By Laurence Kotlikoff

Originally posted at The Seattle Times, July 2017.

Social Security report buries crucial statistic

Investing

Sick and tired of worrying about health “reform”? Let me divert your attention with another “yuge” problem — Social Security. Social Security’s trustees just released their annual report. It’s a very long document, with the most important part buried deep in appendix table VIF1.

Table VIF1 shows the system is $34.2 trillion in the red. That’s its unfunded liability. Stated differently, the system’s trust fund needs to be $37 trillion, not its actual $2.8 trillion, to permit Social Security to pay all scheduled benefits into the future. How large is $34.2 trillion? Very large. It’s almost two years of GDP.

There is, of course, more than one way to make ends meet. If we can’t get the good lord to drop $34.2 trillion into Social Security’s coffers as manna from heaven, we can raise taxes. One option is to take 4.2 percent more out of everyone’s paycheck (up to the taxable earnings ceiling, now $127,500) on a permanent basis. Since Social Security’s FICA payroll tax rate is 12.4 percent, we’re talking a 33.9 (4.2/12.4) percent immediate and permanent Social Security tax hike.

Another option is to cut all Social Security benefits (retirement, spousal, divorcee, widow(er), young child, disabled child, child-in-care spousal, mother (father), disability and parent benefits) immediately and permanently by 25 percent.

One in five retirees is fully dependent on Social Security. Another 30 percent are strongly dependent. Imagine telling roughly tens of millions of retirees that their living standard is going to be cut for the rest of their lives by up to one-quarter.

But doing nothing just makes matters worse, at least for our kids. The longer we wait to raise taxes or cut benefits, the bigger the requisite tax hikes or benefits cuts will be. This is the awful nature of the zero-sum generational game we are playing.

How did Social Security get so deep into the red? The answer is decades of generationally immoral bookkeeping by politicians of both parties. Both Democrats and Republicans have conspired to keep Social Security off the books, even though its $34.2 trillion debt is no less real for it.

As for Social Security’s “trustees,” they either didn’t examine or willfully ignored table VIF1.

Their discussion of the system’s fiscal condition makes no reference to the table or the fact that the system ran a $2.1 trillion deficit last year, i.e., its unfunded liability rose by $2.1 trillion between last year’s report and this year’s report. By comparison, last year’s official federal deficit was only $585 billion.

Keeping major liabilities off the books and sitting back while they grow exponentially is what you’d expect of a country like Argentina, whose politicians spent a century running that country into the ground. It’s not behavior you see in responsible countries like Sweden, Norway, Canada or New Zealand.

I remember listening to talk radio in the New Zealand capital, Wellington, where I was working on a short assignment a few years back. The subject was the government’s unfunded Social Security liability, which had just been announced at 2 (not 200) percent of GDP.

One caller after another expressed extreme outrage at the irresponsible politicians who had let this happen. The fact that this was being discussed publicly startled me. We can’t even get our Social Security system’s own trustees to discuss the system’s true fiscal position, let alone our politicians or the general public.

What does Social Security’s dire straits mean to you personally? Should you take your Social Security benefits early before they are cut? No, and here’s why. I doubt Congress will cut benefits of current low- and middle-income retirees. And the benefit cuts levied on current rich beneficiaries will likely be implemented by making 100 percent, not 85 percent, of Social Security benefits taxable under the income tax. Congress will also likely eliminate the ceiling on taxable earnings.

But future generations will face a more dire situation.

This article was originally published at The Seattle Times on July 22, 2017. (http://bit.ly/2xuE1XZ)