The Day of Reckoning
"I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts." - President Abraham Lincoln.
There are two important dates that dominate the debate on the future of the Social Security System: 2016 and 2038. At present, Social Security receipts exceed the amount required to pay benefits to current retirees. The excess funds go to the Social Security Trust Fund, essentially government IOUs. In 2016, as more of the baby boom generation retires, Social Security receipts will be inadequate to cover the outflow of benefits. By 2032, the youngest cohort of the baby boomers will finally be retiring. Projections indicate that by 2038 the total paid out in excess of receipts will exceed the amount presumably accumulated in the Social Security Trust Fund. Those who choose to deliberately ignore inevitable Social Security short falls suggest that we have nothing to worry about since the day of reckoning is two generations away. The truth is otherwise.
Essentially, the Social Security Trust Fund is a contrivance where one part of the government gives another part of the government an IOU without changing the net obligations of government. During the hearings held by the President's Commission to Strengthen Social Security a useful analogy was drawn explaining this accounting chicanery.
Imagine a person attempting to save money towards his own retirement. Let us call him Joe. Assume that Joe has difficulty in maintaining the necessary discipline for retirement savings. Joe spends current income on current expenses and maybe even pays down his credit card debt a bit. To maintain his retirement fund, Joe writes himself IOUs. He, after all, has good credit. He trusts himself. When Joe retires he has a handful of IOUs to himself. However, the only way to redeem these IOUs is for Joe to generate current income. This is no different than if Joe had not bothered to conjure up the fiction of IOUs at all.
By analogy, the only way the government can pay future retirees once Social Security revenues exceed outlays is to reduce liability or increase income. Reducing benefits, increasing taxes, borrowing money, or all three can accomplish this. The year of reckoning is 2016, give or take a year or two, not 2038. For those who are 50 years old today, Social Security will begin to lack funds to meet benefit payments when they begin retirement. There is not much time for these people to make adjustments.
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