On Fixing Social Security

The prime time news shows this week featured the story of Kathleen Casey-Kirschling. Born just after midnight, 1946, she will be the first baby boomer who becomes eligible for early retirement at age 62 in 2008. She is 61.

Why did this story become prime-time news this week? Because the Social Security Administration pulled off a media coup. The agency held a media event that was covered by the networks. The SSA’s press release describes what happened.

At an event hosted by Michael J. Astrue, Commissioner of Social Security, the nation’s first Baby Boomer, Kathleen Casey-Kirschling, today filed for her Social Security retirement benefits online at www.socialsecurity.gov. Ms. Casey-Kirschling, who was born one second after midnight on January 1, 1946, will be eligible for benefits beginning January 2008.

First, a media event always benefits from a representative human being. The cameras focus on a person. Cameras have trouble focusing on ideas. For that matter, so does Congress.

Second, she was presented as representative of 78 million Americans who are part of her demographic cohort: born from 1946 to 1964. Why someone born in 1964 is a baby boomer is a mystery to me. The U.S. birth rate peaked in 1957. But with 78 million people out there, the Nielsen ratings were bound to be benefited. The PR people at Social Security understood their marks: the media.

“I know how important Social Security benefits are to Americans of all walks of life,” Commissioner Astrue said. “Today, Kathy has reached a personal milestone — she has made the transition from the workforce to retirement. I could not be more pleased that she has chosen to make this transition by filing for her benefits online.” To find out what Social Security services are available online go here.

I don’t recall Mr. Astrue being on any of the network news shows. I flipped channels to see how the story would be handled. But Mrs. Casey-Kirschling got her point across. She was filing for early retirement. Her government ship is coming in, and she will be at the dock on time.

As the nation’s first Baby Boomer, Ms. Casey-Kirschling is leading what is often referred to as America’s silver tsunami. Over the next two decades, nearly 80 million Americans will become eligible for Social Security benefits, more than 10,000 per day. To prepare for this wave of new filers, Social Security has developed a wide range of online services.

“Filing for Social Security benefits online is easy and convenient,” said Ms. Casey-Kirschling. “I urge my fellow Baby Boomers to give Social Security’s online services a try. Save a trip and do business with Social Security from the comfort of your home or office.”

The agency is doing whatever it can to get lots of people to sign up early. The agency fully understands a basic rule of government bureaucracy: the more voters who are dependent on a government agency, the larger the voting bloc that will resist any attempt to shrink it, let alone eliminate it.

“Come one! Come all! Step right up. Get your free money here!”

“Social Security provides economic protection to millions of Americans and their families,” Commissioner Astrue said. “And we remain committed to providing the public with the highest quality service possible. Boomers have always been a generation of trendsetters. Kathy is leading the way by doing business with Social Security online.”

Ah, the wonders of the Web — no more government paperwork! As John Wayne put it, “That’ll be the day.”

BACKFIRE

This was the agency’s pitch. But not a word of this made it onto the networks. What they reported was that the Social Security System is going broke. This was true of the press generally. In an article in Britain’s Guardian, this threat was made clear. The article came right to the point. This generation is indeed trend-setting.

In 1967 they were flower children, and it was all about peace and the summer of love. Now, in 2007, it’s all about the cheque.

You had better believe it!

As Ms Casey-Kirschling admitted when she filled in her online pension application: “I’m just lucky to be at the top of the boom.” For those following her into retirement, demographers predict the crisis in the social security net will emerge as a key concern on the domestic political agenda, if not in time for the 2008 elections then certainly in subsequent years.

When she says “top of the boom,” she means “top of the chain letter.” She understands that those who come after her are going to get stiffed, one way or another. They will sing of her, just as Jerry Reed sang 25 years ago, “She got the gold mine. I got the shaft.”

For Ms Casey-Kirschling, such debates on the future of the baby boomer generation have become almost second nature ever since she was discovered by journalists on the eve of her 40th birthday.

That sentence caught my attention. Her 40th birthday was over two decades ago, and the press covered it. Yet this is the first time I recall hearing about her. Nothing in the intervening years has been done to fix the red ink tsunami that is surely coming.

Now remarried, she looks forward to dividing her retirement between homes in Florida and Chesapeake Bay in Maryland.

Two homes. She has done very well for herself. She is indeed at the top of the boom. She got the gold mine.

What will you get?

“NO BIG PROBLEM!”

I have known this was coming since the spring of 1959, when my high school civics teacher introduced us to the red-ink nightmare of “pay as you go” financing. The system was front-loaded from day one: lots of benefits for very few workers. But demographics will take over, he warned: lots of retirees supported by fewer workers. The retiree-worker ratio would eventually bust the system. “The system will die before you do,” he warned.

The actuarians who monitor the program for the government assure us, decade after decade, that the system will not go bust . . . in the lifetime of anyone reading their reports. Nobody denies that the entire system is statistically doomed. The debate centers around the issue of when. We are assured that we — today’s readers — will cash out. The poor saps who will retire behind us will get stiffed, but we won’t.

What amazes me is that this is the official party line of right wingers as well as left wingers. They all say the same thing: “No big problem.” Yes, there are problems, they admit. Yes, the system is completely unfunded. But it can be fixed if we act now. If we wait, the problem will catch us sooner, but we can fix it.

I read this party line in the mid-1970’s, when I first wrote about the Social Security problem. I have seen the party line published somewhere, every year, ever since. The articles still appear like flies in the spring, always assuring us that this problem can be solved if Congress takes action now.

This week, however, there was a shift in opinion. Without warning, the mainstream media, for one brief and shining moment, ran the story the way my high school civics teacher taught it. The system is going bust. Despite the endless “if we act now” articles, the problem never gets solved. This is because Social Security is a Ponzi scheme, and it always has been. The money taken in is immediately spent by the government. Paying off early participants relies on taxing later participants.

The money is not invested in revenue-generating capital that can amortize the debt. The income from FICA taxes is even counted as revenue, not as a liability. It is revenue in the on-budget budget, and it is used to reduce the reported debt. It is a liability only in the off-budget books, which nobody cites, and which the government actively conceals.

How can the system be fixed when it relies, not on productive capital investment to amortize the debt, but on future workers’ willingness and ability to pay FICA taxes? Why will all those future payments by workers reduce not undermine their ability to invest, because the FICA taxes will reduce their legally disposable income? Why won’t the FICA system reduce capital and therefore productivity?

Here is the government’s idea of a fix. It announced this week that the taxable income base on which the FICA tax will be imposed will rise next year from $97,500 to $102,000.

This is a fix?

I turned 65 in February. The first check will arrive in December. Why the delay? Another fix. Congress passed a law which defers the first check. In the old days, the first check came in your birthday month.

This is a fix?

I think I understand the fixes: raise taxes and cut benefits. Terrific.

The politicians want us to ignore this problem because we are expected to trust them to provide fixes as these become statistically necessary. I trust the politicians. I trust them to apply the same kinds of fixes that they have already applied: raise taxes and cut benefits.

A NON-ISSUE

The party line was enthusiastically presented by a correspondent on American Public Media. The man interviewed is Chris Farrell. I can’t say that I have ever heard of Mr. Farrell, but I have surely heard the party line for many years. He is by far the most committed advocate of the party line I have ever come across. Social Security is a non-issue, he says.

Farrell: There’s a very good reason why Social Security does face some financing issues, I’m not totally dismissing it: We’re living longer. We’re healthier. This is a good thing, this is something to celebrate. Stop the hairshirt economics and stop pretending that you’re fiscally responsible by raising the Social Security issue. It’s a non-issue.

Jagow: But Chris, there are a lot of baby boomers. There are 76 million baby boomers. They’re gonna take a lot of benefits. You don’t think that’s going to push the Social Security system on the verge of bankruptcy?

Farrell: Absolutely not. And the real issue is Medicare and Medicaid. And it is the aging of the baby boom generation, and it is this crazy quilt, out-of-control health financing system that we have, that is a train wreck, guaranteed to happen, over the next several decades. But that’s a different issue, that’s an issue of health care. I have no idea whether we’ll still have a Medicare and Medicaid system in 10 years. Maybe it’ll be reformed. But you want to worry about something, you want to focus on something, it’s health care all the time. Forget Social Security — it’s a non-issue.

This is ever so comforting. Medicare is a train wreck. It threatens to bankrupt the government. This assessment is correct, by the way. But an odd thing happens in train wrecks. Train lines shut down. This train wreck threatens the solvency of the Federal government. Now, as I think about this, I come up with a conclusion: Social Security is a very large freight car on the train that will surely wreck.

Jagow: Are you suggesting that the presidential candidates shouldn’t even address Social Security?

Farrell: They should address health care. That’s what matters. Social Security, when we get a new administration, you sit down with some of the people who are willing to do some bipartisan compromise, you look at some of the research that’s been done, you get some smart people in a room, you cut a deal, it’s over with, it’s done.

So, we have heard for 30 years that if the government does something — we are never told what — the problem can be solved. But the government must act now! Three decades later, nothing has been done except raise taxes and delay the retirement date, yet we learn that Social Security is a non-issue. Then I guess it wasn’t an issue in 1977, either, even though it went legally bust in that year, and Carter had to impose new FICA taxes. It was a non-issue in 1983, too, when legally it went bust again, and Reagan had to hike FICA taxes.

You may think, “Oh, well; this is just some liberal know-nothing. What else could we expect?” So, let me cite Amity Shlaes, who has written a good book on the Great Depression, The Forgotten Man, and who used to be on the editorial board of the Wall Street Journal. As a writer for Bloomberg and as a member of the Council on Foreign Relations, she certainly cannot be successfully accused of being anti-Establishment. She writes:

As the boomers head for the beach, the revenue flowing to the government will begin to recede.

Many Americans believe that shift is important — catastrophic even. They also think that there’s nothing they can do but watch.

This is wrong. Fixing Social Security is doable. The task isn’t as pointless as trying to stop the movement of tides. It’s the equivalent of putting a new drain in a swimming pool.

That’s what I like: great rhetoric. Fixing Social Security is like fixing drain in your swimming pool. I cannot personally verify this, since I have no swimming pool. But this much is clear: all those warnings for 30 years were warnings about fixing a swimming pool.

This problem is so easy to fix that Fred Thompson knows the answer.

Though you might have missed it, the best method for such a fix was offered by Fred Thompson this month in the Republican presidential candidates’ debate. In Michigan, Thompson said that “one of the things that could be done would be to index benefits to inflation. Index benefits to inflation for future retirees.”

That’s all? Not quite. The system is already indexed to deal with price inflation. Social Security has a COLA — cost of living adjustment. So, there is something peculiar going on here.

She writes: “Thompson’s phrasing wasn’t clear, but his idea is.” Folks, if the phrasing isn’t clear in a campaign speech made by a lawyer-professional actor-politician, we can be 99.9% sure that the idea isn’t clear. It isn’t clear for a political reason.

Shlaes then tells us what Thompson “really” meant — a popular sport among intellectuals for many centuries: inserting your idea into another person’s words.

Social Security has another budget-busting factor, she says: an increase in payments to retirees based on today’s workers’ increased productivity. This increase should be dropped, she says. So, what Fred Thompson really meant to say was this: “Stiff the geezers. Change the rules again. Take away the promised benefits.” He just wasn’t as clear as he might have been.

I wonder why.

Anyway, I kind of understand the fix. It’s the same old fix: reduce the benefits. Change the rules. Renege.

It’s a non-issue.

CONCLUSION

I am willing to concede that the Medicare train wreck is the big one. It’s going to happen before the Social Security train wreck. That will reduce the threat in much the same way that a nuclear war reduces the threat of a worldwide banking failure.

It is the same political game, revised. The system’s defender says the problem can be fixed. He does not add “by a salami-style default: one benefit at a time.” He does not add: “Of course, Congress will do nothing to fix it except raise taxes and slice benefits, as it always has in the past.” All we need is to get a bunch of smart guys at a table to cut a deal.

Why didn’t anyone think of this before?

Oh, I forgot. They did. Repeatedly. Then they raised taxes.

Fortunately, I don’t have to worry. My check will be in the mail. Soon.

It’s a shame that I’ll have to pay $15,300 in FICA taxes next year, plus another $5,000 in Federal income taxes, since FICA payments are not deductible from income on my 1040 form. I will also pay at least $7,000 in income taxes on my income from Social Security. Oh, yes, plus state income taxes on the income I will use to pay FICA.

But I don’t have to worry. Social Security is a non-issue, except maybe for Fred Thompson’s campaign.

October20, 2007

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2007 LewRockwell.com

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