The Next Big Bailout?
This in from one of my favorite financial soothsayers. This guy has been spot on in predicting the financial crisis that has engulfed our nation. Here’s what he has to say about social security.
Social Security crunch coming fast
Here’s a frightening prediction: The public pension system’s trust fund could go into the red in the next year, far sooner than expected. Will it get the next huge bailout?
The debate over health care has captured everyone’s attention, but it appears the next big government program that needs to be addressed will be Social Security. That’s the focus of the July 30 article “The next great bailout: Social Security” by Allan Sloan, Fortune’s senior editor at large.
Those who’ve been paying attention have long known there is no money in the Social Security Trust Fund — it’s all been spent. Thus, former Vice President Al Gore’s famous assessment that Social Security receipts should be placed in a “lockbox” was actually correct. Given that so few people really understand the Ponzi nature of the current Social Security financing scheme — created in 1983 by a commission chaired by none other than the world’s greatest serial blower of bubbles, Alan Greenspan — I decided to reprise Sloan’s article. (The Social Security problem is especially important because it likely will put additional pressure on the dollar and on bonds, and exacerbate the funding crisis down the road.)
The story begins: “In Washington these days, the only topics of discussion seem to be how many trillions to throw at health care and the recession, and whom on Wall Street to pillory next. But watch out. Lurking just below the surface is a bailout candidate that may soon emerge like the great white shark in ‘Jaws‘: Social Security.
“Perhaps as early as this year, Social Security, at $680 billion the nation’s biggest social program, will be transformed from an operation that’s helped finance the rest of the government for 25 years into a cash drain that will need money from the Treasury. In other words, a bailout.”
Could Social Security’s number be up?
As I’ve already noted, there is no money in the Social Security Trust Fund — just IOUs from the government to itself. What is liable to spark debate and grab headlines is that instead of producing its biggest surplus ever in 2009-10, the trust fund could start running deficits in the next year, primarily because the weak economy is generating less tax revenue.That’s years earlier than expected. Social Security wasn’t supposed to go into the red until around 2015.
Past projections were for a cash-flow surplus of about $87 billion this year and $88 billion next year. But new projections show those figures may drop to around $18 billion or $19 billion, which could easily go negative. And once the red ink starts spilling (a temporary bounce into the black in the next couple of years notwithstanding), that deficit will grow for the next 20 or so years unless something is done to halt it.
In order to better illuminate what has transpired and how misleading government accounting is, I would like to use the example from Sloan’s article to explain what has happened: “The cash that Social Security has collected from my wife and me and our employers isn’t sitting at Social Security. It’s gone. Some went to pay benefits, some to fund the rest of the government. Since 1983, when it suffered a cash crisis, Social Security has been collecting more in taxes each year than it has paid out in benefits. It has used the excess to buy the Treasury securities that go into the trust fund, reducing the Treasury’s need to raise money from investors.”
In other words, the government spent it. Throughout all those years in the 1980s and 1990s, when folks worried about the budget deficit, it was reported to be lower than it would have been had the Social Security Trust Fund’s money not been going into government coffers, thereby reducing the size of the deficit. Also untenable is the projected worker-to-retiree ratio, which will jump from 30 Social Security recipients per 100 workers in 1990 to 46 per 100 in the next 20 years.
And Social Security funding isn’t the only time bomb. Sloan notes that “when it comes to problems, Medicare makes Social Security look like a walk in the park, even though at about $510 billion this year, it’s far smaller. Not only are Medicare’s financial woes much larger than Social Security’s, but they’re also much more complicated. . . . Medicare is more convoluted, because the health-care system is much more complex than Social Security. Which, when you think about it, involves only money.”
Summing up, Sloan cautions: “Social Security may not make it onto the agenda until next year. But it’s going to show up sooner or later, and probably sooner, because the numbers are so bad that something’s got to be done.” All of these future funding issues will come under scrutiny in the next couple of years as the budget deficit explodes and worries about how it will all be financed take center stage.