INVESTOR'S BUSINESS DAILY
Posted 03/20/2008
As the first batch of 77 million baby boomers hits 62 this year, Social Security is at the height of its golden years but headed for a swift and inevitable decline.
This year, the government's retirement program is expected to collect $92 billion more than it pays out in benefits.
But annual surpluses will peak in 2009, disappear by 2017 and give way to large and growing deficits.
Yet the prospects of action in Washington to forestall this looming crisis are uncertain.
Congress has shown no appetite for Social Security reform since Democrats regained control.
And presumptive Republican presidential nominee John McCain and Democrats Barack Obama and Hillary Clinton have all taken positions that leave little possibility for a bipartisan deal.
Perhaps the biggest obstacle to Social Security reform is the trust-fund accounting that misleadingly suggests the program will be able to pay its bills the next three decades.
Because Social Security has been theoretically lending its excess cash to the government and depositing those interest-bearing IOUs in the trust fund, it has the authority to keep paying all benefits until the trust fund expires in 2041.
The reality is grimmer. The financial challenge posed by Social Security is dwarfed by the problems in the rest of the budget — namely Medicare and Medicaid.
As John Rother, who directs AARP's public policy efforts, explained in testimony in front of Congress: "After more than 30 years of borrowing from Social Security, the U.S. Treasury will be called upon to transfer cash resources back to the trust fund."
By 2017, as Rother acknowledged, "the rest of the budget may be in trouble due to unsustainable fiscal policies."
Consider that in 2007, the combined cost of Social Security and Medicare exceeded their dedicated payroll taxes by $100 billion. By 2018, as Medicare costs balloon and Social Security starts running a deficit, these two programs are projected to drain $545 billion from the government's general fund — on top of what they collect in payroll taxes. Then things deteriorate in a hurry.
By 2022, Social Security alone is expected to face a deficit of more than $100 billion a year (in today's dollars). At that point it will be collecting enough revenue to pay for 89% of promised benefits. Closing that shortfall with tax increases would mean raising the payroll-tax rate to 14% from 12.4%.
By 2029, Social Security faces a $250 billion funding gap that could be closed with a 20% benefit cut — even for the disabled — or a 3.3% payroll-tax hike to 15.7%.
The sooner Washington makes the trade-offs involved in Social Security, the more opportunity future retirees will have to adjust their savings. The longer Washington waits, the more daunting the problem will grow, and the less baby boomers will share in the sacrifice.
If Congress acts next year, with reforms hitting in 2010, the annual cost in benefit cuts or tax hikes of closing Social Security's funding gap through 2081 would be 1.1% of GDP.
If we wait until 2017 to start, the cost would rise to 1.28% of GDP, according to an Investor's Business Daily analysis.
That's the difference between an annual cost of $187 billion and $217 billion in 2017, so delay will expand the problem.
Robert Bixby, executive director of the budget watchdog Concord Coalition, thinks Washington may tackle the problem under the next president — in a second term.
"It's clear enough that something has to be done, and it's a much easier problem to tackle than Medicare and health care, in general," he said.
But he's "a little bit concerned" the presidential contenders are taking positions that reduce the chances of an accord over Social Security.
McCain recently vowed not to raise taxes as president, suggesting he won't sign off on any deal that doesn't close the full shortfall with benefit cuts.
On the Democratic side, Obama and Clinton have spoken against any benefit cuts, leaving tax hikes as the only alternative.
Yet Clinton has signaled her opposition to raising taxes and has attacked Obama's proposal to apply the 12.4% payroll tax on income over the payroll-tax ceiling ($102,000 in 2008).
A Clinton campaign mailer blasts his plan as "a trillion dollar tax increase on America's hard-working families."
Obama later adopted a position similar to that of John Edwards, who supported applying the 12.4% tax on earnings over $200,000, but shielding those making $102,000 to $200,000 from the tax hike.
"Among the options that are available," Obama said, "the best one is to lift the cap on the payroll tax, potentially exempting folks in the middle — middle-class folks — but making sure the wealthy are paying more of their fair share, a little bit more."
To bring in enough money to close Social Security's shortfall and make good on the $2 trillion in IOUs in the trust fund would require an annual tax increase in excess of 25 percentage points on those earning over $200,000, an Investor's Business Daily analysis finds.
Source: http://www.investors.com/editorial/IBDArticles.asp?artsec=16&artnum=7&issue=20080320