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Social Security, a Retirement Pot Stuffed with IOUs


Washington. -- The recent debate over the balanced budget amendment produced some remarkable political obfuscation -- even for Washington.

"They are wanting really to loot this Social Security trust fund," Sen. Harry Reid, a Nevada Democrat, warned a couple of days before the vote, claiming that Republicans would use money that Americans put toward retirement to balance the budget. Other Democrats chimed in and "loot" was a word frequently used.

Lost in the rhetoric was that Democrats and Republicans have been "looting" the trust fund for years, using the money to help finance the everyday operations of government -- everything from making welfare payments to buying missiles.

An even more fundamental truth was also lost in the heat of the rhetoric. Even though it collects more money than it needs, and will do so for another 15 or 16 years, Social Security is headed for trouble, along with other government entitlement programs such as Medicare and Medicaid, as the post-World War II baby-boom generation begins to retire in 2008.

Private pension plans face the same problem, some analysts argue, because the ratio of producers to consumers will decline.

Consider some startling figures: In 2005, there will be nearly five workers for each retiree. Twenty years later, the ratio will be 3-to-1. And consider this: In the first decade of baby-boomer retirement, the number of working Americans will increase by about 3 percent, while the number of retirees will rise by one-third.

That means proportionately fewer workers to finance pension systems for retirees, at a time when medical and health advances are lengthening the lives of many Americans.

"The oldest baby boomers will be eligible for Social Security benefits in just 13 years," says Bruce D. Schobel, a former Social Security Administration official who is now vice president and actuary for New York Life Insurance Co. "They need to know what to expect from the program."

There is no unanimity on the seriousness of the problem, much less on the solutions that should be sought.

Social Security is "a chain letter . . . a Ponzi scheme" that ought to be scrapped and replaced with a private retirement system, former Delaware Gov. Pierre "Pete" S. du Pont IV said last year.

"We are facing . . . a gigantic truck wreck," warned Sen. Bob Graham, a Florida Democrat, during the balanced budget debate. He added, "There is going to be a generational clash in America. There could also be a clash between older Americans and better-off Americans."

Robert M. Ball, former Social Security commissioner, takes a more temperate view. "Alarmist rhetoric . . . about the need for major cutbacks in Social Security is completely unjustified."

He and Mr. Schobel argue that modest benefit reductions and tax increases would do the trick.

Most analysts say that changes need to be made. Suggestions include raising the retirement age (now scheduled to rise gradually from 65 to 67, beginning early in the next decade) to 70; reducing benefits, perhaps by limiting annual cost-of-living increases; making benefits contingent on other income so that wealthier retirees have their Social Security payments reduced; or raising taxes.

Mr. Ball says there is plenty of time to deal with the problem, but that public confidence would be bolstered by acting soon and delaying the effective date of the changes.

There's no doubt that Social Security faces a crisis in public confidence.

Polls show that a third or more of Americans don't believe that Social Security benefits will be there for them when they retire. Only 14 percent expect Social Security to maintain its current level of benefits, according to a recent Wall Street Journal/NBC News poll.

Young Americans have more faith in flying saucers than Social Security, according to a poll taken last year. Only 28 percent of the 18-34 age group think Social Security will exist when they retire, said the poll. But 46 percent believe in UFOs.

So, here's a 60-year-old program that has paid nearly $4 trillion in retirement and disability checks and has a $400 billion surplus that is expected to grow to $3 trillion in the next quarter-century.

Why a looming crisis?

The surplus and the trust fund itself are mirages, and that truth appears to be sinking in.

"The budgetary reality is that the payroll taxes are being used to finance the current operations of government and are masking the size of the on-budget deficit," the General Accounting Office reported five years ago.

"The economic reality is that the trust fund reserves . . . that are financing current consumption rather than productive investment are illusory. They will remain so until the rest of the government achieves approximate balance between revenues and outlays."

Here's the situation:

About 141 million Americans and their employers pay 12.4 percent of each worker's first $61,200 in annual earnings in Social Security taxes. Another 2.9 percent, split evenly, goes to Medicare.

Indeed, if you include the employers' contribution, 58 percent of Americans pay more in Social Security and Medicare taxes than they do in federal income taxes. The Social Security tax is also highly regressive. The person who earns $612,000 pays the same amount as the person who earns $61,200.

If you think those Social Security taxes are squirreled away to finance future retirements, guess again. If you think there is a huge pot stuffed with your retirement savings, guess again.

If there is a pot, it's full of IOUs from Uncle Sam.

The money is being spent as fast as it arrives.

Most of it is used to send monthly checks to 42 million retired and disabled workers and their survivors and dependents. Some is also used to pay the administrative costs of operating the Social Security program.

After all that, there is still money left -- more than $20 billion this year. And that money is used by Uncle Sam to help finance the everyday costs of government -- anything from agriculture subsidies to aircraft carriers.

Uncle Sam writes IOUs for the excess Social Security taxes that come out of your paycheck each week. He also writes IOUs for the interest on the money he borrowed in earlier years. This year, the interest will be more than $33 billion, and it is counted as income to the trust fund.

There is also additional miscellaneous income. Add all of it together, deduct all of its expenses, and you end up with a surplus. For the fiscal year that ends Sept. 30, the surplus will be about $70 billion.

That money -- the real money that comes out of paychecks and the IOUs that come from Uncle Sam -- is used to reduce the deficit. For example, the federal government expects a deficit of $176 billion this year. But, the figure would be about $245 billion if it weren't for the "loot" from the Social Security trust fund.

So, what does that mean for the future?

If you consider Social Security in isolation, things will be fine as long as the money that workers send the trust fund each payday covers the monthly checks and administrative expenses of the program.

But, once the costs of the system begin to exceed the income from the Social Security tax, the trouble begins.

The latest projections say this will happen in 17 or 18 years.

"Once annual spending on benefits exceeds annual revenue from payroll taxes, the unified deficit will increase unless taxes are raised or benefits reduced," Alice M. Rivlin, the federal budget director, warned last October.

"Social Security will face such a cash deficit in 2013."

Optimists point out that, even when this happens, there will still be a $3 trillion surplus that can be used.

"There will be sufficient funds in the Social Security reserves to pay benefits until the year 2029, 34 years from now," Shirley S. Chater, the Social Security commissioner, said recently.

She's right. But remember what those reserves are -- nothing more than IOUs.

(In fact, until this year, the IOUs weren't even on paper. There was simply a ledger in the bowels of government that kept track of the money. Thanks to a law passed by Congress last summer, the Treasury now must actually issue paper IOUs to Social Security.)

The trust fund managers will have to begin cashing those IOUs around 2013. Where will the Treasury get the money?

It will have to raise taxes or borrow it, adding to the deficit -- provided that the government is still running a deficit.

If the money is borrowed, the size of the annual deficit caused by Social Security payments alone will be more than $700 billion by 2029.

In other words, the deficit, now kept artificially low by Social Security revenues, will zoom skyward as the government borrows the money to cover pensions.

But the use of the trust fund to mask the deficit is only part of the problem.

Congress began last fall -- ever so gingerly -- to examine the possibilities for making the trust fund "solvent" far into the future. That occurred before Social Security became a major campaign issue. Since then, few members of Congress have been willing to discuss changes. House Speaker Newt Gingrich said the problem can be put off for six to eight years.

It is clear that Congress will have to tackle the subject. And it is also clear that the problem is larger than Social Security, which represents 21 percent of federal spending and 27 percent of federal revenues.

"The real looting that is going on is the fact that there's a deficit," says a Capitol Hill aide. "That's the key here."

A commission headed by Sen. Bob Kerrey, a Nebraska Democrat, and former Republican Sen. John Danforth of Missouri warned last year that, without changes in the law, spending on entitlements (programs which grant benefits to all qualified applicants, no matter the cost to the government) will consume all federal revenues by 2015.

And 15 years after that, spending on just four of them -- Social Security, Medicare, Medicaid and federal retirement -- will eat up all federal tax income.

"The strength of Social Security doesn't come from the trust fund," says the congressional aide. "The strength comes from the financial health of the government -- and the ability of the legislators to say, 'If you want this program, we are going to have to raise taxes or lower benefits.' "

John B. O'Donnell is a reporter in the Washington Bureau of The Baltimore Sun.

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