Washington didn't want the checks to bounce.
Mr. Greenspan came back with a plan that would make Social Security secure for 75 years or more. The employment tax would be increased. The age of retirement, starting 20 years in the future, would be increased. And benefits would be taxed if your income from Social Security and other sources exceeded a certain amount.
Everyone who was likely to vote and receive money in the near future was relieved and happy.
Unfortunately, it wasn't such a good deal for those who would retire in the future--- they would pay more taxes and receive smaller benefits.
Most of the 'hit' was twenty years in the future. Twenty years is five Presidential elections. It is the geological equivalent of pre-Cenozoic, virtually pre-historic.
Now the same man is Chairman of the Federal Reserve. He's telling us that Social Security is in danger. Again. The question isn't whether benefits must be reduced, but when they will be reduced.
How could this happen?
How could a program that was fixed for at least 75 years show up broken after 20 years?
The answer is simple. And the folks in Washington should have known. In fact, they did know.
Social Security is going broke for a truly wonderful reason. We have been wildly successful at extending human life. Our life expectancies have been advancing for well over a century. There is no evidence the advances will stop.
In 1900, life expectancy was 47.3 years. In 1930, not long before Social Security was created, male life expectancy at birth was 58. Female life expectancy was 62. (Note that expectancy was shorter than the original retirement age, 65. The Social Security program wasn't going to cost much. Lots more people would be paying the tax than collecting its benefits.)
But that was then. By 1980 life expectancy at birth was 73.7.
So lets do the math. By 1980, life expectancy had advanced 26.4 years from 1900. That's 3.3 years per decade. Between 1940 and 1980 expectancy advanced 1.8 years per decade. Go back further in history, and you'll come up with an average gain of 2.5 years of life expectancy per decade.
This happy fact is important. It is also expensive. Each year adds a new bunch of babies. They are born with long life expectancies. They can expect long retirements. In effect, the human 'inventory' is changing. Short-lived people are being replaced with longer-lived newborns. With an expectancy change of about 18 years for each year rolling forward, things start getting expensive.
As long as life expectancies continue to advance--- an event everyone favors--- Social Security projections based on 75-year periods will be gigantic institutional low-balls. If we fix Social Security in 2004 the way we fixed it in 1983, we'll be fixing it again in 2024 and 2048. Each time we "fix" it, taxes will be higher and future benefits will be lower.
What can we do about it?
We can get real about the true cost of living a long time.
Last year, for the first time, the Trustees of Social Security estimated the liabilities of the system based on "the infinite horizon," a method that incorporates liabilities missed in the 75-year method. They also used the method in the 2004 report and included the unfunded liabilities of Medicare.
For Social Security alone, the difference is $6.7 trillion. That's nearly as much as our $7.1 trillion in formal government debt. Put all the programs together and the unfunded liabilities balloon from $23.3 trillion to $55.4 trillion. The difference is a staggering $32 trillion. Small wonder the 75-year fix doesn't work.
|The $32 Trillion Lump Under The Rug|
|The unfunded liabilities measure the value, in current dollars, of the amount by which promised benefits exceed expected tax collections. In all three programs, the financing gap will grow year by year during the 75-year period. It will continue to grow after the 75-year period traditionally used by the Trustees of Social Security.|
|Program||75 Years||Infinite Horizon||Difference|
|Social Security||$ 3.7||$10.4||$ 6.7|
|Hospital Insurance||$ 8.2||$21.8||$13.6|
|Part B (from general revenues)||$11.4||$23.2||$11.8|
Whether the unfunded liabilities are $23.3 trillion or $55.4 trillion that is what is rolling toward our children and grandchildren. They will experience it as tax increases, benefit cuts, or some combination of both. You can read more about it in the "Generational Storm" reader on my website or by reading "The Coming Generational Storm: What You Need to Know about America's Economic Future" (coauthored with Laurence J. Kotlikoff, MIT Press, $27.95)
Is there a cure for this problem?
Yes. But don't expect to hear about it from either political party.
On the web:
Read the Social Security Trustees Report
Check the Generational Storm Reader
Find "The Coming Generational Storm" on Amazon