As I pointed out in my recent Bloomberg op-ed, Social Security is desperately broke -- 31 percent underfunded to be exact. This is not my opinion. This is Social Security's own measure of its unfunded liability contained in table IVB6 of its most recent Trustees Report.
The table's a bit hard to decipher, but it shows that the system is short $20.5 trillion in present value. It needs a 31 percent immediate and permanent increase in annual revenues to pay, over time, all of Social Security's promised benefits. That's close to a 4 percentage-point payroll tax hike! If we wait 20 years, the 31 percent figure rises to 50 percent, which translates into a 6.2 percentage-point tax hike.
In transmitting their report to the public, the seven trustees, including Treasury Secretary Geithner, Labor Secretary Solis, and Health and Human Services Secretary Sebelius, failed to scream "Fire!" Instead, they called for fixing Social Security in "a timely way." I wonder if these people have children or grandchildren.
Presidential hopeful Mitt Romney opposes all tax hikes. Presumably, then, he'd favor resolving Social Security's massive funding gap by immediately and permanently cutting all Social Security benefits by 23 percent.
Why 23 percent? Because Table IVB6 also shows that benefit cuts of this magnitude are what's needed to eliminate the system's long-term funding gap if taxes remain unchanged.
For his part, President Obama has said, "No current beneficiaries should see their basic benefits reduced and [I] will not accept an approach that slashes benefits for future generations." Presumably, then, the president wants to a) eliminate the current 2 percentage-point payroll tax cut and b) raise the tax rate an additional 3.8 percentage points.
Funny, I haven't heard governor tell the country he wants to cut benefits of all current and future Social Security recipients by 23 percent. Nor have I heard the president tell the country he wants to raise Social Security payroll taxes of all current and future workers by 31 percent, which would come on top of a 16-percent hike needed to eliminate his current payroll tax cut.
Maybe the governor thinks keeping taxes too low will raise revenues. And maybe the president thinks keeping spending too high will lower expenditures. Or maybe these gentlemen care more about the next election than the next generation.
Usually, the press would raise some questions. But I haven't found a single article in any of the top newspapers, magazines, or websites referencing table IVB6.
Things are a lot different in New Zealand, which I just visited. The day I landed, the Superannuation Report -- New Zealand's equivalent of the Trustees Report -- came out. I was amazed to hear one talk radio host after another debating how bad the situation was and how much needed to be done now to preclude a bigger burden for younger people in the future. The Kiwis, as strange as this sounds, actually worry about their children's future taxes and benefits. In New Zealand the underlying theme is "Our Kids Are Us." In the U.S. the theme is "Our Toys Are Us."
I've received a large number of comments to my Bloomberg column, which lays out why table IVB6 is the only appropriate measure of the system's insolvency. Many of the comments suggest that Social Security can never go broke because the government can always print money and give it to Social Security beneficiaries.
But Social Security's obligation is to paying real benefits, i.e., providing people with money that will suffice to purchase a basket of real goods and services. The government can hand us each 20 million $1 bills. As we spend it, this will drive up the price level sky high and leave us, on average, consuming nothing more in real terms. So printing 20.5-trillion dollar bills is no answer. Doing so will lead to hyperinflation and leave our country in even worse shape.
The other frequent response to my column was "Let the kids fend for themselves. I paid in my taxes. I'm entitled to collect every single dollar of Social Security benefits I earned. We baby boomers need to defend our rights." This too is an inappropriate response. If our government makes promises it can't keep/afford, we all can't say, "But Uncle Sam promised!" Instead, we need to come to an agreement about how to deal with our government's insolvency (and Social Security's problem is just a huge tip of a gargantuan iceberg) that's fair across and within generations.
A third response was to lift the ceiling on the payroll tax. Under this policy, people making above $110,100 this year would pay Social Security's 12.4-percent combined employer/employee tax on every penny of labor earnings they receive whether on the job or due to self-employment. Whether or not you feel this is the right thing to do, it's not enough. It comes up with only about 40 percent of the revenue needed to balance Social Security's books over time.
I think we need much greater progressivity in our fiscal system, but I also think that patchwork fixes to Social Security aren't the way to go. At www.thepurpleplans.org, you'll see how non-partisan economists would fix many of the economic problems we face. This red plus blue makes purple policy platform is available for free to both the Democrats and Republicans. Please feel free to send the link to your members of Congress and to the President and Governor.
I'm not asking you to do this. Your kids are asking you to do this.