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<p><span class="articledate">Donald Luskin</span></p>
<p><span class="articledate">Natinal Review Online<br>
January 11, 2005, 8:42 a.m.</span><br>
<span class="articletitle">The C-Word: Say It</span><br>
<span class="articlesubtitle">The Social Security crisis begins <i>in
just 5 years</i>.</span><br>
<br>
</p>
<p><span class="drop">T</span>he leftist opponents of Social
Security reform want you to believe there’s no “crisis,” and that
whatever problems the system may have won’t materialize for more than
35 years. Funny how such equanimity and patience seem to elude them
when the subject is global warming.</p>
<p><!--#include virtual="/includes/include_2002_skyscraper.html" -->
It’s even funnier when you realize the objective fact is this: The
Social Security crisis actually starts a lot sooner than advocates of
reform are saying. The Social Security crisis begins to materialize <i>in
just 5 years</i>.<br>
<br>
Here are the facts. You decide whether they amount to a “crisis.”<br>
<br>
Right now the Social Security program collects more in taxes — both
FICA taxes from current workers and income taxes on benefits from
current retirees — than it pays out in benefits to retirees. That
surplus goes into Social Security trust funds, where it is used to buy
Treasury bonds that are held as an investment toward the payment of
future benefits. The purchase by the trust funds of those Treasury
bonds is no different than if you or I bought them. The Treasury issues
the bonds in exchange for cash, which is used to finance the current
expenditures of the federal government. <br>
<br>
<a href="http://www.ssa.gov/OACT/TR/TR04/IV_SRest.html#wp207413">According
to the latest annual report</a>
of the Trustees of the Social Security Trust Funds, the surplus in 2004
was $64.4 billion dollars. It will be higher this year — at $87.7
billion. The surplus will keep getting bigger and bigger through 2008,
when it will reach $108 billion. Each year, that’s more and more money
that the federal government won’t have to raise from the world capital
markets. It’s a captive audience of bond buyers — and a growing one. <br>
<br>
But in 2009, just 5 years from now, the surplus will start to shrink.
In 2009 it will fall to $103.7 billion, and in that year the federal
government will have to go to the capital markets to raise $4.3 billion
that it didn’t have to raise the year before. That’s not a lot of money
in the grand governmental scheme of things. But it’s an important
turning point for Social Security — it’s the year the crisis begins.<br>
<br>
Every year after that the crisis will deepen. Each year the government
will get several billion dollars <i>less</i>
from the Social Security surplus than it did the year before, and it
will have to make up that difference by tapping the capital markets, or
by raising taxes or trimming spending.<br>
<br>
Most observers point to 2018 as the earliest year for the Social
Security crisis to begin. But that’s only the year the crisis will pass
an especially attention-grabbing milestone. That’s the year, <a
href="http://www.ssa.gov/OACT/TR/TR04/II_project.html#wp105724">according
to the trustees</a>,
that the Social Security surplus will disappear entirely and become a
deficit. In other words, for the first time tax revenues will be less
than the benefits paid out that year. From the standpoint of public
finance, though, it will just be another painful year in which the
federal government had to raise more money from capital markets — or
raise taxes more or trim more spending — than it did the year before.
By 2018, the Treasury will have already received $359 billion less cash
each year, cumulatively, than it received in the peak year of 2008.<br>
<br>
Starting in 2018, as soon as Social Security tax revenues are
insufficient to cover benefit payments, the gap will be made up as the
trust funds redeem the Treasury bills they have been hoarding. Not only
will the Social Security system no longer give cash to the federal
government in exchange for Treasury bonds. Starting in 2018 the
situation will be just the opposite: The Social Security system will
give back the Treasury bonds held in the trust funds — and the interest
on those bonds, which is held in the form of <i>more</i> bonds — and
demand cash for them.<br>
<br>
<a href="http://www.ssa.gov/OACT/TR/TR04/lr6F9-2.html">According to the
Social Security actuary</a>,
in 2018 the trust funds will demand $23.4 billion in cash from the
federal government. The trust funds will redeem the last of their bonds
in 2041 — demanding from the government $1.003 <i>trillion</i> that
year. From 2018 through 2041, the trust funds will redeem bonds worth,
cumulatively, $11.9 trillion. Once again, just to be perfectly clear,
let me emphasize that the federal government will have to come up with
this $11.9 trillion somehow — either by tapping the capital markets,
raising taxes, or trimming spending.<br>
<br>
This should illuminate the debate on whether the trust funds are “real”
or not. They are perfectly “real” in the sense that the Treasury bonds
they hold are valid legal claims on the government. But they are not
“real” in the sense that they, as <a
href="http://www.cbo.gov/showdoc.cfm?index=5530&sequence=1">a June,
2004, Congressional Budget Office report</a>
put it, “contain no financial resources” in and of themselves. For
their value to be realized, the Treasury bills they hold must be
redeemed for cash by the government — and that cash has to come from
somewhere. <br>
<br>
>From the standpoint of public finance, the crisis ends in 2042 when the
trust funds’ hoard of bonds is completely exhausted. Under current law,
Social Security benefits will then be trimmed such that they will be
payable out of current tax revenues. <a
href="http://www.ssa.gov/OACT/TR/TR04/II_project.html#wp105057">According
to the trustees</a>,
benefits will have to be cut 27 percent from their present scheduled
levels, with the situation only getting worse as time goes by. So, yes,
the drain on the Treasury will end in 2042 — but at that point the
crisis will simply be inherited by retirees in the form of lower
benefits. <br>
<br>
Those are all simple facts. Yes, they are estimates. They might be off
a little bit one way or the other. But the general pattern is clear.
Social Security will start to become a drag on the budget of the
federal government in 2009. The state of affairs will get progressively
worse through 2042, by which time Social Security will have consumed
$11.9 trillion from the federal budget. And after that, Social Security
benefits will be automatically cut. If that isn’t a “crisis,” I don’t
know what is.<br>
<br>
The opponents of reform claim that the Social Security crisis is, in
fact, a crisis of general public finance — not one of the Social
Security system itself. They see Social Security as an entity separate
from the federal government, and maintain that its own dedicated stream
of tax revenues and trust-fund assets will keep it going for more than
a third of a century.<br>
<br>
That’s a fair point of view, as far as it goes. At the same time, it is
dangerously myopic to treat Social Security in isolation from the
overall finances of government. That would be like finding nothing
troubling about a factory that dumps pollutants into a river. That may
be no problem for the factory itself, but it can be a major problem for
everyone downriver. And when it comes to Social Security, we’re all
downriver.<br>
<br>
But the case of Social Security is even worse than that. By 2042 the
pollution will back up into the factory itself. Unless the opponents of
reform don’t think it’s a problem to automatically cut benefits by 27
percent all at once in 2042, then Social Security itself has a “crisis”
— maybe not right now, but surely by then.<br>
<br>
Don’t be too hard on the advocates of reform when they throw the C-word
around. It’s fully justified. In fact, I’d even dare to use that most
dangerous of all political words to describe the crisis. Yes, the
I-word: <i>imminent</i>.<br>
<br>
<span class="bioline"><i> — Donald Luskin is chief investment officer
of <a href="http://www.trendmacro.com/default2.asp">Trend Macrolytics
LLC</a>, an independent economics and investment-research firm. He
welcomes your comments at <a href="mailto:%20don@trendmacro.com">don@trendmacro.com</a>.</i></span></p>
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