May 3, 2010

Social Security About to Go Bankrupt For 7th Decade

Here's a couple quotes on Social Security: 

"As you know, the Social Security System is teetering on the edge of bankruptcy. Over the next five years, the Social Security trust fund could encounter deficits of up to $111 billion, and in the decades ahead its unfunded obligations could run well into the trillions. Unless we in government are willing to act, a sword of Damocles will soon hang over the welfare of millions of our citizens."

"‘Wage earners, you will pay and pay in taxes...and when you are very old, you will have an I.O.U. which the U.S. Government may make good if it is still solvent.’”

Many people would agree emphatically with both of these statements.  While they seem like something yanked out of todays paper, but of those are actually very old quotes.   The first quote above comes from our President.   However it isn't from Pres. Obama or Pres. Bush before him.  That quote is from Ronald Reagan in 1981.   The second quote is actually much older than that.    It predates most people who are already retired and getting social security.   That second quote was made in argument against Social Security before it actually became law in 1935.

Back in 1977 Social Security was going to run out of money by 1983.

"--The worst recession since the Great Depression and the worst inflation since the Civil War had depleted the reserves in the trust funds to the point that the Disability Trust Fund would be depleted by 1979 and the Old Age and Survivors Trust Fund would run out by 1983."
-- President Jimmy Carter.  Dec. 20, 1977.

Its not just Social Security that has been in perpetual imminent doom of bankruptcy any year now for the past few decades.   Medicare is was going to have been bankrupt 10 years ago or any day now.   (Sorry its hard to get the tenses right on something that was going to happen yesterday for a long time but hasn't happened yet and is still going to happen tomorrow anytime now.  Why do I feel like time travel is involved?)

"Medicare is projected to be bankrupt maybe as soon as 1997."
-- President George H.W. Bush, Oct. 15 1992

Social Security was going to be a failure before it became reality in 1935.   Social Security was going to run out of money in 1983.  Medicare was going to be bankrupt in 1997.   Today Social Security and Medicare are functional and paying out benefits.  Yet today we hear cries of alarm that Social Security and Medicare are going to run out of money and fears that there will be zero benefits by the time working people today are of retirement age. When do all the warnings of imminent doom become crying wolf?    

Social Security and Medicare certainly have some long term potential problems.   In the long term something will likely need to change.   But this isn't a new situation.   In fact as you can see in the quotes above problems with the long term health of Social Security is something that we've been fighting and handling for many decades.  

The reality is that Social Security has been in need of change many times and it has been changed many times.   There have been 20 increases in the Social Security tax rate over the years.   Plus they've increased retirement age and adjusted the taxation of Social Security benefits.   Simply put the government has kept Social Security working over the years by gradually raising the tax rates and dropping benefits.   Why is this time any different?  I don't think it is.


  1. The fact is that all of these social insurance programs (i.e. social security, medicare, medicaid, etc) were in trouble decades ago, but the politicians back then "reformed" the programs. Unfortunately, they didn't reform much, but rather they "kicked the can" a bit further so the next generation of politicians can deal with the real issues. What will true reform look like? It's going to involve either higher taxes or less generous benefits -- as a country we must engage in that debate and decide.

  2. I think people need to understand that the gap is not that large. If I recall correctly, even with no changes, social security could pay out 70% of promised benefits. That is not a huge gap. The typical proposals have been to increase FICA from 6.2% to 7.2%, to index payouts to CPI versus wage inflation, to raise the retirement age about 2 years, and to lift the earnings cap. Again, if memory serves me correctly, I think any 2 of the 4 proposals combined is enough to close the gap. It is not difficult to imagine getting this fixed rather easily.

    Medicare, on the other hand, is severely underfunded...


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