Social Security and the market meltdown

In the wake of the stock market collapse, one theme emerged almost immediately — that derailing George Bush’s reform and privatization plans for Social Security saved retirees from disaster.  People saw the steep drop in stock prices over the last few weeks and figured that retirees would be eating cat food by Christmas. However, that ignores a couple of realities, and in fact we may wind up wishing we’d listened to Bush in the long run.

First, the people who were close to retirement weren’t eligible for privatization anyway.  In fact, the first stock purchases under the 2005 plan wouldn’t have been made until next year, and those only for people whose retirement dates were still years away.  Anyone within ten to fifteen years of retirement had to stick with Social Security with Bush’s transition proposal.  Having that money flowing into the markets now would have provided some welcome capital flow during a recession, and the portfolios could have bought some real bargains.

The bigger issue, I’m told, is the wage-growth assumptions made by economists to declare Social Security solvent in the first place.  The CBO’s analysis of SocSec’s insolvency date assumed a higher long-term growth than anything seen in the last 40 years in order to produce an insolvency date farther out than the one predicted by the Social Security Trust Fund trustees.  The financial collapse has proven those assumptions wildly optimistic and unreliable.  Not only that, but the Trust Fund itself has taken a big hit, thanks to a plunge in Treasury return rates.

The much-derided Trustees’ projections for cash flow deficits (2017) and insolvency (2041) are not going to prove to be wildly pessimistic.   More likely, the burst of the housing bubble will bring those dates significantly closer.  Not only will we wish that Congress had taken action with Bush to effect Social Security reform, we may have run out of time to get it done without putting people’s retirements at risk now.

In the meantime, let me share a couple of tables with you from the Social Security Administration.  The first shows the unfunded obligations just for past and current participants — with a $15 trillion shortfall.  The second shows that the Social Security shortfall is NOT a hypothetical, maybe-it-will-happen-someday event.  It’s on the books NOW in the form of the excess of benefit promises over revenue collected for people who have entered the system already.  Future generations don’t contribute to the problem at all — even if they get everything they’re promised, and even if they’re spared a tax increase (both impossible given the current shortfall), they’d put more into the system than they’d get from it, in present value terms.

Keep these tables and links handy. These tables may not survive the change in administration.