The economy is booming, and that's good news for Social Security, the trustees for the system said the other day. Why, they boasted, the Social Security trust fund won't be depleted until 2032, three years later than previously believed.
There's a problem here, however. It's that there is no trust fund.When the trustees refer to a trust fund, they are talking about the surplus in Social Security payroll taxes that has been collected over the years. Unfortunately, that excess has all been spent on other programs. What now exists is an unfunded liability that must be repaid when the time baby boomers start collecting benefits about 2012. The total figure that will then be needed to enable Social Security to stay more or less intact until 2032 will be an astonishing $3 trillion, which will have to be borrowed or raised through dramatically higher taxes. The other way out would be to cut benefits by about a third.
It's important to keep that fact in mind, for you might otherwise be taken in by demagogic remarks such as the following one from House Democratic leader Richard Gephardt: "Some in Congress want to use a shortfall at least three decades in the future as an excuse to invest Social Security trust funds in volatile equity markets. Clearly, time remains to have a reasoned discussion."
First, the shortfall comes in about one decade, not three, and can be met only by taking action within a year or so if the government is to avoid threatening the economy, raising a regressive tax or cheating beneficiaries out of what they have been promised. Second, equity markets have never been risky over the length of time funds are invested for retirement. If there were to be a long-term downward spiral of the market, it would mean the country was in protracted economic turmoil, causing problems for any method of financing Social Security. The greater risk is to rely on the last-minute judgments of politicians, who have already hiked taxes a number of times, to no lasting avail.
The booming economy is indeed good news for Social Security, in part because the higher surpluses can be used to fund a transition to a partially privatized system. That's an idea growing in popularity because it makes wonderful sense.