Social Security - Myth or Crisis

After Barack Obama and Hillary Clinton referred to changes being needed to keep Social Security solvent, the left went into spin control. This example from the Huffington Post is pretty typical of what the left has been saying for years about Social Security.

Back in 1983, when Social Security really was running out of money, with just a few months of payments on hand, Congress raised the payroll tax substantially. This was done deliberately in order to pile up a surplus to finance the baby boomers' retirement. And so it did: that accumulated surplus stands at more than two trillion dollars today, and is increasing at a rate of $190 billion annually.

As a result of this surplus, all the baby boomers' will have retired before Social Security runs into a projected shortfall in 2041 . That is according to the Social Security's (mostly Republican-appointed) Trustees. According to the non-partisan Congressional Budget Office, Social Security can pay all promised benefits even longer, until 2046. By either date, most baby boomers will be dead, and almost all of the rest retired, before there is a problem.

Of course, there are some who maintain that the surplus "has been spent," that the Social Security Trust Fund "doesn't exist," and so on. These stories should be given all the credibility of reports about "Bat Boy" sightings in the Weekly World News. But unfortunately they are often taken seriously in the major media.

To say that Social Security's surplus "has been spent," is like saying that when you buy a U.S. government bond, your money "has been spent." Whatever has been done with the money, you are still holding a bond, and you will get your interest and principal so long as there is a U.S. government. If there is no U.S. government when you retire, well then you will have other things to worry about besides Social Security, including your private savings.

It's hard to tell if these people actually understand what they are talking about. In case you are not aware of the problem, this is it in a nutshell - every surplus dollar that goes to Social Security is immediately "invested" in a bond which the government issues to itself. The money is then transferred to the general fund and spent. Instead of a surplus, we have a pile of bonds. This is comparable to withdrawing your savings, writing yourself an IOU, then spending all of your money. You can say that you are good for your debt to yourself but you don't actually have the money.

When Social Security needs to cash these bonds the government will have to raise the cash somehow. There are several ways that this can be done but, given the enormous amounts required, none of these will be pleasant. Some of the options include:

Raising the retirement age. This will force millions to work longer. Some percentage will die first. If the government figures it right, enough will die to solve the problem.

Raising the SSN taxes. This will be tough as the percentage of workers to retirees declines.

Reducing benefits. At minimum the formula for figuring inflation is likely to be adjusted. If that is done soon then it will be fairly painless. If we wait then we will actually have to cut benefits to people already retired which will be painful.

Refinance the debt. We could convert the internal bonds to regular bonds and sell them off. This assumes that there is enough investment money out there to cover it and would obligate payments in the future.

Or we could ask Bat Boy for a loan.

Update - I really have a hard time understanding why the left is so defensive about Social Security. The math is pretty simple. Once the outlay is greater than the income then the money will have to be raised from somewhere. This will place a huge strain on the general fund which will hurt all liberal causes.

For years liberals have accused Bush of running up a big deficit so that in the future the government will be devoting so much money to paying off the national debt that nothing is left for social programs. Why then are they trying to do the same thing by denying problems with Social Security?