Home > Americas, English, Special Reports > Confronting The Entitlement Conundrum – Why Social Security May Be America’s Financial Weapon of Mass Destruction

Confronting The Entitlement Conundrum – Why Social Security May Be America’s Financial Weapon of Mass Destruction

By Marquis Codjia

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Warren Buffett, the billionaire investor and long-time Chairman of conglomerate colossus Berkshire Hathaway, emphatically stated in 2002 that derivatives were “time bombs, both for the parties that deal in them and the economic system”. Given the deleterious role these securities had in the recent economic crisis, the “Oracle of Omaha” certainly evinces prescience in addition to his mythic business acumen.

Yet, what will likely choke off economic growth in the U.S., and by percolation, usher in global economic disequilibria, is managing mammoth entitlement benefits due to – or rather, promised to – millions of Americans over not only a year or two, but decades in their lifetimes, once they face thorny existential episodes such as illness, old age, disability, or loss of employment.

Of all government-steered social schemes, Social Security – the federal Old-Age, Survivors, and Disability Insurance (OASDI) program – is the largest, claiming 20% of the national budget in 2009 or $678 billion, right after defense (23%). Other known schemes are unemployment benefits, Medicare and Medicaid.

A conceptual understanding of Social Security is helpful to gauge the dynamics at work in the entitlement debate. Simply explained, Social Security allows retirees to earn pension income from contributions made by current workers – via specific payroll taxes. Understandably, the system remains balanced if contributions made exceed benefits paid – as is currently the case.

However, current projections posit a funding gap starting in 2016 – in other words, expenses will outrun revenues, thus coercing the country into seeking external funds (from new loans or cuts in other programs). Worse, successive governments have borrowed and used up over the years cumulative surpluses held in the Social Security Trust Fund.

The funding deficit is caused by a panoply of factors, the most important of which are the increase in life expectancy, the lowering birth rate, and aging baby-boomers (resulting in fewer workers paying for more retirees).

What’s flummoxing is that the current political elite – like their forerunners in both parties – seem to be voluntarily embroiled in partisan ramblings, and gladly enjoying esoteric rhetoric that renders the populace obtuse, and discredits the urgency and criticality of the social security debate. Consequently, our most intellectually dynamic citizens do not give this topic the socio-economic import it deserves.

The ensuing status quo threatens to turn a tractable conundrum into a veritable crisis – a “time bomb” into a “financial weapon of mass destruction” against America’s social fabric. Former and current Fed chairmen, fortunately, fathom the essence of the matter; thus, Alan Greenspan advocates a mix of measures to bring entitlement programs under control and ensure long-term economic prosperity, while Ben Bernanke warns that “Americans may have to accept higher taxes or changes in entitlements… to avoid staggering budget deficits.”

Several elements form the disquieting body of thoughts that justifies the hyperbolic, or apocalyptic, formulation used in this analysis.

First, the absence of a real, serious forum to gauge the merits of viewpoints engaged in the Social Security overhaul disputation. As noted earlier, this status quo seems to be furthered, at the very least, by consecutive administrations for the past three decades, because either the issue is thorny and politically unpalatable to constituents or elected officials deem it of lower priority. In sum, they dare not venture topics that may derail re-election prospects.

To fill the rhetorical void, snippets of partisan parlance are interjected here and there, mainly to polarize citizens and eschew a thorough debate. One such snippet is the notion that Social Security should be privatized and entrusted with professional portfolio managers because the government should let free-market decide and any form of public management of the behemoth fund is a type of communist intervention intolerable in capitalist America. In this article, the pros and cons of this argument cannot be evaluated with granularity but factual observations reveal the latter’s practical limits. It’s easy to wonder what financial devastation the country would have suffered had the Fund been invested in the stock market before the recent mini-crash. It’s also easy to observe how effective a manager the government can be by analyzing operational results at the Federal Employees Retirement System (FERS), the Army Medical Department, Medicare, and Medicaid, all of which remain sound programs.

Second, the much needed overhaul of the IRS and the country’s tax collection scheme is taking longer to occur, and this delay, coupled to the ongoing government waste at the federal, state, and legislative levels, annihilates any serious endeavour to cut budget deficits.

Next, the systemic spectre of a vicious cycle looms. If the ratio of retirees to active workers grows excessively, there will be fewer contributions to pay pension benefits, and such a reduced purchasing power will yield lower private consumption. Companies will then be forced to cut their workforce if sales are lethargic, and the smaller remaining workforce will contribute even less to the Social Security Fund, and so forth.

Fourth, the Fed – as the lender of last resort – can lend to the U.S. Treasury should public finances deteriorate but it can’t sustainably keep printing money via its quantitative easing tactic lest the dollar tumble on defiance from capital markets and heightened inflation.

Fifth, the country’s incapacity to lower its trade deficits will likely not be solved in the near future because the American industrial complex is currently unable or disinclined to produce superior goods affordably, and opening up U.S. markets to foreign suppliers serve as geostrategic levers in international discussions.

In the end, entitlement specialists and those well-versed in the Social Security issue ask the following: why aren’t authorities implementing the Social Security Trust Fund’s proposal (2009 Report) to marginally raise the tax rate or the salary cap on payroll tax in order to fix the funding gap? For example, raising the payroll tax rate to 14.4% in 2009 (from 12.4%) or cutting benefits by 13.3% would fix the program’s gap indefinitely, while these amounts increase to ca.16% and 24% if no changes are made until 2037.

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  1. April 19, 2010 at 10:44 am

    The amounts of money being banded about is unprecedented. When will it all end? Our ancesters will be repaying money in the next millenia!

  2. Peter Croe
    April 19, 2010 at 11:26 am

    This is a wonderful analysis; it’s refreshing to see that some bloggers are going the extra mile to please their readers with top-notch research.

  3. Yamila T
    April 19, 2010 at 11:28 am

    Social security is a big bomb indeed and politicians don’t really give it a sh*t

  4. Guru34
    April 19, 2010 at 11:29 am

    there’s a social sec crisis and y’all better wake up to the truth.

    A concerned citizen

    • April 19, 2010 at 11:44 am

      Dear reader,

      Thanks for the comments and the words of encouragement in your email; they were appreciated. Getting back into the debate, what do you think we should do to fix the social security crisis?

      Regards,
      Marquis Codjia

      • Rosa
        April 19, 2010 at 11:50 am

        Raise the benefit age to 80 :)

      • AshtonK
        April 19, 2010 at 11:52 am

        Tell Granny to get a job.

      • BankGuru
        April 19, 2010 at 11:52 am

        Let baby boomers do some work.

      • Change
        April 19, 2010 at 11:53 am

        Stop the govt. from STEALING any more cash out of the S.S.Trust Fund. Reagan started it, Obama WILL end it !

      • Rangers
        April 19, 2010 at 11:56 am

        Abolish that garbage of social security that let lazy folks eat from other citizens’ sweat. Let people manage their own money and let government out of it all. How about that?

      • Bill R
        April 19, 2010 at 11:57 am

        I second that thought. End it. Let people keep their own money and save for retirement how they see fit.

      • Jason Ray
        April 19, 2010 at 11:58 am

        I would start a whole bunch of new entitlements of which I have no money to fund.

      • Orange Boss
        April 19, 2010 at 11:59 am

        End the income cap and charge social tax on all wage income and on bonuses/commissions paid in lieu of wages

      • Nothing
        April 19, 2010 at 12:00 pm

        Nothing, I’ll keep putting money into the blackhole, and in 30 years when I’m ready to retire, it won’t exist. Problem solved.

      • Coolio
        April 19, 2010 at 12:01 pm

        We need to reduce rates for the high income SS receivers and to raise the minimum retirement age to 67. That will hold it over for another 50 yrs.

      • J Gordia
        April 19, 2010 at 12:03 pm

        Put Congress on it instead of the retirement system they are on now. Ban all non citizens from collecting or paying in to it. Ban the Government from using money from this fund for anything but SS.

      • Reo
        April 19, 2010 at 12:04 pm

        Allow people to elect whether they wish to be part of Social Security or not. If no, they cannot reap the benefits once they retire.

      • Paris with love
        April 19, 2010 at 12:05 pm

        Allow people to opt out of it. No doubt this would cause it to go bankrupt and tick a lot of people off, but it’s a step in the right direction having moved us closer to capitalism and away from socialism. God bless.

      • Gus
        April 19, 2010 at 12:06 pm

        By making our Senators and Congressmen/women live off of it, under the same scale we do. That is the ONLY way it will ever get fixed.Other than that, don’t count on it being there for you if you are under 55.

      • BOSS
        April 19, 2010 at 12:07 pm

        Quit policing the world get out of the Middle East. Save a Bunch of money. Budget surplus funds Social Security.

      • Benae Yuan
        April 19, 2010 at 12:09 pm

        start by taxing fairly, every one pay the same percentage of tax no matter how much you make, ( if the tax was fair the overall percentage would be lowered); I think also we have solved the problem, with the 401K (experiment) gone very badly, folks can’t retire, so instead of pulling money out they will continue to add funds.

      • Rial
        April 19, 2010 at 12:11 pm

        Shhhhhhhhh! No one is supposed to mention it, someone somewhere is having a sex scandal or dying of swine flu, and that is more important to the news media. All the money that possibly will come into the USA coffers has been spent, all possible sources of loans have been spent. There is no money, nor ever was (it’s the biggest “ponzi scheme” in the history of the nation) in the “social security fund” to pay out to baby boomers. Worse yet, many other non-government pension funds will have to be bailed out too (such as the true purpose of the billions of dollars GIVEN GM & Chrysler, I say “given” because the only taxpayers getting it back are the UAW members, and politicians they support). that leaves only increasing taxes on real estate owners and those remaining workers who have jobs in this country, plus recipients of successful private retirement pensions. The only thing coercing China to loan is more money is the inflation threat of more money being printed, and to what extent China still needs the US economy to sell goods to, but that window is closing even though no one admits it.

        Social Security began as a TEMPORARY program in the early 1930′s.

      • Svvi
        April 19, 2010 at 12:11 pm

        Allow people to opt out. The Social Security system is as an outdated unnecessary, ineffective system. American Have gone with out it longer than they have had it.

        Think about it, with all of our passwords and pin numbers we could just as easily set up a tax ID for ourselves.

        Retirement? Simple. Let’s say You choose to have a retirement account with JP Morgan (for an example only) JP morgan issues you a file number and a password. When you change jobs, which you also have an employee number. On you Job Application you would write in you JP morgan ID for your personel file to assure what ever percent you want to go into you retirement per paycheck. Your Tax Id Could be you state and DL number.

        Unfortunately we are Forced into the social security system. Why? to pay for those who arent working or choose to defraud the system.

        If I could, I would opt out. There is absolutely no legitimate reason for it.

      • Pallier
        April 19, 2010 at 12:13 pm

        Just stop and let people decide how to spend their $$$$

      • Nice Najar
        April 19, 2010 at 12:14 pm

        Liquidate it and rebuild it

      • Sky
        April 19, 2010 at 12:15 pm

        ban it!!!!!!!!!!!!!

  5. Ahmed
    April 19, 2010 at 11:30 am

    Good post here.

    There isn’t any money because the vast majority of the total Federal Debt is actually “Intra-Governmental Debt”, which means that the trusts that had been built up by the baby-boomers (e.g., Social Security) has been “borrowed” from in order to fund deficit spending. The problem occurs in the future because there are so many more baby boomers than there are, well, us (young folk anyways), and, moreover, those baby boomes are all going to start retiring within the next 20 years or so. As more and more baby-boomes retire, they’ll draw more and more from a Pension fund that takes in less and less funding from the population.

    The Federal Government will have to borrow more money in order to finance this. It won’t be able to borrow from these “Intra-Governmental” sources as heavily anymore (if at all), and so more and more of the debt will be transferred to other countries, citizens, corporations, banks, and so on. This is actually starting to happen right now. If you look at the % of Total Federal Debt that is actually Intra-Governmental Debt, you’ll find that it is increasing steadily in the past few years.

  6. Juan Goméz
    April 19, 2010 at 11:31 am

    people that never worked are being given money out of that fund–basically social security works 9-5

  7. P1978
    April 19, 2010 at 11:32 am

    Social Security was originally intended as an insurance plan for people that found themselves destitute in their golden years. It was intended as a ‘pool’ of money that would help care for Americans who were elderly, disabled, sick, disadvantaged, underprivileged, homeless or hungry.
    Instead, Social Security has become the government’s biggest boondoggle – and America’s greatest entitlement.
    No, just because you ‘paid into it’ doesn’t mean you should get it back; that’s the worst flaw in the whole program – and the one issue that cowardly politicians won’t deal with. Social Security should not be available to those who are well-to-do, drive luxury cars, own three homes, and take multiple vacations every year after they retire. They have been fortunate enough to establish financial security for themselves and their families. Yet, they take a Social Security check because they believe they’re ‘entitled’ to it!
    If you have assets, you should NOT be allowed to collect a Social Security check just because you ‘paid into it’. That was not the original intent; that’s what our spineless politicians have allowed it become :)

  8. Zodica
    April 19, 2010 at 11:33 am

    The coffer was tapped into some time back. Main jist is that when “the baby-boomers” retire there will be more money taken out then collected or put in. Basically, more people receiving then working and paying into social-security.

  9. Lange Riaz
    April 19, 2010 at 11:34 am

    The problem now is that the govt is paying more than what it is getting in payments. There’s no surplus now, there’s a deficit but they wont tell the people.Yes, people have paid in over the years, and caused a large sum to pool in the social security fund, a sum that the govt just couldnt keep out of. They tapped into it, and used the money elsewhere. Now that the people who paid into it, the babyboomer generation, are becoming old enough to draw from it, the govt doesnt have the money that was originally put into it because the clinton administration spent it.

  10. Lawson
    April 19, 2010 at 11:45 am

    Cool post :) I never count on ss to live off in my retirement anyway….

  11. FedWatcher
    April 19, 2010 at 11:46 am

    The Fed shd take over FICA and manage it; we can be better off with Bernanke and those finance whizes at the helm.

  12. Polot
    April 19, 2010 at 12:16 pm

    The only way to fix it is to get rid of it.

  13. Icelandic V
    April 19, 2010 at 12:17 pm

    The Social Security crisis will occur because Congress became very attached to spending the baby boomers’ money on whatever it fancied, like Reagan’s Star Wars missile defense fantasy. Finding a solution is an immense task and one that won’t be accomplished until the crisis is fully upon us. Even if a President has a solid solution, the rest of the government is going to put off going along with it for as long as possible.

  14. Ryan
    April 19, 2010 at 12:18 pm

    The only way to fix it is through gradual privatization… an that goes 100% against the socialists agenda…

  15. Babyboom
    April 19, 2010 at 12:19 pm

    Who knows what will fix it…but something needs to be done ASAP. We’ve got 20 million more baby boomers that will start drawing from that in the next 15 years. And it’s the largest slice of our Federal budget.

  16. Neocon
    April 19, 2010 at 12:25 pm

    The answer is quit stealing other peoples money and putting it all in the general fund and then saying it’s a problem. Neocon

  17. Qz Steve
    April 19, 2010 at 12:27 pm

    Well, we could’ve saved about $200,000,000,000 per year by NOT INVADING IRAQ! That might go a ways toward solving the problem.

  18. Hamidou
    April 19, 2010 at 12:27 pm

    Hard to have answers when you use the funds for “pork” projects!

  19. Chok Nu
    April 19, 2010 at 12:28 pm

    Well first of all, we should stop medicating so many old people so they stop living as long.People die for a reason, its part of life. You are right raising taxes will only do so much, instead of giving money to Israel, we could pour that money into social security. More people need to work and contribute to social security, so we should stop sending jobs overseas.We should stop allowing companies that send jobs overseas, to benefit from any kind of tax break, we should pour that money into social security. We should stop faith based government spending and pour that money into social security.We should stop spending billions of dollars on an illegal war, money that we dont have may I add, to secure oil.We should instead focus all our energies on finding an alternative to oil, patent it and sell it to every other country. This is America we can do anything right?

  20. Colleen
    April 19, 2010 at 12:29 pm

    1. Stop spending money we do not have.
    2. Stop bombing and rebuilding foreign countries.
    3. Invest in our economy, not outsourcing jobs.
    4. Stop sending aid to Palestinians, Egypt, Israel, etc.

    The economy will take care of the rest.

  21. Rachel P
    April 19, 2010 at 12:31 pm

    Great analysis here! The author is right, and the system is in trouble…but, in the past, every time there was a surplus of funds in this system, congress, in order to “cut taxes” raided the fund to pay for their pork spending. This fund has been raided so many times, it is ridiculous. OF course, these congressmen are long gone, so they are not around to take the heat…it is us who will be out in the cold, but on the other hand, the government seems to have NO problems creating what will be a 10 Trillion dollar deficit before Bush is replaced in office….that is roughly a 6 trillion dollar higher deficit than he came into office with! It would seem that the “financially responsible party” is NOT so responsible. Under Reagan, the deficit climbed through the roof, under Clinton, it was greatly lowered. IT would seem that the Dems get the heat for spending, when the Republicans do the spending…all on air money! WE cannot cut taxes and spend more money..hell, even I know that one, and I can barely balance a check book!

  22. Courage1967
    April 19, 2010 at 12:40 pm

    Social security is crap. In theory it works, but not with our current demographics. Personally, I don’t think its fair for me to pay for social security when, by the time I hit retirement age (which will probably be in the 70s), there will be no social security left. Realistically it probably wont even help the people in my parents generation – where the retirement age is 10-20 years away.

    People cannot depend on social security, for those who will get it, it will be a very small amount of money that will not be able to support them. People need to start saving money as soon as they start making it for retirement. I think the smartest things we can do on a public level is educate people about saving money – students, immigrants, etc., and different options.

    The baby boomer are living longer thanks to advancements in health technology. The boomer’s children will live even longer. However, obesity is becoming an epidemic which costs billions a year. And demographic trends show that people are having way too few children to balance out these larger generations.

  23. Sarha
    April 19, 2010 at 12:41 pm

    in 1936 president Roosevelt signed the social security bill. i have a photograph of him signing it.[ it was intended to make it possible for people to pay into it for their retirement years. however, it has been misused over the years. the govt took money out of it and gave us an IOU. then they started putting other people on it that were not supposed to be on it. originally, it was for peoples retirement. it would be very good today except for the Washington misfits. blame our system. it stinks.

  24. Arbero
    April 19, 2010 at 12:43 pm

    I don’t believe SS has a shaky future. Everyone who is employed has social security taken from their paycheck. The system works. The myth of a saving account as you stated in not correct. Former president Bush encouraged people to use the amount of money he sent to everyone to use it as a savings account but made it an option. That might be where the “savings program” myth came from.

  25. DarthVader
    April 19, 2010 at 12:44 pm

    If my knowledge of mathematics and accounting were twice as great as it is, I would still not understand how social security deductions from my weekly earnings of from $22/a week to $250/week over a period of 25 to 30 years was adequate to fund so many retirees, but the large amounts of money now contributed from paychecks that range from $500 to multiples thereof are allegedly insufficient to support the system? I don’t believe it.

  26. Eng
    April 19, 2010 at 12:50 pm

    great insights

  27. Turtle Peak
    April 19, 2010 at 12:51 pm

    Ss shd be scrapped out entirely!!!!!!!!!!!

  28. Bernie
    April 21, 2010 at 6:29 am

    what abt taxing churches and other charities to solve the issue?

    • B Plus
      April 21, 2010 at 6:41 am

      Lets face it with religous lobbying groups being some of the most powerful. And most politicians being religous, Church and state are not separated. Its about time they should be taxed like any other enterprise.

    • Elliot
      April 21, 2010 at 6:41 am

      No, we should only tax churches if they insist on sticking their two cent worth into politics.

    • Child Busy
      April 21, 2010 at 6:43 am

      sure, why not? they’re swimming in cash

    • 167Int
      April 21, 2010 at 6:44 am

      no and where is your argument of church and state? oh only applies to what libs want right?

    • Ruby
      April 21, 2010 at 6:47 am

      Yes,pay unto Caesar his due and keep your nose out of earthly governments and facing the heavens!

    • Riha V
      April 21, 2010 at 6:48 am

      No, that would do more harm than good.

    • Paul
      April 21, 2010 at 6:50 am

      1) The fact that some (I wouldn’t say most) politicians are religious has nothing to do with separation of church & state.
      2) That doctrine is NOT in the Constitution.
      3) The Constitution forbids govt. interference in religion & John Marshall ruled that the power to tax is the power to destroy.

    • Leslie Cool
      April 21, 2010 at 6:51 am

      no–But why not tax unions

    • Murch
      April 21, 2010 at 6:52 am

      This is a very good question. If that where to take effect, all religions must be equally taxed, not just christian. I believe that would be impossible. If we did tax the ‘enterprises’ that would only give them more persusive power over majority opinions.

    • Guru
      April 21, 2010 at 6:54 am

      NO

    • Allision
      April 21, 2010 at 6:56 am

      No. However there are examples that should be fixed. One of my co workers mother collects social security and she NEVER worked one day in her life. Just because she is 64. You work, you should get your social security. Or also if you are a widow, widower. And in some cases divorce can transfer that. But we cant tax the church to fix the problem and we have to stop giving people social security that never worked. Who cares how old they are.

    • Yale Alum
      April 21, 2010 at 6:57 am

      YES! Churchs take in billions and don’t pay a dime in taxes.

    • Oldie Jolie
      April 21, 2010 at 6:58 am

      If I were permitted to invest my payments to Social Security, I would retire a millionaire.

      It is too bad that Social Security is a “Ponzi Scheme” that takes my payments and uses them to pay current recipients (hope that is not a surprise for you). The surplus created by the Baby Boomers has all been spent and replaced with IOUs (Treasuries = more debt). If you do not privatize this system and take it out of the hands of thieving Congressmen who are totally unqualified to manage the program, we will be in ever more sorry shape as time goes on. The only reason Social Security ever worked was because the program was limited in scope and people hardly felt the financial strain of it in its early life (many workers, few recipients). Unfortunately, it has grown and expanded to become another government boondoggle that is a poster child for government largess run amok. The original design was totally flawed, but no one really cared at the time because it did not cause financial pain.

      Taxing more will never lift us out of this mess. Privatization is the program’s only salvation. Between this program and Medicare and Medicaid, we are living on very borrowed time. It will begin to explode within the next 20 years and the solution will cost us trillions more because of the reactionary style of government.

      Sorry young and future generations.

    • Ways Cool
      April 21, 2010 at 6:59 am

      Religion is a business like any other .many wealthy families have members who go into religion . This allows them sweet land deals and cash that is not reported donated to churches . Think about it for aminute a church with say a thousnad members all contributing say 2 dollars a week . Thats 5000 a month of none taxed money that is available to continue the work of that institution .Now when i was a kid some 40 years ago we use to stick in 10bucks and each kid stuck in a dollar so that was 13 a week easy plus fund raisers and charity drives ,you get the picture .Churches take in so much money . Now consider those people who leave homes and property and money to churches .Over 80 years that is everyone who once attended and was sold these lies .True many fall away but in the end they try to buy there way back in .Donate half a million for a new church or build and donate a residence for the leader of the cult to which they belong . Religion is in the game of selling a dream and is more damaging then drugs ,alcohol and terrorism combined . Lets place a 50% tax on churches and anual fee’s in the amount of 100 dollars per person .who attends on average during the christmas service or easter season .

  29. Fidelity
    April 21, 2010 at 6:42 am

    Great article here. Good thought with the close relationship of church and state now days. Yes tax any profit company/organization.

  30. Etenu
    April 21, 2010 at 6:54 am

    I agree to some extend yes. I also believe the “Fair” tax would solve much of this problem. Because EVERYONE would actually pay taxes

  1. April 18, 2010 at 11:08 pm

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