Social Security is not headed for disaster

Doom and gloom about the system derives from FDR's explanation of how it worked — in an effort to avert accusations of "socialism." PEDRO MOLINA
Doom and gloom about the system derives from FDR's explanation of how it worked — in an effort to avert accusations of "socialism." PEDRO MOLINA
Posted: July 30, 2012

The gloomy annual report of the trustees of Social Security has provoked the usual ominous predictions of big trouble ahead. Media accounts spoke of significant deterioration in the financial outlook of the system, and declared it unsustainable unless structural changes were made. The scare words might seem to justify the often-heard prediction that Social Security may last long enough to sustain our current oldsters, but that it is headed for bankruptcy and "won't be there" for our younger citizens.

Nothing could be further from the truth.

Into the future, Social Security can and will provide wage replacement at about the same level it does now. It does not depend for its resources on an entity that might run out of money, that has no way to raise more, and could go into bankruptcy. The U.S. government has the ability to raise enough revenue to pay out whatever level of Social Security benefits the public wants. In that, Social Security resembles all the other things the government pays for, including the national parks, the Food and Drug Administration, and the Department of Defense.

At what level does the public want retirees supported?

All indications are that the public is satisfied with benefits that replace wages at about the present level. Can the richest country in the world afford to continue to do that? Of course. Our taxes are very low compared with those of most other developed countries. Our ability to spend more than we now do on government is very high. If necessary, the public would support higher taxes to maintain Social Security benefits.

The doom and gloom about Social Security, and the claims that it needs radical restructuring, derive from the way Franklin D. Roosevelt's administration explained the system to the public. To avoid accusations of "socialism," citizens were made to understand that the pensions they would get would consist of their own money that they had put into a trust fund.

The trust-fund story made it politically easier to start the system and maintain support for it. But that story has made it vulnerable to the prediction that it is going bankrupt and will have to be radically changed. After all, if the pensions come out of the trust fund, and the fund will shrink to zero in about 2033, as predicted, then isn't the system unsustainable?

In fact, the pension payments that Social Security makes are financed 100 percent out of current taxes on the still-working population. In most years, the receipts from the payroll tax have been more than sufficient to pay scheduled benefits. In times when they have been insufficient, money from the income tax is used to pay benefits. If benefits aren't paid out of the trust fund, then what, if anything, does it do?

The trust fund consists of a collection of federal government IOUs in the drawer of the Social Security system. Whenever the money collected by the payroll tax exceeds the amount spent on pensions, the extra money is sent to the Treasury, which spends it on other programs and sends Social Security an IOU. When the amount collected by the payroll tax is insufficient, Social Security sends some IOUs back to Treasury, which uses money collected by the income tax to help pay that year's pensions.

Some right-wing analysts have said that those IOUs are of zero value. They are right! (Write on a piece of paper that you owe $100 to yourself. Are you better off?) However, the fictional nature of the fund's value does not mean that Social Security cannot pay the pensions it owes. And when Social Security's stock of valueless IOUs has all gone back to Treasury, new arrangements can be made to supplement the payroll tax, or raise it.

Whether the trust fund will "run out" in 2033, or is already of zero value, Social Security pensions will be paid if the public wants them paid, and the means will be found to pay them out of current revenue. The public does want that, and always will. People do not want their parents needing financial help from them, or being forced to move in with them, or worse, living on the street.

So Social Security is not broke or bankrupt or headed for disaster, regardless of what its enemies say. Or even what its trustees say.

E-mail Barbara R. Bergmann at brbergmann@verizon.net.

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