social Security system. As I wrote in this space a couple of years ago, piercing this shroud of misunderstanding is the first step in building a political consensus for desperately needed reforms. The following top of the list of Social Security fictions:
Myth No. 1
The federal government saves or sets aside portions of the tax money it collects to be reserved for particular purposes.
Reality: All tax money that comes in gets spent quickly, usually in a matter of days.
Myth No. 2
Social Security payroll taxes are earmarked for Social Security benefits.
Reality: Payroll taxes currently are much greater than the amount required to meet benefits. The surplus is spent on things not related to Social Security.
Myth No. 3
Money spent once can remain available to be spent again in the future if an accounting entry is made in a "trust fund" or "lockbox".
Reality: Money can only be spent once. After that, it's gone.
Myth No. 4
The Social Security Trust Fund currently has more than $2 trillion in assets and will grow to more than $4 trillion by 2018.
Reality: The trust fund balance is a running tally of all the Social Security surplus money that has been spent on other things over the years, plus accrued interest. Having been spent, that money is gone.
Myth No. 5
When Social Security goes cash-flow negative in 2018, it will begin to draw on it's accumulated trust fund balances. These drawdowns will meet the payroll tax shortfall until 2042.
Reality: There is no money in the trust fund to draw down, only IOU's. The crunch begins in 2018, when the government must begin to redeem those IOU's to meet the shortfall. For decades to come, Congress will have to borrow or raise taxes-more and more every year-to pay relentlessly rising benefit costs.
Why have these myths proved so durable? Social Security is viewed in many quarters as a sacrosanct heirloom from the New Deal era. By definition, there can be nothing seriously wrong with it, except perhaps that benefits are rising too slowly.
Looming problems must be viewed through rose-tinted glasses, as per this comment in a recent New York Times editorial: "Currently, the program is projected to come up short in 2042, when it will be able to pay about 70 percent of the promised benefits."
Reassuring? You bet. No need for urgent concern based on that scenario. True? Not by a long shot. (See Myths 3-5.) Here's a reality-based rephrasing: "Currently, the program is projected to come up short starting in 2018, when it will no longer be able to pay 100 percent of the promised benefits."
Let's scrub off the gloss and get down to the facts. Only then can there be progress toward the strengthening of Social Security.
© 2004 Bloomberg L.P. All rights reserved. Reprinted with permission. www.bloomberg.com
